For years I have been an investor, always trying to see the positive and believing that free enterprise and capitalism is the path to prosperity. Work hard, save your money and invest in the stock market. I also believed that owning a beautiful home was a good investment as well. There was a time when America was the envy of the world. Now we are the fool. Our financial system as we know it is gone. Lehman, Bear Stearns, AIG, Fannie and Freddie, Merrill Lynch… gone. Citigroup would fail if not for the bailouts and the great Goldman reduced to a bank. Record layoffs, record foreclosures and trillions of dollars in 401(k) plans and savings wiped out in a year. Millions of lives have been destroyed. Why would anyone want to invest in this country that provides no healthcare, where the states are mostly bankrupt themselves and asking for money and can’t even make their unemployment payments to 10 million unemployed, where a bank will kick a family out in the street because a man lost his job and fell behind on a loan payment? We are the laughingstock of the world. Perhaps the market will rebound but why in G_d’s name anyone would want to invest in this country is a mystery. Substantial damage has been done and it will take years for confidence to return. Why leave your hard-earned dollars in a retirement account that can lose 6% in less than half an hour? Why buy a house that can lose 50% of its value in a year and then risk losing your downpayment and foreclosure when the average shelf life of a job is only three years? An elephant stampede Lobagola into stocks? Makes perfect sense — elephants have poor eyesight and fail to see what is immediately in front of them. In spite of the impressive Friday reversal and clearing of the 20 day moving average and IBD conviction that we are in a confirmed rally, this market isn’t finished until everyone is wiped out. They say the market foresees the future and rises six months in advance of a recovery. Who among us believes that the economy will recover six months from today? We are truly in uncharted waters and a drop of 40% from this level on the S&P would take us to the 50 year long term trendline. Perhaps then the risk reward ratio will favor investing in a country that doesn’t take care of its own people.
The importance of practice in music can't be overstated. There are hardly any musicians of great competence who took up their study after the teens, and most have been practicing intensively since the age of seven. The problem is that most people hate practice, stop at an early stage, and waste their time when they do this. Michelle Siteman in her magnificent book, "The Pleasure and Perils of Raising Young Musicians " has a chapter "Practice Makes Perfect " in which she gives 10 techniques for improving the quality and quantity of such practice.I have received completely positive feedback from musicians who have read this book that the techniques she suggests are ingenious and useful. I believe the have universal value, and I will try to apply the lessons from Ms. Siteman's chapter to improve the practice of trading with a few of my own practice techniques from racket sports thrown in. This is a subject that has received much too little attention as practice makes more perfect in every field including our own, And this would apply to any trader despite his natural proclivities and abilities. It is common to think that a quality for greatness in a field is to love to practice it. But Vladimir Horowitz, Glen Gould and many other musicians, including Beethoven, hated practice when they were young, but they were able to conquer their aversion, usually with the aid of a firm parent who applied some of these techniques. Presumably the head of a trading team should insist on practice regardless of the qualms or machismo of some of those whose recent track record is good, or believe they were to the manor born. Emulate Pablo Casals and Yehudi Menuhin, who practiced eight hours a day, every day of their lives.
It's not enough to say: practice trading. Most people don't know how to do it. And most are bored while practicing so there has to be something that makes it interesting. Musicians handle this by mixing in some easy beautiful pieces with the scales, finger exercises and and arpeggios.
1. Group activity. One universal technique for making practice more interesting is to make it part of a group activity. Somehow those who play instruments in orchestras stick with their instruments to a much greater extent than piano, and this is why many impartial observers suggest that orchestral instruments are better for a child to play than piano, because they stick with it. Practice sessions for traders should be in groups.
2. Money rewards. And what follows from this is that monetary rewards are a great motivator for musicians to practice. Some parents make their kids pay part of their lessons with their allowance money. This has a very salubrious impact on the efficacy of practice. Group trading practice should have monetary rewards. It's amazing how many of us will stoop down to pick up a $5 bill.
3. Record keeping. Record keeping is an important part of a good practice session. A systematic account of what has been learned and what the goals are is always helpful as a foundation. It's also helpful to be able to review the mistakes and winning forays that went into a successful trade.
4. Parental presence. All musicians find it boring to practice alone. Having a parent around to observe reduces boredom. If it's important enough for the parent to insist the child do it, then it's also important enough for a parent to take an interest. The same would apply to a trading manager, who all too often leaves the trading practice to the subordinates without taking an interest in it.
5. Proper logistics. Practice should be at a certain time, and a certain place and there should be good lighting. That way there's no chance that a session can be missed because of a conflict in schedule that arose because the child or trader didnt know that it was scheduled for that day and time. A proper environment without sibling or other traders squawking that they are hungry also improves results.
6. Consistency. Practice every day is essential. The markets are always changing, and after a day or two all the skills begin to detiorate. I once practiced squash every day, 365 days a year, for 10 years. A trader should practice trading each day, or if a hiatus ensues, should practice steadily for a number of days before entering into the fray.
7. Read books about the techniques that other great musicians used to improve their techniques. What worked for them probably would put you on a path that has at least been tested. Eschew the techniques of traders that were not successful, for example the boy trader.
I would be interested in ideas readers have on improving the training and practice of traders.
Larry Williams adds:
I have always thought mastery is a largely the function of repetition.
Obviously you have to repeat the right things. Today's great home run hitters all have instant access in the dugout to videos of their last time at bat to review and repeat the right techniques and stop the wrong. Many scoff at paper trading — sure, it is not as emotional, but still provides valuable lessons.
Chris Ledoux won the world bareback riding championship with very few rides in actual rodeos. He was so banged up he practised on a bucking machine (also wrote a good song about it) to prevent further injury and shocked all the bettors who had never heard of him as he accomplished his gold belt-buckle dreams.
Jim Sogi suggests:
My Karate teacher said, "What is the best practice and training for fighting? Fighting. You can run all day, you can do 1000 sit ups, 1000 push ups, 1000 sprints, and 1000 punches. But the best practice is fighting with an opponent. "My father once said, " The only difference between a small case and a large case is the number of zeros behind the 1."
You can read 1000 books about trading, study data for hours, but the best practice for trading is trading. Even if you do small size, which is best for practice, it keeps your wits sharp and emotions tough and keeps you in the game.
Keep a place set aside for only trading, always ready to go, 24 hours a day without having to clean up, scoot others away. Same with music practice. Have a set aside place or room for music with all the instruments just ready to walk in and pick up and play, even for 10 minutes before dinner. Pretty soon it becomes a habit.
Allen Gillespie takes it further:
Scales and etudes and pieces played with different bowings, speed, rhythm, etc. Breaking down a passage into shorter component parts. For example, if there is a long passage of quickly played 16th notes, first practice with separate bows for each note, then two on a bow, then three, etc. then change the rhythms from just 16ths notes, then just play the key notes from the scale so the ear hears where the passage is headed as many of the notes are fillers, understand and anticipate the pattern. Learn to play by ear. Finally, Always Play/Practice Musically (i.e. even when practicing the notes do not forget to include the crescendos, etc.)
For the trader,
1) Imagine as many scenarios as possible.
2) The distance between lows or highs or between lows and highs might give an indication as to the key
3) Some notes/days are more important than others
4) Trade smaller during times of practice
5) Test different combinations of variables - first separately then two, etc.
6) Despite all the practice, sometimes the best performances are not straight from the page
7) Finally, trading is an emotional game, so play with passion and remember there is always a low note and a high note and many notes in between.
Sam Marx reminisces:
Practice is important and in my sport in high school I practiced quite a bit but always felt that I had a limit because of physical limitations. I was 6 ft. tall but my hands were below average for my size. I couldn't get a good grip on a football or palm a basketball.
Once I was seated at a dinner table next to Bart Starr, former Green Bay QB. That man had huge hands. I have no doubt that enabled him to better control the football and made him a star. Another time I was in close proximity to Gil Hodges and I noticed that he also had huge hands. I believe he was a first baseman. I could just picture him with an oversize glove catching balls or scooping up grounders that would be missed by the average infielder.
A friend of mine was an excellent boxer. His arms were extremely long, also, his head was smaller than it should be for his size. He could just move around his opponent and jab him silly while keeping his head tucked behind his shoulders. Standing up with his arms dangling on his side I thought he looked like a chimpanzee. He had no desire to become a professional boxer but I've seen professionals in the ring with those characteristics. Kid Gavilan comes to mind.
On the options trading floor I noticed that some traders could hear trades from across the pit. Their hearing was acute.
Practice is important, but don't dismiss physical and mental ability, especially abilities in the 3 plus sigma range.
Don't tell your kid that he can accomplish anything if he practices enough. Offer this advice only when justified. Tell him he can greatly improve with practice but don't offer false hope of attaining the impossible. It can be frustrating if you're not in the 3 plus sigma range in the field you're practicing in.
Nigel Davies recalls:
David Bronstein once advised me to prepare for tournaments by studying chess at the exact times the games were scheduled. And I understand that Vladimir Kramnik took this concept one stage further by solving endgame studies (particularly demanding work) during the last hour of such studies. The last hour of a playing session is known to be the most critical, with most games being won or lost at this time. And it does seem that he got the better of Veselin Topalov at this point in the games.
Easan Katir mentions:
I spent one recent Saturday evening at the Hat and Hare Pub in the basement of the Magic Castle, with two accomplished card men, Aaron Fisher and Tony Picasso, discussing their art. Aaron instructed, "to improve, perform at any opportunity, for anyone." The club was full. He said, "C'mon, let's find you some people." So he rounded up a spontaneous audience comprised of three giggly young things, and gave this amateur the opportunity to perform modestly baffling illusions.
Live performing, live trading. No solo practice or paper trading like it. Mind sharp. Managing audience expectations, unexpected reactions and distractions. The joy of good execution. The thrill of conquest. The glow of accomplishment.
Much theoretical study, counting and practicing correctly precedes such moments. For trading I suppose the advice "perform at any opportunity" could be ambiguous enough to become a way to diminish one's capital, unless one adheres to tested guidelines for what constitutes an 'opportunity'. It works for me to transfer these skills to trading.
Evan McKeown writes:
Practice is such an important topic. I have always believed that if you do what you love, and love what you do, then success will eventually come your way. Success itself means different things to different people.
I am a 5.0 tennis player, and love playing tennis. No matter how much I played, or practiced, I never was able to reach a level much higher. Notwithstanding my dedication or love for the game, I have enjoyed other success by meeting wonderful people that share my enthusiasm and we enjoy our weekly matches. John McEnroe once said he hated to practice, so, instead, he played in doubles tournaments. John had one of the best net games in tennis which is unusual today thanks to his devotion to being a doubles player as a substitute for practice.
I am a trader. Once again, I love what I do. Trading is not a job, it is a way of life, my passion. I trade every day, and practice every day. Practice for me, comes in many different forms. Just as in tennis, there is on the court, and off the court practice time. Off the court (or ticker screen) I stimulate my mind with financial literature. The best book I ever read, and the only book I ever read for a second time, is "The Education of a Speculator." This work of art should be required reading for any college finance class. Long before this book made me any money, it first saved me thousands. Years ago, when a perfect storm of events had collapsed my portfolio and nearly had me on the verge of ruin, I sent an email to Vic and Laurel for some word of encouragement after the market had crashed through a 200 day moving average, financial condition in the market that is not unlike the one we see today.
To my amazement, Vic and Laurel wrote me back with a few simple words that inspired confidence. Not so much advice, as it was knowledge on how to handle adversity. I not only made back the 50% that my portfolio had declined, I ended the year with a 27% gain. That email changed my life forever. Instead of placing a sell order and taking a loss of half my assets, I took the pearls of wisdom and made the most of the opportunity.
Thank you Vic and Laurel, for sharing your knowledge and experience of the markets, for being an inspiration for common everyday traders such as myself, and for taking a few moments and write such an inspiring email that changed my life forever!
Pitt Maner III says:
Many years ago I went for 3 days of tennis lessons at Nick Bollettieri's in Brandenton, Florida. An evaluation was done of each player's ability and then we were separated into groups and sent out to practice for about 5 hours each day (with a lunch break at mid-day to watch films of Agassi playing). Thank God it was not in the dead of summer, but at 80 or so degrees it was still quite brutal for moderately trained weekend warriors.
One of my teachers was a former Rhodesian paratrooper named Ian who picked up very quickly on my poor footwork (even for a 3.5 or 4.0 player) and tendency to "float" or not properly set my right foot when hitting a backhand. The school also emphasized the need to follow through on strokes and to keep hitting the ball deep and allowing for sufficient height of trajectory over the net. In other words give yourself a margin of error and don't try to hit winners all the time from the baseline–play it a bit safe and wear your opponent down.
The tendency of beginning tennis players love to hit winners even at the expense of hitting several poor shots and losing games was discussed. Players were taught to recognize the importance of swing points (ie. 40-30 or deuce or 30 all) and to be more aggressive at 40-0 or 40-15. At the pro level students were shown film of Agassi running Lendl and not finishing off points right away if Andre could get Lendl to "lunge" one more time and thus exert more energy. Tennis warfare by attrition.
Tennis at the highest levels was indeed a different game then what I imagined or had gathered from watching Borg and Conners on TV or reading about in Tennis magazine.
On the adjacent court one could watch the 10 year old Anna Kournikova practice with her coaches under the vigilant eyes of her Russian mother. The tennis school had a quite rigorous schedule for the kids–lots of running in the morning, tutoring–school, weightlifting, and hours and hours of hitting tennis balls. At the time Anna said she loved to play tennis and did not mind the practice. We watched as she played practice games in the afternoon against boys her age or slightly older.
At the end of 3 days my toenails were breaking off from my swollen feet (note to file–never come to a tennis camp with new tennis shoes!) I had experienced my first and only time with tachycardia after running side to side "suicides" on the court. My game had been broken down and I was now playing like a sorry 3.0 player and not able to incorporate or integrate all the intensive things that had been taught. There was a German banker who said he worked 60-70 hours a week at home and came to the camp for "relaxation"–masochism at its finest!
But the lessons were learned and not forgotten and months later my tennis game improved and my appreciation for the game greatly expanded.
Steve Scoles makes another point:
An important requirement of successful practice is getting proper feedback in a timely manner — touching a hot stove teaches you pretty quickly not to do it again. Markets, because of their probabilistic nature, are really horrible at given this kind of feedback. In investing and risk management, the short-term outcomes are often unrelated to the quality of your decisions and it may even take years to be proven "right" or "wrong". I don't think this is a new idea to the world of trading, but I have always found playing poker to be a good way of practicing dealing with the probabilistic nature of markets.
Poker has several similarities with investing with some key ones being:
- imperfect information
- probabilistic outcomes
- emotional involvement is in play as money is on the line and your failures and successes can be monitored & commented on by the other players.
The advantage of poker over the markets is that the decision-outcome relationship is usually more analytically simple to learn from and thus the feedback loop is a lot better than what you get from the markets.
Three things that I have found poker helps you develop that can be carried over to the markets are:
1) to learn and internalize how gains and losses are really probabilistic outcomes rather than successes or failures;
2) to improve your ability to evaluate decisions on a basis other than the outcome;
3) to improve your ability to maintain emotional stability through the various ups and downs.
Jim Sogi makes his second remark:
In Japan the Sumo wrestlers live a strict regimen of diet and training. They avoid emotional upset that might affect their appetite. This is like trading. It has to be approached as a competitive sport. Physical training, proper sleep, good food, avoiding drugs and alcohol are necessary during the trading week to be in top shape when in the fray. If something upsets me or I fall out of training, the trading can be affected.
Alan Millhone follows up:
I will speculate that the Sumo's do not watch much TV nor hear any negative news while in training ? Mental discipline in Sumo, trading, board games,etc. is critical. When I attend any Checker tournament I get my rest, eat properly, no TV when on the road. Mr. Sogi is correct that being upset is a big deterrent to functioning properly in any endeavor. Staying focused is Job # 1 and critical to proper performance. The avoidance of drugs and alcohol holds true in any event we pursue.
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