my own trading book through various periods of increased volatility often brings frustrations and distractions that result in poor performance across the board.”
Overload of information.
External distractions.
Fatigue, exhaustion and burnout.
That’s a very extensive list of stressors that traders face. It illustrates the complex nature of the trading environment. Not every trader will experience all of these, of course; everyone’s stress response is individual. But these are, in my experience, representative – and the kinds of stressor I have focused on helping you deal with in this book.
These situations require traders to have the psychological skills and physiological capacity to overcome them and trade at their best.
4. Get Good at the Downs
The pain of loss
Imagine you have been invited to take a bet on a coin toss – heads or tails. If you call incorrectly you lose $100. How much would you want to win, if correct, in order to take the bet?
This is a question from research in behavioural finance that I often ask in my trading psychology workshops. The most popular answers are between $101 and $300 (the market makers, scalpers and high-frequency traders looking for multiple plays at the $101 end of the spectrum; the directional traders with their 2:1 or 3:1 risk-reward ratios at the $200–300 end).
Occasionally a few people come in at around $500, with the odd person at $1,000.
Research into loss aversion suggests that, in the example above, on average people want to win around $200.6 That is, they would like $200 to offset the risk of losing $100, such that $2 of pleasure is needed to offset every $1 of pain.
Flipped around: the pain of loss is twice the pleasure of winning.
This asymmetric relationship between the pleasure of winning and the pain of losing, in combination with our brain’s bias towards negativity (hence the strength of our stress-based survival emotions) goes some way to explaining why the downs of trading can feel so painful.
It is important that we find a way to deal with this pain.
I was recently having a coffee with a trader I coached many years ago who has now left trading. We were talking about how amazing trading and life was when he was making money (“You almost feel invincible”), and how tough it could be when it was not going well. He went on to tell me that there had been several times in his career when he had been really struggling with his trading – and much worse than I knew.
He had been losing money, losing confidence, losing self-belief. And on his commute home he had stood on the train platform and thought: ‘What would it be like if I jumped. Would it be quick?’
Trading as a craft is challenging to master, but a trader also needs to master his or her mind and body. Becoming bulletproof is about being able to survive the short-term stresses of trading and to stay in the game for the long term.
I have sometimes heard people refer to trading the markets as a dance. In reality it is more like a wrestling match. A dance partner is not likely to get up and tackle you to the floor, or put you in a choke hold to make you submit.
“The art of living is more like wrestling than dancing, because an artful life involves being prepared to meet and withstand sudden and unexpected attacks.”
— Marcus Aurelius
The inner citadel
“I have on two occasions lost my whole year in short spaces of time. One being as a very inexperienced, naive trader where I had left excessive orders in a market overnight and a pipeline burst and caused the market to spike, resulting in me waking up in the morning to a large short position and my year’s work gone. The other was as a more experienced trader and being stubborn, and over-confident in my positions and really not managing my risk well. The second time was a far bigger monetary hit but also a lot harder as I had very high hopes for that year and was on cloud nine… this hit took me back down to earth and made me realise what markets are capable of doing. They were both humbling experiences.”
— A commodities trader
Are you mentally prepared for the challenges and difficulties of trading?
Do you have a mental framework to deal with losses, making mistakes, missing out on opportunities, fear, anxiety, uncertainty, stress, drawdown, redemptions, change, poor results?
There is no shame in answering ‘no’ at this stage. Being ready for dealing with such adversity is not something we are born with, it is developed throughout our life and through our life experiences – it is forged.
The Stoics recognised the need to be prepared for adversity and developed a philosophy – a way of thinking and, importantly, doing – that was focused on preparing and fortifying them for challenges to come. In many ways these ancient philosophers were like mental athletes, developing their mental strength, flexibility and stamina ready to face the challenges of life.
They talked about the “Inner Citadel” – “the fortress inside of you that no external adversity could ever break down”.7
I think of the inner citadel as a mental fortress – built up by skills and practices that allow you to manage adversity effectively. This fortress is not there at birth. It is established through your life and your trading experiences. Part of becoming bulletproof is building and strengthening your inner citadel. Within this book, each exercise and technique is an opportunity to add another stone to your fortress walls.
Ask yourself:
How is your inner citadel currently?
How are you already working on building your inner fortress?
Getting good at the downs
You cannot remove the risk from trading. That means that negative experiences are part of the game. They are inherent to the nature of the activity. All traders experience stress, difficult thoughts, unwanted emotions and uncomfortable sensations at times. When you make a trade you are taking a risk; it is perfectly natural to feel some stress.
The goal is to get good at dealing with the stress – with the downs. The most effective way that you begin to learn to deal with tough trading situations is by being in them.
It is being in loss-making trades, enduring periods of drawdown, recovering from a mistake, missing out on an opportunity, experiencing fear and dealing with changing market conditions where you develop your coping skills and strategies. It is through exposure to stressful events that you train your physiology to endure the physical responses to stress.
If you avoid stressful or difficult situations in your trading you never develop the psychological or physiological capacity to deal with them and achieve your trading potential.
“ ‘No tree becomes deep rooted unless strong winds blow against it’ – the shaking and pulling is what makes the tree tighten its grip and plant its roots more securely – heavy rain and strong winds
