The Mental Strategies of Top Traders: The Psychological Determinants of Trading Success

I’m a great advocate of the author’s earlier work but found this one, while interesting, more relevant to professional fund management than day-to-day trading.

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.

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.

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.

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.