Trading – particularly for a living – is without doubt one of the toughest occupations but also the most rewarding. Just look at the wealth of the top traders in the business! As a result of the sheer number of traders wanting to build their wealth consistently over time I am often asked what it takes to be a successful trader?
The answer to this question is very complex as it takes many skills and attributes, but for those who have heard me speak on this topic will know that I regularly compare trading to professional sports. In fact any performance related field can be equally compared. I just happen to like sports. A lot.
Success as a professional athlete takes the usual well known attributes – commitment, determination, years of practice and development, patience but what really sets the great champions apart is mental strength.
Throughout an athletes career they are all hit with adversity at some point. Periods of bad form, injuries, personal struggles and no matter what they try on and off the field nothing seems to return their good fortunes. It is as if they have become cursed. Goal scorers go through droughts, gridiron footballers fumble the ball, track and field athletes can no longer set personal bests.
As a result these athletes are pressured with negativity, from newspaper headlines, TV commentators, even coaches and team owners suggesting the athlete is past their prime, no longer a “star” and are demoted to lower divisions, benched or even sold to another team. All of these aspects place enormous pressure on the athletes mental state where success is no longer now governed by their talents (they didn’t lose them overnight) but their personal confidence and mental strength. The ability to win again.
As traders our scoreboard is our profit and loss statement. There is no hiding. It’s their in black and white and unlike athletes we don’t still get million dollar paychecks when we hit bad form! Too many losing in trades in a row, one single giant loss or even an extended period without real growth in profitability can begin to shatter a trader’s confidence.
Sometimes this confidence drops through frustration without even the trader knowing it. Slight changes to their trading style, trading regularity, slightly larger positions or wider stop losses or even trading “new” markets that the trader never tackled before can all be examples of trading behavior that reflects a change in the trader’s psyche.
The worst case that results is a drawdown in returns, worse case a total loss of life savings. I have seen it happen and thus it is crucial that a trader is aware of changes in their mental state because tackling these demons is the foundation of success. Being right about a trade and making money are two very different things. There have been many cases in my career where I have been right about a particular view but failed to capitalize on that idea – either through fear of losing money, trading a larger position size than normal and then unable to mentally handle the profit and loss swings, or the most frustrating not taking a profitable trade due to fear of some global issue (like Greece etc) – have led to right ideas not turning into profits.
So what can we do as trader’s to combat these potentially career ending factors?
For my trading team we have a sports psychologist who monitors our performance and mental state to ensure we remain confident and capable in making the right judgment call and not swayed from our disciplined strategy. Our sports psychologist has worked with the Australian Olympic swimming team, the Australian cricket team and many world champions in many fields. He even has professional gamblers as his clientele. The key to the success of working with a professional in maximizing performance (and has little knowledge of the financial industry) is that they are not focused on your trading style but free to hone in on your mental attitude and outlook. Sports psychologists run anywhere between $100-$200/hour – a small price to pay considering the amount of capital trader’s place at risk everyday. There are several specialists in this field that anyone can visit – a simple internet search will find several sports psychologists for the more committed.
The second method which takes no outlay at all is to monitor your trading style through trading statistics. I monitor all our trades through a simple excel spreadsheet that contains everything from position sizing, number of trades in day, differentiated into specific markets and even market capitalization of the stocks traded.
From this I can tell whether there is any significant change in our normal trading strategy that should be a cause for concern. It tells me if we have specific success in trading certain sectors or markets and where we have little or no edge. We correlate the P&L with the overall market performance to ensure that we are not fooled into believing that we have some specific advantage when our profitability is only a function of the market appreciating (a common occurrence in bull markets).
Trading success is born on the ability of finding an edge over the competition and exploiting it over and over. Anything and everything is monitored to keep us from making crucial mistakes even small ones as these can all add up over time to really hinder the bottom line profits.
Anyone with a basic knowledge of excel can structure something like this by inputing as much data as possible about every trade made. It is important to take the time to do this because it is the backbone to longevity in this business. There are no short cuts. There are no magical black box programmes which will make you money with little effort. If there was we would all be rich. And those that say there is are lying. No success in anything comes without hard work. Think of all the hours professional athletes put into honing their skills since they were three years old. Yes, thousands of hours and those that don’t simply don’t make it.
Remember trading is a zero sum game. For every one winner there are twenty losers. So to make sure that you are successful you need to commit and not to just researching markets but every aspect. Think of yourself as your own professional sports team and think about all the support staff that go into running a successful winning team – coaches, trainers, physiotherapists , doctors, nutritionists etc. As trader’s we need that support too to remain competitive.
