David Hesketh spent nearly four years as a trader at Bank of America Merrill Lynch in London. Today he's the founder and COO of Financial Skills Limited, a company that provides trading simulators for investment banks. Hesketh's simulators are used by banks to assess students during summer internships. As a result, he's almost uniquely positioned to spot where inexperienced traders across the industry go wrong.
"A lot of the leading global investment banks and several hedge funds have all used our simulation for their interns," says Hesketh. "The issues we see are common across the market."
Hesketh says the first misconception that junior traders have is that the more trades they put on, the more money they're likely to make. If you're not a 'flow trader' working on a bank's own system, Hesketh says this is a losing strategy.
"Traders in banks can successfully trade intra-day because they have much greater directional information and see the flows," he tells us. "Banks are also generally market makers - they make money by running their franchise trading both sides of the bid and the offer. If you are an intern, grad or junior trader, you won't have that level of information. You are at a disadvantage."
Instead of trading short term intra-day, Hesketh advises novices trading on his simulation to take a longer view. "Do your research, form a well-thought out strategy including stop-loss and profit-take levels, and allow your position to evolve over several days or longer."
Young traders also fail to predetermine their exit points on both the upside and the downside.
It's particularly important to have a 'stop-loss' in place that prevents you from losing more than a specified amount. "Human beings tend to treat their loss-making positions very differently to their winning positions," says Hesketh. "We're evolved to treat loss-making as inherently more painful than winning due to the asymmetric nature of life. If you're walking through the primordial jungle and tread on a venomous snake, you'll be out of the gene pool. No amount of positive life events can make up for the finality of death."
The same applies to junior traders. "Junior traders tend to cut their winners very quickly but to sit on their losing positions as they get bigger and bigger, waiting for them to get back to flat," Hesketh says.
In the same way that it makes sense to put a stop-loss on your trades, it makes sense to implement a profit-take, which closes a trading position after a certain level of profits has been achieved. Without this, Hesketh says the temptation can be to hold the position even when it no longer makes sense.
The worst thing you can do as a trader is to double down on your losses. Also known as, 'gamblers ruin,' this happens when you react to a loss by throwing more money against in the hope that things will turnaround and you'll make a profit. "It shows a very cavalier attitude and is a real read flag," says Hekseth. Around 40% of novices are guilty of doubling down. 70% are guilty of holding onto losing trades.
Finally, there's a tendency to assume that banks will evaluate you based upon your P&L.
"While obviously important, banks should not solely be interested in whether you end up losing or making money," says Hesketh. "Interns, grads and junior traders lack the same level of information as their professional superiors. "
Instead, it's all about how you respond to loss."What banks don't want to see is arrogance," Hesketh says. "They don't want to see that you think you know best and that the market is wrong. They don't want to see you holding onto losing trades longer than winning trades and most of all, they don't want to see you doubling down."