There is a great program on British television: Million Dollar Traders. There are two very important lessons that every trader needs to understand, which have been perfectly illustrated in this documentary, and I want to discuss them here. Any trader who does not understand these lessons is doomed to fail, just as many of the traders on the show are failing.

Before we go any further, here’s a quick recap of the show for anyone who hasn’t seen it. City of London trader and hedge fund manager Lex Van Damn (big name!) decided to set up an experiment to see if he could teach someone to trade. He interviewed hundreds of applicants and finally selected 8 people. The ones he chose came from all sorts of backgrounds: there’s an environmentalist who wants to test and trade only ethical stocks: a soldier, a boxing promoter, an entrepreneur, a retired IT consultant, a vet, a student, and a trader.

Some of these people are better educated than others, which is important because it ties directly into one of the lessons that this show has so beautifully illustrated, which I’ll get to in a moment.

The ex-vet (I’m talking about an animal doctor here, not the army vet type!) is highly educated and comes from a wealthy family. The retired computer scientist spent 40 years working as a computer programmer at IBM. The merchant studied at university before joining the family business.

At the other end of the scale, we have the fight promoter who does not have such a privileged upbringing. The soldier and the environmentalist have an average education as far as I know, and the student is obviously still studying.

Van Dam and his team of traders gave two weeks of intensive training to the eight who were selected. They covered all the bases, including fundamental analysis, technical analysis, trading psychology, and all the practicalities like how to work with your Bloomberg terminals and place trades.

After that, they went straight to their own trading floor for six weeks of live trading, with real cash. Quite a bit, actually: a hard-earned million dollars by Lex Van Dam.

In the first program we saw highlights of this training and the first week of trading. As you can probably imagine, their first week was pretty traumatic and they were all over the place. By the end of the first day, only one of them had made a transaction. By the end of the week, they had all done it, but they had all lost money.

In the next episode, we watched them trade for another two weeks. And this is where it gets really interesting, because we’re starting to see who gets it and who doesn’t. Depending on your own trading experience, you may be surprised at the results so far…

Well, here is the first lesson: success in trading has very little to do with intelligence and everything to do with personality.

Before I continue, let me make a disclaimer. What constitutes intelligence is something that is often debated. Is a high IQ intelligence? What about the creative types? For our purposes here, I’m going to accept the popular conception that intelligence is a reasonably high IQ and a good education.

On that basis, we would expect the college-educated computer programmer, vet, and tradesman to do well. The soldier and the promoter of the fight should find it more difficult.

And yet it was the exact opposite. In fact, Simon the computer programmer (remember, he worked as a consultant for IBM for 40 years) ended up quitting halfway through the experiment. He just couldn’t do it. It didn’t follow his personality. He said, and I quote him to the best of my recollection:
“This is the second most stressful thing I’ve ever done in my life, after my divorce.” He was a mess. His results were so bad that he was losing the team more than the winning traders were making, combined!

Why would someone apparently intelligent, well educated and used to working with numbers have such a hard time trading? Well, he said it himself best:
“I’m used to writing computer programs. Once they’re written, they either work or they don’t work. If they work, they keep working forever. If they don’t, then you find the bugs, fix them, and then the program works and keeps working forever.” always. With this, I keep doing the same thing but getting different results. Why? Because there are humans involved.”

I couldn’t have put it better myself. Despite the thousands of “trading shows” that take place every day, trading is essentially a human activity, driven by emotion. And boy, have we seen some excitement in this show. Cleo, the former vet, has spent 3 weeks sitting in front of her operating screen and has barely done a single operation: she is paralyzed with fear. She hasn’t had a big loss, but she hasn’t made a profit either, she can’t, she won’t trade! Another of the traders whoops with joy every time one of his trades progresses. Both are totally controlled by their emotions.

But let’s go back to what Simon the IT guy said. He is trying to apply rules to trading, in the same way that his computer programs are essentially just sets of rules. He can’t cope with the fact that doing the same thing over and over again doesn’t always produce the same results.

This is the second big lesson that Million Dollar Traders expounds: trading is not about rules, it’s about principles.

What is the difference? Hollywood screenwriting legend Robert McKee puts it brilliantly:

“A rule says ‘You have to do it this way.’ A director says ‘This works…and has all the time remembered.’ The difference is crucial.”

Paraphrasing what he goes on to say:

“Eager and inexperienced traders obey the rules… Artists master the form.”

Trading is more art than science. Hard rules cannot be applied. If that worked, we would all set up automatic trading programs, everything would be automated, and the market would just stop working because no one would have an advantage anymore.

Instead, we must learn the principles of what makes prices move. Understand the humans who make decisions. Understand emotions and responses to prices on a screen. And have a set of guiding principles that guide us in our business decisions in any given circumstance.

Understanding the principles and being able to apply them in any situation is far more valuable than blindly following a set of rules.

And that’s why the computer failed. He has spent his entire working life following rules. Put it in front of a graph and it will still apply the rules.

The vet, on the other hand, was simply a slave to his emotions. She was completely controlled by her fear. The worst thing is that she knew it! Her screen was covered in post-it notes telling her “you can’t win if you’re not negotiating” and “just pull the trigger!” etc. But despite knowing what she should do, she didn’t really dare to do it. Her upbringing, her privileged background, and her apparent intelligence were worthless to her.

And then we had the winners. By far the most successful trader so far is single mother Caroline, the businesswoman. Her experience creating her own business and overcoming all the obstacles and difficulties that come with it (not to mention the difficulties of being a single mother of twins), prepared her very well for the trading floor. While those around here were jumping for joy at making a small profit or crying into her coffee cup after suffering a loss, the entrepreneur calmly watched her charts, completely emotionally disconnected from the market.

With ruthless precision, he was cutting back on his losing trades, as I imagine he could lay off underperforming employees. He greeted his winners with the same total lack of emotion as his losers. When Lex Van Dam called her into her office to congratulate her on being “…the best trader on the floor,” her response spoke volumes:

“I’m just the best at this point,” she said. “All my trades could turn against me this afternoon and then I’ll be the worst.”

As Lex correctly answered:
“That’s why you’re the best, because you understand it.”

The soldier has also done quite well. His training has prepared him to examine situations, think through possible options, and then choose his action carefully, based on a set of guiding principles. Certainly the strength of character and ability to keep emotions in check that comes with battlefield experience are an asset to him on the hardwood.

Now, I’m not saying that only battle-hardened ex-military types, or successful businessmen can become merchants. What I’m saying is that most people don’t recognize the importance of personality, emotional control and some flexibility when it comes to the markets. If you go into the game knowing the challenges ahead, you have a much better chance of success.

As of this writing, there is still one final show to air and from what I understand only three of the traders make it to the end of the eight week experiment. Maybe the vet will come back, but I’m not counting on it!

Let me then summarize the two lessons that Million Dollar Traders have crystallized so beautifully on screen:

1. Success in trading has very little to do with intelligence or education. It has everything to do with character. More specifically, strength of character. Those who can control their emotions rather than be controlled by them are much more likely to succeed.

2. Learning to trade is about learning principles, not rules. Understanding the principles will allow you to make money in any market, under any type of condition. Rules can make some money for a short time, but as long as there are humans on the market, rules will never produce fixed, predictable results every time. If that’s what you’re looking for, put your money in the bank. Actually, on second thought….!