This is not a game for those who are used to getting straight "A"s


At the outset, I would like to make it clear that I have nothing but respect for those with straight "A"s and I am in no way belittling their contribution to mankind. While their contribution in science, technology, literature etc has been tremendous, their IQ is of very little value when it comes to trading. In fact, it's a handicap. As a disclosure, I am one of those guys with straight "A"s but went through a long process of transformation before i became a successful trader.

I don't think there is any profession which is as counter-intuitive as trading. This is not a game for the perfectionists. This is not a game for those who are used to getting straight "A"s in their college. It becomes all the more difficult for those with impeccable academic credentials. Trading is all about imperfection. You get a lot of "F"s a.k.a stop-outs and occasional "A"s a.k.a winners, not exactly the kind of treatment the best and the brightest are used to. This becomes a severe handicap for these types trying to trade. In the pursuit of perfection, they spend a lot of time on the drawing board trying to design the perfect system. When that holy grail system starts handing out the "F"s, they rush back to the drawing board, trying to perfect it again. When they fail to find that perfect system, that perfect trade, they will find things to blame like the Fed manipulation, the algos, the specialists, the insiders, the news and what have you. And if somebody is making money despite all this manipulation, they call them the herd, the lemmings led down the cliff!

Imagine this. You start your trading day with 2 stop outs. You get the third trade setup. Will you take it or pass it? A high EQ (Emotional quotient) trader would persist through the pain and pull the trigger. What would a high IQ guy do? He won't like the fact that even if he wins that third trade, it would only provide a win rate of 33% for the day. If for some reason, the third trade fails too, he would be devastated as his win rate would drop to 0% for that day, a thought which is very hard to swallow for someone used to straight "A"s. He would rush back to the drawing board to figure out what went wrong. Well 3 losses in a row is peanuts. Any trader who has traded for any length of time will sooner or later hit a string of 8-10 losses in a row. After the 10th consecutive loss, how would you feel? Would you take the 11th trade? Do you have the necessary mental training to persist despite the pain? If you are used to straight "A"s, then obviously you don't. You might have a winning mindset, which is great in other areas of life. You succeed in most  other endeavors, with that kind of mindset, but not in trading! That's why a marine would make a better trader than an academic.

Do you have the tenacity to take 10 losers in a row and pull the trigger on the 11th trade? If you don't, you will invariably end up freezing on that 11th trade, which if it happens to be a winner, you not only lose the profits on that trade, but worse start another series of losing streak. This requires a different sort of mental conditioning that is not taught in colleges. Academics don't understand this and don't have experience in this kind of stuff. The bright folks do understand that it's not the win rate alone, but the average win - average loss is what gets credited/debited into their trading accounts, at the end of the day. Now even if the net happens to be a credit, most perfectionists would not like the feeling of 4 losers and 1 winner resulting in a net credit. They would rather have 4 winners and 1 loser with a net debit, which is psychologically more satisfying. That's why what feels good psychologically is usually not what makes money in the markets. I know a close friend of mine, a very bright guy from a top school, who once told me, "Who cares about money ? What kind of sh*t is this business!? I have no satisfaction in the whole process." That pretty much sums up the intellectual aspect of trading. 

Most intellectual types get easily bored in this business. What attracts people to trading initially is the intellectual challenge of cracking the markets. They come to trading with this false notion that money is made by cracking the code of the markets, predicting the future, predicting every top/bottom and wiggles in the market. When they realize that, not only can they not predict the markets consistently, but those who don't even predict the markets make money, it's devastating !. Now even it they succeed in making money, they would not last long, because the intellectual aspect is missing in the whole trading process. I am not saying that bright people cannot succeed in this business. They can, but it requires a change in mindset. It requires toughening up, getting used to imperfections, getting used to beat up by the market, genuflecting to the market and throwing away the ego aside. It's all part of the EQ building process, which is only learnt from the school of hard knocks. College education won't teach you that.

Princely Mathew hosts The Smart Money premium service at ElliottWaveTrader.