Gifted and Talented Traders

ammo · May 21, 2011

Quote from NoDoji:

First, I studied charts in my preferred trading time frame (5-min) and made notes about the price action environment leading into price pivots that led to strong moves.

Why do price support and price resistance occur here and not there?

At what point does a trend appear to be starting another push?

What happens when a trend reverses?

Do the same things seem to happen again and again, far more often than something else happening?

What defines chop?

When breakouts fail, does the price environment or the time of day provide clues that the breakout might fail instead of run hard?

I got very specific, until I eventually learned to choose levels at which price is likely to find S/R, studied ways of entering and managing such trades, and every day after the close of market, made detailed notes about entries, survivability of stops, minimum targets, how much heat was taken on each trade before it became profitable (if it became profitable).

I gradually defined rules to keep me from trading in chop.

I made notes about what happens just before ranges, flags or triangles break out. How long does the consolidation normally last at various stages of a trend (young, middle-aged and mature)?

After a few months, I determined that out of all possible trades available to me each day (valid setups with entries, stops and targets by the rules), on average a certain percentage of them resulted in a minimum profit target or better without hitting the stop loss. It was a win percentage of over 60% and my average profit target was at least twice my average loss. I consider that high probability. It's a strong edge.

All this was done manually end of each day, though I was still trading live. My problem was I wasn't trading all valid setups, so the "edge" was diluted.

There were some trades that fit my plan, but inexplicably failed. This caused me to hesitate on trades and miss many good ones.

I always want a reason for something and eventually I began to notice a pattern to the failed trades. Once I could define the setups that looked good according to my rules, but failed very regularly, I learned to recognize the price environment surrounding these failed setups and began to trade them in the opposite direction.

These eventually turned out to be my highest probability setups in that they produced large, fast profits at least 80% of the time.

It's the persistence, hard work, and attention to detail that pays off.

Many traders have extremely consistent trading behaviors that fail to produce a profit. For example, some traders put on a trade, move their stop to break even too soon, get stopped out, watch the trade run without them, chase an entry right about at the point the price push is ready to make a normal retrace, then get stopped out of the trade for a loss or another break even. There are traders who do this with such consistency that they can transform their behavior to produce high probability trades. They have but to recognize the setup and entry they desire, wait for price to move in their favor (without yet putting on the trade), then place a limit order at the price they initially planned to enter. Price will pull back to their entry and lift the order (that's where they're stopped out b/e all the time), then price will make the move that they normally end up chasing.

I was one of those traders for a while. I had a bad habit of moving my stop to b/e too soon, getting stopped out of quite a few trades nearly to the tick, then watching the trade run hard without me, or I'd chase an entry and get less profit or nothing at all, or sometimes a loss out of it.

My trading roomie said, "It seems that price comes back to that entry level a lot with this style of trading."

It was a big Aha! moment for me, but it took someone else saying it out loud for that to sink in.

So the only gifts and talents involved here are pattern recognition and stubborn persistence.

I agree. Making strict rules based on my back testing resulted in the eventual (it seemed to take forever for me to get there) ability to simply trade setups and manage them according to my rules for that exact reason. There are no excuses, no wringing of hands and gnashing of teeth, it's all very mechanical now.

Here comes the setup. The entry signal is X. Order placed at X. Stop placed here. Minimum profit target zone is there.

Hey ho, let's go!

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gabfly,notice how she mentions taking notes and writing things down, like a scientist,I and probably you,are learning by osmossis,i think one of these ways is faster

NoDoji · May 21, 2011

Right, ammo, I approach it very scientifically knowing that odds will be in my favor if certain things happen over and over again and only fail occasionally.

Gabfly, although I've recently added a lot of discretion to my trading, the core setups and rules are the same well-defined setups and rules I developed over a good part of last year with a few other traders.

I have a setup where I enter a trade in the direction of a trend off a price pullback. Although I tweaked my strategy to avoid slippage and use tighter protective stops, the price at which I enter is the same, and the minimum profit target is the same.

I used to trade breakouts at the breakout level. I now position myself ahead of the breakout based on months of observation and note-taking to determine the optimal way to do that. The minimum profit targets on these trades are the same, the size of the protective stops are the same or quite similar, but the discretionary method of entering gives me a better entry price with no slippage.

I could teach someone the core rules and they'd make money if they followed the rules. I've added some discretionary nuances to how I trade the setups my core rules dictate; those modifications don't affect the statistical edge much.

Lornz · May 21, 2011

Quote from volente_00:

Interesting subject.

I would like to see statistics on the % of profitable traders that participated in gifted and talented programs in early education and if there is a correlation between the two.

In the early 80's I was labeled gifted and talented and participated in the gt program at my elementary school. I was chosen due to consistently scoring in the top 5% or greater on the standardized progress tests that were given in each grade. To be honest I don't remember much about the program other than we were taught how to program in logo using apple computers and we would convene in small groups and constantly brainstorm. This was my first introduction to using pc's. I do remember the teacher went above and beyond to challenge our critical thinking skills and I would sometimes get into trouble for being lazy since I was used to being bored in regular class.
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I have been contemplating that myself. I come from a country that does not have neither standardized tests nor gifted programs. I was extremely bored in school and never did any homework. In High School I used to skip class and read Nietzsche and Blake instead. I wish I had the opportunity to participate in a "gifted" program, maybe I would've gotten more out of my time in school.

Lornz · May 21, 2011

Quote from Ghost of Cutten:

Trading talent comes down to 3 things:

1. Pattern recognition. This is the most important skill, without it you can't discover exploitable edges. There are different ways to spot patterns - quant/scientific approach, or discretionary/artistic approach, but you need to be good at one of them or you will fail.
2. Emotional control/detachment. If you are a highly emotional person, or very impulsive, you will fail at trading. The more like Spock you are, the better.
3. Passion for the game. If you find trading and markets boring, you probably won't succeed, and why bother succeeding at something boring anyway? Move along.

As for how important gifts and talents are - they are hugely important. Someone without natural talent for pattern recognition, emotional control, and markets, will take years of hard work to become remotely good. Someone interested in markets, with great pattern recognition ability, and emotional control, will generally become profitable within a few months to a year, and will be significantly profitable within 3 years at most. That is a huge difference. If the latter type of 'natural' is hard-working too, they can become worth $100mill plus within 10 years if they want to. If they are lazy or more interested in enjoying life, they will still generally be able to make decent 6-7 figures fairly consistently over the long-term. The plodder type will never have those options.

Talented traders start with grubstakes and are making 6 figures in their first year or two, and millionaires (unless they spend too much or blow it on bad business investments) within 3-5. Untalented traders labour at institutions earning salaries, and may save their way to semi-wealth, but are never going to make big scores; those dumb enough to try going solo blow up or bleed to death within a couple of years, then give up and go back to employee status.
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Great post! I've enjoyed your contributions over the years, Cutten.

With regard to pattern recognition, I've always wondered about the correlation between IQ and trading success. IQ tests are mainly built around pattern recognition, so there should be a high correlation.

Gabfly1 · May 21, 2011

Quote from NoDoji:

...Gabfly, although I've recently added a lot of discretion to my trading, the core setups and rules are the same...
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So you have overcome your previous aversion to TWT?

NoDoji · May 21, 2011

Quote from Gabfly1:

So you have overcome your previous aversion to TWT?
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TWT?

Gabfly1 · May 21, 2011

Quote from NoDoji:

TWT?
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Thinking while trading.

http://www.elitetrader.com/vb/showthread.php?s=&postid=2950070&highlight=twt#post2950070

Blotto · May 21, 2011

Quote from NoDoji:

What are the "gifts" or "talents" a trader needs to attain rapid progress to a very advanced level?

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The ability to make almost seven thousand posts on Elite Trader in three years.

NoDoji · May 21, 2011

Quote from Gabfly1:

Thinking while trading.
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Yes! I've totally overcome that! I do all my thinking ahead of the potential setup and I'm prepared when the time comes. In fact I usually have my order placed in advance now.

I started documenting the trades I missed out on by TWT and realized that 80% of of the trades I missed were very profitable. It became an edge in and of itself

Quote from Blotto:

The ability to make almost seven thousand posts on Elite Trader in three years.
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Damn, that's downright frightening :eek:

I think I need to get to a Trader's Anonymous meeting now...

zdreg · May 22, 2011

Quote from NoDoji:

I see these terms used a lot. Usually "gifted" and "talented" refer to abilities that express themselves early in life and result in rapid progress to a very advanced level with seemingly little effort.

What are the "gifts" or "talents" a trader needs to attain rapid progress to a very advanced level?

1. The ability to follow basic rules that someone else provides with full trust in the outcome based on probabilities.

2. The ability to dedicate the majority of one's time every day to market research, definition of setups that place odds in one's favor, ability to recognize those setups as the form, definition of rules for trading those setups, and, finally, #1 above.

I worked with a trader last year and once I explained my standard setups, he immediately understood the concept and was able to trade it beautifully. His "gift" was that he could trust a set of basic rules and follow them.

I fall into category #2. I spent 50-60 hours a week for over 2 1/2 years learning to trade, and currently spend around 45 hours a week continually evolving as a trader. I have a 360-page trading journal (started in April 2008, only 6 weeks from my first trade ever) and over 100 spreadsheets (started in June last year) mastering basic and advanced trading tactics to cope with various market environments (volatile/calm, trending/ranging, up or down).

I met a piano player in college who was a prodigy. He had perfect pitch and perfect recall (innate "gifts") and began playing extensively starting at age two. By the time he was in college, he was truly amazing.

I met a guitar player in college who didn't begin playing until he was in high school, didn't have perfect pitch or strong recall of anything he heard, but mastered the craft of reading music and playing with technical precision that could "wow!" anyone.

Whether traders have certain innate "gifts" or whether they hone their craft through sheer persistence, in the end their P/L's look every bit as green on a consistent basis.
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"talent is overated" covers this ground very well.
http://geoffcolvin.com/books/