Tuesday, July 24, 2007

The Trader as Entrepreneur: A Different Take on Trader Personality

Trading coaches frequently emphasize the importance of treating trading as a business. Indeed, many find it helpful for traders to develop formal business plans to guide their pursuit of profits. Interestingly, however, there are few discussions in the trading literature about traders as entrepreneurs--and how the challenges that face traders are similar to those that confront business founders.

A recent book by Jessica Livingston entitled "Founders at Work" takes a look at tech-sector entrepreneurs through interviews (a bit like the Market Wizards series). Included are founders from such firms as Yahoo!, Adobe, Apple, PayPal, Research in Motion, and Flickr. They provide insight into the early days of their firms and what it took to put those enterprises together.

Here are a few themes that dominated the interviews and that shed valuable light on trading success:

1) Entrepreneurship is a Team Activity - Many entrepreneurs started their businesses by recruiting friends and classmates. The quality of the teamwork--and the relationships between the founders--was essential to success. Later, venture capitalists became critical team members, not only for their funding, but for their industry connections and business savvy. Similarly, the best traders I've known have developed networks for information, batting around ideas, and social support. At professional trading firms, they benefit from the assistance of risk managers and the guidance of more senior traders. They also benefit from the deep pockets of the firm, enabling them to leverage their skills by trading portfolios and position sizes much greater than could be traded with their own accounts. Even the solo trader operating from home now benefits from a host of Web 2.0 resources, from forums/chat rooms to blogs to social investing sites that encourage sharing of ideas. One neglected element of the trader's team that I've found to be crucial to success: the supportive spouse.

2) The Entrepreneur is Immersed in Building the Business - One interview after another speaks to the long hours and heroic efforts made by startup teams to get their products out before the competition. In many cases, the drive was not for money--no venture capitalists were as yet in the picture. Rather, the founders of the firms loved the process of building from scratch. I find the same dynamic at work with the best traders. They love markets. They are absorbed in developing their trading. I've met many traders who work during market hours and then seek a relaxed lifestyle from 3:15 PM CT onward. I've yet to find one of these traders who have sustained career success. It's the trader who pours through market research, company screens, trading journals, and business news who continually builds the trading business. I'm continually impressed how the best performers at banks and hedge funds religiously work on their trading. The work on the business is never done.

3) The Entrepreneur Loves Entrepreneurship - Once the founders establish their business and perhaps sell it to a larger firm, they frequently move on to other entrepreneurial ventures. Indeed, many of the founders interviewed by Livingston set up their firms before they even knew what they would be producing. Often, the firms started out with one business concept, only to eventually stumble upon the winning one. The primary motivation was to create something from scratch, and creativity played a large part in the success of these firms. All of the founders were steeped in tech before they started a venture and most started ventures before they founded the business that gave them success. Similarly, the successful traders I've worked with often spend a good amount of time in the markets before they settle on the specific markets and trading styles that provide them with long-term success. They are not the traders looking for quick riches or holy grails; rather, they find a creative way of viewing markets and trading that provide them with an edge. They love trading and often continue trading long after there is financial need.

4) The Entrepreneur is Resilient - Many of the firms described by Livingston and the founders nearly went under on multiple occasions. There were harrowing tales of running out of money, running into roadblocks, and trying to accomplish much with little in the way of resources. Through it all was uncertainty. There were no guarantees in the early phases of the ventures that they would ever truly have a superior product, whether people would buy that product, or whether there would be funding to bring the product to market. Traders face a similar landscape of risk and uncertainty. Many traders have gone through nerve-shattering drawdowns before finally achieving lasting success. Only a deep belief in self and the value of one's pursuits can sustain the individual when it seems as though the odds are stacked high.

So often we hear that the ideal trader personality is one of discipline and emotional restraint. When we view trading as a business and the trader as an entrepreneur, a different set of personality strengths come to the fore:

* Passionate
* Creative
* Hard-Working
* Committed
* Resilient

* Able to Thrive Amidst Uncertainty

* Visionary

* Collaborative

These are the traits help to distinguish successful entrepreneurs and traders. Not everyone possesses this constellation of traits and talents. In evaluating yourself, don't just think of your trading as a business; think of it as a start-up venture. Then consider yourself to be a venture capitalist. Would you fund you? Do you have what it takes to define a creative strategy in the market and bring it to fruition against many obstacles and constraints? Is trading your way to escape the rigors of real work or do you consistently exemplify the eight qualities above?

Feet on the ground and eyes on the stars--it's a rare but powerful combination, in business and in markets.


A Visit With a World-Class Trader


Markus said...

Funny, I had the same thought yesterday reading "My Start-up Life" by Ben Casnocha. the book is very worth reading it (and it takes only a couple of hours ;-)
If you are really passionate about what you are doing hard working is just a part of it. Finding a balance and not neglecting other parts of your life then becomes more and more an important challenge.


Mr GG said...

Dr Brett, you seem to have hit a sweet spot. Churning out quality posts one after another.

Humble1 said...

I read your article on Mark Greenspoon and I wondered what you meant by "review markets in video" Does he use a program to capture the images on his monitor and review those at the end of the day? Thanks.

Brett Steenbarger, Ph.D. said...

Hi Markus,

Thanks for the note and the book recommendation. You're absolutely right about the need for balance. When all the self-esteem eggs are in a single basket, that's a vulnerable position to be in!


Brett Steenbarger, Ph.D. said...

Thanks much, Mr. GG. It's been very helpful to be meeting with traders and actively trading during the remainder of the time. The interplay of the two provides much food for thought (and blog posts!)


Brett Steenbarger, Ph.D. said...

Hi Humble,

Marc (and other traders I've worked with) actually videorecords his trading screen and reviews both the market action and his own trades. Very helpful tool to identify what a trader did right and wrong--


Humble1 said...

Thanks Brett, because I had a picture in my head of a guy trading with a video cam looking over is shoulder, and it just seemed silly to me.

John said...

wow, what a great blog! Thank you.
I've had personal experiences when all of the "self-esteem eggs" are in one basket...which is referring to the balance that Markus spoke of. I've been back to the drawing board 4 or 5 times now, beginning in in 2001 to present. If you're passionate, have deep beliefs, and are not afraid to fail, that's awesome, and that's what it takes. However, failures do affect others besides ourselves, spouses, children, family, etc. I have learned the value of networking, teamwork, and collaboration...in addition to having a rock solid business plan or trading strategy. Everytime I step outside the strategy, I lose...eventhough it hangs in front of me on the wall. Develop it, and follow it! Small losses are ok. Learn from them. Large losses mean you didn't follow your strategy. Unfortunately, my strategy has been developed by being back at the drawing board too many times....wondering what went wrong. It wasn't that I did not have a strategy, or that it wasn't that good...but that I did not have the discipline to follow it! I've asked the question over and over again, "How can something so simple as trading....be so difficult?" My 9 year old son could do better than me. Why? He would simply "trade-the-chart" and follow the strategy. No emotion, no news, no thinking. Just trading!