Training the Electronic Trader

March 2000
By Robert A. Kanter and Carol E. Kanter

ELECTRONIC TRADING IS A HIGHLY FOCUSED, STRESSFUL, AND RIGOROUS ENDEAVOUR, requiring training, discipline, and experience. With individual ability as a variant, learning to trade always takes time. As a golfer must learn the intricacies of the game, a trader must study and develop the skills for trading. The neophyte golfer starts by learning how to grip the club, place his feet, swing the club, and strike the ball properly. It can take years to perfect the sport. For the trader, time and real-life trades offer the necessary frame of reference for the development of trading as an art form. A trader needs to understand the basics and continuously practice the skills until they are internalised and gut instincts take hold.

As in pro ball, training and coaching are at the core of successful trading. A well-organised, professional trading firm should have recruiting and interviewing systems that attempt to give a clear view of what it takes to be a trader. The training programme should attempt to ensure success with intense training. At Electronic Trading Group, direct teaching and a video-based training programme are combined with hands-on practical experience. The video-based training programme is organised and delivered by the company's president and includes a series on options presented by a well-respected guest lecturer. The tapes are available on both the Internet and the firm's intranet, serving as a foundation and a source for renewal for those who choose to refer to them. An adherence to the principles that are presented on the video series has created a strong trader culture through trader management; the trader who deviates from the company's trading principles is uncomfortable in his surroundings. Trader management, akin to coaching an athlete, is simplified by peer pressure. Although not a team effort, momentum and accountability to the principles of trading is increased through osmosis.

In a trading firm, the recruiting staff must search for candidates possessing entrepreneurial qualities, such as creativity, willingness to take risk, desire for independence, and an aggressive and competitive nature. Other characteristics required are discipline, tenacity, logical thinking, and strong memory, including both short and long term, with a fast rate of retrieval. Tenacity and the will to succeed consistently are key to profitable trading over the long term.

In any form of competition, whatever the goals are, aggressiveness, combative readiness, and driving energy are important forces, but not to be confused with impulsiveness, which is contrary to discipline. Therefore, within the recruitment process, it is important to determine the balance of these characteristics. There is a fine line between a logical thinking person and an overly analytical person. Most often, an overly analytical individual is too much the perfectionist, over thinks the trade, and pushes the button after it is too late. In addition, there are emotional and psychological components that are hard to detect at the recruitment level. Does the person have enough tenacity and discipline to build on his success and to fine-tune his skills, or will he, at one point, self-destruct and give back his prior gains? As an example, a neophyte trader might have worked for over a year to become consistently profitable, and as a result of that success, takes an inappropriate risk. A trader who feels successful may react by losing discipline. While basking in an aura of success, the trader may relax too much, compromise trading criteria, and set himself up for failure.

A good training programme should illustrate the psychological and emotional impediments and pitfalls in trading; traders need to know how to make trading decisions without emotional interference. To some extent, this involves experience, but guidance can be of great assistance. For a novice trader, hindsight is not necessarily the best teacher; it is too costly. Trial and error is not only time consuming and expensive, but the trader can develop bad habits while groping for a methodology.

The well-trained trader will develop a defensive strategy as part of a well thought out game plan; whereby, liquidation of unprofitable positions will be implemented methodically rather than being subject to reactions that are emotionally charged. The amateur fighter must also have an offence that can exploit openings in the competitor's plan of action by striking expeditiously. Similarly, the well-trained trader must be able to recognise a trading opportunity and implement immediately. The professional boxer includes an excellent offence and defence as part of a total game plan. The game plan has an overall strategy that has been predetermined, allowing for adjustments based on the opponent's tactics. Resourcefulness and the ability to find a way to win, despite adversity, are other necessary characteristics for successful trading. As a boxer must sometimes depend on inner strength or sheer will to win in competition, the trader must also pursue when challenged.

In today's electronic trading environment, trader training requires efficient retrieval of market information, superior decision making ability, and effective implementation. There are many choices of software packages that distribute and display market information. The operational reliability and the ability to move the information to where you want it on the screen should dictate in choosing a particular vendor. Each trader needs to visually adjust the screen so as to expedite delivery of information to the brain for processing. Proper fonts, colors, and positioning are the visual variables in this process, allowing the eyes to retrieve the information sequentially and rotationally in order of importance.

Rapid decision making is inherent to electronic trading. Unlike trading in the pre-electronic trading era, there is no time for any passive decision making. Today's trader is driving an airplane, not a car. In fact, the electronic trader is now piloting the Concorde in crowded skies. The professional trader must make logical, quick probability decisions, based on relevant market criteria on a continuous basis. The trader must configure a blue print for decision making.

Implementation of trades is best achieved by following predetermined game plans. The trader must anticipate all the potential events that might occur from the point of initiation through liquidation. Proper planning allows for appropriate reactions rather than emotional ones. The professional trader will, through practice of proper principles, internalise and automatise all of these components to become an efficient trading machine. As in boxing or any other sport, the wrong habit, once developed, is difficult to overcome; professional training is critical.

In sports, success is dependent on additional factors after the initial training. Specifically, the professional must continuously learn from his mistakes, not through unplanned trial and error, but by making adjustments with introspection and guidance from a coach; the electronic trader is no different. Very often, a trader who has been successful for a period of time begins to feel immortal and loses respect for changing markets and principles previously adhered to. At this point, risks are increased and trading criteria are lowered. As an example, a bull market trader unable to acclimate to a bear market might find himself reading annual reports, which is the behaviour of an investor not a trader. More specifically, the last long side trade might get away from him and turn into an unplanned long-term investment, tying up capital and subject to an untimely sale for needed cash. The momentum trader who has not learned to trade against the tide may be beached when markets become dull and volume wanes. If appropriate adjustments have not been made, this trader may give back all profits.

It is advantageous for a trader to talk trading with a peer group and mentor. Even if a trader is introspective, sheds his ego, and faces the problem head-on, discussions with other traders may help to highlight weaknesses, leading to faster resolutions. The individual trader lacking in the opportunity to communicate with peers may lose out on early identification of faulty strategies, develop bad habits, and lose money. Trading in a vacuum is less than ideal; trading in an atmosphere with other professionals of similar quality and education is preferable. The global marketplace coupled with technological advancements is dynamic and ever changing. Therefore, the electronic trader must keep abreast of all new developments, including regulations, and how these affect his trader business.

A decision to trade in the electronic trading arena should not be taken lightly. Education and reeducation are necessary; on-going learning and flexibility are required. The electronic trader will experience "future shock" continuously. Keep in mind that the market will change; there is never one market; there is never one way. What worked before, may not work today or tomorrow. The trader must never be lulled into complacency by opportunistic times or methods that have previously proven worthwhile. New markets may mean new methods. If trading is the chosen career, treat it like a business. Do not get enveloped in the tenor of the times; continue to do research for other trading possibilities; assume there will be changes; one should never stop learning. The trader who stays profitable is a lifetime student of the markets and the changes within it.

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