Thursday, 14 February 2019

‘We’re Blind to Our Blindness’: The Power of Self-Awareness in Trading.



We’re blind to our blindness’ is a quote by Daniel Kahneman from an interview back in 2011. This quote reveals much about the human condition which reveals itself in the realities of a person’s work as a trader or investor.

Trading Problems as Symptom not Cause

When I meet new trading and investing clients who are keen to develop and improve their performance, I ask them ‘what aspects of their work is holding them back?’.

Their answers typically involve a list of behaviours such as fears, being too emotional, stubbornness, irrationality, lack of discipline, impatience and a host of other behaviours.

If only I could get past my ‘Fear of Missing Out’ ”, is a common type of response I hear.

The difficulty with ‘identifiable behaviours’ is that often they are not the cause of people’s problems but instead the symptoms of challenges which lay far deeper. Typically, the cause of problems resides well beneath the level of consciousness. ‘Out of sight and out of mind’. – These are the blindness that people are blind to.

As an analogy consider a tree: What you see are the visible aspects of the tree.



This is not however the full tree. The tree's root system is out of sight. This root system has a huge impact on the growth of the tree, but is not visible.


Even then that is not the full picture. The tree doesn't exist on its own in a vacuum: Stand back further and the complexity grows. 




The trees health and wellbeing is impacted by environment, its interaction with other trees and their root symptoms, climactic condition, weather events, quality of soil, nature; plants and animals which live off and interact with the tree.

Behaviours as symptoms are merely presenting factors of far deeper causes and factors both inherent and relational.  

Behaviour as Symptom: Consequences of trying to fix symptoms.

There are so many unseen and unknown factors which are subtly pulling the strings on our decision-making when trading and investing. This is what makes the job of trading so difficult. 

The ‘behaviour as symptom’ issue is however more damaging than merely mislabelling. Once the problem is incorrectly labelled, it is then compounded by trying to self-fix symptoms.

In medicine, problems are resolved not by fixing symptoms, but by attacking causes. The symptoms may disappear for a while, but the cause of future problems remain deeply entrenched.

In trading, failure to correctly attend to the causes of issues eventually impacts confidence. A person's self-belief starts to erode and self-doubt slowly increases.

Self-Awareness, Reflection, Standing back.
  
Trading does not occur in a vacuum. Traders sit within a complex web of relationships, both work and personal.

The job itself involves encountering uncertain and extremely complex situations whilst trying to find a path through the complexity of financial markets.

At the core of this is the individual themselves trying to fight their own ego. Their ego seeks to preserve feelings of self-worth and personal identity which have been forged throughout their life. The ego has been further re-enforced by its own efforts to preserve itself.  

Preservation of self, through the distorting lens of ego, is one of the greatest inhibiters to trading success. Faced with this, people are limited in their ability to perceive a true and realistic picture.

Everyone who trades or invests faces behavioural challenges. Those best equipped to deal with the behavioural challenges are the ones most likely to ultimately succeed.

It is said often of people such as Warren Buffett, Ray Dalio, Paul Tudor-Jones, that their ‘Intellectually Honesty’ is their greatest gift.

I see the same in many exceptional traders I have worked with. These people recognise their flaws, fully own their mistakes and errors, and see the emerging pictures that bit more clearly.

These traders are always curious, never accepting that they have the answers. They constantly ask questions and challenge their own, as well as others, ideas and perceptions.

With some outstanding traders I have recognised a trait called ‘Egolessness’. This is managing the ego in a way which captures its best aspects and downplays its worst.  

We must learn ‘how to be’, to be better than we currently are.

'Behavioural Trading' is something I talk about and write about often. When I coach individuals I am often working on helping them develop their 'behavioural trading' aspects. 'Behavioural Trading' is about coming to terms with how one really is and helping to shape an approach to trading around that reality.

Returnign to the Daniel Kahneman quote, the full quote is even more revealing than the short excerpt: “We're blind to our blindness. We have verylittle idea of how little we know. We're not designed to”.

Your job as a trader, investment professional, or a manager, will be greatly helped by becoming a little less blind, and working to counteract some of our 'metaphorical' design flaws as humans. It is not just the market you have to overcome, it is also yourself



Steven Goldstein is a leading Performance and Executive coach who helps people, teams, leaders and businesses in the financial markets to cultivate better, stronger and more effective performance.

Steven has worked as a coach since 2009 with many significant trading and investment businesses. Prior to that Steven worked for more than 20 years on the Rates and FX desks at some of the world’s leading investment banks.

See Steven's Full Profile

Alpha R Cubed work with people and businesses in the financial markets to help them explore how they could help improve and develop behaviour to catalyse stronger and more effective performance.

We run coaching and development programmes for individual and teams engaged in Financial Market activities. In addition we help Financial Market businesses develop 'Organisational Effectivessness.

If you are curious about how we could help you or your business, please email us at info@alpharcubed.com. or call +44 (0)7753 446097.

Friday, 8 February 2019

Good Traders Focus on Results, Great Traders Focus on Processes.





The article told the story of actor Bryan Cranston who, in his autobiography, described the lessons he learned that helped him go from being an average actor to becoming an extraordinary one.

Cranston wrote how he was inspired by a mentor to focus on the process rather than trying to win auditions. Until then his emphasis was purely on winning, and at this point he was winning mostly small bit part roles.

The mindset shift which resulted in a process orientation was subtle. He started focusing on what he needed to do to win, rather than focusing on winning itself. This led to Cranston starting to land bigger roles, and eventually the career defining roles which has made him one of the world’s most sought-after actors.

Trading - Extraordinary Performance

As a coach I work with many outstanding traders across a variety of trading business. Occasionally I come across someone I categorise as truly exceptional. One such trader who springs to mind is an individual who is completely process focused. He is not driven by winning or by his results, but by developing, refining and sharpening his process.

Winning is important, but not as important as correctly doing the things that enable him to win. As a result, he does not consider a loss a failure if the process was right. For him, failure is defined by whether he considers his process was good and that he stuck to the principles of his process.

This is a defining characteristic of the process focused. In contrast, the results focused individual defines success by the outcome. The danger of this is that in a world where the outcome owes a lot to luck and randomness, traders can end up relying on flawed processes.

An example to emphasise this.

Imagine you bet $1 dollar on an outcome of an event which had a 10% probability of success and the payoff was 15 times the $1 investment.

Say the event was the spin of a wheel numbered 1 to 10. Let us say the number 6 paid out 15 times the bet. Whilst all other numbers paid 9 times the bet.

A sane person would presumably bet on number 6 every time as this would have a positive expectancy. For every 100 spins one would expect 10 wins of $15. Thus, they would expect a return of $150 against a total $100 investment.

You will of course not win 90% of the time which may try your patience. Also, as a result of randomness it is possible you may lose more than you win until enough spins have occurred for randomness to start evening itself out.

The risk for an outcome focused person playing this game is changing their process due to the witnessed outcomes. If they went through some relatively barren periods, they may start to lose faith in their processes.

Perhaps say the number 7 starts coming up seemingly far more regularly, and separately they buy into the myth of lucky number 7. As a result, they decide to start placing bets on number 7 even though they have been told this is completely random. They will have been led by a focus on outcomes and ‘fooled by randomness’.

We see similar occurrence play out often in trading situations where a trader abandons their process and adopts the trades of a colleague on a good run. The trader is seeing someone else succeed and starts copying their choices.  

The danger here is the trader now no longer has any process other than mimicking somebody else’s trades. This situation is far more common than many people realise.

Process, Process, Process.

The same is true of financial market businesses as it of people. A couple of weeks I published an article on Ray Dalio and Bridgewater Associates, and how their success owes a great debt to creating a ‘Behavioural Edge’.

A key part of their success is their culture and the way they behave within that. Bridgewater work incredibly hard to ensure they are always trying to improve and enhance the behavioural aspects of how they work and function. In other words, their focus is on their process.

If the process is right, then good outcomes should follow. - It is all about the process.



Steven Goldstein is a leading coach who helps people, teams, leaders and businesses in the financial markets to cultivate better and stronger performance. Steven has a rare and unique set of skills having worked as a coach since 2009 and having been a trader for over 20 years at some of the world’s leading investment banks.


At Alpha R Cubed we work with people and businesses in the financial markets to help them explore how they could help improve and develop behaviour to catalyse stronger and more effective performance. If you are curious about how we could help you or your business, please email us at info@alpharcubed.com. or call +44 (0)7753 446097.

Monday, 4 February 2019

‘It’s Not The Markets You Have to Overcome, It’s Yourself’.



‘If only’ is something traders say a lot. 

If only I had the perfect entry and exit system. 
If only I had put more size on. 

If only I would have held on a bit longer.
If only I had followed what my gut said.
If only ….. (You fill in the gap).

Were ‘If only’, and it’s sibling ‘Should have’, represented as small notes of paper, you could wade knee-deep through them on the floor of any trading room. 

‘If only’ and ‘Should have’ represent the battle each trader has with themselves as they seek to navigate the uncertainty of financial markets. 

For you as a trader or investor to succeed, it's not the markets you have to overcome, it’s yourself. 
‘It’s Not The Markets You Have to Overcome, It’s Yourself’. 

To The Victors Belong the Spoils.

An extensive research paper* found that whilst about 20% of traders make money in a typical year, they also found that it was not the same 20% every year.

The real success rate, those traders who achieved continued and sustainable success over many years, was actually closer to just 1%. 

And even then, only a small portion of that 1% achieved extraordinary outperformance: Otherwise known as ‘smashing it’. 

In this sense trading is no different to other fields of performance.

In sport, only a small number get to play at the very highest level, even though many will reach a very good standard. 

Sport provides a great analogy to trading. - The biggest enemy for any sports player is not lack of technical ability, the real enemy is the enemy within. 

During my trading years, I use to keep the following ‘Babe Ruth’ quote visible on my desk. ‘Never let fear of striking out, keep you from playing the game’. 

This quote sums up the mental challenge of trading, as much as it summed up the mental challenge Babe Ruth faced when he stepped up to bat. 

It emphasises the real challenge ‘Winning the Inner Game’. 



Winning the ‘Inner Game’.



The image below highlights the ‘Inner Game’ as the Foundation which the Outer Game rests on. 

I shared my own journey on developing my Inner Game as a trader in an article titled ‘What is Behavioural Trading?’

In that article I described my own awakening as a trader after going through a coaching programme and experiencing the huge impact this had on my performance. 

I now see many of my own clients go through a similar awakening and transformation as traders.

Developing the Outer Game, the tangible aspects of trading and investment performance, is relatively easy. It may not happen overnight, but in time and with good mentoring, one can become reasonably competent in these areas.

Becoming competent technically may mean you survive for a time, as I did. But somewhere along the line you need to become good. 

Even then, being good is still is not 'good enough'. To truly succeed you need to learn to become ‘excel’. 

Only the very good make it into the top 1%, and only the truly excellent become the small percentage of that group that ‘smash it’.

Becoming very good comes from developing 'Behavioural Mastery': Behavioural Mastery includes emotional intelligence, decision-making abilities, resilience, congruence between personal stance and risk approach, reigning in your ego, and a host of related factors.  

The sages of Financial Markets recognise this. - Warren Buffett said "You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ." He went on to say that 'The key to success is emotional stability'. 
'The key to success is emotional stability'. - Warren Buffett.
Learning About Yourself. 

During the first half of my trading career, I spent much time searching for that elusive technical edge, perfect system, or secret signal that I believed would help me excel. That search only lead to marginal improvements at best. 

What really helped me to make the big transition to a higher level was learning about myself, with a coach as a guide on that journey.

Leaning about myself involved learning who I was, how I was, how I was impacted by risk and uncertainty, how my interactions with the environment influenced how I behaved, my style and how it could provide an edge, and what parts of myself sought to sabotage me. - That was the catalyst for what lead to a huge improvement in my trading. 

We spend so much time looking outside of ourselves, that we miss what is in inside of ourselves. 

There is a great quote taken from the ancient Chinese general and philosopher Sun Tzu in his book 'The Art of War'.

If you know your enemies and know yourself, you will not be put at risk even in a hundred battles.
If you only know yourself, but not your opponent, you may win or may lose.
If you know neither yourself nor your enemy, you will always endanger yourself.


Getting to 'Know Yourself' is something every trader should seek to engage in if they wish to succeed in the long-term.

It is why I firmly believe that your success as a trader or as an investor does not come from learning to beat the market, it comes from learning to beat yourself.
 
*The cross-section of speculator skill: Evidence from day trading: Barber, Lee, Liu, Odean: Journal of Financial Markets 18 (2014) https://www.sciencedirect.com/science/article/abs/pii/S1386418113000190


Steven Goldstein is a leading coach who helps people, teams, leaders and businesses in the financial markets to cultivate better and stronger performance. Steven has a rare and unique set of skills having worked as a coach since 2009 and having been a trader for over 20 years at some of the world’s leading investment banks.


At Alpha R Cubed we work with people and businesses in the financial markets to help them explore how they could help improve and develop behaviour to catalyse stronger and more effective performance. If you are curious about how we could help you or your business, please email us at info@alpharcubed.com. or call +44 (0)7753 446097.

Saturday, 2 February 2019

WHAT IS BEHAVIOURAL TRADING ?


Behavioural Trading: Turning the Behavioural Spotlight on Yourself.

Reflection

If you think being given the trading strategies of the best traders in the world, or a signal system which tells you where to buy and sell will make you a successful trader, then I am afraid you have not yet worked out what trading is!

Behavioural trading is the idea that success comes not from knowing where or what to buy or sell, but to how ‘to be’ when buying, selling and managing your risk. 

There is a common belief, that the best traders succeed because they can control their emotions and because they think before they act.

That is far too simplistic: The successful traders I have met succeed because they master the behavioural side of trading, not because they can control their emotions.

I worked as a trader for over 20 years, and for the past 10 years have been coaching traders from across the buyside and the sellside of markets. The idea that you can help someone who lacks discipline to suddenly become disciplined is nonsense, but equally it does not mean they cannot  become a successful trader.

Some of the best traders I work with continually moan about their lack of discipline, yet they are very happy when their hunches lead them on to act on a news event which turns out to be the trade of the year. – Discipline would never have allowed them to take that trade.

Behavioural Trading is about knowing yourself as a trader or investor. Becoming aware of yourself, of who you are, how you function, what needs you have, and working out how you are going to meet them.

"Behavioural trading is the idea that success comes not from knowing where or what to buy or sell, but to how ‘to be’ when buying, selling and managing your risk." 

Behavioural Trading is not Behavioural Finance or Trading Psychology  

Behavioural Finance looks at the markets and investor behaviour to make sense of what is happening.  
Trading psychology is an observational assessment of what people engaged in trading are doing from a psychological perspective.

Both take a third person perspective. They look at the behaviour of others and try to make sense of them.

Behavioural trading is about turning the spotlight back on yourself and making sense what is happening for you.

It is about becoming aware of who you are, your nuances and habits, your behaviours, what drives and motivates you, what pulls your strings, what contributes to your success, and what undermines you.

The more you know and can make sense of how you function as a trader, and the more you can start to take control of how you work as a trader, and the more you can develop and sharpen your edge.  

"Behavioural trading is about turning the spotlight back on yourself and making sense what is happening for you."

The Metaphorical Mirror

Behavioural Trading is learning to look at yourself in the first person and to be objective about it. To see the real you, not an idealised version of yourself.  

Back in the year 2000, some 15 years into my own trading career. I was asked by the bank I worked at, to join an Executive Coaching programme.

Though the programme was intended to focus on developing me as a manager, the real value was what I learned about myself. - The structure of the coaching was highly reflective; the coach effectively took me on a journey through myself.

If I am honest, until then, I had largely survived as a trader. – Though that was not how I saw it at the time.

Using the metaphor of the music charts, my career until then had seen me produce a few hits and even a number one, but I could not say hand on heart, ‘I was a really good trader’.   

After the coaching, things started to improve dramatically.

It was not quite a light switch going on, but rather the beginning of a new phase which snowballed in the years ahead. The years after the coaching were by far the best of my career.

The coaching had held up a metaphorical mirror which for the first time allowed me to see myself not as I wanted to see myself, but as other would see me. – This was hugely empowering.

That coaching was the catalyst for what I now call ‘Behavioural Trading’.

Developing your ‘Behavioural Trading’ Capability.

‘Behavioural Trading’ helps people to craft a way of trading which fits themselves.

When we learn to trade, we go with the ideas and methods of others. Somewhere along the line we must develop a way of working which fits ourselves.

When I work with great traders, I have noticed how often they have crafted a way of working which is personal to them, which suits their personality, their beliefs, their style, their philosophy, their attitude to risk. This crucially helps foster trust; trust in themselves.

"This crucially helps foster trust; trust in themselves."

If I was to say what is the greatest attributes successful traders possess, it is self-trust.

After my own coaching experience, for the first time I felt that at the end of each year I could trust myself to generate a significant positive return. 

Luck was no longer going to be the defining factor, I had it in me to make good performance happen.

That is Behavioural Trading  

Footnote

People ask me often why I no longer trade. – During a conversation in 2009, the same coach who worked with me in 2000, planted the idea in my head of working as a coach, helping others to develop their behavioural trading capability. I jumped at this idea, believing I could still trade and coach. The truth is, trading is full on, I found splitting myself between coaching and trading impossible. – Coaching was my new passion, and I chose to focus on this.  



At Alpha R Cubed we work with people and businesses in the financial markets to help them explore how they could help improve and develop behaviour to catalyse stronger and more effective performance.

If you are curious about how we could help you or your business, please call us or email me at steven.goldstein@alpharcubed.com.

Steven Goldstein is a leading coach who helps people, teams, leaders and businesses in the financial markets to cultivate better and stronger performance. Steven has a rare and unique set of skills having worked as a coach since 2009 and having been a trader for over 20 years at some of the world’s leading investment banks.

Saturday, 3 June 2017

Becoming the Master of the ‘Best Guess’: The Challenge of Trying to Win at Trading


During a recent conversation with a coaching client, the client remarked to me that 'He could not see any logic or rationality in anything in the market'. - He wanted my opinion on this, and how he should manage this.

I explained how often the logic we apply to the market is rarely fully formed or complete. If we wait for completion of the logic, the market has usually moved to discount it. Thus, often we must make a decision based on incomplete information.

'Often we must make a decision based on incomplete information.' 
This is challenging for many, but it can also often is the best time to trade. - At this stage, the market has yet fully moved to price in new ‘value factors’, thus the risk/reward for an idea may me much better.

Equally there is a risk that the picture we see forming may be false. This is why, in my opinion, great traders, are often ‘Masters of the Best Guess’.

The Human Mind and Best Guessing
Making a best guess is extremely challenging. The human mind dislikes incomplete pictures made from a few basic focal points and often seeks to complete the picture based on previous experience.

Our minds seek extra insight to complete an incomplete picture or story. However, often it does not have the time, data or resources available to do this. What it therefore does is fill in the gaps to allow us to make the best sense of what we can with the information we have.

The danger is this can undermine our vision and our perception can become easily distorted. The narrative may be correct, but equally it may represent a logic based on a false premise used to justify a ‘feeling’ based decision, or a decision not necessarily based off clear logic (Which abstractions often are).

I confided in my client that when I was a trader, this happened to me on many occasions, and sometimes seriously sabotaged my trading.

I shared an example with him from my own trading: Bizarrely the example I shared with him was one that turned out to be a successful trade.

The rationale for the trade was based on a technical set-up, however once the trade was in motion, I then started to form fundamental narrative which fitted with what was happending. The logic-based narrative which I constructed was based on a macro-economic fundamental case and turned out to ne completely wrong. It was not relevant however as the trade had been extremely successful.

The discussion with my client continued and my client raised the famous trading mantra; - ‘Trade What You See, Not What You Think You See’.

The challenge in markets is that 'what we see' is rarely is, if ever, a true and complete image. Rather it is a pieced together image based on templates from experience. This is how the brain works.
'The challenge in markets is that 'what we see' is rarely is, if ever, a true and complete image.'
Optical illusions provide good examples of this:

In the image below the squares marked A and B are identical in colour and shade. However, your brain is not seeing this because it expects something different given the checker board pattern and the shadow cast by the green cylinder.

Your brain is telling you that square A and B are different colours.

No matter how hard you stare at them, whilst they remain in this format, your brain will not allow you to see the truth. You may wish to go to this link explains this.



Or watch the video below.  


Another excellent example, which I think provides a better metaphor for markets is this image:




Markets never show us a clear and logically constructed picture. There are just too many variables, different views, vistas, and possibilities. We are therefore left making ‘best guesses’, whether we like it or not.

Your Job as a Trader is to Master Guessing.

Thus, your job as a trader is to become the master of playing the ‘best guess’ game.

It is for that reason we need to have checks on our behaviours, on our optimism and pessimism, on our own arrogance and on our levels of confidence.

It is why we need some sort of process and structure to our trading, our analysis, our trade management, and the juxtaposition of all the aspects.
'Your Job as a Trader is to Master Guessing.'
Summary
We cannot help ourselves as humans in applying logic and rationalisations to fill gaps in data or to try to explain data or events, it is how we work. This is both our blessing and curse.

This is why the concept and idea of 'Behavioural Trading' is so vital to learn to succeed as a trader or an investor.

Behavioural trading is about mastering the 'Inner Game'.

The starting point is greater self-awareness.

Greater self-awareness, means understanding the basic drivers of your decision-making and behaviours, developing an understanding of who you are from a ‘third person’ perspective, and being conscious of how your emerging situation impacts your behaviours and actions.

As you become more self-aware, so you should be able to start capturing the upside of your capabilities more effectively. You should also become better at limiting the downside which results from some of the negative aspects of how we function.

This is why we believe 'Its not the Markets You have to Overcome, Its Yourselves'. 

This will enable you to more effectively develop the skills need to ‘Guess’ successfully.

This is what will help you to increasingly become a master of the ‘best guess’.

It is why I firmly believe that your success as a trader or as an investor does not come from learning to beat the market, it comes from learning to beat yourself.

*The cross-section of speculator skill: Evidence from day trading: Barber, Lee, Liu, Odean: Journal of Financial Markets 18 (2014) https://www.sciencedirect.com/science/article/abs/pii/S1386418113000190


Steven Goldstein is a leading coach who helps people, teams, leaders and businesses in the financial markets to cultivate better and stronger performance. Steven has a rare and unique set of skills having worked as a coach since 2009 and having been a trader for over 20 years at some of the world’s leading investment banks.


At Alpha R Cubed we work with people and businesses in the financial markets to help them explore how they could help improve and develop behaviour to catalyse stronger and more effective performance. If you are curious about how we could help you or your business, please email us at info@alpharcubed.com. or call +44 (0)7753 446097.

Alternatively email steven.goldstein@alpharcubed.com or visit the website www.alpharcubed.com.
 
Join the flourishing LinkedIn Group ' Behavioural Trading'. and follow me on Twitter.