A traders mental toolbox

When discussing the psychological skill set needed to be successful over the long term in trading and investing, comparisons are often made with various sports. This discussion usually centers around individual activities such as golf, triathlons, and other endurance activities that involve a combination of both physical and mental prowess.

One team sport that has a lot of similarities to the trading environment is baseball. Although it does not have a large following in Australia it is, as you know, a huge sport in America. Baseball has been played in the US for over 140 years and has, as a result, accumulated what is referred to by many statisticians as the ‘world’s largest data set’.

Virtually everything that has ever happened on a baseball playing field in that time has been recorded – a virtual pleasure-dome for analysts and statisticians who run all sorts of analysis on all aspects of the game and the players. Many of you may recall the movie “Moneyball” which was based on the story of the Oakland Athletics baseball team and their use of statistics, numbers and a forecasting program to select their draft picks each year. Batting averages, numbers of home runs, the speed of pitches, win: loss ratios and a myriad of other data and information is available to analysts.

Baseball is also played with a lot more regularity than most other sports. Whilst a football player usually plays one match each week during the season, baseball players often play 5 or 6 games each week. Like traders, they have to be constantly ‘on the ball’ and ready to respond to various stimuli in a highly emotive and continually occurring environment. Not only must they be physically fit to meet the athletic demands of the game, they also need to develop strong mental and psychological skills to deal with the constant demands of this ‘environment’.

As well as the ‘numbers’ which are a representation of each players physical skills and talent, baseball scouts (the guys that are uncovering new players and working out which players to trade) also look at a number of psychological abilities that they believe contribute to a players success. Writing in his book “The Signal and the Noise”, author Nate Silver identifies these 5 major traits. The similarities with those required by traders and investors are extremely close.

1. Preparedness and work ethic. Because baseball is played with such regularity, the players can’t get ‘psyched up’ for a game like a football player for their once a week game; they have to be ready to perform at a high level every day! To do this, they need a structured, disciplined approach to allow them to continually engage the rigours of their environment without getting distracted by the noise.
2. Concentration and focus. This concerns the way a player conducts himself during the course of each game. The player must be able to react quickly to events occurring during the game. Any lapse of concentration can have disastrous results for the individual player and the team. They must also be able to remain focused on the game plan even during times of adversity and when it seems the plan may not be working.
3. Self-confidence. Players will always have periods of exceptional performance and slumps. It is a roller-coaster of emotion during periods of both over-achievement and under-achievement. They need the mental strength and tools to get them through both the good times and the bad times. Do they have a fear of failure or a fear of success? Can they overcome the fear of failure with a strong desire to succeed.
4. Stress management and humility. In baseball, even the best hitters fail most of the time. A player with a batting average of .300 actually hits the ball, on average 3 times out of 10. That means only 30% of his swings are successful hits!  (The batting average (BA) is defined by the number of hits divided by ‘at bats’. It is usually reported to three decimal places and pronounced as if it were multiplied by 1,000: a player with a batting average of .300 is “batting three-hundred.) A player with a batting average above .300 is considered exceptional. One of the games most recognised players, Babe Ruth, had a batting average of .342 (34.2%). The ability to cope with this constant failure requires a strong mind, a short memory, humility, and a sense of humour. Each miss means the next home run is one step closer.

5. Adaptiveness and learning ability. Players need to be able to process new information during the game in a dynamic and changing environment. They need a coach or mentor who they listen to and respond to. They also need to be able to adapt to changing life situations (marriage, children, divorce etc etc) whilst still operating at a high level. They need to be able to control the level of intensity and keep everything in perspective.

These same habits apply to our endeavours as traders and investors in the financial markets. By being aware of these psychological skills we can better master the traits required to achieve long term success.