Monday, September 07, 2015

Lessons From Basketball: Trade Like a Free-Throw Shooter

Looking back on my years at Duke, it seems I remember the time in the gym as well as the time in the classroom.  Many life lessons are taught on the court, in practice and during games.  Seemingly little stuff, like having Coach pull a key player from a game because he didn't acknowledge the assist that led to his score or ending practice by having to make 10 consecutive free throws.  Nothing quite prepares you for pressure at the stripe as wanting desperately to get showered and get home and needing to make that 8th, 9th, and 10th free throw--knowing that, if you miss the tenth one, you start over again.

A while back I wrote about self-coaching and the process of shooting free throws.  Good free throw shooting is all about proper form, concentration, and repeating your stroke without variation.  The really good shooters at the line don't work on making foul shots in practice; they work on making the shots and not hitting the rim.  That's when you know your stroke is perfect.

What messes up free throw shooting is anything that messes with your concentration.  Thinking about how important the shot is at the end of a game.  Thinking about missing the last two you took.  Fatigue takes its toll both on concentration and shooting.  When you're winded, you make those subtle mistakes that ruin your stroke.  You don't extend after releasing the ball.  You don't take the extra moment to distribute your weight properly.  You don't stay focused on the front of the rim.  

A lot of traders trade as if they're in a basketball game, when in fact they should trade as if they're at the foul line.  In a basketball game, it's all about situational adaptation.  At Duke, Coach used to call out "ball - you - man".  That meant that you were always supposed to position yourself between the player who had the ball and the man you were guarding.  Deny the pass.  Sure, they could go over the top and lob the ball over you, but that's a lower percentage pass, a slower pass that can be intercepted.  If the ball is lobbed over you, the situational adaptation is that the defender nearest the player receiving the ball will "go helpside" and rotate over to defend.  Knowing when to defend your man, when to go helpside, when to go from "ball - you - man" to boxing out after a shot, when to break downcourt after a missed shot--it's all situational adaptation:  knowing what to do in a very fluid environment.  

That's what trading is like for many traders.  They try to make situational adaptations in the fluid environment and, all too often, they get winded, lose their concentration, and make boneheaded plays.  If the situation is more fluid than your adaptation, you fall behind in the game.

The trader who approaches trading like a free-throw shot is not trying to keep up with the flow of the game.  The free throw is not a highly dynamic situation; it's all about proper form and excellent execution.  The trader who trades like a shooter at the line has his or her "setups":  certain patterns that repeat reliably and that should be traded the same way, with great fidelity.  It's about making the shot, not winning a game.

Now in point of fact, for those who truly play the game, there *is* a dynamic element to foul shooting, just as there's a dynamic element to bowling.  Playing on one court is not like playing on another; that's why you take plenty of practice shots when you're the visiting team.  One ball differs from another--even a little change in the pressure of the ball can affect the rhythm of bouncing the ball and shooting, as well as the feel of the ball and the way it bounces on the rim.  Is the rim tight or loose?  It makes a difference when you don't quite achieve "nothing but net."  In bowling, lane conditions can be very different from one tournament to another; the court surface in basketball affects the dribbling and the feel of movement. 

And of course the free throw early in the game can be very different from the free throw in the last minute of the game.  The 1 and 1 free throw is not quite the same as having two chances when fouled in the act of shooting.  In bowling, the tenth frame differs from the first; one spare conversion is not like another.

So you have your standard setups and ways of trading those, but you're always adapting to the situation.  The trading setup is like a snowflake:  it has a patterned structure, but no one exactly replicates another.  The setup looks and feels different in a high volatility environment; in a highly trending environment; in a very slow market.  The trader who trades like a free-throw shooter is all about discipline and standardization, but also all about adaptation.

Most important of all, when you trade like a free-throw shooter, you make the market adapt to you; you don't try to trade all markets all the time.  You decide when you take your shots and when you stand back.  Like the poker player, you bet when you have an edge and you stand aside when you don't.  If you're trading like someone playing a basketball game, then you have to adapt to all market conditions all the time.  Do you really have an edge doing that, or do you simply end up overtrading?

The two variables you can always control in markets is when you play and how much you bet.  Many psychological problems in trading come from not making use of those two variables.

Further Reading:  Reinventing Yourself