Enhancing Trader Performance
Dan Gable, one of the great competitors in the history of sport. To say that he’s an expert performer is a considerable understatement. As a high school wrestler, he won his state championship three times and was undefeated in 64 consecutive matches. He proceeded to win 117 consecutive matches at Iowa State University and twice won the national championship. He was an Olympic gold medalist, outscoring his opponents 130–1 in his final 21 qualification and Olympic matches. As a wrestling coach for the University of Iowa, his teams went 355–21–5, yielding 45 national champions. In his book "A Season on the Mat," Nolan Zavoral provides a simple assessment of Gable: “Nobody trained harder.” Gable was known to practice so hard that he would literally have to crawl to exit the wrestling room. Often, while crawling, he would find a second wind and continue training.
Trading is a performance discipline and trading performance can be cultivated through the same kinds of training activities that generate expertise in such diverse domains as athletics, chess, and the performing arts.
It’s so basic that K. Anders Ericsson, perhaps the most prolific researcher in the field of performance, considers it the cornerstone of expertise.
Ericsson refers to this as deliberative practice, and it is a hallmark of expert performers. Through guided practice, experts open themselves to feedback and, as a result, become better decision makers.
We often hear the phrase “practice makes perfect,” but performance experts in sports emphasize that it is perfect practice that makes perfect.
How practice time is structured makes the difference between a performer with 10 years of experience and one who has a single year of experience repeated 10 times over.
Vince Lombardi once commented that good losers usually lose. So it was with Mick and Al.
Competence precedes confidence: Winning mind-sets result from mastery, not the reverse.
Practice is the cornerstone of expertise because it multiplies experience.
But elite performers are doing what they want to do when they labor far more than eight hours a day on their craft.
It is difficult to imagine enjoying an activity for which one has little or no aptitude.
Research tells us that a minimum of 10 years is required. Indeed, this “10-year rule” is one of the more durable findings in expertise research spanning sports, the arts and sciences, chess, and medicine. There is so much knowledge and skill required by most fields that elite performance necessitates years of development.
Over and over we see examples where the difference between success and failure is being in the right niche.
When traders find their niches, they open themselves to talent-environment interactions that create massive multiplier effects.
When I first came to Kingstree Trading as director of trader development, one of the first books that owner and founder Chuck McElveen recommended to me was "Good to Great" by Jim Collins.
1. What you can be best at. 2. Where you can be most profitable. 3. What you are most passionate about.
How do you know that you’re trading the right way for your talents and personality?
EXHIBIT 2.1 Trading Experience Checklist
Yes No
Have you tried trading different time frames (intraday, swing, long term) on an ongoing basis? Have you attempted to trade different markets (stocks, futures, commodities) on an ongoing basis? Have you experimented with trading different styles (technical, tape reading, quantitative, mechanical) on an ongoing basis? Have you been trading on a regular basis for a year or longer? Have you made major adjustments in your trading approach after becoming dissatisfied with your results? Do you have a trading method that you consistently follow?
The issue is not one of possessing a global “right personality” for trading, medicine, sports, or any broad performance field. Rather, it is finding the right fit between your personality and the specific type of trading, doctoring, or athletics that you might undertake. Dale had the right personality to be a leader in the Army infantry, but perhaps he would have failed miserably on a Navy submarine or in the cockpit of a fighter jet.
Jim Dalton, author of "Mind over Markets" and "Markets in Profile," recently stressed to me,
These are the three legs of the performance stool: (1) your talents and interests, (2) your trading style, and (3) markets and their personalities.
If you rush your trading development and enter markets without first finding your niche, your most fundamental traits are apt to work against the niche you (artificially) define for yourself.
An interesting book called "Now, Discover Your Strengths" by Marcus Buckingham and Donald O. Clifton, Ph.D., makes the compelling case that people develop their potential by building on their strengths, not by trying to overcome their weaknesses.
Your ideal trading niche will be one that allows you to exercise your greatest talents while working around your weaknesses.
But if the trying becomes trying, try something else.
Traders—his text "The Essentials of Trading" is an excellent resource—and
Now you can see that the first learning loop of performance development is learning about yourself.
Though competence does not imply expertise, it is impossible to consider someone an expert performer who is not also competent in his or her domain. Competence, from this perspective, is necessary but not sufficient for expertise. If we are going to master markets, we must first keep up with them. We become competent before we become expert.
A competent trader is one who consistently covers his or her trading costs. An expert trader is one who makes a consistent and acceptable living from his or her trading.
The developmental psychologist Howard Gardner,
Competent music students sit at a piano for an hour a day and practice their pieces before getting on with their lives. The budding expert, however, has to be dragged from the piano. The interest, born of that crystallizing experience, is all-consuming.
Denise Shekerjian, who interviewed Coles and 39 other winners of the MacArthur Foundation genius awards for her book "Uncommon Genius,"
Because of this intimacy, I can trade equity index markets competently armed with only my TICK indicators and one-minute price and volume data.
Ordinary learning generates ordinary performance. Immersive learning—sparked by the crystallizing experience—is the motive force behind Collins’s flywheel, generating multiplier effects that build expertise.
Good performers do common things uncommonly well. But great performers do uncommon things.
We also made use of a portable heart rate monitor to keep track of his physiological arousal. We agreed that he would not take actual positions until he had mastered the art of keeping himself calm and collected when he watched the market.
He immersed himself in a state of focus and, while in that state, observed something he had not seen before. This new perception—his crystallizing experience—reorganized his views of the market. What was danger became opportunity; what was frustrating now was exciting; what was incomprehensible made sense.
Quite simply, if you do not experience the performance high, you are in the wrong niche.
“Only those who have the patience to do simple things perfectly,” the saying goes, “will acquire the skill to do difficult things easily.”
His rage to master the game was so strong that it obliterated the normal distinction between work and play.
I conducted a statistical study and found that the periods of greatest volatility and trending price behavior occurred near the times of the London and New York opens.
The comfort of a long lunch with buddies is the price one pays for missing an early afternoon breakout. There is nothing comfortable about the training regimens of Bobby Fischer, Lance Armstrong, Dan Gable, or Bob Knight.
Pablo has been with Kingstree from the start and has been consistently profitable throughout. When you talk the markets with him, his eyes brighten just a little and his tone becomes a bit more animated. Pablo doesn’t have a trading career. It has him. And that makes all the difference in the world.
Lance Armstrong describes being “clamped” to the bike pedals for hours and days on end, burning 6,000 calories a day and losing up to 12 liters of fluid during all sorts of weather conditions.
Psychologist Mihaly Csikszentmihalyi refers to this as the flow experience: the performer becomes so absorbed in the performance that it seems to flow effortlessly.
In my book "The Psychology of Trading,"
Csikszentmihalyi’s important observation is that the flow experience occurs only when there is relative balance between the demands of a task and the talents of the performer.
When task demands greatly exceed the ability of the individual, the result is anxiety. If task demands fall well short of a person’s capability, boredom is the consequence. The flow state occurs between boredom and anxiety, at that optimal state of arousal in which tasks are challenging without being overwhelming.
To a large degree, our moods are moderated by our perceptions—and especially our perceptions regarding our own competence.
In "The Little Book That Beats the Market," author Joel Greenblatt describes a deceptively simple—but effective—system for stock.
Changing markets and the law of averages dictate that slumps will occur.
Lance Armstrong. Diagnosed with testicular cancer that spread to his brain, he underwent a grueling regimen of chemotherapy treatment that, according to his book "It’s Not About the Bike," left him in a fetal position, retching.
Almost from the start, Lance treated cancer as he had treated his cycling foes: with a powerful competitive drive to win. “You’ve picked the wrong person to mess with” was his way of talking to the cancer. When his nurse tested his lungs for strength, he blew with all his force and told her to never bring the device to his room again; his lungs were fine. He insisted on walking the floors of his hospital rather than accept a wheelchair. He began biking as soon as his treatment allowed, despite his greatly weakened state.
The competence that distinguishes the path of expertise from the path of normal capability is one that transforms the individual. This is what Robert Pirsig meant when, in "Zen and the Art of Motorcycle Maintenance," he declared that the real cycle you work on is yourself.
I invite you to try a small experiment and visit the Daily Speculations website of Victor Niederhoffer and Laurel Kenner (www.dailyspeculations.com).
One common theme on the list, also found in Niederhoffer’s book "The Education of a Speculator" and his later effort with Kenner, "Practical Speculation," is the notion of markets as ecosystems.
How you structure your learning, however, will determine whether trading becomes the worthy challenge or a frustrating obstacle.
What does it mean to structure learning for success? Csikszentmihalyi outlines several preconditions of the flow experience in his book "Creativity":
- Clear goals at each step of the learning process.
- Immediate feedback regarding one’s actions.
- A balance between challenges and skills.
In his book "Coaching Wrestling Successfully," Dan Gable explains how he consistently elicited excellence from his teams. He broke each skill into several segments and then demonstrated each with a clear explanation.
Structuring Practice for Success: Research Findings
- Practice of varied skills is more effective than concentrated practice of a single skill.
- Mixing skill practice in a random fashion is more effective than practicing skills in uniform blocks of time.
- Qualitative feedback is helpful for beginners, but very specific quantitative feedback is more useful for experienced learners.
- Frequent feedback is helpful for beginners; not as helpful for experienced learners.
- Practice that encourages implicit learning is more resistant to emotional interference than practice that facilitates explicit learning.
Effective practice targets specific skills, mixes them for drilling, and provides constructive feedback geared to the performer’s stage of learning.
If the training is successful, it will be demanding—but motivating and empowering. It will build the sense of competence so that training becomes motivating in its own right.
There is a huge difference between the learning of professionals and the learning of amateurs. The amateur golfer learns golf by playing rounds with buddies; amateur tennis players get on the court and hack around. Amateurs learn by performing, creating repeated experience without structure or feedback. Professionals learn by drilling, progressing through structured sequences of skills with the assistance of feedback and mentoring.
Mark Hatmaker emphasizes in his book "Boxing Mastery" that the expert boxer progresses along a training continuum.
Chris McNab, author of the "SAS Mental Endurance Handbook," quotes Sun Tzu’s classic text "The Art of War": “If officers are not thoroughly drilled, they will be anxious and confused in battle; if generals are not competently trained, they will suffer mental anguish when they face the enemy.”
Insight: Much of the emotional pressure felt in performance can be traced back to inadequate training. The anxiety, boredom, and frustration described by Csikszentmihalyi are not merely causes of trading problems, they are the inevitable consequences of being out of the flow state. Proper training is trading psychology, sustaining the mindset as well as the skill level of the performer.
A fascinating study cited by McNab found that only 15 percent of Allied troops in World War II who were in battle actually fired their weapons. Without prior exposure to the intense fighting conditions that they encountered, they froze under pressure.
A regression equation to predict player ratings, coaching did not appear as a significant predictor. Instead, the cumulative practice hours of the players and the number of chess books that they owned were the two best predictors of expertise.
Kent State University in Ohio, the Massachusetts Institute of Technology, the University of Northern Colorado, and the Illinois Institute of Technology are but a few of the programs that actively teach trading in simulated environments.
Some of the most valuable programs, I believe, are those that allow you to watch experienced traders trade in real time and explain what they are doing and why.
John Conolly’s site, Teach Me Futures, archives many such programs and offers free access to a trading simulator through CQG.
My approach to this issue was to use a version of the TICK that only incorporates upticks and downticks from the 500 stocks in the S&P index. This Tick16 Index, developed by Tickquest, Inc., and implemented in their NeoTicker program, moves more quickly than the traditional TICK and is more faithful to the movement of the ES contract. Because it moves differently from the TICK, however, with a different range for high and low values, it takes a bit of adjustment. The NeoTicker simulation is perfect for this purpose. I create a chart that monitors ES price and volume, with the Tick16 displayed in a window just below. This allows me to see the movement of the Tick16 as I track ES price and volume change. On an adjacent screen is the Market Delta program, which graphically displays the proportion of volume in the ES that is traded at the bid and offer prices. This provides a ready measure of the degree to which participants are committing themselves to the long and short sides of the market.
As mentioned, another company that has made simulation free for the trading public is CQG, Inc., through the Teach Me Futures website.
The right kind of trading books—those that explain and illustrate specific trading methods—are also quite valuable by providing methods that you can practice, and eventually modify, on your own. (Jim Dalton’s work on Market Profile, Thomas Bulkowski’s work on chart patterns, and the trading patterns described by Linda Raschke, James Altucher, and Larry Connors come to mind.)
One of the best pieces of advice I ever received as a developing trader was something Linda Raschke wrote quite a few years ago. She suggested mastering just one pattern before tackling others.
—K. Anders Ericsson, "The Road to Excellence," page 43.
The more people sweat in practice, to paraphrase Navy SEAL Richard Machowicz, the less they’ll bleed in performance.
Recall Bobby Fischer’s chess lesson advice to his biographer: Play all the games in the chess book—then do it again.
Dean Keith Simonton has it right in his book "Greatness": Elite performers are distinguished by their productivity.
Ericsson’s research suggests that the concentration of the performer is an essential element in deliberative practice—another factor that distinguishes it from playful experience with a performance field. This means that the duration of effective practice sessions must be limited to allow for rest and recuperation of attention and focus.
Ted Williams is considered by some to be the greatest hitter in the history of baseball. His book "The Science of Hitting" is a classic account of elite performance.
The solution to the puzzle, I believe, is that it is not the number of years that is necessary to generate expertise, but the quantity and quality of the learning trials.
The magazine "Trader Monthly."
Videorecording, journaling, and the gathering of trading metrics are the strategies that I have found to be most helpful to the improvement of trader mechanics.
In his book "Trading Risk," Kenneth Grant recommends that traders limit their risk to a fixed percentage of their portfolios.
Victor Niederhoffer, in his book "The Education of a Speculator,"
John Carter, author of "Mastering the Trade" and developer of the Trade the Markets mentoring service, has seen more than his share of traders in search of holy grails. He recently emphasized to me, “Amateur traders turn into professional traders once they stop looking for the ‘next great technical indicator’ and start controlling their risk on each trade.”
My favorite application of videotaping is talking trades aloud so that your tape captures the thought process behind the trade, as well as the trade execution.
During trading, you watch the market. Videotaping enables you to watch yourself.
A tactic that I favor is to stay in a trade as long as volume is expanding in the direction of my position.
When Richard Machowicz, author of "Unleash the Warrior Within," left the Navy SEALs,
When traders are active in low-opportunity markets, the first hypothesis that comes to mind is that they’re pressing, trying to create opportunities.
When I asked John Forman, author of "The Essentials of Trading," about what traders most need to do to improve their performance,
Charles Kirk, editor of "The Kirk Report," a comprehensive digest of market information and trading ideas,
After going on a fishing trip with Rob Ross, who recommended that he read "Reminiscences of a Stock Operator" to get a different outlook on trading,
“I wanted one tick fifty times rather than a fifty-tick move.”
Trading is a performance field.
Trading consists of a variety of performance niches.
Trading performance is a function of training.
Trading expertise is a developmental process.
Question to Trading Markets founder, money manager, and market author/researcher Larry Connors: “In your experience, what’s the one thing traders most need to do to improve their performance?” Larry’s response was so thoughtful that I present it in its entirety:
First, you need to find a systematic method which removes most (if not all) of the emotion and discretionary judgment from your trading. Be prepared . . . this could take years. Once you have identified a system that can be profitable over the course of time, then you have to develop a mindset in which you:
1. Focus on executing your system perfectly for each individual trade.
2. Focus on weekly or monthly gains and not the results of individual trades.
3. Track and quantify your performance mercilessly.
4. At the end of each day, each week, and month evaluate your actions and then commit to doing better tomorrow.
5. Stay positive in your thoughts and spoken words.
6. Stay away from negative influences that cause you to have doubts and fears about your ability as a trader.
7. Teach others to maximize their performance and, in so doing, maximize your own.
Please make note of what Larry is saying: To succeed in the markets, first find your edge. Then work on yourself. Your first task as an aspiring expert is to find your opportunity. Next to that, all else is secondary.
(www.cqg.com).
(www.tradingtechnologies.com).
TradeStation
Mind Over Markets. This Jim Dalton.
TradeIdeas(www.trade-ideas.com).
(www.traderfeed.blogspot.com).
Trade Like a Hedge Fund. James Altucher’s book.
Trading Psychology (www.brettsteenbarger.com).
(http://abnormalreturns.wordpress.com).
(http://bigpicture.typepad.com).
(http://adamsoptions.blogspot.com).
(www.fickletrader.blogspot.com).
(www.tickersense.typepad.com).
"The Education of a Speculator." Victor Niederhoffer’s autobiography is a fascinating look at the life and mind-set of a performance-oriented trader, with plenty of insights into markets as well.
"Practical Speculation." Victor Niederhoffer and Laurel Kenner.
"The Essentials of Trading."
"How Markets Really Work." Larry Connors’s.
"Mastering the Trade." John Carter’s book.
"Trading Risk." Kenneth Grant’s book.
"Encyclopedia of Chart Patterns." Thomas Bulkowski’s.
**www.traderfeed.blogspot.com.**
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