By 
There is a great show on British television: Million Dollar Traders. There are two very important lessons that every trader needs to understand, which have been perfectly illustrated in this documentary, and I want to discuss them here. Any trader who does not understand these lessons is doomed to fail, just as many of the traders in the program are failing.
Before we continue, here’s a brief recap of the show for anyone who hasn’t seen it. City of London trader and hedge fund manager Lex Van Damn (big name!) decided to set up an experiment to see if he could teach someone to trade. He interviewed hundreds of applicants and ultimately selected 8 people. The ones he chose came from all sorts of backgrounds: there’s an environmentalist who wants to try trading only ethical stocks: a soldier, a boxing promoter, a businessman, a retired IT consultant, a veterinarian, a student, and a trader.
Some of these people are better educated than others, which is important because it ties directly into one of the lessons that this program has illustrated so beautifully, which I’ll get to in a moment.
The ex-vet (I’m talking about an animal doctor here, not the army vet type!) is highly educated and comes from a wealthy family. The retired computer scientist spent 40 years working as a computer programmer at IBM. The merchant studied at university before joining the family business.
At the other end of the scale, we have the fight promoter who doesn’t have such a privileged upbringing. The soldier and the environmentalist have an average education as far as I know, and the student is obviously still studying.
Van Dam and his team of merchants gave two weeks of intensive training to the eight who were selected. They covered all the bases, including fundamental analysis, technical analysis, trading psychology, and all the practicalities, such as how to work with your Bloomberg terminals and place trades.
After that, they went straight to their own trading floor for six weeks of live trading, with real cash. Quite a lot, actually: a million hard-earned dollars for Lex Van Dam.
In the first program we saw highlights of this training and the first week of negotiation. As you can probably imagine, their first week was pretty traumatic and they were all over the place. At the end of the first day, only one of them had made a transaction. By the end of the week, everyone had done it, but everyone had lost money.
In the next episode, we saw them trade for another two weeks. And this is where it gets really interesting, because we’re starting to see who gets it and who doesn’t. Depending on your own trading experience, you may be surprised at the results so far…
Well, here’s the first lesson: success in trading has very little to do with intelligence and everything to do with personality.
Before I continue, let me make a disclaimer. What constitutes intelligence is something that is often debated. Is a high IQ intelligence? What about the creative types? For our purposes here, I am going to accept the popular conception that intelligence is a reasonably high IQ and a good education.
On that basis, we would expect the college-educated computer programmer, veterinarian, and tradesman to do well. The soldier and fight promoter should find it more difficult.
And yet it was exactly the opposite. In fact, Simon the computer programmer (remember, he worked as a consultant for IBM for 40 years) ended up quitting halfway through the experiment. He just couldn’t do it. I didn’t follow his personality. He said, and I quote as best I can remember:
“This is the second most stressful thing I’ve ever done in my life, after my divorce.” He was a mess. His results were so bad that he was losing the team more than the winning traders were making, combined!
Why would someone who is apparently intelligent, well educated and used to working with numbers, have such difficulty with trading? Well, he said it best himself:
“I’m used to writing computer programs. Once they’re written, they either work or they don’t. If they work, they continue to work forever. If they don’t, then you find the bugs, fix them, and then the program works and keeps working forever.” always. With this, I keep doing the same thing but get different results. Why? Because there are humans involved.”
I couldn’t have put it better myself. Despite the thousands of “trading programs” taking place every day, trading is essentially a human activity, driven by emotion. And boy, have we seen some excitement in this show. Cleo, the former vet, has spent 3 weeks sitting in front of her operating screen and has barely done a single operation: she is paralyzed with fear. She hasn’t had a big loss, but she hasn’t made a profit either, she can’t, she won’t trade! Another one of the traders screams with delight every time one of his trades goes through. They are both totally controlled by their emotions.
But let’s go back to what Simon the computer guy said. He is trying to apply rules to trading, in the same way that his computer programs are essentially just sets of rules. He can’t face the fact that doing the same thing over and over doesn’t always produce the same results.
This is the second big lesson that Million Dollar Traders exposes: trading is not about rules, it’s about principles.
What is the difference? Hollywood screenwriting legend Robert McKee puts it brilliantly:
“A rule says ‘You have to do it this way.’ A director says ‘This works…and you have all the time remembered.’ The difference is crucial.”
Paraphrasing what he goes on to say:
“Eager and inexperienced merchants obey the rules… Artists master the form.”
Trading is more art than science. Rigid rules cannot be applied. If that worked, we would all set up auto trading programs, everything would be automated, and the market would just stop working because no one would have an advantage anymore.
Instead, we must learn the principles of what makes prices move. Understand the humans who make the decisions. Understand emotions and responses to prices on a screen. And have a set of guiding principles that guide us in our business decisions in any given circumstance.
Understanding the principles and being able to apply them in any situation is much more valuable than blindly following a set of rules.
And that’s why the computer failed. He has spent his entire working life following rules. Put it in front of a graph and it will still apply the rules.
The vet, on the other hand, was simply a slave to his emotions. She was completely controlled by her fear. The worst thing is that she knew it! Her screen was covered in post-it notes telling her “you can’t win if you’re not trading” and “just pull the trigger!” and so. But despite knowing what she should do, she really couldn’t bring herself to do it. Her education, her privileged background and her apparent intelligence were worth nothing to her.
And then we had the winners. By far the most successful trader so far is single mother Caroline, the businesswoman. Her experience building her own business and overcoming all the obstacles and difficulties that come with it (not to mention the difficulties of being a single mother of twins), prepared her very well for the floor. While those around here jumped for joy at having made a small profit or cried into their cup of coffee after suffering a loss, the entrepreneur calmly watched her charts, totally emotionally disconnected from the market.
With ruthless precision, he was cutting back on his losing trades, since I imagine he could fire underperforming employees. He greeted his winners with the same complete lack of emotion as his losers. When Lex Van Dam called her into her office to congratulate her on being “…the best operator on the floor,” her response spoke volumes:
“I’m just the best at this point,” she said. “All my trades could turn against me this afternoon and then I’ll be the worst.”
As Lex correctly answered:
“That’s why you’re the best, because you understand it.”
The soldier has also done quite well. His training has prepared him to examine situations, think about possible options, and then choose his action carefully, based on a set of guiding principles. Certainly the strength of character and ability to keep emotions in check that comes with battlefield experience are an advantage for him on the floor.
Now, I’m not saying that only battle-hardened ex-military types, or successful entrepreneurs can become merchants. What I am saying is that most people do not recognize the importance of personality, emotional control and some flexibility when it comes to the markets. If you go into the game knowing the challenges ahead, you have a much better chance of success.
At the time of writing, there is still one final show to air, and from what I understand, only three of the traders make it to the end of the eight-week experiment. Maybe the vet will come back, but I’m not counting on that!
Let me then summarize the two lessons that Million Dollar Traders has crystallized so beautifully on screen:
1. Success in trading has very little to do with intelligence or education. It has everything to do with character. More specifically, strength of character. Those who can control their emotions instead of being controlled by them are much more likely to succeed.
2. Learning to trade is about learning principles, not rules. Understanding the principles will allow you to make money in any market, under any conditions. The rules may make some money for a short time, but as long as there are humans in the market, the rules will never produce fixed and predictable results at all times. If that’s what you’re looking for, put your money in the bank. Actually, thinking about it….!