Purposeful Trading

Stock investment analysis

What does it take to be one of the best at what you do?

People talk a lot about natural ability. The phrase ‘they’re a natural’ is one we’re all familiar with.

It’s undeniable that genetics can play a roll. Physical and mental factors will certainly make a difference in some pursuits.

But not everyone is cut out to run the 100 in under 10 seconds. It’s probably fair to say it also takes something extra special to be a rocket scientist for NASA.

But let’s assume you were dealt a reasonable genetic hand. What are your prospects of excelling at something?

Take trading for instance. Can anyone learn to be a great trader?

Well there was a real life experiment on this very issue. It came about due to a bet between two legendary traders —Richard Dennis and William EckHardt.

You see, Dennis thought he could teach almost anyone to trade profitably. EckHardt, on the other hand, said trading ability was a special gift…something you were born with.

The two set out to design an experiment to test their views. They found 14 people with little or no trading experience. Dennis called the group the Turtles.

Dennis began teaching his students a set of trading rules…rules he knew would make money. These rules were the sum of a long and successful career. 

The end result was incredibly successful. It’s the stuff of market legend.

The Turtles reportedly made over $175 million dollars in five years. Many of them went on to hugely successful careers independent of Dennis.

There’s no doubt this is a fabulous story. But can ordinary people really be so successful? Is there any science behind this…or is it just a Hollywood style script?

This was no fluke

The secrets of success are no longer so secret. There is actually quite a bit of evidence that suggests the experiment was no fluke.

I read a fascinating book a while back called Bounce. Its author — Matthew Syed — is an Olympian and award winning journalist.

Syed presents a lot of research on what it takes to excel. Success, it turns out, largely comes down to something Syed terms purposeful practice.    

What’s the difference between purposeful practice and practice? Well, quite a bit apparently. Put simply, purposeful practice is quality practice.

Top performers use this type of practice for the sole aim of getting better. It engages the mind (and/or body) completely and pushes the outer limits of a person’s ability.

This was certainly my experience as a young trader.

The sink or swim culture of an investment bank dealing room didn’t give me much time to get it right. The clock was ticking. I had to learn as much as I could from every trade.

Hour after hour I would spend studying price charts. I was searching for recurring patterns that I could use to make money. This was intense learning…it was purposeful practice.  

Champion golfer Jack Nicklaus explains it like this:

Nobody, but nobody, has ever become really proficient at golf without practice, without doing a lot of thinking and then hitting a lot of shots. It isn’t so much a lack of talent; it’s a lack of being able to repeat good shots consistently that frustrates most players. And the only answer to this is practice.’

Just change a few words and this is all about trading, or anything else for that matter.

Let’s try this: it’s a lack of being able to repeat winning trades consistently that frustrates most traders.

Success is a formula…the research proves it. The key is to fully commit yourself to what you’re doing.

Richard Dennis gave his students a set of rules. They then had to apply the ‘formula’ to become natural talents. Not all of them could do this. But many who did became amazingly successful.

Compare this to less intense everyday practice.

Syed gives an example of something most of us do all the time…driving. We should all be expert drivers with this much practice. Yet, barely any of us would survive one hot lap in a Formula 1 race car.

You see, few of us are practicing our driving with purpose. We get around with the radio playing, we talk to others, and we think about other things — everything it seems except precision driving.   

There’s no way around it. We have to practice with purpose to be really good at anything.

So just how much high quality practice do we need?

Brace yourself for this…it’s a big number. The magic figure is about ten years.

It doesn’t matter if you’re a chess grandmaster, a sportsperson, a musician or academic. The findings are the same. It takes roughly ten years of purposeful practice to be our best.

It’s true there are no shortcuts in life. But there are ways to be good at what you want to do without putting in ten years to become an expert. In a moment, I’ll tell you how.

First, there’s another excellent book I recommend — Outliers, by Malcolm Gladwell. Gladwell refines the ten years to a 10,000 hour rule. He says it takes at least 10,000 hours — 1,000 hours per year — to become an expert in any complex task.

Trading certainly qualifies as complex.

People who think trading is easy typically have short careers. They don’t see the need for purposeful practice. The thinking goes: ‘How hard can it be? Just buy low sell high!’

Unfortunately, it isn’t that simple.        

I believe there are two ways you can accelerate the 10,000 rule. It’s partly how I got through my early years as a trader. My boss in those days was Carlos. He was in his 40s and had made the bank a lot of money over the years. 

Carlos was always telling me to read as much I could about the markets. He said this was a way to fast tracking my learning. The experiences of others can be a great teacher. 

One book in particular had a big influence on my early career — Market Wizards, by Jack Schwager. The book is a collection of interviews with top traders. It contains a lot of wisdom.

The other way is to be like the Turtles. You need to develop your skills alongside a set of rules…a system.

The Turtles had five years of purposeful practice using Richard Dennis’s system. This was life changing for many of them.

A system is a ready-made set of rules. It’s both a map to follow and a teacher to learn from.

My system for ASX stocks — Quant Trader — is exactly this. It uses rules to identify and trade stocks with the potential for big gains.

And it’s more than 10,000 hours of purposeful practice in the making! You can learn more here.

Until next week,

Jason McIntosh
Editor, Quant Trader

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The Daily Reckoning offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, The Daily Reckoning delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors. Founded in 1999, The Daily Reckoning is published in 7 countries with a worldwide readership of almost 1 million people.

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