Gary Norden looks at what it takes to succeed in trading.
The best poker players or traders can trade each situation on its merits and may play the same hand or trade the same price in completely different ways on different occasions. These are the people who make a living from what they are doing. While it is not easy, there are techniques we can learn to try to think in this way. Then it is up to our own analysis and attributes.
No matter how many golf lessons I have, and no matter who my coach may be, whether or not I can become a professional golfer will depend on my own mental and physical attributes. Of course, I should be able to improve my golf, which will enhance my enjoyment of a social game and may win me a few dollars here and there (although after tuition fees I may still have lost money). Similarly not everyone has the attributes needed to be able to trade for a living. Many people can improve their trading with the right tuition, but whether they can eventually make a living from this business depends on factors that are difficult to teach.
Many would-be traders want to use a system, either mechanical or pattern-based, which they can employ time and again. Unfortunately, those who sell such 'education' have great stories about the outcome and reliability of their approaches. Many new traders find the stories irresistible. They believe: "If I follow this pattern/system again and again, over time it will prove profitable."
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Chess and poker both involve decision making similar to trading. When learning chess, people like our new traders will look for an 'educator' who teaches them along the lines of 'if your opponent moves his bishop to square XY then you move your knight to XZ ...and over time if you adopt this systematic approach you should win more games than you lose'. Doing this takes the uniqueness out of each game, but no doubt our educator will have a stack of evidence 'proving' how successful his system is.
Although we learn certain set moves when studying chess, each game is unique. If we adopt our educator's approach we may end up with a string of losses and no way of knowing how we can improve our play. Any knowledgeable player will easily foresee our moves. We may be able to beat other inexperienced players, but when we play with better players we will not win many games. Everyone can learn certain moves for chess, such as specific opening moves, but to become a good chess player requires more. Anyone can understand and play probabilities, but to be among the best players we need to be able to adapt to each game and, if necessary, change our style of play.
If we learn a systematic approach, we are not actually learning to play chess - we are learning only one style of playing. In order to play chess well we need to understand the game and think like a chess player. To win consistently against different opponents we need to adapt our play according to how we think each opponent is playing. This will change from player to player and even the same player will vary his or her play from game to game. Most of us don't have the ability to read the game as well as do Grand Masters. Few become great chess players.
While a systematic approach makes decision making easier, we will find out whether it worked only after the event. If we then want to change our technique we will be forced into using hindsight to try to discover what went wrong. While hindsight will always provide us with an answer (because we already know the outcome) it may not be the correct answer, because there are so many possible variations.
Poker is fast becoming one of the biggest sports in the world. It is the third most watched televised 'sport' in America. Many new players learn the respective probabilities of any card or suit in a game of Texas Hold 'em. For example, if we are dealt a Queen and a Seven we have a 50 per cent probability of winning against another random hand. Anything better than a Queen and a Seven has a greater than 50 per cent chance of success. As with traders, most poker players lose. Only a small percentage will ever be able to make a living from the game. Yet most players who play for money understand the probabilities of the game as well as what are good and bad hands. Much of the skill lies in being able to assess each situation on its own merits and in being proactive. Those who simply play the probabilities may make money over time (although their chances of doing so are not as great as they think). But they will be unlikely to win tournaments or great amounts of money and therefore, after costs, will be unlikely to make a living from playing poker. Good poker players will soon spot those who are playing mechanically and beat them.
Occasionally some poker players will win large sums as a result of taking big risks. While they might attribute their success to their own skill, if we copy their approach we are unlikely to come out as a winner.
While it is widely recognized that only a small percentage of chess or poker players will ever be able to make a living from their game, many educators suggest that this is not the case with trading. Yet the decisions under conditions of uncertainty that we face in trading are very similar to those in chess and poker. Furthermore, with poker as with trading, each decision results in our making or losing money.
Many people are too scared to conduct their own analysis and make their own decisions. They are more comfortable relying upon someone else's 'system' or 'proven' patterns. Mechanical or pattern-based trading may make decision making easier, but it is highly unlikely -- even if they are as reliable as claimed by their supporters - that such methods alone will allow you to trade for a living. While we can all improve our discipline, whether we can trade for a living depends on how we adapt to and cope with new situations. While understanding of markets and of decision making can certainly help, few traders will ever be able to make a decent living from trading.
Interestingly there are firms now marketing software for online poker players that, among other things, monitor the betting patterns of opponents. While such software may help us beat inexperienced or bad players (who we should be able to beat anyway), it will be of little use against the better players, who vary their game. Even if their decision making is not random, they have to make it appear so. Hindsight can help us to find patterns in what they were doing, but patterns are difficult to spot while a game is in progress.
When we trade, most of us cannot choose who we trade against. We have to trade against professionals. To make a living from trading we need to be able to read and understand the markets so that we can try to change our approach before we lose money, not after. It is important to aim high and to find out whether we are capable of such decision making. Even if you cannot make a living from trading you can still enjoy trading or investing as a pastime. Then you will not risk too much money, if you stay disciplined and know how to make good trading decisions.
There are a fortunate few firms who can choose who they trade against. The market making CFD and spread betting firms can trade against private traders. About 80 per cent of private traders lose money. Being able to trade against them seems like a fantastic business opportunity, especially as the private traders pay for the privilege. They sometimes pay twice, because they pay the spread and commission fees. As someone who has spent a great part of his career trading against other investment bank traders and hedge fund traders, I am more than a little envious of such firms. Any bank trader would love to trade against private traders for a living...
Many system or chart traders incur large losses from time to time from 'unforeseen' circumstances. Anything that has not occurred before will not be in their data or on their charts and will, therefore, be unforeseen. Good traders know how to find and weigh up outcomes the easy decision to buy again at $4. Technical analysts, claiming their views are based on psychology, will tell them that the $4 is a support level. This is highly debatable.
A better and more rational approach would be to analyse the current situation on its own merits. There might be other information to suggest that, this time, buying the stock at $4 is a bad trade. Unfortunately for chart traders this information will not usually be on the graph. I am not saying that all moves are predictable in advance -there are many illogical or random moves in the markets. But there are also many opportunities where information is available. Those who buy at $4 and are disciplined enough to stop themselves out on a break of $4 may not lose much. But what have they learned about trading or the markets? How can they improve next time? Their decision making is easier than is decision making for someone who tries to analyse each situation on its merits, but it is no more reliable than a rule of thumb and it is unlikely to lead to the trader making a living from this business.
The best poker players or traders can trade each situation on its merits and may play the same hand or trade the same price in completely different ways on different occasions. These are the people who make a living from what they are doing. While it is not easy, there are techniques we can learn to try to think in this way. Then it is up to our own analysis and attributes.
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