Monday, November 27, 2006

Three Market Idiots

There are three varieties of idiots in the market you're likely to encounter during your trading career. Contemplating the above truth from the great site of Despair, I thought I'd give you a heads up, so you can avoid these laggards in the great Darwinian race. You see, social success is not so different from trading success: you ride your winners and dump your losers. And, trust me, these three are not ones you want to ride:

1) Idiot #1: The True Believer - You've probably encountered at least one of these dolts during your market sojourns. They are the ones who have figured out the answer to the market. Not an answer, mind you. *The* answer. It usually is some kind of numerological or astrological scheme, and it is always a hidden secret. Unfortunately, True Believers don't seem content with keeping their knowledge hidden. They're always after you to "unlock the mysteries" of the market by sharing in their discoveries. A surprising number of True Believers are also True Bears, which means that they're forever predicting the end of the financial universe as we know it. They predicted it in 1980, 1990, 2000, and they're still predicting it. And when the market rallies and proves them wrong? Well, that just means the bubble is getting even bigger and the implosion of the universe will be even more profound. My take on True Believers? This is not investing or trading; it's cultism. And true believers are at the point where they *have* to believe, or they'd come face to face with the awful realization of the utter waste of time and money their beliefs have brought, as the Dow has risen from 775 to over 12,000 within a 25-year period.

2) Idiot #2: The Gambler - This is the "I'm-giving-up-my-job-to-become-a-trader-because-I-don't-like-working-9-to-5" idiot. Observe that this bottom-dwelling resident of the phylogenetic scale is not giving up his job because he's had success at trading. He's also not giving up his career because he so loves trading that he researches it day or night and has found a winning edge. No, The Gambler doesn't do anything beyond 9-to-5, because what he's after are easy riches, not effort and earned success. He hears that others have been successful (usually from Idiot #3), and he figures, "That means I can do it too". Invariably, the Gambler is attracted to daytrading. Why? It gives him a sense of action, and it justifies his decision to abandon all efforts at productive work. Besides, you can't really explain to your wife and kids why you're not out there with working humanity supporting your household when you're sitting around doing nothing, holding positions for weeks at a time. So the Gambler actively trades in and out of markets, pretends like he’s got a job, and every so often berates his spouse when she wonders when the family will be able to pay its bills. My take on Gamblers? They're not interested in trading; they're interested in their fantasy. So interested that they'll take their bank accounts and families down with them.

3) Idiot #3: The Self Promoter - It's easy to find the Self-Promoters. By their very nature, they're in your face hawking their wares, lauding their recent market calls, and promising easy trading success. Open any trading magazine and you'll see their well-coiffed, grinning idiot faces leering at you, usually as part of a trading "event" that just happens to be selling all their products. The key to recognizing Self-Promoters is that they promote themselves, not ideas or methods. Indeed, a substantial number of them don't trade. Those include the "Trading Coaches" who promise to improve your confidence, but offer no concrete trading guidance that you could ever feel confident in. They also include the "Gurus" who tout simple chart patterns and indicators, carefully avoiding any possible objective testing of their wonderful setups. Self-Promoters never talk about how hard it is to achieve trading success; that would not sell well, especially among The Gamblers. Instead, they borrow their pitches from the "no money down" real estate guys and tell you how easy it will be to succeed with no capital. My take on Self Promoters? I don't mind people who deceive others; they're merely dishonest. It's the ones that deceive themselves that frighten me. That's when dishonesty becomes delusion.

So there you have it: a rogue's gallery of trading idiots. Once you tune your mind to this threefold taxonomy, you'll have no problems at all recognizing them within moments of their opening their mouths. And, if you want to be happy, you'll follow the advice of literary critic Dorothy Parker and not toss these idiots aside lightly. Rather, you'll hurl them with great force.


John Wheatcroft said...

Years and years ago I was interested in horse racing from a fan's perspective. I met all of the same types in the handicapping world as we find in the stock trading world. Whereever there is a semblance of an easy buck you will find these kinds because there are so many people out there who are just stupid enough to buy in on the scheme.

yinTrader said...

Hi Brett

Just as there are 3 types of Market Idiots, there are equally blind mice among the gullible public. They want to believe that success in trading is easy with little or no capital with ' pitches from the no money down' by Self Promoters, which you rightly pointed out.

When will they ever learn?

Brett Steenbarger, Ph.D. said...

Yes, John; I think you're right. I suspect the same was true back in the days of gold speculation and tulip speculation before that. True believers, gamblers, and self-promoters seem to be universal!


Brett Steenbarger, Ph.D. said...

Hi Yin,

I'd have to agree with you. Undercapitalization and overambition are the worst combination when starting out in the trading world.


surfntrade said...


These classifications of people actually exist in all walks of life. The ones that try to get by with little or no effort convinced that "life" is that easy. The huckster that is there pecking at you everywhere you turn - be it a car sellsman, infomercial, phone call at night, etc. But I am more interested in what you think about "trading for a living." Do you believe that it can be done,or do most everyone that takes the jump fit into one of your trading classifications. BTW, I realize that you contribute a significant amount of your time to this information exchange due to your interest in this profession (or maybe interest in the subjects that engage in this profession), but after seeing you at the "Trading Summit", I am very interested in any psycho-trading seminars that you may be participating in in the future. Not sure if that term came out right, but I think you know what I mean.

Many thanks.

Brett Steenbarger, Ph.D. said...

Hi Surfntrade,

I appreciate the note. Yes, of course it is possible for people to make their livings from trading. I have worked with quite a few people who have sustained good incomes over a period of years.

That having been said, most of these traders have been well-capitalized, and most of them have had access to technological advantages and lower commission rates available at professional trading firms.

I think it is asking too much to expect a home-based trader with a small account to make the kind of returns that could sustain a good living. Inevitably, such a trader takes on too much leverage/risk to make those returns and blows up.

If I wanted to start out a career as a trader, I would obtain specialized training/education in financial engineering programs that have a good track record of placing grads in hedge funds, investment banks, and prop firms. It really helps to have those institutional resources.

Alternatively, I would consider joining a group of traders in which each is trading either their own money (arcade) or the firm's capital (prop firm) as a way of obtaining lower commissions, first class trading tools, sound trading strategies,and mentorship.

Can people succeed on their own? Yes; but the resources of a trading firm can really accelerate the learning curve.

Thanks for your interest--


Anonymous said...

I enjoyed this piece on the three idiots. You might be interested in an article I wrote describing one more idiot, the Persuasive Personality (which may be related to the Self Promoter but is perhaps more sinister?).


Brett Steenbarger, Ph.D. said...

Thanks TraderGordo,

Your post is *excellent*, and I'll link to it tonite from my personal site--


Anonymous said...

Hi Brett,

You mentioned starting a career as a trader by enrolling into top schools with financial engineering program. I think that is only the path to land a secured high-pay job to risk someone else's money. The academics have interests only in building mathematically tractable models that are so far away from the reality. The deeper one got indoctrinated by the academics, the less likely one can become a master trader, since in that level, trading is more art than science. Just look at Paul Samuelson, an MIT's economic professor, based on the EMH and random walk theories he claimed that no one can beat the market, but on the other hand,he himself put money in Warren Buffet's Berkshire Hathaway. Other ironic event is the blowup of LTCM, while this hedge fund employed the 'fathers' of financial engineering: Myron Scholes and Robet Merton.
The market is no doubt complex, but it is by no means random. For the convenience of easy modeling, financial engineering developed all theories on the foundation of market randomness. I would say, a master trader is one who can figure out the complex behaviors of the market, while the academics failed to decipher the complexity hence claim the market to be totally random.

Brett Steenbarger, Ph.D. said...

Hi George,

Thanks for your comment. You put it very well: the market is complex, but not random.

I find that mainstream academic finance (see Journal of Finance) is much closer to this position than is commonly recognized. That is especially the case with respect to behavioral finance and neuroeconomics research.


Isophorone said...

It seems to me that the multilevel marketing (MLM) industry preys on the kind of people you describe. I am somewhat loathe to use the term "idiots" as I think some (not all!) of these people are dealing with large amounts of personal frustration.

Many years back I was doing volunteer work reading for a man who was severely visually impaired. He got into a lot of these schemes (as well as letting himself be guided by a broker who got him into all kinds of risky stuff). He would go from one MLM scheme to another, convinced that the next one was "different" or had some "really good product" or service. It's just tragic when you see this kind of stuff happening.

Brett Steenbarger, Ph.D. said...

Hi Isophorone,

You raise a great point. Many people are frustrated with their lots in life and are vulnerable to hype. It is, indeed, tragic to see lost money and lost dreams when the need to strike it rich overcomes sound judgment. Thanks--


rukna said...

i agree that the lure of quick bucks is so great that all the fools start shining

Frenj said...

This is the one advice I would have for anyone wanting to start trading for a living:

Open a new checking account (or empty your current account) and trade for a month. After each successful trade, send half of the gains to the checking account. The other half stays in your trading account to compensate for losses and increase your capital.

After a month, start paying all your bills from the new checking account. Keep doing this for several month and be totally honest. And see where that takes you.

This is the best wake up call I can think of.

I started trading for a living 8 years ago, because there was nothing else I could think of that I could do to make a living.

At the age of almost 50, I found myself alone. I had never worked. Had no education and had a physical handicap that prevents me from doing much manual work. All I had was a tiny savings account.

I looked into what I could do with it, and became very interested in economics and how the financial markets work. Actual trading was the part I liked least, the research, the part I liked best.

For the first 5 years, I doubled my account 4 times. I believed I was becoming a good trader. I was, but what really helped was that I was in the right sectors at the right time. The charts of my trades show many mistakes, but I was riding a bull, and making money.

At the same time, I was staying with a friend, and my expenses were at a minimum, so my account grew.

Four years ago, I had made enough to buy a small house for cash and still have a trading capital. Now I started having more normal expenses. I have always been a very frugal person and live on well below average expenses. And yet, my gains never completely covered my expenses.

I didn't follow my advice, because I never thought of it then. I paid my expenses from my capital rather than my gains. For the past 3 years, my capital has been reduced to almost nothing.

Today, I face a very uncertain future, if any future at all.

You might think I must be pretty mediocre as a trader. My expectancy is 1.46. For every dollar at risk I make an average of $0.46 gain. Or an annual average of 46%. Not bad. But the gains were never enough to pay the bills, and my capital melted away, a little at a time, every month.

I hope someone can learn something from this.

Brett Steenbarger, Ph.D. said...

Thank you Frenj, for sharing that difficult story. I have made it into a blog post for 8/1/09 and hope that it helps many people.


DreamJOBZ said...

Dear Brett, G'day

I've read your 3MI, your words are powerful, you sound like Ayn Rand. Particularly, the words, "dishonesty becomes delusion". I was laughing aloud. It is nice, but what is the solution. You have said what not to look for, but if you finished the write up with what kind of quality/system that reader should look for it will helpful. Otherwise, it looks like marketing jimicks to buy your books. LOL. Are you saying, there should be a system based trading which is objective?! not subject.

Please delete if my post jeopardize professional dignity.

Be Awesome,
Raj, DreamJOBZ

Brett Steenbarger, Ph.D. said...

Hi Raj,

I think if you look through the blog, including posts archived on the Become Your Own Trading Coach blogspot site, you'll find some potential solutions. I don't find that your post jeopardizes professional dignity; I'm just curious that you find the blog post to be a marketing gimmick to sell books. And, yes, I do find it helpful to cultivate an objective basis for subjective (discretionary) trading, both by studying market patterns and by studying one's own trading outcomes.


DreamJOBZ said...

Dear Brett, G'day again,

Thanks for your reply. Yes, I am going thru your Become Your Own Trading Coach Blog < >. I agree what you said in that blog, nice to confirm with you that I am on track. At present in our Forum there are about 5000+ members, in that I directly communicate 15+ traders. Yes, it gives enormous confidence and some satisfaction of social contribution which I love to do. The greatest thing what I found when share I could see the market clearly. And I could trade in harmony. That is something awesome. Well, thanks for your guidence. I will share this in my next seminar/webinar.

God bless you with more happiness health & wealth. Keep Chargin'

Be Awesome
Raj, DreamJOBZ

Admin said...

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