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How much of trading success can be attributed to innate ability? The answer is, as Richard Dennis and Bill Eckhardt proved with their Turtle Trader experiment back in the early 80′s, none. 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.
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.
The process of trading, from scanning the markets for a setup to closing the position, consists of a sequence of tasks. Over time we create habits by combining these tasks together in a process. Our tendency is to use heuristics or mental shortcuts to make the tasks easier on our brains. In doing so we open ourselves up to certain cognitive biases such as framing, anchoring and confirmation bias. If these are formed early in a trading career they can be detrimental to our equity curves and potential as a successful trader.
So perhaps good traders aren’t born but rather made. Traders are made by the habits they form. It takes, on average, 21 days to form a habit while taking much longer to unlearn one. Certain characteristic traits, namely Conscientiousness with two of its facets–self-efficacy and self-discipline, lend themselves nicely to forming good habits. Other characteristic traits, such as Neuroticism, can lead to bad habits. It’s therefore important to know what characteristic traits you bring to the markets.
If you’ve been in the markets for a while and find yourself unsuccessful, the culprit may be the habits and biases you’ve formed early in your trading. As humans our brains have a difficult time in distinguishing between good and bad habits. The good news is that bad habits can be changed into good habits through interrupting the habit cycle and changing the routine. Interrupting the cycle is easier than it sounds and well worth the effort as longevity in the markets as a successful trader is the reward.