One of the most interesting aspects of working as a trading coach is the ability to see, first hand, what contributes to the success of traders. So often the factors that lead to success are not those emphasized in mainstream articles and books. Here are two unappreciated virtues I see among successful portfolio managers and traders:
1) The ability to tolerate uncertainty – Every trader at certain point of time uncertainty ,where due to violent market moves gets confused which side to trade. Its how you trade in this uncertain period will decide whether you will be successful trader or will end up being a loser.
Professional traders aviod such uncertain times In such uncetain situation, the modal opinion of any trader should be “I don’t know”. Uncertainty is itself a view and, in fact, should be one’s base case. When a trader cannot tolerate uncertainty and needs to manufacture conviction, the result inevitably is over trading the objective opportunity set. It is impossible to properly manage risk if you are intolerant of uncertainty.
2) The productivity of time spent away from trading – I consistently find that successful traders spend more time identifying good trading opportunities than actually putting on and managing trades.Mihaly Csikszentmihalyi Distinguished Professor of Psychology and Management at Claremont Graduate University conducted a fascinating study with artists in which they were shown 27 objects and asked to arrange a small group of them into a composition and generate a sketch. They had one hour for the task.
The artists fell into two categories.
One group quickly identified the objects for the composition and spent the better part of the hour refining their sketches.
Second group spent most the hour figuring out what to draw. They selected objects, started sketches, changed the objects, sketched some more, rearranged objects, etc. By the time they found the composition they liked, they spent only a few minutes on the final sketch.
The drawings of the second group were rated as significantly more creative by a group of art critics than those of the first group and, after a five year period, the second group demonstrated significantly greater success as artists. The less successful artists spent most their time sketching. The successful artists spent most their time finding compositions worthy of sketching. It’s a great analogy for trading.
Good things happen when these two strengths come together. The ability to accept uncertainty frees the mind to maximize time away from trading and creatively generate sound trade ideas. For the successful trader, uncertainty provides the opportunity to get away from screens and look at markets through new lenses.
Overtrading exists when the need to trade exceeds the need to understand.