Some forms of trading will never be ones you could bond with. Others might fit your personality and talents beautifully. Consider four traders:
• Sherry, a graduate from a top MBA program, is a currency trader for a multinational banking organization. She takes long-term positions in the spot (cash) market based upon global/macro considerations. Much of her day is spent talking with knowledgeable bank and hedge fund traders and researching economic statistics from the major regions and countries of the world. Sherry can tell you shipping rates and volumes for most of the major world ports; equally readily, she can summarize each country’s monetary policies, debt levels, and interest rates. Just a few good ideas per year account for much of her profit. Sherry trades infrequently, but takes large positions when she does, using day-to-day market movement to help her build positions at favorable prices. Over time, Sherry has built a network of colleagues who share information about large buyers and sellers in the marketplace. She considers this form of information gathering essential in a decentralized global market. Her network, she believes, is her edge. She would never consider making decisions from short-term price swings, and she doesn’t view trading as a science. Markets, she believes, reflect capital outflows and inflows that result from decisions made by the largest banks, funds, and central governments. Her job is to track these in an environment with limited transparency. She sees herself as a jungle explorer on a continual safari, stalking for information.
• David, a former star athlete in college, works for a proprietary trading firm in Chicago, where he is the equivalent of a market maker in the S&P 500 (ES) electronics futures market. David is in the market at most times, generally working offers above the market and bids below. His goal is to profit from the bid-ask spread by buying bids and selling offers. Rarely does he hold a position more than a matter of seconds. Once in a while he gets “run over” when the market moves rapidly, but he can usually scalp ticks and earn a good living. David has no idea what is going on in the economy; nor does he care. He is an aggressive, action-oriented trader. His world is the moment-to-moment shifts of bids and offers in the marketplace. David likens trading to playing poker: He watches what large traders are doing by monitoring volume on a trade-by-trade basis and tries to decide when they have strong or weak hands. His trading is punctuated by shouts of joy and frustration, and his cubicle—set near the trade stations of similar traders—seems more like a locker room environment than the office of a professional trader. Once he leaves his desk, his market day is done. He religiously avoids thinking about the market lest he become locked into opinions the next day. He thinks charts are a waste of time, and the only news he follows is economic reports released during trading hours. Markets move, he believes, because of the large locals and institutions that trade each day. His job is to read their actions and intentions the way a poker player reads the tells of opponents.
• Pat, a business development manager for a regional manufacturing company, is a moderately active, part-time trader of equities, relying on momentum patterns for trades that last three to four weeks on average. He reviews dozens of charts each weekend, scanning his microcap stock universe for relative strength information and volume trends. Few analysts cover the stocks he trades. This is fine by him; he doesn’t want the opinions of analysts to interfere with his reading of supply and demand. Pat cannot give much of a description of what each of the companies does; he only knows their short-term trading patterns. He particularly gravitates toward stocks of companies with recent news events and price breakouts. His greatest success has come from capitalizing on the volume and volatility in individual small stocks following earnings reports and surprise developments. His stocks don’t closely follow the major market averages, so Pat spends little time looking at economic reports. Instead, he tracks patterns of momentum with the Commodity Channel Index (CCI) using end-ofday data. He has developed a feel for the CCI’s patterns and uses them to time entries and exits. During the day Pat focuses on his work in sales; at night he briefly reviews his charts and adjusts his portfolio as needed. Holding his positions for days or weeks at a time and limiting his screen time to evenings helps him separate his trading from his family and work obligations, but also provides him with supplemental income. He believes that charts capture the psychology of the marketplace and that small stocks avoid the noise created when large institutions trade in and out of the market. He views himself as a kind of psychologist: His job is to catch swings in market sentiment and profit from price trends.
• Ellen retired from her position as a software engineer following the buyout of her previous employer. Her cash-out from stock options allowed her to take up trading as a second career. She studied market patterns from historical data, testing these to determine whether it was profitable to trade them. Eventually she found a recurring pattern of trending price behavior in the fixed-income markets based upon early morning strength and weakness. Ellen developed automated programs to trade these patterns in the 10-year Treasury note and 30-year bond, freeing her from the screen as the trades unfolded over the day. Recently she hired a brokerage firm to trade the systems for her, providing her with more time to develop mechanical systems in other markets. Ellen’s goal is to diversify her risk by trading a basket of commodities with her best-performing systems. Her research is filled with estimates of risk and evaluations of system parameters: drawdowns, profit/loss (P/L), and so on. She frequently tweaks existing systems and tries out new ones. She studies little of the fundamentals behind market movements and rarely interacts with others over their trading opinions. For Ellen, trading itself is an unemotional task best left to computers. System development is her first love, a source of continual challenge and fascination. She believes that markets are continually evolving, requiring constant evolution of her systems. Her job is to recognize when markets are changing and identify their new patterns as quickly as possible, before they become more widely known to traders. She views herself as a scientist, ferreting out patterns amid randomness.
These four traders are composite portraits of individuals I know personally and who are successful in the markets. As a psychologist, I find it interesting to see how each of them found a niche in the market that fits their personality and lifestyle. Pat is a consummate businessperson, with more than a bit of people skill. It is difficult to imagine him as a full-time trader; he enjoys the social process of business development far too much for that. It is also impossible to imagine Ellen haunting trading chat rooms. Truth, for her, is to be found in empirical research—not the randomness of people’s impressions.
To look at him, David could be any kid off the street. He wears shorts to the office, with a baseball cap turned backward. When he is not trading, he is drinking with buddies over a poker game or playing basketball in a local league. He is clearly driven by the competitive element of trading and its nonstop pace. Over the course of any particular day, he may trade well over a hundred times. Sherry, on the other hand, is far more calculating.
She divides the world into those people who have information and those who don’t. Her skill, she believes, is the ability to assemble large amounts of information into a coherent picture. The upticks and downticks of the market, for her, are random noise hiding what is really going on among the market movers. She believes the real work of trading is extracting information from her network, just as Ellen believes the real work of trading is research and system development. For them, all the rest is merely placing orders. For David and Pat, reading the market is the essence of trading; everything else is extraneous.
We refer to Sherry, David, Pat, and Ellen as traders, yet their careers barely overlap. Each has found a niche, just as psychiatrists, surgeons, and radiologists find their niches within medicine. When my daughter Devon began modeling school, I always thought models were models. It turns out that very different talents and skills determine who will be successful as a runway model, a print model, or a hair model. Fortunately, trading—like medicine or modeling—is broad enough to encompass a variety of careers, each drawing on particular skill sets and interests. This provides traders with the possibility of finding the kind of market and market activity that will prove personally as well as financially rewarding.
Success reflects the fit between the person and the performance environment.
Finding the right niche makes all the difference in the world when it comes to performance. A hall-of-fame baseball pitcher might well be a flop as a hitter; a punter in football rarely makes a good linebacker; commercial print models are not necessarily the ones who dominate the runway; the best medical researchers don’t always make the best teachers: Over and over we see examples where the difference between success and failure is being in the right niche. Sherry and Ellen would fail miserably as scalpers; David would go crazy waiting months for his positions to work out. Pat actually did try trading full-time and lost his motivation as well as a fair amount of money; the experience was too isolating. Each of them, however, has found success through a meshing of who they are as people and how they approach markets.
All four traders work hard at what they do, but none of them really consider it work. Every single one has expressed a sense of wonder at getting paid for doing what they love doing. David is a gambler; Sherry is a huntress—they do what they do because it is who they are. The key step in their performance development was not the discovery of a great indicator or the exercise of some mystical knack for trading: It was simply finding, within the trading world, an activity that allowed them to express their talents and interests. For that reason, trading became intrinsically interesting and rewarding, sustaining their learning curves. One does not become a top gun without some click between personality, abilities, and the challenges of being a fighter pilot. That same click is found among trading’s top guns.
Read More : Trading: A Multitude Of Niches
