Tuesday, January 29, 2008

What Makes an Expert? Three Surprising Research Conclusions

The goal of every serious trader is to acquire expertise: the ability to succeed across a variety of market conditions over time. A recent study that I reviewed found that such expertise is rare indeed, perhaps as uncommon as 1 in a thousand. The same researchers, however, found that such expertise *does* exist: a small core group of traders persist in their success year after year.

So what makes an expert? How can traders guide their own development and become expert traders?

A research summary from K. Anders Ericsson, a leading researcher in the field, offers three surprising conclusions:

1) "Measures of general basic capacities do not predict success in a domain" - Experts cannot be distinguished by their superior intellects or other cognitive talents. This suggests that, while certain inborn traits and lack of capacities might prevent the development of trading expertise, the presence of particular native talents cannot ensure success.

2) "T
he superior performance of experts is often very domain specific and transfer outside their narrow area of expertise is surprisingly limited" - Being an expert in one domain does not predict expertise in others; a person can be a highly accomplished trader, but not expert in other areas. Moreover, a person can be an expert scalper or portfolio manager and yet fail at other forms of trading. This is the notion of "niche" that I describe in my book: the successful trader has found a particular sphere of success that expresses his or her skills and interests.

3) "Systematic differences between experts and less proficient individuals nearly always reflect attributes acquired by the experts during their lengthy training"- A saying among expertise researchers is that practice does not make perfect; perfect practice makes perfect. The expert is one who has undergone a structured, deliberate process of training that builds competencies, offers extensive feedback, and draws upon intensive effort over time to internalize knowledge and skills.

What does this mean for traders? Here are three conclusions of my own:

1) The majority of traders are looking for expertise in all the wrong places. They look for *the* right trading charts, indicators, setups, or systems. They are like beginning golfers who think they'll succeed if they only get the right set of clubs. Because they hope to get "the answer", they expect success in a year or two. The research is unequivocal: expertise develops over a period of many years. If those years are not structured properly, traders will repeat a single year's experience ten times; they won't acquire ten years of experience.

2) The vast majority of offerings in trader education are not structured for expertise development. Seminars, books, Web articles and blogs, weekend courses--all can be useful in imparting information. But expertise development is not simply about the accumulation of information; it is about skill development under realistic, challenging conditions. No doctor, athlete, or musician could acquire expertise by attending seminars or reading books alone. The same is true for traders.

3) The reason most traders fail is that they never enter a path of expertise development. It is rare to find training programs of any quality and substance at proprietary trading firms; one finds mentorship at investment banks and some hedge funds, but this is very hit or miss depending upon the commitment of the mentor and his/her skill in imparting skills and structuring a learning process. The independent trader has even fewer resources to generate and sustain an accelerated learning curve. There is much more to acquiring expertise than keeping a journal and trying to follow a simple plan.

So what does a trader need to progress from being a novice toward becoming competent toward exhibiting expertise? A curriculum: a structured process, like physicians undergo, that begins with information and understanding and then progresses steadily through skill development. In my next post on this topic, I'll explore what such a curriculum might look like.


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popeeka said...

I am a beginner trader and I would love to see how such a curriculum could look like. Tnks!

Lavonne said...

Thanks for these posts. I finished reading your book Enhancing Trader Performance a few weeks ago, and am now going through it more slowly a second time...it's joined a few often flipped through, much underlined trading favorites on my desk.

Sandor Tucakov Caetano said...

Hi Dr. Brett,

When I read your book I got many questions about how a intermediate term swing trader curriculum should look like...


Evolved Trader said...


Another great post. Trading experts are what I call unconsciously competent.
We gather knowledge in our Explicit memory system, however it does not become an intrinsic part of who we are until it's placed in the Implicit memory system and the autonomic nervous system. Thats why just reading Trading books is not enough to become and expert. You have to apply the information flawlessly through repetition.

Thanks for the insights Brett,

Adam said...

Brett ~

Fantastic post! Brilliant! I look forward to the next episodes.

My own experience with hired “experts” is that their refined knowledge gives them the ability to be wrong with great precision, sometimes with spectacular results.

Witness the many thousand economists predicting future GDP performance. Their oracular musings are wrong more often than random guessing would return.

Around the globe, expert biochemists are conducting experiments hoping to develop cancer vaccines. With many billions spent, not one post-diagnosis drug has yet been brought to market.

Expert market prognosticators expound at length on millions of televisions. One can say with confidence that following their guidance would lead to blow-up.

We look to experts for specific knowledge, yet expertise seems to lead to the absence of robustness. Robustness would be a methodology leading to partial success in a wide spectrum of situations.

The most robust batter in history, Ted Williams, divided the strike zone into 77 areas the size of a baseball, seven wide by 11 high. Knowing where his sweet spots were, and not swinging at others, gave him greater than random predictive ability and outstanding results.

Experience has taught that while life might be like high school, there is no high school for traders. Booting up our screens, we’re instantly in the jungle with predators who offer no quarter. Only the robust survive.

I’m convinced that nothing can replace the strict discipline of extensive research and testing that leads to our dividing market situations into Williams’ strike zone and swinging only at the sweet spots.

Perhaps the greatest expertise of all would be having the patience to pay our tuition to the market while learning who we are there, then slowly expanding our competence in order to be selectively responsive in the ever-evolving landscape.

The day I peer into a mirror and see a market expert looking back at me, I hope I’ll have the wisdom to go to cash and take up stamp collecting.


John Forman said...

Hi Brett,

Your conclusion points are exactly why I structured my book the way I did, with lots of encouragement to practice and exercises for doing so. Of course in my case I wasn't trying to teach a specific trading system or anything like that, but rather aiming at getting the reader to develop and expertise of sorts in the basic foundational elements of trading so they could then move on to the more specific skills. Unfortunately, while I can (and have) constantly expound on the value of practice, I can't control whether a reader does it.

That's said, I'm very eager to see what your curriculum looks like to see how it compares with what I've seen in my athletic coaching experience. As you noted in Enhancing Trader Performance, there are a great many overlaps between athlete and trader development.

Author - The Essentials of Trading

Tim Knight said...

Wonderful article; thank you, Brett!

MikeH said...

Thanks, you just gave me ideas for structuring my simulation sessions, including four specific scenarios to practice.

Brett Steenbarger, Ph.D. said...

Thanks, Lavonne; I wrote the book because I saw so little published on the topic of *how* traders can develop expertise--


Brett Steenbarger, Ph.D. said...

Great point, Ryan; repetition is indeed the key to internalizing skills and making them automatic--


Brett Steenbarger, Ph.D. said...

Hi Adam,

The Ted Williams analogy is *perfect*. I can't think of a better success formula for trading than knowing the sweet spots in your strike zone and laying off the not so sweet areas. Thanks much--


Brett Steenbarger, Ph.D. said...

Hi John,

Very good point: a trading curriculum should bear similarities to training programs in sports and other performance fields. Your book is definitely a resource in that vein--


Johan said...

Really looking forward to this post Doc!

And thanks for all the other findings you are sharing.

Regards from Sweden