Continuing the series Seven Lessons I’ve Learned, I wanted to talk about the right lens or framework for understanding trading. Is it “combat”, is it a “sport”, or is it “a treasure hunt”? All of these are valid metaphors for describing some aspect, but I don’t feel that it captures the essence of the activity.
Instead, peak performance is the lens that I use. To me, peak performance means performing well under pressure, as is the case in many fields like sports, medicine or other stressful professions. In our case, we are making risk/reward decisions about what to do with our capital. The causes of pressure are numerous and come from a variety of internal and external sources. They can range from the gyrations in the market to our own psychological state. No matter what the market conditions, we still have to make the right investment decisions. No matter what our P&L has been recently, we still have to make the correct decision. No matter how we’re feeling and how little sleep we got last night, the markets are still open. We still have to manage positions and to seize opportunities as they arise. Ultimately, our goal is to trade as if those pressures don’t even exist.
The good thing about this is that we can draw on lessons from other peak performers. There is a huge body of literature as to what works for cultivating skill and expertise and what sparks peak performance. Scientists and researchers have studied peak performance in numerous fields, whether it be medicine, music or sports. They know what it takes and how to develop expertise and skill in a field. We know what to do to improve at a certain discipline. The general process for getting better and is well-established. We just need to adapt it to our own particular circumstances.
There are a few main points that are of fundamental importance for generating peak performance:
- Deliberate practice is necessary—defined as “a highly structured activity engaged in with the specific goal of improving performance.” You have to stretch yourself consistently if you want to be the best. You also have to train up the skills that are necessary for your success. If you’re going to play basketball, then you need to engage in separate drills for dribbling, passing, shooting and playing defense. If one is your weak point or not something you like doing, then it’s even more important to do so. Deliberate practice is a set of drills and preparation that is specifically designed to work on your skills. By improving and perfecting all of the skills that you will need, you are making the right steps towards success.
This is a never-ending discipline. Even the best basketball players will still practice shooting and passing every day, no matter what. For traders and investors, deliberate practice will look different, but it still should be structured and intense. It could mean plotting out various scenarios in the market and anticipating your reaction. It could mean digging through your existing positions again to make sure that the investment cases still make sense. It could mean putting in that extra half hour of preparation in the morning, when no one else is around. Or for a long-term investor, it could mean stretching yourself to put more detail into a financial model in a shorter period of time. Deliberate practice may look different depending on what we are doing in the markets; but remember to make it intense, challenging, and designed to contribute to your overall performance.
To summarize, forget “practice makes perfect”; rather keep in mind that, “perfect practice makes perfect”.
- 10,000 hours. You have to put in an enormous amount of time and effort to achieve mastery and to acquire the necessary skills. As Malcom Gladwell popularized in his book Outliers, the typical top performer in any field has put in 10,000 hours of preparation. And not just any kind of preparation, but skill-building deliberate practice. Even seeming child prodigies like Mozart or Bobby Fischer didn’t appear out of nowhere and ride their seemingly limitless natural talent to success; they too had put in the necessary hours of hard, structured practice to reach that level of expertise. There are no shortcuts. You devote significant amounts of time in order to be successful in the markets.
In the markets, there are several consequences. The first is that you should prepare for a long journey to gain skill in the markets and be patient. It takes time to put in 10,000 hours of preparation! While you should be taking risk early on, you shouldn’t be taking any significant risk until you have put in a healthy amount of preparation and practice. Investing should not be about gambling or trying to get rich quick. Don’t get frustrated with yourself if you’re not “there” yet. Rather, focus on being tenacious, building your skills and knowledge of the markets and on getting a bit better every day. After a year or two of solid effort, you should be well on your way.
- Automaticity. These skills need to be practiced until they become automatic and performed without thinking. A top-tier basketball player has perfected everything about his jump shot and practiced until it becomes automatic, something that he can do without thinking. A chess grandmaster can play blindfolded, visualizing the entire board in his head. Similarly, an elite trader or investor will have perfected his methodology and everything else to the point that he can execute it flawlessly, even under the most difficult of circumstances. If he can’t execute it automatically, then he risks holding on to positions too long, panicking too early or getting chopped up by changing market conditions.
- Preparation. Any kind of practice or preparation needs to be carried out under conditions that are as close to possible to game time. As Dr Shane Murphy writes in his book, The Trading Athlete, any preparation needs to prepare you for performing under game time conditions, otherwise it will not adequately prepare you. A great example of this in action is the Southern Utah University basketball team, which has seen its free throw percentage improve dramatically after it changed the way that it practices free throws. Instead of shooting them before practice in a haphazard way, now they attempt them in the middle of practice, with penalties for missing them—as close to simulating the game-time experience as possible.
The lessons for the markets are quite straightforward. If you are just starting out, then you can use a simulator to gain familiarity, but your goal should be to move on to real money as soon as possible. There’s a reason that SMB has its newbie traders using real money so quickly. Even if the sums are not meaningful, the best preparation for trading substantial sums is to risk small amounts of real money. It will give you the feeling of trading or investing according to that methodology, in real time. You will learn to execute it flawlessly. Moreover, you will endure the emotional ups and downs that can accompany P&L swings, learning how those emotions can interfere with your ability to make sound decisions. Once you’ve proven yourself on those small sums, then you can work your way up to larger sums.
To put this all together, I want to give an inspiring example of automatic peak performance under pressure: the team at Pharo Management, a leading macro hedge fund focused on emerging markets. On September 11th, their offices were located on the 85th floor of the World Trade Center, two floors below where the first plane hit! Yet they had prepared for a disaster scenario and were able to execute on the plan, despite having to deal with the stress of the actual terrorist attacks and having to evacuate the building. In the end, they were even profitable during the whole timeframe. This is where skill and preparation combine to generate automatic peak performance.
One of the main paths to better preparation and to building skill is constant reviewing and tweaking. The concept of tweaking and reviewing that it is one of the three core parts in my book’s representation of a trader’s development. Thee three steps are: Plan the Trade; Trade the Plan; and Review/Tweak. By thinking of in these discrete steps, we are able to understand better the life cycle of a trade and the various component parts of it. By making reviewing and tweaking an integral part of it, then we are able to diagnose issues and where in our process we need to make changes.
In undertaking deliberate practice to build our skills, we need to be constantly aware of how we’re doing and which areas may need improvement. To make that more effective, we have to being keeping track of a variety of measures of our performance and be monitoring them in real-time. Obviously, we follow the basics like P&L. But we also need to be measuring as much as possible of the inputs. What kind of justifications or rationales did we have for each position that we put on? What kind of characteristics did each trade have, relative to our ideal setup? How did various entry points and exit points perform and what kind of P&L did we generate? How has our strategy performed under varying market conditions? How have we been doing—have we been sticking to our process consistently or deviating? How have our moods and work ethic been over the past few months? Once you start digging, you can see that there are almost innumerable variables to track and things to think about. But it is only by reviewing and monitoring the widest range of data that we can zero in on exactly which areas we can fix, change or upgrade.
The extension of tweaking and reviewing is seeking out coaching. In a macho field like investing, coaching can often be shunned because it is viewed as an admission of weakness. Coaching is hardly a sign of weakness—it is the gateway to improving our skills. Top performers like Michael Jordan, Tiger Woods, and Peyton Manning have all benefitted from a host of coaches to work on various specific aspects of their game. Tiger Woods had a small army of coaches, with one focused on his putting, another on his long, yet another on his mental game, etc. Having various coaches does not mean that he needed a ton of help. In fact, the opposite probably holds. It is precisely the “coachability” of these athletes that accelerated their development, as they were able to address these weakness, build on their strengths and to take their game to the next level. We too should seek out the objective, outside feedback that comes with a coach or mentor in order to get better. It could be from a more experienced trader, from a boss or even from a professional coach that we seek out. If none of those are possible or affordable, then we can try to be our own coach. Dr. Steenbarger has written an excellent book, The Daily Trading Coach, full of practical advice on how to be our own trading coach.
We have addressed the ways to build expertise that are specific to what we’re doing in the markets. There are also methods from outside of the markets to help us to create peak performance. I’ve included these separately because there less of a direct link that with such tools as deliberate practice. Rather, they foster an overall environment conducive to developing skill and achieving mastery, in any field.
1.Rest and Relaxation. I have emphasized this in the past, but it bears repeating. We need to take time off in order to let our brains recover from the difficulty of learning and processing so much. We can only stay focused for so long before we run out of energy. Even the best performers, like musicians or writers, can only do 4-5 hours of intense, deliberate practice per day. After that we are fatigued and need to recuperate. The downtime helps us to unwind, to lower our stress levels and to let our new learnings soak in. In a famous study of musicians who were training, the second biggest factor in their success was the amount of rest that they got. The benefits of rest are important for improving our overall state and performance.
- 2. Mental Practice. Mental practice is the perfect booster for regular practice. A famous study by Alan Richardon demonstrated that visualizing free throws was as effective as actually shooting free throws.While it may sound fanciful, it works because mental practice utilizes the same brain circuitry as regular practice, thereby strengthening the existing neural connections. We should utilize some visualization exercises in our daily preparation to reinforce the work that we are already doing. Combine this with meditation or mindfulness exercises and we will have the optimal mental state for achieving peak performance.
- Overall health. In addition to rest and relaxation, we need to treat our bodies well in order to get the most productivity. We should try to engage in some routine exercise; to watch what we eat and maintain a healthy weight; and make sure that we get all of the vitamins, minerals and fluids that we need. The mind is a part of the body and in order to thrive it needs the strongest, healthiest body possible. The combination of a healthy mind and body gives us the ability to work and think well even under the most taxing of circumstances
One challenge that we will run into is trying to perform when the stakes get high and the pressure is on. In the markets, this could be when the markets get very volatile or when we have just increased our position size. In any event, if the pressure goes up, then we run the risk of “choking”, i.e. failing to perform under pressure. We’ve all seen the top athlete who falls apart when the championship is on the line—and we certainly don’t want to become that person. Instead, we want to be Michael Jordan or Reggie Jackson, who are known for performing even better when the pressure is greatest. How can we do that?
I addressed this topic in great detail in another blog post, “Choking and Trading”, and will leave you with the main points. Stress produces a host of physiological reactions which can impede our performance in any field:
- Focusing on tiny details instead of the end goal. We’ve all seen golfers who deal with a stressful putt by waggling their putter 100 times. Stress causes us to focus on little details in an attempt to block out the pressure and to occupy ourselves with something that we can control. The problem is that we are losing sight of the end goal and thus less likely to achieve it.
- Hurting our creativity. Stress narrows the range of options that we feel we have, giving us that so-called tunnel vision. Just like the player who wants to pass only to one teammate and loses sight of the open man, stress often causes us to block off options that we would normally consider. With fewer options, we are even less likely to make the right decision.
- Reduce our emotional control. We’ve all seen well-composed people who “lose it” under pressure. This is a direct result of a reduced ability to control our emotions.
Stress can certainly impede our trading performance—we can choke in the markets too. Perhaps my favorite post from the SMB blog is “Trading is All Psychology”, about a trader who knows exactly which setups to follow and what to do, but who can’t pull the trigger when the moment arrives. This is choking in its purest form. What can we do to prepare ourselves for stressful situations, achieve peak performance and avoid choking?
- Reframe any stressful incident or choking. If we do choke, then we should not beat ourselves up over it. Instead, we should dwell on what we can learn from and do better. If we choked in the markets because we didn’t stop out of a losing positon at the right time, then we should work on improving our stop discipline. The
- By writing down and dumping out all of our anxieties before a stressful moment, we will usually realize that our fears aren’t as bad as we could initially make them out to be. We want to use this as a way of calming our anxieties and addressing them.
- Improving our physiology. How we hold our body has a surprising effect on how we feel. By practicing good posture and steady, deep breathing, we will actually feel more confident, capable and relaxed—the perfect antidote to trading stress. If you want to minimize stress in the markets, then get a good chair, get some fresh air, pay attention to your posture and do your breathing exercises.
We have explored trading as peak performance activity. Hopefully, this piece gave you an overview of what peak performance is; how it works; and what we can do to achieve mastery and avoid choking. Ultimately, if we want to become the traders and investors possible, we will want to use every resource possible to build our skills and to make sure that we can execute flawlessly. We want to perform at the highest level, and that means making and carrying out the right decision no matter what.
No relevant positions
By Bruce Bower | E-mail: Bruce [at] howoftrading.com
Blog: www.howoftrading.com | Twitter: @HowOfTrading
This is excellent stuff
I agree with you, but I think the 10.000 hours rule is a little misinterpreted by most people. The book Outliers quotes a variety of famous people, but they are all the absolute #1 in their fields and became world famous stars…
Unless a trader’s goal is it the become the best trader in the world, he will not need 10.000 hours to achieve trading profitability. Whereas you are right that become a consistent profitable trader requires a lot of hard work, sacrifices, constant analysis and much more.