Innateness and Trading

I’ve posed the question several times before regarding how much of trading success can be attributed to innate ability. The answer is none, as Richard Dennis and Bill Eckhardt so proved with their Turtle Trader experiment back in the early 80’s.

What is innate that has an impact on our trading are habits. MIT’s McGovern Institute for Brain Research suggests that habit formation is indeed an innate ability which is perfected through experience. In particular,  their research focused on the costs and rewards of certain choices using pattern recognition (much like trading).

Neuroscientists led by Institute Professor Ann Graybiel found that untrained monkeys performing a simple visual scanning task gradually developed efficient patterns that allowed them to minimize the time it took to receive their reward.

The findings not only help reveal how the brain forms habits, but also could shed light on neurological disorders where amplified habit-formation results in highly repetitive behavior, such as Tourette’s syndrome, obsessive-compulsive disorder and schizophrenia, says Graybiel.

Trading is a skills based activity in which we make decisions under conditions of uncertainty and risk. We can have uncertainty without risk but it is impossible to have risk without uncertainty. It is when we place our capital out there on the uncertainty of a stock’s direction that risk enters the picture. Just like those monkeys, if we are correct in assessing risk while making a profitable trade we tend to replicate what works, again and again, until habits (systems) are formed.

It takes, on average, 21 days to form a habit while taking much longer to unlearn one. Negative habits, such as framing, anchoring and confirmation bias which are formed early in a trading career can be detrimental to ones equity curve. Oftentimes the result is a former market participant that is broke and jaded.

While it is possible for anyone to learn to trade, certain personality traits do lend themselves to making the transition from trader to master trader smoother. Conscientiousness is THE most important personality trait when looking at two of its facets–self-efficacy and self-discipline.

I’ll be talking more about this subject in a few weeks at the Trader’s Expo in Vegas on the 17th of November. Hopefully you can join me. If you are unable to attend their will be a live webcast of the session, check it out.