Dr Amit Malik – A guide to mastering the traders' mindset

In an interview with Moneycontrol, Dr Malik talks about the challenges in becoming a successful trader and why many traders fail.

Q: While globally psychiatrists have worked with traders to improve their performance, in India we do not see that trend. What got you interested in working with traders?

A: Numbers have always interested me. I have been involved in the market, but with regards to my personal investments, and not as a trader. I have friends in the finance industry with whom I network regularly; that’s where we started talking about trading psychology.

I have been reading about it for a while and the data clearly showed that globally, a lot of individual traders and institutions are taking a structural psychological approached to manage their trade. Globally, large fund houses have structured support to help their traders manage their mind better which in turn helps in better trading.

But very little of this is happening in India. Emkay Global and their Finlearn Academy have identified this vacuum. We work together with traders on applying a lot of psychological principles to make them trade better, make a better decision, manage their emotions better and develop discipline in order to become consistent traders.

I am absolutely fascinated with the response from the institutional side. I was under the impression that it was the individual trader who would be in need of psychological support but feedback from the institution side has been amazing. They have come back requesting more programmes with their teams. Our work focuses more on implementation and not theory. We give individual feedback to the team members.

As to my background: After completing my medical degree in India, I moved to England and did my post-graduation from Nottingham, and did my post graduation psychology training for six years. I worked with the National Health Service in the UK as a consulting psychiatrist.

Then I went to the London School to complete my MBA and took on more of a management role in the field of psychiatry. I was on the board of The Royal College of Psychiatrists for three years before deciding to come back to India.

My area of interest is how decision making impacts various aspects of life, how people think to behave and how it impacts their life. In the UK I felt that if my patients had access to support earlier on in their lives, they could have stopped their condition from getting worse and would have recovered more easily. This made me think of how can mental healthcare be delivered early-on and at a larger scale.

I have taken the help of technology and now run a mental health platform under the banner Innerhour (www.theinnerhour.com).

Q: How does your individual traders’ class look like and what are some of the issues you deal with in the class?

A: Our three-month programme normally has experienced traders attending it. Experience, however, may vary from a few years to 20-30 years. What we have seen is that the more experienced a trader, the more he takes away from the class. They understand the behavioural challenges they were facing that restricted them from doing as well as they like. They relate to it when we discuss the topic.

A newer trader has more basic issues to tackle. Like we had this trader who used to do his analysis perfectly, his paper trades showed his strategy was good but he was not able to press the button. So we worked on building this aspect of his trading. His anxiety issues were tackled by reducing his trading size. He traded only in a smaller size for three months before picking up again.

The experienced trader, on the other hand, comes in search of a structured framework. He knows what his problem areas are but he comes to understand the entire framework,from maintaining journals to how to think about the trading plan, in order to increase their trading output. Basically, they really come for the framework and the tools to understand the entire cycle from planning to execution to review and planning again.

We do a lot of personalised reviews which makes it easier to adapt. At the end of each month, we give them activities to do, on which we give them feedback. Because of the activity, we get adaptability.

Q: A very basic question, can anyone be a trader?

A: What we do not talk about in our class is innate traits. Anything that you need to be a trader can be taught, be it how to manage your thoughts, how to handle your tension, manage your emotions, how to be more disciplined, your patience. Everything needed from a psychology point of view can be taught. So theoretically, yes, you can be taught to be a trader.

But the issue is how you internalise it.

It ultimately boils down to the question of why you want to spend the time and energy to trade, how motivated are you, and how critical are the trading goals to you. If you are highly motivated, then it is easier to internalise the training well. If you are not then it will take longer, and would need the motivation to change.

A lot of what we talk about is behavioural changes. A lot of it is how can I behave differently in the trading context to my current behaviour. But all behavioural change is hard. Take the case of going to the gym. How often do we go beyond the first month?

It is all about how I can change from being a person A to a person B where the two require very different behaviour in the trading context. That requires a very high level of motivation.

More than intelligence, ability or aptitude, the motivation to become good at trading is the most critical factor in internalising everything.

Q: Can you give us an example of how a motivated trader changed his behaviour.

A: One of the basic things that we teach is how to cut down on impulse trading. There are two factors that we really focus on – how to make a trading plan, and how to stick to the plan.

So we had this one reasonably good trader who was particularly affected by impulse trades. When we looked at his data, we found that he did very well with his planned trade, but his impulse trades used to eat away nearly 90-95 percent of his profits.

We then worked around some exercises on how to get disciplined and stick to the plan for the next six months after, which his profit and loss improved significantly.

There are three parts here – preparing a trading plan, sticking to the plan and developing the discipline to stick to a trading plan that helped this trader. But gaining discipline is not so easy.

The science of discipline says that discipline is dependent on four factors – standards, motivation, monitoring and will power.

Say one has set a standard that he needs to wake up at six every morning to exercise at least four days a week. Why he wants to do this is because he had a heart scare and does not want to die early. He has young children whom he wants to see grow. This is a strong motivation. He monitors this by keeping a diary and marking the days he exercised.

These three are behavioural which requires the fourth – will power to do it. The thing about will power is that it can be developed like a muscle. There is a school of thought that says that if you develop will power in one part of your life, then you can translate it to another.

Say you have one thing that you do regularly that you should not be doing. For example, you are in the habit of eating sweets after dinner. You know that after eating sweets, you will gain weight, and you should not be eating it. If for a period of three months, you develop the will power of not touching sweets after dinner, then this will power muscle will develop globally and that you can apply to get disciplined and take it to your trading.

We used this exercise on the trader to improve his discipline in avoiding impulse trading.

Q: How important is goal setting in trading?

A: Goal setting is extremely important. We start our programme with goal setting and normally we get people coming to us saying that this is too boring, we need technical stuff. But when I meet them three months down the line and ask them how many strategies out of the twenty that I taught them are they applying. They say probably one or two. I then tell them this is because their goal setting is not in place.

There is a science to goal setting. There are two parts to goal setting. One is why goal setting is important and second is how to set goals in different time frames of your life.

Goal setting will translate into motivating you to do the changes and second, it will give you an objective measure of whether you are succeeding or not.

For example, if you have a goal of taking 95 percent of your trades as planned trades or having a trading account which is five times your current trading account in five years. These are objective goals and not vague ones like I want to become a better trader.

What we have here is a clear pass or fail. This makes it tangible to monitor your progress as well as motivates you towards progress, because when you see small wins, you are motivated to reach the final goal.

If your goal is to reach 95 percent of your trades as planned trades from the current level of 70 percent, and after a month you touch 80 percent, you will be motivated to improve upon this score in the next month. These goals give you a clear sense of direction and sense of achievements or it may give you a warning sign that I am slipping and need to take corrective action.

Goals should be set for different time frames, ranging from two to three months to a year and a maximum of two to five years. When you are setting these goals, make sure the earlier time frame goals are easier to achieve and progressively increase it.

Q: How important is keeping a record of your trades?

A: Most of the successful traders that I have met are very meticulous in their record keeping and writing notes. They go and reflect back on their notes and actions and decisions all the time. The idea of keeping a real-time record is to know why I made the decision at that time and to learn from it.

Records are of two parts – what is my detailed trading plan and then the recording of individual trades. Both are very important because they are your course material as a trader. You go back to it and learn from it.

Q: A fundamental question over fear and greed: which is more dangerous for a trader?

A: I think the more dangerous is greed. Because when you are fearful, you will leave money on the table and you will not take any disproportionate risks. When you are greedy, your risk-taking ability becomes disproportionately high. We have seen it in markets where we see people over-trade and go out of their trading plan.

This mostly happens when you are doing well — you get a sense of over-confidence and you over-trade. Fear, on the other hand, is less risky though you lose out on the opportunity cost.

Q: What is the most important part you work on with someone who wants to become a successful trader?

A: The discipline and motivation to build a plan and follow it through. I often see people who do not want to do that work. After they learn a strategy, they just want to jump in and trade. It is probably because it is too cumbersome. But the beauty of it is that after you get it right you will never do anything else because you see the impact it has on your trading life.

That’s the one thing that is important – developing a trading plan, following it and constantly reviewing it. It does not have to be a static plan. It has to be dynamic, where your experience teaches you and has to give feedback to revise the plan.

Q: What would you advice a new trader?

A: My advice to new traders is always to come into the market with the idea of staying in the long term and understanding that very few people, less than one percent, achieve long term success. Come in with the idea that you will be willing to put in the work and put in the discipline to reach that one percent slot.

Come in the market for the right reasons. Be very clear why you want to trade beyond making money. There are many ways of making money, but trading is not easy as it requires planning, preparation, discipline and execution in order to be successful. So keep that in mind and not just jump into trading. The two things you need are discipline and patience, something which most people do not relate with traders.