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Q&A: Why Trading Is Nothing Like Playing a Competitive Sport

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A sports psychologist and in-demand Wall Street trading coach explains why finding the top of your game means NOT thinking like an athlete.

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As most of you have already discovered, the psychology component of trading and investing is often one of the most challenging parts for many to learn. From what I've seen, it requires a lot of experience combined with a keen sense of self in relation to your decision-making process to understand how best to utilize your strengths, skills, and knowledge to perform at your very best.

In continuing our summer interview educational series, I interviewed Doug Hirschhorn, Ph.D., best known as "Dr. Doug", and the author 8 Ways To Great: Peak Performance On The Job And In Your Life. Those of you looking for a good book to take on vacation for some extra-credit reading, I highly recommend it. As you'll see by our interview, Dr. Doug's perspectives are helpful to many of us involved in the markets and who desire to achieve big things.

Kirk: Tell us a little bit about yourself, what you do and how you first got interested in the markets.

Doug: My first passion is baseball. I played college ball at Colgate University until my senior year when I herniated a disc in my lower back. When I graduated college, I got a job on the trading floor at the Chicago Mercantile Exchange in the Euro Options pit. I loved the environment because it reminded me of the competitiveness I used to enjoy through playing baseball.

A few years later, I re-injured my back and then left the floor to trade online (late 1990's). After about six months, I decided I didn't want to sit and stare at a screen all day, so I changed directions and left the trading world. I was planning on going back to my first passion (baseball) and be a college baseball coach. I was scared but prepared to live by the motto of "do what you love and the money will follow."

When I found out I had to get a masters degree to coach at the college level, I looked around and discovered this new field called sport psychology. I knew nothing about it, but I loved the way it sounded, combining sports and psychology. I did my masters degree at Southern Connecticut State University (1998-2000) and had an internship with the University of Connecticut baseball team. As I was learning how to apply sport psychology principles to improve athlete's performance, a great idea hit me: I could use these same strategies to improve trader performance. After all, the fear, anxiety, confidence, risk-taking issues were almost identical. That was the foundation for my first book The Trading Athlete which I co-authored with Shane Murphy, a leading Sport Psychologist.

After I completed my masters degree, I went to West Virginia University to do my doctorate in Sport Psychology. My plan was to be a "trading psychology coach" when I graduated. The job didn't really exist so I was planning on creating it for myself. After my first year at WVU, I was offered a job at a large proprietary trading firm in NY to be their trading psychology coach. I left WVU and I moved back to NY. It was a risk and I was pretty scared. I remember talking with my wife about the decision and telling her that I didn't know if it would work out, but I did know that if I didn't give it a shot, that I would regret it for the rest of my life.

So I compartmentalized my fear and followed my gut. That was 2001. After a few years with that firm, I accepted a position at a hedge fund (in a similar role). A year and a half later, the hedge fund went through some tough times and I was laid off along with half the firm. It was at that point that I formed Edge Consulting and began to coach traders full time.

At the moment I am currently on retainer as the trading psychology coach for several major banks (i.e. Credit Suisse, Deutsche Bank) and have worked or currently work with traders at seven of the ten largest banks in the world. I am also on retainer with several multi-billion dollar macro and fixed income hedge funds. I am a sole practitioner and frequently appear in the media (CNBC, CNN, BLOOMBERG, FOX, TODAY). My coaching practice focuses on improving the performance of elite traders, large portfolio managers and principals of hedge funds.

Kirk: What were some key lessons you learned early on that had the most positive influence on you?

Dr. Doug Hirschhorn: Some of the key lessons I learned were:

  • Making money is easy, keeping it is hard
  • You can have a 1000 reasons to get in a trade, but you only need 1 reason to get out
  • Focus on the process (quality of your trades), not the outcome (profits/losses)
  • Know what your edge is (what your pitch looks like) and trade only when you have edge (swing only when your pitch appears).

Kirk: Out of all the personality types that exist, do you think there is an ideal personality type for a trader?

Dr. Doug Hirschhorn:
I don't believe the ideal personality type for a trader exists. I believe anyone can be successful in trading while the level of success, of course, will vary.

I think successful trading is about understanding your own personality and then developing a trading style or approach that matches your personality. For example, if you are an analytically minded person, then you should develop a longer-term, fundamental or technical approach. If you're an intuitive type person, then you will be successful with a shorter-term, price-action approach. Where I see traders get messed up is when they try to trade in a style that is in conflict with their personality or when the market is paying a specific style of trading and the trader loses patience and tries to change their natural trading approach.

Kirk:
One thing many people notice is that Wall Street firms tend to hire a lot of former athletes. So, in your research, do athletes make better traders?

Dr. Doug Hirschhorn: No, they do not. My doctoral dissertation actually examined the assumption that traders with athletic backgrounds are more successful. My data showed that this was not true. In my applied practice over the past decade, I can tell you that I spend more time deconstructing the athlete mentality then layering it into someone.

I would even go as far as saying that Trading is NOT like sports:

  • In sports, you are NOT supposed to think, "What if I mess up this shot?" In trading that is called risk management.
  • In sports, when you miss a shot, you don't lose points. In trading, when you get a trade wrong, you lose money.
  • In sports, the opponent adjusts to what YOU do. In trading, the market does not know or care about YOU.
  • In sports, you focus on improving weaknesses. In trading, your strengths are your weaknesses and vice-versa.
  • In sports, if you get poor results, you need to practice harder, put in more effort. In trading, effort is not positively correlated to improved performance.

Kirk: That's a terrific observation. I must also ask you about another thing. If practicing harder does not mean you'll receive better results, then what does?

Dr. Doug Hirschhorn: I hear a lot of traders say they work hard but fall short of reaching their potential. Why does this happen? The problem is they don't work hard on the right (mental) stuff, such as taking the time to know how you are hardwired; figuring out your "edge" (competitive advantage); learning the basics of how to take "smart risk" by thinking in terms of expected values and finally by holding yourself accountable. I remember years ago doing a workshop for a large group of college baseball coaches. I asked the group, "What % of baseball do you think is mental?" Their responses ranged between 50% to 95%. I then asked them, "How much time do you have your players work on their mental game?" Their responses were, "0%, 5% or at best 10%." So how does that make sense, you think more than 50% of the game is mental but you only spend 5% of your time on it. Guess what, I realized the same goes for trading. But for traders, I get responses like 90% or 95% is mental; yet they spend zero time working on their mental game.

Kirk: Why do most traders fail?

Dr. Doug Hirschhorn: Fear. First, fear of missing out on opportunities to make money. Second, fear of missing out on opportunities to limit losses. All trading problems stem from those two things.

Kirk: If fear is the number one enemy, as you say, then what are some specific steps traders can take to manage and overcome that fear?

Dr. Doug Hirschhorn: I have three recommendations:

1. Recognize when fear is present
2. Welcome it (normalize it)
3. Implement a behavior modification program (with real consequences) to prevent you from acting on it

Kirk: How do traders frequently sabotage themselves in the markets?

Dr. Doug Hirschhorn: They stray from their own game plans often because they get influenced by someone else's opinion. This is another reason why comparing yourself to others is destructive rather than beneficial.

Kirk: What do you think are the greatest misconceptions beginning traders have about trading the markets and about trading systems?

Dr. Doug Hirschhorn: That you have to be right more often than you are wrong in order to make money. Fact is 45% to 55% is the average winning percentage of most traders. Some of the greatest traders I have ever worked with have winning percentages lower than 45%. Profitable trading is not about being right or wrong, it's much more about how much you make when you're right versus how much you lose when you're wrong.

Kirk: Many new traders often report experiencing information overload. Do you have any recommendations on how to combat this challenge?

Dr. Doug Hirschhorn: Yes, know what your edge is. Have a check list of things you look for. Keep the list simple. The rest of the stuff happening is just noise, so ignore it.

Remember, your winning ratio is going to be around 45% to 55% anyway, so spend less time trying to be right and more time on sizing your positions properly and managing your risk.

Kirk: In your view, how often should a trader spend time looking in the rear view mirror and evaluating their performance? Isn't there a fine line between too much and not enough? Do you have general rules of thumb to recommend?

Dr. Doug Hirschhorn: I think the trader should review them for 15 to 20 minutes at the end of each trading day. Then when you go to bed, put it to rest. No need to go back to it in the future. The past is the past. You documented it. You learned from it. Then you should move on to the next day and focus on that.

Kirk: No matter what the trader or the strategy, we all experience highs and lows in the markets. How does one learn how to maintain confidence when their short-term results do not meet their expectations?

Dr. Doug Hirschhorn: By measuring their success based on the caliber of their process and trading decisions and not based on their profits/losses. For example, count the number of high quality trades you have each day. The goal should be to have over 90% of your trades be high quality entries and exits.

If you're doing the right thingsm over time, you will get paid. You have to have faith in that and in your process. Traders do not control when they get paid, which is the frustrating part, especially if it is days, weeks or months. If you're unable or unwilling to pour yourself into your process and have faith that doing the right trades (when entering and exiting positions) will eventually lead to success, then do yourself and your money a favor and don't trade.

Kirk: Excellent point! Many traders, including myself, struggle intensely on keeping a healthy work/life balance. Since most of us trade from home and understand that the efforts we put into trading often have a direct relationship with the profits we make, what suggestions would you recommend to me and others who struggle with this issue?

Dr. Doug Hirschhorn: I must repeat: more effort does not equal better results. In fact, more often it leads to over-thinking and diminishing returns. As I explained in a prior question; in sports if you get poor results, you need to practice harder, put in more effort. In school if you do poorly on a test, you need to study harder. In trading, effort is not positively correlated to improved performance.

As far as work/life balance, I'm not the right person to ask. I'm not a life coach, and I make that clear to my clients. They retain me to make them better traders, to get them to solidify their edge and to hold them accountable. They don't hire me to make them better people, better friends, or better spouses. I don't judge anyone. Balance is a very personalized factor and some view balance as working 16 hours a day doing what they love; others prefer to work less and play more. To each his/her own.

Twitter: @TheKirkReport
No positions in stocks mentioned.
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