I’ve been meaning to revisit a post by Doc Brett Steenbarger on the 5 defining features of "Market Pros," and the long holiday weekend is as good a time as any.

The Doc notes that these "five
features stand out. Pretty much everything else follows from these five:"

1)
The less successful traders are anticipating market movement and
trading accordingly. The highly successful traders are identifying
asset class mispricings and trading off those.

2) The less successful traders are trading particular instruments
and pretty much stick to those. The highly successful traders recognize
that any combination of trading instruments can be considered an asset
class and appropriately priced (and gauged for mispricing).

3) The less successful traders think of their market as *the*
market. The highly successful traders focus on interrelationships among
markets that cut across nationalities and asset classes.

4) The highly successful traders place just as much emphasis on
understanding markets as predicting them. The less successful traders
don’t ask "why" questions.

5) The less successful traders are convinced they have proprietary
information of value that they must not disclose to anyone. The highly
successful traders use their proprietary information to selectively
share with other highly successful participants, thereby gaining a
large informational edge.

The other interesting observation was a new phrase he coined: "analytical creativity."

Good stuff, Doc.

Category: Apprenticed Investor, Markets, Psychology, Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

10 Responses to “Defining Features of Market Pros”

  1. Alaskan Pete says:

    Oh, what a bunch of pap. Simply a collection of opinions, stated as fact, with no supporting data. Without defining “trader” the assertions are meaningless. He could be talking about anything from Joe Sixpack trading long only equities in a cash account to Goldman Sachs and their entire “book” of instruments.

    Take assertion #2: ” The less successful traders are trading particular instruments and pretty much stick to those. The highly successful traders recognize that any combination of trading instruments can be considered an asset class and appropriately priced (and gauged for mispricing)”

    How does he account for the many, many extremely successful pit traders who essentially trade a particular instrument in a particular futures market…say a beans or cotton futures trader, for either their entire career or long stints of it after which they may simply switch to another single instrument? See: The New Gatsbys: Fortunes and Misfortunes of Commodities Traders by Bob Tamarkin.

    Secondly, how many non-retail/non-small scale “traders” does he think don’t use pairs of instruments to hedge or play statistical arbitage/reversion to mean plays on ratios?

    This guy is making broad based statements that do not reflect reallity because he attempts to compare methodologies used by different trading factions (i.e. hedge fund, mom-n-pop retail, prop shops/arcades, i-banks/MMs proprietary, etc) as if they were one group called “traders”.

    Even when I was a young neophyte trader I was putting on stat arb plays (did very well at times playing ratio mean reversions in things like HUI:Gold), option hedges, intra-sector long/short pairs, etc.

    Steenbarger comes across to me as a leech who can’t make his own stake trading and attaches himself to trading circles as some performance guru using a bunch of psychobabble BS.

    Here’s all you need to know about trading psychology in 3 easy bullets:

    1. Emotion is your enemy. Find out whether you can detach emotion from your methodology. If not, stop now and hire someone who can, or go the DollarCostAvg/MPT route or go to Vegas and put it all on black. If so, proceed. Scaling out your trading to larger time frames can be helpful in managing emotional influences.

    2. The easiest way to eliminate the emotion problem is to use a primarily mechanical method/models with a statistical edge and follow the method without fail. See: Dennis, Richard.

    3. There are no gurus. If they were that good/talented, they wouldn’t be selling and thus destroying the usefulness of their “methods”, but instead applying it and making themselves very wealthy. Most of the best have a statistical edge whether through their sheer size and ability to move markets, access to inexpensive capital, access to (inside) information, front running upgrades etc.

  2. PC says:

    I agree with Alaskan Pete. I have read Steenbarger’s book “The Psychology of Trading” and don’t think much of it.

    Steenbarger wrote:
    2) The less successful traders are trading particular instruments and pretty much stick to those…………

    That is nonsense. Trading is all about finding a specific edge, however small it is, and then sticking to this edge repeatedly. The easiest way to find an edge is to specialize in a few marktes and get to know them really well and then hone in on a particular type of trade.

    3) The less successful traders think of their market as *the* market. The highly successful traders focus on interrelationships among markets that cut across nationalities and asset classes.

    This assertion is a real stretch. If you focus on the price action of a particular market, then you don’t really need to focus on the others because what’s happening elsewhere will be reflected in the price action of the market you are trading (unless you are trying to predict markets which is a futile endeavour). Also you never know when these inter-relations between different markets are going to stop working – just ask LTCM.

    4) The highly successful traders place just as much emphasis on understanding markets as predicting them. The less successful traders don’t ask “why” questions.

    Here is a quote from Richard Dennis – “Most pepole would rather understand markets than make money. You don’t need to understand markets in order to make money.” Nuff said.

    5) The less successful traders are convinced they have proprietary information of value that they must not disclose to anyone. The highly successful traders use their proprietary information to selectively share with other highly successful participants, thereby gaining a large informational edge.

    Bunk again. I don’t see Warren Buffett sharing his information with other investors. You either can create your own information edge or you can’t. If you need to swap information with others in order to create an edge, you are in deep trouble over the long run (ask Ivan Boesky).

    Walter Schloss, a value manager and friend of Warren Buffett, once said he just works in his office sifting for mis-priced securities and his phone very seldom rings. He doesn’t need any calls from Wall St. giving to gain an informational edge.

    These general statements by Steenbarger are highly harmful to beginning traders as they give a misconception of what it takes to succeed in trading.

  3. trader75 says:

    Tough crowd.

    I disagree with a fair chunk of what’s been said here, but more than a few would probably disagree with my views too.

    A few observations:

    1) If you think it’s your way or the highway, you are neither wise nor observant.

    2) If you don’t know what your edge is, you don’t have one.

    3) Dealing with the markets day in and day out is a lot tougher than dealing with contradictory opinions.

    4) There’s no point in protecting beginning traders from themselves. If a neophyte can’t develop a healthy sense of skepticism and find his own light, he (or she) had no shot anyway.

  4. rick says:

    Totally useless wisdom , like the buy low ,
    sell high wisdom.
    Give me some quantitative, unemotional, systematic
    method of trading, instead of jibberish.

  5. Eye Doc says:

    By Steenbarger’s definition trend followers are lousy traders as a rule, since they don’t predict the markets, or try to understand them. Obviously, such is not the case.

  6. rick says:

    Trend followers have the odds in favor,
    trying to time market turns is a risky and
    difficult endeavor statistically speaking.

  7. Bynocerus says:

    Wait a sec: Barry’s post isn’t particularly useful, yet trend following is? Ironically enough, Michael Covel’s book is right beside the comment box as I post, so let me take the other side.

    I’ve read the book Trend Following (a friend of mine gave it to me last week), and in my opinion, the book is worth more as a doorstop than as a trading primer.

    If one had simply margined herself up on the S&P 500 over the last 20 years going long only she would have done better than every other trader listed in the book (25%/yr is pretty goddamn good for doing nothing, IMHO). In fact, for nearly every trend trader I’ve ever read about, higher than average returns can be traced back to one and one thing only: leverage. If I’m double margined the market for the last 20 years and I underperform the S&P by 5 – 10% points, as is the case for the best of the best traders in Mr. Covel’s book, I should not be allowed to touch OPM.

    This entire year, I’ve posted EVERY time I’ve taken a position one way or the other. And, of the five traders I’ve made, three including going to cash January 9, shorting the market May 10 and getting long again June 15 (I was stopped out of the other two for a total loss of 4%), so one might think I at least know a little something (I’ll be happy to dig up the posts in my spare time if you’d like).

    I do agree that if you have a system that works you should in no way be sharing it with others – too many people doing the same thing is why regression to the mean is so prevalent in this industry. But to reiterate, if you’re “system” involves buying or selling an index when moving average 1 crosses moving average 2, I’ve got a bridge to sell ya.

  8. Bynocerus says:

    Quick correction – got long June 21, not June 15.

  9. MASH says:

    Top traders read Traders Magazine only, ( have you guys noticed how many STANY member have let their membership lapse) we like Barry but don’t pay much attention to CNBC. Chicago guys stay out of the Cactus and you will do good!!!

  10. JohnB says:

    The list of 5 features is way, way too simplistic and doesn’t even touch upon why people are successful.

    Trading doesn’t have to be so complicated…

    -Most of the information out there on trading is junk; it’ll never help you gain an edge. 98% of it is useless. CNBC, message boards, hot tips, the latest hot method, astrological signs, mysticism.

    -The first step is to only study the super successful investor/trader (Market Wizards, anything by Jim Rogers, Buffett, etc). Think for yourself, observe what’s going on around you (i.e. real estate bubble). Ground yourself in the fundamentals of the market. If you know the market, you never would have been suprised at the internet bubble, various panics, crashes, and different market phases (high or low volatility).

    -Only trade when you have an edge. Never gamble or hope. It doesn’t matter whether the market agrees with you or not, what matters is that you buy based on sound logic and reasoning.

    -This is a game where you can wait and wait and wait for the right pitch. You never have to be pressured into one system or one approach. Why limit yourself into being a “value investor” or a “trend trader”. The right trade may fall outside these labels.

    -Think for yourself. I can’t overemphasis this enough. People do crazy things all the time without thinking. If they spend thousands of dollars on a vacation, they’ll do weeks or months of research. Yet when it comes to stocks, people spend thousands (tens of thousands) based on a tip 10 seconds ago. Sheer madness.

    -You should never be straining or forcing something that isn’t there. This isn’t like trying to bench press 800 lbs. Go back to what’s your edge, and buying based on logic and sound reasoning.

    That’s about it guys.