Thursday, January 11, 2007

Four Overlooked Qualities of Successful Traders

One of the things I most enjoy about working with traders in various settings--prop firms, hedge funds, and investment banks--is the opportunity to see how successful traders actually succeed. I'm constantly amazed at the variety of strategies and skills that can be joined to create profitable approaches to trading and investing.

During this most recent road trip, four characteristics of successful traders--ones that are commonly overlooked--have jumped out at me, and I thought I'd pass along:

1) The Constant Desire to Improve - I met with a group of traders who have been successful over a period of many years. Nevertheless, they were participating in day-long meetings, including a seminar with me, to build on their success for the coming year. It was very clear that they are continually searching for new opportunities and strategies. They also value continuing education, keeping up to date with what's happening in their areas. They track their performance and, individually as well as a group, are setting very specific goals for improvement.

2) The Ability to Press Their Advantage - The really good traders are aggressive; no doubt about it. When they're seeing the market well and have good ideas, they aren't shy about using their size and pressing their advantage. Lesser traders are very quick to take profits and are risk averse re: losing those profits. The very successful traders keep their risk management, but don't hesitate to become more aggressive when they see opportunity. They remind me of boxers who, seeing opponents hurt, will go for the kill. The less successful traders seem to lack that killer instinct.

3) Emotional Resilience - The very successful traders have a great attitude about losing. They know it's going to happen. They don't take it personally. If anything, they try to find learning experiences from losses. Elsewhere I have written about how good traders view a losing trade as "paying for information". A trade with an edge that doesn't go their way either tells them something important about the market, or it tells them something about their execution. Either way, it's a potential learning experience. Resilience means that the excellent traders trade well out of a hole. They can be down money for day, week, or quarter and continue to make the same good trades they would normally make.

4) Creativity - We normally think of creativity as a trait that belongs to artists, but it also is quite noticeable among traders who have been successful over many years. They find edges in the most unlikely places. They look at interesting relationships within the market they're trading, and they find unique relationships from one market to another. One trader very recently told me of a strategy that exploited the way one market was priced related to a similar market at certain time periods. I would have never thought of that idea in a million years. He was making consistent money from the concept.

As I write about these four qualities, I'm struck by how they also can be found among very successful athletes, entrepreneurs, and performing artists. When you're a career trader, you truly are an entrepreneur, running your own business. Many of the same enterprising qualities we find in the business world are present in spades among excellent traders.


Mike Roznowski said...

Dr. Brett,

I just finished Taleb's "Fooled by Randomness" have you read this book and did you enjoy it as much as I did?

Challenging the conventional wisdom would be an understatement.

Brett Steenbarger, Ph.D. said...

Hi Mike,

I completely agree; it's a very different--and unsettling--view of the trading world. Thanks for the recommendation--


Anonymous said...

Hi Brett,

I remember about 10 years ago Larry Williams gave a seminar and he mentioned something very interesting. He said he interviewed 100 traders and asked them this simple question.. "What are the top 3 reasons why you trade?" Larry williams said that not one single person put down for the number reason why they trade is to make money. Making money might have been number 2 or 3 on their list but it wasn't number one. Most people put down for number one that they trade for the excitement or because they want to show how smart they are or needed to pay off a debt..etc..Larry's point was that if you want to be a successful trader, you have to realize why you are trading. So I think one of the overlooked qualities of a successful trader is to know the real reason why you trade.

Anonymous said...

Could you please share the concept you referenced in your post regarding market relationships? What made the concept unique? Any hints would be appreciated!

Thanks for your thoughts and time to create this blog!

Brett Steenbarger, Ph.D. said...

Hi Kevin,

I completely agree; that's an excellent observation. Trading often is pursued to fill unmet psychological needs, not just to make money. That can be disastrous when those needs collide with the needs of prudent risk taking. Thanks for the note--


Brett Steenbarger, Ph.D. said...

Hi Naked,

Unfortunately, as a psychologist, I am bound by rules of confidentiality. I can't pass along trading ideas that traders share with me in the course of our discussions. I doubt that many people would talk with me if they knew what they were saying would wind up in a blog read by thousands of people a week! I appreciate the interest and will pass along ideas from my historical tests, some of which have been inspired by contacts with traders in various settings.


Anonymous said...

This is an excellent post. Thank you! I'm a relatively new trader (I was previously a corporate lawyer) and have been amazed by the joy of the creative process behind trading, from system development to learning to read and understand market action. Every day I'm amazed that there is money to be made in such an intellectually fulfilling activity. In my limited experience, the hardest lesson to learn has been #2 -- letting your profits run (and its corollary, cutting your losses short). It sounds simple, but it's often a fine line.

Brett Steenbarger, Ph.D. said...

Hi Jason,

Thanks for your comment. I agree with you. The good trader limits risk, but the great trader also maximizes opportunity.


ChartingStock said...

Good Points-I found this idea of the "Killer Instinct" the most interesting part. I Remember years ago hearing that the turtle trader organizers had a set of traits they had developed & would only accept traders into the fold that passed the initial "traits". A further analysis of these characteristics could very well yield extraordinarly valuable information. Keep up the good work & Good Trading!
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Dataman said...

I believe that our attitude towards losing/losing money (within our own risk management framework) determines whether or not we will be successful as traders and investors. The reason is, this in turn determines our ability to stick with a particular market view for the appropriate cycle time - for example a macro trade may take a while to play out necessitating a tolerance for volatility.