Trading and investing performance occurs at the point where the trader and the market meet, where decisions are made and P&L (profit and loss) is ultimately won or lost. Traders and fund managers must take risk under conditions of uncertainty and be able to manage the outcomes of those decisions and their consequences, as well as coping with the wider pressures and stresses that trading can bring.

This is a psychologically challenging environment. Humans favour certainty over uncertainty, and when you take financial risk in such an ambiguous environment, with imperfect information and with high consequences, you are influenced (largely outside your awareness) by a whole number of brain, mind and even body processes that can influence your decision-making and behaviour in ways that lead to market returns which are sub-optimal. Emotions, your mood, your thoughts, beliefs and perceptions, your attention, mental shortcuts, your energy levels, the environment you are in, your past and recent performance, your hormones and your patterns and habits of behaviour are all factors that can play a part in your trading and investing decisions. Furthermore, changes in market conditions, increased competition in the markets, regulatory changes, institutional restructuring, growing automation, the rise of high-frequency trading, information overload and increasing pressures to perform have exacerbated the demands placed on traders and fund managers over recent years.

Beyond skills and strategy
Karl is a commodities trader who trades predominantly intraday with some overnights being held where required. Over the last few months he has been trying to run his trades a little further. He has a good belief in the levels that he selects in the markets, and his performance over the last few months has been relatively stable despite some choppy market conditions. When we meet he is keen to look at ways to hold his trades for longer. His profit targets are typically around 10 ticks (price movements) and yet he is more often than not getting out at around three ticks as a reaction to noise in the market, or his position moving offside (against him), only to see on many occasions that his original target level eventually gets hit. He knows what he wants to achieve from his trades, and believes in his ability to pick good levels at which to enter and exit the market, yet more often than not he doesn’t follow through with his plans. Take a moment to reflect on your own trading and investing experience. Have you ever:

• Taken profits too early, before profit level was hit?
• Run losses too far or moved your stop further away to avoid a loss?
• Taken trades that were not part of your strategy or approach?
• Not taken trades that were part of your strategy or approach?
• Taken too much risk; traded too big?
• Taken too little risk; traded too small?
• Chased your losses, or revenge traded?
• Overtraded in a state of euphoria?
• Traded through boredom?

All of these – as I can testify from my experience in working with thousands of traders and fund managers across the globe and across asset classes – are quite common trading behaviours.

As early as 1759 in The Theory of Moral Sentiments, (1759, printed for A. Millar, London) Adam Smith described the battle between the “impartial spectator” and the “passions”, between knowing what is right and best and the challenge of temptation and instant gratification. Not much has changed in all those years – Warren Buffett talks in a similar way abouttraders and investors needing to avoid the “temptations and urges” that get other traders into trouble. We are still fitted with the same mental software, the same brain information-processing systems, and as a result we are still experiencing the same dilemma.

The key challenge in trading is not so much “Knowing What To Do” (KWTD) as “Doing What You Know” (DWYK). This creates the psychological gap that exists between having a strategy with a positive expectancy and actually trading it in such a way that it returns something close to those expected profits. One very experienced trader I worked with in a training session at a leading investment bank remarked how just being able to get better at running his profits and cutting his losses would have a considerable impact on his P&L, and how this was true for other traders in his team and across the trading floor.

To perform well in the markets you need more than just skills, knowledge and a strategy with an edge or some competitive advantage. You need to have a mind-set that is resilient, that allows you to take risk, to navigate uncertainty, and to manage the pressures and stresses of the trading environment and its results orientation. You need to have the levels of awareness required to manage your thoughts and emotions and to be able to regulate your own trading behaviour, to be able to sustain focus, resist the temptations to react on impulses and reduce the impact of behavioural tendencies and biological responses. A strong psychological approach is integral to producing consistent and successful trading performance, to maximize the returns on your trading strategy.

This is an edited extract taken from TraderMind: Get a Mindful Edge in the Markets, by Steve Ward, published by Wiley, November 2014, in paperback and e-book (£18.99).

Steve Ward works with financial traders, trading teams and leaders in proprietary trading groups, energy companies, banks and funds across the world, utilizing his expertise in the areas of performance, psychology, lifestyle management and making decisions under conditions of high stress, risk and uncertainty. He is the author of High Performance Trading and Sportsbetting To Win, and was the consultant trading performance coach to BBC television’s Million Dollar Traders series.