What follows is PART THREE of a three part interview with Dr. Doug Hirschhorn, author of the book 8 Ways to Great, frequent CNBC contributor, and well known peak performance coach, whose clients include many top traders at hedge funds and banks around the world. The topics discussed will include the following:
The most important factor in a trader’s success.
Why top traders seek the benefits of coaching.
Are top traders born or made?
Trading is the hardest way to make great money.
Are female traders better than their male counterparts?
The role of fear and fear?
Thinking in probabilities: Probability + Payout = EDGE
Risk vs. Reward.
The average winning percentage for top traders.
Process trading explained.
A great baseball analogy.
PART 3
Proper goal setting.
The C.H.A.M.P. Process.
Accountability.
8 Steps to successful journaling.
Treating the trading game as a business.
The best books to read.
Four differences between sports and trading.
The primary goal of 8 Ways to Great.
CHT: Great analogy. Great point. We all know that setting goals is important to be successful. What process do you have for your clients, for them to follow when setting goals? What are some of the common mistakes that traders make in goal-setting?
DH: The program that I have put into place with my clients, over the years, is a five step process called C.H.A.M.P.Ò Each letter represents a different step. “C” stands for controllable, meaning the goal has to be entirely in your control. “H” stands for hard, meaning the goal has to be hard, challenging. It’s got to push you outside your comfort zone. “A” stands for accountable. You either have to hold yourself accountable or let someone hold you accountable. My clients hire me to hold them accountable, and I do, through what I call a journaling process. And then “M” stands for measurable. You have to be able to quantify your goals as you make progress throughout. And “P” stands for positive mind, meaning you have to get in the habit of telling yourself what to do, rather than what not to do. Most people will get in the habit of saying things like, my goal is to not make dumb trades or to not double-down on losers. That’s negative minded, as opposed to telling yourself what to do, and a positive mentality which is, my goal is to limit my losses more aggressively or size-up trades more aggressively when my edge appears. So that simple little twist of telling yourself what to do, rather than not to do, is a positive-minded aspect that wraps up the goal setting process.
Now, biggest mistake I see people make when setting goals for their trading is that they set money-oriented goals. And that’s a big mistake because for a goal, to be set up for success, it has to be entirely in your control. Making and losing money are not in the trader’s control. If it were, then you could just say, I want to make a million dollars this year, and you would be making a million dollars this year. What is in a trader’s control, is the quality of trades they make or the work that they do beforehand. Just like in baseball, a batter only has control over the pitches that he chooses to swing at. Once he hits the ball, once the trader makes the trade, it is out of that person’s control. It goes into the environment, there’s physics that attack it, there are players out in the field that decide whether the ball lands safety and the hitter gets on base. In the trading world, once you push the button, the world, the economy, the markets, decide whether you are going to get paid for that trade or not get paid for that trade. Then it comes back to you and you get a chance to make another decision (called managing the risk of the trade). You get to decide whether you want to add to that position or take the risk off, but your job as a trader is not to determine whether you make money or lose money. Your job as a trader is only to make high-quality trades every single time. You have faith that if you consistently do the right thing, then over time you will make money and have a successful career in trading.
CHT: Awesome. In the last chapter of 8 Ways to Great, you talk about accountability. How do you keep your trading clients accountable on a daily basis? Do your clients keep a trading journal and if so, what do they write about?
DH: I do hold my clients accountable, like I mentioned before, and a daily journaling process is a mandatory part of my coaching that I offer them. It allows me to see what goes on in their head on a daily basis. But more importantly, it allows them to take some moments for reflection at the end of the day. This concept is not much different than an athlete watching game film after the event, to analyze the plays, what happened, how he performed in them, and learn from his mistakes. This is the same purpose behind my journaling process. In my journaling program, I do not ask or care about how much a trader is making or losing. That is irrelevant information for me and for them. What is only relevant is that they are consistently making high-quality trades. So here are the steps that I have them do, and what I’m going to give you now is just a basic eight-step outline that I give all my clients to start off with, and again, anybody can do this. What I then do is modify and tweak the information in the journal process based on their specific style and how they’re developing. But the eight steps are a great way to start.
1) Before the trade happens, the first thing I ask my client to do is to identify if it’s one of three types of days: is today a day to make money, limit losses, or do nothing? Now, after you’ve been trading for a couple of months, you’ve pretty much been able to identify which one of those types of days it is. It’s not secret information, nothing mysterious. Traders get a feel for whether it’s a day for them to make money, limit losses or do nothing. Where traders get into trouble is when it is a day to limit losses or do nothing, but because they are afraid of not being able to make money to pay bills or earn a living, they start to press and force trades to try to make money.
2) The next thing I ask them to do is to look around and identify what current market events are in play. I want them to look around globally and see what’s going on in the world. Are there any news releases that are coming out that are important and relevant? Are there any current events going on in the world that could affect the market unexpectedly? It’s not about predicting the future, it’s more about being aware of these events coming up that could disrupt the normal flow of information. So they have to have some macro awareness, and they can get that information from tons of places no matter what platform they are using.
3) Then the third thing I ask them to look at is to identify what their current trading thesis or game plan is. What is their belief or theme for the day, the week, the month? Where do they think the market is going? What do they think is going to happen? They have to have some semblance of an idea about a game plan. Now, if the trader currently has a portfolio of trades they are carrying on for several days or weeks, then I want them to look at their trades and their current portfolio and ask themselves, “Are the trades that I have in my portfolio (a) in-line with the theme that I have for the market and (b) are they sized correctly? On the other hand, if the trader has no trades in his portfolio and comes in flat every morning, I want him to focus on what his plan for the day is for entry levels, exit levels and trade sizing even before he pushes a button to put a trade on.
4) Then, after the trading is done for the day, I have my clients look at what they did well that day. And I want them to examine their performance objectively. Most people would say, “Well, if I made money, I did good, and if I lost money, I did poorly.” Again, I believe it’s more about looking at the process behind the trade, not just the profit or losses. Did you size into trades correctly? Did you stick to loss limits? You could have lost money all day long, but if you took smart, good losses, then you actually did something well that day and you traded optimally.
5) The next thing I have them look at is, what did they do poorly that day? This is where they can become critics of their performance. Did they get distracted? Did they put a trade on because someone else had it on? Did they trade out of fear or anger? Did they become over-confident and put on a sloppy trade?
6) The next step, I have them do is to look at what’s actually making money in the world. Which markets? Which products? What type of style? Are the markets range bound? Are they trending? Are commodities making money? Are equities making money? I want them to look around and see where and what money is flowing into.
7) Then, I have them look at what’s not making money in the world. This helps them open their eyes to the reality. For example, if my client is great at trading trending FX markets but range bound fixed income markets are getting paid, then that’s a huge indicator to the traders that they need to size things down and wait until their strategy is getting paid and the markets are in-line with their trading edge. Having that patience and discipline are skills anybody can learn to do. It is just a matter of having the self-discipline and awareness to do it and the journaling process creates that for the trader.
The final question I have my clients answer in their journal is what lesson did I learn today? Every day that they trade they need to retain some new piece of information, some new approach, some new thought and take note of what lesson the market is teaching them. I love for my clients to make mistakes. I believe people should always make new mistakes and be willing to learn from the mistakes of others because you’re not going to live long enough to make all those mistakes yourself. So as long as you’re always growing and learning, then you are on the path to success and trading.
CHT: That is excellent advice. We could be sitting here just talking about a CEO of a company. You know they go through the same thing, and that’s what traders have to go through, too. It’s just running your trading as if it is a business.
DH: Yes. That is precisely what my new book, 8 Ways to Great (G.P. Putnam’s Sons, 2010), is all about. I earn my living as a Wall Street Trading Psychology Coach and I quickly realized that the same things that I work on with traders, are the same factors that can be applied to business, parenting, personal finance, fitness, dieting, relationships and pretty much any area or any aspect of your life. For this reason, 8 Ways to Great is actually marketed to the masses and not just the financial industry, even though I’m a trading psychology coach to the elite on Wall Street. The key principles laid out in 8 Ways to Great, are “transferrable skills.” For example, if you want to start a new business then by thinking about risk-reward like my super successful hedge fund clients do, you will make a better, more objective business decision and set it up for success from the very beginning. And this example translates perfectly for deciding other things like should you sell your house in the current market and for how much , should you go back to school to earn a better degree, should you pursue another line of work, should you get engaged/married. At its essence, what I help people do, is learn how to think like the elite so they can make better decisions and do better at whatever-it-is that they want in life.
CHT: Top traders are always working on sharpening their skills and educating themselves on how best to perform. In your coaching, do you have a reading list of preferred trading books, psychology books, that you would recommend that we read?
DH: I do. I will tell you, however, that they’re not trading psychology books. I will also tell you that my recent book, 8 Ways to Great, really is a collection of all the best information I’ve ever read, as well as my best practices that I’ve learned from working with the top of the top in the trading industry. It is a short, 114 pages and gets directly to-the-point. Each chapter highlights a different principle of greatness, and it’s literally a path to greatness on how the best of the best on Wall Street think about achieving greatness. Here are some of the books that I’ve read over the years that have helped me formulate my thought process, as well as some books that I’ve read recently that I found to be very useful and in-line with my program and process.
The Psychology of Influence, by Robert Cialdini, it’s a classic book in the social psychology space. It’s a great read and it’s not about trading at all, but it’s about how people think, and how they get influenced in the decision making process.
The Psychology of Judgment and Decision Making by Scott Plous, I believe it was written back in 1993 and is one of those books that tells you a lot about the research that was done about human behavior, about how people have faulty thought processes. On the surface, it has nothing to do with trading, but it has everything to do with decision making, and what I’ve learned is, trading is about decision making, especially decision making in uncertain situations. The more you understand humanity, the more you understand how people are hardwired to think and how faulty we are in our thought process. I believe the greater self-awareness a trader has, the greater chance they have to improve their performance.
Drive, by Dan Pink, talks about what really motivates people, I think it’s an excellent concept book.
Crush It by Gary Vaynerchuk. Now this book I love, because Gary is like this out-side-the-box character who has a passion for wine. His message is simply know what you’re good at, just do that, and really, that’s the same message I give to traders about their competitive advantages. Great trading is about knowing what you’re really good at, developing a style that emphasizes it and then having the discipline and patience to trade only when the market is paying your style.
Talent is Overrated by Geoff Colvin is another great one that I recently read. This book talks about the research on deliberate practice and that is really what differentiates mediocrity from greatness. I view my book, 8 Ways to Great, as the “how to” manual for the concept of deliberate practice. Great achievement does not just happen on it’s own. It takes the creation of a process and the deliberate practice surrounding that process to become great.
CHT: I have heard you say before that Trading and Sports are not similar. Can you explain what you mean because I think most people assume they are alike.
DH: Sure. There are four primary differences between trading and sports. (1) In sports you would never want to think to yourself, “What do I do if I miss this basket? Or strike out? Or hit it into the water?” In trading, you have to ask yourself that question all the time because that is what is called risk management. (2) In sports if you don’t jump high enough or run fast enough, then you target that skill and work on it so you can get better results. In trading, more work does not always give you better results. (3) In sports, the rules are consistent, predictable and never change. In trading, the rules change constantly, meaning, what makes money on one trade does not necessarily make money on the next trade even though it may look exactly the same. (4) And finally in many sports, you have to deal with a defense that reacts to what you do and tries to limit your success. In trading that is 100% not the case. Here is a good example of what I mean by this last point. If we’re playing a pickup game of basketball and let’s say you notice that I am very good at doing lay ups from the right hand side of the basket but I stink at doing lay ups from the left hand side, what is your defensive strategy going to be?
CHT: I am going to start to cut off the right side of basket.
DH: Correct. And as a result, I am not going to score many points. The beauty of trading is that the market does not change what it does based on what you do. Do you understand that? The market doesn’t say, “Doug’s good at this skill, so we’re going to start to do something so he can’t do that anymore.” The market doesn’t know or care about you or me or anyone for that matter. It doesn’t react to you specifically. I know it may feel like it is out to get you, but trust me, that is your own insecurity, fear and paranoia. This is a profound concept because it actually means that anyone can make a substantial living just identifying and then doing that one thing that they are very good at. The key is to have the patience and discipline to wait for when the market is paying that skill. When the market is paying right handed layups that’s when you should be doing them big and all day long. When the market is paying left handed layups then you need to sit on the bench and wait and do nothing. That’s called discipline. That’s called having patience. Traders, unfortunately think that they have to be ambidextrous, and learn how to do everything in every market so they can make money all the time. This approach is flat out wrong. It goes against the age-old concepts Gary Vaynerchuk talks about in CRUSH IT and it goes against the well-supported research on deliberate practice. As a result, I can confidently say that trading is NOT like sports.
CHT: Finally, what is your goal for those who read your 8 Ways to Great? Is there a key take-away from the book?
DH: The key take-away is that anyone can be great. It’s open and available for everybody to have. It’s not a secret or a mystery and it’s not genetically driven. It’s not like sports where some people are born being able to throw 95mph so they are going to get drafted to the pros and the rest of us won’t because we throw in the mid 70 mph’s. Or someone is 6’8” tall and will have a shot at playing elite basketball but if you are 5’2” then you are not. Greatness is a mental, not physical and it demands a process-driven approach. It is about reaching your full potential, and in trading, the unique part is, anybody can do this because anybody can participate and learn how to think like a top performer in order to get top performing results. It does require effort, planning, taking smart risk, and finally, execution. Following my 8 Ways to Great process will help people find their way to great.
CHT: Awesome. Doug, I appreciate your time. I know you are real busy. I appreciate you joining us and sharing your thoughts.
DH: My pleasure. Thanks for having me.
Catch PART 1 here and PART 2 here.
DISCLAIMER: There has not been and will not be any exchange of compensation for this interview. Dr. Hirschhorn is kind enough to share his knowledge with those who might benefit; therefore, the value is to be determined by its recipients.
