Risk Intelligence: The Dirty Little Secret of Successful Traders

Successful traders and investment professionals come in all shapes and sizes. They possess many, often vastly differing personalities and characteristics, have widely differing approaches to finding value, and adopt a broad array of different ways to monetise that value.

In my role as a 'Trader Performance Coach' I have been privileged to have access to many outstanding traders and investment professionals. This leads people to ask me the same question time and again. ‘What is it that differentiates the few extremely successful traders from those many capable individuals who are good, but do not quite make the grade?’

In other words, 'What is their dirty little secret?'

This is not a question which can be answered with just one simple response. Successful individuals have multiple small edges that I believe compound to provide them with one huge edge. Something I call ‘the law of multiple small edges’.

It’s not IQ.

Whislt a moderately good level of IQ matters in trading, I do not believe it is a differtiating factor leading to success. If anything, a moderate level of intellectual intelligence is just a minimum requirement. Emotional intelligence is far more important, however the key delineator of trading success is something slightly different, though closely related to emotional intelligence.

The author Dylan Evans calls it ‘Risk Intelligence’,  he defines as "a special kind of intelligence for thinking about risk and uncertainty". Evans brought this concept into the open with his brilliant book 'Risk Intelligence: How to Live with Uncertainty'

At the root of Risk Intelligence is the ability to estimate probabilities more accurately. Taking this one step further, and applying it to an Investment and Trading context, I see Risk intelligence, as 'the ability to be able to determine, assess and evaluate risks with greater accuracy, and then crucially to monetise these risks effectively'. 

Risk Intelligence is generic across all types of trading styles.

Risk Intelligence works across all domains. From day traders to momentum and price action traders, from relative value traders, to longer-term macro fund-managers.

I meet highly risk averse traders and highly risk tolerant traders who equally display high levels of risk intelligence, and intuition-based traders and evidence-based traders, both of whom can display high levels of risk intelligence.

Likewise, the ability to build a successful system is not just reliant on technical, data or computer skills, the construction must also factor in risk intelligence, as must the running and management of the systems.

On the other hand, there are many examples of 'very smart or highly intellectual' people who lack ‘risk intelligence’. At the root of the ‘Long-Term Capital Management’ catastrophe of the late 1990’s were Nobel prize-winners who were flawed in their understanding of risk. The fatal flaw at Enron, a firm who supposedly hired the brightest and the best, was a complete vacuum of Risk Intelligence.

Risk Intelligence is the ability to ‘thrive in conditions of heightened uncertainty and complexity’.

The ‘Risk Intelligent’ individual is conscious that they will not always win. They are willing to suffer or sacrifice losses, albeit in a limited way. They make room for this in how they work. ‘Risk intelligent’ traders ‘lose well’. One of my favourite trading maxims is 'In trading, the best loser is often the long-term winner’.

This concept is challenging for many people who enter trading. Our Western philosophy grooms us all our lives to win, to come top of the class, to accumulate knowledge, to have answers, to get the best grades. In the Western discourse, failure is not accelerated or tolerated: ‘We must not lose’, ‘we must not fail’, ‘we must not accept defeat’, ‘we must not ‘not have the answer’.’

The ‘Risk Intelligent’  cultivate a mindset which gets past these attitudes. They usurp conventional thinking. This mindset, like Carol Dweck’s 'growth mindset', is a feature of the most successful traders. They are willing to accept defeat as a necessary evil on the way to victory. They are willing to admit they ‘don’t know the answers’. In a complex world, where you only ever have at best a tiny fraction of the relevant information in real time, how can any truly 'know the answer'?

A former trading client, who was also a successful poker player, told me that when he was at the poker table he didn’t believe he was any better at winning than the other players, but when it came to losing, he felt he was ‘far better than most’.

By accepting defeat as a necessary evil, and factoring it into the success equation, he was better able to accept the consequences of bad luck, and better prepared to ride out the negative outcomes of risky plays that didn’t work.

He took this same attitude into his work as an investment bank trader. This attitude contributed to him becoming the top trader in a firm which had several hundred traders and later led to a very successful career in the hedge fund world.

Conclusion

Risk Intelligence is not something we are born with. Like all forms of intelligence, we cultivate it throughout our lives. Some painful early life experiences may even make us more prepared for it. However, everyone can develop and improve their Risk Intelligence. I know as a trader I was lacking in Risk Intelligence in my early years, but my latter and most successful years were marked by far higher degrees of Risk Intelligence. 

Article by Steven Goldstein 

Steven Goldstein is a Performance, Team and Executive Coach who focuses on Risk and Financial Markets people and businesses.

Core to Steven's work is the belief that everyone has the potential, often latent or hidden within them, to surpass where they are now and to grow into what they want to be. His work as a coach helps people to rediscover that potential, to recognise it, to value it, and to leverage it to be better, happier, and more productive.

Prior to becoming a coach Steven worked for more than 20 years as a Rates and FX trader at some of the world’s leading investment banks. See Steven's Full Profile.

If you are curious about how Steven could help you or your business, please email him at info@alpharcubed.com. or call +44 (0)7753 446097. To know more about the work of AlphaRCubed and their broader performance and growth development services, please view their brochure at this link. .

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