Become a Successful Trader

I’m a big fan of reading. And to take it one step further, reading physical books. I’ll admit, I do read the occasional Kindle book on my iPad, but typically only if it’s not available in print.

There’s something special that happens in the brain when you read (not off a computer screen) that stimulates the creative juices and strategic thinking part of the mind.

It doesn’t always have to be a trading book either. Subject matter totally unrelated to trading can provide incredible insights. I find that books from other disciplines written by highly successful individuals are where I gleam the most insights.

The book Thinking in Bets by Annie Duke falls somewhere in the middle. There are a lot of great parallels to trading through the experience in Duke’s professional poker career. The psychological aspects are directly inline and there are some downright fantastic takeaways. I definitely recommend it!

There are some great habits to gleam from this book, but reshaping a habit requires time, preparation, practice, and repetition. The classic go to book on habits is by Charles Duhigg, The Power of Habit.

“Outcomes are rarely 100% luck or 100% skill. Identifying a negative outcome doesn’t have the same personal sting if you turn it into a positive by finding things to learn from it.” – Annie Duke

The term “Thinking in Bets” triggers a more open-minded exploration of opposite thinking to those ideas that just serve to reinforce our existing beliefs.

A game of incomplete information

“Poker is a game of incomplete information. It is a game of decision-making under conditions of uncertainty over time. (Not coincidently, that is close to the definition of game theory). Valuable information remains hidden. There is also an element of luck in any outcome. You could make the best possible decision at every point and still lose the hand, because you don’t know what new cars will be deal and revealed. Once the game is finished and you try to learn from the results, separating the quality of your decisions from the influence of luck is difficult. “ – page 21

“What good poker players and good decision-makers have in common is their comfort with the world being an uncertain and unpredictable place. They understand that they can almost never know exactly how something will turn out. They embrace that uncertainty and, instead of focusing on being sure, they try to figure out how unsure they are, making their best guess at the chances that different outcomes will occur. The accuracy of those guesses will depend on how much information they have and how experienced they are at making such guesses. This is part of the basis of all bets.” – page 28

The world is a pretty random place

The influence of luck makes it impossible to predict exactly how things will turn out, and all the hidden information makes it even worse. If we don’t change our mindset, we’re going to have to deal with being wrong a lit. It’s build into the equation.

A great poker player who has a good-size advantage over the other players at the table, making significantly better strategic decisions, will still be losing over 40% f the time at the end of eight hours of play. That’s a whole lot of wrong. – Page 35

“Because decisions in poker are made so quickly, players don’t have the luxury of time in coordinating their rational, long-term, strategic plans with their decisions at the poker table (sound familiar). And all those decisions made under severe time constraints have immediate consequences expressed as an exchange of poker chips. The constant exchange of chips reminds players that there is risk in every decision. You can win a hand after making bad decisions and lose a hand after making good ones. All the execution decisions made along the way really matter.” – page 180

“Improving decision quality is about increasing our chances of good outcomes, not guaranteeing them. Even when that effort makes a small difference – more rational thinking and fewer emotional decisions, translated into an increased probability of better outcomes – it can have a significant impact on hour our lives turn out. Goo d results compound. Good processes become habits, and make possible future calibration and improvement.” – page 179

Overcoming the need to be right

Traders almost ALWAYS have a hard time being wrong. They develop a bias, think the market should move in one direction, and if it doesn’t just can’t seem to admit that they were incorrect on their analysis.

In Thinking in Bets we learn that being wrong hurts us more than being right feels good. To put it another way, losing feels about twice as bad as winning feels good. I’m sure you can relate in your trading, think of a recent losing trade versus a winning own. In essence, winning $100 feels as good to us as losing $50 feels bad to us.

Thinking objectively

Thinking in bets embodies skepticism by encouraging us to examine what we do and don’t know and what our level of confidence is in our beliefs and predictions. This moves us closer to what is objectively true.

When we think in bets, we run through a series of questions to examine the accuracy of our beliefs:

• Why might my belief not be true?
• What other evidence might be out there bearing on my belief?
• Are there similar areas I can look toward to gauge whether similar beliefs to mine are true?
• What sources of information could I have missed or minimized on the way to reaching my belief?
• What are the reasons someone else could have a different belief, what’s their support, and why might they be right instead of me?
• What other perspectives are there as to why things turned out the way they did?

The importance of loss limits

“When I reached a point in a session and considered continuing past that limit I could use a 10-10-10-like strategy (a strategy by Suzy Welch to ask what are the consequences of my actions 10-minutes from now, 10 months from now, 10 years from now?) to recruit my past- and future-self: How have I felt when I kept [trading] in the past? How has it generally worked out? When I look back, do I feel I was [trading] my best?”

This routine of asking myself these questions helped mitigate the in-the-moment risk that, as I was losing my mental edge, I might try to convince myself that the [market] was so great that I had to keep [trading].”

“That was the purpose of my loss limit in poker. Because of the loss-limit agreement I had made with myself and my group, I ran the conversation in my head that I’d be forced to have when I explained why I kept playing beyond my limit. It gave me a chance to regret the decision before I bought more chips.” – page 187

Conclusion

To go out on a high note and positive takeaways,

“The benefits of recognizing just a few extra learning opportunities compound over time. The cumulative effect of being a little better at decision-making, like compounding interest, can have huge effects in the long run on everything that we do. When we catch that extra occasional learning opportunity, it puts us in a better position for future opportunities of the same type. Any improvement in our decision quality puts us in a better position in the future.” – Annie Duke