Q&A with Steven Goldstein

Why Is Managing Our Emotions So Critical to Success in The Markets?

The following two statements are both accurate:

1) We are emotional beings and we have relatively little control of our emotions, particularly under stress.

2) The quality of our decisions, and our ability to objectively assess what is happening in markets is heavily impacted by our emotional states.

In a nutshell, that is the big emotions dilemma. 

There is another point, however. We tend to think of emotions as bad, but that is a very jaundice way of looking at emotions. Your emotions are often the cause of your brilliance, your unique abilities, your resilience, and your strength. Success at trading requires the ability to sense and scan news, data and information, develop insights, generate ideas, make plans, then put all those plans into action. There are many ways your emotions help you achieve this. Every great trader in some way has been able to master these skills and do so in ways which fully utilise their emotional capabilities.

Of course, the ability to be objective, balanced, and make decisions also requires not allowing emotions such as fear, greed, envy, and shame to control you. It is a balance! This is why managing your emotions is so vital. 

After suffering a big loss, or a string of losses, what is the best way to mentally recover from that?

I experienced losses such as these many times in my own trading career. These varied from the stomach-wrenching large losses, to the string of losses often termed ‘Death by a Thousand Cuts’. The large losses were easier to deal with, yes, they were more painful at the time, but once you suffer that heavy blow, you are forced to step back and reconsider things. Whereas the ‘Death by a Thousand Cuts’ occurs by stealth and is often drawn out over time. Often people are not even consciously aware of the depth of the cumulative drawdown and their impaired mental state at these times, and thus will keep going back in for more, sometimes, upping the ante.

Two factors are usually present when a trader suffers a large loss. Firstly, the individual has been put into a ‘Tilt’ state of mind. If it were a Poker match, the individual would have lost all his pot soon after going on ‘Tilt’. This is one of the key differences between poker and trading, a poker player is forced out, but traders usually still have a pot, and thus remain at the trading desk long after they should have withdrawn. The other factor is that the trader is usually totally ‘out of synch’ with the market. At times like this, they cannot buy a winning trade. Naturally they need to re-synchronise with the market, but their ability to do this when they lack the balance needed to be objective, is extremely limited.

Consider trading as analogous to boxing, your mind is severely bruised, your ego is hurt, your emotions are frayed. Taking a break is the only antidote. Like a boxer’s body needs time to heel, the trader’s mind also needs time to heel so that their emotional state can return to balance.

How do I get my confidence back after going through a losing streak? 

Once a trader takes a step back, they can soon start to regain clarity and personal balance. This period of time off can be anywhere from a day or two, to several weeks.

I will share a story which is a great example of this. It was with a bank client I was working with a few years ago, actually in Australia ironically. The bank trader had been through a horrendous long period of ‘Death by a Thousand Cuts’. His trading had taken him to the brink of losing his job. I had been asked by his manager to see if I could work with him to help him get out of his situation. This was not a novice trader, but someone who had almost 20 years behind him in the market. Drawdowns and losses hit all traders irrespective of how long they have been in the game.   

The first step was to get him to stop trading, but this was harder than it sounds. This trader couldn’t help himself, he always thought he could make his money back, and he continued to trade at first. Eventually as he got closer to the automatic limit where he would be stopped from trading permanently, he realised he had to stop. Following his second coaching session, he agreed to take two weeks off.

After this break he told me how much better he felt, ‘it was as if I could see again’ were his words. This emphasised the degree to which he had lost sight of reality until that point. 

The next stage was to get him back in synch with the market. I suggested taking tiny positions, the size was irrelevant, we just had to get him back in synch with the market and feeling the market again. We also had to do so, without him suffering any meaningful setbacks that could have caused him to breach his permanent stop. He could have tried paper- trading, but he and I preferred doing something however small, just to give it a little more realism.

Over the next few weeks he started to re-synchronise with the market again and his mojo and enthusiasm started to return. We had to be careful not to rush in, as there was a temptation on his part to get more engaged. Eventually, we did start upping the size whilst keeping it far less than usual still. The trader soon got into a decent run, and we used this to up the size further, though still being on the conservative side. Building back confidence was more important than trading p&l at this point.

The remainder of that year went well, and though he still finished the year in negative, it was not remotely close to the lows. Furthermore, he was off the radar for now of the heads of the trading business. Going into the next year, his confidence and self-belief had returned, and I was delighted to say that the following year he started back at this normal trading size and had a stormer.     

How do I know if my strategy or edge really work?

Your strategy is your overall approach, and this is something you keep working on and adapting. It is impossible to know if your strategy will really work, but successful traders develop their strategies over years and adapt to changing market conditions as they arise. There is no best strategy. I do wonder if by strategy you may have meant your system.

Part of your strategy is your system, which I define as the series of actions you take in order to monetise your analysis, and this may include the analysis process itself.

Firstly, let me say that there is no strategy or system which is ever guaranteed. Just ask the geniuses behind LTCM. They believed they’re found a perfect strategy that couldn’t lose, and in doing so, it created the very instability which saw it suffer massive losses. Every strategy or system, in order to have the potential to provide rewards, must by implication have the potential to fail too. So in the sense, it is not about whether your strategy or system will work, but is it a reliable strategy or system, is it capable of producing a positive expectancy over time, and how do you work with it most effectively to make sure I monetise the positive expectancy.

When you are talking about edge, then this is a whole different matter. Trying to actually define what your edge is, is incredibly difficult. I often ask people what their edge is, and they say, ‘I’m smart, intelligent, logical’. Well, guess what I say, ‘you and the rest of the market’, that is not an edge.

Truth is most people wouldn’t know what their edge was if it hit them in the face. I spend a lot of time in my coaching trying to help people find their edge. Once it becomes clear and apparent what their edge is, then that edge can grow in power. Saying that, even traders who are successful aren’t necessarily sure why, they often attribute it to some other factor, usually along the lines of them being smart, intelligent, logical.

I do not believe an edge is necessary one thing, but usually an accumulation of many different marginal factors which combine and compound to form an edge. And often that edge is only marginally slim. This is why I feel it is useful to know where your positive edge is, and your negative edge for that matter; we all have negative edges too. The only way you can truly know if your edge really works, is whether you are still in the game. If so, it is probably working thus far. But it will need to continue working, and you will need also to make it work more effectively. Survival will only take you so far, at some point you must start thriving too. Ultimately if you do succeed, it will be that you were able to leverage your edge fully, which enabled that. 

The Importance of Having a Mentor

Let me start with this dilemma. You are dropped in the middle of the Amazon rainforest, you have a few weeks supply of food, a machete, and a small medical box. You have to somehow figure how to get out of the jungle and back to civilisation. The chances of you succeeding this are daunting enough as it is, but you aren’t doing this in isolation, 99 other people have been dropped at various places nearby with the same challenge. If they come across you, they will kill you and steal your supplies. It really is dog-eat-dog. Now you can do it on your own, or you can forfeit some of your supplies, and invest in bringing an experienced guide with you who has faced this challenge many times before. The forfeiting of supplies is a cost to you, and there is no guarantee the guide will help you succeed in that challenge, but nonetheless, your chances of success have just gone up considerably.

Finally, there is a massive prize for the winner, but there can only be 1 winner in this challenge, so yo may escape, but if another escapes the jungle first, it was all for nothing. The reason the number matters is because only about 1 in every hundred people who try their hand at trading will go on to achieve success. 

I use that example to explains the importance of having a mentor. 

That said, I would like to expand on that now, as you are really in my space here now.

To succeed in the world of sport, physical endeavour or military combats, or any activity of performance and endeavour, your techniques and skills have to supported by mental and psychological strengths which in turn rely on good processes and practices that enable you to execute actions effectively, under pressure, in the heat of the moment. Trading is no different to this, and to consider it to an intellectual exercise, will undermine your chances of success. If you are serious about competing at a high level, in any of these fields you work with a coach and often a mentor too. The higher up you go, the more coaches and mentors you have. Sportspeople at the top of their game may have several coaches, if you decided you wanted to learn to climb seriously so you could challenge some of the world’s biggest mountain presumably you would work with someone acting as a coach, who would literally show you the ropes and help you prepare for the huge challenges which lay in score. Likewise, if you are in the military and join an elite special forces unit, you are coached almost until your eyeballs fall-out.

Coaching helps people achieves levels of performance that on their own they are unlikely to ever attain. It gives them an edge, it helps them develop new capabilities, it challenges them and holds them to account and it catalyses growth in areas which would otherwise remain challenging for them. The whole point about working with a coach, is that the odds of success massively improve.

That said, there is a quandary about coaching in the world of trading. There are many people who call themselves coaches but have had no development as a coach. Coaching is a profession. I myself have gone through years of training and hundreds of hours of learning and have attained professional accreditation as an executive and performance coach learning high levels skills, methods and techniques. I’ve also done thousands of hours coaching people in trading and risk roles, as well as with leaders and managers, honing my technique and craft which supports people to change, grow and transform. But anyone can say they are a coach and offer their services, and this is part of the problem. I see people who have spent next to no time either developing themselves as a coach or have had no time working as traders or very limited experiences and never achieved anything remotely close to succeeding offering themselves as coaches. I was a professional trader for 25 years working in the markets for major investment firms. So it really is buyer beware. And if I’m honest, there are very few trained coaches with experience working in the industry.

I will now differentiate between a coach and mentor; the boundaries aren’t always clear.

A mentor can be thought of as many things, but perhaps the best way is to see them as a guide. Someone to show you the ropes, lead the way, someone who has been there, who has suffered and battled and thus can advise you, and who you can resonate with. Most successful people have had a mentor, someone who was pivotal In their success at an early stage of their career. The mentor doesn’t always have to be from the same career, they can be a person you know who inspires you and can offer sage advice. The challenge for many is finding a mentor. Usually it is someone in a trading role already. But here is the issue. People aren’t going to be able to stop what they are doing to mentor you. Traders are extremely busy people, dealing frantically with the challenges of the job. Most people I know who had mentors, happened to work with them. They were in the same trading floor as them, be it an exchange or trading room. Being located with them meant they didn’t have to stop, they were around them, mentoring them often as they went.

The overwhelming majority of retail traders would not have access to a physical mentor. They can however get services which enable them to have a mentor of sorts, though I lean towards being cynical on how effective these are. If I go back to my own trading career. I cannot imagine having the time to mentor someone who was not physically around me. But if you can however get a decent mentor, it could prove extremely valuable to your growth and chances of success.

Thanks Steven

I’m incredibly grateful to Steven for the amount of time and effort he put into this QnA. The psychological component of investing is rarely discussed but ultimately is so crucial for success and thankfully Steven is an expert in this field. If you want to get in touch with Steven you can follow him on Twitter or via his website: alpharcubed.com