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From battlefields to FX: How this trader manages risk and psychology for success

August 01, 2019 12:30

If you've ever done any trading, you've probably realised that the biggest part of winning the game is your mindset - understanding your psychology and how to work with it to become a profitable trader over the long term.

In this interview, professional trader Paul Wallace shares his trading experience and his insights into trading psychology.

Paul is a professional financial trade with more than 27 years' experience working in competitive, results-driven, performance environments. Paul has always been fascinated by success, achievement and peak performance, whether on the battlefield, sports field, boardroom or financial markets.

He runs the trader evolution practice, Tradingbeliefs, helping traders manage and improve their overall performance, and he is also one of the hosts of Admiral Markets' new webinar series Trading Spotlight.

In this interview, we discuss the crossover between the military and trading, developing a risk management mindset and how much capital you really need to start trading.

What did you do before you became a trader?

My background began as an Officer in the Royal Air Force working in Air Battle Management as a Fighter Controller for six years. If you've ever seen one of those old war movies where there's a room with a big map in it where enemy air raids would get plotted. Setting up from that would be a fighter controller who would contact all of the airplanes to get them into formation for the battle.

Today of course it's all done with computers and happens at a thousand miles an hour, but the concept is still the same - it's all about mental agility, being able to make quick decisions, being comfortable under pressure and being able to cut your losses.

In fact, when they first built that system in the 1930s, they tried to get scientists to do the job. But what they found was that scientists wanted to take their time and think through the outcomes, so instead they needed to find people who were comfortable in that fast-paced environment. So during the Battle of Britain, many of the fighter controllers were actually stock brokers from the City. So that started the link between battle managers and traders, because there are a lot of very similar skill sets.

Then, during the 90s there was a Bank in the City trying to get Battle Managers and Air Traffic Controllers on their bank floor, as there were a lot of similar skill sets. At the time I was under contract to the Air Force but it's what first piqued my interest, and I knew it was something I would look at in the future.

How did you first get into trading?

After the end of my Air Force Contract I ended up working in the City of London in internet and telecommunications at the end of the 90s during the dot-com boom. I was bored in my job and started to trade around my day-job, focusing on the internet companies that I worked with during the day.

As part of my job, I would have to go into companies and talk about what they wanted to achieve. And if I got out of a meeting and resonated with what they were trying to do, I'd go and look at their share price and buy some shares.

I wasn't a great trader - I was just a lucky punter who happened to be in the right place, at the right time with knowledge of the right industry and a key appreciation for risk management from my days as a Battle Manager. I think the military gives you an in-built understanding of risk management - when to push a position, and when to run away bravely.

I did well and enjoyed the challenge of it all. Then a few years later I got the chance to take a voluntary redundancy from my corporate job and decided to transition across to trading full time.

What was your inspiration to trade?

In a word: autonomy. I now get to live my life by my own rules. I take great pleasure in that.

How do you find the time to trade at all?

I do some work at the weekend to prepare for my week and sharpen my focus towards which instruments I should be concentrating on that week. I will be aware of the major news events that are coming up in the week ahead. I will have also fully reviewed my trading results from the previous week and will ensure my records are up to date.

Then I'll do my analysis of the FX markets in the week ahead, figuring out the strength and the weaknesses in the FX markets, which will shape where I spend my energy in the coming week.

Then every morning I'll do some work to either place trades or manage my positions. Then if I am at my desk and not travelling that week then I'll do some shorter-term intra-day trading on an opportunistic basis.

What are some of the early mistakes you made?

Part of the reason I was lucky was because I had a healthy respect for the market and risk management – that helped enormously. One mistake I made after I went full time is that I experienced success and started trading too many correlated instruments. This is great when the market's going your way – but is painful when it goes against you! Once again, good risk management meant that I learnt from the experience and lived to fight another day.

What are the biggest lessons you've learnt?

  1. Always live to fight another day!
  2. Never enter a trade without knowing where your exit is.
  3. Never chase a trade – if it has left without you then move on.
  4. You can't control the market – but you can always control your position.
  5. Simplicity and precision work well for me in my set-ups.
  6. Less is more. Always.
  7. Always record your trades and debrief your trading sessions.
  8. Get a life outside of trading.
  9. Trading is a lonesome endeavour - so be around other good traders when you can be.
  10. Have high standards – but don't beat yourself up – there is always another trade.

Why do you think the majority of new traders lose money?

From my experience it's usually a deadly mix of being over-confident and under-prepared that causes problems. Optimism bias rears its head, where we assume that things will work out well, and along with being uneducated it can be quite a challenging time for a new trader. On the flipside of that is confirmation bias and survivorship bias where we filter in the stories we hear about people who are following our style or strategy.

So being over-confident and under-prepared is a dangerous mix because you don't know what to fear. What's interesting is that many traders do well on their first few trades. So that optimism turns into confidence, which turns into euphoria, which then turns into poor risk management, and then they get hit by losing trades.

This then leads to a spiral of revenge trading - they don't want to lose the money, they think the market owes them that money back - and they start making poor, emotional trading decisions. For many traders, this will be the end of their trading career.

The key is helping traders save themselves from what is the natural human condition, which is part of what Markus, Jens and I will be covering in our webinars.

How much capital do you need to start trading?

One of the mistakes most new traders make is being under-capitalised, so they're always trying to hit 'home runs' in their trades. That rarely ends well.

The question shouldn't be 'how much capital do you need?', it should be 'what sort of returns can you expect?' People's expectations are set wrongly by a number of trading education firms that claim you can make tens of thousands a year with 20 minutes of work a day.

The reality is that you need to have the right capitalisation for your goals. A lot of people think they can open an account with €500 and make €5,000 a year, and that's unrealistic. While it might be possible, the probability is enormously low.

If you're starting out with a €500 account, if you are able to double that in your first year with trading and risk management, that is a magnificent performance - that's a 100% return.

I see traders all the time who deliver great results - they might make 20%, 30%, 40%, 50% or even more on their account. But they might be trading with a €10,000 account. So even if they generate 50% returns, that's still just €5,000, which isn't enough to live on. So what happens is they get frustrated, and then they start trying to hit home runs.

For most traders, the focus should be trading well with the account balance they have.

What advice do you have for new traders?

Make sure you're managing risk from trade one on day one – otherwise you'll struggle.

Be very careful of how you define 'success' in your trading. Most people define it by the outcome of the trade and a growing profit in their account. But in reality you're still learning to trade and so your definition of success should be: Plan your trade. Trade your plan. Manage your risk. If you do those three things, then the trade is a success regardless of the outcome of the trade.

What sorts of things will people learn from your webinars?

I hope that they'll learn a healthy respect for the markets and to always manage risk. I hope they'll learn about the importance of process, discipline and self-awareness in your trading. Furthermore, how it's perfectly possible to have a very simple trading plan that any trader can easily execute.

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Disclaimer: The opinions expressed herein are those of the interviewee and do not necessarily reflect the views of Admiral Markets investment firms.

Trading with financial instruments (CFDs, Stocks, ETFs) offered by Admiral Markets carries a high level of risk which is not suitable for all investors due to their complex nature. Before entering into client agreement or making a transaction, please make sure to read the terms and conditions of our service. Consult a specialist if necessary to ensure you understand the risks involved in trading.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 84% of retail investor accounts lose money when trading CFDs with this provider.You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.



Risk Warning

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 77% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.