You are a smart lady or gentleman and you’ve decided that you want to be a professional trader.  You think that if everything pans out that you would like to manage other peoples money for a living, perhaps as an Asset Manager or Commodity Trading Advisor.  Or you fancy getting onto an institutional desk and trading their massive proprietary capital.

You’ve always had a high IQ and been strong academically throughout life even doing all the extracurricular activities to make your CV stand out.  You went to a good University and came out with a decent degree.  You got offered jobs that you wanted and now you have realized that you are drawn to the markets.

BUT SO FAR YOUR TRADING EXPERIENCE ISN’T REALLY WORKING OUT HOW YOU HOPED!!

A recent psychology study by the University of Western Ontario has shown that the notion of IQ is a ‘myth’.  “There is no such thing as a single measure of IQ or a measure of general intelligence”.

The study determined three factors that combined to create human intelligence or our ‘cognitive profile’ -> reasoning, short-term memory and verbal ability.

Now here’s the catch……

You definitely need those three to be a good trader (verbal intelligence being least important unless you are tying to raise money in which case it may be the most important) but what the study overlooks is the key area of intelligence that is needed:

EMOTIONAL INTELLIGENCE

Victor Sperandeo covers this:

“Assume that you’re a brilliant student who graduates from Harvard summa cum laude. You get a job with a top investment house, and within one year, they hand you a $5 million portfolio to manage. What would you believe about yourself? Most likely, you would assume that you’re very bright and do everything right. Now, assume you find yourself in a situation where the market is going against your position. What is your reaction likely to be? “I’m right.” Why? Because everything you’ve done in life is right. You’ll tend to place your IQ above the market action. ”

Perhaps that describes you a bit?  Well here is the hit to the sensitive bits again from Victor:

“I discovered that you can’t train people how to trade by just imparting knowledge. The key to trading success is emotional discipline. Making money has nothing to do with intelligence.”

Did you get that?  Making money has nothing to do with intelligence!!  This interesting study on IQ leaves out the key facet that you need to have to be a trader.

EMOTIONAL INTELLIGENCE

The good news?

You recognize this and decide to work on it.  You can develop your emotional intelligence.

A good place to start would be:

• Reading this site
• Reading the Inner Voice of Trading
• Taking up meditation, yoga, tai chi etc
• Joining a Trading Tribe
• Finding a coach or mentor

Trading oil may seem exciting and where it’s at because the oil market is mentioned in the news every day. Trading it may make you feel like you’ve elevated your status as a trader.   Like many commodity futures contracts, the black gold can be volatile. And while you may find that exciting, be sure your account — and your nerves — can handle the volatility.

A good litmus test is to look at the 20-day Average True Range, or ATR. The ATR does what it says on the tin: it gives you an idea of the average range the price can move on any given day based on an average of the last X days (in this case 20). I like to think it gives me a idea of a contract’s personality.

Looking at Crude Oil: Light Sweet Crude Oil (West Texas Intermediate) The ATR is currently $2.14.

Now given that the standardized contract size is 1,000 barrels, you can expect the average daily non-directional movement to be $2,140 – a potentially large swing in your equity.

Is your account big enough to trade the contract? Consider what I mentioned in an earlier post entitled Meaningful Risk?.

Risking 1% of your account equity, position sizing accordingly would suggest that in order to trade this contract, you’d need capital in the region of $214,000 if you were to place your protective stop 1 ATR away from your entry price.

If you aren’t sufficiently capitalized and you emotionally must trade oil, then you might consider looking at the options offered by ETF’s (Exchange Traded Funds) in the US or in Europe / Australia consider CFD’s (Contracts For Difference). You can also consider trading the mini contracts if your style is suited for commodity futures.

Then there is the question of the thickness of your stomach wall you have for this market. A brief snapshot of the fundamentals surrounding this market at the moment suggest you’ll need a thick one:

* Slowing of World economy: China slow down, European mess
* An understanding of how OPEC works
* The Middle East and the escalating tensions with Syria
* Israel / Palestine bombing in Gaza
* Upcoming Israeli elections and the ongoing problems with Iran
* Iran and its ongoing problems with it seems just about everyone else
* Iraq’s production

If you take all of this into perspective, you may see that by trying to up your status, you concurrently up the probability of taking a destabilizing financial loss. Know yourself.

Guest Post

You all too often hear that 80-90% of those who try to make it as traders fail.

There is no question that it is a very tough profession and for some perhaps not a good fit.

I wonder about this statistic though.  Many professional traders failed their way to success. They failed forward as it’s said.

After all, so much of trading is learning to take losses and building the emotional capacity to trade your plan without deviation.

Perhaps the statistic changes to being slightly more favourable each time a trader gets back in the ring for another round.

Admittedly it takes a particular kind of resilience to do this.

One thing is certain finding good training and mentoring can help you to short cut some of the steep learning curve. It’s very important to find someone you trust and who’s approach gels with you.

You also have to be open to the possibility that you can be a successful trader.  If you aren’t, you have pretty much guaranteed you aren’t going to achieve what you want.

Breaking the four-minute-mile used to be considered scientifically impossible. Then Roger Banister broke the barrier in 1954.  His achievement opened up the possibility that it was possible to others.  Over the next few years many more people broke the barrier.

It took one man to show that it was possible.  That was all that was needed to allow others athletes to make the mental shift and open to the possibility they could do it too.

Read the Market Wizards books (listen to Michael’s Jack Schwager Hedge Fund Market Wizards Video Interview) and read around this site for countless other examples of those who have achieved what you want.  Ask yourself are you open to the possibility that you can do it too?

Be sure that you aren’t getting in your own way of being a trader.  You may need to open up the possibility that you really can.

What do you think about the statistic?  Does the failure rate decrease the more someone perseveres?  Let me know what you think in the comments.

One of my first books on commodities was Jim Roger’s Hot Commodities – How Anyone Can Invest Profitably in the World’s Best Market.

Among other things, I took away the knowledge that commodities were real things that were understandable if you put the work in and most of all were influenced heavily by supply and demand.

Jim also made it very clear that when it came to things like mines it was far from a fast process. So in short by the time price started advertising that there was more demand than supply it took a considerable period of time to get a mine ‘online’ and in turn it was quite easy to guess what would happen to the price of these now increasingly scarce resources.

Of course we then have the reality that the deals start being done to increase production.  There is a good time of money making by the producers but then production catches up with the lag that was in place and then price has a tendency to drop as supply has matched or surpassed its previous levels.

The New York Times had an interesting infographic on how the Natural Gas Bounty is Turning Against Producers that I feel illustrates the kind of thing Jim talks about in Hot Commodities and illustrates the supply / demand cycle in a popular commodity.

To get a good take on where the Natural Gas market is right at the moment listen to he recent podcasts:

The most recent Energy Market Update podcast 

We talk about following trends and about the importance of consistency well here’s one for you.

The Rolling Stones confirm their 50th Anniversary concerts.

That’s right these 70 year old guys are still rocking and you know with certainty they will fill the stadiums they book.

They set a trend that everyone followed and you cannot argue about their consistency to deliver on sold out stadiums.

If only we can have these kind of consistent results from our trading.