Dr Doug "The Head Coach" discusses the psychology of trading and the similarities between coaching the top athletes and the top traders.
How did it all start? (How did you get into trader coaching?)
I played baseball my whole life and through college (I was a catcher). When I graduated, I got a job on trading floor for a proprietary trading firm at the Chicago Mercantile Exchange. They used to hire athletes almost exclusively because they believed athlete's made better traders. Anyways, I worked there for a few years and then a herniated disc in my lower back forced me to leave the floor and trade equities electronically. I did that for about 9 months and then realized I wanted more out life so I left the trading world to go coach baseball - figuring I would be poor but happy. I went to do my masters degree in sport psychology and as I started to learn more about it, I began to bridge the gap between trading and sports and realized the same strategies I was using with athletes as a sport psychology consultant would work well with traders since the emotions, fears and confidence issues seemed to be similar. I put a book proposal together with my friend Shane Murphy and we submitted it to John Wiley. They loved the idea and picked it up on the spot. The title of the book is The Trading Athlete: Winning the Mental Game of Online Trading. From there I got a job at a trading firm in New York as their in-house performance coach, two years later I went in house with a hedge fund in a similar role. Now I run my own consulting business (Edge Consulting LLC) which, consult to multibillion dollar hedge funds, portfolio managers, trading firms and high net-worth traders.
Do you think trading and sports are similar?
Not really. In fact, I find I have to deconstruct the athlete mentality from most traders. You see in sports, you are conditioned to believe that if you fail you just need to work more or try harder to get improved results. In trading this is not always the case and sometimes may even create more trading problems and even worse performance. Also, in sports you are taught to always think positive and to visualize the successful shot or throw. In trading, to be successful you have to think about how bad things can get before you do the trade. You have to know, understand and be comfortable with your downside risk. Could you imagine a golfer before hitting a shot thinking about what he is going to do if he ends up hitting it in the water hazard? That is not what you or I or anyone would call a game plan for successful golf. Fact is athletes and weekend athletes spend their time visualizing success whereas successful traders have to spend their time imagining what if scenarios, disaster situations and how to employ solid risk management. Success in sports is about maximizing the upside, while success in trading is oftentimes more about controlling the downside. On the surface sports and trading seem very similar, but go down a few layers and the mental game is quite different for each.
Do you think athletes make better traders?
Absolutely not, and I have the data to back it up. My dissertation examined that exact question. What I found was that there was no relationship between athletic background and success in trading. I did find some personality traits, however, that indicated a higher probability of success in trading. For example my study found that successful traders tended to score lower in the personality trait of openness meaning they were less influenced by outside opinion.
Why do you think the industry assumes athletes are better equipped to be traders?
I think it is because trading requires mental toughness (competitive drive, handling pressure, losing, working hard, discipline). So people assume because sports require mental toughness, then an athlete should be better equipped to trade. But I think making the assumption that all athletes are mentally tough is faulty. Many athletes are not competitive individuals. Surprisingly, some of the most well known athletes actually experience either a fear of success or a fear of failure. You don't have to dig very deep to realize that many of them play the game praying they don't get the ball when the game is on the line. My point is that even at the elite levels, they deal with some real fear and it negatively impacts their ability to perform. This became very clear to me as a sport psychology consultant working with professional and elite athletes. If mental toughness actually is important to be successful at trading then why couldn't a chess player or musician or video game player be considered "mentally tough." Of course he or she could be but the industry is just so thick headed into thinking one way. It is not much different than how Lewis describes the flawed old scout mentality in Moneyball. The fact is that just because someone looks like a ball player does not mean that they are a ball player. You have to look deeper. Same with trading. Especially with electronic trading.
You have worked with some of the top traders in the country. What do you think they have in common?
First and foremost it is self-awareness. They know who they are and what they are good at and what they are not good at. They consistently do more of what they are good at and less of what they are not good at. You see, trading is really different from sports. In basketball if you are good at dribbling with your right hand, then the other team usually finds that out pretty quickly and they exploit it by covering you on the right side. End result is you are no longer able to do what you are best at. In trading, however, the market has no idea what you are good or bad at and it does not change what it does to gain an advantage over you. The best traders I have ever met have a clear and defined process. They always follow that process. Sometimes the market pays them, sometimes it takes money away from them but they keep doing their process because they know over time, their process works and will earn them substantial money.
What tips would you give new traders about how to overcome the fear of placing a trade/losing on a trade?
Most traders make the mistake of thinking that they have to be "right" with a winning percentage over 80% in order to earn a living as a trader. Not true at all. People have to realize that even the best traders make money only about 53% of the time. So stop trying to be perfect. Just make smart trades and take smart losses.
Is there anything you can single out as the most important thing you would tell a trader to consider before placing a trade?
Calculate each trade's expected value. What is the probability of it working and how much will you make vs. what is the probability of it not working and how much will you lose. If the reward outweighs the risk by at least 2:1, then you can put the trade on knowing you made an objective trading decision. This does not guarantee the trade will work (remember it is a 50-50 game) but if cut your losses and employ this objective strategy consistently then, over time, you will make money trading.
Is there anything you can single out as the most important thing you would tell a trader to consider once they are in a trade?
Constantly ask yourself the following question, "If I had no position on, what would I do"? This simple exercise helps traders take the emotions and money out of their trading decisions and allows them to view their trades objectively. Traders have to remember that the market does not know how much they are up or down so the trader should not be focused on that either especially when making their trading decisions.
Which do you find most common in traders - over trading or under trading? (and why)
This is a tough one but I would say it is overtrading because it is so easy to get involved in the market these days. Access is low cost and geography and information is no longer a barrier. Anyone and everyone from anywhere in the world can open an account and trade. The problem is the simplicity of getting involved gives a false psychological impression that the game is "easy" as well. This is a painful lesson which traders learn early in the game and the frustrating part is coming to terms with the fact that something that looks so easy could actually be so hard to make money at. Learning how to trade is relatively easy and only takes a few months. The hard part is really learning how to think (objective) and act (disciplined) like a trader. Helping people achieve that is essentially what I do for a living.
How badly, do you think, money-focus affects otherwise good traders?
I would say it is easily the number 1 reason for failure in trading. It sounds simplistic but if traders could just see the numbers on the screen as points in a game as opposed to what I will refer to as "Tangifying" (the art of turning unrealized or realized P and L into tangible things like cars, mortgages, rent, etc.) then they would be able to turn their entire trading career around or take it to the next level. Almost every person in the world has a mental number in their head of what is "a lot of money." The best traders I know think in terms of percentages. This helps them focus on making the right trades rather than how much was made or lost on the trade. Teaching this skill to successful traders is what allows me to help them take their game to the next level.
What is the best piece of advice you could give a novice trader in today's markets?
H + W + P = E
Hoping + Wishing + Praying = Exit the Trade.
That simple equation is the difference between success and failure as a trader.
How did it all start? (How did you get into trader coaching?)
I played baseball my whole life and through college (I was a catcher). When I graduated, I got a job on trading floor for a proprietary trading firm at the Chicago Mercantile Exchange. They used to hire athletes almost exclusively because they believed athlete's made better traders. Anyways, I worked there for a few years and then a herniated disc in my lower back forced me to leave the floor and trade equities electronically. I did that for about 9 months and then realized I wanted more out life so I left the trading world to go coach baseball - figuring I would be poor but happy. I went to do my masters degree in sport psychology and as I started to learn more about it, I began to bridge the gap between trading and sports and realized the same strategies I was using with athletes as a sport psychology consultant would work well with traders since the emotions, fears and confidence issues seemed to be similar. I put a book proposal together with my friend Shane Murphy and we submitted it to John Wiley. They loved the idea and picked it up on the spot. The title of the book is The Trading Athlete: Winning the Mental Game of Online Trading. From there I got a job at a trading firm in New York as their in-house performance coach, two years later I went in house with a hedge fund in a similar role. Now I run my own consulting business (Edge Consulting LLC) which, consult to multibillion dollar hedge funds, portfolio managers, trading firms and high net-worth traders.
Do you think trading and sports are similar?
Not really. In fact, I find I have to deconstruct the athlete mentality from most traders. You see in sports, you are conditioned to believe that if you fail you just need to work more or try harder to get improved results. In trading this is not always the case and sometimes may even create more trading problems and even worse performance. Also, in sports you are taught to always think positive and to visualize the successful shot or throw. In trading, to be successful you have to think about how bad things can get before you do the trade. You have to know, understand and be comfortable with your downside risk. Could you imagine a golfer before hitting a shot thinking about what he is going to do if he ends up hitting it in the water hazard? That is not what you or I or anyone would call a game plan for successful golf. Fact is athletes and weekend athletes spend their time visualizing success whereas successful traders have to spend their time imagining what if scenarios, disaster situations and how to employ solid risk management. Success in sports is about maximizing the upside, while success in trading is oftentimes more about controlling the downside. On the surface sports and trading seem very similar, but go down a few layers and the mental game is quite different for each.
Do you think athletes make better traders?
Absolutely not, and I have the data to back it up. My dissertation examined that exact question. What I found was that there was no relationship between athletic background and success in trading. I did find some personality traits, however, that indicated a higher probability of success in trading. For example my study found that successful traders tended to score lower in the personality trait of openness meaning they were less influenced by outside opinion.
Why do you think the industry assumes athletes are better equipped to be traders?
I think it is because trading requires mental toughness (competitive drive, handling pressure, losing, working hard, discipline). So people assume because sports require mental toughness, then an athlete should be better equipped to trade. But I think making the assumption that all athletes are mentally tough is faulty. Many athletes are not competitive individuals. Surprisingly, some of the most well known athletes actually experience either a fear of success or a fear of failure. You don't have to dig very deep to realize that many of them play the game praying they don't get the ball when the game is on the line. My point is that even at the elite levels, they deal with some real fear and it negatively impacts their ability to perform. This became very clear to me as a sport psychology consultant working with professional and elite athletes. If mental toughness actually is important to be successful at trading then why couldn't a chess player or musician or video game player be considered "mentally tough." Of course he or she could be but the industry is just so thick headed into thinking one way. It is not much different than how Lewis describes the flawed old scout mentality in Moneyball. The fact is that just because someone looks like a ball player does not mean that they are a ball player. You have to look deeper. Same with trading. Especially with electronic trading.
You have worked with some of the top traders in the country. What do you think they have in common?
First and foremost it is self-awareness. They know who they are and what they are good at and what they are not good at. They consistently do more of what they are good at and less of what they are not good at. You see, trading is really different from sports. In basketball if you are good at dribbling with your right hand, then the other team usually finds that out pretty quickly and they exploit it by covering you on the right side. End result is you are no longer able to do what you are best at. In trading, however, the market has no idea what you are good or bad at and it does not change what it does to gain an advantage over you. The best traders I have ever met have a clear and defined process. They always follow that process. Sometimes the market pays them, sometimes it takes money away from them but they keep doing their process because they know over time, their process works and will earn them substantial money.
What tips would you give new traders about how to overcome the fear of placing a trade/losing on a trade?
Most traders make the mistake of thinking that they have to be "right" with a winning percentage over 80% in order to earn a living as a trader. Not true at all. People have to realize that even the best traders make money only about 53% of the time. So stop trying to be perfect. Just make smart trades and take smart losses.
Is there anything you can single out as the most important thing you would tell a trader to consider before placing a trade?
Calculate each trade's expected value. What is the probability of it working and how much will you make vs. what is the probability of it not working and how much will you lose. If the reward outweighs the risk by at least 2:1, then you can put the trade on knowing you made an objective trading decision. This does not guarantee the trade will work (remember it is a 50-50 game) but if cut your losses and employ this objective strategy consistently then, over time, you will make money trading.
Is there anything you can single out as the most important thing you would tell a trader to consider once they are in a trade?
Constantly ask yourself the following question, "If I had no position on, what would I do"? This simple exercise helps traders take the emotions and money out of their trading decisions and allows them to view their trades objectively. Traders have to remember that the market does not know how much they are up or down so the trader should not be focused on that either especially when making their trading decisions.
Which do you find most common in traders - over trading or under trading? (and why)
This is a tough one but I would say it is overtrading because it is so easy to get involved in the market these days. Access is low cost and geography and information is no longer a barrier. Anyone and everyone from anywhere in the world can open an account and trade. The problem is the simplicity of getting involved gives a false psychological impression that the game is "easy" as well. This is a painful lesson which traders learn early in the game and the frustrating part is coming to terms with the fact that something that looks so easy could actually be so hard to make money at. Learning how to trade is relatively easy and only takes a few months. The hard part is really learning how to think (objective) and act (disciplined) like a trader. Helping people achieve that is essentially what I do for a living.
How badly, do you think, money-focus affects otherwise good traders?
I would say it is easily the number 1 reason for failure in trading. It sounds simplistic but if traders could just see the numbers on the screen as points in a game as opposed to what I will refer to as "Tangifying" (the art of turning unrealized or realized P and L into tangible things like cars, mortgages, rent, etc.) then they would be able to turn their entire trading career around or take it to the next level. Almost every person in the world has a mental number in their head of what is "a lot of money." The best traders I know think in terms of percentages. This helps them focus on making the right trades rather than how much was made or lost on the trade. Teaching this skill to successful traders is what allows me to help them take their game to the next level.
What is the best piece of advice you could give a novice trader in today's markets?
H + W + P = E
Hoping + Wishing + Praying = Exit the Trade.
That simple equation is the difference between success and failure as a trader.
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