The Mental Strategies of Top Traders: The Psychological Determinants of Trading Success 1st Edition

While this book was intended for portfolio managers, analysts, hedge fund managers, and people that manage traders I believe that all traders will find it helpful. Author Ari Kiev has combined what he has learned over the years while working with traders along with interviews with successful portfolio managers. The book is about the correct mental strategies that must be used to be a successful trader and also gives you ideas on how you can determine if you have the right psychological make up to be successful yourself as a trader. The driving force behind the book is the question "How can you increase your chances of winning?" "The issue is not which horse in the race is the most likely winner, but which horse or horses are offering odds that exceed their actual chances of victory...Under this mindset everything but the odds fades from view. ...You are looking for the best bet, not whether you like the horse." This is a perfect analogy, I have recently thought of day trading as being a horse race where you are allowed to bet on the winner while the race is under way then collect your profits on the bet while your horse is still winning. Those are much better odds than a real horse race. Legendary trader Nicholas Darvas has also advised betting on stocks like horses by picking the biggest and fastest one. I also like the following quote from the book that emphasizes consistency in trading: "If you do the right thing enough times, the results will take care of themselves. Process over immediate results is the key." Since portfolio managers are only right 60% of the time and traders even less, the capacity to come back from failure and draw downs is a major characteristic of a successful trader. Every trader I know and every legendary trader I have studied ALL had to come back from losing most of their capital at the beginning of their trading careers, including myself. But after paying for this education they all came back to become successful and wealthy. Successful traders have the ability to function on their own, to find and develop ideas, and stay disciplined and on target. Winning traders also develop balance between a sense of urgency to get things done and achieve goals and the need to do this in a balanced way so that mistakes are not made due to haste or over enthusiasm. The personality traits for a goal directed trader are that they are an achiever, focused, an avid learner, and have the intuitive ability to see the whole picture. "Successful risk taking is the ability to take risk in a controlled way, follow the rules, manage draw downs, cull losers, add to winners, express conviction in ideas in terms of sizing, and use capital appropriately." Ari Kiev also explains in depth that to be a winning trader you must separate your emotional responses from the trading decisions you are making. Fear and greed are two of these emotions that ruin traders causing them to sell at low prices and buy at high prices, and not taking trades when their system tells them to, then chasing a trade when it is to late. This book is an excellent book to add to the trading psychology part of your home library. I have been a successful trader/investor for a decade and have read 150 books on trading and I give it 5 stars with no hesitation.

This was a suggested read by Tod Mitchell of Trading Concepts. And all trades need to read it

Not fun to read, longer than it should be and not recommended as a read unless you are a trader or work with traders very often.

Maybe his other books have more learning material, but sorry to say, this book is not good. If one wants to learn about trading and psychology, you get Bret Steenbarger's books.

Ari Kiev has worked with the best hedge fund portfolio managers and traders in the world. His set of books on the psychological elements of trading are the best ever written. I can only guess at his motivation for sharing these secrets with the world. He has given away the "keys to the kingdom." Reading and adopting the ideas in this book is priceless; a lightyear jump ahead of the levels others are playing the game.I have summarized the key points below, to whet your appetite. Some of the real juice of the book is in the interviews; I have only included a few of my favorite quotes.Master traders have Intellect, Instinct, and Guts, a unique Psychological Profile. The best traders have a history of success, ability to take risk, creativity, originality, self-awareness, self-control, and resilience. Goal-directedness is the key; coupled with planning for action. Traders must identify a variant perception based on doing their own work, and understanding not only the company business model, but what key factors move the stock and how the Street sees the stock. In turbulent times, goal-directedness is even more important. The ability to take appropriate risk requires balance between failure to act and failure to cut losses in the face of drawdowns. Thinking outside the box, ingenuity, strategic thinking and creativity are part of an "expectational analysis." The ability to be self-aware, separate emotions from decisions is how master traders deal with the stress of volatile markets. Ari Kiev spends the bulk of the book discussing the psychology of dealing with market volatility and drawdowns, since this is the time when separating emotions from decision-making is most critical.A quote in the book used to highlight the importance of goal-setting, even in portfolio management:"Until one is committed there is hesitancy, the chance to draw back, always ineffectiveness. Concerning all acts of initiative (and creation), there is one elementary truth, the ignorance of which kills countless ideas and splendid plans: that the moment one definitely commits oneself, then Providence moves too. All sorts of things occur to help one that would never otherwise have occurred. A whole stream of events issues from the decision, raising in one's favor all manner of unforeseen incidents and meetings and material assistance, which no man could have dreamt would come his way. Whatever you can do, or dream you can, begin it. Boldness has genius, power and magic in it." W. H. Murray, Scottish Himalayan Expedition leader.An outline for establishing a variant view:1. Understand your sector. Find something changing, a transformative event.2. Do the work that will increase your conviction that your expectations will be realized.3. Don't worry about day-to-day price fluctuations if your thesis is correct.4. Define the variant view and set up some benchmarks to see whether your thesis is playing out.5. Technical analysis can support your thesis.6. Get sized with good ideas even if you have got only one or two data points. You have to think bigger than your own limited set of data points.7. You can expect 4 to 5 good ideas per year. Go down multiple paths since you don't know which ones will come to fruition.8. Don't worry too much about the downside. Take a variant view and keep doing the work.9. Sell into strength as the rest of the Street starts to recognize the story and your variant view is becoming consensus. However, there is value in holding on as a story unfolds even past the point where the idea becomes consensus. (AAPL)10. Dig deeper; talk with people in the industry, read financials, listen to conference calls, build your own models.11. It is often uncomfortable when your views diverge from the consensus, but this is where there is the most opportunity."My goal in portfolio management is not to be the smartest or the most knowledgeable guy. It is to make money... The key to this is to ensure that my daily actions and the decisions I am making about timing and the sizing of positions correspond with my goals. The whole notion is one of being uncomfortable, of pushing yourself, and that's how you ultimately wind up earning outside rates of returns.""Some goal-directed individuals also demonstrate what Prussian military strategist Karl von Clausewitz called the coup d'oeil, the intuitive ability to grasp the essence of things at a glance or to objectively see the whole picture. An individual with this characteristic is more likely to keep his cool and then make the correct decisive moves.""Perhaps the most important way a trader can stay goal-directed even in the face of a drawdown is to stay focused. He must be resilient and aware of his impulses and how they may be influencing his trading."Planning for Action:1. Have a detailed trading plan with a unique variant perception and the path to getting paid.2. Set a realistic but challenging goal based on what repeatable performance you've had in the past.3. Not only set the goal, but take every action possible to ensure that you reach that goal.4. A truly goal-oriented trader will make an increased effort during times of great stress.5. Plan for a variety of future scenarios so you will be well prepared to take advantage of opportunities when the market begins to turn.Risk management- a deeper look:1. Long stocks only? Does the PM hedge with indices instead of finding short alpha plays in single stocks?2. Poor alpha generation: judge PMs by performance relative to their sector3. P/L distribution: sometimes returns are dominated by one or two positions for the entire year. This can be a problem is these one or two results are not repeatable year after year. A distribution of P&L where the magnitude of the top winners, trade by trade, exceeds the magnitude of the top losers is preferable. This is an indication of a repeatable process.4. Successful risk-taking behavior is the ability to take risk in a controlled way; follow the rules, manage drawdowns, cull losers, add to winners, express conviction in ideas in terms of sizing, and use capital appropriately.5. Best traders are goal oriented risk takers without excessive cautiousness that might interfere with his ability to trade stocks. Calculated risk; get bigger when you have an edge.6. Passion, dedication.7. Examine P/L, percentage winning trades, slugging ratio or W/L ratio, Sharpe ratio."Master trader will be comfortable dealing with unprovable events or the tails of events rather than having to rely on consensus or conventional ways of approaching problems. This edge gives the trader an ability to see the world in a unique way, to see patterns where others simply see complexity. When he sees clarity, he is able to take decisive action. Over time, he develops a high tolerance for ambiguity and uncertainty, which is the essence of thinking in a nonconsensus way."Variant Perception Question List:1. Is there an element of change and a clear path to getting paid?2. How much does the thesis depend on internal or external factors?3. What are the catalysts?4. How much of the thesis is internally driven by the company?5. What is your conviction level?6. What is the upside/downside probability of getting fundamentals right?7. What is the probability of getting paid if you are right?8. How much is "in the stock?"9. Is this only an absolute-return call, or relative-performance?10. Should this idea be hedged?11. Are there macro/sector risks that you didn't consider?12. Could you actually lose even if your thesis is right?"We always make money when people go from fundamental to emotional decision making. We try as hard as we can to be the fundamental people and not be the emotional people. It's hard to maintain objectively. That may cause me to have a slightly bigger draw-down than the guy who is emotional, but my draw-up is going to be bigger."IDEA EVALUATION CHECKLIST:The Elevator Pitch:1. Does the thesis incorporate an element of change?2. Is there a clear path to getting paid?3. Is there quantifiable upside and downside along the path?4. How much of the thesis is external vs. internal?5. What specific variables have the most impact on stock price?"There is a misconception about how much knowledge you possess and how likely you are to win.""Contrarian denotes `going the other way' whereas variant doesn't necessarily mean you are directionally different. It just means you might be different on magnitude.""If you look at the various studies that have been done, you will find that when people play earnings they don't do as well as they think they will do. In fact, they lose money fifty percent of the time.""Remember this. While it's always nice to have the opinions of peers, trusted confidants, and advisors, in the end, you alone are responsible for the decision you make. You must be a strategic thinker, and sometimes you have to follow your gut instinct. To do this successfully, you must also learn to manage your own emotions and decision-making process."Don't be too concerned with changing your mind about positions which you have advocated. You must be more concerned about your profitability than your public image. The logical course of action is to admit to the fact that you may have been wrong in the timing and find better places to deploy your capital.While getting bigger in a losing position may be a solid decision, it must be carefully weighed.(Not trading your conviction during volatile times) "This is exactly how people lose a lot of money. Its human nature, they want to wait until it feels OK. You have to be willing to be uncomfortable and go after the opportunity when no one else is willing to do so.""The key to continuing to succeed even in the midst of uncomfortable feelings is to recognize that emotions are not reality. They are simply feelings about a situation, and we ought not to confuse our feelings about reality with reality itself."Handling emotions. A process.First, recognize the problem so that you don't perpetuate it. Own the problem. Don't try to rationalize or justify your actions. Simply admit the facts. This is what happened. This is what I did. When you are too busy trying to defend yourself, you are not open to instruction from the past or from peers. Then, make a conscious decision not to act impulsively or automatically in an effort to eliminate feelings of discomfort. Notice the feelings. Recognize that they are not pleasant but move forward with determination and a clear presence of mind, reacting to the events at hand- not to the feelings you have conjured up as a result of the events. Don't waste time trying to change how you feel. Just notice them, let them pass; learn to stay centered in the present moment. Keep coming back to the present moment. Keep coming back to your plan of action, what you know, not what you feel, away from the off-kilter thoughts which impel you to become distracted by negative impulses.Keeping a log of your trades and how you felt and how those feelings affected your actions and decisions in the trade can be very useful.Developing the trader's edge requires staying calm and managing risk in periods of great market volatility. The toughest lesson for most PMs is to cut losses and to get out of trades that aren't working, especially during periods of drawdowns.Ripe for a fall. Identifying a crash before it occurs."These periods tend to follow euphoric periods when it's just too easy, when everyone is making money. You feel like you are brilliant. That's a precursor; you are usually within weeks at that point. We try to look for when we are being sloppy. If we are doing it, other people are doing it, which means the whole system thinks it's smart. You feel like you are smart when you have made a lot of money. When you start to see that people are doing really well, that it's really easy, then I think you should take your gross exposure down in advance."Emotions and decisions.1. The key to trading success is to commit to a stretch target over a specified time horizon and then construct a strategy to reach this target. This sounds easy, but is hard to implement, especially in turbulent times.2. To manage your anxiety and fear during volatility, you must notice and separate your emotional responses from your decision-making.3. When a trader reacts to his emotions, he often tricks himself into believing false notions about himself- overvaluing his ability or undervaluing his potential.4. Must have both self-discipline and self-esteem. Trader with self-esteem will rebound from failure, considering a blown trade simply as a challenge to win at the next opportunity. In order to be willing to risk making a mistake, a trader must have strong self-esteem.5. An experienced PM has a process, sells his losers, doesn't chase flyers, doesn't overreact to the market drawdown nor get paralyzed, does not rationalize his performance, does not justify, does not get irritated nor avoidant. He has discipline, is not emotionally attached to positions nor forms conclusions based on faulty notions.6. The key to continuing to succeed even during uncomfortable feelings is to recognize that emotions are not reality.7. Developing the trader's edge requires staying calm and managing risk in periods of great market volatility- cutting losses and getting out of trades that aren't working, especially during periods of drawdowns

I found the book very poor in terms of knowledge and practical use for traders. It's oriented for fund managers who are recruiting new employees. It was a big disappointment for me.

This book is a quickly written tome attempting to make money off of the pain of others. It is based on a training program at SAC that turned a blind eye to humiliating treatment.