Dr. Indre Viskontas:
Hello and welcome to Inside the Mind of a Trader, the show where we explore how brilliant traders are wired for success. I'm Dr. Indre Viskontas, neuroscientist and professor of psychology at the University of San Francisco. My next guest is James Kostulias. Hi James.
James Kostulias:
Hi Indre.
Dr. Indre Viskontas:
So as part of my job at the university, I have to give advice to young undergraduates who come in and they often come in and tell me what their parents want them to do, but what they really want to do. And I have to say that a lot of them choose majors that their parents don't really approve of and history is one of those majors.
But here you are, head of trading with a history major. So how does your history major come into the work that you do?
James Kostulias:
I honestly wasn't exactly sure what I was going to do with a history major. I always loved to read, I always loved to write, and I kind of sort of lucked into my way into finance back in 1998 at a small company called Datek Online.
One of the things I've found though with a history major is it's so important to help you understand context. And for me in the world of finance, whether it's around sort of what condition the markets are in today, whether it's around some of the things you've sort of seen historically, whether it's looking at stock prices or price of other instruments, context is so important.
Dr. Indre Viskontas:
I want to talk a little bit about this context idea and how do you teach that to somebody who's just getting into trading, who's really looking maybe at the markets, who are looking at the numbers, maybe even someone who's coming from more of a quantitative background. How do you tell them what to look for in terms of context?
James Kostulias:
Yeah, I think obviously data is important and there is so much of it within the financial industry and context is critical, right? No doubt about all that.
I think, though, the historical element that helps us with obviously, you know history, you learn about history, you understand history to try not to repeat history. At the same time, you don't see a ton of history repeating itself exactly when we look at the markets but you certainly see patterns. Obviously if you look in the world of technical analysis it's all based on patterns.
One of the things for me that's really important is to have people understand maybe it's a market cycle and going through a severe market downturn, or maybe it's a great rising bull market, there are certainly things you learn and you can pick out from previous ones that are important to help you think through. Maybe it's not to make an exact decision based on what you've seen in the past, but maybe it influences your plan or it influences the way you're thinking about a trade or it influences you to maybe not make a trade, which is sometimes a really important step along the way of some of the risk management practices.
Dr. Indre Viskontas:
One of the things that our brains are really good at is pattern recognition, but usually for patterns that we find personally relevant. So for example, we often see faces in cliffs or a piece of toast. Faces are highly relevant to us, they're highly important to us, so we'll see them even when they're not there.
I wonder if you have any thoughts about how pattern recognition both is something that, we as humans, are skilled at, but can also lead us astray when we start seeing patterns that aren't actually there?
James Kostulias:
Yeah, look, I think it's true for patterns as well as sort of historical repetition where absolutely you need to be really, really careful. Just because something looks similar to an event or it looks similar to a head and shoulders pattern, whatever basic technical analysis pattern you might want to use, you have to factor in a lot of a broader context. I think it's helpful to understand, "Hey, I've seen this before." What may have happened, what didn't happen relative to price movements or things like that. But it's also really important not to just go all in on that assumption, "I've seen this before, history is going to repeat itself, it's going to happen exactly the same way."
I think that's where you can get in trouble, especially if you start ... You have a losing trade or a losing position and you go down a path, I've seen this before and maybe I want to double down on that trade. Sometimes that may work and sometimes that may get you into a much worse sort of situation. I think learning from the patterns of the past is really important, but not assuming they're going to happen exactly as they did. There are just too many other factors that apply.
Dr. Indre Viskontas:
What are some of the other skills that you think traders should really be working on as they try to improve their ability?
James Kostulias:
A lot of what we do and a lot of what we talk about at Charles Schwab and with our whole offering of Schwab trading powered by Ameritrade is the educational component. Traders are constantly learning and, hopefully, constantly evolving. They're constantly adding to their playbook. Whether you're somebody who's more fundamentally based or more technically based, there's so much to learn across how to trade different instruments, across how to trade different markets. We believe we have the best value proposition across that full continuum across the entire street. And so we have Schwab trading powered by Ameritrade as the sort of core trader brand, and then we've got all of the different wealth management components offered by Charles Schwab. And we believe now, for 35 million clients, we can really offer the best value proposition across anything those clients may need. Whether it be super active trading at one end of the spectrum or more long-term investing/I want help managing all of my money on the other end of the spectrum. We can really do it all.
What I would say is continue to learn, continue to evolve, continue to read, continue to interact. We have tons of educational courses and content and articles and tutorials and webinars and all of those types of things, but continue to learn and continue to educate yourself.
I think from what we've seen, people who are constantly looking at learning new things, maybe it's new features within the platform or maybe it's sort of gradually upgrading to more derivatives trading, but just constantly looking and evolving, I think, is really important.
There's no sort of one playbook to trading. I think that that's a really important concept for people to wrap their head around.
Dr. Indre Viskontas:
And that feeds into something that is also really human. We are curious as a species, our boredom is something that is actually aversive. It can be physically painful to be bored, so we gravitate towards learning new things and where things are changing.
James Kostulias:
Yeah.
Dr. Indre Viskontas:
What are some ways that people can use, maybe, either the historical example of the markets or so forth where maybe they can see some patterns or they can see elements, pathways, that might not be the next new thing but could actually be this good solid thing.
James Kostulias:
Yeah so I think there's an element of trading that can be a bit of a grind. What we like to talk about though is having a plan and being sort of set to it. And sometimes it's a lot of little profitable trades that ultimately end up making you real nice money over sort of a longer period of time as opposed to sort of that one giant trade if you want to use the lottery ticket example. We don't like to ever go there.
But I do think to your point, it may not feel as sexy as sort of that, "Hey, I want to go out and make a splash with this big, big trade," as opposed to having a steady trading plan and a steady trading philosophy where you're making a few percent here and there and you're hedging your winners appropriately, you're cutting your losers.
I do think trading can seem really fun and really cool, and I think there's an element of it that does excite people. The whole notion of seeking alpha is that belief that you can beat the market, you can beat whoever it is on that other end of that trade. Anytime you're buying, someone is selling and vice versa. But I think at the end of the day, they're traders who are really successful understand that there's work to do to sort of grind through some of that and it isn't always going to be the perfect market for you to sort of sit back and make easy money.
I mean, there are time periods where it seems like anybody can trade and make money. We had a little bit of that run up around the meme stock mania. You saw that back in the dot come boom of 2000.
But I think the experienced traders and the best traders understand over time that it is a process and there is a lot of work and sometimes there can be a little boredom in that and you've got to sort of muscle through that a little bit, if you will.
Dr. Indre Viskontas:
And then the other kind of aversive state that can happen I think is the stressful one. As you mentioned, there are times when things are stressful. What are the tools that you would recommend that people look for to help stress management?
James Kostulias:
I think where trading gets the most stressful is where the emotions take over and where you start to feel like, "Hey, I need to be right about this, or I am right about this. Everybody else is wrong about this." And there are times in the market you can be absolutely right in your concept or your theory, your hypothesis can be correct, your timing is wrong. And sometimes that proves to be actually the worst sort of case scenario of everything.
I think the number one thing we try to talk to people about is sort of take that emotional element aside. So have a plan when you go into position, have an exit strategy on the upside, have an exit strategy on the downside. Don't get too caught up in the, "I have to be right here." Don't go down the path of continuously sort of chasing your losers and sort of doubling down, being okay to recognize you make a mistake. You're going to make mistakes in trading far, far more frequently than we'd all like to, which is totally okay. Try to keep your mistakes smaller.
And then also be comfortable at a point in time where you're okay to take your winners and at least take some of those profits off the board. Because I think that's the other flip side of it is that FOMO, that fear of missing out of I don't want to sell now because it can continue to go up, can continue to go up.
Often you will look at the worst trades you make are the ones where you get too emotional, where you think it can only go to the moon or you think it's going to definitely reverse because something that nobody else knows. I think to me, it's taking that emotion out, having a plan, and really trying to stick to that plan even if things don't get your way.
Dr. Indre Viskontas:
It's amazing how much mindset has an influence even on the way our physical bodies work. You don't like running but somehow have run four marathons.
James Kostulias:
Not well, but yes.
Dr. Indre Viskontas:
But there must have been a time in that marathon where you used some mental skills to get through and finish ultimately.
James Kostulias:
Yeah, I would argue a marathon. I did finish all four, yes. One right here in the lovely city of Chicago. I would say probably more mental than physical. And I do think there are some absolute sort of trading parallels back where I said, there are going to be periods of time when you're just grinding through things and it's not going to be sexy and you're not going to be feeling great about your time for this mile, but it's another mile done and it's another mile sort of finished. I think, at least for me when I started, it was at a point in time where I really want to get in shape. I didn't have a ton of time. I had two young kids and things were busy and work was a little crazy, so I got the most bang for the buck sort of running.
I could argue that there are parallels you could draw back to the trading world where, again, if you want to be in this for the long haul, if you want to do this and consistently generate profits, you have to take winners off the table maybe a little earlier then you maybe think you need to or cut bait with a loser because you don't want it to have a negative impact. You could have 3, 4, 5, 6 months of solid returns and then all of a sudden have one or two trades that end up essentially canceling all that out.
That's not typically the way that things should be done, but in the moment you may want to double down on that losing trade. I think sometimes there's just a log the miles, try and keep them under 10 minutes and just keep going, and eventually when you hit 26 miles, you got that last point too at the end, but you're pretty close. And there are again, are parallels to the trading world that I would draw there.
Dr. Indre Viskontas:
We're going through yet another technical or digital revolution, and sometimes it can feel like a bit of an arms race against computers when you're thinking about trading as opposed to against just the other person on the other side of the trade. How are you thinking about this future and what kinds of skills do you think people should really be beyond the strategic planning that you've mentioned and kind of understanding the context? Is there any other skill that you think people really should be thinking about as we go into this new frontier?
James Kostulias:
Yeah, I mean it's certainly not a secret that technology dominates a lot of the trading world. I mean, there's a whole school of algorithmic trading that is sort of no people. I think from what we see, our most successful traders and most successful clients are very comfortable with technology. They're very comfortable with the platform. The platform isn't what's making them money. The platform isn't what's giving them these magical trading ideas and these perfect buy and sell signals, but they're using the platform as sort of the instrument to execute what they've got going on up here.
Being comfortable to use the platform and sort of all of the different tools available, whether it be sort of thinkorswim is our premium trading platform, but being able to use the platform to validate your hypothesis, to seek out new trading ideas. You may have a theory somewhere, but you're not exactly sure what instrument you're going to use to execute that. Being able to go, being able to do scans, being able to execute technical studies, being able to dive deep into news, those are all things you can absolutely do on the platform.
At the end of the day though, you can program for buy and sell signals. You can even automate those ultimately if you want, but it's really you who are making that ultimate decision. I don't see a time anytime soon when it's like, hey, I want to be a trader, but I don't want to actually have the mentality of a trader. I'm just passing this all off to a robot to do. I don't think we're anywhere near that, but I do think using technology sort of as your instrument, maybe as a musician might, ultimately to execute and to bring to life what you are thinking about is really, really important.
Dr. Indre Viskontas:
Well, James, thanks much for being on the show.
James Kostulias:
My pleasure. Thank you.
Dr. Indre Viskontas:
Join us next time as we look inside the minds of brilliant traders.
