Tuesday, October 23, 2007

Reflections on Opportunity and Trading Success

I just received word from my publisher, Wiley, that The Psychology of Trading and Enhancing Trader Performance have been picked up for translation in the Czech Republic. That adds to foreign language translations in China, Germany, Japan, Poland, and Spain. Much of the international interest in the books has come through this blog; many thanks to international readers for their support.

A valuable point about trading psychology and performance was made by Jeff in his comment to my recent links post. Jeff quoted an excellent article from Teresa Lo, in which she cited William Eckhardt's observation that "what really matters is the long-run distributions of outcomes from your trading techniques, systems, and procedures". Further, Eckhardt observes that, if you make a bad trade and maintain good money management, you won't get hurt too badly. But if you miss a good trade, that opportunity is lost forever. Moreover, it may be that those missed good trades that makes the difference to those "long-run distributions of outcomes."

I'm glad that Teresa posted that perspective and that Jeff picked up on it. So much of success, whether it's writing books, trading, or advancing in a career, boils down to consistently pursuing opportunities when they present themselves. The majority go nowhere, but it's the few that work out that can make all the difference.

So it is in trading. I'm in the process of reading Michael Covel's new book The Complete Turtle Trader, which highlights the opportunity theme in a different context. (By the way, I like the book quite a bit and will write a review shortly). The Turtles had no magic formula for crystal-balling which markets would trend and which wouldn't. Instead, they diversified their capital and went with relative strength. Many of the the strong markets reversed and whipsawed them. But it was the few, good trending markets that provided the lion's share of the profits and more than compensated for the losses due to chop.

We often focus on bad trades and trying to eliminate those. What doesn't show as readily in our P/L summaries are the missed opportunities: the occasions in which we failed to take trades either because of fear, risk aversion, discouragement, or because we hit our loss limits for the day or week. That's Eckhardt's point: if you manage your losses, the odds are pretty good they won't put you in the poorhouse. But if you fail to seize opportunity, you'll never make the big leagues.

If you are truly serious about a trading career, seize every opportunity you can. If you have the chance to trade with really good traders, go for it. If you have the opportunity to talk with a successful trader, jump at it. A new idea? A new market? Keep looking for where opportunity may lie: the difference between success and failure may just be the one or two promising paths you take the time to investigate.


Dynamic Thinking and Trading Success


Anatrader said...


I have read the book: The Complete Turtle Trader, just once, but what strikes me most is that the dynamics of good trading apply whether you are a Turtle trader or not.

Looking forward to your book review.

Saul said...

Hi Brett,

Great point on the importance and significance of 'missed trades'.

If we say that at a high level in a defined trading period we have a given number of trading opportunities, separated into trades taken and trades missed. While we need to give consideration to ‘trades missed’, I think it is just as important to evaluate the efficiency of our 'trades taken'.

Something I've found useful in my own trading to do this is Maximum Adverse Excursion (MAE) and Maximum Favourable Excursion (MFE).

In case anyone wishes to explore the concept further, a good summary article is below:


For more detail, two great books by John Sweeney:

Campaign Trading: Tactics and Strategies to Exploit the Markets (John Wiley & Sons, 1996)

Maximum Adverse Excursion: Analysing Price Fluctuations for Trading Management (John Wiley & Sons, 1997)



West Coast Trader said...


Many thanks for reviewing my thoughts the other day - and for your comments on the subject. One of the issues that I deal with is staying positive through days where I experience drawdowns on losing trades. Always the tinkerer, I find it necessary to "sit on my hands" because you never know when that one trade will turn into a runner and get you back to even and beyond. That's where trust in your system comes in. If it is a system that hasn't been fully explored and tested, I am more apt to abandon the technique in favor of impulse trades. It's just then that a missed stup (based on the abandoned technique pops up) and turns into a runner only to be recognized after the close when I conduct my trading replay. That trust in your technique, which becomes the foundation for consistent trading, is needed so that the mind is free to recognize opportunities wherever they may be. Once the three keys are secured: (1) Passion, (2) Plan, and (3) Discipline, then the opportunities will be there for the picking.

Jeff said...

Thank you very much for your insightful reply!

Brett Steenbarger, Ph.D. said...

Hi AnaTrader,

Yes, there are certain trading principles that apply to many different strategies and time frames. Among those is risk management.


Brett Steenbarger, Ph.D. said...

Hey Saul,

Thanks for the comment. You're absolutely right: MAE and MFE really drill down to the quality of a trader's execution.


Brett Steenbarger, Ph.D. said...

Hi West Coast Trader,

Trust in your system, ideas, methods, rules: you're absolutely correct; it's impossible to handle the risk and uncertainty of trading without that trust.