Trading Success: A Perspective From Wonderland

It's a particular joy for me when the comments to my blog posts are every bit as good--if not better--than the posts themselves. Such has been the case with my recent post on finding an edge in the currency markets. I heartily recommend that you read the comments to my post--particularly those of Ziad and Brandon (BW).

When I visit different proprietary trading firms, investment banks, and hedge funds, I feel a bit like Alice in Wonderland. The reality I experience at these firms is nothing like the one that is portrayed in the popular trading literature.

Trendlines? Oscillators? Chart patterns? Wave formations? Angles? All of those figure prominently in the books, seminars, and magazine articles that dominate the mass market.

Yet I have yet to see a successful trader at any of these firms use these tools. You would think, by sheer chance, having worked with well over 100 traders personally and closely, I'd find *someone* who trades the way the books and magazines describe.

But no. I have found none.

Rather, what I find is a kind of reasoning that might best be called "relational". The traders who are doing this for a living and making a successful living year after year invariably relate the instrument(s) they are trading to a broader network of market events.

This can take the form of intermarket analysis (i.e., developing a view on currencies based on interest rate differentials and yield curve dynamics across countries), but can take other forms as well. For instance, I notice short-term S&P traders at prop firms looking at what is happening in related markets (NQ, for example) and sectors (financial stocks) to get a handle on what their market is up to.

Somewhat defensively, a few readers have replied that it *is* possible to make money trading simple market patterns. To clarify (and also to apologize if I was unclear): I never meant to say that it is *impossible* to succeed without relational reasoning. Rather, I was passing along my observations over the last two years that I have not encountered a consistently successful professional trader who trades simple, linear relationships limited to their trading market.

It was not always thus. When I first came to Chicago, I saw many traders thrive simply by trading patterns in the depth-of-market displays for their instruments. As an increasing proportion of that trade became automated (and the automation exploited mispricings across instruments), that trade went away. It is now rare to see a highly successful short-term trader in Chicago trade in that market-making style.

Similarly, in the late 1990s, it was common to see traders thrive by trading momentum patterns among NASDAQ stocks. That trade also dried up as we moved to record low volatility. It doesn't mean that someone, somewhere *can't* make a living by trading short-term momentum, but the opportunity is not what it once was.

There is much to be said for trading a style that is congenial with your talents, skills, and interests. Still, such a style must be consistent with objective opportunity if it is to yield enduring success. Many of the trading approaches described by the popular trading literature (such as buying strength and selling weakness) not only have no edge in short-term trading of stock indexes, but actually run counter to objective opportunity.

I'll state my position baldly and take the heat as it comes: I think the individual, independent trader is being sold a bill of goods. There are firms that have a vested interest in making traders believe that success is easy and that the simple patterns offered by their software, trading courses, and publications will provide a road to riches.

It's no different from the "no-money down" real estate seminars or the pyramid marketing schemes. All promise great returns with little effort or knowledge.

The irony is that traders would love for me to validate their fantasies and tell them that untold wealth is around the corner if they just follow a particular set of indicators or self-help methods.

But I can't do that. I visit the traders who are truly successful--and whose success I can personally verify--and I see them doing something very different from what the seminars and magazines describe. Similarly, when I look at who is truly successful in real estate and in business, I find entrepreneurs who study and master their markets--not people who are acting upon a seminar, a wing, and a prayer.

Success *is* possible for the individual trader; I've seen it happen. But it's the result of a developmental process that includes a kind of cognitive development that transcends simplistic reasoning. More on that cognitive development in my next post.