Sunday, December 03, 2017

Three Key Ingredients of Trading Success

Mike Bellafiore recently mentioned that quite a few of the traders on the SMB floor that floor have been experiencing their best ever returns.  That creates a wonderful database for studying the ingredients of trading success.

The first contributor to success is simply the market environment.  It is not a coincidence that November was a stellar month for the active day traders.  Many smaller cap stocks in the blockchain/crypto space have made huge moves intraday and over the course of a week.  It is very difficult for directional traders to achieve stellar returns in low volatility environments, something we're noticing among hedge fund returns lately.  What enables the active traders to achieve solid returns is their ability to direct their trading to what is "in play" at the time, thereby finding spheres of opportunity when VIX is still modest.  The principle here is that what you trade is as important as how you trade.  You can be the greatest gold miner in the world but go broke if you're digging in the wrong places.

On a parenthetical note, I might mention that the above principle is as important for longer time frame participants, not just the active day traders.  The directional macro investor typically benefits, not simply from volatility, but from trend.  If you look at the returns of hedge fund traders this past year, you'll find that the ones doing well have tended to be those who have been long stocks (or a combination of long stocks and long bonds in the risk parity trade); short volatility (which has trended lower most the year); and/or trading "mean reversion"/relative value strategies (in which stretched relative relationships tend to retrace in lower volatility environments).  Like any entrepreneur, the successful trader has to operate in a market that provides distinctive opportunity.

The second contributor to success for the traders who have had career best months and years has been the presence of an overarching visionary goal.  Several explicitly stated to me early in the year that they wanted to be million dollar earners this year.  It was a regular part of their thinking, and it framed how they thought about their performance.  The presence of a vision kept them energized and provided the motivational thrust for working on their trading.  Holding the vision kept them excited and energized through the year.  In many cases, that excitement and energy carried over to members of their team, fueling their performance.

The third success element for these traders was having small goals to accompany their large visionary goal.  The small goals were the things they needed to work on day to day and week to week to keep getting better.  Without the large, visionary goal, the smaller, process goals would have been mere drudgery.  But without those short-term process goals, the big vision would never have come to fruition.  As Bella explains in his post, it was the accumulation of trading improvements during the year that set the trader up for exploiting the trading environment.

When you have an inspiring vision and a robust process for working toward that vision each day, you set yourself up for success when opportunity arises.  

How are you preparing for success in 2018?