In a recent post, Mike Bellafiore raised the important question of “Why Do You Trade?” In that post, Dr. Jonathan Katz pointed out that the motivation to make money is often not sufficient to sustain traders. He explains that, “People need to continually find new challenges in what they do and pursue.”
This is a great topic, because it separates those who sustain trading as a career from those who burn out on trading as a job. At every firm where I have ever worked as a trading coach—and those firms include investment banks, proprietary trading firms, and hedge funds—I have seen skilled, successful traders go through lengthy losing periods. Indeed, one of the way perceptive investors knew that Bernie Madoff was not legit was that his track record did not include such protracted drawdowns!
If making money is the sole or dominant motivation behind trading, then normal and natural drawdowns will become threatening to the trader’s sense of self. Losing money will morph into feeling like a loser—and that’s a great way to turn setbacks into slumps.
In many professions, the gratifications from the work (a physician healing a patient; a teacher mentoring a student; a builder constructing a beautiful house) are separate from the monetary payments received. In fields such as sales and trading, the success and failure of the work are more directly tied to monetary outcomes. If I’m a psychologist at a hospital and insurance companies reduce my fees, that will be frustrating, but it won’t affect my feelings about my work with clients. If I’m a trader or a pharmaceutical salesperson and I don’t make good money, it’s harder to find meaning and gratification in my performance.
For me, trading is all about mastery: the mastery of markets’ complexities and the myriad challenges of self-mastery. Making money is an affirmation of that mastery, much as a close physical bond is an affirmation of a meaningful romantic relationship. But it is no more sensible to pursue trading to make money than it is to pursue marriage to get sex. The affirmation is not the goal: it is what is experienced when personally meaningful goals are achieved.
From the perspective of mastery, every drawdown is something to be embraced. Drawdowns tell us that we have lapsed, either in our market mastery or in our self-mastery. Perhaps markets have shifted regimes and are responding to new factors; perhaps we have failed to remain consistent in the best practices that generate ideas, translate them into trades, and manage those positions. Either way, losing money has a purpose: to make us better. It does not have to be a threat to self-esteem: it can be an opportunity to expand oneself.
I’m writing this at 6:30 AM on a Saturday morning. The reason I’m writing at 6:30 AM is that, from 4:30 AM until now I have been working on identifying past market regimes that have behaved similarly to the present market. It’s unusual to have market corrections with low correlations among sector groups and low volatility. I needed to figure out what that’s all about, because maybe—just maybe—that will help me help a trader somewhere down the line.
And that’s what it’s all about: to want to get up early of a weekend morning to push the envelope a little further and expand the horizons just a bit. Thanks to Bella and SMB for the opportunity to share what makes one battle-scarred guy tick after more than 30 years in the business.
Brett N. Steenbarger, Ph.D. is Clinical Associate Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical University in Syracuse, NY. In between keeping up with five children and six grandkids and writing a book every few years, he hangs his hat at a U.S.-based hedge fund.