Can Individual Traders Succeed in Today's Markets?

Lately I've encountered considerable hand-wringing as to whether individual traders can succeed in markets increasingly dominated by meddlesome central banks, high speed algorithms, and large amounts of capital in concentrated hands. To be sure, the proportion of individual traders that makes consistent money is not high, particularly in the daytrading world. Of course, much the same could be said of the proportion of young athletes, actors/actresses, or writers that succeed in professional careers.

What distinguishes successful individual participants from the others? Having worked at multiple trading firms and interacted at a close level with many traders for over a decade, I've identified two factors that seem to be responsible for success.

The first distinguishing factor is uniqueness of perception, which is related to creativity. If a developing trader isn't seeing something unique in markets, it's unlikely they will generate unique results. The successful trader looks at different market data, different market strategies, different markets and relationships among markets. There is not much "plain vanilla" in what they do. In an important sense, they are playing a different game from consensus traders.

It is because of this uniqueness of perception that successful traders find unique edges in markets. They cultivate the uniqueness by talking with successful market participants in different strategies and markets; reading out of the box market-related research; and trying out lots of new ideas in modest size. They love innovation; they love tinkering; they are intellectually curious--and they have the practical bent to put new perspectives into practice. Many times, the quantitative study of markets--searching for reliable patterns in markets--provides fuel for these fresh ideas.

The second distinguishing factor is self-awareness and self-understanding. The traders successful in today's markets know their strengths, recognize their vulnerabilities, and craft strategies that play to their cognitive, as well as personality, strengths. Per Kahneman's distinction of thinking fast vs. slow, the truly excellent traders are either deep thinkers or fast thinkers. They either analyze markets in greater depth than others and see detail and nuance that others miss or they view markets broadly, seeing patterns emerge in real time. The successful trader is distinctive in one of those forms of information processing--and they make the most out of that.

It is this self-awareness and self-understanding that helps the successful trader take a good amount of risk when opportunities are present and stand aside when they are not. It is also this self-awareness that helps the great traders hire assistants and build out teams that expand their skill sets and trading scope. Very, very often, the successful traders have benefited from formal mentoring from a more senior, skilled trader. Very often, the successful traders eventually become mentors themselves. Success starts with raw materials (drive, persistence, curiosity) and develops through real-time mentoring and experience, just as it does for physicians and plumbers.

The bottom line is that at every firm where I work, I do see successful traders who achieve success consistently. The opportunity sets may have changed over the years (more on that in an upcoming post), but the talent and skills to capitalize on those new opportunities are alive and well. A new generation of traders is emerging, doing new things to exploit those new opportunities.

Further Reading: The Single Most Important Trait of Individual Traders
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