Are left brain people better traders than right brain ones?

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John Forman - The Essentials of Trading author

This question was actually left as a comment to my What type of trading resources would help me read charts? post from yesterday. 

Dear John,

Thank you for the fantastic site and all the time and effort you put into helping others.

My question is also aimed at gaining success, not about books but rather about myself. There must be some psychological side or mental abilities that make some better than others at trading. Perhaps I’m being naive but by common sense I would guess that someone which is good with numbers would do better than someone who is awful at math. What you support this notion? What about “geeks”, people who can spend vast amount of time going over information, and in general are attracted to sciences; would you say they would make better traders than someone who likes to spend their time with people and play music?

Regards,
Daniele

This is a really interesting question. It’s one I don’t think anyone’s asked me before - at least not in this fashion. I’m glad for the opportunity to address the subject, and hopefully some others will take up the question as well, either on the own blogs or by commenting on this post.

Firstly, I think there are a lot of quantitatively oriented people out there (call them geeks or whatever) who would bristle at the idea they don’t like spending time with people.

As for whether the left brain quant types or the right brained “social” types are better suited for trading, I don’t claim any psychological expertise or training, but I’ll tell you what my feeling is on the subject.

Yes, you need to be able to do some basic arithmetic to figure out profits and losses, position size, and stuff like that. That isn’t terribly challenging math, though, and not really the intent of the question.

I think this question comes in large part from the fact that most of trading is numbers. Prices. Volume. Returns. They’re all numbers. But that doesn’t mean only the math-literate can understand it. Quite the contrary.

One point I would make here is that price movements are very much products of a social environment. That means they are not inherently quantitative in nature. Yes. There are definitely instruments and relationships between instruments which are highly mathematical in nature. Options and other derivative instruments can be very complex. Price movements in the main, though, are the result of human decision making processes - many of which are emotionally driven, or at least influenced.

Understanding the drivers of price movement aside, pattern recognition is a major element of trading (see Brett Steenbarger’s post Implicit Learning and the Unattached Mind). When we trade we are basically looking to identify patterns in price movement which tend to repeat. Now granted this can be done in a complex fashion using quantitative methods. But it can also be done in a mainly visual fashion by looking at the charts and seeing the patterns which develop on them. It definitely doesn’t take a math geek to see a trend in place.

There are certainly some skills needed for successful trading. I would not put them in the category of requiring a degree in math, physics, or statistics, though. The discipline to do the things your trading plan requires is one. The intention and drive to continue improving is another. I could list more, but there really isn’t much point. None of them require geekdom.

So for me the bottom line is that right brain types should not believe they are less able to succeed in the markets than left brain types. It’s all about finding the right niche and applying your own strengths and abilities to their optimal benefit.

What type of trading resources would help me read charts?

Here’s a question from a relatively new forex trader named Craig which gives me a bit more to work with than some others, like the one I answered yesterday.

I’ve recently (since July) been trading forex.  I find it to be quite exciting and really enjoyable, but am looking at anything you might be able to suggest that will help improve profitability.  I’ve been using some systems by J. Welles Wilder (Swing Index System to be precise) and I’ve found some success (have had a week with 18% gains, and other times where I’ve pretty much given that all back).  So what type of resources/advice/readings could you suggest that would help me become more astute at reading the charts, interpreting market direction, etc as my goal is to hopefully turn my trading hobby into a full time job at some point in the future (looking several years down the road at a minimum).

This may sound strange, but a book which I found to provide a good starting point for simple chart reading is How to Make Money in Stocks. Obviously, that’s not a book about forex trading, but chart analysis is chart analysis and not market dependent. I consider that book the one which launched me on the path toward being a technical analyst and trader.

Of course John Murphy’s book Technical Analysis of the Financial Markets is considered the best overview of technical analysis methods. It’s a great place for anyone interested in pursuing technical methods to start. There are a great many different ways to approach technicals and the Murphy book can help you identify the one or ones which make the most sense to you.

Having that fit is extremely important, by the way. There’s a vast array of indicators and techniques. A lot of folks will argue the most of them don’t work. More correctly, most of them won’t work for you. Some will, though. Those are the ones you need to identify.

I think another great read for anyone getting into trading is Markets In Profile, by James Dalton. This book will help you understand the real inner workings of the markets and how/why prices move. The charting methodology and analytic techniques are the basis for the Following the Quest for Value
course I developed.

And I cannot present a listing of good books and such without mentioning Market Wizards, Jack Schwager’s collection of interviews with top traders and money managers. I consider them a must read for all traders. And here’s an online video of Jack Schwager talking at an FXCM conference which is well worth viewing as well.

In terms of tools, I’m a big fan of Metastock. I have used it for many years in my own trading and analysis and also use it at work for my stock market analyst job.

I’m always open to answering questions. The more you give me to go on, though, the better I can be of assistance.

What would be the best way to learn currency day trading?

The following question came in from a budding new trader named Adam.

Really like to start day trading currencies, have no experience whatsoever - but what I got is the will to succeed in this field, and I thing the proper set of mind. Wish to find out with the $1000 account and I am successful go with 25K account for live trading. What would be the best way to approach and to learn the skills. Can you advise?

This is one of those open-ended questions which are really hard to answer with any specificity. It ends up making me ask some questions in response.

First, what inspired Adam to pick currency trading over the other alternatives?
Did he pick forex based on some marketing message, or after hearing it was a good market? Or did he do his research and identify that as the best market for him? If not, my suggestion is that he step back and do a proper evaluations.

Second, why day trading?
Again, did Adam select day trading after consideration of all the alternatives? Or did he just hear that it was the thing to go? As with picking a market, thought needs to go into these decisions. Day trading is the sexy thing to do (seemingly) but it is definitely not for everyone - or even most folks.

Obviously, I’m going to recommend reading my book, The Essentials of Trading, or going through my trading course of the same name, to anyone who is new to trading. Both were designed specifically for new traders.

Aside from that, though, for Adam it’s a questions of developing a complete understanding of the mechanics of the currency market. Then he needs to understand how and why forex rates move. Cornelius Luca is the author of a book which can help in that regard: Trading in the Global Currency Markets. It’s a pretty thorough discussion of the forex market, if a bit textbookish (and don’t expect any specific strategy advice). 

After that Adam needs to start developing a strategy for pulling profits out of the market and gaining the experience trading which is really important for consistent success. That means a lot of study, research, and practice with both demo and small deposit live account work.

Reading market strength and weakness

Here’s something I sent to my mailing list the other day. I figured it was worth posting for blog readers as well.

I’ve got a trade proposition for you. I’ll help you if you help me. Sound like a fair deal?

For your part, I would like some help from you with my on-going fund raising efforts. If you don’t know what I’m talking about, I’ll take a second to explain. Otherwise, you can skip ahead to what I’ve got to offer you for the assistance.

Several years ago I started a youth volleyball club program in Rhode Island. I’d been involved in coaching and managing club programs for a few years prior to that, but wanted to develop something which would more widely benefit girls (and later boys too) in the state. If I remember correctly, we reached 7 girls teams and 3 or 4 boys teams at the peak of my involvement. Our coaches and parent volunteers were fantastic and our teams were always extremely competitive - winning several regional championships and competing very well in a number national level tournaments. It was a program we were all very proud of, and justifiably so as it had a major impact on volleyball in the state.

I ran the club for five years, at times coaching teams myself as well (I was also a college coach during that span). A couple years ago, however, I stepped away from volleyball to get back into the market full-time once more. The new employment meant a move away from the area, so I couldn’t stay involved with the program in any direct fashion anymore.

The club continues on, though, and I try to support its efforts (and other Rhode Island volleyball teams) as much as I can. Mostly that means financially. The cost of gym space, uniforms, equipment, and all the other stuff that goes into running a program continues to rise to finances are really tight. I’ve been applying the vast majority of the revenues I’ve taken in from my courses and other efforts to volleyball expenses for some time now. My goal is to raise $100,000 toward that objective. I use my knowledge of trading and the markets to serve that purpose.

With that in mind, I’ve got something new in the works. It’s something I will provide to you in exchange for your help in reaching my goal.

What I’m offering is a new course I’m putting together. The focus of it is on how you can gauge the strength or weakness of the markets using fairly simple charting methods. Basically, I’m going to walk you through things you should look for in whatever market(s) you trade to let you know what the underlying situation is in the market. Timeframe doesn’t matter. As long as you can use bar charts you’re good to go.

The techniques I’m going to share are the ones I use every day to advise professional and institutional traders, so this is the good stuff! It’s based on pretty easy support and resistance concepts, which I will share with you in detail.

This is not an indicator based methodology. It isn’t specifically a system either. The idea of what I’m doing here is giving you something you can use to improve your trade selection by helping bias you in the right direction.

I expect the course will be ready for you this weekend. It will be presented in video format, and naturally you will be able to ask me any questions on the material you might have. Click the link to pre-order for just $40.

Pre-Order Here Now

Make sure you get on the list before the release this weekend. Once I have the full course put together and have a better idea of it’s real value I’ll no doubt be moving the price up because I’m pretty sure I’ve way under priced it at this point.

I’ve received a couple of questions:

“Would this be using daily charts or intra-day? Or doesn’t it make a difference?”
 
It doesn’t matter. Charts are charts. The same patterns repeat whether you’re talking about minutes or months.
 
“Will there be more than one video?  How will we access them?  Will we be able to view and review them at our will?  Can we download them?”
 
I can’t say at this point how many videos the course will cover. It’s going to depend on the final length. I tend to prefer not to go much more than about 30 minutes to a video file, though, for the sake of download time and user attention span.
 
As for access, I’m planning on making them downloadable so that you can have them for unlimited review.

“How does this compare to the price distribution (Market Profile) course you did earlier? Is it similar material?”
 
While I do expect to use a little price distribution charting to highlight some of the points I plan on making, the thrust of the material will focus on basic charting which can be done with bars. Actually, I’ll be using candlestick charts, but not because I’ll include any candle specific methods. I just find them a more rapid read than regular bar charts.

If this course interests you, make sure you get on the list before the release this weekend. Once I have the full course put together and have a better idea of it’s real value I’ll no doubt be moving the price up because I’m pretty sure I’ve way under priced it at this point.

Pre-Order Here Now

Ten Things That Trip Up System Traders

Dave over at StockTickr posted 10 Ways New Automated Traders Get Tripped Up today. It’s a great post with a lot of very good insights, not just for those seeking to trade in an automated fashion. Any trader can get some value out of his comments. Here are the 10 “ways”:

1. Trading Too Large, Too Soon
2. Trading Strategies that Trade Too Frequently
3. Doing No “Forward Testing”
4. Blaming the Money You Lost on the Backtest
5. Not Comparing Actual Results with Backtested Resultss.
6. Using Market Orders for Entry without Reason
7. Ignoring Slippage and Commissions
8. Not Spending Time Learning Why Some Unprofitable Strategies Backtest so Well
9. Manually Overriding Your Automated System
10. Not Understanding that It’s a Marathon Not a Sprint

Go visit the actual post to read Dave’s comments for each of the points, and to see the bonus he tacked on as well. Very good stuff!

Those Who Can’t Trade Teach

Spend enough time in the trading arena and you are sure to run across someone saying that those who sell systems or books or other information are only doing so because they can’t make money trading themselves. You might even be guilty of thinking or expressing a view something like that yourself.

Yes, I said “guilty”. I use that term intentionally because it represents an incorrect mindset.

“if you are a good trader why do you need me to fund your effort  that does not make sense but it tells me you make more money selling than you do trading”

I received the above via email yesterday. It was in response to an invitation I sent to my mailing list to pre-order a new course I’m putting together. It’s on the subject of using simple chart analysis methods to recognize market strength and weakness. This is stuff I use every day and I have been thinking for some time about recording a video (or set of) to share them. I’m finally getting around to doing just that, and will be using the proceeds to support the volleyball organization I used to run - as I have done with most of the revenues I have taken in over the last year plus.

In case you were not aware, several years ago I started a youth volleyball club program in Rhode Island. I ran it for five years (I was also a college coach during that span). A couple years ago, however, I stepped away from volleyball to get back into the market full-time (I’d been out for about 7 years). The new employment meant a move away from the area, so I couldn’t stay involved with the program in any direct fashion anymore. The club continues on, though, and I try to support its efforts as much as I can (and other RI volleyball teams where possible). That means financially. The cost of gym space, uniforms, equipment, and all the other stuff that goes into running a program continues to rise, so finances are really tight. Since I have all this knowledge and experience in trading and the financial markets, it makes sense to use that to create a mutually beneficial situation where I can provide information to traders and investors and use the proceeds on the volleyball side. I don’t keep any of the funds for myself.

Now I included the above information in the email I sent about the new course, so I’m not sure where this particular emailer is suggesting that I’m making more money selling than trading. I’m not personally making any money selling, so there’s no comparison to be made.

Basically, this person is telling me that I must be a poor trader since I’m in the education business. Of course they know next to nothing about me, so they really have no basis for drawing any conclusion one way or the other. This sort of thinking is indicative of a failure to consider all the reasons why someone might get into education in the first place.

Yes, there are certainly those out hocking systems and whatnot who are insincere and unscrupulous. That’s the reality of things. Of course trading is hardly alone in that. There are always going to be con artists in every venue where they see the potential for profit.

But that’s really not the main point of this  “those who can’t trade teach” thing. Let’s step back and take a look at the wider “those who can’t do teach” thing. It’s a complete crock, of course.

Think about it. If no one who ever could do taught, then the bulk of our educational system would be gone. Think of all the college professors who are experts in their fields who both do and teach. If no one who ever could do shared what they do, no one would ever learn the doing!

For my part, I’ve been active in educational efforts of one sort or another for many years. I started coaching volleyball while still in high school. I was talking with my alma mater’s Finance Department chair about program adjustments as soon as I got into the professional market arena. I was certainly not getting paid for either. It would be more than a decade after I did my first volleyball coaching before I finally started getting paid for it (sub-minimum wage if you count the hours I was putting in). I didn’t earn a penny on trading education until Wiley published my book, The Essentials of Trading, which was after I had already spent a couple of years contributing in the university classroom (not being paid) by presenting much the same material to college students as ended up in the book.  And if you think I’ve made a lot of money off my book you are sorely mistaken.

I love helping people learn, develop, and reach their potential. That’s why I spent so many years getting paid very little to coach volleyball full-time. It’s why I spend much of my spare time thinking about ways I can help people with their trading and investing. It’s very rewarding. I fully expect to be an educator on some level or another for as long as I live, regardless of my level of wealth.

There are definitely other people out there like myself. I’m certainly not alone, so let’s try not to be so cynical about things.

And other motivations aside, do we begrudge people for making a secondary income? If you have a job and you trade on top of that, it’s the same thing. You’re doing something additional to improve your financial situation. It’s a bit hypocritical to cast aspersions on folks who pursue an income from selling trading educational material. If they are putting out complete crap or it’s dangerous, then criticism is certainly fine and justified. If, however, they are providing at least as much value to those who are purchasing their products as they are receiving from them, then what’s the problem?

Video documentary of the Crash of 1929, and other things

I was recently pointed to an interesting documentary video of the Crash of 1929. If market history intrigues you, give it a viewing. Just be aware that it’s nearly an hour long, so you’ll need to have some clear time to get through the whole thing in one sitting.

The Financial Philosopher is at it again. His Thinking Outside of ‘The Game’ post is one which will definitely make you ponder some things.

Brett Steenbarger’s latest post is Greatness in Life and Trading. As always, he makes some very insightful comments about approaching things in life, to include trading.

Brett also recently linked to a good post on the Options for Rookies blog entitled Premature Celebration. It’s on the subject of over-confidence. I, for one, am very familiar with that. It repeatedly kick me in the tail, and not just in trading.

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