So why is it that traders, like those turtles, who pay strict attention to their money management and understand the psychology still fail? I think it’s because of a fourth dynamic that goes beyond the above three. Understanding trading psychology and making it part of your attitude are two distinct challenges. 

This fourth dynamic, or the defining factor, that separates consistently good traders from the rest is actually your attitude towards trading. As Douglas states in his book “Trading in the Zone,” “The winners have attained a mind set- a unique set of attitudes – that allows them to remain disciplined, focused, and above all, confident in spite of adverse conditions. As a result, they are no longer susceptible to the common fears and trading errors that plague everyone else.” 

Hypothetically speaking, two traders are trading the same game plan with respect to method and management. They are also both aware of the discipline needed to follow the plan. Now, as all approaches do, the plan gets under water. Trader one who has not fully developed the mind set, will tend to drift away from trader two emotionally. He may begin to question the method, starting to take personal responsibility for the adverse conditions. This may manifest itself in many ways including taking trades off or changing leverage. 

What’s happening here is beyond the method, management, and discipline model. This is about the perception of the situation. It’s about how we are thinking, and trader one is now thinking differently than trader two, even though they are in identical situations. Trader one is in essence putting his self esteem on the line, where being right is more important than making money. He is losing confidence and trader two is not, making trader two less likely to make mistakes. 

Ed Seykota also talks about it a bit in the original “Market Wizards” when he said, “Psychology motivates the quality of analysis and puts it to use. Psychology is the driver and analysis is the road map.”  This is true of all games. The golfer who finally gets down a great swing will soon realize that attitude, the way he looks at his game and his ability to stay confident during the adverse times, will determine his/her success.     

So, my conclusion is that good traders can not be taught. You can’t teach somebody to be a winner. That’s all on the individual. You can teach a person great method and great money management strategies. You can even teach a person good discipline to execute the plan if you threaten their job. But what happens when they leave the controlled environment? How will they act on their own? My guess is the winners will continue to win. 

“What can a losing trader do to transform himself into a winning trader?” Seykota was once asked, “A losing trader can do little to transform himself into a winning trader. A losing trader is not going to want to transform himself. That’s the kind of thing winning traders do.”

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Michael Covel, author of   “The Complete Turtle Trader”, gives an explanation. “Some Turtles like Jerry Parker have chosen a path of less risk and less return. Some like Tom Shanks have stayed true to their higher risk/reward roots. Even though they have made different choices they are BOTH still trend following Turtle traders!”   

Well, this might explain some variation in success. Sure, different approaches with money management and leverage will produce different equity curves, but what about those that lost money using the same program? 

For example, there is speculation that Curtis Faith has no public track record for the last 20 years and may have even blown up Acceleration Capital. It appears that Curtis, even as a Turtle had his own interpretation of the Turtle rules. Covel in “The Complete Turtle Trader” says “Faith apparently traded much larger and made more money than all of the other Turtles. Mike Cavallo (another turtle) thought Faith had exceeded what they were allowed to trade.”  

In fact, the message from all the other turtles was “Faith’s trading didn’t reflect what they’d been taught” and there was a good chance he was risking so much that he could ultimately be ruined (as in mathematical risk of ruin).”  

Even Curtis himself mentioned in his book “The Way of the Turtle”, that most of the Turtles didn’t last long after the program. But why is that? 

I think part of the answer lies in what Mark Douglas, in his workshop “How to Become a Disciplined Trader”, referred to as the Invisible Barriers. These invisible barriers are the reason great traders go broke. They are the reason that no matter how much state of the art software is available, 90% of the people who trade commodities lose money. These barriers are in effect, ourselves, and all the baggage that we carry through the airport of trading. Like Anais Nin said, “We don’t see things as they are, we see things as we are.” So, I guess we better work more on seeing things as they really are. 

Douglas points out that a unique perspective is necessary beyond the methodology of a good trading plan. The trader has to set up a mental framework to manage the methodology in the “real world” or he will be “floating in a sea of endless possibilities, at the mercy of his own unrestrained impulses, often without the slightest clue of what to do next or completely immobilized even when he does know what to do.” 

Good traders build this framework in anticipation of these invisible barriers, largely because what we learned to be successful in day to day life does not apply to trading. Somehow we have to learn to protect against the unexpected events…. even if the event is dealing with our own irrational behavior. 

Douglas says that “trading is the kind of endeavor where you either get it, or you don’t. If you don’t get it doesn’t matter what trading systems or high tech equipment you have, or how much time you spend doing market analysis. What will make a difference is learning how to change your perspective to include some fundamentally different beliefs.” 

So, the trick is to build this framework that will help break through the barriers, before you go broke. I don’t know about you, but it took me a few times to get this part right. 

In part 3, I will explore the defining factor that separates the consistent winners from everyone else. View part 3 here

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I was having a conversation with one of my clients yesterday on the subject of whether good traders are born or whether they can be taught. I brought to his attention that this was the identical argument between Richard Dennis and Bill Eckhardt back in the early 1980’s. 

Dennis felt that you could teach committed people to trade by instilling good trading rules, money management and discipline. Eckhardt on the other hand felt that it was more innate, where aptitude played the key role. They decided to put the argument to test. They interviewed a group of qualified individuals for the purpose of forming a group to teach how to trade. Eighty applicants were interviewed out of one thousand, and 13 were chosen (three of which were friends). 

Dennis named the group the “turtles” after returning from a trip to Singapore where he said to a friend, “we are going to grow traders just like they grow turtles in Singapore.” 

They were taught a mechanical trading system, which covered all the aspects of successful trading, while simultaneously removing most of the emotional struggles. After a period of time, Dennis felt comfortable enough to invest in accounts ranging from $500,000 to $2,000,000 and let the Turtles trade.   

Well, it turned out to be quite an experiment. It is estimated that as a group, they averaged an 80% annual rate of return over the next four years.  So, I guess Dennis proved that good trading can be taught….. or did he? 

Even though the conventional wisdom is that Dennis won the bet, why is it then that some Turtles did not make it where others went on to be very successful? After all, they had been taught the very same approach.   

Stay tuned for part two…….where we explore the possibility that Dennis and Eckhardt were both right. View part 2 here

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