What The Best Traders Look Like

By Author: Anthony Green
Total Articles: 36
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The best traders have certain characteristic, measurable trading patterns. The largest percentage of their profitability comes from a small percentage of their trades. This means success comes from a small number of very large trades, where they have developed an edge (based on such things as inter market information, supply and demand, and the movement of other stocks) over and above their basic understanding of the fundamentals of a stock (for example, earnings and cash flow). The best traders have a high risk-adjusted rate of return (RAROC) and Sharpe statistics. (The Sharpe ratio is a risk-adjusted measure of profitability.) They tend to do better trading low-volatility/low-beta stocks.

Their profitability correlates positively with the number of shares, price per share, and amount of dollars invested. They tend to have higher average dollar gain per winning share and per trade than average dollar loss per share and per trade. Their success is also positively correlated with length of time a stock is held. Examining some of the negative characteristics of less successful traders, on the other hand, one finds negative ...
... correlations to holding periods and dollar volume, as well as high commissions and acute clustering of profit and loss (P&L) around a handful of transactions that suggest overtrading. In other words, some traders may hold on to positions too long.

One trader with a high winning trade percentage shows a relatively flat ratio of winning trade/losing trade margins on a per-trade and pershare basis. This suggests that he might be able to increase his profitability by staying with winning positions longer. Of course, there are differences among successful traders. Some excel at using the Instinct, trading the short side of the market, and trading in the technology and financial sectors. Others tend to perform better using brokers rather than automated trading mechanisms.

One trader who thrives by focusing on biotech and pharmaceutical stocks shows lower Sharpe and RAROC statistics, which are reflective of the erratic nature of biotech stocks. There are variations within these ideal patterns, too. Some successful traders don't hold their shares for a long time, even though they are
winning trades. Others have their performances too highly correlated with market indexes in general. Still others may hold on to losers too long, as indicated by the relative equivalence of their average dollar gain per winning trade and the average dollar loss. They may even show that their average losses exceed average profits on a per-share and per-trade basis

Psychologically, the best traders all have much in common. They possess risk taking ability, flexibility, and a capacity for conviction. They are able to trade without letting their ego get in the way. In other words, they have the ability to stay in the present and view events truthfully and, therefore, objectively. They focus on the movement of stocks, without distraction by disappointment or euphoria�either of which may interfere with the correct view of reality. While I know extremely successful traders who do not share all of these characteristics, including a good friend of mine who is convinced he lacks a "capacity for conviction," most successful traders have a strategy for winning, and they adhere to it with persistence, creativity, and drive. And when they are winning, they don't become lax but actually play bigger, continually upgrading their game