The Right Circumstances and Trading
Van K. Tharp, Ph.D.
In my last
update, I discussed Malcolm Gladwell’s new book Outliers.
In that book Malcolm discusses what might be involved in
being a hugely successful person.
Malcolm asks different questions in his quest for success
than I do as a modeler. As
a modeler, I look for what successful people do in common.
Gladwell, in contrast, looks for what is common about their
background. Since our
questions are different, we tend to come to different conclusions.
generally concludes that successful people are influenced by the
The amount of practice
they give to their craft. In
particular, those who achieve 10,000 hours of practice (especially
if it is the right kind of practice) are the ones with outstanding
When they were born.
For example, children who were born so as to have the most maturity
before a particular cutoff date have a huge advantage.
The oldest children are typically the most mature and thus
excel and get more opportunities and training. For example, almost all NHL hockey players are born in the first three months of the year. When the tryouts occur they are the most mature so they have a huge advantage. And those who are the most mature, get into the accelerated programs.
What kind of values
their family had. For instance, middle and upper class children get
training from their families about success that poor children just
do not have.
Being born at the
right age and time to take advantage of some particular change in
Their cultural legacy,
which might include hard work (e.g., the rice farmer legacy), or the
need to defend yourself from any insult (e.g., the legacy of honor).
However, the latter is seldom an edge for success.
One of these,
in my opinion, has no relationship to trading success and that is
one’s birth date. There
is no advantage, in my opinion, to being born on any particular
month for trading success. I
cannot imagine any circumstance in which that currently applies to
are definitely big changes in society that occur and being at the
right place at the right time to take advantage of that can be a
huge advantage. I can
think of one trader in particular for whom that was true.
When I interviewed him as part of my modeling work, I
promised him that I would not mention his name, so we’ll just call
him the Mechanical Trader.
Trader, in my opinion, has several huge edges that amount to being
at the right place at the right time with the right skills and
knowledge. Isn’t that
what Gladwell talks about extensively in his book?
Mechanical Trader went to one of the top engineering schools in the
world—one that does financial modeling.
As part of his early training, he became a programming expert
way before most people even knew about computers in the mid-1960s.
He spent six months testing trend-following systems on a big
main-frame computer with punch cards.
When I was at his house in 1990, all of his trading programs
on his personal computer were written in assembly language.
Mechanical Trader was exposed to some of the early geniuses of trend
following, especially Richard Donchian.
Thus, he was one of the first, if not the first,
computerized trend follower. That
was a huge edge, in my opinion. I’m
not sure what his system was, but it was probably as simple as a
moving average crossover, such as those advocated by Donchian.
You might have trouble using one of those today, but they
were much easier when few people used them.
Mechanical Trader thoroughly understood the power of position
importantly, he had developed an algorithm to use position sizing to
go for goals that most people would consider impossible.
In addition, he began by trading commodities before the field
was dominated by huge CTAs.
So let’s look
at the combination of edges that he had.
First, he was one of the very first computerized trend
followers. This alone
was a huge advantage at a time when no one else had it.
Second, he traded in a highly leveraged market that was full
of trends and he understood how to use position sizing to make huge
amounts of money. He was
probably the only person around who had that combination of edges.
understood that the golden rule of trading was to cut your losses
short and let your profits run through a trend-following model.
And most importantly, he understood that if he had trouble
doing that, he needed to work on the source of the problem—his
edge of being the first computerized trend follower in a highly
leveraged area, knowing both the power of using position sizing to
achieve huge returns and understanding the importance of working on
yourself to be sure that you do not make mistakes.
I think there
are probably others who have had huge edges in trading by being at
the right place at the right time, but none stand out to me as much
as the Mechanical Trader.
have the ability to give people a huge edge in trading and that edge
could take a number of forms. Here
are some of the edges that you could be able to take advantage of
First, I tend
to doubt that there are any particular computer advantages these
days. But I think very
few people realize that it is possible to easily develop a Holy
Grail system that fits any one kind of market.
The real secret is to understand that it is only a Holy Grail
System for that one kind of market and when you try to make it fit
all types of markets, you will have major problems.
I don’t know how long this will be a major edge, but it is
certainly is an edge now.
people are starting to understand the importance of position sizing,
but few people understand that the purpose of position sizing is to
meet your objectives. And
I think that very few people understand that it is only
through position sizing that you meet your objectives.
The purpose of a good system is just to make it easier to
meet your objectives.
people still have not understood that all of this is impossible if
you don’t know yourself. For
example, how can you have objectives if you don’t understand who
you are? And even more
importantly, how can you reach your objectives if you don’t have
enough control over yourself to keep from making mistakes?
So gaining self-control is also a huge edge.
Van Tharp: Trading coach, and author, Dr. Van K. Tharp is widely
recognized for his best-selling book Trade Your Way to Financial
Freedom and his outstanding Peak Performance Home Study program
- a highly regarded classic that is suitable for all levels of
traders and investors. You can learn more about Van Tharp at www.iitm.com.