Are Good Traders Born or Made?

03/23/2012 1:30 pm EST

Focus: TRADING

Darren Miller

Founder and CEO, Psychtrader.com

Trade psychologist Darren Miller tackles the hotly contested issue of whether anyone can be trained to be a successful market participant.

Is it nature or nurture? Let’s talk with Dr. Darren Miller. Darren, are good traders born, or can they be nurtured?

That’s a hot topic. A lot of people would argue on both sides of that. I think probably one of the most famous cases would be the Turtle Traders back in 1983, a group of unknown people were gathered together.

Richard Dennis was it?

Yes, and they more or less had a bet going on about whether it was nature or nurture. What their research showed was that anybody can become an effective market participant.

There wasn’t anything that contributed from the innateness. One of the areas that can inhibit your success in the markets is innate habits.

There is some recent research out by the MIT Brain Research Center. They took a group of untrained monkeys and basically taught them, and they were able to recognize patterns—simple patterns—in order to get their reward or their token.

What the research suggests is that mental shortcuts are rewarding for us, and so we will try to do the least steps to get to our end result.

In trading, you see that people want to make the most money as quickly as possible. That is something that is innate.

We often hear trading compared to professional athletics. I think that there is some innateness in a professional athlete. Some people are just born to run and play the sport that they play, although I recall Spud Webb at five foot six winning the Slam Dunk contest, so there are opportunities out there for everybody.

Well anybody that’s ever tried to stop biting their fingernails or quit smoking knows how difficult it is to break a habit. How do you coach them to break bad trading habits?

Yeah, it’s something that if there is no coaching or guidance from a mentor or somebody at the beginning, these habits can be made rather quickly, and they are difficult to break as their trading career progresses, and it’s not easy.

I always say trading is like a diet because it takes a lot of discipline. All of us have tried to either lose weight or gain weight from a diet, and if you’re not disciplined, the end results are not there. Same with trading; and so the way you overcome it is first of all to prevent yourself from getting in certain habits.

We talked about confirmation bias and the other shortcuts we take to get to where we want to be. If that’s not the case, there is some cognitive therapy that can be done that can immerse you in the situations where a bias may present itself. Then you train at that point to say “OK, this what you would typically do, but this is what we’re going to do from this point forward.” So rehearsal, role-playing stuff works pretty well.

What do I look for in finding a trading mentor?

I think it’s important for them to be a market participant. There are a lot of people that talk the talk, but they don’t walk the walk, and I’m not saying that they necessarily need to be a market wizard, but they definitely need to have skin in the game.

I think another thing that you should look for is somebody that has some experience. They don’t necessarily need to be a seasoned veteran, but they need to have been through some market cycles and some volatility so that they aren’t just talking from theory, but they’re also including their personal experience.

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