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Explaining Market
Success
By Brett N. Steenbarger, Ph.D.
Numerous books have been written on the topic of
trading success. Nevertheless, it is unclear how expert traders
obtain their expertise. Several explanatory models are implicit in
market writings:
1) The
psychological model – What makes great traders, this model
asserts, is self-mastery. Great traders don’t necessarily possess
better trading methods or secrets, but apply common wisdom more
consistently, with less emotional interference, and therefore with
better risk management. Developing trading expertise is a function
of developing oneself in this model.
2) The
scientific model – What makes great traders according to this
model is superior research. Markets exhibit cause-effect
relationships, and these relationships shift over time. The role of
research is to uncover these patterns and capitalize upon them.
Such a model is, in a sense, the opposite of the psychological
model. It hypothesizes that, once you discover inefficiencies in
the marketplace, these can be incorporated into mechanical systems
that eliminate any troublesome human elements from trading.
3) The
hidden pattern model – Success in the marketplace, this model
emphasizes, is a function of understanding. Patterns exist in the
marketplace that do not shift over time, but also that are not
necessarily observable on the surface. The role of the great trader
is to successfully decipher and apply these universal patterns.
This is not so much a function of research as experience; such
approaches to trading as charting, Elliott Wave, and Market Profile
are not systematic approaches to trading, but instead rely on the
trader’s interpretive skill.
4) The
performance model – Trading is viewed as a performance activity,
like athletics, in this model. Successful trading can be broken
down into component skills and aptitudes that can be honed through
intensive exposure and practice. Expertise is less a function of
explicit research or pattern-based interpretation as rapid execution
of perceptual and motor skills.
No doubt each of these models possesses elements
of the truth, and it is quite possible that all of these models
represent a portion of what it means to be a great trader, not
unlike the descriptions of the elephant offered by the proverbial
blind men. Models one and four emphasize qualities of the trader;
models two and three stress the underlying qualities of the
marketplace.
In a sense, these models are like lenses that
traders wear, shaping how they view the world and prioritizing what
they work on. They reflect deep belief structures about the nature
of the world: whether reality is fixed (capable of being captured
by universal patterns) or changing (capable of being captured
through ongoing research); whether knowledge is explicit (obtained
through psychological reflection) or implicit (reflected in
performance).
Because these models of market success are drawn
from our fundamental views of the world, I suspect that they are far
less amenable to modification than is commonly appreciated. A
researcher will be turned off by Elliott Wave theory not because of
objective evidence (which the researcher finds lacking and the
Elliotician sees aplenty), but because the very notion of fixed,
unchanging Platonian realities does not mesh with a perspective that
emphasizes dynamic interrelationships. To a trader who views
trading expertise in performance terms, the idea that success is a
function of mindset simply does not register: Can one become a good
surgeon through self-development? And yet can one perform without
the right internal harmony (as the recent experience of the Los
Angeles Lakers demonstrated)?
Perhaps the successful trader differs from the
unsuccessful one, not because of the superiority of one model over
another, but because he or she has found a model for professional
development that fits with his or her basic personality, outlook,
and experience sets. The unsuccessful trader may lack a coherent
model altogether—impulsively shifting from working on self to
working on market, working on research to working on discretionary
interpretation. Or unsuccessful traders may pursue models that
utterly conflict with their fundamental personalities traits and
life experiences, as in the case of intuitive individuals who
attempt to force their trading into mechanical schemes.
In that sense, the models are like religions:
There may be multiple paths toward spiritual growth, but it is
necessary to find a path that speaks to you. One cannot be a devout
Christian one day, a disciplined Zen practitioner the next, and
still later an Orthodox Jew. By asking fundamental questions—Where
is opportunity in the marketplace? What competencies do I need to
capitalize on this opportunity?—you can begin to grind your own
lenses and formulate a plan for furthering your success.
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Brett N. Steenbarger, Ph.D. is a clinical
psychologist and active trader, writer, and
researcher for the past 20 years, Brett is the
author of The Psychology of Trading (Wiley;
2003) and numerous articles on trading psychology
for print and online financial publications.
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