There’s a great show on British TV – Million Dollar Traders. There are two very important lessons that every trader must understand, that have been perfectly illustrated in this documentary, and I want to discuss those here. Any trader who doesn’t understand these lessons is doomed to fail, just as many of the traders in the show are failing.
Before I continue, here’s a quick resume of the show for anyone who hasn’t seen it. London City trader and hedge fund manager Lex Van Damn (great name!) decided to set up an experiment to see if he could teach anyone to trade. He interviewed hundreds of applicants, and finally selected 8 people. Those he chose came from all kinds of backgrounds – there’s an environmentalist – who wants to try and trade only ethical stocks – a soldier, a boxing promoter, an entrepreneur, a retired IT consultant, a vet, a student and a shopkeeper.
Some of these folks are better educated than others, which is important because it relates directly to one of the lessons that this show has so wonderfully illustrated – which I’ll come to in a moment.
The ex-vet (I’m talking about animal doctor here, not the army kind of vet!) is highly educated, and comes from a wealthy family. The retired IT man spent 40 years working as a computer programmer at IBM. The shopkeeper studied at university before joining the family business.
At the other end of the scale, we’ve got the fight promoter who has no such privileged education. The soldier and the environmentalist are of average education as far as I can tell, and the student is obviously still studying.
The eight who were picked were given two weeks intensive training by Van Dam and his team of traders. They covered all bases, including fundamental analysis, technical analysis, trading psychology, and all the practical aspects such as how to work their Bloomberg terminals and place trades.
Following that, they were straight onto their own trading floor for six weeks of live trading, with real cash. Quite a lot of it in fact – one million of Lex Van Dams own hard earned dollars.
In the first show we saw highlights of this training, and the first week of trading. As you can probably imagine, their first week was pretty traumatic, and they were all over the place. By the end of the first day, only one of them had placed a trade. By the end of the week, they all had, but they had all lost money.
In the next episode, we saw them trade for another two weeks. And this is where it gets really interesting, because we’re starting to see who gets it and who doesn’t. Depending on your own experience in trading, you may be surprised at the results so far…
Ok, so here’s the first lesson: Success in trading has very little to do with intelligence, and everything to do with personality.
Before I go on, let me just make a disclaimer. What constitutes intelligence is something that is often debated. Is a high IQ intelligence? What about creative types? For our purposes here, I’m going to go with the popular conception of intelligence being a reasonably high IQ and good education.
On that basis, we’d expect the computer programmer, vet, and university educated shopkeeper to do well. The soldier and the fight promoter should find it tougher.
And yet exactly the opposite was true. In fact, the Simon the computer programmer (remember, he worked as a consultant for IBM for 40 years) actually ended up walking out halfway through the experiment. He just couldn’t do it. It didn’t suit his personality. He said, and I quote as best I can remember it:
“This is the second most stressful thing I’ve done in my life, after my divorce”. He was a wreck. His results were so bad, he was losing the team more than the winning traders were making – put together!
Why would someone apparently intelligent, well educated, and used to working with numbers, struggle so much with trading? Well he said it best himself:
“I’m used to writing computer programs. Once they’re written, either they work, or they don’t. If they work, they continue to work forever. If they don’t, then you find the bugs, fix them, and then the program works and continues to work forever. With this, I keep doing the same thing but I get different results. Why? Because there are humans involved”.
I couldn’t have put it better myself. Despite the thousands of “program trades” that are made every day, trading is essentially a human activity, driven by emotion. And boy have we seen some emotion in this show. Cleo the ex-vet has spent 3 weeks sat in front of her trading screen and barely made a single trade – she’s paralysed by fear. She’s not made a huge loss, but she’s not made a profit either – she can’t – she won’t trade! Another of the traders whoops for joy every time one of his trades ticks up. They’re both totally controlled by their emotions.
But lets get back to this thing Simon the computer man said. He’s trying to apply rules to trading, in the same way his computer programs are essentially just sets of rules. He can’t cope with the fact that doing the same thing over and over, doesn’t always produce the same results.
This is the second great lesson that Million Dollar Traders is exposing: Trading is not about rules, it’s about principals.
What’s the difference? Hollywood screenwriting legend Robert McKee puts it brilliantly:
“A rule says ‘You must do it this way’. A principal says ‘This works…and has through all remembered time.’ The difference is crucial.”
To paraphrase what he goes on to say:
“Anxious, inexperienced traders obey rules….Artists master the form.”
Trading is more art than science. You cannot apply rigid rules. If that worked, we’d all set up automatic trading programs, everything would become automated, and the market would just stop working because nobody would have an edge any more.
Instead, we must learn the principals of what makes prices move. Understand the humans making the decisions. Understand the emotions and responses to prices on a screen. And have a set of guiding principals to lead us to our trade decisions in any given circumstances.
Understanding principals and being able to apply them in any situation is far more valuable than just blindly following a set of rules.
And that’s why the computer man failed. He’s spent his entire working life following rules. Put him in front of a chart, and he just carries on applying rules.
The vet on the other hand, was simply a slave to her emotions. She was completely controlled by her fear. The worst thing is she knew it! Her screen was covered in post-it notes telling her “you can’t win if you’re not trading” and “just pull the trigger!” and so on. But despite knowing what she should do, she couldn’t actually bring herself to do it. Her education, privileged background, and apparent intelligence were worthless to her.
And then we had the winners. By far the most successful trader so far is single mum Caroline, the entrepreneur. Her experience in setting up her own business and overcoming all the obstacles and difficulties that come with that (not to mention the difficulties of being a single mother of twins), prepared her nicely for the trading floor. While those around here were either leaping up and down with joy at having made a minor profit, or crying into their coffee cup after suffering a loss, the entrepreneur was calmly watching her charts, entirely emotionally detached from the market.
With ruthless precision, she was cutting her losing trades as I can imagine she might fire under performing employees. She greeted her winners with the same total lack of emotion as her losers. When Lex Van Dam called her into his office to congratulate her on being “…the best trader on the floor”, her response spoke volumes:
“I’m only the best at this point,” she said. “All my trades could turn round against me this afternoon and then I’ll be the worst.”
As Lex rightly replied:
“That’s why you’re the best – because you understand that”.
The soldier has been doing pretty well too. His training has prepared him to examine situations, think through possible options, and then choose his action carefully, based on a set of guiding principals. No doubt the strength of character and ability to keep emotions under control that come with battleground experience are an asset to him on the trading floor.
Now I’m not saying that only battle hardened ex-army types, or successful entrepreneurs can ever make it as traders. What I am saying is that most people fail to recognise how important personality, emotional control, and a certain flexibility are when it comes to the markets. If you go into the game knowing the challenges ahead, you have a much higher chance of success.
At the time of writing, there’s a final show still to be broadcast, and from what I understand, only three of the traders make it to the end of the eight week experiment. Maybe the vet will make a comeback, but I’m not counting on it!
Let me then summarise the two lessons that Million Dollar Traders has so beautifully crystallised on screen:
1. Success in trading has very little to do with intelligence or education. It has everything to do with character. More specifically, strength of character. Those who can control their emotions rather than be controlled by them, are far more likely to succeed.
2. Learning to trade is about learning principals, not rules. Understanding principals will enable you to make money in any market, under any kind of conditions. Rules might make some money for a short time, but as long as there are humans in the market, rules will never produce fixed predictable results every time. If that’s what you’re looking for, put your money in the bank. Actually, on second thoughts….!
Day Trading Ideas, Market(s) Analysis | admin | July 8, 2009 | 
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day trading, investing, market analysis, market commentary, Market(s) Analysis, s&p 500, stocks
