Powerful Predictors of Trading Success

 

7/30/2025 - Personally, my most powerful predictor of trading success is when the trade idea lines up on multiple dimensions.  Specifically, if the pattern I am tracking (for instance, a moving average crossover on the adaptive moving average indicator) is occurring on multiple time frames *and* if the idea is confirmed by backtested historical evidence (for example, superior returns following oversold breadth conditions), the odds of success rise quite a bit.  Trading success comes from being willing and able to not trade until the lining up occurs.  In that sense, the predictor of success is selectivity and the ability to refrain from trading when the picture is mixed--and the ability to size up trades when the odds are skewed in your favor.  Not unlike poker in that respect.    

7/29/2025 - In every performance field, elite performers spend more time preparing for performance than in actual performing.  A basketball or football player spends more time in practice than in playing games.  Olympians spend more time in training than in performing their events.  Actresses and actors spend more time rehearsing their roles than performing on stage.  Elite military teams spend more time developing and practicing their missions than in actually carrying them out.  A powerful predictor of trading success is the amount of time and efforts spent preparing for actual trading.  Time in front of the screens is not necessarily preparation.  In sports as in markets, the rigor of preparation is how we earn success.            

7/27/2025 - Here are a few of the best predictors of trader success that I've found during my years of helping trading firms with their hiring.  The best candidates meet the following criteria:

*  They can describe their edge(s) in great detail.  Their descriptions include unique information that goes into their ideas and unique ways of entering/exiting trades for best reward relative to risk.

*  They can explain why their edge works.  Their reasoning is not correlational (I trade the X period crossover of the Y period average because it's worked in the past).  Their reasoning is causal.  They understand who is in the market, how those participants behave, and how to take advantage of their behavior.  Causal edges are more likely to persist.

*  They can provide specific examples of how their trading has grown/adapted/expanded over the past year.  They are always looking for new edges and broadening their coverage.  They develop many edges for different market conditions, different trading instruments, and different time frames.  This breadth of edge provides diversification, helping them adapt and succeed when markets change.

The great traders aren't just looking to trade.  They are continually building a business.

7/25/2025 - I've been working for over 20 years with traders in proprietary, hedge fund, and investment bank settings.  During that time, I've seen great success and I've seen heartbreaking failure.  The number one predictor of success is the presence of active mentoring.  By "active mentoring" I mean the opportunity to research and generate trade ideas with experienced, successful traders and the direct observation of those traders in expressing, sizing, and managing the resulting trades.  The odds of success for a developing trader are directly proportional to the opportunity to watch a mentor in real time and learn from their best practices, discuss the trade, and participate in the generation of new trade ideas.  Once the learning becomes second hand--via books, videos, etc--its effectiveness goes down tremendously.  

The best predictor of success is learning by doing and benefiting from the live role modeling of successful professionals.  This is how young athletes develop, and it's how medical students mature into capable physicians.  Trading psychology is not the best predictor of success.  Indeed, problems in trading psychology often are the result of inadequate training.  Mentoring is always live, in person, and conducted via teams.  When you become part of a successful team, you internalize the mindset and best practices of success.

Why Do I Go On Tilt?

 

7/24/2025 - A wild thought:  What if we're in different brain states when we recognize opportunity setting up in markets vs. when we are focused on markets but don't see opportunity vs. when we're not focused on markets.  What if we could monitor our brain states in real time and identify not only when we're in the zone, but also when we're seeing opportunity?  Does intuition leave a distinct brain footprint?  That's my next project--  

7/23/2025 - On the Fitbit device that I use (Muse S-Athena), there is an exercise on the app in which the goal is to keep an owl in flight.  If blood flow is going to the brain's frontal cortex, the owl rises in elevation and flies faster.  If blood flow is moving away from the frontal cortex (our center of thought/reasoning/decision making), the owl lands and stops flying.  Before we ever experience tilt, our blood flow moves away from our thinking centers and toward our flight/fight regions.  The goal of the exercises on the device is to be able to sustain longer and longer periods of flight for the owl--and to be able to return the owl to flight after it has landed.  This measures our cognitive endurance, and it measures our capacity for recovery.  If we train the brain for endurance and recovery, we become able to prevent tilt mode before it ever hijacks our actions.

The problem with tilt is not an excess of emotion.  The problem is a lack of brain fitness:  poor cognitive endurance and poor capacity for recovery.  This is a game changer for trading psychology.

7/22/2025 - The cognitive technique below is quite promising in intercepting the frustration that leads to tilt trading.  A different, behavioral, approach involves learning to keep oneself calm and focused with visualization and deep breathing.  (I am finding brain training devices helpful for this).  Once we have mastered that skill and can get ourselves in the zone on demand (which takes practice), we can then engage in our focused relaxation while we vividly imagine frustrating trading situations that could put us on tilt.  We begin with mildly challenging situations and gradually visualize more frustrating ones.  We don't proceed to a more frustrating visualization until we can keep ourselves fully relaxed while imagining the less challenging one.

Once we can keep ourselves calm in imagination mode, we then start trading with small size/risk and employ the focused breathing in real time when challenging situations occur.  When we can trade small size/risk successfully without tilt and handle drawdowns and unexpected events without losing our concentration, we gradually step up our sizing/risk-taking.  

What this does is literally train mind and body to respond to losses and unexpected trading events in a mode that keeps us grounded in planned trading, not a reactive mode.  This takes practice, but once you have the skill, you have it for a lifetime of successful trading--and you can apply it to other challenging areas of life.  

7/21/2025 - How can we prevent tilt from happening in the first place?  In this post, I'll describe a cognitive approach; in the next, I'll outline a behavioral method.  The cognitive approach links tilt to our self-talk.  In other words, we go on tilt not just because of what is occurring in our trading, but because of what we tell ourselves about what is occurring.  Tilt is preceded by frustration and frustration shows up as negative self-talk.  The key to preventing tilt is identifying the feelings of frustration and the frustrated self-talk *as they are occurring*.  

That takes practice in thinking about our thinking and maintaining awareness of what we're feeling.  In real time, you're aware not only of the market and what it's doing, but also in what you're thinking and feeling about what it's doing.  In my own trading, I actually talk aloud as my position is moving, evaluating what is happening.  The talking aloud enables me to hear myself and stay aware of myself.  If my talking aloud becomes at all emotional, I can catch my frustration in real time before it manifests itself as tilt.  When I find myself getting tense or talking emotionally, I can quickly return to a focused mode by breathing deeply and slowly and focusing on the trade in front of me.  

As a rule, I find it very helpful to have my stop loss orders entered into the book in advance.  That way, I don't have to worry about emotionality interfering with my trading plan when a trade doesn't work out.  When our trading decisions are mapped out in advance and entered in the order book, our trading can be planned and not reactive.

  

7/20/2025 - Reacting to market action is necessary for the management of risk and reward.  Overreacting to market action is a function of the unmet needs we bring to trading.  We can overcome emotional trading by turning our best trading practices into trading routines:  repetition brings familiarity, and we don't overreact to something that is routine.  If we *need* to be right--if we *need* to make money to feel successful as a person--then we will overreact to loss.

The key to overcoming tilt is to anchor our self-assessment in longer-term improvement, not in immediate P/L.  And how do we do this?  By first trading in simulation mode, where there is no money at risk at all.  That trains us to make the right decisions in real time and turn that decision-making into habit patterns.  Only once we've internalized those habits do we begin taking small risk and rehearse making the right decisions.  When we're consistent and profitable at the small level, we bump up the risk-taking gradually, in small increments.  The idea is to build the right habits and learn to enjoy the process over the proceeds.  Small, steady improvement based on consistency is what helps us internalize great trading.  What is familiar and routine cannot shake us up.  There is no overwhelming frustration if we're focused on doing the right things.  

When we take the ego out of each trade and just focus on doing the right things, there can be no tilt. 

The Psychology of Finding and Trading Edges in the Market

 

7/18/2025 - Essential to trading edges is our trade execution.  There are different execution rules and strategies for different kinds of markets.  Treat all markets the same and you'll get suboptimal results, become frustrated, and then blame your problems on "trading psychology".  Key consideration:  Is the current market trending; is it cycling; or is it cycling within a directional trend?  Very often, there are short-term cycles even within strong trends that offer great risk/reward entries and effective spots to take profits.  Amazing how our psychology improves once our market understanding improves-- 

7/17/2025 - Yesterday taught an important lesson in the market.  Stories about the possible firing of the Fed Reserve Chair created sudden volatility and large price swings in the overall market.  I was in the middle of a decently sized position in the stock index futures market when the news hit.  The position was based upon a well-researched idea, and the idea was working out--until it stopped working out.  I waited for the next bounce, took modest profits, and waited out the storm.  The important lesson is that the idea is not the trade.  The idea informs your position, but the management of the position involves tracking price, volume, and the here and now risk and reward.  It's important to find and trade edges in the market, but that's only the first step in sustaining profitability.

7/15/2025 - In my first book, The Psychology of Trading, I described my college experience with playing pinball machines.  What I found is that each machine had a particular quirk that could be exploited to consistently score points.  For example, on one machine, if you let the ball come down the chute and hit the left flipper (without using the flipper), the ball would bounce to the right flipper, where it could be sent back through the chute for points.  Rinse and repeat.  I consistently won free games exploiting this quirk and I quickly learned to experiment and find quirks on other machines.

The stock market is not a pinball machine.  It is a collection of different machines.  The quirks of one stock or one type of market differ from others.  The key is to be willing to experiment and experiment and lose and lose until you figure out the quirk/edge of the current type of market.  Very often, as with the pinball machine, the quirk comes from a non-obvious way of playing the game--and consistently exploiting that edge.  Success comes from doing something unique very well and very consistently.  As in poker, the need to keep playing the game under all conditions eliminates all edge.         

7/13/2025 - Traders are typically looking for probabilistic edges in the markets and instruments they trade.  They look to put the odds in their favor.  

One of the greatest mistakes beginning traders make is to assume that an edge can be derived from a single source:  a chart or indicator pattern, an earnings release, a breaking news event, etc.  This fails to identify--and understand--the context in which the opportunity is occurring.  Here are some of the most powerful edges I have encountered with the traders I've worked with:

*  A move occurs across multiple time frames, as in the case of a short-term breakout that is also a breakout on a longer-term basis or a failure of overbought conditions across time periods.  The broad context of the shorter-term move often defines the opportunity of that move.  When time frames line up, meaningful movements often occur;

*  A move occurs multidimensionally.  Some of my charts have time on the X-axis; others feature bars that represent fixed units of volume.  The most promising opportunities show up across the different charts as well as across time frames.  For instance, the moving average crossovers that I track via Ehlers' adaptive moving average measure sometimes occur on the volume-based charts as well as the time-based charts, capturing shifts in momentum in a multidimensional fashion.  I have found these opportunities to be especially promising.  Similarly, simultaneous signals from multiple indicators/systems tracking opportunities in different ways are worthy of attention.

*  A move occurs across related markets.  If a move can be detected across the broad range of sector ETFs, there's a good chance that this represents a momentum move of the entire market and broad based participation of institutions.  Similarly, if a move is occurring across such asset classes as stocks, bonds, and the dollar, the odds are good that something is occurring across macro markets that is attracting the interest of large investors.  Such broad-based participation often signals an evolving trend.

What this means in terms of trading psychology is that one must be focused on many time frames and many markets and charts to identify the most promising opportunities.  The great enemy of performance in this dynamic situation is distractibility.  It's the ability to see many patterns across many time frames and instruments that enables the trader to capture the best opportunities.  This is why it is vital to work on our capacity for focus when markets become busy.  It is also why traders often perform best in team settings, where there are multiple sets of eyes on multiple markets and time frames.  

Opportunity occurs as patterns of patterns.

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Our Trading Psychology Is Shaped By The Questions We Ask

 

7/9/2025 - One vital question for those who are early in the process of learning how to trade:

* Are you actually getting mentoring, or are you only getting information and instruction?  Because trading is a performance activity, teaching is not the same as training.  Can you imagine someone pretending to teach you football by emailing you diagrammed plays and showing you clips from games?  Would that really teach you how to play the sport and what to do in specific situations?  Mentoring means directly observing the performance of an accomplished professional and being able to ask questions about that performance and--eventually--trying the performance on one's own with direct supervision and feedback.  The saying in medical school is "see one, do one, teach one".  The way junior analysts learn trading on a hedge fund team is by seeing the actual, live trading of the portfolio manager and reviewing what was done and why, as well as what could have been done differently.  If you're not watching your mentor trade live, you're not getting mentoring.  You're getting instruction.  No one ever learned to perform on stage or perform on a basketball or tennis court in a classroom or through videos.  True mentors mentor through live performance and supervise your live performance.    

7/8/2025 - Here are three more questions that reflect best practices from successful traders and hedge fund managers/team members:

1)  How do you begin your trading day to ensure that you're in peak condition in terms of energy, focus, and preparation?  My experience is that the day is often won or lost based upon what the trader does before placing the first trade.

2)  How do you spend your time outside of trading to ensure that you're in a state of maximum well-being?  That means making the most of activities that are enjoyable, fulfilling, and energizing, including relationship activities and physical workouts.  For the hard-working professional, the great enemy of performance is burnout.  

3)  What research am I doing today that has the potential to open new doors of opportunity for my trading going forward?  Successful traders don't have "an edge"; they are constantly searching and re-searching new sources of edge in different instruments and market conditions.  If we're not innovating, we're going stale.

 

7/6/2025 - Successful traders, I've found, are distinguished by the questions they ask, not just by answers they've come up with.  Here are a few questions that can shape our success:

1)  What is the one lesson I can learn from the day that can make me a better person?  A better trader?  How can I apply that lesson to tomorrow?

2)  What is the market's personality right here and now and how has it been changing?  Are we becoming more or less volatile?  More or less correlated from sector to sector?  Broader or narrower in strength and weakness?  Look more closely; step back further:  what are traders/investors failing to see?

3)  If I wait patiently for great trading opportunity, how can I best learn and grow during the waiting period?  How will my learning and growing benefit my future trading?

4)  What makes my best trades different from my other trades?  How can I recognize that in real time to take greater advantage of my strengths?

5)  What makes my worst trades different from my other trades?  How can I recognize that in real time to reduce my vulnerabilities?