Wednesday, November 05, 2014

Three Powerful Predictors of the Success of New Traders

I recently conducted my own mental survey:  I identified the young traders I had seen grow into successful money managers with superior track records of risk-adjusted returns.  I then asked myself how they achieved their success.  What were the ingredients that enabled them to evolve from junior roles to ones of unusual achievement?

Three factors stood out:

1)  Diligence - All of the successful young traders were workhorses and not show horses.  They put significant time into studying markets, learning from others, and learning from their mistakes.  All spent much more time in preparation, research, and idea generation than in trading.  They also displayed diligence in managing their capital.  All were very good at being open-minded, recognizing when a trade was not working out, and limiting losses.  This diligence in preserving capital helped them not lose too much money during their learning curves.

2)  Mentorship - Every single young trader I've seen go from zero to hero, where I directly observed the evolution, has benefited from a high degree of mentorship.  I am not talking about taking trading courses, reading trading books, or working with "coaches".  Rather, I'm referring to working side by side with a talented senior trader; observing their preparation, research, trading, and risk management; and absorbing the lessons of those observations.  There is a reason mentorship is embedded in most professional training programs, from the apprenticeships of master plumbers and electricians to the clinical rotations of medical students and the training of fine artists.  Role modeling channels and accelerates performance development.  

3)  Originality - Every successful young trader I've observed and worked with has been "out of the box".  They do not look at the same things as other traders, and when they do look at the same things, they see them in different ways.  Their originality might show up in trading unique markets, unique strategies, or finding unique expressions of ideas.  While they learn a great deal from mentorship, their creativity enables them to absorb the *process* of the successful mentor, but apply that process in ways that make it entirely their own.  They do not follow the herd and they have enough confidence in their judgment that they can act on their unique views.

I believe the combination of these factors helps explain why success eludes many new traders.  Some lack diligence and look to trading as a way to avoid working for a living.  Others are hard-working, but have not found the mentorship needed to guide their development.  Still others are easily swayed by media and those around them and fail to cultivate signature strategies with an edge.

I was recently reading a report from Charles Kirk to the traders that he mentors.  A decent portion of the report outlined a trade setup that he had missed.  Kirk clearly identified the error, owned it, and explained how he would learn from it.  That's the difference between a genuine mentor and a would-be guru.  Mentors are talented, but they are not perfect.  They offer learning experiences from their expertise, but they also aid learning via their mistakes.  You're most likely to learn from others if they themselves embody diligence, the capacity for teaching, and originality.

Further Reading:  How to Find Trading Mentors and Surpass Them