Sunday, 10 January 2016

8 Things Traders can learn from Professional Boxing

Analogies and metaphors can be a great learning tool because they make complex and not so obvious concepts easily accessible. Whereas trading and boxing don't seem to have much in common at first glance – two guys beating each other up vs. making sophisticated decisions in the financial markets – the underlying principles show a lot of similarities.

1. You can't avoid getting hit

Even though the best boxers have great reflexes and are very quick on their feet, they will still be hit many times during a fight. It's impossible to not get hit at all during a fight. Getting hit does not mean that you are going to lose; it's part of the game.

In trading, you can't avoid losses and they will occur frequently; it's not even necessary to avoid losses and trying to prove you are wrong often ends in a disaster. The professional takes his losses unaffected by them and just keeps going; he does not lose his focus and waits for the next high probability trade pattern to land his punch.

2. Take many hits without taking that ONE hit that will knock you out

As we have said, getting hit is normal. But, at the same time, you have to avoid taking that one huge hit that will knock you out. You have to play great defence, be quick on your feet and never let your guard down. Just one moment of carelessness and one serious hit can mean the end.

In trading, you have to control your risk at all times and define your worst case scenario. Use adequate position sizing, protect your trade with a stop and make sure that never, ever a single trade can result in a major loss.

3. You don't have to go for the Knock-out. A win on points is also a win

Although a knock-out looks great, it is no different from a regular win by points. The best boxers don't use uncontrolled swings or suddenly start attacking recklessly. They know that by making precise and effective punches, they will be able to win as well, without running the risk of running into a counter attack.

In trading, you don't have to go for the big winners either. Regular and well executed winners will add up over time. The professional trader stays in control at all times and he knows that his edge guarantees trading success over the long term.

4. Control your emotions. Don't let your opponent in your head

Before two opponents step into the ring, the mental fight has already started. Professional boxers know that if they can get into their opponent’s head, they can tip the scale in their favour. Tilting your opponent has the goal to make him do imprudent things, deviate from his plan and act emotionally.

As traders, we don't have a real opponent we can face. The opponent of a trader sits between his own ears and controlling your own temper and emotional state is the key factor to trading success. Often, just one loss can lead to an emotional downward spiral where traders lose much more than necessary.

5. The preparation for every fight is different

The preparation for every new fight is different because the opponent changes. A boxer has to first analyse his opponent; find his strengths, weaknesses and the unique characteristics and then come up with a game plan. He can't just use the same preparation and fight plan for every fight.

Traders often make the mistake of applying one method to different markets, time frames and market conditions. Volatility and momentum change all the time; different markets move differently from each other and the way price manifests on lower time frames is very different from higher time frame price action. Thus, a trader needs to adapt with his trading method each time he wants to enter a trade and evaluate market conditions.
"In boxing you create a strategy to beat each new opponent, it’s just like chess." – Lennox Lewis

6. You have to react to what happens at that moment

Even though boxers prepare a game plan where they lay out how they will approach the fight and how to set the pace, they are always ready to change it on the fly. When their opponent behaves differently than expected, when they unexpectedly take an early hit or if they see a weakness, they are ready to change their game plan instantly.

Traders are usually too static and only operate in reactionary mode. Although you need a trading plan and follow your rules, if something unexpected happens, you have to adjust immediately. Amateurs often freeze in times of adversity and then get knocked out by a punch they saw coming for a long time.

7. You have to work yourself up from the bottom

Tyson, Ali or Holyfield didn't just decide that they were going to fight for the world championship title. They started years and decades ago, worked hard without knowing how their future career would look like; they fought in dozens and hundreds of small fights in run-down gyms and slowly worked their way up until one day they could make the step onto the big stage.

Traders have to follow a similar path. You can't just decide to be a winning trader. You will most likely go through several accounts, lose money for months and sometimes even years; you have to work 7 days a week, 12 hours a day, not knowing if all the effort will pay off, but never forgetting about your goal.

"The fight is won or lost far away from witnesses—behind the lines, in the gym and out there on the road, long before I dance under those lights." – Muhammad Ali

8. Master the basics

The best boxers are the ones who have perfected the boxing basics; they have a perfect footwork, jab effectively, have a save guard, a dangerous hook, and great endurance. The best boxers don't necessarily have the most extravagant techniques or developed special tricks; they are just masters at what really matters.

Only if a trader can master the basics, he has a chance of succeeding. Being able to perform a multiple time-frame analysis, understanding how to read price strength and sentiment, understanding the basic principles of statistics and variance, having a stable position sizing and risk management approach and religiously following his own trading rules is the foundation of any great trader; trading is not about new and better indicators and finding a trick to call better entries.

"The tempt for greatness is the biggest drug in the world." – Mike Tyson

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Quote for the day

"Premature optimization is the root of all evil." - Donald Ervin Knuth