WHAT IS IT THAT THE BEST TRADING AND INVESTMENT PROFESSIONALS DO THAT IS DIFFERENT TO THE REST OF THE FIELD? WHAT IS IT THAT GIVES THEM THAT 'SUSTAINABLE EDGE WHICH ENSURES THEY ALWAYS WIN IN THE LONG RUN?
As a 'Behavioural Performance Coach' the question I get asked more than any other are:
What makes a great trader or investor? In this article I draw on over 30 years experience working first as a professional trader, then as a coach helping traders develop the 'Mindset and Behaviours' needed for success in financial markets. For simplicity I will mostly use the word 'traders' throughout this article, but equally it refers to anyone taking or managing risk in financial markets settings, including investment professionals, quantitative and systematic traders, risk managers, as well as discretionary traders. Whilst this article specifically relates to traders and those engaged at the sharp end of risk-taking, the lessons from this article can equally be applied to people in many professions and roles.
The 'Behavioural' Side of Trading. (Your 'Inner Game').
When it comes to understanding the 'Behavioural Side of Trading' I like to think of the 'Iceberg Analogy', during your hourly, daily, weekly trading activities, you will see and do many conscious activities which are visible and tangible, and which you could describe as your daily duties. Think of these tangible activities as being your 'Outer Game', the actions and activities you engage in to help you achieve success in your trading and investment. This is where you will devote your energy and efforts as you: In the iceberg analogy these represent the visible part of the iceberg, as seen below.
However, the greatest influence on your work is the 90% of the iceberg that is not visible but hidden below the surface. These are 'Non-Conscious' activities. they are there, you just cannot see them, and thus you devote far less energy and effort to addressing them, and trying to improve and enhance them. If you could see the full iceberg, it would look like this.
If we look at it this way, the part of the 'Iceberg' below the surface represents the 'Behavioural aspects' of trading and investment performance. This is the non-consious aspects of trading the intangible aspects which are pulling the strings, swaying your actions, biasing your choices, and subtlely driving the voices inside your heads to make good and bad decisions. This is you Inner Game. - The most successful traders excel in these behavioural aspects of trading, driving consistent sustainable out-performance.
I use a simple metaphor, 'The House of Trading Mastery' to emphasise what is meant by the your 'Inner Game.' - In this context, it is the unseen and intangible aspects of trading, such as temperament and mindset, emotions and ego, and what I term the 'Human Operating System'. Your 'Inner Game' is the
underlying foundation of everything you do in your trading, a strong 'Inner Game' supports a strong 'Outer Game'. The 'Outer Game' being the more tangible aspects of your trading which you would see. or could describe if you were to relate the activities you do in your work to someone. Successful trading requires a strong 'Outer Game' and a strong 'Inner Game', however your success will ultimately be down to your 'Inner Game'. Get that right, and the strong 'Outer Game' will do the rest for you, neglect it, and the 'Outer Game' will fall apart. - The following diagram highlights this Metaphor.
Traders tend to spend virtually all their time and focus on the 'Outer Game', but very little time and energy is expended on developing their 'Inner Game'. yet it can be developed and very successfully. Towards the end of this article, I have highlighted some examples of how our own 'Coaching Programmes' have supported traders to develop this aspect of their trading, with very powerful results.
The 10 Behavioural Traits of Highly Successful Traders and Investment Professionals.
All traders start out with the best of intentions, however too often their focus becomes misdirected, with too much attention spent looking at achieving short-term goals or projecting themselves and not enough focus spent
looking at the process and reflecting on that. For the trader who wishes to develop themselves toward adopting the attitude and mindset needed for success in the financial markets, I would suggest 'aiming' towards a goal of trying to implement, practice and incorporate the 10 traits within their general approach to their work. There is no hierarchy to the traits, and in many cases, the behaviours and practices associated with one trait, help to re-enforce another: The ultimate goal of all these traits is to help the trader develop their 'Inner Game', and improve their 'Outer Game'. In doing so one will soon find that they are better able to rides the waves of uncertainty, complexity. and non-constant data which throws itself at you, makes markets appear so random, and tests your very sense of self-worth to the core.
Trait 1) Successful Traders Learn from their Mistakes.
Most successful traders have been through a painful learning process, usually many times over.
Whilst to a degree all people learn from their mistakes, successful traders seem to learn better than others. Whilst those who are really successful keep on learning, never ever thinking they ‘know it all’. – In trading; the moment you think you know it all, pre-empts the moments when you find out that you don’t.
Possibly the most successful hedge fund trader of the past few decades, Ray Dalio, founder of Bridgewater Associates, emphasises this aspect of trading into the way he works, and has embedded it into the culture of the business he founded. Dalio believes that mistakes are the greatest learning tool we have and at Bridgewater it is a key principle that ‘it is acceptable to make a mistake, but never acceptable not to learn why or how you made the mistake’.
Helpful behaviours to support development of this trait: Keeping records/journals of actions, thoughts and feelings. Reviewing and evaluate actions and behaviours. Be willing and open to seeking and receive feedback. Practice developing clarity of mind and the ability to objectively assess your own behaviours. Develop abilities for objective thinking and reflection. Formulate a growth and continual development plan. Monitor growth progress and development.
Trait 2) Love of Trading and a Competitive Will to Win.
The most successful traders love trading, they have developed a real passion for it. There is not much
chance of being successful as a trader if you don’t have a strong desire and passion for trading. – Don’t get me wrong, most people get into trading for the money, however at some point this transforms into a real interest and a passion. – When I ask successful traders what is it that motivates them to continue to be a trader, rarely is it the money that is mentioned; more often it’s a love of the job, and various other aspects that go with that.
Helpful behaviours to support development of this trait: Developing one’s self-efficacy. Immersing oneself in learning, training and personal development. Clarity over long-term goals and objectives. Spend time and with other people in the industry who are passionate about trading.
Trait 3) Trading Style Congruent to a Person’s Personality and Character.
The top traders have a trading style suited and congruent to their personality and character, it is a style which they have molded around their own particular strengths, and which works to offset weaknesses and flaws they possess.
It is unlikely the novice trader is going
to start with the same style and approach to trading that they will
eventually settle down with. At first they are likely to adopt the style
of their teacher, trainer or mentor, however over time they will refine
and alter it to fit to their character and personality.
To
achieve this one must have a high degree of self-awareness, including
the ability to achieve honest self-appraisal and reflection. This can
take many years, and a requires a high degree of honesty, something not
always easy when one desires are telling is driving a person in a
direction which may blind them to their reality.
In my work with traders
I have pioneered the use of ‘Risk Profiling’ to help traders better
understands their personality traits,
and the style and behaviours that their personality is most suited to.
One of the biggest problems traders have is when they are using an
approach or style which is not best suited to their personality. I
compare it to an athlete who chooses the wrong event for their body
type. I find that most successful traders are employing a style an
approach which suits their personality and thus gives them a defined
edge they can work. The consequence of this is that traders of all types
can achieve success, whether they are highly risk-adverse, highly
risk-seeking, logical and methodical or intuitive and emotional.
Helpful behaviours to support development of this trait: Conscious alignment of approach to suit strengths and allay weaknesses. Develop mindful awareness of one’s self, character and behaviours. Willingness to seek and receive feedback. Appraisals/personality Tests/ Risk Profiles. Set goals to include congruence to strengths and character traits. (
View this recent webinar, which was a collaboration between myself and Geoff Trickey of
PCL Ltd, creator of the Risk Type Compass tool)
style which they have molded around
their own particular strengths, and which works to offset weaknesses and
flaws they possess.
Trait 4) Reduction of Anxiety and Stress.
When trading or investing, one can seem to do everything in accordance with previous experience
and rational analysis and still price action can do the complete opposite of what one would expect. That is because financial markets are an example of a ‘complex system’. A ‘complex system’ is one of shifting dynamics, partial information, and non-constant data. Within a complex system one only understands situation retrospectively. Problem-solving requires ‘probing, sensing and responding’. However, this is often temporary as the situation changes, and problem solving needs to be re-calibrated by further ‘probing, sensing and responding’. Those who operate within ‘Financial Markets’ adopt a problem resolution process of this nature. - ‘Complex Systems’ are not the domains of ‘Professional Experts, Technical Specialists, or ‘Scientists’, as the LTCM disaster of the late 1990s highlighted all too well. Rather, success in ‘Complex Systems’, requires adopting a ‘behavioural and emergent approach’, it is the domain of the highly skilled and capable. In financial markets, emotional intelligence, spatial awareness, probabilistic thinking, and behavioural abilities all come to the fore, as much as, if not more, than, intellectual intelligence.
Existence within a complex system creates a huge amount of anxiety and stress, but that is part of the territory, the very nature of trading requires one to immerse themselves in uncertainty.
Anxiety and stress affects people in different ways and at different times; it has a distorting effect on the way we see and perceive the world and our immediate environment, and alters our ability to make sound judgments, and appropriate decision. Successful traders will have developed various tactics which enable them to reduce anxiety levels. This will include preparation and planning of trades, reducing the need for ‘seat of the pants’ trading, or if that is there style, ensuring they are appropriately engaged for ‘seat of the pants’ trading. They also manage their personal resources, such as time, physical and mental energy, to help stay on top of the market and reducing the likelihood of ‘rushes of blood’ to the head.
However, keep in mind that complete removal of stress and anxiety should not be an aim. Stress serves a purpose; it keeps traders alert to threats, danger and opportunity and helps one’s creativity to flow. There are times when trading at very low stress levels can be highly unproductive and lead to ‘trading with abandon’: This sort of behaviour can sometimes be seen when a trader has had a good run, and is a major cause of traders giving back profits repeatedly. Some traders will take a break from trading after a good trading run, in order to avoid just this situation.
Helpful behaviours to support development of this trait: Ability to be objective about one’s self. Engage in activities which clear the mind; physical and mental activities. Keep an inspirational reminder article or object present to ground you and break harmful/negative thought process. Make time away from trading. Talk to people, do not lock yourself away. Share your thoughts and feeling with a sympathetic listener, close friend, spouse or partner. Find ways to suspend self-judgement. Write your thoughts and feeling in a journal/diary. Learn to read bodily cues and signals.
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To find out more about participating in the exceptional Alpha R Cubed 'Behavioural Performance Coaching Programme', used by leading Hedge Funds and Investment Banks, email info@alpharcubed.com.
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Trait 5) Humility and Humbleness: Successful traders curtail their ‘Ego’ and ‘Pride’.
How does one do justice to such a
huge topic in just a few short paragraphs? Just about every major
story of
Financial Market excess and collapse has, closely entwined in its narrative,
tales of excessive egotism and hubris: The collapse of Lehman Brothers, the
fall of LTCM, the Enron scandal, the decline of Amaranth Advisors; the largest
ever hedge-fund failure. Whilst these are clearly examples on a much larger
scale, the twin dangers of ego and excessive pride affect most traders at some
time: I have seen people’s ego’s and pride get them into some horrendous
trading messes, and I myself have not been immune to this happening more times
than I perhaps care to admit.
The opposite of Egotism and
Pride, in this sense, are Humility and Humbleness. These two traits are not
ones that the common media depiction of successful traders as ‘Master of the
Universe’ would have us recognise. However, these are words that I associate
with many of the most successful traders I know.
One of the greatest errors many
traders commit is to allow their trading and their beliefs or views on the
market to become entwined with, and an extension of, their egos. The same can
be said with regard to ‘pride’, though closely related to ego, pride is
slightly different, and though considered a positive emotion, excess pride
(hubris) can be a major impediment to successful trading. It is vital that a
trader can admit they are wrong, capable of being wrong and that they have
limitations and flaws: Failure to admit to being wrong, or even being capable
of being wrong, can lead to traders somehow trying to exert their will over the
market or holding onto positions rather than crystallize a loss.
As an excellent example of humility and humbleness, I highly recommend listening to the following interviews from the chatwithtraders podcast with Peter Brandt, a veteran trader with an exceptional track record. Interview 1 can be heard
here, an additional interview can be heard
here.
Helpful behaviours to support development of this trait: Keep sight of
your original goals, this includes recalling that ‘Trading is not about being
right or wrong, it’s about doing things right and making money’. Listen well
and be willing to seek open and honest feedback. Ensure you look into and learn
from mistakes. Try and be an optimalist and not a perfectionist; an optimalist
admit to flaws, failings and errors, their working style is flexible. Be
mindful and conscious of not imposing your ego on people. Avoid boasting and
building your-self up to other people. Listen to people, ask questions, try not
to enforce your views and opinions on people. Find ways to suspend
self-judgement. Avoid criticizing and judging other people. Practice ways to develop
objective thinking and reflection.
It is hard to find a book on
trading that does not stress these virtues. Yet actually following through
and
exercising these virtues within one’s trading is one of the hardest things to
achieve on a regular basis. All the hard work and preparation which goes into
one’s work can be lost in a few moments of ill-discipline. Mike Tyson put it
correctly when he said, "Everybody has a plan until they get punched in
the mouth."
Successful traders place
significant emphasis on these aspects of trading, they think through what they
do thoroughly, planning and preparation help build a solid foundation which
allows them to exercise the necessary patience and discipline needed; it also
helps facilitate a reduction in uncertainty and thus helps reduce anxiety and
stress levels. Let us not however imagine that successful traders are anything
like perfect in this area, they aren’t, however many of them will display
higher propensities to display these skills than the majority of traders. It is
nonetheless this propensity to perform these skills and attributes, which means
that when opportunity or even luck present themselves, they are better prepared
to take advantage, and when unfavourable outcomes occur, they are more resolutely
able to deal with these situations. As the great South African golfer Gary
Player once famously said, ‘Luck is what happens when preparation meets
opportunity’.
Helpful behaviours to support
development of this trait: Keep sight of your main goals, this includes
recalling that ‘Trading is not about being right or wrong, it’s about doing
things right and making money’. Invest time to develop appropriate behaviours,
invest time in putting those behaviours into practice. Review your progress
toward development goals. Develop a structure around your trading. Develop a
strategic perspective, ensure you are consistent in applying the tactics needed
for the strategy.
7) Respect for Risk and Uncertainty.
Successful traders have a huge
respect for risk and an appreciation for the dangers of uncertainty.
There is a
subtle difference between the two: Risk is a subset of uncertainty, one can
assign a value to risk, but not to uncertainty. As an example; if the market
dropped tomorrow and my position was stopped out, then I would lose $X: that is
my risk. However, I do not know if the market will drop tomorrow or by how
much, and if so whether it will hit my stop: that is uncertainty. Some people
try and price uncertainty, which they mistake for risk, however, it is hard to
truly put a price on uncertainty. This point is admittedly contentious and some
may debate the simplistic definitions, however I do believe that attempts to
price uncertainty typically end in disaster. People thought they had valued
uncertainty correctly at LTCM, and the lessons of this were quickly forgotten
as people also thought they had correctly priced uncertainty ahead of the
Global Financial Crisis.
Top traders embrace risk, and
respect uncertainty, they know crucially that they do not know what comes next
and are at best making educated guesses. Successful traders are not gamblers,
the only casino games successful traders usually play is poker, they usually do
not see poker as gambling, in poker they have the ability to shift the odds in
their favour, in all other casino games, the odds are too heavily stacked
against them. There has to be positive expectation of a favourable outcome, not
merely an assessment of market direction.
Helpful behaviours to support
development of this trait: Structured approach to Trading, Developing a
strategic perspective. Develop a rule base for risk. Plan trades and include
risk in trade evaluation. Develop an approach for assessing risk/reward. Ensure
you are consistent in applying the tactics needed to enforce the strategy.
Evaluate your performance in risk assessment. Monitor your progression.
Trait 8) Develop effective Risk/Money-Management Practice.
Successful traders see their
trading as a business. – It would be foolish to enter into business
under-
capitalized and without sufficient liquidity. Many do, but that is
tantamount to a gamble, some are lucky enough and survive, but they owe their
survival to good fortune. – Good fortune can only however be stretched so far,
running a business requires careful and tight management of costs and expenditure;
prudent business owners do not put all their ‘eggs’ in ‘one basket’. – Trading
should follow the same principles.
Successful traders devote a lot
of time to these issues, they know that failure to adhere to basic principles
of money management leads to ruin. It is surprising how many traders ignore or
forget the basic principles of money-management. Simple acts like; not placing
stops, removing stops, or placing too large a trade, can cause losses to
multiply and greatly increase the risk of failure. Taking profits too quickly
means they fail to cover the costs of their losses and many traders focus on
how much they believe they can make, and forget the basic principles of
assessing how much they could lose. Some traders run their trading on Martingale
principles, something which only has to fail once to lead to wipe-out.
Money-management is the
unexciting, somewhat boring aspect of trading, however this is so crucial and
important that it should carry at least equal weight with other key aspects of trading.
In the aforementioned podcast interview with legendary trader ‘Peter Brandt’, Brandt, who has
achieved a stunning return of over 40% during an 18-year period up to 2012,
said that he sees himself as no more than ‘a glorified order enterer’. Too often people put their
energies into assessing market direction, and where to enter and exit the
market, they completely ignore or give scant attention to money-management. The
'House of Trading Mastery' model below emphasises the importance of ‘Money and Risk
Management’ within a traders 'Outer Game'. It occupies a single Pillar alone, and yet gets relatively scant attention.
Helpful behaviours to support development of this trait: Have a well-developed structured approach to trading. Developing a strategic perspective to your trading. Develop a rule base for risk. Plan trades and include risk in trade evaluation. Develop an approach for assessing risk/reward. Ensure you are consistent in applying the tactics needed for the strategy. Include this element of trading in your personal development plan. Understand the need to size trades according to risk of loss.
Trait 9) Successful Traders focus on making money, not being right.
Successful traders realise that they are not in control of the market (uncertainty), they view the
market as a force of nature without an agenda. The only thing they can control is their own actions, activities, behaviours and emotions. The top traders know they are not infallible. All humans have biases and limits to cognitive abilities, anyone is capable of being swayed or easily distracted and everyone’s personality is different and brings different influences to bear on their decision-making. However, successful traders work around these factors, they accept that losing is part of winning, and they know their job is to make money, not to be right. It is another of the paradoxes of trading: Successful traders can lose money, get markets wrong, but still consistently come out on top. Failing traders can have wins, get markets right, and still consistently under-perform.
Successful traders apply focus and concentration commensurate with what is needed: They will display realism not fantasist ideas hoping that markets turn their way, or bemoaning some sort of conspiracy. Top traders are willing to be flexible and make the leap to the other side of the trade if they realise they are wrong, rather than stubbornly stay with a trade to prove their rightness, and satisfy their ego. They will stay in the here and now, not dwelling on past victories or defeats, or celebrating as of yet unearned future victories. Importantly they develop a strong relationship with losing, some of even attested to me that they ‘love’ their losses. It makes them easier to accept, particularly if they can contextualise them as just part of the process of winning.
Helpful behaviours to support development of this trait: Focus on long-term goals and objectives. Focus on strategies and tactics to achieve long-term goals. Reviewing and evaluate actions and behaviours used within your activities. Willingness to seek and receive feedback. Step back from the fray. Practicing ways to clear mind and develop objective thinking and reflection.
Trait 10) Achieving Balance and Perspective in Life.
Successful traders try to keep their external lives in balance and uncomplicated. They have a holistic
view of their lives, whereby trading is a part of their lives, if the other parts of their lives are out of balance or synch, then this will affect their trading, and likewise when their trading is out of balance, then this can have an effect of the other parts of their lives.
Many traders will look to remain fit and healthy and avoid doing things to excess. Likewise, they try to keep family matters as uncomplicated as possible. Their own investments tend to be safe and relatively uncomplex. All of this helps ensure a clear and uncluttered mind in order to focus attention and resources on trading.
It is easy to forget the human element to trading, as people try to add further to their tools, electronic systems, instruments and technical capabilities. However, it is our human aspects which make us successful, the great British Army Officer Field Marshal Montgomery, who achieved such success in the second world war, once said, ‘Man is still the first weapon of war’, this is the same in trading, our humanity and our mind’s capabilities, despite its limitation and flaws, are significantly more powerful than the most advanced computers.
Helpful behaviours to support development of this trait: Step back from the fray. Make time in advance for other interests and responsibilities. Practice ways to clear the mind and develop objective thinking and reflection. Focus on long-term goals and objectives. Focus on strategies and tactics to achieve long-term goals. Engage in activities which clear the mind; physical and mental activities. Keep an inspirational reminder article or object present to ground yourself. Talk to people, do not lock yourself away. Share your thoughts and feeling with a sympathetic listener, close friend, spouse or partner.
Developing your own Behavioural Edge (Your Inner Game).
The only true edge one can have in trading and investment, which does not involves stepping into grey areas, is a 'Behavioural Edge'.
Our own work at Alpha R Cubed has demonstrated how developing people’s cognitive and behavioural abilities can give them a 'Behavioural edge' which can make a huge difference to their trading performance. Our coaching and consulting helps people and teams to leverage their behavioural strengths and develop superior cognition to improve how they engage with risk and monetise the uncertainty within financial markets. The table below highlights some examples of how this can help make a huge difference to performance. These are just some examples from bank and hedge fund clients where performance improvements have contributed to multi-million dollar improvements in performance.
The above numbers only tell part of the story, client feedback tells another. The following is from Simon Horwood, formerly Co-Head of Trading for Global FX and Short-Term Rates at Credit Suisse. It is part of a response to an internal inquiry within Credit Suisse about the success of the coaching with some of his traders:
Wrap Up.
People often think the likes of Warren Buffet, Paul Tudor-Jones, Ray Dalio, have some super source of informational advantage, however every bit of information they get is available to the rest of the world. The difference is that these people are 'Behavioural Masters', they execute everything that they do a little better and a little smarter. Behavioural Mastery is vital for successful trading, probably more so than any system, product, analytical tool or service, yet is so undervalued in terms of people's priorities. Developing these traits should be as important, if not more so, than the method you develop, your money management process, and your information and subsequent analysis: Behavioral mastery underpins all these factors.
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