I claim that the best traders are the best "predictive" traders. By that I mean not that we are using fancy math or neural nets on time series. I mean that we have "superior" brain functions that result in better prediction from sensory inputs. But here is the interesting part. The higher brain functions that actually make the prediction, get fed the relevant information to make that final prediction, can come from different parts of the brain, and we favor which brain functions to direct our analysis based on our talents and lack thereof. So, if you are especially adept at visual patterns, but poor at seeing relations in numbers, the input to the predictor function of the brain gets its input from that part of the brain that relates visual patterns, as opposed to another part of the brain that say, recalls a number(s) as the independent variable(s), or another yet that sees patterns in the raw numbers. You will probably become a technical analyst by looking at charts. BTW, this sort of explains why there are lots of traders that are good at sports. It is well known that different parts of the brain are involved in different functions. For example this is worth understanding: http://www.neuroskills.com/brain.shtml On a more simplistic level, here is a beautiful study that shows that the brain compartmentalizes qualitative and quantitative functions: http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/1999/05/12/MN28876.DTL
It is interesting that the one thing that many traders, even really good ones, have a near blind spot for is, risk. As far as I can see, the brain has not developed/evolved a function/area specializing for the, at least the instinct of, tail risk. Neiderhoffer was/(is ?) a really good (predictive) trader. He is terrible at assessing tail risk.
Are those two statements not somewhat contradictory? Unless I am mistaken, you are essentially saying is that he doesn't know when to stop buying dips, so to speak. But anyone can floor the accelerator. It's how you handle the turns that counts. No?
Nitro, love ya man! Your posts are on top of it! But IMO you are bringing up the timeless issue of intuition versus unambiguous hard coded system calls. Whenever I have a brain fart that doesn't smell leaking out of my ears, I try to quantify what the "something" was that caused the creeper. I usually find it, code it, and find that it was sheer brilliance (what anybody else would call bullshit). But every once in a great while I succeed in coding intuition, and it rocks! Ultimately, such needle in the haystack coding activities formed the core algorithms in my system.
I see no contradiction. Market gives you big edge. You take it. Market goes your way. Take profit when rubber band snaps back. Do this 999 times and you make money. The one thousand time comes. Move goes against you. You add. It keeps going against you. You add. It has a "once in a hundred years flood" - Asta la vista.
Well, two sides of that coin. If you take profits and are disciplined, you will make money in markets. However, the people that make killings in markets don't get rich taking nickles and dimes, unless you do it in a very high frequency setting, which is even harder than most trading. Also, your position doesn't always start out profitable. If you are trading scared money, and exit every time a position goes against you, you are almost certainly doomed in trading. It is tautologous that you don't blow up if you take tiny profits and take small loses. You will never get anywhere but a job.
I am not suggesting that what I am saying is new. What I am saying is that to most people, why one trader is great and another average or a loser, is mostly a mystery. I do claim that the original post gives some insight into that phenomena.
Except that the "once in a hundred years" keeps happening with far greater regularity than advertised. I remain unconvinced about "good" traders who repeatedly succumb to fat tails. You are essentially describing Mr. Victor Niederhoffer, who strikes me as little more than a pig at the trough who didn't see the butcher knife in time perhaps once too often. However, it's a good combo if you manage money and have no pesky pangs of conscience about engaging in a bit of moral hazard.
You said in original post that you think great traders have superior brain function of sensory input, and this give a superior prediction, yes? After that you say you do not think the brain of good traders have input for risk of tail risk. What I ask to you nitro is maybe the traders who take profit early (not always small profit) is a brain function happening of tail risk. So ok, like you say, if a trader always take a small profit and small loss he will not make any big money. But if a trader have good predictive sensory, he will see a trend, take the bet, add to winners, BUT, also take his profit (not always small) and keep his winning, because he have a sensory for tail risk. That is compared to Neiderhoffer who has good sensory prediction, but maybe overconfident when he has a good bet, and becomes blind to risk of tail risk..then blows up. So who makes more money of the big picture? The one who takes money off (realized gain) and plays again with only a part of the winning money, or the one who makes huge money, but then loses it all in a blow up? I am not sure, but it is interesting question. So maybe the trader who takes a good profit early is using intuition/risk sensing part of the brain?