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3. The Nature of Trading

Before you get into this chapter, take a few moments to reflect on these two questions:

 What are the challenges and demands you face in trading the markets?

 What do you need to be good at in order to meet those challenges and demands?

Trading as a high-performance activity

It was February 2005 when I first stepped onto a trading floor. It was the first Friday of the month, non-farm payrolls day (the release of US employment data – as I later found out, a significant day and a big market opportunity for traders).

I can remember the minutes leading up to the data release so clearly. The traders – well over 100 in total – all returned to their seats and began to prepare themselves for the upcoming announcement. Then came the countdown from the in-house analyst – “one minute”… the noise and hustle on the floor died down… “thirty seconds”… a focused hush… “ten seconds”… a feeling of anticipation, expectation, an obvious increase in adrenaline and energy… “five seconds”…

Then the data was read over the squawk box. There was an eruption of activity, noise, emotion. It was visible even within a few seconds that many traders were experiencing high levels of stress – and the emotions that came with it.

Over the coming hours I witnessed the highs and lows that trading the markets can bring. Some of the traders made large sums of money, others were flat, some were seriously down and nursing big losses on the day. It was my first encounter with trading. I became acutely aware that trading was a challenging, pressurised and often stressful occupation – something that only became more vivid as I spent time working with traders.

And I recognised that challenge, pressure and stress from another world entirely.

Before working with traders, I had spent a number of years as a sports psychology coach to elite athletes and teams. Trading was undoubtedly the nearest activity to sport that wasn’t a sport. Like elite sport, trading is a high-performance activity – and makes for a demanding environment in which traders must operate.

The trading performance environment

One of the core demands in trading is making risk-based decisions under conditions of uncertainty. Both risk and uncertainty are stressors. That is, they activate the stress response in our nervous system. The work of behavioural finance and neuropsychology shows clear challenges for the brain in making decisions under such conditions.

Humans prefer comfort, certainty, familiarity. A sense of control. Traders are continually exposed to a lack of control over market conditions and the outcomes they get on any given trade. Each trading decision has consequences and those consequences must be dealt with, not only financially but psychologically and physiologically. Traders must cope with the highs and lows of winning and losing – with strings of losses, with making mistakes, with being wrong, even with getting a bad outcome from a good process.

You did all the right things, prepared well, executed well, managed your risk, stayed flexible, yet still lost.

Often, decisions are made with incomplete information, sometimes within short time frames – both of these take further cognitive and emotional tolls. For those traders working within institutions there are the added pressures of making your budget for the year and servicing clients; for fund managers, the additional challenges of dealing with investors and the potential of redemptions.

The trader’s performance environment

Ups and downs

“When you are making money trading is the best job in the world. When you are losing money it is the worst.”

— A futures trader

It is common for me to arrive on the trading floor and to greet traders informally with a ‘How’s things?’ and to be met by the phrase ‘Ups and downs’, or in more severe cases, ‘Ups and downs, but mainly downs’.

That response, more than anything else, summarises the trading experience. For some shorter-time-frame traders these ups and downs occur multiple times over the course of the trading day. For others they may be less frequent or more protracted.

I have never met a trader who experienced any other version of events than ups and downs.

In fact, in over 20 years of working with elite performers across a range of high-performance domains I always heard the same story. I believe it is common to all high performers pursuing performance excellence. It’s a consequence of choosing to take up challenging activities, performed in demanding environments. And it’s a result of caring about what you do.

If you want low stress, the simplest strategy is not to give a s***. The downside is you probably won’t achieve your best results.

These ups and downs define the whole trading experience – the journey. It is through the downs that we develop the attitude and skills that prepare us for future challenges.

Of course, life itself is full of ‘ups and downs’. Trading the markets is ultimately just a highly concentrated form of the human experience. And we are wired for survival – which is both what gives rise to difficult thoughts, emotions and sensations. And what means we can ultimately overcome them.

“Life is hard, brutal, punishing, narrow, confusing, a deadly business.”

— Epictetus

The downs of trading can be momentary – or they can be protracted. Traders need the skills to manage both. Stress can be a short-term ‘acute’ response, or ‘chronic’, a longer-term exposure. Chronic stress brings with it an additional challenge for traders, one which I have had plenty of experience of with my own clients: fatigue and exhaustion, at the extreme end of which lies burnout.

Stress and fatigue play a huge part in reducing a trader’s ability to make good decisions and perform at their best. They bias traders towards the short term, amplify risk aversion, increase bias-proneness and reduce cognitive functions such as self-control. Building the resources to offset the stress response and reduce fatigue, to increase physiological capacity, is fundamental to being bulletproof.

The psychobiology of winning runs and losing runs

	Winning run	Losing run
Brain	Reward-seeking circuits activated	Risk-avoidance circuits activated
Hormone	Testosterone	Cortisol
Emotion	Excitement	Fear
Feeling	Pleasure	Pain
Risk	Risk seeking	Risk aversion
Bias	Overconfidence, irrational exuberance	Underconfidence, irrational pessimism

A survey of my trading clients revealed a variety of examples of the stressors that traders face. I have listed them below, and for a few have given the feedback in the trader’s own words. Which of these ring true for you?

 Dealing with losses and drawdown.“July–Aug 2017 I lost my whole year’s P&L from a series of absurdly over-exposed positions. I didn’t deal with it very well. At all.”

 Uncertainty in the markets.

 Volatility.

 Missing out on trades.“I cannot stand when the market does the ‘most obvious thing’ and I don’t have the position on or am the wrong way round through overthinking it.”“Seeing other people do well in a consensus move and being the other way has caused me to trade out of frustration and anger initially; then panic when it continues to go against me.”

 Expectations, pressure.

 Worrying about how to make money, where the next P&L will come from.“I get wound up not so much by what my current year-to-date P&L is, but more the feeling of ‘where is my next $ going to come from’? After having a series of losing trades/days/weeks, I begin to think how am I possibly going to make another $ from this? I’ve had moments where I am flat or down on the year, but have felt incredible optimism because I think I am onto the right strategy going forward. Same in reverse; had great half years then hit a bad patch and thought to myself: I literally have no ideas left and I can’t see how it’s even possible for me to add to my YTD numbers.”

 Being wrong.

 Taking heat on a position, being offside.“When I have a relatively large position and am heavily offside, this can distract me from other opportunities as I’m so focused on the position that’s concerning me.”

 Being behind budget/target for the year.

 Other people’s results being better than yours.

 Quiet markets, boredom.“No market action and the anticipation of signals that haven’t manifested yet – here the main problem for me is to deal with the impatience affecting my decision-making process.”

 Holding overnight positions.

 Major risk events.“My most stressful trading situations have been big major risk events like Brexit, major European elections, etc. Mainly due to the fact that due to the increased volatility you have a level expectation on yourself of how well you should be doing – and so, regardless of how you do, you tend to feel you should have done better.”

 Investor redemptions.

 Not being able to execute trades as you would like to, liquidity.“During a drawdown, wanting to reduce position sizes, but not being able to – this is a real problem in credit markets where liquidity (your ability to buy or, more importantly, sell an asset) can disappear in an instant. Knowing what trades you want to do, and not being able to do them, is a more stressful experience than the loss.”

 Regulation.

 Making a mistake.

 Large positions.

 Multiple positions in the market.“Most stressful situations for me tend to arise when I am trading either too much size or too many products at one time.”

 Management and leadership ‘interference’.

 Career risk.

 Balancing trading and life commitments.“Outside of risk-specific stressful events I would say the next most challenging experience I have is the constant battle with balanced intensity, with my commitments outside of trading; and then trying to manage 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.