Thursday, February 28, 2008

Why Trading Might Be the Most Difficult Job in the World

Reader and trader Don Chase emailed me with a perceptive observation, noting his belief that trading might just be the most difficult job in the world. He asks:

How many guys do you know who can accept being wrong?

How many guys do you know who can be wrong and lose money?

How many guys do you know who can be wrong. lose money and not feel bad?

How many guys do you know who can be wrong, lose money, not feel bad and reverse their position?

How many guys do you know who can be wrong, lose money, not feel bad, and reverse their position quickly?

Don's point is that trading requires an unusual combination of emotional resilience (the ability to tolerate being wrong) and mental flexibility (the ability to use losses as information and quickly change one's position in the markets).

Many people have a need to be right. That makes it difficult to quickly accept losses, and it makes it especially difficult to flip one's views. The best traders don't have a need to be right, and in fact they readily admit that there's many times they're wrong.

There's a different reason why trading might be one of the world's most difficult occupations: the rules of the game are always changing. In most performance activities, from sports to chess, the rules don't change from year to year. Market patterns, however, are continually shifting: trends change, volatility changes, and historical patterns that worked at one time suddenly fail during the next time period (a phenomenon that has recently tripped up several quant funds).

Because markets are ever-changing, success is never assured. Indeed, it's not at all unusual for very successful traders to re-enter a learning curve when market conditions change radically. It takes a very secure person to be able to accept those returns to the learning curve, and it takes a highly conscientious person to keep losses down when market patterns undergo a major shift.

Don has a great point. The average person loves job security; trading offers none. The average person loves success; trading invariably ensures periods of loss. The average person wants to be right; plenty of great traders are wrong half the time. Trading can be a tremendous challenge and a highly rewarding activity, but to get to that point, you have to be emotionally wired differently from the average person.


Resilience and the Courage of Your Convictions

Resilience and the Uncompromised Life