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Principle #5: Trading is a team sport. I recently described a number of ways in which teamwork magnifies our learning and spurs our performance. Teaming up with other dedicated traders adds layers of accountability to our decision making; it also provides us with multiple inputs for trade ideas and ways of managing risk. Many psychological challenges of trading occur out of frustration, due to limitations of trading in isolation. When traders are committed to helping one another, there is no room for emotionality and impulsivity. Ultimately, however, traders who develop their own expertise within a team provide unique and valuable input to one another, supercharging decision-making processes. It is very rare to find elite talent that develops in isolation. In sports, in academics, in the arts: mentoring from experts/coaches and learning from peers supercharges performance. Who is making you better every day? Who are you making better every day? It's great to learn in a community, but it takes teams to build the performance that comes from commitment.
Principle #4: Great trading requires the ability to invest. A member of an Olympic basketball team will work intensively (with coaching/mentoring) on every part of their game--passing, shooting, defending, rebounding, etc.--and will spend further time to work on practicing new plays and strategies tailored to the vulnerabilities of the opponent. They invest hours and days of practice to prepare for competition. Similarly, the best traders invest time in every part of their game, from finding the best opportunities to refining entries, sizing, exits, and the structuring of positions. Working with a coach/mentor adds a layer of accountability to the trader's efforts and helps traders focus those efforts in the areas needing the most work. For the professional, much more time is spent in practice, review, and making improvements than in actual performance. The goal is not simply to win a game or make money, but to become your very best in every aspect of what you do. The measure of a great trader is found in what they do outside market hours.
Principle #3: The best trading proceeds from values, not needs. This is related to the idea that great traders have a passion for markets, not trading. The challenge of understanding markets engages our curiosity, fueling efforts to dig deeper and dig differently. That is what uncovers fresh edges in markets. The best trading teams that I've worked with are just as engaged in markets when they're not trading as when themes are active and prices are moving. In trading, as in other performance fields, success is a function of the ratio of time spent practicing and preparing for performing vs. the time actually spent in performance. We can only sustain such intensive, deliberate effort if we find something intrinsically rewarding in preparation: we value the process of curiosity and discovery.
This is why trading based upon needs never works. When we need to trade--when we need P/L--markets control us. We're no longer engaged in a performance mode. In trading, as in our personal relationships, deficit needs are a weak foundation for longevity. The best relationships, including our relationships with markets, are based upon positive values. They are expressions of who we are, not vehicles for what we lack and need.
Principle #2: Know who is on the other side of your best trades. Many of the best short-term trading edges come from exploiting the behavioral tendencies of others in the marketplace. What that means in practice is, not that you simply avoid emotional trading, but that you identify the emotional trading of others and take advantage of their cognitive errors and overreactions. We had a great example on Friday, when the SPX went down on meaningful selling pressure (as measured by the number of trades hitting bids; the number of stocks trading on downticks). Eventually the selling pressure led to a situation where buyers came in (as measured by volume lifting offers; the number of stocks trading on upticks) and price moved higher. From that point forward, there were continued bouts of selling that could not push the market to fresh daily lows. The bears kept selling, even as price and volume were telling them they were wrong. That contributed to a rebound that was every bit as potentially profitable as the prior decline.
The people on the other side of your best trades are those slow to update their views and positions. They are trading their ideas/biases and not truly tracking market activity and its shifts. The open-minded ability to adapt rapidly is one of the most powerful edges for short-term traders.
When trade ideas come from immersion in the market, we experience a quiet confidence in those ideas. Calm clarity is a sign that an idea has come to you--that you're not simply imposing your needs, your views, your desire to trade on the market. One of the most promising practices in trading psychology is training the brain to more consistently operate in a mode of enhanced focus. The best trading comes, not from controlling emotions, but from building our capacity to stay in the zone. When we wait and wait and wait and track the market and track the market over time, we are doing the very things that help train our brains.
Success comes from active patience. That's when the great trades come to us.