Good Vs. Great Trading

[Predictor 11]

Good traders are able to identify opportunities in the market, plan trades, execute trades, and manage trades at a reasonable level. A good trader identifies the opportunity, plans the trade, and executes the trade. He takes his losses with discipline. One might think that great traders are similar to good traders but just better. The reality is that great traders are distinctly different from good traders. The difference is not merely a difference in measure but a difference in kind.

 

Great trading is actually much closer to gambling. One of the key differences between great trading and good trading is that great traders don’t just play the odds: great traders play the unknown. The market simply isn’t predictable enough – enough of the time -- to allow for the type of returns that great traders seek. So, great traders are much more likely to be going out into that unknown space. This seeking out the unknown always involves a cost. The cost for greatness is the potential for loss, even significant loss. A great trader will typically take more risks. The risks could involve taking trades with higher uncertainties (less confirmation), higher risk per trade (giving a trade more room), and in general just a higher level of risk. This increased level of risk taking is balanced by increased trading skill.

 

The problem with trading just trading well is that the game, the trading game, is really close to a zero sum game, even when played perfectly. The focus on limiting risk tends to ignore the reality that every business has to make a profit to survive. The problem with trying to avoid risks is that it tends to push the game to such a competitive level such that the trader must trade at a near perfect level just to break even and nobody can trade perfectly forever. Eventually mistakes are made and losses occur. Great traders are more creative. They move laterally and find creative solutions. Great traders don’t really compete against others. It is more of a dance. Instead of playing the games against others, they make up their own game.

 

Great traders are much more aggressive then good traders. A good trader may set a stop loss at a predetermined level and take the stop out mechanically – only to watch in frustration as the trade instant reverses and works out to their original plan. Great traders monitor the market with the knowledge that the stop out may be a bad stop out. They watch the market and try to determine whether they should get re-enter or take the loss. Often, the correct action is an aggressive re-entry and that can mean the difference between winning and losing.

 

Great traders have really mastered a core set of skills:

1. They recognize when they are wrong.

2. They incorporate new information into their existing plans.

3. They execute at a high level. They perform.

4. They recognize when they are right, and they push their winners.

 

Below, I review each core competency in greater detail:

 

1. They recognize when they are wrong.

 

The ability to recognize when one is wrong is very powerful skill because it allows the trader to take small losses when appropriate. The ability to manage risk well allows the trader to experiment at a low cost, gain experience, and adapt to changing market conditions.

 

2. They incorporate new information into their existing plans.

 

Great traders incorporate new information into their pre-existing decisions and they use that new information to better their existing plan of action. A good analogy can be found in the game of No Limit Poker where a player is dealt “hole cards” and these hole cards have different values. For example, a pocket pair is going to be worth a lot more than any two random cards. But, when the flop comes and depending on the board the odds can change dramatically. The analogy is that most good traders and most systems actually play the “hole cards”, and they don’t play the flop. They don’t incorporate new information. Most traders aren’t able to make intelligent sense of brand new market generated information. Even most experts struggle to incorporate new information after they’ve made a decision. One example of incorporating new information is the trader who is stopped out, processes newly generated market information, and intelligently and aggressively re-enters the trades that are more likely to work out.

 

3. They execute at a high level. They perform.

 

Most traders have experienced watching a trade that is stopped out and then starts to reverse and go in their favor but they don’t execute. Many traders have limiting beliefs about discipline and about how they should trade that prohibits them from capitalizing on what they identify. Of course, great traders aren’t inhibited. They don’t delay. They act. They are able to act because they’ve worked through the mental garbage that inhibits and limits most other traders. They’ve approached the game with meta-awareness and have adapted to focus on their key trading strengths and eliminated aspects in their trading that was limiting and distracting. As a personal example, I found my performance improved dramatically when I quit worrying about where to place my stop and just entered with a fixed stop. Contrary to traditional wisdom, I found that when trading in “real-time” that my performance improved significantly when I didn’t plan the trade or measure my stop loss. Utilizing the fixed stop loss allows me to enter trades more rapidly which often proves a significant advantage. And, without having to spend precious brain power trying to determine the best stop loss, I am able to focus more on what the market is actually doing , what it is likely to do next, and adjust in real-time. These adjustments introduce new risks and required generating new structures for managing those new risks. In essence, great traders have incorporated a series of better designs into their trading.

 

4. They recognize when they are right and they push their winners.

 

The novice often entertains the incorrect idea that it is possible to cut out the losing trades, and that successful traders simply don’t lose. The reality is that avoiding bad trades is nearly impossible. Instead of focusing on avoiding losses, great traders focus on maximizing their best opportunities. Of all the skills of great trading, the ability to push the best trades is one of the most important which is why I’ve saved it for last. Every trade has a different pay off. Most trades have probably about as much chance of making the trader money as losing the trader money. But, a smaller percentage of the trades are good trades and have a marginally higher probability of making the trader money and an even smaller percentage of the trades have a very high probability of working out. For hypothetical purposes, imagine 3 trades. The first trade has a 50/50 pay off, the second a 60/40 pay off, and the final one has an 80/20 pay off. Ask yourself, does it really make sense to bet as much on a 50/50 pay off as an 80/20 pay off? Of course it doesn’t make sense to bet the same amount when the odds are different. Yet, many traders insist on betting the same amount each time. A reasonable reason to bet the same amount each time is that varying the position size introduces difficult to quantify risk. A wholly different reason among small futures traders is that the contract sizes are so large in relation to the account that essentially they are always forced to bet the max -- which isn’t desirable.

Of course, there is one more than one way to push a great trade. The simplest and often effective method is to simply add more contracts. A variation is to allow the open profits to increase to a greater degree without increasing the contracts. One can also increase the stop, target, or in general give the trade more room. All of these methods increase the risk and the potential for reward.

 

It is notable that the ability to take more risk when one has a greater confidence is one of the greatest distinctions between liquid markets – like the S&P 500 - and most gambling games. The market simply doesn’t care how much you desire to bet and the cost for betting more is marginal – unless you’re a huge whale. While it may technically true that you can bet as much as you’d like in a no limit poker game, you can be sure that equally skilled players will respond by simply folding or only calling when the probability of your winning is only marginal. It makes sense that great traders capitalize on one of the defining distinctions between markets and gambling games.

 

As mentioned earlier, great trading is in many ways dangerously close to gambling. The higher levels of aggressiveness, risk taking, and uncertainty that characterize great trading must be paired with equally rigorous risk management and performance monitoring.

 

--

http://themarketpredictor.com

[mohsinqureshii 10]

Nice article but.

 

the people you mentioned as GREAT TRADERS have more frustration when they are loosing and they don't know when they will be exiting from the trades.

 

while the people you mentioned as GOOD TRADERS have less frustration when they are loosing because they knew when they will exit and how much they afford to loose as they have placed the stop losses.

 

In my view GOOD Traders are LOT better then the great one's ( The GAMBLERS )

[MightyMouse 12]

Nice article but.

 

the people you mentioned as GREAT TRADERS have more frustration when they are loosing and they don't know when they will be exiting from the trades.

 

while the people you mentioned as GOOD TRADERS have less frustration when they are loosing because they knew when they will exit and how much they afford to loose as they have placed the stop losses.

 

In my view GOOD Traders are LOT better then the great one's ( The GAMBLERS )

 

Do not take this the wrong way, but if you think good traders are better than great traders and you strive to be a good trader and not a great trader, then I think you are missing the point of the whole post.

[jpennybags 11]

You can can strive for the "great trader" benchmark, but being a "good trader" will make a living for you. Beware the ills of perfection.

[steve46 12]

Yes Jpenny, you hit it right on the nose....and how realistic is it to think about "greatness" when so many are struggling just to make a living at this tough business?

 

I think each person should have the right to define their own success...this simple rule set helps me to reach my goals and may help others......

 

CREATE a profitable trading plan

ANTICIPATE the setups

RECOGNIZE the entries

EXECUTE your trading plan with discipline

 

My suggestion is that traders try to improve consistently in each area...

 

 

Best of luck in the markets

Edited August 26, 2012 by steve46

[Baker 10]

good traders = play it safe

 

great traders = take risks but can control damage

 

basically?

[Predictor 11]

All traders take risks. Great traders tend to take more risks at times but less risks at other times. A great trader and a good trader may get into the same trade idea at the same time and with the same basic plan but the great trader will tend to end up in a better position.

 

The good traders are operating more on a single dimension whereas the great traders are able to incorporate greater amounts of information intelligently into their decision making. The great trader tends to maintain "meta cognition" of the game. In other words, the good trader identifies his plan and trades the plan whereas the great trader is able to see many plans. The great trader keeps a very "wide field" vision of the entire game.

 

The great trader is also keenly aware of his own relationship to the "wide field". In other words, if at any time he loses that meta-awareness then he knows to cut back, get out, adjust, etc.

 

The great trader takes more risk but doesn't realize it most of the time. Even when they do get hit: they've typically made much more when things were working. I like to think of it like the best defense is a good offense.

 

 

good traders = play it safe

 

great traders = take risks but can control damage

 

basically?

[zdo 20]

Predictor, enjoyed reading your article and posts in this thread…thanks.

I sincerely hope all our content herein helps move you and others to greatness.

 

Some thoughts about your list

1. They recognize when they are wrong.

2. They incorporate new information into their existing plans.

3. They execute at a high level. They perform.

4. They recognize when they are right, and they push their winners.

 

3. They execute at a high level. They perform.\

This is really the only one that genuinely belongs on the list! All the other list items are superfluous – traits shared with good traders, etc…

ie greatness in any performance work is determined by how one handles the BIG important moments, points, games, playoffs, whatever. … example - in tennis you can win significantly fewer points than your opponent but still win the match by winning the important points. The “greats” in all performance work finely balance their foci at these moments and push themselves (and not their risk btw … ‘taking more risk’ has been discussed (but not including in the list ? ) but the ‘risk’ profiles between the “great” and “good” really do not differ much ie am not really in agreement with the assumptions you're making in post 7... however your points throughout that great traders are in deeper and wider awareness that they are really gaming than are good traders is well taken). Behind almost all the stories of great traders it is a set of outsized wins or runs that made them – what’s not channeled in the stories adequately is the preparation and tactical readiness they had developed to “push” themselves at the right market moments

 

… so thoughts re the other list items

 

1. They recognize when they are wrong.

sb

1 They accept being wrong

good traders (and even not so good traders) recognize when they are wrong, but in the internal 'battle of the biases', pre-existing reactive - responsive tendencies, etc - too often go into a hopeful denial of the error state of a trade that isn’t working…so the acts required to ‘correct’ it aren’t taken…

 

2. They incorporate new information into their existing plans.

sb

2. They incorporate new opportunities into their existing plans (or something like that)

incorporating new broadcasted, willy nilly, information is common to both goods and greats

 

 

4. They recognize when they are right, and they push their winners.

This list item is actually too system dependent. I understand what you’re getting at but, if anything, the greats are good - ie only just a little bit better than the goods - at getting out at just the right times... Unless one is a TRUE trend follower, you don't push push push winners. etc etc

 

 

..were that every TL post was about greatness... high level performance...

 

Thanks and all the best,

 

zdo

 

“Never base your life decisions on advice from someone who doesn’t have to deal with the results” sounds like Tams ?? :rofl:

[zdo 20]

...You can can strive for the "great trader" benchmark, but being a "good trader" will make a living for you. Beware the ills of perfection.

Beware associating“perfection” drives with greatness. For one, the ‘greats’ are MUCH MUCH better at shaking off, even ignoring mistakes, losses, and imperfections than are the ‘goods’ …

 

...and also, even if one ‘settles’ for being ‘good’, there’s no guarantee he will be a ‘good’ …

so re

…how realistic is it to think about "greatness" when so many are struggling just to…?

in my view, better to just go ahead and set sights on ‘great’… it is “realistic” to think about greatness if you can truly assess and accept where you are now and tolerate the elevated tensions generated by the larger discrepancies created…

 

...also, in my experience, those who ‘settle’ in this business tend to gradually devolve themselves out of the game…

 

…back to the article

…One might think that great traders are similar to good traders but just better. The reality is that great traders are distinctly different from good traders. The difference is not merely a difference in measure but a difference in kind…

...then the article didn’t really quite fish that out far enough. Predictor, (and et al.) could you please expand and amplify on that some more for us? Thanks.

[jpennybags 11]

Beware associating“perfection” drives with greatness. For one, the ‘greats’ are MUCH MUCH better at shaking off, even ignoring mistakes, losses, and imperfections than are the ‘goods’ …

 

...and also, even if one ‘settles’ for being ‘good’, there’s no guarantee he will be a ‘good’ …

so re

 

If I left the impression that "good" is good enough... not my thinking at all. You don't get to be "good" by accepting the notion that "it's good enough". My point was that you can mess up a good thing by laboring over "mistakes... losses... and imperfections".

 

The ills of perfection... perfection is just a perception of one thing compared to another. In the end what you will be pursuing is a perception... not perfection. What you may lose in that pursuit is the joy that comes from living in the moment... which is perfection.

 

I kind of feel the same way about the word "greatness", but I suppose we must call it something... alas, the limitation of words.

[Predictor 11]

A good point was raised, greatness is not seeking perfection. Seeking perfection or the "grass is always greener on the other side" phenomena isn't the way to greatness. Let me expound, I'm very strong at discretionary trading-- reading the market -- and I'm very good at predicting the market. But sometimes I lose.

 

But let's say I couldn't accept the losses... I go out and seek a completely new trading method or try to buy an automated system. That's not greatness for me. That's seeking perfection.

 

Greatness is working on existing strengths. Its a working from existing strengths. Of course, it doesn't mean that I can't trade a system -- just because I'm good at discretion. I've been trading my own system for a couple years and it has worked extremely well.

 

But greatness is part of a feeling. It is a working from strengths. Its a working on the process. It is based on empiricism and feedback loops.

 

I like to say success is a process not a destination. Every trade I can choose whether to be 'great' or just average. Greatness is about a desire to trade at one's best. Let's say you're in a trade and you get a phone call or need to run to town or a distraction... giving that trade up.. not trying to win... that's moving one away from the greatness. Maybe you're up on the day or at a new all time high... maybe you don't want to take that trade so you can savoir your victory... victory is worth savoring but again if you're making decisions based on anything beyond achieving your best then that's moving one from greatness.

 

Other things that move one away from greatness, are things like boredom or the need for excitement. I took 1 impulse trade several weeks ago. I had never did that before. I "banned' myself from trading for about 3 days and it hasn't happened since. Every trader needs to be their own best manager and coach.

 

ZDO very true....

>Beware associating“perfection” drives with greatness. For one, the ‘greats’ are MUCH >MUCH better at shaking off, even ignoring mistakes, losses, and imperfections than are >the ‘goods’ …

 

 

ZDO... good vs great

 

Well part of the difference can be understood that a "great" trader has a strong advantage -- not necessarily a defined edge. Its partially explained by math size*volume=potential profits/losses. Gamblers tend to take many negative expectation bets and bet too large and they have large outsize losses. It took me a long time to understand where the similarity arose. Most of the associations of good traders is based on the idea of selectivity -- this is profit factor optimizing. If we seek to optimize the net profit then there is going to be less selectivity...

 

Much of the difference though is in the mental aspects... the good traders hold false beliefs, self limited ideas, false perceptions, false ideas, etc. Good traders are often conflicted. The great traders have worked through that.. in essence they've crushed the doubts, the rational arguments, and everything that else that holds others back. Plus, they are willing to do the work to find the truth.

Edited August 28, 2012 by Predictor