Saturday, August 20, 2016

Awakening Your Trading Talent

Talent is what we're born with; skill is what we acquire with practice and experience.  Exemplary performance, such as that at the Olympics, lies at the intersection of talent and skill.  Without the hard work of skill development, talent becomes unfulfilled potential.  Many hours of hard work without distinctive talent, on the other hand, can produce competence, but rarely more.

We have one great advantage in our quest for exemplary performance:  talent loves to be exercised.  When something comes naturally to us, when we gravitate toward activities in our free time, when we lose ourselves in the flow of an activity--the odds are good that talent is involved.  Skill building is not always a labor of love; sometimes it is much more labor than love.  When we yoke skill building to talent, we can find the motivation to get through difficult drills and detailed performance reviews.  When skill building is attempted in the absence of talent, it is sheer drudgery, and it is rarely sustained.

Can anyone succeed as a trader?  Of course not.  Not everyone succeeds as an athlete, and not everyone can succeed as an opera singer, surgeon, or graphic artist.  Performance follows from talent and intentional efforts to cultivate talent to its fullest.  Without the right kinds of bodies, we won't be Olympic sprinters, wrestlers, or swimmers.  Without the right kinds of minds, we won't be chess grandmasters.  Raw material matters.  It may not be sufficient for greatness, but it is necessary.

Show me a great trader, and I will show you at least one great talent.  Great traders play to their great talent; they maximize their strengths.  

Show me a great trader, and I will show you a passion for his or her work.  Why?  Because talent loves to be exercised.  A great talent is like a great horse.  You can't keep it in the stall indefinitely.  You have to let it run.  Great talent loves to run and run free.  The result is unusual productivity.  But only if the talent is awakened and refined by skill development.

Trading success comes with greater difficulty in recent years, because the machines have at least two sources of talent:  processing speed and processing breadth.  Machines can "think" faster and can integrate more information than those relying on the unaided mind alone.  What person can trade dozens or hundreds of strategies across multiple time frames and multiple assets to create smooth profit/loss curves?  Little wonder that asset management firms relying on such processing power have amassed hundreds of billions of dollars of assets.  Markets work by the golden rule: those who have the gold, rule.  Market movement is a function of capital flows, and those who have the greatest capital are in a position to most influence those flows.

Great size comes at the expense of great maneuverability.  When you have hundreds of billions of dollars, you cannot easily sell out of your holdings without greatly disrupting markets and getting very poor prices as a result.  Large money managers have to build and trim positions over time, and that building and trimming leaves footprints.  Among the traders who are succeeding in the current environment are those who possess the talents and skills to read those footprints.  Opportunity does exist in the trading world, but it is a different opportunity set from the one I encountered when I first began trading in the late 1970s.

But you cannot exploit those opportunities if you don't understand your strengths, how to exercise them, and how to refine them with skill development.  How can we know what we're truly good at?  That will be the focus of the second post in this series.

Further Reading:  Creativity and Greatness in Trading