T2W Trading Community

Enhancing Trading Performance

Students of trading are at a huge disadvantage relative to students of chess.  Chess books document the performance of centuries of experts in actual tournament situations.  Because of this, chess students can create and play through almost any challenging situation imaginable, drawing upon the accumulated wisdom of experts.  Trading possesses no such database.  Trading books, unlike chess texts, are not annotated compilations of the trading decisions of objectively rated experts.  One cannot use trading books to recreate trading sessions or to systematically explore trading decisions and their alternatives.  Chess books lend themselves to independent deliberative practice; trading books present ideas outside the context of actual trading.

As a result, traders tend to spend little time in the systematic practice that is the single greatest predictor of chess expertise—not to mention expertise in music, athletics, and dance.  This violates a principle from the performance research that is so striking that it might even be called a law:

In every performance field, the development and maintenance of expertise requires a high ratio of time spent in practice relative to time spent in actual performance.

Athletes spend far more time working out, practicing, and scrimmaging than actually playing in competitive events.  The same is true for chess masters, professional dancers, fighter pilots, and racecar drivers.  Our analysis of chess expertise helps to explain this law.  Only significant time spent in absorbing winning and losing chess enables players to internalize the patterns of play that distinguish experts from non-experts.  The trader who spends more time trading than practicing trading is like the golfer who spends more time playing rounds with buddies than on the driving range, putting green, and in lessons.  We all know golfers like that, and they are not the ones who make their living on the PGA tour.

This then leads us to the single most important step you can take to become an expert trader:

The expert trader needs to be able to review and re-experience markets and systematically rehearse facets of trading performance: entering, managing, and exiting positions.

Note that what I am suggesting is NOT paper trading.  Paper trading is usually a following of the market in real time, accompanied by simulated trading decisions.  Such paper trading does not allow traders to replay market action, review their decisions, test out alternatives, etc.  It is this re-experiencing that cements learning, and it requires a database of market days similar to the database of tournament games utilized by chess books. 

Think of each trading session as a chess game, and each game as a contest between two expert players named “Bull” and “Bear”.  Every short-term swing in the market is a move by Bull or Bear that ultimately leads either to a victory for one of them or a draw.  In tracking the moves of Bull and Bear, we can pause the match at any point and observe how each player exploits the weak moves of the other.  With the aid of an electronic database that collates similar trading sessions, we can even explore how alternate moves by each side produce different outcomes.  Moreover, we can play and replay the “games” (and their similar variants), seeing if our simulated trading decisions accurately reflect our reading of the strengths and weaknesses of the players’ positions.

How could we create such a database?  Two methods stand out at present, and my hope is that software vendors will create even more:

1. Replay.  Some programs, such as Ensign and e-Signal, allow users to replay market data at varying rates of speed.  This permits repetition of a market day, so that paper trading can be accompanied by review and fresh practice.  Programs that allow users to save and replay tick data are especially valuable, as this creates a library of trading sessions akin to the collections of chess games found in books.
   
2. Taping.  Videotaping of one’s trading screens allows for unlimited review of market action and one’s trading decisions.  It is not too far-fetched to imagine video-taping of simulated trading from video-taped data, creating feedback loops for learning.  Over time, collections of these tapes form a library for study that would allow traders to practice trading almost any kind of market imaginable. 

If this analysis has merit, then most of the services offered to traders in the popular media have limited value.  Self-help techniques, exhortations regarding discipline, didactic presentations of patterns, and general rules and advice do not turn chess novices into experts, and there is no reason to believe they will advance the performance curve for traders.  Knowledge and practice—and especially the direct experience of knowledge-in-practice—are the keys to the acquisition of expertise.

We commonly hear the statistic that 90% of all traders ultimately fail.  If this is so, it is not because they lack the right personality traits, indicator patterns, or software programs.  Rather, they have failed to structure their learning to facilitate expertise.  This is one of the most important lessons we can learn from the decades of research and hundreds of studies on the topic of performance.  The path to our greatness lies not only in performing, but in the systematic work we put into performance.  The next great advance in trading technology, I believe, will be the creation of dynamic learning environments that serve as the electronic equivalent of chess books.  The learning platforms we rig for ourselves today will pale in comparison to tomorrow’s technology, but that matters little to those pursuing self-development.  The single most important step you can take, Ayn Rand realized, is to fight for tomorrow, so that you might live in it today.