Two groups file into a room…

Eyeing each other suspiciously they settle down into private booths. They’re about to do battle.

To the left we have the psychopaths – hooligans, violent serial offenders, and worse. To the right we have the financial traders.

To win this game of strategy they’ll need the ability to make calculated decisions under extreme stress. They’ll need to mentally calculate probabilities on the fly and then take immediate action based on their own chances of coming out on top. It’s all about good strategy.

So who’s your money on to win, the psychopaths or the traders?

Believe it or not, this experiment was carried out for real at a Swiss University. They played a game of “prisoner’s dilemma” where the participants can betray each other or co-operate in an attempt to win.

Why traders ‘undid themselves’ by being too competitive:

And the surprising result showed the traders coming off second best. Their competitive attitude was their undoing. Instead of keeping their business heads on and aiming outright for the most points, they spent too much time comparing themselves to the other players…

“It was more important to the traders to get more than their opponents. They spent a lot of energy trying to damage the opposition”.

It sounds like a classic case of ego getting in the way of performance… strategy going out of the window as pride takes over.

Anyway, back in the test the psychopaths were all business. By definition they lack empathy. It means they don’t care about other people’s feelings, but equally, they don’t care how other people see them.

So the psycho’s had no problem trampling over the others as they clawed their way to the top and they didn’t care what the others were doing until the final reckoning.

So does this mean psychopaths make really good traders?

It’s a fascinating idea. Scratch away at the surface and you might find psychopathic tendencies in the current crop of top performers.

Especially when you dig a bit deeper…

Researchers at Glasgow University found psychopaths are easily bored and thrive in jobs where there’s lots of action. They’re cold, callous, and prepared to take risks. Plus they’re happiest in situations where things are always changing and they can quickly react.

Doesn’t that sound familiar? The financial markets would be a perfect fit!

Now here’s the killer question: the research concluded that psychopaths are made, not born. Peer group and environment can encourage psychopathic behaviour in the best of us…

So are potential and actual psychopaths attracted to the markets or is it the other way around – does successful trading encourage psychopathic behaviour?

I think there’s probably an element of both.

At an institutional level anti-social behaviour is encouraged and traders who lose all sense of proportion are often the ones most highly rewarded.

It’s why traders like Jerome Kerviel end up losing their employers 4.9 billion Euros on bad futures positions. I mean, what are they doing trading that kind of size in the first place?

There’s no way the bank’s compliance would (or should) sanction it.

And the scary thing is you only get to hear about the big trades like this that go wrong. Think how many huge positions have ended up making money for the banks instead. If the money goes into the bank’s pot all is well. Any regulatory infringements get swept under the carpet (well, unless someone blows the whistle).

In terms of successful trading creating psychopathic tendencies, I think we have lots to use to our advantage…

First, let’s turn the equation around and look at it like this:

The RIGHT psychopathic tendencies = Successful trading

Simply embrace the elements of a psychopath’s make up that will serve you well as a trader and leave all the bad bits out!

Here’s how to apply the psychopath’s personality traits for a boost to your trading success:

  • RUTHLESSNESS: It’s not difficult to be ruthless when you’re trading from the screen – we’re not talking about physically hurting people here! Just keep it about trading to make money. Avoid getting into any ego-driven competition on the trading forums – your performance will almost certainly suffer in an attempt to ‘look good’.
  • FEARLESSNESS: This is the first side of the self-discipline coin. Make sure you’re trading at a level of risk you’re comfortable with… the thought of risking your money must not hamper your ability to place trades accurately. You need to overcome fear to get your long-term profitable edge working away for you.
  • IMPULSIVITY: This is the other side of the self-discipline coin and is one trait you need to dial right down. Overcome the urge to place ad-hoc trades just because the market ‘looks like’ it might go up. And don’t go jumping straight back in looking to take your revenge on the market for a recent losing trade if it wasn’t part of your original plan.
  • SELF-CONFIDENCE: You must have confidence in your trading strategy before you can take full confidence in your own ability to make profits from the markets. Make sure you have a reliable and tested system of identifying and placing high-probability trades.
  • FOCUS: If you’re a daytrader this might mean shutting down your email program, signing out of Facebook, and hiding your phone in a drawer for a couple of hours. Sod’s law says the perfect trade will come along just as you’re distracted by an amusing text message from one of your pals.

If you’re an end-of-day trader, make a daily ritual of checking your charts at a certain time. Don’t go at it willy-nilly missing days out because you were in the pub. Make sure you design a routine that fits your lifestyle – one you know you can stick to.

  • COOL UNDER PRESSURE: If you’re trading your system exactly as it was designed this is something you don’t need to worry about. Just do what your system says and then sit on your hands. Other’s might comment on your ability to keep cool as the money rolls-in but only you will know how carefully you designed things to be this way.
  • MENTALLY TOUGH: This comes with experience. One of the best things I was taught as a fledgling trader was an early lesson in getting over the feelings of taking a loss. I was encouraged to take a string of deliberate losses just to get those emotions out my system quickly. If you make it so you don’t care about the losing trades what have you got left to worry about?
  • LACK OF EMPATHY: Have no concerns about other trader’s feelings – we’re all here in the markets for the same reason and they’ll gladly relieve you of your money given a chance!

But do give some thought to how your trading approach might affect those near and dear to you. Are you short-tempered with your family after a bad day in the markets? Or are you easily lost in thoughts of new trading system ideas when you should be enjoying a meal with your wife?

Trading is so exciting and mentally stimulating it can be difficult for others to understand your enthusiasm.

Big Tip: Make sure you know when to switch off. Take regular time away from all thoughts of trading. You’ll come back the next day refreshed, balanced, and ready to do battle (plus you’ll keep the full support of your family).

  • CONSCIENCE: A healthy conscience – the sense of right and wrong – is the difference between using all the other traits as a fast-track to success, or misusing them and ending up in prison! So if one day you find yourself trading currencies for a large European bank, don’t forget to check yourself (and your trading limit) before dropping an earth shattering order on the market!

So I hope you enjoyed our journey into the psychopath’s mind…

The above matrix of personality traits was taken from a fascinating book written by Andy McNab (ex-SAS soldier of Bravo Two Zero fame) and Dr Kevin Dutton. It’s an entertaining and thought provoking read. If you want to tune-up your own mental trading processes you should check it out – I highly recommend it.

Here’s a link to it on Amazon: The Good Psychopath’s Guide to Success

Be Prepared: Market Moving Data Coming This Week (London Time):

Wednesday 16th July:
09:30 GBP Claimant Count Change
13:30 USD PMI
15:00 USD Yellen Testifies

Thursday 17th July:
10:00 EUR CPI
13:30 USD Building Permits
15:00 USD Philly Fed

Friday 18th July:
– No Big Reports

Monday 21st July:
– No Big Reports

Tuesday 22nd July:
13:30 USD CPI
15:00 USD Existing Home Sales

I hope you enjoyed this weeks’s issue. Check that book out if you get chance and I’ll catch you again soon.