Sunday, November 01, 2015

Two Great Predictors of Trading Success

For many years I've been involved in interview and selection processes to hire traders at prop firms and hedge funds.  Those years of experience have been valuable, because I've been able to see, first-hand, who makes it in the trading world and who doesn't.

One standout conclusion comes from all of this:  The two best predictors of long-term trading success are:

1)  Originality - Traders who develop their own, unique approach to markets are more likely to succeed that traders that employ generic methods.  My common impression when I meet a promising trader is, "Wow...why didn't I think of that?"  I quickly recognize that the trader has achieved an insight that others have not.  That original thinking is more likely to generate distinctive results than run-of-the-mill thinking you could hear from any of a dozen market participants.

2)  Flexibility - The worst traders I know are perma-bulls or perma-bears.  They fit markets to their own thinking, rather than adapt to changing markets.  The best traders work with a kind of anti-confirmation bias:  they actively scan for information that does not fit with their views.  That enables them to be flexible and adapt quickly to new market conditions.    

If I were to place these two predictors of success under one umbrella, it would be "real-time creativity."  The successful trader sees and approaches markets in fresh ways--and continually refreshes those perceptions and methods.  

The recent Forbes post emphasizes that this real-time creativity is something that can be learned.  Indeed, the structured methods referenced in that post can help us cultivate original and flexible thinking.  We can't stand apart from the herd unless we're able to stand above the herd in our perception.  Consensus, status-quo thinking will never generate standout returns.   

As the latest post notes, using a trading journal to exercise our capacities for originality and flexibility is a great way to train ourselves to find the opportunity in markets that others are missing.  Two questions are a great starting point for such journaling:  1)  What am I seeing in markets today/this week that others are not seeing? and 2) What am I seeing in markets today/this week that is different from what I saw yesterday/last week? 

Further Reading:  The Hard Work of Trading is Achieved Through Play