Are left brain people better traders than right brain ones?

If you're a first time visitor, I encourage you to subscribe to the RSS feed so you don't miss anything. Thanks for visiting!

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.

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?

How come you don’t trade full time?

During an email exchange with a member of my mailing list and a student of my trading course, I was asked this:

How come you don’t just start trading full time? Wouldn’t it be more lucrative then working the day job?

I have stated on a few occasions that I am not now, nor do I ever plan to be, a full-time trader. I have absolutely no desire to spend my days trading. It’s just not my thing. I need variety in my day and that certainly doesn’t provide it. As well as I know myself, I know I wouldn’t be able to stick with active day (or even short swing) trading for very long. It doesn’t suit me at all. I’m much better off operating in longer-term timeframes - weeks or even months.

As for it being more lucrative, I get paid pretty well to be a stock market analyst. I get very good benefits, mostly paid by my employer. A lot of would-be trading for a living types fail to properly account for all that income and benefits they really need to replace. It’s also a much less risky income flow. For me trading and investing will probably always be primarily about weath creation and preservation, not about generating income.

Do you use the Commitment of Traders report to trade?

 A forum member messaged me with the following question about the Commitment of Traders (COT) report:

hello,do you use the cot report to trade and which is the best service online to use for getting results with the cot data.can you use it from one week so see if the commercials are going long or short and then wait for the next week to get in or out depending on the commercials positions.

To answer the question about where I get the data, that www.commitmentoftraders.com. They offer free charts going back about a year. All you need to do is register. Of course you can also get the data from the CFTC in a raw format.

As for whether I use it to trade, the answer is, “Not directly”. The COT data is lagged. The report comes out early each week for data collected as of the previous Tuesday. As such, you will never have the figures in a timely enough fashion that you could possibly use to them make short-term trading decisions. It’s more a question of seeing where the money is flowing and how the different trading groups are positioning themselves. That can help you track the smart money and work against the less-smart money.

Where should I put my stop and take profit orders?

A trader this weekend emailed me a question about the placement of stops and take profit orders.

Please, I have this simple but confusing problem. Where to place my STOP LOSS ORDER AND MY TAKE PROFIT ORDER while making new order both in BUYING AND SELLING PLease explain these to me in your reply.

Here’s the thing. Your exit strategy (stop loss or take profit) should be based on the same strategy you use to enter positions. By that I mean if you are trend trading, then your exits should be based on that. If you are a range trader, then you stops and take profits should be based on that. You generally should not employ a seperately derived strategy for exiting and for entering for the simple reason that you could cause conflicts between the two.

Let me explain that with an example.

Trend trading is an approach which focuses on attempting to identify trends near their beginning, get on, and ride them for as long as they will run. One’s entry strategy attempts to spot newly developing trends. The exit strategy employed should be one which seeks to close a position when that trend has ended. That generally means leaving a position running and not using a target for the simple reason that if one were to employ a target it could result in large profits being missed. Trend trading systems tend to generate the bulk of their returns from a relateively few very large winners. The trader who uses a target would lose thost every big winners, probably ruining the performance of the system.

On the other hand, one trading a range system would definitely want to use a target based on the other edge of the range being traded.

As for the placement of stops, my personal view is that a stop should be put at the point where, if reached, the market has told you that the move you were expecting to happen is probably not going to, at least the way you anticipated. I do not use arbitrary fixed stops. Nor do I employ “stop loss” orders. My stop exit is placed on the basis of my overall strategy.

Of course, the best as advice will always be “test, test, test”.

Next Page »