Of all the performance fields, sports have stimulated the most research. A 2001 review of findings in sport psychology, for example, takes up well over 800 pages and 30 chapters and already it is being replaced with a 900+ page volume in 2007. When I began writing my book Enhancing Trader Performance, I realized that traders--and mentors of traders--knew little about this research, and yet many of its findings are directly relevant to trader development.
One of my favorite researchers in the sport psychology field is Janet Starkes in the Department of Kinesiology at McMaster University in Ontario. Her research summary in the 2001 Handbook of Sport Psychology is a particularly clear integration of work in the areas of sport and dance.
Here are a few conclusions from the chapter by Drs. Starkes, Helsen, and Jack and what they might mean for traders:
** "The finding that experts in a particular sport are better than novices, not merely at physical skills but also on the underlying perceptual, cognitive, and strategic components of sport, is robust in both laboratory and field research" (p. 175). In other words, when people become skilled, they literally learn to see things in new ways and think in new ways. It's not just a difference of hardware (having better memory, vision, or concentration); experts develop their own software: internal programs that enable them to recognize patterns and act upon them rapidly.
** "The primary importance of the "10-year rule" is that it seems to hold up regardless of the domain investigated. As such, it is one of the most robust findings in expertise research to date" (p. 175). The development of the "internal software" that enables batters to recognize pitches, soccer players to seize openings in the field, and traders to find setups on the fly requires a lengthy process of development in which experience becomes internalized to the point where it is second nature. Structured practice, sustained over time, is essential to success.
** "Understanding what practice is best and how practice should be carried out are even more important questions than how much" (p. 175). As sport psychologists say, it's not that practice makes perfect. Rather, it takes perfect practice to make perfect. Practice that is effective provides immediate feedback and correction to learners and structures tasks in a logical progression, with skills broken down into components for repeated drilling. Sitting in front of a screen and trading is not practice; sitting in front of a screen and drilling placing and managing orders in the book based on readings of order flow is.
** "Data from sport studies also indicate that those practice activities that require the greatest physical effort and mental concentration are ultimately the most enjoyable" (p. 175). This gets at the heart of what develops expertise. The expert performer, in trading as in sport, is born with certain talents and finds the exercise of these to be fulfilling and enjoyable. This sustains the developing performer through the lengthy, 10-year learning curve. The "flow" state described by Csikszentmihalyi is also a state of enhanced information processing. A key to training success is structuring learning to sustain the flow state: that is a major function of coaches.
** "Whether one examines wrestling, figure skating, karate, soccer, or field hockey, there is a montonic relationship between the amount of practice in which one has engaged throughout one's career, and one's eventual athletic success" (p. 186). The way I stated this in my book is that, in every performance field, expert performers spend more time practicing and honing skills than in actually utilizing them in formal competition. Rarely, however, is this the case among traders. Is it so surprising that--according to industry insiders--the average trader blows out of their account within seven months?
On my personal site and in this blog, I cover a range of ideas related to the psychology of traders and the psychology of markets. Few of these ideas, however, are as important as the ones above. Trading psychology can be so much more than endless discussions of controlling emotions, instilling discipline, and thinking positively. The best trading psychology is training, properly structured and informed by research.
There are some good online trading rooms out there. I recently met Andy Swan of Daytrade Team, and it looks as though they're educating traders about trading patterns in real time. I have nothing but positive things to say about Woodie and the CCI Club, which is an unusually supportive and informative real-time forum for learning trading. John Carter's Trade the Markets service comes highly recommended as a place to observe and learn trading in real time. I've known Linda Raschke for quite a few years now and can only offer the highest praise for her continuing online, real-time efforts to educate traders in both futures and equities arenas.
Those are great places to start your training. Eventually you'll need a trading gymnasium: a place to practice skills, obtain feedback, and develop your own expertise. I'm pleased to see that the Chicago Mercantile Exchange, in partnership with the Chicago Board of Trade and the New York Mercantile Exchange, is taking a leadership role in addressing this need. With that kind of institutional support, we may yet get to the point where the development of traders can reach the level of sophistication that we're seeing in sports.
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"With that kind of institutional support, we may yet get to the point where the development of traders can reach the level of sophistication that we're seeing in sports."
But, to what purpose I wonder - and to whose benefit?
I scratch a living from futures day trading my own accounts. I've come up the hard way over a number of years and learned the technicalities pretty thoroughly. Sure I may have got there quicker with some solid focused tuition along the way but I don't regret the route I took.
From my perspective right now, the more rookies that fancy themselves as Gordon Gecko's, the better. After all, it's a zero sum game so, for me to take money consistently from the markets requires that others lose it. I'd rather hold on tight to any edges I develop, thank you very much. They decay quickly enough as it is without broadcasting them to the world and his dog.
Don't get me wrong though. I still appreciate knowledgeable and perceptive stuff published about trading as and when I find it (This blog included). Thing is, most such authors have either given up on trading as a primary income source or are seeking income and systems feedback whilst developing their own trading abilities to the point where they can do without either - IMHO that is. Hardly makes them the most qualified of instructors does it?
As a psychologist I'd be interested in your views on the 'herd mentality' that seems to abound in wannabe traders when the 'profession' is an essentially isolated dog-eat-dog one.
Hi,
Thanks for your note. I agree that traders can learn the ropes on their own, but the problem is that many traders don't know what they don't know. That's where the education and training come in. It's in the self-interest of established brokers and exchanges to not have traders jump into a market and blow up.
As for making money from rookies, the successful trader doesn't do that. Rookies trade small accounts and small position sizes. Successful traders are trading with other large traders and institutions. In that field, training and development are as important as they are among elite Olympic athletes. At least that's what I find among hedge funds and investment banks.
Your skepticism is well founded; many educational sites are merely promotions for services and products. My hope is that, in some small way, this blog can help traders know what they don't know so that they can further their development.
Could you provide examples of a trading gymnasium? and the type of exercises to use with it?
Thanks
Hi jtc,
My new book, coming out in October, deals directly with components of a trading gym. One essential ingredient is a program for simulated trading with live and historical data, so that you can work on trading different kinds of markets (trending, volatile, range bound, etc). With the simulator, you can also drill such skills as working orders in the book to get filled at good levels, recognizing shifts in demand and supply from volume data, scaling in and out of trades, setting stops, etc. Videotaping trading to review performance is another key element to the gym, where you can watch what you were doing as the market was trading. Screen capture programs such as Camtasia (www.techsmith.com) can be used for this, or a camcorder with its own hard drive (mine is the SONY DCS 100).
Brett
Hi Brett
Speaking for myself, a novice online trader, still a mentor student, constantly seeking to give an edge to my trading, for my own account, I find your blog very informative and educational.
I have read briefly about research in Sport Psychology, and if I recall right, it was you who spoke about this parallel for trading success.
My mentor has always emphasized the importance of Psychology which will make or break us. Planning and Money Managment are necessary for success but they form 40% against 60% for Winning Psychology.
Having started realtime trading in late Feburary till now, I am beginning to see why Psychology or emotions play a big part in trading well.
Last night was a case in point. After attending cocktails for Dali show in Singapore, my head was swimming a little. I was home by about 9pm (9am ET) and looking at the market on S&P futures and GBPUSD cash, I had to choose only one instrument to focus in that state of mind. I chose S&P as my favourite.
Although it was more a rangebound market, I was able to detect a buy signal at 1327.75 which was filled. However, my head was still spinning, so I put in a stop sell order at 1322 and a limit sell order at 1331 expecting resistance at 1332, in order to turn in.
At 4.30am (4pm ET) I woke up to check my position, and to my delight, my limit sell order was filled. The high was 1332, I believe, but then the last trader would be a loser!
I could have traded GBP too but limiting my trades was the way to go given the condition I was in.
Hence, understanding our emotions will help us avoid forcing trades and I owe this to reading Psychology.
Hi,
Thanks for that perspective.
As I mentioned recently on the Elite Trader site, I believe psychology is important once one has an edge in the marketplace, because it helps the trader consistently exploit this edge under conditions of high risk/reward. I don't think psychology can ever substitute for that edge. Most trading problems, I find, are caused by trading randomness, not by defects in psychology. (Although trading randomness over time will certainly add to one's psychological distress!)
Brett
Hi Brett. Really your blog and website are gems. I see you mentioned in your last blog "Research in Sport Psychology" about Kinesiology. I've been reading a book - Power vs. Force by David Hawkins. I find it interesting so far. In the book Hawkins shows a map of consciousness. The interesting thing is that he relates every level of consciousness (level of self-awareness) with different emotional states and not-surprisingly the low levels of consciousness are associated with negative feelings: frustration, regret, apathy, fear, etc. and the high levels are associated with feelings like joy, love, compassion, enlightment. As you mention when successful traders trade they feel joy, passion of what they are doing, which would mean that they are calibrated in the higher level of consciousness, according to Hawkins. Isn't that the right path - self development and self awareness so that you start building your internal software. Yes, to do this a trader has to find a proper training method and the right trading gym, even though it would takes time to build trading skills, but this is the way.
Thanks,
Krasimir
"It's in the self-interest of established brokers and exchanges to not have traders jump into a market and blow up."
To the extent that they rely on fees and transaction charges for their income (and of course avoiding bad publicity) - agreed. But it depends upon how you define and divide up their other activities and the contribution made by them to bottom lines. Exchanges have members who effectively make markets and rely as much on proprietory trading for their profits as on their built in spread advantage. Brokers too are involved in proprietory trading and able to optimise their quotation algorithms to the advantage of such activities and therefore at the expense of their customers - perish the thought! As for the investment banks - the JP Morgans/Goldman Sachs of this world; frankly the laws of libel prevent me posting an acurate description of the probity of their operations and the way they affect markets. THAT constitutes just a tiny smigin of what rookies 'don't know that they don't know' - and can't easily be trained in either.
In other words, 'successful' traders, trading their own accounts profitably have some big handicaps to contend with, many of which are simply ignored (if they are understood at all) by those providing trader training. As for not making money from rookies - well, I don't have the figures, but it would be an interesting research project (ie the extent to which dumb money contributes to the bottom lines of such as the spread betting/CFD type providers for example, whose 'quotes' are so far out-of kilter with the broker market as to ratchet up handicaps still further.
All this is Just my humble opinion of course. I see any so called 'science' of the markets in much the same way as I see the Social Sciences - ie as pseudo-science. The simple reason is that markets are not deterministic in the strict scientific sense, but driven by the decisions of people (even when those decisions are the result of complex programming). People are inherently capable of being mislead and frankly, 'being mislead' is the state of the bulk of market participants for most of the time, with the job of the MSM and the real pros being to do the misleading. From my perspective it is far more beneficial to study the behaviour of crowds and the extent to which they may contain elements of predictability - before the event so-to-speak. I see myself as a tiny minow in a huge shoal of similar sized (but nonetheless predatory and cannibalistic) fish being preyed upon by enormous predators capable of devouring 20% of the shoal at a sitting (The Goldman Sachs/JP Morgans of this world). My task is to ensure that I remain close to the centre of that weaving, twisting, turning shoal and to be fast, fit and knowledgeable enough to both avoid the attentions of my cannibalistic fellows and devour the odd one or two myself now and then.
A pretty bleak environment eh? Yep - not unlike some of those huge internet war games out there really. My trick is to turn off when I'm not trading an go seek my social life elsewhere.
Why am I telling you all this whan I should be keeping my mouth tight shut? Big question. Can't really answer it in available space either.
Hey ho
Thanks for your comments, Krasimir. The work on "flow" does, indeed, support the notion that, when skills and challenges are evenly matched in a pursuit that is of interest to a person, the result is an enhanced state of consciousness that is also an enhanced state of learning. One quick measure of whether a trader is on the right learning path is simply evaluating the frequency of those flow experiences.
Brett
Hi Sabretache,
I agree that it is extremely challenging for small, independent traders to compete against established professional firms. Of the groups you mention, the proprietary traders who function as locals in the electronic markets are the greatest challenge for the independent daytrader. They are in the market almost continuously and can move prices ticks at a time. Being able to read what they're doing is essential. As far as longer timeframe independent traders go, those larger institutions become a major factor in sustaining trends. IMO, traders who cannot read volume patterns and differentiate local-driven from institutionally-driven markets will have a hard time succeeding.
As the saying goes, "When elephants fight, the grass is trampled." But elephants don't fight the grass; they don't even notice it. So it is with large and small traders, in my experience with them.
Brett
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