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Demons of Trading Can Shrink Your Potential: Four Experts Discuss the Mind Games of Trading
by: Gail Osten
GO: At what point in their trading/investing journey do you typically see traders/investors, personally? What types of situations typically bring them to you?
RR: There are several. One would be that they’ve spent years designing a system to trade and now they can’t “pull the trigger” on the system. That’s one. Another would be that they’re losing money over trading or not getting out of losses, and they come to a forced awareness that they need help. They’ll come to me then.
GO: Those are the most typical problems that you see?
RR: Yes. Or maybe they work for a bank and they’ll ask the bank to send them to me and they will.
GO: Ok. So, you do both individuals and individuals trading for institutions. Interesting. You work with institutional traders as well, Ari.
AK: Right. I work with a number of hedge funds, and I work with individuals within these hedge funds.
SIDEBAR
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Blogs: A Tool for Cultivating a Winning Mindset
by: Brett N. Steenbarger, Ph.D.
As a psychologist and an active trader, I am my own trading coach and client. Much of my self-work has little to do with resolving conflicts from the past, learning coping skills, or other such therapeutic staples. Rather, I find myself working on consistently implementing the cognitive, emotional and behavioral patterns that distinguish exemplary performers across a variety of disciplines. There is rich research literature on the psychological factors that distinguish creative, successful individuals in the arts, sciences, sports and politics. Dean Keith Simonton, psychologist at the University of California, Davis, and K. Anders Ericsson, psychologist at Florida State University, are two of the more prolific contributors to this body of knowledge. Both emphasize that high levels of achievement in any field are the result of continuous, intensive, deliberative practice, in which skills become internalized to the point of becoming automatic.
An insightful article about legendary baseball pitcher Sandy Koufax appeared in the May 16, 2003, issue of Investor’s Business Daily. Koufax observed, “As much as you can do to get the variables out of the delivery, the easier it is to repeat. That’s the key to a repeated golf swing or pitching motion or batting swing…The pitcher wants to do exactly the same thing every time.” Jane Leavy, author of Koufax’s biography, noted, “The hardest thing in sports is no single act, it is the replication of that act.”
Working on my own trading, I have been able to achieve a higher degree of replication by developing a set of rules to guide my entries, exits and position sizing. Most of these rules are based on research that I have performed regarding the trending qualities of the SP and ND futures. In general, I want to be entering directional markets when the market’s trendiness is expanding, exiting when the trendiness is waning, and adding to positions when the short- and intermediate-term trends and trendiness are aligned.
To keep myself grounded in these rules, I maintain a daily weblog (“blog”), which is an online diary that allows me to follow each trend-related measure, assess its status and formulate my ideas for the coming day’s trading. (The blog can be accessed at www.greatspeculations.com/brett/weblog.h
tm). The blog forces me to focus on basics and “get the variables out” of my trading. I have found that it greatly reduces my internal mental chatter during trading by taking much of the discretion and potential impulsivity out of decision-making. It takes me out of the mode of trying to pick tops and bottoms and concentrates my efforts on riding the sweet spot of market movements. It also makes all of my market mistakes quite public—a useful tool in cultivating humility!
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GO: Because you’re there to help them anyway, in the context of the hedge fund, what are the most typical problems that you try to help them through?
AK: I think the biggest problem is getting people to size their positions, and I try to do that typically by getting them to set some goals. One is to really develop a methodology where there is a consistent kind of track record of performance. Somebody can have more winning days, but they don’t make as much money on their winning days as they do on their losing days, which means they’re holding on to their losers and not getting out.
GO: That’s very typical, isn’t it?
AK: Yes, so I would use these kinds of parameters. How much can you make this year? Given what you know, given that you have some control of sizing, given that you have so much capital, maybe you can make X dollars this year. OK. Say you have Y dollars of capital, so the next thing would be to get them to say, “To make X dollars a year means to make Z dollars a day. And to make Z dollars a day, how many positions do I need? How big should they be? How long should I hold them? How much work do I have to do to give myself the confidence to be able to buy those kinds of things.” So, managing loss and developing that discipline, building a kind of methodology, finding a group of financial instruments that you really can do the work on. It’s not just automatic.
GO: But to be able to ingrain a skill, to make it automatic, doesn’t that take a certain type of personality? Are there certain types of personalities that make better traders than others? Or are there certain personalities that should probably avoid trading altogether?
AT: One is the opposite of the other. Entrepreneurial people – and that means self-starters, motivators, risk-takers. People who are not only analytical, but who are creative as well. Most people think that to have the analytical skills is to be a great trader, but I found that to be a really great trader you also have to be creative and synergistically combine the right brain with the left brain. Emotionally self-confident, optimistic, self-disciplined—that’s how I would describe a good trader.
GO: What about smart?
AT: There are different kinds of smart. There is emotional smart. There is street-wise smart. There is wisdom. There is intellectually smart. I find that intellectually smart very often gets in the way of being a great trader. People that are street-smart, wise and intuitive are more likely to be better traders.
GO: Are there certain types of personalities that make better traders than others?
BS: Absolutely. That was some of the questionnaire research that I was doing a while back with Linda Raschke while we were looking at traits and coping styles. The successful traders were high in a trait called “conscientiousness,” meaning they were very dependable, very reliable. The successful traders had coping styles that were more problem-based. When something went wrong in trading, they would say, “OK, what can I do about this trade?” The traders who were having problems were high in a trait called “neuroticism,” which is a tendency toward negative emotional experiences, like anxiety and depression. And when the unsuccessful traders were having a problem with trading, they would get emotional and they’d say, “What’s wrong with me?” and “Nothing ever works.”
GO: So there are certain personalities that probably should avoid trading altogether?
BS: I think so. No one ever wants to hear that, of course.
RR: I don’t think so. If they want to trade, we’ve got to find a way for them. They come to me to find a way, and so I’ll find a way, with their personality, to do it. But basically, good traders are optimistic. They are optimists who can apply discipline on top of their optimism. Good traders are risk takers. They’re people that are comfortable with uncertainty. They’re adventurous. They’re able to think quickly and make decisions. Act. They’re able to act. They’re willing to admit when they’re wrong, and they don’t have a fear of being wrong.
SIDEBAR
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The Day Trader Who Didn’t Trade
by: Ruth Barrons Roosevelt
In my years of coaching traders and investors, I have seen many kinds of self- and profit-defeating behaviors. One would think it would be easy enough. Find a winning strategy that gives you an edge. Test it to make sure that it works. And employ the strategy consistently. Some do that, to be sure. But others become their own worst enemy on their way to success.
Traders and investors hang onto losing positions until the enormity of the loss
overwhelms them. They sell their winning positions quickly to pocket slender profits, while the trades go on to make enormous profits. They write trading rules, only to violate them. They get greedy and over-trade, only to lose all their money. Some simply can’t pull the trigger on a trade or investment. The opportunities slide right past them as they remain immobile and disappointed.
John Smith (not his real name) came to me after a year of watching the markets. He said he wanted to support himself by day trading the E-mini S & P. He had only taken three or four trades in the past year. His proven system offered him 15 to 20 trades a day and made money on paper. He had the idea that if he studied enough, he could pick out the winning trades and let the losers ago. In fact, those few trades he had taken had been losers. Time and money were slipping away. It costs money just to sit there day after day doing nothing.
John said he was learning by watching the market. I suggested that what he was learning was how not to trade. I suggested he start each day setting his intention to actually trade, and that he leave the screen as soon as he let the first trade go by. He agreed, but was unable to do that. He sat there watching, telling himself he was learning about the market. He had developed a comfortable spectator sport.
When fear is stronger than desire, fear dominates. John feared losing money, and he feared being wrong. Each time a signal came up, he imagined that if he took the trade, it would be a loser. Imagination is stronger than will power, and so he was unable – no matter how determined – to put the trade on.
Over the next three months, John began to trade. First, he mentally rehearsed taking all the trades. He shifted the belief that losing made him a loser and was wrong, to the belief that losing is a natural part of the game and that not taking all the trades is wrong. He shifted his imagination from losing to winning by asking himself whenever an entry signal came up, “What if this trade is a big winner?”
Most importantly, he learned to set a new intention when he began each day’s trading. He shifted his intention away from losing or making money to following his system. He understood that the long-term consequences of following a winning strategy consistently was indeed wealth creation.
He developed what I call emotional inoculation through actual trading. At first he only took one trade a day, then two, then three, and finally all of them. Each time he took a trade, it became less significant and easier to do. Today he makes a nice living with his trading.
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GO: Do you ever turn anyone away?
RR: No, I don’t, because they’ve come to me and said, “Help me.” I’ve had some really difficult clients, and I’ve been able to get them trading.
GO: Well, for those people who really want to trade, but need help, how do they find a good coach or therapist? How would you define a trader’s coach or therapist?
AT: First of all, recommendation is the best. Credibility, evidence of work and accomplishments, speeches, articles, books. Ask for testimonials or ask for people to call. A good coach takes an investment in your life, someone who makes a long-term commitment to you – not just there for you right in the beginning, but at each new level of success. And the good coach makes a trader as independent as possible as soon as possible. That’s really important. In a typical psychology class, you’re really taught to keep a client coming. A coach gets the best results when a client trusts and follows the advice the coach gives, so it can’t only be a one-way street. There has to be a bond between the coach and the trader to get the best results.
BS: A good coach or therapist is part expert, part teacher. I think if you don’t have experience and expertise in the skill domain, you’re going to be limited in what you impart. I don’t think a person could be a good basketball coach if they had never played basketball. That being said, just knowing a lot about something or having done it oneself doesn’t necessarily mean you’ll be effective in imparting it to others. In fact just recently, there were all of the problems with Michael Jordan and the Washington Wizards; he is no longer with the team because they felt that he wasn’t effective in imparting his abilities to others. He’s clearly one of the greatest ever to play the game and, yet, he didn’t seem to be able to mentor all of the young ones to reach his level. You have to have both.
AK: I think a good traders’ coach is somebody that understands the trading process, that understands the challenge, the dilemma that traders face as regards the realm of uncertainty in a disciplined way…the balance between the willingness to take risk against the need to preserve capital. That creates a certain amount of inner tension and frustration, and you have to be able to deal with that. You need somebody that’s interested in working with people who are in a game that lends itself to high performance. Not everybody likes to do that because you’re talking to people who are—if they’re successful—able to do things that are beyond what most “ordinary mortals” could do. So, these guys are, as a result of their willingness to play in the game, like sports stars. You have to be able to work with them and help them and not put a value judgment on their lifestyle or the fact that they’re making such an inordinate amount of money. And yet, do it without feeling envy or jealousy, which isn’t necessarily the easiest thing.
GO: I’d like to switch gears here. There are probably more investors than traders, so I want to address the investors out there with this question. What do you do differently for traders and investors? Is there a difference?
BS: I think it’s a completely different thing. They’re not even related in my book psychologically because in investing you are making longer-term decisions and it’s a very conscious, deliberate, analytical process. In trading, very, very often, you’re making short-term decisions in very active markets, and you’re relying on skills that you have honed over time and that you’re executing relatively automatically. The shorter the time frame of your holding a position, the more automatic your skills have to be. You don’t have time to engage in elaborate analyses.
RR: Yes, but it shouldn’t be too much different, it’s just a different time frame. That’s where people in the stock market got robbed. If they had had more of a trading mentality, they would have gotten out or gone short. But they didn’t. So we really don’t want to think of investment as just staying put. With any good investment, you have to see if it’s still a good investment. You need to reassess it. Investing is just a slower-term trading, and I think if you look at it that way, and reassess all the time, you would be much better.
AT: Psychologically, a trader and investor go through the same process, but those who make quicker decisions are more likely to have more emotional issues to deal with. For both, I start out with an assessment.
GO: In other words, we have some very different ideas out there about what it means to be an investor and a trader. It’s definitely something to consider for anyone who is seeking a trading/investing coach. This is always something I love to ask because I think it is exceedingly helpful for traders – if there were three pieces of advice you could offer the new trader, what would they be?
AT: First, to have a good education in trading. And while there’s a lot of stuff out there, there’s a lot of people teaching and everything, you really need to self-educate. Just read, read, read, read and read. And then have a plan, a business plan which includes rules for entering and exiting a trade. And follow those rules, and if you can’t follow those rules, then hire a coach.
SIDEBAR
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Stretching into a New Comfort Zone
by: Adrienne Laris Toghraie
Robert has been a consistent trader for many years. Each morning, he awakens knowing that his mortgage is going to be paid, his children will remain in private school, and his wife can impress friends with elegant entertaining from his trading profits. When Robert stopped at my booth at his first trading conference and looked at my sign, “Problems with Discipline, Stop Here,” he said, “This is the most important part of trading,” and asked if I could bring him to a new level of success in trading. I suggested that he take an evaluation and see if there was anything that was actually preventing him from reaching his next level of success. Though Robert’s evaluation indicated that he was in great psychological shape, he wanted to kick up his trading and his life a notch. He decided to work with me in private consultation.
Robert had a remarkably good life without the trials and setbacks that most traders experience. But I was to find out that being safe in his level of comfort was why he never made it to exceptional levels of trading success. His practical and loving parents who never wanted to risk or stretch beyond their comfort zone passed those ideals on to their son. When I asked him why he wanted to go beyond his level of security, he said it was because his son’s achievements as a golfer inspired Robert to do more. The athletic coach had inspired his son’s success, which then inspired Robert to become the best that he could be. Robert joked, “I cannot be outdone by my son.”
In order to motivate the best performance in Robert, we had to change his values about money and risk, which meant that we had to increase his neurological system’s comfort zone. We accomplished this transformation by replacing his current mental images of his life and the feelings of comfort those pictures inspired, with new pictures of how he would like his life to be and feelings of comfort with a more enriched life. In addition, we developed an overview of his entire life, accentuating and expanding on the things that gave him more pleasure in a progressively more ambitious lifestyle.
I am pleased to report that Robert is actually working fewer hours, making more money by cherry picking, and risking more with his better trades than ever before. This process has given him twice the amount of time he is able to spend with his son on the golf course, and he and his wife are spending more quality time together. Their life together has been revitalized. He is taking better care of his health and has a new interest in learning more about himself. Now, Robert lives his life finding enjoyment and excitement in the process of reaching towards the best he can be in all areas of his life.
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GO: OK. Ruth?
RR: Find out what works. Verify that it works. Do it.
GO: Those three things.
RR: It’s pretty simple.
GO: Brett?
BS: First of all, if your goal is to become proficient, that takes, like in any field, a number of years of concentrated practice. In trading, start with a very small account and very small positions, so that you can survive your learning curve. And, then, as you gain success, as you gain experience, you can always add to your size.
The second thing is that, if a newcomer’s going to be a full-time, very active trader, he must be adequately capitalized. If he’s under-capitalized, he’s subjecting himself to very high potential draw downs. So when a trader is under-capitalized, he goes through more emotional swings because the draw downs are affecting a greater percentage of his total equity. So, being well capitalized is also a psychological strategy.
GO: I don’t think most people would have considered being well-capitalized as a good psychological approach to trading. And your third piece of advice?
BS: My number three piece of advice: Find a mentor. Find someone who you can emulate and learn from that person. That was certainly true when I learned how to do therapy. I could pick up things from their style and synthesize those into my own style. And I think it’s the same with traders.
GO: Ari?
AK: First, keep your losses down. Be willing to face the facts, tell the truth, admit to being wrong, and get out to preserve your capital. Don’t get attached to your ideas to the point that you are losing money.
Second, as you build up a cushion, begin to size your positions commensurate with your level of conviction in your ideas and consistent with your profit targets. This is tougher than it appears, and most people tend to be too conservative and cautious and miss opportunities. Be willing to be guided by your objectives and do the work necessary to justify your conviction.
Third, review what you have done, be flexible, keep course correcting and improving your performance and adjusting to the new and changing demands of the marketplace. Successful trading requires attention and intention and commitment.
GO: Brett, there is one other thing that you said to me that I’d like to add as refers to how trading, or working on it, can be of benefit generally. One more time, because I think it’s a good way to end this piece.
BS: When done properly, I think that working on trading is a way of working on yourself. As you work on the trading, it forces you to deal with pressure in certain ways, and it improves you as a person. And as you improve yourself as a person, and work on your ability to handle risk and work on those analytical abilities, it helps the trading as well. So, in the best of all worlds, you get a certain synergy going, your trading is improving and you’re improving. That makes it a noble pursuit.
GO: Excellent comments from you all today. Thanks again for your insights.
AI
