What we can learn from Tennis

Know which game you are playing

Sitting back and watching the Australian Open Tennis, I marvel at the brilliance of these players. Their technique, athleticism and emotional fortitude under pressure is all vividly on display in this game. It is the ultimate one-on-one sport that draws you in as the rally goes deeper and deeper. They are true professionals owning their craft. I don’t play but the action is engrossing. However, given the way my brain is wired, I start to think about Trading and the parallels with this sport. How does tennis relate to my performance and what can I learn?

In a recent timely post, Sahil Bloom introduced concepts raised by Simon Rao in his book, Extraordinary Tennis for the Ordinary Tennis Player. In summary, the fundamental differences between amateur and professional tennis players are:

• Amateur tennis is a Loser's Game: 80% of points are lost on unforced errors. You win by steering clear of errors and waiting for your opponent to make mistakes. If you can own your first serve, second serve or return of serve, then the points are wrapped up.

• Professional tennis is a Winner's Game: 80% of points are won on incredible shots. Cutting back mistakes is not enough in itself. You have to swing for the exceptional play.

This is a truly fascinating and powerful insight. As Sahil concludes, there are two core lessons:

1. You have to know what game you are playing: there’s no point trying to hit really incredible shots if you are in a loser’s game. Instead, just keep it simple to avoid errors. If you playing in a Winners game, you need to take risks and try those elegant plays.

2. The game you are playing may well change as the level changes: what begins as a loser’s game may transition into the Winner’s game. As an example, someone beginning a health and fitness campaign could be defined as playing a loser’s game. You need to be consistent in getting into the gym, eating cleaner, getting the work done, and avoiding previous destructive habits patterns. Your later health goals could then be described as a Winner’s game as you move up the athletic ladder. Better results go to those who specialize with a specific and personalized training program that tailors to one’s sport or goals. Nutrition and recovery initiatives becoming increasingly important.

It strikes me that these same rules apply to Trading. Ask yourself- are you better off by being consistent and just focusing on avoiding mistakes? Or are you getting paid by swinging at just a few big opportunities in the year and trying to execute these flawlessly? You can’t do it all so where should you be directing your full attention to win the game at this stage in your career? I delve into this below.

The unforced errors: Avoiding mistakes

I realise there is an element of irony here as my Trade reviews, report cards, and Tweets often show the better trades instead of my mistakes. The focus seems to be on the glamour shots. Of course, I am not immune from errors. It is hard to write about what I am actively doing behind the scenes to try to limit these! I did address my biggest problem area as “Overtrading” in my 2023 review with data post. These losses accounted for 15% of my yearly P/L. If I can cap or reduce these to an acceptable standard, then I can better move up the ladder to play the winner’s game.

The temptation is to read Twitter, see all these Traders putting up XYZ dollars, and then try to replicate. However, full attention to the beautiful trades may well be exactly the wrong thing to do. More broadly, when I think about unforced errors in day trading, the following spring to mind:

• Not taking stops when wrong

• Cutting winners short

• Making hard trades (fading) rather than going WITH the catalyst and flow

• Overtrading outside of a playbook

• Adding in the wrong places

• Poor preparation leading to missed opportunities

• Poor preparation leading to chasing

• Execution errors

• Lack of reflection and no feedback structure

• Not having borrows ready or access across brokers

• Not being in a good mental and cognitive state due to lack of sleep or alcohol

Note nowhere did I mention the edge itself. To play the game, all you need to know are the basic rules. You do not need an advanced strategy. I honestly think you can build a successful day trading career around a solid catalyst with a simple out-of-the-box system and focusing on avoiding the mistakes above. Consistently. I can almost guarantee that for most readers, addressing these issues is the true holy grail. Let your stats be the truth. Once you know the problem patterns, address them. There are some simple solutions for each of the categories but it needs concentrated attention. Stop worrying about those beautiful all-day trend trades or sexy breaking news trades - these are the glamour shots and they are rare. Start worrying about unforced errors and the results will take care of themselves.

The good news is that your opponent is not actually the market. It is yourself.

The beautiful shots: One Good Trade

Outsized rewards come from just a few trades each month. Inevitably, they come about when I am in a good mental framework without prior baggage. Invariably that means I have not been making mistakes prior or I have consistently applied myself. I am now in a true position to receive information and swing for it.

When I think about the professionals in tennis, those incredible shots consist of:

-First serve;

-Return of serve;

-Down the line finisher.

Now when I reverse engineer those same key levers for Trading, they could be:

-Stock selection (knowing the right shot to play)

-Sizing;

-Exit management.

By identifying these areas, I can now devote time and training resources to these high-value skills that have a disproportionate impact on results. Collect very specific data and tools to gauge improvements in these major areas. This is what I am attempting to do currently with my report card goal on Sizing. For example, some data to track sizing may include $ position size per strategy; position size versus grade of setup; volume at vwap intervals; volume at different price points. How am I executing versus available liquidity?

Conclusion:

Just like sport and tennis, Trading is a true performance domain. There are many insights and parallels that we can take into our profession. I simply love the mental model of the loser’s game versus the winner’s game and it has got me thinking deeply about how best to apply myself. I hope it does for you too.

My current goal is to focus on Sizing via my report card. I want to move up the ladder to be a true professional. I know that there are only a few choice situations and trades where I can fully do this. In this way, I am making less trades and hopefully less errors. The beauty of trading is that you don’t have to play a hand. Unlike Tennis, we can choose to sit out and just wait. Make more by doing less.

If you are going to play, think about what level you are on and apply yourself accordingly.