Running PsyQuation gives me the opportunity to observe and really think about the way traders go about making a profit and more importantly the struggle they go through adding to their profits. For the purposes of this article I am going to keep it simple and avoid going into statistics and reference academic research.
What I have observed from my trading and watching others is that making money in the short term is not as hard as it is to maintain and increase trading profits. I am going to assume for the purposes of this discussion that the trader has a marginal edge. Why then is it only a matter of time before the promising track record almost always ends in poor performance or said more elegantly, the persistence of superior trading performance diminishes with time?
Have you ever played a round of golf where you start off playing incredibly well only to hand in your card after the round having collapsed in the closing holes. I am sure there are professional golfers who can relate to this with a 4 day tournament, doing great for 3 rounds only to blow it at the end. Have you ever played a game of chess where you are doing so well for most of the game and then suddenly a momentarily lapse in concentration leads to a loss. Have you ever played a game of tennis with someone much better than you are, yet it is going with serve all the way through the first set right up to the tie breaker and then, collapse. Have you ever watched a MMA or boxing fight where the champion seems to be equally matched but through composure and patience he is able to prevail. I am sure I could list many more examples, you get the point.
What I have observed with the best performers (traders included) is that they are able to concentrate longer than most, they are able to avoid those knockout blows by being patient and disciplined. I have also noticed that when the inevitable lapse of concentration or mistake happens the best are able to put it behind them quicker than the rest. They don’t dwell on the mistake they accept it and move on from it. The traders that under perform are those that cannot accept their mistake. They dwell on it. They berate themselves for being stupid. They get vengeful and want to teach the “market” a lesson.
I have a couple of ideas around an alert that can help traders identify when they are in a destructive cycle of behaviour before its too late. The thought that comes to mind almost instantaneously is the need to have someone to talk to about your trading. In order for debriefing to work you have to be committed to exposing yourself to admitting your mistakes. An idea that has long been in my head is to create a PsyQuation Group where we can openly discuss our hard times in a friendly and supportive environment. If you think this is an idea you will support then please vote here. In the meantime I recommend that you use the MAE – MFE trading tool to help analyze how you manage your maximum adverse excursions as well as the other tools we offer to power your trading decisions.
One last comment. It is for the reason described in this post that we don’t believe traders with a track record of less than a year are ready to manage other peoples money. The AxiSelect program is designed to incubate traders with a 6 month or longer track record but put them through a minimum of another 6 months before we will move an incubated trader to the phase we call “Pro” i.e. someone we think is ready to manage other peoples money.
If you are serious about trading for a living, one of the most impressive ways of getting an investors attention is to demonstrate the length of your track record. Remember many people can have a lucky 3 – 6 month track record of superior performance. It is much harder to maintain that superior performance. As an investor I would much rather invest with someone who has a good lengthy track record than someone with an excellent short track record.
While we are at it I will provide a further clue to the PsyQuation Score™ and how it considers trading talent. The skill coefficient a key component of the score ignores almost everything I have written above except for whether the trader has edge. A trader with no edge has almost no chance of making long term profits. A trader with edge and no risk management has almost no chance of making long term profits. Therefore it is clear a trader looking to make long term profits needs edge and risk management.
All the best. Mike