- Learn to use your emotions, not avoid them.
- Trade the time frame that's right for your personality.
- Adapt your style and expectations to the conditions of the market.
- Distinguish between a good trade and a profitable trade.
- Avoid perfectionism.
- Develop a personal "success template."
- Focus on the process to be consistent.
Investing by Gut FeelThe 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 JoeFor 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.
- Avoid the urge to be perfect. Many traders look back over a week or month and see trades they feel they "should" have done, or positions they "should" have pursued more aggressively. Steenbarger finds that this attitude can be damaging. "You are psychologically translating a modest success into a frustrating failure," he says. Traders don't develop confidence by finding fault. Fault-finding often leads to the dangerous step of "revenge trades," in which you try to make up for a perceived past failure by pushing the next trade twice as hard, regardless of merit. Good traders accept missed trades and underleveraged trades as a natural part of the lifelong learning process.
- Develop self-knowledge by creating a "success template." Steenbarger says his trader-patients always want to talk about their losers rather than their winners. He recommends they develop a "solutions focus" by dwelling on their winners while still acknowledging their losers. To start this process yourself, write down the one thing you did best each day in the market and which you want to repeat tomorrow. Likewise, write down the biggest mistake you made each day, and wish to avoid tomorrow. If you keep up this simple two-entry diary and review it regularly, you will be on the path to achieving self-knowledge and developing the ability to observe and change your behavior. "Change starts slowly, but then it gets momentum and starts turning faster and faster," the psychologist says.
- Collaborate with a colleague or mentor. It's useful to work with someone who can help you build self-awareness -- not in a didactic, teaching environment like a classroom, but in a collegial atmosphere. It could be two traders in the same office or someone on the phone or over instant messaging with whom you can exchange ideas with goodwill and honesty. Talk about what worked and didn't work each day or week, and probe each other's comments without bravado or self-flagellation -- as if you're in a group-therapy session.