Case Study: “The Perfect Trader”
Let me make it perfectly clear that there is no such thing as “the perfect trader.” He or she simply does not exist. People simply can never attain anything close to perfection. All of us have an irrational, emotional component to us that will interfere with our trading. We all make slips and blunders. We all sometimes fail to learn the lessons we are supposed to be learning, and we make the same slips and blunders all over again. That being said, it can still be a useful exercise to summarize the key points of the successful traders’ personality traits presented in this book by trying to imagine what the perfect trader would think like, feel like, and act like. If we wanted to build the perfect trader from the ground up, what traits would we instill in him or her?
It turns out that one of the traders who participated in our NEO-AC study—he preferred to remain anonymous, so I will just use his initials (C.M.)—actually scored what might be considered the ideal personality profile for a trader—or at least as near to the ideal as could be hoped for. Based on the accumulated and averaged results of all the successful traders we studied, C.M.’s personality profile nearly matches what we would expect in the perfect trader. (C.M. would be the first to admit that, although he has been a very successful trader for quite a few years, he is still not perfect!)
First, C.M. not only has a very low overall N score, but in particular he has an incredibly low anxiety level (N1 = 2) and an undetectable level of vulnerability (N6 = 0). C.M., based on those numbers, is one cool cucumber when things get dicey
Remember, nearly all of our top traders scored low in both anxiety and vulnerability; this was one of the consistent patterns we saw in our research. C.M. just scores lower than anyone else we tested! Anxiety or fear is the predominant emotion that traders face again and again, so being low in N1 clearly gives someone the upper hand in trading the markets. Under pressure or heat, we would not expect C.M. to easily frazzle or melt down. Staying sharp and mentally focused and not being overcome by anxiety or self-doubt, C.M. is able to spot and crush good setups in the markets when they present themselves.
That’s exactly what C.M. tells us he experiences. He has noticed that frequently he has nerves of steel, though he tells us that, of course, there are times that he too becomes anxious. He notes that this is especially the case when the market moves strongly against him over a weekend, when he feels less in control of his trade, and when there are fewer options to manage the situation. He says that anyone is bound to feel anxious at those times and that there is no way to remove anxiety completely from trading.
C.M. feels that what sets him apart from other traders (and I believe this is key, so get your highlighter out!) is that he does not fear having anxiety. He does not have anticipatory fear; he does not have anxiety about the possibility of getting weak knees when things get dicey. It is not in the front of his mind. Further, he says that even when an anxious moment does set in, he knows it is going to dissipate quickly. Just by knowing, on a very cognitive level, that he is not going to emotionally fold under pressure is a huge part of C.M.’s success.
Awareness of anxiety, then, sounds very crucial, if we are going to learn from the example of C.M. That may seem like an obvious or even simple point, but it is huge! Not only does C.M. not have much anxiety while trading, but he does not have to worry about his emotions controlling him or interfering with what he is trying to do in the markets. He does not have that emotional specter always shadowing him.
Let me use an analogy. It would be like driving down the open desert highway at a very high speed already knowing in advance, with absolute certainty, that there are no highway patrol officers lying in wait for the next 100 miles. Not to advocate speeding on the roads, but with this major fear factor, or obstacle removed, a speeding driver could fly down the highway at a higher rate of speed and—here is the kicker—would be able to do so more safely than if he were doing so with he thought “Smokey” might be hiding behind the next billboard. Why? Without the constant thought in the back of his mind that a patrol car could be around the next bend in the road, the speeding driver could put all of his attention into his actual driving technique and any bumps or potholes along the way. He would be more in tune with his car and more apt to pick up on small changes going on in the environment. So too will the trader who is super low in anxiety be able to trade more freely—without constantly having to worry about his emotions and doubts creeping in and taking charge.
On the actions scale (O4) C.M. scores very high. This indicates that C.M. likes to take very big risks, but not so much for thrills or excitement. In fact, C.M. reports that all his life he has enjoyed taking various kinds of risks, such as racing motorcycles, catching alligators with his bare hands, and other such activities. “I like a good challenge; it’s always been that way. But it’s not a competition for me, and it’s not because I like to tempt my fortune. It’s also not at all important that I prove myself to others or to make people like me. I take risks primarily to prove to myself what I can do. It’s all about the personal challenge.”
C.M. went on to say that he was especially struck by how clearly the NEO-AC personality test identified this aspect of him. He explained that, although he has been very successful trading the futures markets, his primary motivation for trading is “to tackle a very difficult task, see how hard it really is, and see how well I can do it.” This is a very common theme I discovered among the very successful traders. It’s not about a thrill or a rush, and not even so much about making lots of money for most of them (although that is always nice); it’s really about a sense of mastery or the pursuit of mastery.
On the competence scale C.M. is also very high (C1 = 28), which reflects his self-confidence. His achievement striving is also very high (C4 = 26). A trait commonality shared with the other great traders we tested and interviewed is C.M.’s sheer willpower to be successful. “Tenacity counts for most everything,” is the way he puts it. The very best traders, like C.M., have a fierce and unconquerable determination. They will stop at nothing to be successful. And it shows in their NEO-AC.
C.M. also scored very high on the order facet (C2 = 25). As with other profitable traders high in C2, C.M. uses systems trading a lot. He describes himself as “80 percent a systems trader, 20 percent a discretionary trader.” Interestingly, he says that he had to come up with his own set of system rules that work well for him, because he found that “a lot of rules taught in trading courses and books are plain wrong.”
C.M. recognizes that the market is always changing and that his systems need to morph along with the market in order to remain relevant. C.M. reports that, in late 2009 after the quantitative easing of the markets, he did not sufficiently adapt his rules and systems to the new market conditions. For the first time as a trader he started losing money, instead of making it, on a consistent basis. It was only after six months of continued losses that he realized what was going on.
Under these new conditions the market was frequently making consecutive runs of up to a dozen days in a row, or more. The systems and methods he had developed over the years, prior to the quantitative easing, were built to operate on much shorter runs. His systems were no longer valid for the new markets. But it took him a solid half-year to figure out why he was suddenly losing money. His tried and true systems no longer applied to the current market conditions, and yet he was so used to relying on and following his systems that he had trouble divorcing himself from the idea that he had to operate by a certain set of rules. Here his high C2 was actually getting the best of him: He was too rigid, unable to bend the rules or make new ones. Only after finally recognizing what was going on and losing a lot of money in the process, did he find a way to adjust his trading methods to the markets’ new operating standards. He was then able to resume being a successful trader.
A key point here is that those traders who are very high in C, even the very best traders out there, may find themselves getting stuck in their old ways and slow to adapt to changing conditions. Paying close attention to how well we are adapting to new market situations is imperative. Think Darwin and evolution here.
One final thought about our “perfect trader,” C.M. While he is clearly not a dummy, it should be pointed out that C.M. never completed high school. Without a high school diploma or any education and training in finance/economics, he has become fabulously successful at something he has a true passion for. This really goes to show that personality and how one manages his or her emotions play a gargantuan-sized role in mastering the markets. Becoming a consistently successful trader has far more to do with the depths of one’s determination, the ability to adapt when needed, and being mentally resilient to stressful situations, and far less to do with how educated someone is or maybe even how smart he or she is (IQ).
Mental Edge Tips
When C.M. first started trading the markets years ago, he went broke right off the bat by losing all of the $65,000 he had started with. His failure stemmed from following the trading advice of others. Let me end this chapter with a very instructive mental edge tip and quote from C.M.:
It was all due to my inexperience and my idiocy. But luckily I had a friend who believed in me and backed me for a second try at the markets. My backer said, “I know you are going to be successful, because you are too stupid to quit trying.” Through trial and error, I came to figure things out by myself and developed my own personal trading style that I am comfortable with. That’s what it’s all about, finding a method that you are comfortable with. Looking back, my initial wipeout was the best thing that ever happened to me, because it forced me to learn to develop my own style instead of just trying to copy someone else’s. And I have since learned that those who do well trading the markets right out of the blocks eventually all fail, because they falsely learn and come to believe that trading is not that hard and that anyone can do it. Even later, when they eventually fail, as they all do, they still have this idea that trading isn’t that hard of a thing and that they can make money again. They think just by following someone else’s model or method they can make money, because they got lucky that first time. I am lucky to have learned the secret to successful trading, and I have had a wonderful run of years because of it.