The heart and Soul of a Trader

Some of my clients have phoned me to

say that the amount that they have in

their trading account at BOM has gone

down.

They tell me very sadly with barely

hidden sobs that their account has

dropped from let’s say $5,000 down to

$3800.

“What is happening” they ask me with

great concern?

My answer is "we had some bad

results - put some more money in and

get back in the game"

They answer "I don't want to lose any

more money"

But I want them to think about it

another way…

If you buy a residential property and

the value has dropped, as has

happened to many properties in the

last year, you don't stop paying the

mortgage.

You continue pumping money into it

in the belief that the value will go up.

It is the same with trading. With the

most volatile markets we have had in a

life time we are definitely going to

have some draws downs.

But if you pull out of the game at

every down turn you will never profit

at the upturn.

Eric Lester – Executive Coach

Sue’s Corner

Ask yourself who’s holding

you back from accomplishing

your dreams.

Answer:

YOU

Now ask yourself why…

Robert Kiyosaki

Duane, Joseph & Sue at the best Indian restaurant in Melbourne –

Everest at Fairfield.

The Trader's Journey: A Four-Stage Cycle

Purely by the numbers, the best trader of the last decade is the hedge fund manager of Advantage Funds, John Paulson. As the real estate bubble began to burst, Paulson set the record for money made in one year by a single hedge fund manager—an astonishing $3.7 billion according to at least one ranking source.

He followed up that performance by earning $2 billion in 2008, a number that landed him in only second place among hedge fund managers. With more than a billion made in both 2009 and 2010, he has been on a performance run that is spectacular by any measure.

It probably wouldn’t surprise you that this “king of markets” shares some characteristics in common with top performers in other fields: musical composers, performers, athletes from Michael Jordan to Tiger Woods and others in between.

We like to think that once our heroes or gurus find the key to top performance, they then remain masters of their domain. In reality, we find that most top performers in any difficult endeavour experience a cycle of performance. Almost everyone who reaches the pinnacle sees a pullback at some point from that extreme level. True masters then find the resolve to climb back to peak performance.

Earlier this year, John Paulson’s fund was down 34%, and it certainly has gone lower since then (that drawdown figure was reported before the August drops in stocks and gold). But Paulson isn’t the only one struggling in 2011. An article in the Financial Times listed a host of huge names in the industry who have been slammed this year, including the revered bond king Bill Gross of Pimco.

Looking beyond the trading world, however, is this pattern unusual? Michael Jordan went from the “top of the world” with three straight NBA championships to traveling by bus from stadium to stadium fighting against his amazing athletic prowess on minor league baseball team. He then returned to basketball to win three more championships.

Tiger Woods was undeniably the best golfer in the world for more than a decade. Now Woods is clearly fighting against his golf game: injuries and swing inconsistencies have taken their toll. It’s tough to argue though that his once iron-clad mental game has fallen significantly since his very public indiscretions. Whether he will rebuild himself remains to be seen and is one of the great debates in all of sports right now.

That well-known top performers (traders, athletes, etc.) show a similar pattern of achievement and struggle should not come as a surprise, as we all share a very real cycle of performance. Those who have had difficult times in the market this year have lots of company.

Let’s explore one way to look at this performance cycle and how understanding it can help us spend more time flowing with the markets and less time fighting them.

The Performance Cycle

Performance in complex or competitive endeavours often follows a sine curve

Let’s look at the four phases briefly and relate each one to a trader’s ongoing experience in the market.

1. Flow. This is probably the easiest phase to recognize. It’s John Paulson in 2007 and 2008 managing a portfolio that was designed to take advantage of market conditions. It’s Michael Jordan in 1989 sinking the shot over Craig Ehlo in the Eastern Conference finals. It’s Tiger Woods at Augusta in the 1997 Masters or at Pebble Beach in 2000 making the best golfers in the world look insignificant for a weekend. And most importantly, it’s YOU taking that trade or making that investment when the idea matches the market. This is when success seems effortless.

2. Fall. This is toughest part of the cycle to identify as it’s happening. Statistically we fully expect it—the return toward the mean after a period of outperformance. The fall, however, can often be a hazy time when bits of that flow feeling still linger, but the results start to decline. We may find it easy at first to ascribe the changes to outside influences: news affecting the market or distractions affecting our performance. But as we continue to fall, we begin to realize that things aren’t like they were when we were in the flow. Results drop, and things don’t seem easy and effortless like before. Uncertainty starts to dominate and lack of confidence begins to creep in.

3. Fight. Quite simply, this is when nothing seems to fit—our trades don’t match the market. It’s when hedge fund managers invest heavily in the rebound of financial stocks and they drop lower, or portfolio managers bet on rising rates and a catastrophic drop in US Treasuries that just never seems to come. This is when a golfer can’t find the fairway with his driver or the cup with his putter. This is the time when you and I fight the trend trying to pick a top or bottom for a turn. Or when we keep praying for a breakout or breakdown that seems to never come as the sideways market keeps on going.

4. Fume. Eventually we realize that we have been “fighting against” instead of “flowing with.” Different people react in different ways during this phase: some people withdraw, and some fight even harder for a while. While the name I chose for this phase may seem negative, it strikes me as truly necessary. We need to break our pattern of fighting. We need a time out. For those that truly recover and head back to the Flow state, this Fume phase usually ends in a cathartic moment when we realize why and how we were fighting against the markets, our natural tendencies and abilities, or our golf swing. And we free our minds once again to flow with what works.

And then, like the instructions on the shampoo bottle, we “Lather, Rinse and Repeat”: we go back to the Flow state and the cycle continues.

In the past week, I found myself going through this cycle in full. Fortunately, good position, sizing strategies and risk management practices instituted over many years allow me to manage my Fall and Fight stages within a framework that limits my downside.

So last week, my Fuming phase took place in its entirety during one exercise session. I just couldn't see what was happening, and I didn't know why. I felt remorse all the way to my light-switch epiphany: I had been stuck looking at the markets in one time frame and not seeing the bigger picture. With that realization, I made both a mental adjustment (a mental state change that I use when I am fighting against a trade) and a physical adjustment (putting a higher level time chart on my main trading screen). Making those two changes put me back into the flow of the markets.

As traders and investors, we will have ups and downs. Even the great ones do. The way to spend more time in Flow phase and less time in the Fall, Fight and Fume phases is to recognize where we are in the cycle. Self-awareness will allow us to react quicker, break our fighting pattern, make adjustments and move back towards the Flow phase. With practice, we can reduce our cycle time and spend more time flowing with the markets and enjoying our trading and investment activities and results.

Chief Global

Equities Strategist,

Joseph

Bhattacharya at a

cocktail party held

with Richard

Branson in

Melbourne.

Never allow fear to stop you from realizing your dreams, there’s a whole new world out there for those willing to step out and take a chance. Follow your passion and your heart and everything will start to fall into place. You never know what magic awaits until you take that first step. You can do it!

Think of yourself like a professional athlete. You need to surround yourself with a solid team of coaches, experts, and supporters to achieve your exceptional goals.

Phone: 1300 852 024

info@citadelmarkets.com

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