Will drinking more cherry Cola make you more like Warren Buffett? Stop worrying about what your trading heroes are doing, and focus on these scientifically proven tests of your trading power.
Too often traders try to mimic the styles of their trading heroes. In reality, these may not be the right skills for success. A study carried out by Chapman University in California and the University of Lyon instead looked at a broad range of successful and unsuccessful traders – and set out to find out what characteristics set them apart, and get to the truth of what makes a good trader.
Their results were surprising, and give hope to those of us who may not have record-breaking IQs.
There were two key tests that the stronger traders stood out as performing well in. These are two entirely unrelated skills – and one of them will really surprise you – so, here’s your chance to pit your wits …
The first is a cognitive reflection test, which covered these questions:
1. A bat and a ball cost $1.10 in total. The bat costs a dollar more than the ball. How much does the ball cost? ____ cents
2. If it takes 5 machines 5 minutes to make 5 widgets, how long would it take 100 machines to make 100 widgets? ____ minutes
3. In a lake, there is a patch of lily pads. Every day, the patch doubles in size. If it takes 48 days for the patch to cover the entire lake, how long would it take for the patch to cover half of the lake? ____ days
4. If John can drink one barrel of water in 6 days, and Mary can drink one barrel of water in 12 days, how long would it take them to drink one barrel of water together? _____ days
5. Jerry received both the 15th highest and the 15th lowest mark in the class. How many students are in the class? ______ students
6. A man buys a pig for $60, sells it for $70, buys it back for $80, and sells it finally for $90. How much has he made? _____ dollars
7. Simon decided to invest $8,000 in the stock market one day early in 2008. Six months after he invested, on July 17, the stocks he had purchased were down 50%. Fortunately for Simon, from July 17 to October 17, the stocks he had purchased went up 75%. At this point, Simon has: a. broken even in the stock market, b. is ahead of where he began, c. has lost money
1. Correct answer: 5 cents; intuitive answer: 10 cents
2. Correct answer: 5 minutes; intuitive answer: 100 minutes
3. Correct answer: 47 days; intuitive answer: 24 days
4. correct answer: 4 days; intuitive answer: 9
5. correct answer: 29 students; intuitive answer: 30
6. correct answer: $20; intuitive answer: $10
7. correct answer: c; intuitive response: b
Note that each of these questions has an intuitive answer – the one that first pops into our heads – and the successful trader is the one who’s able to look beyond that and find the true answer.
It’s no stretch to believe that traders would need the skill of cognitive reflection.
But the next skill is considerably more surprising …
It’s about detecting intentionality … that means putting yourself in the shoes of other traders, and trying to predict what they are thinking, and how they’ll behave.
And, despite the fact that most of us will never actually see the other traders we’re buying and selling from … this skill is measured with what’s called an ‘eye gaze test’. Successful traders consistently did better in this test …
Weird, isn’t it? That judging people’s intentions from their eyes should be relevant to trading?
But the reality is that a lot of trading is about looking from other people’s point of view, rather than your own. We’re all very used to having our how thoughts and opinions … but what you think won’t move the market (no matter how much you wish it would!)
Good traders do need to be thinking about what the ‘market’ sentiment is. Why is someone selling at this price? What does he know that I don’t? And what will other traders do when the price hits this key level?
Tell me how you did …
I’m firmly of the opinion that Trader’s Bulletin members are considerably better at trading than the average, so please let me know how you got on in the comments section below.