Dr. Doug's Blog

  • Hedge Fund Risk Aversion: The Calendar Year Effect

    Dec. 6, 2014 Comments

    Portfolio Managers at long short discretionary hedge funds are Risk Averse (rather than Risk Seeking) in December and January.

    1) The calendar year ends on December 31st for nearly all of the long-short discretionary Hedge Funds. This means that whatever a Portfolio Manager’s YTD PnL is at the end of that day, is what his or her final payout for that year is going to be based.

    2) The closer they get to Dec 31st, the more "real" the money is to them. If they are up then they don't want to risk it. If they are down or flat AND, particularly, if they have deferred or claw backs in place from the fund, then why would they put that money at risk so close to the finish line when they finally get it?

    3) No PM wants to start January down money (in the hole) because it becomes incredibly difficult (psychologically) to trade the rest of the year with a "monkey on your back." Plus if they start off down too much, they may get their capital cut which is the slow death version for a PM who now has to make back the same dollar losses but with less capital to do it.

    Now that I identified why a PM is much more likely to be Risk Averse during December and January, let's consider if it changes whether the PM is Up, Flat or Down coming into December. Based on my applied coaching work, I have found that it does not change in any of these three scenarios.

    1) PM is Up.

    2) PM is Flat.

    3) PM is Down.

    ALL 3 have the same outcome: Increased Probability of Taking Less Risk in December. 

    And here is why.

    PM is Up for 2014

    A PM who is up money right now does not want to risk giving it back because the psychological impact of giving profits back in a few short weeks after a full year of work is devastating. This creates an awful risk/reward situation so they end up taking less risk in the markets during this time.

    PM is Flat

    A PM who is flat right now doesn't want to risk losing money because even if he makes a little money back he is probably just covering some of his costs that were accumulated throughout the year. But if he loses money, he starts 2015 in the hole and has to make it back before he can get paid for 2015. (I.e finishing down 2% in 2014 means if he makes 7% in 2015, he will only get paid out on 5%, after expenses, in Jan/Feb 2016)...and that is a long time to wait to get paid - especially if you have a family to support.

    PM is Down (has two viable scenarios)

    a) If he is down a little, say 1.5%, then the risk of losing another 1.5% and finishing the year down 3% is much worse than the benefit he gains by making 1.5% and finishing the year flat. This is because of what is known in the Psychology field as Weber’s Law, which states that the perception of a situation changes even though the ratio is the same. I have found this effect to be magnified by two other variables: (1) if there are clawbacks in place that the PM is waiting to collect and (2) having to make back a loss of 3% before you get paid again is psychologically a lot worse than only having to make back 1.5% (which is viewed by a PM as ‘close to flat’ anyway).

    b) If he is down a lot and close to his yearly stop out level, he is probably worried he is going to get fired so you would think he should be incentivized to just "go for it" because he has nothing to lose and everything to gain at this point. But there is another side to this, especially if he plans on having a future career in this business. 

    If he swings big and misses, he is unemployable at another hedge fund because he will have earned the reputation as an irresponsible risk taker who strayed from his process and decided to throw a "Hail Mary" pass to try to win the game on the last play. No risk manager wants that guy on their team because even if he DOES complete the Hail Mary pass - while he made back his losses this time - everyone knows throwing Hail Mary's is not a sustainable investment strategy. In fact, given a larger sample size, it will more likely lead to blow ups and rogue trading catastrophes down the line.

    Process Leads to Profits,

    Dr Doug

  • 53 Seconds - That is what a Hedge Fund Portfolio Manager Can Learn from the World Cup

    July 15, 2014 Comments

    53 seconds is about how long it will take you to read this post.

     

    53 seconds is also the amount of time an elite football player touches the ball in a 90-minute match. (According to a study that looked at 30 French League 1 matches over a period of two seasons, see www.scienceofsocceronline.com)

     

    For the purpose of this post, please don’t get distracted by if it is exactly 53 seconds. The point is, it is not 3 minutes. But, for argument sake, let’s suppose it was 3 minutes (180 seconds). That would mean in a 90-minute match, each player touches the ball just 3% of time.

     

    When I think about that, it makes me wonder what differentiates failure from success in elite football. Is it the 1% - 3% of the time that each player touches the ball or is it what the player is doing, thinking about and focusing on during the other 97% - 99% of the time during the match?

     

    The outcome (what the player does when he touches the ball) is what we celebrate because that is when goals, passes, headers and saves occur. If 97% - 99% of his time during a match is spent NOT touching the ball, greatness must be determined by his process (what he does when he is not touching the ball.)

     

    As a Portfolio Manager, what percent of your time each day is spent executing trades compared to watching the markets, doing research, charting, thinking about positions and ideas? My guess is the ratio of time spent executing relative to time spent not executing is remarkably similar to that of the football data.

     

    And yet, you celebrate the execution (1% - 3% of your efforts) because that is when money is made and lost but the process (97% - 99% of your time) is what will define your success.

     

    Having a background in Sport Psychology and working as a Peak Performance coach to Portfolio Managers at Hedge funds, I immediately see the similarities between what it takes to be a great football player as well as an elite PM.

     

    Greatness in both, requires the following:

    • Continuous focus during the entire match (trading day) so that you are always in the right place at the right time if and when the window of opportunity (trade setup) appears for you to strike (execute your trade).

     

    • Having the patience to watch the markets (game play) develop so you avoid getting in too soon or worse, over trading.

     

    • Having the self-discipline to not give into your natural urge to do something because you feel like you need to make something happen.

     

    • Focusing on your process and having faith that, over time, great process leads to great results.

     

    How can you cross the bridge between putting some or all of these concepts into action?

     

    Solution

    Think about your experience playing a sport and ask yourself questions like:

     

    -  “When I was playing (name of sport), what did I do to stay focused (or patient or disciplined) during the game?”

     

    - “How many hours did I spend practicing (working on my process) compared to the number of hours I spent executing in a game?”

     

    I have found that getting you to relive your experiences as an athlete opens the door to helping you apply those same mental skills to your advantage as a portfolio manager so you can continue to Dare to be Great!

     

    And if you can learn anything from the World Cup, it is that winning is less about what you do when you touch the ball 1% - 3% of time and much more about what you are focusing on during the other 97% - 99% of the time.

     

    Process Leads to Profits,


    Dr. Doug

  • Mental Impact of Low Vol Markets

    July 9, 2014 Comments

    Here is a simple flow chart I put together: When a PM gets frustrated in a low vol market, that frustration can lead to several destructive risk taking behaviors. 

    The solution: Focus back on your Process and keep things simple.

    Trade well,

    Doug

  • Shorting: Understanding the Psychological Barriers

    June 17, 2014 Comments

    - We are faced with consistent historical evidence that, over time, markets go up.

    - Buying is a natural occurrence for us. We are consumers of food, goods and resources.

    - On the other hand, Selling something we don’t even own is not a natural experience.

    Irrational Rationalization #1

    If I go long and it goes down (and I hold it), then at least I still have something to show for it.

    Irrational Rationalization #2

    If I go long and it goes down, it eventually will go back up.

    Irrational Rationalization #3

    The price of anything cannot go below zero so the closer it gets to zero, the more it can go up and less it can go down.

    Irrational Rationalization: #4

    When I go long, I have an emotionally infinite reward and a quantifiable (finite) risk.

    Irrational Rationalization#5

    When I go short, I have an emotionally infinite risk and a quantifiable (finite) reward.

    "Process Leads to Profits."

    Dr Doug

  • 3 Reasons Why Women Make Great Portfolio Managers

    May 28, 2014 Comments

    As a Peak Performance Coach, my number-one priority is helping my clients improve their performance. Wall Street talks a lot about gender equality, but I think that’s sort of dumb, because the markets (at least the last time I checked) do not pay you any more or less because you’re a man or a woman. The markets pay those who make money. Here are the three main reasons why I think Women Make Great Portfolio Managers:

    1. Men let pride/Ego get in the way of their decision-making processes; women DON'T.

    Ask any guy the following: “Before you had a GPS, when you got lost while driving, would you stop and ask for directions?” Virtually every guy out there will quickly answer, “No way.” Yet almost every woman will respond, “Of course I would.” For men, being lost or confused triggers some kind of territorial, caveman-ego thing that makes us want to solve the problem on our own rather than show any sign of weakness by asking for help. It’s not our fault. We are just wired that way.

    Therefore, to avoid driving around aimlessly for hours, we have to recognize when we’re becoming ego-driven and make a conscious effort to stop ourselves and make a correction. That means expending a lot of mental energy just to be able to get to the same place most women would have been from the start, quite naturally and effortlessly.

    From a trading perspective, this could mean women are less likely to trade for revenge and turn one bad trade into two, three or four, whereas men might do that—just as they would choose to drive around for hours getting more lost, hoping things work out. Can you say “rogue trading”?

    2. Self-awareness is the single most important characteristic among elite portfolio managers.

    Many women keep diaries. I don’t know why. I am a guy. For whatever reason, we just don’t do stuff like that. Have any of you guys ever written in a diary about your emotions, friendships, relationships and feelings just because you felt like doing it? Yeah, that’s what I thought. And if you did, I am pretty sure you wouldn’t admit it.

    The single most important part of my Peak Performance Coaching practice is requiring my clients to keep a daily trading journal. I work with the PM to create a customized list of questions to answer each day about his or her trade ideas, game plans, trade sizes, what they did well, what they did poorly and so on. Then I hold them accountable by having them email their responses to me each and every day.

    The journaling process is similar to an athlete watching game film so he or she can learn from their mistakes and continue to improve their performance. It’s not fun, but it’s effective, because in the end, athletic greatness is about discipline, and so is great trading. My clients constantly tell me how valuable they find this daily journaling. It helps them to organize their thinking. It keeps them on top of their trades. It reduces the number of sloppy trades they make. It helps to decrease the amount of time they stay in a slump when it happens occasionally throughout the year. It also keeps them in the “Zone” longer—improving their risk management by helping them get bigger in their highest- conviction trades and smaller in their lowest-conviction ones.

    3. When men get into arguments, they throw punches or start wars. Women pause, reflect, plan and then unleash well-calculated mental warfare.

    My 12-year-old daughter told me that when her younger brother makes her mad, instead of hitting him (which she realized results in his hitting her back harder), she has found that she can hurt him more by just saying mean things to him. Look at that—12 years old and she is already on her way to becoming an expert in mental warfare! She didn’t go through any secret military training to learn this skill; it came naturally and intuitively to her. In your world, the market is frequently telling you that you are wrong and taking money away from you. The automatic male response is to get angry and fight back by “trading for revenge.” This is not the case for women. When the market proves them wrong, they will get upset just like the men, but instead of trading for revenge, they tend to quickly cut back their risk. Then, once they have done damage control and before they make their next trade, they take the time to reflect on what happened, why it happened, and what they will do differently the next time.

    Process Leads to Profits.

    Dr Doug

  • How Should a Portfolio Manager Deal with Range Bound Markets? By Thinking Like a Backup Quarterback.

    May 19, 2014 Comments

    Backup quarterbacks know that when they get the call to come off the bench, they have to be ready, in a moment’s notice, so they can deliver results.

    Trading or managing a portfolio in a range bound market is a frustrating and mentally grueling experience (similar to that of being the backup quarterback). These markets can easily cause the best traders to get sloppy, bleed out PnL and lose sight of their process.

    To deal with this, you have to Think Like You Are the Backup Quarterback.

    Here are six strategies you can put into action

    1) Avoid complaining or listening to others complain. That type of behavior is destructive.

    2) Be productive with your conversations and thoughts by stating/documenting your observations rather than your opinion.

    3) Become a master student of the game and fill your time by studying it and thinking about it rather than just staring at the screen (field) or worse yet, trading out of boredom, frustration or anger.

    4) Be willing to miss out on that first breakout but also be ready to take action so you don’t end up waiting for over-confirmation and miss the window of opportunity – in other words, you don’t want to still be warming up when the ball is in your hands.

    5) Stay healthy by keeping your sizing right. Your positions should be small enough so that the PnL swings do not keep you up at night worrying...and yet be big enough so that they keep your attention so you don't get complacent.

    6) Recognize when you are becoming complacent or trading out of fear so you avoid putting on trades outside of your core process.

    Four examples of some of the best backup quarterbacks in history.

    Frank Reich
    • Had only 20 starts in 13 years in the NFL
    • In 1993, he got called off the bench in a playoff game vs. the Oilers
    • He led the Bills to the largest comeback in NFL history by coming back from being down 32-points and winning in overtime

    Jeff Hostetler
    • In 1984, he was the backup quarterback to Phil Simms
    • For the next six years, he didn’t play much
    • In 1990, Simms broke his foot and Jeff came off the bench to finish the season
    • Jeff led the Giants to beat the heavily favored Bills in Super Bowl XXV

    Jim Plunkett
    • Heisman trophy winner
    • Won Rookie of the year in his first season with the Patriots
    • Next six years didn’t do well and was traded to the Raiders as a backup QB
    • For the next two years, he barely played
    • In 1980, starting QB, Dan Pastorini broke is leg and Jim came off the bench to take over
    • Jim led the Raiders to win Super Bowl XV
    • In 1983 he was again called off the bench to take over for Marc Wilson and Jim led the Raiders a second time to win Super Bowl XVII

    Earl Morrall
    • Earl was the backup QB to Bob Griese
    • In 1972, five games into the season, Bob broke his leg
    • Earl came off the bench, started, and won the next 11 games

    "Process Leads to Profits"

    - Dr Doug

  • Loss Aversion - Is it really 2 to 1?

    Feb. 6, 2013 Comments

    In the behavioral finance world or behavioral economics or psychology economy (whichever label you prefer), the concept of Loss Aversion is well known and accepted.

    Credit is given to Amos Tversky and Daniel Kahneman for convincingly demonstrating that human decision making, when it comes to money, is inherently flawed.

    Among many other things, one aspect of their research showed that people acted differently towards profits than they did towards losses.

    More specifically, that for every $1.00 a person losses, they feel the need to make $2.00 to equally offset the emotion induced by the loss.

    As a result, the famous term "loss aversion" and 2 to 1 ratio were born.

    But is it really 2 to 1?

    More importantly, is the ratio 2 to 1 among elite performers?

    I do not believe this is the case. Let's look at the Lakers, Kobe Bryant, for example.

    Kobe has been in the NBA for 16 years and has an average free throw percentage of .838 (83.8%)

    If we put him on the line and asked him to shoot 10 free throws, what would his loss aversion ratio be?

    If he misses the first basket, how "bad" do you think he would feel? And if he makes the second and third basket, how "good" do you think he would feel? 

    Framed, this way, you can see how his “good” feeling may not be so high; yet his “bad” feeling would be extremely high and I believe it would take more than making 2 baskets in a row to offset the "bad" feeling he got from missing his first one.

    In fact, it should take making 8-9 baskets in a row to offset the one he missed. Why? Because as a professional basketball player with career average 83.8% free throw percentage, he EXPECTS to make many more shots than he misses - exactly 8.38 out of 10.

    So what about the elite portfolio manager?

    Again, he has a proven track record of success and profitability (just like Kobe) so he EXPECTS to make money over time.

    This is why I don’t believe his loss aversion ratio is 2 to 1 like the average person who was part of Kahneman and Tversky’s research.

    Instead, I have found that it is greater than 5 to 1 and even more interesting (as my graph above shows) this ratio increase at an increasing rate the longer he goes without making money.

    As a trading psychology coach, this is critical for me and my client to understand so that we can take proactive measures in preventing him from losing objectivity in his trading process and falling prey to destructive trading behaviors like trading for revenge, over-sizing trades, rushing into trades and not sticking to stop losses.

    Trade well,

    Dr. Doug

  • H + W + P = E

    Jan. 8, 2013 Comments

    Understanding your own trading psychology is critical to being a successful portfolio manager. 

    Are you focused on trying to make money? Or are you more focused on trying not to lose money?

    The truth is that making money is the easy part. It is keeping it that is so hard.

    Statistically, you are going to make money half the time anyway as I have found that discretionary traders make money on approximately 45-55% of their trades. That is not my opinion - that is what the data say.

    The difference between being profitable and not profitable or modest and substantial returns is not about the frequency of being "right." It is about how much do you MAKE when you are right and how much do you LOSE when you are wrong.

    Don't trade to be right. Trade to make money. In order to make money, you have to lose less.

    As a trading psychology coach, the formula I use with my clients is as follows:

    H + W + P = E™

    Hoping + Wishing + Praying = EXIT THE TRADE! ™

    Trade well,
    DrDoug

  • Only Losers Set Money Goals

    Jan. 11, 2012 Comments

    Do you want to know how to make more money in 2012?

    The answer is to focus on the Process rather than the Outcome.

    Process

    The things you can control like your trading or investment process.

    Outcome

    The things you cannot control like whether you make or lose money on a trade or investment.

    Contrary to what everyone thinks, we don’t get to control whether we make money when we trade. The market, economy and global events are in charge of that part of the equation.

    Like a professional tennis player, your only job is to make sure you are prepared, willing and able to execute when it’s your serve or when the ball is hit back at you. That’s it. But keep in mind, that preparation only comes from hours and hours of focused, specific and intentional practice. I firmly believe that Geoff Colvin was right when he pointed out that Talent is Overrated.

    In trading the financial markets, I believe this concept is particularly true.

    Almost all traders make the mistake of starting the year out by setting money goals. When you do that, you set yourself up for failure for two reasons:

    1) Every single trading decision you make from that point forward is going to be focused on just one thing, the money – and that is the one thing you cannot control.

    2) All money does is serve as a distraction to people for a variety of  reasons. You can learn more about this in the area of behavioral finance which explains why smart people make bad choices when it comes to money. (I have found Dan Ariely’s work to be of particular value).

    To correct this, what I have my clients do is set daily, monthly an yearly goals that are focused on their process, meaning the little things they have to do put themselves in a position to gain the greatest benefit if the market cooperates or to limit their losses if the market does not.

    The Little Things

    • Knowing their edge (competitive advantage)
    • Timing into the market
    • Sizing their trades based on their conviction level
    • Having game plans and stops to manage the risk

    Don’t believe me just yet? Fine. Try this one on for size:

    Whatever you do don’t think of pink elephants dressed like ballerinas.

    What are you thinking about right now? Probably pink elephants dressed like ballerinas.

    Wow, really? If I were you, I would keep that to yourself because people may think you are crazy.

    My point is that our minds are easily influenced by simple statements and those statements force us to focus on things whether we want to or not. And when you focus on the wrong things, you lose.

    Ever heard a coach say this, ‘Whatever you do, don’t fumble the football.’

    What ends up happening? The guy fumbles the ball.

    ‘Whatever you do, don’t hit the ball into the bunker on the left-side of the fairway.’

    What ends up happening? You hit the ball directly into the bunker on the left-side of the fairway.

    ‘Whatever you do, don’t double fault.’

    What ends up happening? You double fault.

    Did you accomplish all of these failures because you suck? No.

    Well, to be fair, you may also suck, but in this case the more likely reason is because you are unintentionally forcing yourself to focus on the WRONG things (such as fumbling the ball, landing in the bunker and double faulting on your serve).

    I am not by any means suggesting that if you change the way you think that you will automatically transform into the greatest golfer on earth or a Wimbledon tennis champion. But what I am saying is that when you focus on the wrong things you DECREASE your chances of being successful. And for traders, the wrong thing to focus on is the money.

    My advice, go back and look at the goals you set for 2012 and if they are worded so that you are focusing on the outcome (results) then change them so that you are forcing yourself to focus on the process (the little things).

    Trade well and Happy New Year.

    Dr Doug Hirschhorn

  • Size Does Matter (On Wall Street)

    Dec. 19, 2011 Comments

    Two friends are invited to a super wealthy man’s house. As the two friends walk up to the mansion, one friend says to the other:

    This is the most incredible house I have ever seen!

    Look at the size of the yard!

    Look at the spectacular landscaping!

    Look at the custom stone carved architecture!

    Look at how many rooms this place has!

    The other friend, taking all of this in, turns to his buddy and says,

    I see it all; but I have one thing the owner of this house will never have.

    The dumbfounded friend stares back at him and says,

    Oh yeah, what?

    To which he calmly responds,

    Enough.

    Size does matter. At least it does for traders and tens of thousands of others who work in the financial industry. The reason is not about greed; but rather insecurity. Money is essentially the only measuring stick traders have to quantify their success and accomplishments for the year. The more you earn, the more respect you get from your peers. It is never a question of Is 3 Million a lot or little amount of money to make in a year? – of course that is a lot of money, to ANYONE.

    The issue is not about the amount of money, it is about their self worth. It is about how much they are valued by the bank or by their peers. In the end, it is about their self-esteem.

    Instead of judging these people, how about we try to understand their world, from their perspective, especially this time of year since this is when they are being told how much their efforts for 2011 are or are not being rewarded.

    What do you think it would be like to live in a world where the number of zeroes on your W2 defines your value as a person? I am not saying it is right or even healthy. I am just saying that is the reality in which traders exist.

    If you are reading this thinking that you could find 3 million reasons to muscle throughout it and buy happiness and self-worth with that kind of scratch in your bank account, then you have just taken a step inside the shoes of many of these wall-street warriors. They think the same way. The more sacrifices they make, the more painful the grueling 24/7/365 stress imposing job gets, the more money it takes to fill that void.

    The problem is that it is a void – an infinite, emotional void that will never be satisfied by cash.

    Trust me, the grass isn’t any greener on their side of the fence. The lucky ones love the fast paced, stressed filled life and quickly burn out. The rest of the bunch endures it as long as they can, oftentimes doing it just to maintain their family’s lifestyle, ruining their marriage along the way, until they finally burnout.

    In my coaching, I have rarely seen a trader who is successfully able to separate who he is from what he does. Just like a professional athlete, their identity is tied to their occupation.

    Is that sad? Good? Bad?

    Seriously, I don’t know and the truth is, who am I to judge anyone. Who are any of us to pass judgment for that matter? Is engaging in an occupation that has short-term rewards but in the long run probably burns years off your life worth it?

    A recent Sports Illustrated article profiled the 1986 Bengals NFL team and looked at the long-term physical and sometimes mental injuries most of these players are dealing with now in their 40’s, 50’s, and 60’s as a result of their years of playing professional football. The shocking part is that 37 of the 39 players (94.8%) said, it was worth it and they would do it again, even knowing the long-term damage it has done to their bodies.

    That is crazy! Right?

    No it’s not.

    To these elite performers, the brief moment to be able to live their dream was worth the damage it caused. For traders, it is the same.

    I am not suggesting that makes sense to most people because it doesn’t. I am just saying that for some people, enough is not an option.

  • 4 Letters That Will Make You Wealthier

    Dec. 1, 2011 Comments

    H + W + P = E

    I have combined these four letters to create a simple formula that is time tested and proven to make investors and traders wealthier.

    The reason why this formula works is because everyone makes money trading. That is the easy part. In fact, if you ever have the opportunity to see the actual “hit rate” or frequency of being right verse wrong on trades, you would find that traders (regardless of experience or success) make money about 50% of the time.

    In a game where the only three things that can occur is the market goes up, down or sideways, then it makes sense for 50% to be the natural win/loss ratio. * There are some trading strategies like quant and relative value that have higher hit rates; but that is a whole different ball game and not one I am going to address in this post.

    So if traders, on average, are right only 50% of the time, meaning they make money 50% of the time and lose money 50% of the time, then how do some of them manage to be profitable?

    The answer is that when they are right, they make more money than they lose when they are wrong. Framed another way, you could say that making money is actually the easy part (you are going to do it 50% of the time). The hard part is how to keep it.

    That is why successful investing and trading is about losing less money or what we call Risk Management.

    The way I have taught my clients to lose less money is by embracing the formula:

    H + W + P = E

    (Hoping + Wishing + Praying = Exit The Trade!)

    Anytime you find yourself in an investment or trade and catch yourself doing one or all of the following:

    • Hoping it gets back to the price where you bought it.
    • Wishing you had waited longer to get into it.
    • Praying that some market event occurs to increase the value of your position.

    Then you know you have become emotional about your investment or trade and you need to start to Exit The Position!

    Remember, trading is a game of probabilities, not perfection. To continue to build your wealth, you don’t have to be right all of the time, you just need to learn how to lose less when you are wrong.

    H + W + P = E

    (Hoping + Wishing + Praying = Exit The Trade!)

    Anytime you find yourself in an investment or trade and catch yourself doing one or all of the following:

    • Hoping it gets back to the price where you bought it.
    • Wishing you had waited longer to get into it.
    • Praying that some market event occurs to increase the value of your position.

    Then you know you have become emotional about your investment or trade and you need to start to Exit The Position!

    Remember, trading is a game of probabilities, not perfection. To continue to build your wealth, you don’t have to be right all of the time, you just need to learn how to lose less when you are wrong.

  • 5 Reasons Trading Is Not Like Sports

    Nov. 21, 2011 Comments

    Close to 15 years ago, I started my career as a trader on the floors in Chicago. As a former Division 1 college athlete, I was what many firms believed to be ideally suited to be a successful trader. To this day, it still seems that the underlying assumption is that to be a great trader, you have to have traits like competitiveness, resiliency, goal orientation, focus and, of course, confidence. So it makes sense that, sports, in general, would be an excellent breeding ground for finding the next great trader or investor. In fact, you don’t have to scratch the surface very much at any major financial institution or hedge fund to see how important they view athletic background to be when looking for new talent.

    While I do believe that great traders share some common characteristics with athletes, I think it is far too short-sighted to assume that an athlete would be able to develop into a successful trader. In fact, my doctoral dissertation challenged the long-standing assumption that athletes made better traders and my research revealed that athletes did not necessarily make better traders.

    In my applied work as a trading psychology coach to the elite on Wall-Street, I can tell you I spend far more time deconstructing the “athlete-mentality” then I do layering it into people in order to improve their performance. Even more compelling is that I have identified 5 reasons why trading (or investing) is not like sports.

    1. In sports, before you take a shot, you are NOT supposed to think, “What if I mess up this shot?” If you do, that means you lack confidence but in trading that is called “risk management” and is an essential element of successful trading.
    2. In sports, when you miss a shot, you don’t lose points. In trading, when you get a trade wrong you lose money.
    3. In sports, the opponent adjusts to what YOU do in order to beat you. For example, in tennis, if you have a great forehand but a weak backhand, then your opponent will quickly pick up on that and start hitting balls to your backhand, exploiting your weakness. In trading, the market does not know what you are doing and therefore, it does not alter what it does in response to what you do.
    4. In sports, in order to get better, you need to focus on improving weaknesses. In trading, your strengths are your weaknesses and vice-versa.
    5. In sports if you get poor results, you need to practice harder and put in more effort. In trading, effort is not positively correlated to improving performance. In fact, in trading, more work frequently leads to over-analysis, over-complicating things and worse results.

    The bottom line is if traits such as competitiveness, focus and confidence are believed to be so important to creating a foundation for successful trading, then why only limit the pool to consider former athletes as the people who have these skills? After all, musicians, writers, artists and even online gamers certainly have to embrace many of these traits in order to be successful in their respective fields. Just because it is not the accepted norm of the industry, does not mean it is invalid.

  • Think Like a Woman and Make More Money

    Nov. 5, 2011 Comments

    I am a trading psychology coach, who has doctoral level training in Sport Psychology. That means the only thing I focus on in my consulting work is how to improve performance. Wall street says it cares about gender equity, which I think is kind of silly because what pays the bills and earns the salaries is one thing: Performance. And last time I checked, the markets do not pay you more just because you are a man or woman; however, thinking like a woman may give you an edge in trading.

    I believe women, in many ways, are able to be very successful in occupations that involve the combination of money, risk taking and risk management. And a lot of it has to do with the simple fact that they are hardwired that way. What this potentially means is that maybe there should be more women then men on the front lines or in senior risk taking positions on trading desks.

    Here are three reasons why I think women can be great traders.

    (I have many more reasons but I am just going to hit on a few in this blog post.)

    1) Men let their pride get in the way of their decision making process and women don’t.

    1. Ask any guy the following, “Before GPS’ were around and you got lost, would you stop and ask for directions?” Pretty much every guy out there would quickly, say, “No way.” Yet, almost every woman out there would respond, “Of course, I would.” For men, being lost or confused triggers our caveman ego and makes us want to solve the problem on our own rather than show what we think is ‘weakness’ and ask for help from a stranger. It’s not our fault. We are just hardwired that way. This means in order to short-circuit this and avoid driving around aimlessly for hours, we have to recognize when it happens, intentionally stop ourselves and then put in a corrective measure. That is a lot of work and mental energy we would have to expend just to be able to get to the same place where a women got to from the beginning, quite naturally and effortlessly. From a trading perspective what this could mean is that women are more likely to not turn one bad trade into two, three or four bad trades. Whereas a man, may do this, just as he would choose to drive around for hours, aimlessly because of his pride. Can you say, “Rogue Trading?”

    2) Self-Awareness is the single most important characteristic among elite traders.

    1. Many women keep diaries. I don’t know why. I am a guy. Guys, for whatever reason, just don’t do stuff like that. At least not by their own measure. Have any of you guys out there ever written in a diary about your emotions, friendships, relationships and feelings just because you felt like doing it? The single most important part of my trading psychology coaching practice is that I require my clients to keep a daily trading journal. I give them a list of 20 or so questions to answer each day about their trades, their game plans, their trade sizes, their emotions, and so on and then hold them accountable to emailing it to me each and every day. I am constantly told by them how valuable they find the daily journaling to be. It keeps them on top of their trades. It improves their risk management and helps them get bigger in their highest conviction trades. They all (the male traders at least) tell me they don’t like doing it and that it is weird at first but extremely helpful to solidify their thinking. My female trader clients actually like doing the daily journals for the same reasons and it also comes more naturally to them to do it. The bottom line is the more writing my traders do, the greater and deeper level of self-awareness they obtain.

    3) When men get into arguments, they get physical or start wars. Women pause, reflect, plan and then unleash a well-calculated mental warfare.

    1. My 9 year-old daughter told me the other day that when her younger brother gets her mad instead of hitting him (which she quickly discovered results in him hitting her back harder), she has found that she can hurt him more by just saying mean things to him. Look at that, 9 years old and she is already on her way to becoming an expert in mental warfare! She didn’t go through any CIA boot camp to learn this skill – it came naturally and intuitively to her. In the trading world, the market is constantly telling the trader he is wrong. It is constantly (about 45% – 55% of the time) taking money from the trader. The automatic male response is to get angry and want to fight or what I commonly refer to as “Trade for Revenge.” This is not the case for the women traders, however. When the market proves them wrong, they will get upset, just the same, but instead of trading for revenge or over-trading, they will quickly cut their risk back. They then take the time to reflect on what happened, why it happened and what they will do different next time. And they do all this before they get back into the market for the next trade.
  • Fear and Fear Move the Markets, Not Fear and Greed

    Oct. 27, 2011 Comments

    It is common to worry about what is in front of us rather than relying on faith for a future outcome.

    With constant media headlines involving the European credit crises, concerns about the current U.S. economy, high unemployment rates, and the reality of more job cuts (rather than job creation) on the horizon – people want solutions now, jobs now, positive returns on their investments now (not later). That is what causes fear to be the driving force in all of our decisions.

    This is why the point behind my blog post today is to talk about fear and how fear moves the markets rather than the long-standing assumption that it is Fear and Greed.

    Just look at today’s volatility for an example of this. Do you really think that the reason the S&P 500 had its best month since 1974 is because of greed? I sure don’t.

    The markets go up and down because of fear. Investors and traders are afraid of missing out on opportunities to make money so they rush into trades and push the markets up – or they are short and get caught on the wrong side so they end up having to chase the markets up. Their decision to make the trade is not because of GREED – it is because of FEAR so they can stop losing money! Today’s 2% rally in the Eurodollar may be a good example of how short-covering and fear can push the market up.

    Fear can also push the market down. When investors and traders are long and things are not going well, then they start to panic because they are afraid of missing an opportunity to limit their losses. As a result, they aggressively sell their positions out and that is what pushes the prices down as they scramble for safety.

    Fear makes our decisions for us in our personal lives as well. As I am sure you have heard by now, a large number of Americans are afraid of not being able to find a job while the currently employed portion of Americans are afraid of losing their jobs. Once again. Fear and more fear.

    To the homeowners out there, we deal with the same thing as it relates to the value of our homes. Many people have been afraid over the past few years to sell their homes because they think the current price is too low so they hold onto it, which artificially keeps the market up even though the true value, or what the bank values it at, has decreased. And to the homebuyers out there, how many of you are afraid to buy right now because you worry that the price may continue to go down?

    Whether we are talking about trading, investing, job security or buying/selling homes, I don’t see much greed going on; instead I see, hear and read about a lot of fear. Don’t you? And that is why I think it is pretty clear that fear is in the driver’s seat of our decision making process.

    The hardest part to digest is that fear has to do with the unknown and the unknown makes people uncomfortable. If you’re able to master the single skill of learning to get comfortable with being uncomfortable then maybe you will be able to move past the fear that is making your decisions for you.

  • Part 2: 95% Chance to Win, Would You Play?

    Oct. 24, 2011 Comments

    The value in this question is that most people (even very successful people) naturally get sucked into the idea of wanting to be “right.” After all, who likes to be wrong or lose? Do you?

    There is a great concept that permeates among the top traders in the world and it is that they don’t trade or make investments to be “right,” they trade and make investments to make money.

    So if you have a 95% or even 99% chance to win at a game, should you play that game? Conversely if you only had a 2% chance to win at a game, should you play that game?

    As some of you have already pointed out in your comments, the correct answer is, “It Depends.”

    It depends on how much you would make if you right compared to how much you would lose if you were wrong. A common misunderstanding about what makes great traders and investors is that they are right more often than they are wrong.

    This is far from the truth because being right and wrong is really only as relevant as how much you make when you are right compared to how much you lose when you are wrong.

    Ever heard of the Black Swan theory developed by Nassim Taleb? Fortunes have been made, lost and missed on this very idea. There are also plenty of relative value or quant-minded traders who are right very often but lose way too much the few times they are wrong.

    This is such a simple concept that it is troubling to many people but it is the core reason why even smart, successful people end up taking “dumb” risk instead of “smart” risk.

    I always tell my clients, “If you want to be smart or right, then teach at a university. But if you want to make money, then follow the math and keep your emotions on the side-line.” The key is to focus on the entire situation (the combination of probabilities and their respective payouts or what is known as the Expected Value) rather than getting wrapped up in just the probabilities.

  • 95% Chance to Win, Would You Play?

    Oct. 24, 2011 Comments

    Here is a simple concept that will change how you think and the decisions you make.

    Whether they are traders, investors, entrepreneurs, business people, industry leaders, athletes, musicians it doesn’t matter what field…they know how to take what I call “Smart Risk.” Some of them naturally do it and others have had to learn.

    Here is a simple test to see if you are hardwired to think like them; and don’t worry, if you are not hardwired this way, you can learn how to think this way.

    Question:

    “If you had a 95% to win at a game, would you play that game?”

    Post your answer and I will respond.

  • Wall Street Goes Down But It Is Not Out

    Oct. 12, 2011 Comments

    As you may have heard by now, Wall Street is about to take a hit. Jobs are getting cut. Bonuses will be down again. Goldman Sachs and Morgan Stanley are even considering whether it makes sense to be classified as a “bank” in the future.

    Based on the overwhelming (positive?) feedback I received last week from my Occupy Wall Street post, my guess is that most of you (particularly the self-proclaimed 99%) are probably not so upset about this.

    You probably are even thinking, “It’s about time! What comes around goes around!”

    You may be right and I may be crazy but let me try to shed some light into what is really going on inside the mind of this thing we generically call “Wall Street.”

    Practically speaking, this is not good for anyone. Not you and certainly not the other hardworking 1% of Americans who earn their living inside Wall Street banks.

    First off, Wall Street isn’t dying, it is just transforming. This is not the first time the financial industry has had to face adversity and figure out a way to survive. The banks will earn less (or at least some parts of the banks will) while, believe it or not, other parts will probably earn more.

    Hedge funds will still be around and it is very likely you will hear about some funds putting up incredible returns this year and in the years to come. What this means is that some of the mega-rich will, indeed get richer and not because they are criminals but because they are savvy investors who know how to maximize an opportunity when it appears.

    Talent will flee the banks because traders go to where the money (or at least the opportunity to make money) exists – and that does not appear to be at the banks for the fore-seeable future.

    Here is the kicker. When talent leaves, performance suffers. When performance suffers, valuations of the publicly traded banks decrease. Which means the shareholders (the 99%) get hurt.

    In real dollar terms, this means less revenue, which means less taxable dollars to be siphoned into the government for programs like education and public transit.

    On a more direct level, it means less opportunity for smaller vendors or laborers who earn their living providing services for the “1%” who have disposable income.

    To that 1%, it means they will have less interest in spending money on anything like vacations, eating out, shopping at the mall, toys for kids, baby sitters and so on.

    As I said, it isn’t good for anyone.

    I am not an economist and I am not a journalist but it doesn’t take either of those to look at what is happening and to draw some plausible conclusions on where this is going.

    I will say it again: Wall Street isn’t going to die.

    Wall Street will re-invent itself. It will continue to be an industry where traders earn more than brain surgeons, lawyers and teachers. Those traders will just will earn less then they did in the past. That may not be fair, but it is the truth.

    So while the 99% may have won (and statistically speaking they should have) – I think, as Americans, we can say we all have lost.

    And if I can offer my glimpse into the future and say this, “We will all be worse off in the short-term but much better off in the long-term.”

    As any savvy investor will tell you, you have to squeeze out all the longs before you can bottom out and find a great entry level to get back in so you can make new highs.

    It appears that despite all of the global efforts to prevent a bottom from occurring, we are going to get there whether we like it or not and certainly whether we want to or not.

    To all you haters, be prepared because as we start to head towards the real bottom, the smartest investors and traders out there will be riding that wave straight down and reaping huge profits along the way, only this time, they won’t be at publically traded banks for the rest of the investors (the 99%) to benefit from, even if it was on a very small level.

  • Buy! Sell! Hold! Does it really matter anymore?

    Oct. 10, 2011 Comments

    “I can’t take the stress anymore, I feel like I am a financial yo-yo and every day, there seems to be some breaking news story about volatile markets, rogue traders, lying this and cheating that’s, banks failing, credit defaulting, global meltdowns and so on.”

    If this sounds like you – then you are learning to be “helpless.”

    Why? Because of the repeated cycles of dozens of painful emotions such as fear, disappointment, anger and frustration that you spiral through each day listening to the news, reading the headlines and watching your investments go up-down-up-down-up-down.

    The inability to consistently understand the decisions people make and what moves the markets is not a new phenomenon. “I can calculate the motion of heavenly bodies, but not the madness of people.” Isaac Newton (1643–1727).

    If that is the case, then what is the point? Maybe it is just time to give up?

    A psychologist named Martin Seligman, along with several colleagues, did some “shocking” experiments in the 1960’s that had some compelling results which suggest that maybe it is time to give up. Basically, he discovered that if you punished a dog for doing both good and bad things, then it would eventually “Learn to be Helpless” and just give up.

    Now if you are sitting there saying, “That does not apply to me. I am not a dog” then you are missing the point. We are talking about behavior and human behavior is oftentimes just as predictable as a dog’s, especially when we get confused, scared or emotional.

    Dr. Seligman’s experiments went on to show that if you view the situation as not personal and not permanent, then you can overcome learning to be helpless. In other words, we all experience setbacks but if we view them as temporary then we have a better shot at improving our situation down the road. So it looks like we may be different from the average dog because we can choose our frame of mind and that alone, can make a huge difference!

    Does it really work?

    Elite performers on Wall Street are excellent examples for us to observe because the markets are constantly putting them in their place and reminding them who is boss (just ask billionaire John Paulson about his fund’s performance last month) but what makes great traders, investors or even entrepreneurs like the late Steve Jobs (have you read his life story yet? if not you should) exceptional is that they are resilient in the face of adversity, fear and pain, and they choose to see a temporary setback where others would see a career defining failure.

  • Occupy Wall Street? Do you even understand Wall Street?

    Oct. 3, 2011 Comments

    Go ahead, Occupy Wall Street until your heart is content, but could you please be a little more specific on who or what you are angry at? The Sell-side? The Buy-side? Financial advisors? Retail traders? Mutual funds? The Sales traders? The Execution traders? The Market makers?  The flow traders? The Research analysts? The Quants? The High Frequency traders? The Administrative Assistants? The Human Resource departments? The IT departments? Prime Brokerage sales? The Risk Managers? I am confused.

    Do you even know the difference between sell-side and buy-side? Or is it everyone you are angry at and just taking the lazy short-cut and calling the whole group “Wall Street” because you have failed, on your own, to take the time to really understand the industry you are protesting?

    You do realize that is not much different then generalizing an entire population (and in this case, industry) because of the crimes or ethical miscues of a few.

    As your Occupation of Wall Street continues, you may want to grasp a few things. First, it is not going to change anything in the short term and probably not much in the long-term either.

    I hate to be the bearer of that news, but money makes the world go round and “Wall Street” is all about money. Second, the top traders, banks and hedge funds are still going to out earn and generate substantial profits from speculating on the disconnects in the prices of things generated from all the moving parts in the global economy and it has nothing to do with why you lost your house or job or can’t find a job. If anything the successful ones are helping you, your pensions funds, retirement savings and the economy in general. If Wall Street stops. The world stops. Period.

    As I said in previous posts, these people didn’t create the game, they are just playing it. The good part is that they are still going to pay their taxes, employ others and spend money so others will benefit from that on some level. More importantly, they will remain as beacons of success and reminders to us and future generations of what true capitalism means.

    Here is how I see it.

    I was raised in a home where a core value was to fight the good fight, regardless of the odds. I know many of you involved in the Occupy Wall Street events believe you are doing exactly that.

    I truly believe in the idea of fighting the good fight but I think there are two ways to go about this.

    Choice #1

    Choose to spend your time, effort and energy focusing on what you think is wrong or broken and then hold up signs, protest, sing, dance, dress up and even to some extremes, sleep in the streets in order to be “heard.”

    Choice #2

    Focus on how to improve your situation. Take a close, hard look at your life, how you spend your time, what you choose to read and learn about and if all of those things will put you in a better position in order to thrive not only in today’s world but in the future years to come.

    Choice #2 is what allowed me (and by the way, the same celebrities that are joining the Occupy Wall Street events) to be an entrepreneur, willing to face fear, work hard to earn my Ph.D. in Sport Psychology and become incredibly successful as a Trading Psychology Coach. And guess what, in this great country, anyone can choose to do that. Yeah, it may take a long time. So what? The only major difference between me/the people I coach and the masses of other people out there are that we are willing to do what it takes to be great.

    Didn’t some U.S. president back in 1961 make a speech about instead of asking what your country can do for you to instead ask what you can do for your country? I am pretty sure some dude said that. What was his name? Oh, yeah, John Fitzgerald Kennedy. (see 4.00 minutes into this video).

    Here is a suggestion, to the young people out there, which are part of what I call “generation entitlement.” Video gaming, tweeting, facebooking and other online forms of social voyeurism are probably not the best use of your time or intellectual capacity.

    Surfing the net, reading blogs about pointless (although possibly interesting) information; again, probably not the best use of your time. And call me crazy but spending hours, day after day, for weeks holding up signs in parks or in front of buildings, chanting, singing, complaining about what is wrong or broken in the world, while it may be fun or even what you think has meaning at the time, I am thinking it’s not a great plan for how to get your life and career back on track or even started.

    To those who are allowing your faces to be plastered all over the media, as you dance around, acting angry. Wow, I am pretty sure you have just made yourself even more unemployable then you were before the Wall Street Occupation. Not a smart move on your part. I know the rest of you are thinking it so there, I said it.

    But, hey, the choice is yours. We live in a free country and get to make our own choices and those choices have consequences that are sometimes good and sometimes bad. That is the beauty of America.

    The other fantastic part is that if you work hard, stay focused, set goals and commit to achieving the things you focus on, then you can also benefit from the reality of capitalism. You also get to set the right example for your kids or others on how to deal with adversity. You can either complain or kick butt and take names? I choose the latter.

    Here is what I think

    You should keep protesting. In fact, spend more time doing it. Stay longer, get more people to join in on the complain train because that frees up opportunity and creates less competition for the rest of us who are focusing on what we can do for ourselves and our families to improve our situation rather than wait for others or the country to do it for us.

    Thank you for your timeless wisdom, JFK.

    God bless America, land that I love.

  • The Bigger the Recession or Global Meltdown, the Better.

    Sept. 28, 2011 Comments

    Whether Alessio Rastani is a legitimate trader or not is actually irrelevant to me because the point he makes is correct.

    You show me a major catastrophe (earthquake, tsunami, terrorist attack) or a major political battle on monetary policy and I will show you a trader who sees an opportunity to make money.

    It is not that traders are the evil, greedy spawn of Satan; they are just immersed in an occupation that thrives on identifying disconnects in the pricing of financial products and then extracting a profit from it.  And the reality is that things like catastrophes and politics frequently can cause major disconnects.

    At its purest level, traders really are just a more advanced version of  ticket scalpers.

    The scalper stands outside the football stadium and buys a ticket at one price and then sells it at a higher price (hopefully) to someone else. The “profit” or “loss” he collects for his efforts is the difference between the two prices. He has no intention or even desire to go to the game. He may not even care who wins. He only cares that there are people who are interested in getting rid of their ticket and others who are interested in buying that ticket.

    Does that make the ticket scalper evil? If so, then don’t stop drawing the line with traders – extend it to ticket scalpers or any other occupation that makes a living from buying things cheap and selling those things at a higher price, like any salesperson of any product.

    Welcome to the world of opportunity.

    The worse the world economy gets, and the more traders appear in the media spot light, the more I think traders are quickly replacing lawyers as the punch line of jokes such as,

    “What is the difference between a catfish and a lawyer?”

    Answer: “One is a bottom dwelling, scum eating organism and the other is a fish.”


    Like it or not, a recession creates volatility and that creates fantastic opportunities in the market. It happened back in 2008 and it appears to be happening again in 2011.

    Sounds crummy, right? How dare those greedy sons-of-a…. making more and more money while the rest of us are hurting, trying to survive, keep our homes and find jobs.

    I feel your pain, anger and frustration, I do; but before you get all high and mighty, do keep in mind two things:

    1) Traders did not create the financial markets; our governments did. Traders are just the ones playing the game (scalping the tickets) and the best ones out there play the game extremely well, especially when catastrophe strikes or during major periods of political unrest. In the trading game, because it is a pure meritocracy, when you play well, you get paid well.

    2) Also, keep in mind that we live in a free world and the market is not selective on who it lets play the game. That means anybody from anywhere in the world can plug in a computer, connect to the internet, step up to the plate and start to trade.

    Is it risky? Of course, and I am not suggesting you should trade! By all means, DON’T!

    I am only saying, you have the right and opportunity to trade, if you want. So, if you choose to not play the game, then don’t hate the players, hate the game.

    Like it or not, a recession creates volatility and that creates fantastic opportunities in the market. It happened back in 2008 and it appears to be happening again in 2011.

    Sounds crummy, right? How dare those greedy sons-of-a…. making more and more money while the rest of us are hurting, trying to survive, keep our homes and find jobs.

    I feel your pain, anger and frustration, I do; but before you get all high and mighty, do keep in mind two things:

    1) Traders did not create the financial markets; our governments did. Traders are just the ones playing the game (scalping the tickets) and the best ones out there play the game extremely well, especially when catastrophe strikes or during major periods of political unrest. In the trading game, because it is a pure meritocracy, when you play well, you get paid well.

    2) Also, keep in mind that we live in a free world and the market is not selective on who it lets play the game. That means anybody from anywhere in the world can plug in a computer, connect to the internet, step up to the plate and start to trade.

    Is it risky? Of course, and I am not suggesting you should trade! By all means, DON’T!

    I am only saying, you have the right and opportunity to trade, if you want. So, if you choose to not play the game, then don’t hate the players, hate the game.

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