The trade press within the industry where the commodity is important fans the fires of demand. Insiders begin to speculate. Word spreads to the financial community and press quickly. Sooner or later, the mass media carries a story. That’s when the average investor bids for a piece of the action, which usually signals a blow-off top. Prices crash.

At several points along the rocky road from bust to boom and back again, excellent trading opportunities present themselves. A technical trader watching a flat or stagnant price chart notices a slight uptrend. Perhaps the long-term downtrend line drawn earlier on the chart was penetrated. Or it might be a fundamental trader with informed contacts within the industry in question who hears talk of shortages, sees inventories decline, or notices price movements. This stimulates him or her to call some distributors, check import-export data, shipments, etc.—all the links in the chain from production to end use.

In either case, these traders get an edge on the herd. They begin with a few test trades. Is this a real change in trend or just a blip on the radar screen? If it is for real, they may pyramid their position by buying more and more positions with the unrealized gains from the earlier ones. This substantially increases leverage, profit potential, and risk. With a little luck, they exit before the blow-off top, using the story on the “Nightly News” as a signal.

FundsSome of the best research into the anatomy of stock and futures traders was done by Jack D. Schwager and recorded in his two very readable books, Market Wizards: Interviews with Top Traders and The New Market Wizards: Conversations with America’s Top Traders. Use these books to get an insight into how the great traders think, before you actually talk to any CTAs.

What you want to learn is what your prospective trader thinks is his or her edge. From what unique perspective do they view the action in the pits, which gives them an advantage over everyone else? A few examples from the Wizard books help illustrate the point.

  • Linda Bradford Raschke was trained as a musician. She sees price patterns as refrains that repeat at intervals, often with a variation.
  • Mark and Joe Ritchie, whose firm CRT has earned an estimated $1 billion in trading profits, credit the quality and team spirit of their employees.
  • Monroe Trout, a legendary trader known for consistency and low drawdowns, believes his excellent timing stems from the computerized trading systems combined with his personal touch.
  • Al Weiss is the personification of the long-term trend analysts, using charts that go back over 150 years.
  • Jeff Yass applies mathematical game theory to options trading.

These are just a few of the world-renowned stock and futures traders interviewed. Mr. Schwager also spoke with Bruce Kovner, Richard Dennis, Paul Tudor Jones, William O’Neil, David Ryan, Mark Weinstein, and several others. You even get interviews with psychologists, like Charles Faulkner and Dr. Van K. Tharp, who specialize in studying achievers and solving psychological trading blocks.

Use these interviews to develop lists of questions to ask of the CTAs or traders you interview. You want to learn about their philosophy of dealing with winning and losing streaks and how much respect they have for the market.

Great traders tend to take what the market gives. They are confident, but humble. Anyone who tries to muscle or bully the market doesn’t last long. All of the wizards were brought to their knees at one time or another in their trading careers. Recovering and learning from the experience separates the haves from the have nots.

There are no right or wrong answers to these questions, as there is no wrong or perfect way to trade the market. The key to success is not a magic trading system, but the person behind the system.

Nevertheless, there are certain native skills and behavior patterns that seem to be present in the majority of successful traders. Your antennae must be continuously sweeping to detect them as you mix it up within the futures industry.

The most important characteristic is desire, which most commonly manifests itself as a passion for the markets. These people follow the market constantly. They have quotation equipment everywhere—at the office and at home and a handheld system for in-between times. They rarely get tired of reading or talking about the markets.

Probably the second most important trait is discipline. Discipline to follow their trading system religiously, no matter what it is. Discipline to do the hard, dull work often required to keep up with the markets they trade. Discipline to adhere to their money management rules.

After these two, it is the willingness to put in hundreds of hours each month—whatever is necessary. Some markets trade 24 hours a day. It seems that you never get a break. These people read, read, read . . . study, study, study . . . trade, trade, trade.

There are even a few more mundane traits that also seem to be always present. One is above-average math skills. The market moves so fast sometimes and there is so much at stake, if you can’t add, subtract, and multiply in 16ths, 32nds, and 64ths, you’re going to make a serious error at some point. It helps to be able to instantaneously calculate a spread, straddle, or strangle in your head.

Successful traders have a prodigious memory for what appears to be minutiae concerning the markets they trade. Answers to questions like when and what was the last low for the October T-bond contract, pops to their mind like Babe Ruth’s home run record. Chart pattern reliability, cycles, seasonal patterns, export figures, rainfall by month by county in Iowa, hog-corn ratios—the list of facts and figures goes on and on, depending on what they trade.

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