The Market Wizards books were enormously influential in helping us think about trading success. There are many great lessons offered by the Wizards and their paths to success. The relatively unwritten story is how few of the Wizards have sustained a high level of success. In recent years, we have seen many formerly successful money managers and funds achieve returns well below their benchmarks. A surprising number have gone out of business altogether, unable to justify the fees they charge.
Interestingly, the majority of funds that have achieved superior returns in recent years have utilised quantitative methodologies. An important reason for this is that successful quantitative funds employ large numbers of researchers and can deploy large numbers of strategies across multiple markets and time frames. That is well beyond the bandwidth of individual traders.
successful traders, A majority of those depart from traditional Market Wizard advice in one important respect: they don’t trade a “style” that “fits their personality”. In fact, I’ve found that having a fixed “style” has been an excellent predictor of trader failure. The trader with a static methodology is ill-prepared to win when markets change in their volatility, trending, correlations with other markets, and relationships to economic variables. A great deal of recent under performance has occurred in recent years as the result of the failure of directional traders, dependent on momentum and/or trend, to adapt to low volatility markets that exhibit significant mean reversion on short time frames. Unable to adapt their strategies and/or time frames, they become dinosaurs.
More successful traders have shown an ability to do what the quants have done and often have integrated quantitative modelling into their discretionary trading. They develop multiple strategies for trading, increasing the diversification of their returns and raising the odds that some strategies will pay off while others lag. In my own trading, I break down the most recent market regime into a trend component and one or more cyclical components. Depending on the presence of a trend and the frequency and amplitude of the dominant cycles, I could end up looking like a short-term directional trader, a longer-term trend trader, or a mean-reversion trader. Alternatively, many day traders that I work with screen for stocks exhibiting the qualities that fit their trading styles, trading different names on different days.
Either way, the key is adaptability. By viewing markets creatively, traders can develop new and multiple edges and sustain their success. This has been such an important dynamic in recent success that I made adaptability and creativity two major emphases in the Trading Psychology.
Many, many seeming psychological problems in trading are the result of the frustration that occurs when we trade in ways that simply do not fit the markets we’re trading. Once we begin to research and innovate, the sense of adventure, opportunity, and optimism returns. Change is never easy. It requires the willingness–and especially the humility–to return to the learning curve and start over as a student. But that also is part of the fun and challenge of markets: we’re always given the opportunity to learn and develop.
A great first step in this process is networking with other traders and seeing what they are doing that is working. Another great step is reviewing your own trades to see what has separated the winners from the losers. Activate your curiosity and you’ll begin a creative challenge that can thoroughly remake your trading. Market Wizardry is something that always has to be built anew. No edge lasts forever, because no market stays the same forever.
