Thoughts on trading

Legendary trader Paul Tudor Jones has got himself into troubled waters for comments he made in a discussion  in front of students and alumni of the University of Virginia about the impact of having children on female traders' focus. Blogger Finansakrobat was the first I have seen who dared to speak up in Mr Jones' support.

Mr Jones is trying to back-peddle on the interpretation of what he said. I have nothing insightful to say on the subject of childbirth and trading but his point (I think) is that macro trading requires total focus. There are lots of examples of women who do extraordinary things after they have children. But what makes a great trader is something Mr Jones knows a lot about. So it set me thinking.

Since the industrial revolution, it has become the norm for 'work' and 'play' to be separated for most people. The cry of 'TGIF' says that for many, 'work' is still place you have to go to to earn the money to pay for 'play', which happens elsewhere. But that model is breaking down. Lots of people take work home now, some work from home. And lots of people enjoy work as much as they enjoy the time they spend 'not working'. "Macro Traders" as described by Mr Jones, usually fit into this category. But getting work and non-work life into balance is important. I've worked in a firm where the CEO was having an affair as the firm fell apart around it and worse still, so were a worrying numbers of the rest of the senior management team. I would have thought that one secret of a good leader in a high-stress environment, is that he or she is either brilliant at separating work and home life, or has a very stable home life that doesn't distract him/her from the day job. Sir Alex Ferguson, for example, seems to fit into this mould of work-obsessive whose home life is a rock of stability.

Trading, as a career, is pretty simple. You use other people's money (and sometimes your own) to make bets and get paid if you get it right. But underneath that simplicity is a need for clear rules and understanding, and almost above all else, balance within a team. A group of traders who risk each others' money as well as other people's on a day-to-day basis, need to have clear rules about much risk they can take, and how much they earn as individuals in return for making money for their employer and their investors.

A simple example is a group of four people in an investment team They are all of a similar age and experience. Three of them have no debts, reasonably healthy bank balances, but not enough money to, say, buy a Caribbean island. Their 'dream' in working together in a fund is that they will make some money every year, grow the assets under management and maybe make a lot of money one day They definitely don't want to retire and die a slow death running down their savings, but they don't feel the need to 'bet the house' on a turn of the card - they can wait for success. The fourth member of the team through, has been through a divorce, has a young family and while he lives in a sumptuous house, drives an expensive car and wears a pretentious watch, he has a big mortgage as well.

This is a team (probably) doomed to failure because one member has completely different emotional (and financial) drivers determining how he trades. He's not trying to wait for a great trading opportunity while building a business slowly and carefully. He needs success quickly and in the world of finance, he has the tools at his disposal to try. A more aggressive trading style may work, but probably won't.

An aggressive trader can bring down a hedge fund or indeed, a bank. Defenders of female traders sometimes argue that they are less inclined to behave that way. I don't know if it's gender-specific at all. What I do know, is that in a small business, it is important for all the people in the business to have consistent goals and ambitions. Not identical, just consistent. In a trading firm, where one person's focus and style can undermine everyone's efforts and where decisions need to be made at work, or at home or on holiday (markets won't stand still and allow you to ignore them) this consistency of goal, ambition and style is all the more crucial. Mr Jones, I sense, understands this very well.

I have always found the intellectual part of trying to work out where markets are headed more interesting than the nitty-gritty of executing trades. The best traders I have worked with, by contrast, have enjoyed the psychology of markets as much as I have enjoyed the economics of them, and are far better at the psychology than I could dream of being. For better or for worse, they have tended to be able to make sure their non-work life doesn't interfere with their ability to focus on trading, too.