Working Through Some Issues in This Market

Investing by Gut Feel

The good doctor's most surprising finding is that many pros flourish without using any of the tools most commonly discussed in books and the media: They spurn technical analysis, quantitative analysis, accounting, discounted cash flow analysis, earnings projections, insider transactions and macroeconomic conjecture. Instead, they trade intuitively off a "feel" for the market honed during long hours of market observation and participation.

Forget about unemotional investing. Trading superstars are "very aggressive, very emotional guys" capable of using their unusual perceptive capabilities to process information quickly and make split-second decisions, Steenbarger says. "They have an intelligence of a sort, though you would not necessarily say they are book-smart."

No schools teach this stuff, so top trading companies start with men and women who meet the personality profile of a riverboat gambler -- definitely not MBA types -- and then train them to hone their instincts to take advantage of the repetitive flat-footed reactions of their competitors.

"You can't be analytical -- no big-picture stuff," he says. "You've just got to know when to go for the kill, when to add aggressively to your position when it's winning, rather than taking profits." In other words, just as in the days of Wyatt Earp, they're the quick and the dead.

Tips for the Average Joe

For those of us who don't have the tools or desire to be a gunslinger in the bond or crude-oil pits, here are a few ideas to work on over the remainder of the year:

• Adapt to the market. Steenbarger says he sees many traders who want to trade this range-bound market as aggressively as if it were a trending, momentum market; they keep trying to buy potential breakouts or short-sell potential breakdowns. But they just get chopped up. The problem is that the big ego required to be successful gets in their way. In times like these, he says, traders need to subordinate themselves: Be a bit more humble and just take what the market offers. Expect breakouts and breakdowns to fail and play excursions out of the range only for a reversion back to the range.
• Sometimes the right play is no play. The successful poker player knows he isn't at the table to play cards, but to win money. He knows when to hold 'em and when to fold 'em. In the market, periods of extremely low volatility hold scant opportunities for traders. Don't force it. It may be best just to hold cash and wait for better, higher-volume opportunities.
• Set process goals, not P&L goals. Setting ambitious goals to make a certain amount of money in a nontrending market may put you on a path to disaster. It takes your attention away from trading well -- doing your homework and following your rules. It's like a baseball player who'd rather hit 30 home runs than execute his swing properly. If they fall off pace, they start to press and swing wildly instead of focusing on a smooth, solid stroke. The most successful traders are ones who develop a set of rules that work in most markets, and then painstakingly follow those rules day in and day out without regard to the precise amount of money they're making. Set a goal of consistency, not of dollars.