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Trader Education: Essay by Bill Luby

This blog is devoted to options education.  I recognize that other bloggers emphasize education and I'll occasionally share some thoughts from these bloggers.

A couple of days ago, Bill Luby (VIX and More) published a piece that had already appeared in Expiring Monthly magazine (May 2010), and I'm sharing it with Options for Rookies readers.

you remember from your school days those students who, when confronted
with a complex issue, would acquire a look on their faces somewhere
between consternation and dread, immediately thrust a waving hand up
into the air and blurt out in a worried voice, “Do we have to know this
for the test?” I can be fairly sure that none of these people ended up
as successful traders.

One only has to look at the history of
hiring patterns at Wall Street firms to get a sense of the evolution of
thinking about how to develop a successful trader. For many years, the
model for aspiring traders was considered to be a genteel Ivy League
education. Over time, Wall Street firms began to favor graduates with a
more humble socioeconomic pedigree who were considered hungry, hard
working and highly motivated to prove something to the world. In more
recent years, we have seen Wall Street seek out physicists and those
with exceptional quantitative skills. Lately, a desire for poker skills
has also come into play.

As I see it, all traders are ultimately
self-taught. There are no required classes, readings, homework
assignments or even a syllabus with recommendations. Tests are
administered on a daily basis, frequently with multiple tests on the
same day. Worst of all, everyone is graded on an unfavorable curve in
which there are more Fs than As.

Against this backdrop,
education counts, but skill and experience count even more. An
insatiable curiosity helps, as does a willingness to explore unfamiliar
territory. Great trades, insights and strategies present themselves in
somewhat random fashion and, as Louis Pasteur observed, “Chance favors
the prepared mind.”

But what kind of preparation is ideal?
Malcolm Gladwell [in 'Outliers''] asserts that 10,000 hours of experience is a
prerequisite for greatness in almost any field. In a normal career, that
level of commitment usually translates to five years, but on Wall
Street, 10,000 hours of experience can be crammed into 3–4 years. Of
course, all hours are not created equal. A trader’s capacity to
distinguish between random events and meaningful patterns is important
to establish a solid trajectory of growth and development.

my personal education process, unlearning was more important than
learning. My formal schooling consisted of an undergraduate degree in
political science and a traditional MBA program. After two decades of
business strategy consulting experience deeply rooted in fundamental
analysis, I was ill-equipped to excel in a short-term trading time
frame. In order to embrace technical analysis, I first had to jettison
my fundamental perspective on investments and build a new foundation
based on technical analysis and market sentiment.

In my opinion,
the best way to approach trading is to consider the educational process
to be a lifelong endeavor, crossing as many multi-disciplinary
boundaries as can be digested. In a way, I like to think of the
foundation of trading success as building a large idea stew and
developing an eye for spotting high potential new ideas. The trick is to
have the right breadth and depth of knowledge so that when one stumbles
on the next great strategy, it can be easily identified, captured and
developed. Call it opportunistic research and development, if you will.

luck would have it, some of the most successful trading strategies I
employ are based on areas in which I had limited knowledge when I first
encountered them. No matter how well things are going, I take the
approach that I never have the luxury of being satisfied with the status
quo and need to embrace the idea of getting out of my comfort zone. In
trading and in life, it pays to constantly refresh the pipeline of new
ideas and continue to tinker with them, because you never know what will
be on tomorrow’s test.

As options traders, there are some differences in our approach (longer holding period is the most obvious). However, all traders have some traits in common and Bill's story applies to us as well.


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