Tuesday, February 10, 2015

Trading as Training in Mental Toughness

Every year you start with a zero P/L balance.  At any time, a rogue event could turn your portfolio and your account upside down.  If you don't kill, you don't eat:  you're only as good as your latest performance.  When you're very good, you'll still lose on roughly half of everything you do.  That means you'll have strings of losers and periods of drawdown.  Markets will sometimes change faster than you can adapt.  You'll question whether your edge in the marketplace is gone.  You'll see others whose edges truly have eroded and you'll wonder if you can ever hope to compete with the machines.  

Little wonder that those who do succeed in the money management world display a good amount of mental toughness.  There are tremendous rewards to those who succeed and precious little job security for those who don't.  The entire profession is based upon the ability to act in the face of uncertainty and take meaningful risks.  How many fields--even in sports--require such daily endurance?

An excellent overview article identifies several components to mental toughness:

1)  Hope - A strong degree of self-belief;
2)  Optimism - A general expectation of favorable outcomes;
3)  Perseverance - Consistent pursuit of one's aims in the face of adversity;
4)  Resilience - The ability to adapt to challenging situations

Mental toughness thus requires the grit described by Angela Duckworth--that ability to keep going when the going keeps getting difficult.  Learning to handle smaller pressures and challenges builds the toughness needed to handle the larger ones.  Dealing with day to day, week to week setbacks in trading is training for dealing with the inevitable larger setbacks.  

This can only happen, however, if the elite performer maintains what Emilia Lahti describes as an "action mindset".  The Finnish concept of Sisu describes the ability to tap into hidden wellsprings of resources during times of extreme challenge; Lahti describes it as a kind of second wind, in which environmental demands bring out more than we thought we had.  It is not enough to endure; fueled by Sisu and in an action mindset, we can find and pursue the opportunity in challenges.

I have spoken with many traders who go on winning streaks and then become complacent.  They cut back on their rigorous preparation and take more marginal trades.  It's as if, instead of a second wind, they lose their wind--or at least their willpower.  What if winning is as challenging for the competitor as losing?  What if it's not just adversity that challenges us, but any cognitive/emotional state that greatly differs from our norm?  Ironically, the trader who experiences win after win after win may be as challenged as the one who experiences a series of losses.  

That would explain my observation that the best traders double down on their discipline and planning after they have made money.  In Lahti's terms, they sustain the action mindset.  Their Sisu kicks in, not because they experience extremes of pain, but because they experience extremes of positivity.  It is any shift outside our normal experience that taxes us--even shifts that we desire.  Most traders have a plan for dealing with drawdowns.  How many have a plan for dealing with draw-ups?  

Maybe, just maybe, sustaining performance after consistent winning requires as much mental toughness as sustaining performance after consistent loss.  Perhaps success brings its own adversity.

Further Reading:  Emotional Resilience in Trading