The 4 tactics of trading champions
As a psychologist and trader, I find myself mulling over one question more
than any other: What makes highly successful traders different from others?
Inspired by the experience of working with traders who earn a consistent
six and seven figures a year, I began a program of research into every
performance field I could find–athletics, chess, performing arts, medicine,
and elite military–to see what makes expert performers tick.
I hope to share my results in an upcoming book later this year.
The book’s thesis is simple: Trading is a performance activity, and
expertise in trading can be developed by the same processes that create elite
performance among athletes, soldiers, musicians, and chess grandmasters.
What this means is that there is much more to trading success than finding
good indicators and sustaining a positive mindset.
Elite performance is a function of
an ongoing learning process that is accelerated by training.
To see what it takes to be a winner in a performance field, let’s take a
trip to pit road on the NASCAR circuit and observe the pit crews that often make
the difference between success and failure for a driver.
Our tour guide for this visit will be Breon Klopp, senior director of
development at PIT Instruction and Training,
LLC, a training center for pit crews across the country.
If any performance field is as competitive as trading, it is car racing.
A mere fraction of a second can separate race winners from losers, and no
efforts are spared–from pit crew training to automotive engineering–to gain
an edge over competition.
One similarity between racing and trading is that technology has leveled
the playing field, leading participants to seek their edge through superior
training. In trading, the online
medium and improved computer technology have leveled the field with respect to
information and access to markets. In
competitive racing, Klopp notes, “rule changes have created great parity in
the performance of race cars. A
byproduct of that parity is that car speeds are very similar and it is very
difficult for cars to pass each other on the racetrack.
The competitive focus has shifted to pit road, where drivers are
dependent on the performance of their pit crew to gain or lose positions against
the competition.â€
Klopp observes that racecars traveling 180 miles per hour are moving 264
feet per second. That means that
every hundredth of a second gained by a pit crew translates into 2-1/2 feet of
advantage–a meaningful edge in races that are often determined by inches.
When you consider that the simple act of missing a lug nut and having to
retighten it will add approximately 1.3 seconds to a pit stop–putting the
driver behind by 300 feet–you can appreciate the performance pressure faced by
crews.
How do pit crews train to the level of expertise in which they can perform
routine maintenance on cars, jack and change four tires, fuel up, and change
oil–all in 13 seconds? Klopp
offers the following observations:
- Frequent
practice of routine tasks — This includes both individual and team
rehearsals. “The goal,â€
Klopp explains, “is to have these common tasks performed to perfection at
an almost subconscious level so crew members may be attentive to tasks that
are more difficult or occur less frequently.â€
When routine skills become automatic, one’s resources can be
devoted to handling unusual situations as they arise. - Highly
realistic practice — The students at PIT conduct live pit stops in
full gear with cars matching the ones they’ll work with on race day, right
on down to the paint. Drivers
and crew chiefs participate in drills and practice communications with the
crew. When practice is
realistic, skills are more likely to carry over to race day. - Simulation
of difficult racing situations — Crews rehearse scenarios involving
equipment malfunctions, driver errors, and other problems so that they will
be prepared for almost any eventuality.
“The most competitive pit crew coaches and teams believe there
should be no unforeseen events, just undesirable ones,†Klopp explains. - Feedback
about performance — Digital video recordings are made of race days and
practices, and all individual performances are timed and observed for
possible improvements. When
problems occur, those become the focus of further practice.
Crews are constantly learning and improving.
What struck me most in talking with Klopp was the similarity between the
performance dynamics on pit road and those among Olympic athletes and other
elite performers. Expertise
follows from an intensive learning process that combines structured practice of
skills with realistic simulation and continual feedback for improvement. Indeed,
business organizations have become so interested in developing this source of
edge that they are sending workers to “Thinking Inside the Box†classes at
PIT, where they can acquire and hone individual and team performance skills.
The implications for traders are immense.
If trading is indeed a performance activity, we should expect the
following strategies to speed the development of expertise:
- Practice of core trading skills (reading supply/demand, order
placement, position sizing, determination of targets and stops) so that they
become automatic; - Realistic simulation of markets to gain experience with reading
market patterns during volatile and non-volatile markets, trending and
non-trending conditions, etc.; - Simulation of difficult trading situations in which trends and/or
volatility suddenly change; - Feedback about performance through the collection of trading
metrics that track how well traders trade under a variety of market conditions.
The good news is that performance expertise is not a
mystical, inborn quality: it is the result of an intensive developmental
process. We observe this process
among athletes as diverse as Lance Armstrong, Michael Jordan, and Dan
Gable–and we see it among concert musicians and prima ballerinas: drilling of
skills, simulations of performances, and feedback to create steady improvement.
More tools are available now than ever to assist this process.
Trading platforms such as Neoticker
and Ninja Trader are now building
simulation into their offerings and enabling traders to track the results of
their trading with detailed feedback. I
notice, for example, that the latest version of Trade
Station now allows traders to collect performance data on their trading that
is as detailed as their reports on mechanical trading systems.
Simulation and metrics are built into the Trading
Technologies platform, and an excellent metrics program from Trader
DNA allows traders to assess their performance as a function of market
conditions. (Please note: I have no proprietary interest in these
firms; nor did they solicit any mention from me for this article).
With a structured program of practice, simulation, and feedback, performers can
reach elite levels of expertise, achieving seemingly impossible goals.
When a group of equipment technicians from Intel’s High Performance
Maintenance crews came to PIT to try their skills on pit road, these
manufacturing-savvy professionals could muster–at best–33 second turnaround
times. Through intensive training
processes, real crews shave 20 full seconds from those times–and do so with
consistency. The elite traders I
have been privileged to work with are much like those crews: their core trading
skills are honed to the point of being automatic, and their ability to read
patterns in noisy market data and act upon them has become lightning quick.
As sport psychologists like to say, it’s not practice
that makes perfect, but perfect practice that makes performance. Or, as
one of Breon’s coaches used to say, “Practice makes permanent…poor or
perfect.”
Brett N. Steenbarger, Ph.D. is Associate Clinical
Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical
University in Syracuse, NY and author of The
Psychology of Trading (Wiley, 2003). As Director of Trader Development
for Kingstree Trading, LLC in Chicago, he has mentored numerous professional
traders and coordinated a training program for traders. An active trader of the
stock indexes, Brett utilizes statistically-based pattern recognition for
intraday trading. Brett does not offer commercial services to traders, but
maintains an archive of articles and a trading blog at www.brettsteenbarger.com
and a blog of market analytics at www.traderfeed.blogspot.com.
He is currently writing a book on the topics of trader development and the
enhancement of trader performance.