The New Market Wizards: Conversations with America's Top Traders (55 page)

How did you first get involved in working with traders?

In 1987. I was approached by Steve Bianucci, a young Treasury bond floor trader who was working with Pete Steidlmayer’s Market Logic School [Steidlmayer has since left the school] and looking to make the transition from the floor to position trading. He wanted to know if NLP could be used to build a working model of a great trader. I was intrigued by his question, and it served as the catalyst for a research process that is still ongoing.

What kind of research?

Observing great traders to construct a model of trading excellence.

Wasn’t it difficult to gain access to such traders? I have trouble imagining that many of them would willingly agree to be the subjects of extended observation and modeling.

In the case of floor traders, such as Tom Baldwin [a phenomenally successful T-bond floor trader profiled in
Market Wizards
], direct observation was quite easy, requiring nothing more than access to the trading floor, which I got. In the case of Pete Steidlmayer [a highly successful futures trader and the inventor of Market Profile—an analytical methodology that relies heavily on the study of intraday volume], he offered classes and I was able to observe him directly. Finally, in the case of some supertraders, the observation was one step removed—watching video tapes of their trading and listening to their talks or interviews. Jimmy Rogers, Paul Tudor Jones, and Richard Dennis [three of the best traders of our generation, who were also profiled in
Market Wizards
] fall into this last category. I later saw Dennis on a futures industry panel that you moderated and determined my inferences about his trading strategies and emotional management style were accurate.

Can you give me a typical example of a trader who came to you for help?

I recently worked with a man who is a good trader. However, every time he gets ahead, he ends up giving back a good part of his profits. While I was working with him, it came out that he knew lots of traders who made money but who, in his words, were “not wonderful human beings.” He wanted to be successful as a trader, but he was worried about becoming like them. His unconscious solution to the problem was to not become too successful.

His beliefs also had a very restricting effect on his personal life. He thought that he had to put trading first—that trading meant that he couldn’t have a personal life or a family. Using NLP to change those beliefs helped evolve that part of himself that he had mistakenly thought was sabotaging his trading. This was a particularly gratifying experience for me, because I saw him reclaim a part of his life that he thought he couldn’t have as a trader.

He recently called me to say he had tripled his position size to over a thousand contracts. By resolving his inner conflict, he freed up mental power to better watch for opportunities and improve his trading.

What differentiates those who excel at trading from the vast majority of traders?

One critical element is beliefs. In his book
Peak Performers,
Charles Garfield reported that the key element these individuals share is a total belief in the likelihood of their own success. Contrast this with Dr. Michael Lerner’s research, published in his book
Surplus Powerlessness,
in which he found that most people feel that they have very little power over their lives. He based his conclusions on thousands of interviews conducted with people from a wide cross section of occupations. This general contrast between peak performers and the majority of the population serves equally well in explaining an essential difference between the outstanding traders and all other market participants. The supertraders have an absolute confidence in their ability to win—a confidence confirmed by competence in the markets. Contrast this with most traders who lack confidence in their system or approach and the typical tendency of many traders to blame others (their broker, floor traders, and so on) for their results.

Beyond confidence in their own success, what are some of the other characteristics of successful traders?

Another important element is that they have a perceptual filter that they know well and that they use. By perceptual filter I mean a methodology, an approach, or a system to understanding market behavior. For example, Elliott Wave analysis and classical chart analysis are types of perceptual filters. In our research, we found that the type of perceptual filter doesn’t really make much of a difference. It could be classical chart analysis, Gann, Elliott Waves, or Market Profile—all these methods appear to work, provided the person knows the perceptual filter thoroughly and follows it.

I have an explanation as to why that may be the case.

I’d certainly be interested in hearing it.

I believe a lot of the popular methodologies are really vacuous.

[He laughs.] Aha! That’s a pretty provocative statement. You’ve got my attention.

All these technical methods are based on price. In effect, they’re all different-colored glasses for looking at price. Proponents of RSI and Stochastics (two popular overbought/oversold indicators) would see price patterns filtered through these price-derived series. Gann analysis enthusiasts would see the price patterns through a Gann-based interpretation. In these cases and others, traders accumulate experience on price patterns—albeit from different perspectives. Some of the methodologies employed, however, are probably totally worthless. It’s simply that instead of looking at prices through clear glass, traders who use these methods are looking at prices through different-colored tints. The method, or tint shade, is a matter of individual preference. To extend the analogy, I would compare these methods to nonprescription sunglasses: they change the view but don’t necessarily improve the vision. The bottom line is that these methods seem to work only because the people who use them have developed some sort of intuitive experience about price.

That actually fits pretty well with my own view. People need to have a perceptual filter that matches the way they think. The appropriate perceptual filter for a trader has more to do with how well it fits a trader’s mental strategy, his mode of thinking and decision making, than how well it accounts for market activity. When a person gets to know any perceptual filter deeply, it helps develop his or her intuition. There’s no substitute for experience.

What other characteristics typify successful traders?

Another important element among traders who excel is that they have an effective trading strategy. I’m using the word “strategy” in an NLP sense, meaning a series of internal representations, mental pictures, words, and feelings, leading to a desired outcome: winning trades. One trader can act decisively, while another may be paralyzed by indecision. The difference lies in their strategies.

I’m afraid you’ve lost me. In your use of the word, what typifies the strategies of successful traders?

An effective trading strategy will have the following characteristics. First, it will be automatic. Given a specific situation, the trader will know what to do without second-guessing himself. Second, a good strategy will be congruent—that is, it won’t create any internal conflict. Third, the strategy will incorporate Away From motivation by including some specific risk control plans. Fourth, part of the strategy will involve imagining the trade from the perspective of already being in the position and considering what might be wrong with the trade
before
putting it on. Fifth, an effective trading strategy will provide specific evidence that will allow the trader to evaluate the merits of a trade.

Are there any other characteristics common to successful traders?

Management of one’s emotional state is critical. The truly exceptional traders can stand up to anything. Instead of getting emotional when things don’t go their way, they remain calm and act in accordance with their approach. This state of mind may come naturally. Or some people may have ways of controlling or dissipating their emotions. In either case, they know they want to be emotionally detached from feelings regarding their positions. When a position is going against him, Pete Steidlmayer’s attitude appears to be: “Hmm, look at that.” He observes his own positions with scientific detachment. By staying calm, outstanding traders get the necessary feedback to determine whether or not their approach needs to be revised.

Is having the proper emotional state an intrinsic quality? Or can it be learned?

Both. Some outstanding traders just appear to he that way—they have a natural scientific detachment—while others have learned to exercise a military-like control over their emotions. Either approach will work, but these traders are the exceptions. Trading actually tends to attract people who are ill suited to the task—those who are enamored with making lots of money; people who are willing to take high risks; individuals who seek excitement or who react to the world with emotional intensity.

How do you teach these types of people to adopt the kind of mental state appropriate to successful trading?

One thing I do is to have them actually get up, step back, and imagine seeing themselves sitting in their chairs. I get them to calmly watch as if they were observing someone else doing the trading. I also have them do other NLP exercises that are designed to achieve the same goal.

And just doing this type of simple mental exercise is sufficient to create permanent behavioral changes? For example, are you implying that previously high-strung traders will automatically respond calmly in crisis situations, simply by virtue of having done such mental exercises?

If someone is very high-strung, it means he’s particularly emotional, and it may take more work to make sure the results stick, but overall, the answer is yes. I know that it sounds hard to believe, but our brains learn very quickly. If you change the way the brain perceives a situation, you will change the way it will respond to that situation forever.

Of course, sometimes there are other conflicting considerations. One of my earliest clients was a very emotional trader who had a successful system but couldn’t follow it. I taught him some techniques for emotionally detaching from the market. I watched him applying these techniques one day, and it really worked. In just a few hours, he was up $7,000. But just as I was savoring a sense of self-satisfaction, he turned to me and in a monotone voice said, “This is boring.” I thought to myself, Uh-oh. I would like to say that I helped him solve his problem and that he made millions of dollars and lived happily ever after. No, the guy blew out. He knew how to go into an emotionally detached state, but he didn’t like to be there.

This experience taught me that some people are in the markets because they like the excitement. Since then, I’ve learned to help people who have that need for excitement to find it in other places in their lives and to schedule it, so their brain gets the idea that this process is not about denial but about appropriate times and means of expression.

Anything to add regarding traits that differentiate winning from losing traders?

A final critical characteristic distinguishing winning traders from losing traders relates to what I’ve termed “operating metaphors.” An operating metaphor determines how we view the world, and it shapes our beliefs, actions, and life-styles. Some of the metaphors used by traders to describe the market are a woman, war, and a game, to name a few of the more common ones. As an example of the game or puzzle-solving metaphors, Richard Dennis says, “It’s like playing a hundred chess games at once.” Pete Steidlmayer says he’s “solving the markets.” Paul Tudor Jones sums it up with, “It’s a game, and money is a way to keep score.” Each operating metaphor will lead a trader’s brain to a different set of beliefs and a different approach to the markets, with some being more effective than others.

Contrast the metaphors I just cited with some of the operating metaphors I’ve typically heard around the trading floor. “I got torn up today,” makes the market into a beast of prey. “We took a hit” reflects thinking that the market is a war and the speaker a wounded participant. Which metaphor will result in your feeling more objective about the market—playing a game, even a high-stakes game, or defending yourself from an attacking wild animal? The answer is obvious. The difference is in what is suggested by the metaphor. In the game, there are winners and losers, but your survival isn’t at stake, as it is with being attacked by a wild animal. You may respond brilliantly to save yourself from the beast, but that metaphor doesn’t encourage you to learn and practice long-term strategies and tactics the way a game does. Having an operating metaphor appropriate to your trading style is fundamental to success.

Can you tell who will be a successful trader and who will not?