While departing for the land Down Under, I had a thought that crystallized an issue in my mind. When I talk with traders, I can often sense within the first few minutes of conversation whether the trader is successful and talented or not. What hit me was identifying, consciously, how I was arriving at that assessment.
The really good traders tend to have differentiated market views. Their thinking is of a higher order of complexity. So, for example, they may be bullish on certain themes, bearish on others. They like some stock market sectors, avoid others. They see in range bound terms sometimes, trending on other occasions. Sometimes they'll see a market dominated by locals and trade accordingly; other times, they'll see "paper" (institutions) dominating the trade and they'll make adjustments.
The really good traders see a large playing field. If they see a weak dollar, they think about how that affects bonds, metals, energy, and international returns. If they see a breakout from a multiday range, they see a swing move in the making, not just an opportunity to make a few ticks. They can be daytraders or portfolio managers--it doesn't matter. They see the field across time frames. They see how markets are interconnected. They see how the morning trade relates to the overnight range, and how today's trade is connected to what we did yesterday.
And the less successful traders? They're bullish or they're bearish. That's it. They think in simple terms of causation: We're having a housing slump; that means we'll have a bear market. We're making new highs; that means we should buy because we're in an uptrend. The news is good, so we'll buy. The news is bad, so we should sell. No complexity. Sadly, we see much of that kind of thinking in the financial media.
Jean Piaget, the developmental biologist, emphasized that cognitive development occurs through a process of assimilation (taking in new information) and accomodation (integrating that new information with what we already know). Over time, that enables us to develop increasingly complex (and accurate) models of the world (schemas). I strongly suspect that process is at work in the development of successful traders.
We often hear advice to the effect that traders should keep things simple. Complexity for its own sake is not helpful in the least. Still, when I talk with successful traders, I am impressed by the relativity of their views: they look at how this is related to that and how they can profit from the relationship. It may be a simple relationship, but it's not simplistic.
The difference is important.
Overlooked Qualities of Successful Traders
Defining Characteristics of Market Pros