In my previous article I explained why technique, skills and knowledge are far more important factors in trading success than psychology. I touched on the use of psychology in sports and in this newsletter I will expand on this.
On my Norden Method website I explain how retail traders are often taught to play the wrong game. From a trading skills perspective, I will expand on this idea in a future newsletter. Today I want to explain why so many trading psychologists and coaches are also playing the wrong game; they are teaching based on a misguided idea of what mindset is required to succeed as a trader.
Finite and Infinite Games
Whenever we embark on a new venture or play a game we should understand whether it is a finite game or an infinite game.
Simon Sinek’s excellent book The Infinite Game is a must read on this topic.
Here is a quick explanation of the difference between a finite game and an infinite one:
In a finite game, the game has a defined start and end and there is a clear winner. After the game finishes the players move on to play again another time. So the game ends but the players continue.
An infinte game has no defined start and end point. The game is continuous but the players drop in and out. You cannot win an infinite game.
Examples of Finite and Infinite Games
Most sports are good examples of a finite game. When Liverpool play Manchester United, the game has a defined ending, a winner (usually Liverpool!) but both teams subsequently get to play again in another game. Similarly tennis matches are a sequence of finite games, with winners and losers but both get to play again at the next tournament. Finite games can’t take place without the players.
Examples of infinite games are business and indeed life. The business world is ongoing; new firms comes in and out of industries. One firm can never declare victory as such even if it is a dominant player. Apple cannot claim to have won the mobile phone industry any more than Nokia could a couple of decades ago. Similarly, in life, we cannot declare one day that we have won (or lost) at life. Both in business and in life the game continues but players drop out and new playes come in.
What type of game is trading?
Trading is an infinite game. It is ongoing but the players drop in and out. If I have a great day today I can’t declare victory. It’s just one good day and tomorrow it starts again. Further, the game continues whether I am here or not.
How does this affect psychology?
Why does this matter? The mindset required for an infinite game is very different from that required for a finite game.
A finite game has winners and losers so this is where we get the idea behind a winning mindset. This is why top sports stars may employ a psychologist. Remember though, they already have the necessary skills; by employing a psychologist they are seeking some extra edge to ensure they have the right mindset to win a game that has winners and losers.
Remember too that athletes are defined by wins and losses. How many games or titles they win?
As there are no winners in an infinite game, the mindset we employ must be a different one.
What is the correct mindset?
To stay in the game.1
Our aim must be to stay in the game. This is exactly Rule #1 from my book An End to the Bull; preserve your capital and stay in the game.*
Another great mindset for traders is to embrace ‘the grind’. If you want to know more about the grind please watch my YouTube video here.
Unlike athletes, we are not defined by how many wins we have. Success for us is staying in the game and being profitable enough to survive.
The wrong game
Yet time and again I read and hear trading psychologists talking about a winning mindset and comparing the psychology of trading to the psychology of sports. They are completely different.
As Sinek, explains, playing an infinite game with the mindset of a finite game player is a recipe for failure.
So here is another way in which some trading psychologists are actually causing more harm than good.
Where can we learn from sports stars?
There are some aspects of pro athletes’ behaviour that traders should model though. Interestingly, they are related to process and technique, the topic I covered last week. These are, responding to feedback and practicing purposefully, both of which are key aspects of the Norden Method.
It is essential that traders understand the business they are in and adopt the required skills and mindset.
Retail traders are routinely being told to play the wrong game in so many ways including:
- The skills they should learn (unreliable technical analysis)
- The importance of psychology (rather than technique and knowledge)
- And the nature of that psychology and mindset (play to win rather than stay in the game)
Trading is a tough business even for those who go about it in the right way. For those who play the wrong game, sustainable success will be near impossible.
In this newsletter I have shown that the sports based mindset of playing to win which is such a common theme among trading psychologists is actually, the wrong one. Our goal is to stay in the game and we must adopt a mindset accordingly.
You do not win as a trader, you just get to play again the next day. If that game doesn’t appeal to you then you should not trade.
Note: I should note here that in the book “An End to the Bull” there is a short section titled ‘Play to Win’. The main thrust of this section however is to preserve your capital and not to treat your trading account as spare funds that are available to lose. This fits with staying in the game as being our number one goal. I wrote this section long before I was introduced to the concept of an infinite game and if I was writing this section now I would change the title.