Trading Psychology

Background

Claradan is a global leader in the adaptation of Behavioural Finance to business and financial markets. Claradan utilises a wide range of behavioural sciences in its activities and excels in the interpretation of academic research into actionable and relevant applications.

 Claradan’s Trading Psychology programs are designed to give traders, managers and sales teams a greater understanding of the decision making processes that dominate capital market functions. We do not promote the concept of an optimum trading style, but instead deliver relevant, actionable knowledge that enables all participants, whatever their role, to enhance their own performance and gain a greater understanding of the behaviour of those around them.

Examples of Delivery

The proliferation of electronic markets now makes mapping decision making far easier and the results more reliable, the moment of decision making – the deal – whether executed in house or by a client is captured in time; furthermore the environment the deal was executed in can also be replicated by studying the prevailing price action and volatility of the market.

Claradan uses a mixture of quantitative and qualitative approaches to suit different needs and development styles;

Workshops

Claradan delivers a number of workshops that can be tailored to specific needs, all of our content features;

• The very latest up to the minute market examples and does not rely on historical examples
• Delivered in clear, industry specific language
• The focus is on ensuring participants take away actionable knowledge that has a direct impact on their performance.

Recent Example Workshops

• Introduction to Behavioural Finance
• Behavioural Finance & Technical Analysis
• Behavioural Finance & Pensions

Recent Application

Claradan was given a mandate by a leading UK Bank to bring up to date the DC Pensions product development team with the background application of Behavioural Finance in their market. The one day workshop was held in house with 8 team leaders from around the UK.

Outcomes – The team leaders left with knowledge of the principals of Behavioural Finance and where it has successfully been used around the world in the pensions industry. In addition they had a clear understanding of the areas of their business where Behavioural Finance could be utilised to enhance the product offering and performance as well as mange the client experience more effectively.

Analytics

Claradan combines traditional data analysis with behavioural modelling to produce sophisticated data that quickly identifies areas of a trader’s performance that are successful and areas that are adversely affecting revenue generation.

With the benefit of electronic markets, we consider ‘the deal’ as the moment of decision making captured in time, in addition the environment the deal was executed in (the price action) can also be accurately recreated. This gives a reliable platform for analysis.

We compare the trading strategy/plan to the actual trading activity and run behavioural finance models to identify patterns in the trader’s decision making, by adding this level of clarity and quantitative approach we are then able to work with the trader to reduce the impact of performance inhibitors and highlight successful practices to be fully leveraged.

Recent Application

Claradan’s analytics were employed by a successful independent trader in Chicago who was aware of ‘weakness’ in his decision making that resulted in a repeated trade instigation that was cleanly outside of his trading strategy (Traders will often be aware of behaviour but will consider it a weakness or a fault). He was prone to entering the market with a counter trend trade if a move happened that he considered a ‘surprise’. Criteria he gave were – not around an economic release, time of day he expected volatility, or the move in points was quicker than ‘normal’ expectations.

• Claradan analytics clearly identified this trade pattern and was able to map the performance of trades instigated in this fashion. We were able to explain that this was a symptom of ‘anchoring’ and a cognitive process that was in fact helpful in our everyday lives – but could be problematic in this very specific scenario.
• By giving the trader clear indicators of the type of market conditions he was likely to make these trades, and why it was a natural instinct and not a trait of a bad trader, he was able to recognise earlier and earlier the environment these trades may enter his behaviour and eventually make a far clearer rational assessment on whether to enter them or not.
• In addition we were able to remove any negativity associated with the trades which could go on to affect confidence,

One-on-One

Claradan conducts one-on-one sessions with traders and these arrangements can compromise of anything from 2-3 meetings through to long term arrangements over several months.

Our one-to one delivery usually unfolds along the following lines;

• An initial consultation, in the form of an informal meeting to establish the following; understand the traders approach, risk appetite, philosophy, style and experience.
• Ascertain what the individual wishes to achieve and how success will be measured
• Apply analytics to create a picture of actual trading activity to compare to the individuals own view and plan.
• Design support mechanism to help achieve desired goal.
•  The client will be in daily contact with Darren Agombar via pre agreed format such as Reuters Messenger, telephone etc. throughout the entire process.
• Weekly face-to-face meetings.

For Recent Deployment please see Analytics Recent Application above.

Sales

Claradan not only uses its behavioural knowledge to help traders reach higher levels of performance but increasingly advises sales teams on areas such as Client Engagement, establishing the ‘Behavioural Personality of the current client base and developing effective messaging and techniques to convert more deals and new clients.

Recent Application

Claradan was requested by an independent Investment firm to assess the return it was currently achieving from its existing client base and to provide segmentation to enable effective future client targeting.

Claradan was not only able to give a clear picture of the businesses most profitable clients by measurements such as demographics, industry, sales person etc. but we also provided a level of behavioural segmentation to the existing clients.

Claradan measured for evidence of a change in risk appetite in the existing client base (high net worth individuals) and validated our assumptions that although investors were less risk seeking than pre crisis, choosing to hold assets that protected their capital or were very low yielding (a commonly accepted belief) there was appetite to take on high risk investment opportunities but with only a small percentage of their overall capital at risk. What we may consider ‘lottery ticket trades’.

The company was able to develop a selection of opportunities within its existing product offering, commercial property investments, that met with this otherwise untapped and unrecognised demand.

Case Study – Low Confidence Trader

As a final example of how Claradan is not only able to transfer its behavioural knowledge to our clients but also how we use that knowledge in our interactions and presentation of our work.

Claradan was requested by a team leader to work with a previously successful trader who has been experiencing an extended period of poor performance. The candidate was extremely reluctant to meet and was extremely hostile at the initial consultation which was one-on-one. It was clear that the trader was feeling under pressure and in fear of losing his portfolio and subsequently admitted that he felt ‘it was the final humiliation and he’d rather just go quietly’.

Our objective was to win trust from the outset and we did this by altering the perspective and preconceived opinion of why the team leader had brought us in by;

• Emphasising we were not in the business trying to clone the perfect trader!
• Our objective was to help identify and reduce the impact of performance inhibitors
•  Help him understand that many of the natural cognitive processes that help in everyday life can be problematic in a trading environment
• Explain the impact of positive and negative feedback loops on decision making

Result

Our ability to quickly gain trust with the trader enabled us to deploy some very simple techniques to help regain confidence and improve performance. A particular problem was the affect a series of losing trades had on an already low morale trader – we were able to explain the decision patterns he demonstrated in these scenarios – running winning trades too long in attempt to recoup collective losses in one profit – and design a simple solution of isolating each trade as a single event. This helped eradicate the accumulation of losses in his mind and manage each trade in accordance with his strategy.