Risk Management With Kathy Lien

Dr. Indre Viskontas:

Hiya, and welcome to Contained in the Thoughts of a Dealer, the present the place we discover how good merchants are wired for achievement. I am Physician Indre Viskontas, neuroscientist and professor of psychology on the College of San Francisco.

On this episode, I will be speaking to Kathy Lien. Kathy is a world famend knowledgeable in buying and selling currencies and the co-founder and managing director of BK Merchants. However when she’s not buying and selling, she might be seen on CNBC, Bloomberg and her personal in style Foreign exchange YouTube channel. Hello Kathy.

Kathy Lien: 

Hello.

Dr. Indre Viskontas:

So I really feel like I already know you as a result of I’ve seen inside your mind.

Kathy Lien:

I hope you discovered some issues which are attention-grabbing.

Dr. Indre Viskontas:

Oh, a lot, a lot. However I wish to begin with asking you what it was wish to be a prodigy. At 13, you began faculty.

Kathy Lien:

Nicely, it was undoubtedly one thing that was surprising, however to be trustworthy, Indre, I did not really feel that a lot totally different. I felt prefer it was second nature. I am in an trade the place I’m typically the one feminine, the one minority, and I used to be the one 13-year-old at New York College on the time. And I feel, from very early on, it was simply a part of who I’m. I am not afraid to be the one one within the room doing what I am doing.

Dr. Indre Viskontas:

So while you had been rising up, do you know that your pondering was totally different from, say, the opposite children in your class?

Kathy Lien:

No, I would not describe myself as a prodigy. I might mainly say that I be taught issues so much sooner and I choose up issues so much sooner than most individuals, and I feel that helps me perceive ideas. And thank God New York College made you are taking lessons and many alternative matters, and certainly one of them was macro, microeconomics. And who knew? It simply made good sense to me. And it is from there that I actually felt like this was second nature.

Dr. Indre Viskontas:

Once I have a look at your mind, I can actually see a few of the issues that you simply’re describing. Do you wish to inform me a little bit bit concerning the sorts of cognitive abilities that you’ve got developed over time that you simply assume make you a great dealer?

Kathy Lien:

I react way more on intuition. And as soon as I’ve developed a buying and selling system, I’ve a buying and selling system that I’ve used for over 10 years now, and it is nearly second nature to me. So for me it is nearly growing the behavior and repeating the behavior over and over.

And it is a sophisticated course of as a result of for me, I am a dealer that fuses what we name elementary evaluation and technical evaluation. So I dissect all the incoming information stream, I check out what the market sentiment is, whether or not it is a constructive day, a unfavorable day, I check out whether or not traders are bullish or bearish, and I mix that with chart evaluation, nevertheless it occurs in a short time for me. This complete course of might occur in 10 minutes most.

So I feel it goes again to my preliminary studying course of. One of many ways in which I used to be capable of go to varsity at 13 and graduate at 18 was as a result of I took, throughout summer season packages, accelerated math studying lessons the place I discovered alternative ways to do mathematical equations in a short time. And I feel, taking that sort of pondering into the actual life state of affairs and buying and selling, I have been capable of acknowledge the shortcuts and be capable to course of them shortly in order that I could make quick buying and selling selections.

Dr. Indre Viskontas:

It is actually attention-grabbing. You talked about instinct, and lots of people consider instinct as one thing that you simply simply have a intestine feeling, both as a result of you may have this literal, bodily response, or that you simply’re not consciously conscious of what it’s that is coming into your decision-making, it simply form of feels proper. And I feel lots of people do not perceive that that intuition, that instinct is constructed up over time via studying. And it appears like that is what you are describing, this build up over time of this data base that now you may shortly question versus simply going with a sense which will or will not be primarily based on any precise actuality.

Kathy Lien:

I agree. I imply, that is true of many careers on the market. I simply received off the airplane. A pilot, by intuition, is aware of tips on how to react in sure kinds of turbulence and atmosphere. And also you name it intuition, nevertheless it’s additionally expertise over time.

Dr. Indre Viskontas:

Yeah.

Kathy Lien:

And I feel that is available in all the things that all of us do. And for me, that is buying and selling.

Dr. Indre Viskontas:

So this can be a statistical map of your mind of what it seems to be like by way of its activations whilst you had been doing the fluency job, so the place you had been pondering of both trading-related phrases, so we gave you a immediate like excessive frequency, after which we requested you what had been you excited about or like seaside, like what you concentrate on while you go to the seaside. So in yellow that is how your mind was lively through the seaside and unrelated questions. After which blue, is trading-related. And what you may see is that there is much more blue than there may be yellow, and particularly in these form of frontal components of the mind and round this complete space within the temporal lobe, which is the place we retailer ideas. So it means that while you’re excited about issues which are trading-related, you activate much more representations in your mind, you may have much more ideas to attract from.

However the different factor that we discovered exceptional general throughout all your mind scans is that your mind had extra, bigger swaths of activation than the typical undergraduate. However once we requested you to make selections that had been both primarily based on a faux buying and selling state of affairs that we made up, versus a faux different, hopefully, equally advanced state of affairs like, “Who would you vote for in an election? And here is the professionals and cons of a specific stance,” you spent much more time excited about the non-trading associated eventualities, however for the trading-related, you had been like inside three seconds you had your response.

Kathy Lien:

These had been actually attention-grabbing questions as a result of I wasn’t certain whether or not I needs to be voting primarily based upon what I feel goes to be the profitable consequence or what I feel ought to occur on an ethical foundation. So I spent extra time excited about that, and I feel that in all probability got here via via the outcomes. As a result of there’s one factor, you understand what the end result shall be, the probably final result, you understand what needs to be the end result primarily based upon your personal ethics? And I feel I used to be simply toying with it.

Dr. Indre Viskontas:

Okay, in order that makes quite a lot of sense. After which once more, within the blue trading-related questions, what we see is much more exercise right here within the parietal areas the place it is about shifting consideration. It is about shifting your consideration inward to your ideas. So it looks like there you form of had extra of a strategic method of accessing the present data you may have in your mind fairly than these sorts of islands of exercise within the different selections the place it appears, though you had been form of possibly utilizing totally different networks, probing totally different points of the way you assume as a way to have a look at these. Is that sort of-

Kathy Lien:

I feel quite a lot of the questions that had been trading-related concerned numbers, and so, it was simpler for me to course of. It is one thing I am very snug with. And as I stated, the extra non-trading associated ones I felt had been simply whether or not I ought to decide about what needs to be finished versus what I feel personally would be the consequence, what individuals vote for.

Dr. Indre Viskontas:

That is actually attention-grabbing due to course, nicely, I assume I say after all as a result of I do know that, however you may not, which is that the arithmetic, the maths areas of the mind are sometimes on this parietal area. And so, it does look like you are performing some form of precise calculations here-

Kathy Lien:

Yeah.

Dr. Indre Viskontas:

… regardless that… Okay, attention-grabbing. So by way of simply this fashion of trying throughout all of those slices within the mind, so yeah, what you see right here is that you’ve much more of this exercise in these components of the mind which are concerned in strategic retrieval, math, these sorts of instruments while you’re speaking about these trading-related selections.

Okay. So are you prepared for the subsequent one?

Kathy Lien:

Okay.

Dr. Indre Viskontas:

So that is the place we requested you to do that job that entails pairing form of dangerous decision-making versus one thing that may be a management. Okay, so let’s begin with the management job. We confirmed you a few stamps and we requested you which ones one do you want higher, proper? Completely random.

Kathy Lien:

Sure.

Dr. Indre Viskontas:

That could be a management situation as a result of we wish to management for issues like simply making a call, we wish to management for a desire and in addition even simply the button presses, like motor actions concerned there. We wish to have the ability to subtract that or take that away from…

The duties that we’re actually involved in is once we pair you with this selection. There is a secure selection, so there’s at all times a 100% likelihood of, say, getting a greenback. After which, there is a dangerous selection the place it may very well be an 80% likelihood of getting $2 or a 20% likelihood of getting $10.

And we had been involved in various issues. Initially, which decisions do you make? How do you strategize about these sorts of decisions? In order that’s form of the conduct, after which, what’s taking place in your mind while you’re making these selections.

So relating to the stamp situation, we see the areas that we count on like right here, which is your visible cortex. Mainly, you are simply these options of the picture after which some motor, possibly a little bit little bit of dorsolateral prefrontal cortex, which is form of such as you’re simply pulling the set off on making that call.

However relating to this threat situation, right here once more, you may see, there’s much more blue than there may be yellow. So that you’re recruiting many extra networks and areas while you’re doing that, and particularly right here on the entrance a part of the mind the place you’ve got received your govt functioning abilities, so these are the abilities of a CEO of strategic planning and that form of choice making on the idea of your prior data. However you even have this large swath once more right here again within the parietal lobe the place quite a lot of your conceptual data is saved. So it looks like you make this choice. Does this sound in any respect what you had been doing?

Kathy Lien:

I’m undoubtedly making a call once I’m trying on the choices given to me which are associated to buying and selling. I assume, I am involved in discovering out, nicely, how does this examine to another person who just isn’t essentially in coaching. And is my mind activated in several methods than a university pupil could be, for instance?

Dr. Indre Viskontas:

100%. 100%.

Kathy Lien:

Okay.

Dr. Indre Viskontas:

So it seems to be very totally different, however I will get to precisely how they differ in a minute. However first, while you took the dangerous possibility, you may see right here in blue, there was much more choice making, much more of your mind that was concerned. And once I seemed on the response occasions that you simply used as a way to make that call, I discovered one thing actually attention-grabbing, which is that the primary 10 or 12 trials that you simply noticed these totally different ranges of threat, you appeared to take longer. After which, when you had seen that degree of threat, the subsequent time you noticed it, it was actual fast. So it seems to be to me such as you determined, “Okay, when it is a 35% threat, I am at all times going to do X.” Is that what you probably did?

Kathy Lien:

Sure. I feel it actually comes right down to my buying and selling fashion as nicely. I am a powerful believer of buying and selling defensively, which signifies that when I’ve earnings, I defend my earnings as a result of on the finish of the day, we wish to stroll dwelling with more cash within the financial institution than we left.

And at first, in this system that you simply had, we didn’t essentially see the cash within the financial institution that was given afterward. So it took extra pondering by way of do I wish to begin specializing in accumulating gradual, excessive chance earnings or do I wish to take the wager, after which, hopefully, generate that revenue within the financial institution in order that I can hold it afterward? So there’s quite a lot of pondering concerned in that.

Then as soon as I noticed the checking account and I noticed how a lot was within the financial institution, I knew that I might react extra shortly as a way to retain that fairness that was within the account. And on the finish of the day, that is what I feel merchants, particularly these of you which are buying and selling for your self needs to be excited about, which is that when you’ve got made cash that possibly you wish to take much less threat as a way to defend your earnings, otherwise you wish to take into consideration how if I made $100 already, the max loss I wish to take is $50, a minimum of I can stroll away with some earnings. So relying upon the chance profile, if that threat alternative is $200 for a $50 wager, and it is simply your first commerce, then possibly you do wish to try this. So there’s much more pondering that goes into the choices that I make that I feel are reflective of my private buying and selling conduct.

Dr. Indre Viskontas:

And we see that by way of the quantity of mind activation, the quantity of pondering that we actually see that you simply’re pondering. And I’ve yet one more actually cool discovering to indicate you, however let’s take a fast break and I will be again with Kathy Lien.

James Kostulias:

Numerous what we do and quite a lot of what we speak about at Charles Schwab and with our complete providing of Schwab Buying and selling Powered by Ameritrade is the academic part.

Lorraine Gavican-Kerr:

We actually like to show our shoppers about threat administration, about utilizing a platform. I feel that we actually wish to set individuals up for achievement for no matter they wish to do. So merchants have totally different goals, totally different targets, they commerce several types of merchandise.

Chesley Spencer:

Enabling them to see what they’re able to do, notably with issues like derivatives or choices the place it is not practically a lot a binary of, “Hey, you assume that is good? Purchase it, it will go up. You assume that is unhealthy? Promote it, and go down.” All of these have very explicit actions one can take primarily based on them. It is much more nuanced than only a easy purchase or a easy sale.

Lorraine Gavican-Kerr:

The individuals who work behind the product and expertise are merchants, they’re tremendous engaged, they love what we do.

Chesley Spencer:

Recommendation could be very a lot part of the general Schwab enterprise, however within the buying and selling area, it is way more about empowerment.

James Kostulias:

Whether or not you are someone who’s extra essentially primarily based or extra technically primarily based, there’s a lot to be taught throughout tips on how to commerce totally different devices throughout, tips on how to commerce totally different markets. And so I feel from my perspective, what I might say is proceed to be taught and proceed to teach your self. There is not any form of one playbook to buying and selling.

Dr. Indre Viskontas:

Okay. So that is the discovering I used to be most excited to indicate you, which is that once we give this job to undergraduates or mainly anyone, what we count on to see is that their reward pathways, their form of sense of motivation are activated by the extent of threat, so the extra threat they take or the extra reward they get, the extra activation they get in these reward pathways. We noticed none of that with you.

So I might expect to see right here on this area too, within the striatum, quite a lot of exercise that’s a minimum of considerably modulated by both the dangerous or certain selection or the extent of threat. And as you may see, that is just like the least activation that we noticed.

And even once we have a look at your complete mind, once we examine the risk-taking trials versus the stamp trials, we do not see any activation in these emotional or reward pathways just like the amygdala and the striatum as if you do not have an emotional response to what it’s that you simply’re doing. And possibly it is this job, however I believe that that is one of many methods too that you’ve got develop into a very wonderful dealer. So how is it that you simply… What do you concentrate on that?

Kathy Lien:

Nicely, I do not assume that being fully unemotional is one of the simplest ways to explain my buying and selling course of. I imply, I am solely human, proper? So I’m watching my trades, there may be some emotion connected to it, however the job, most of the duties that had been finished, the questions associated to buying and selling mainly offered me with a selection of one thing that had an 80 or a 100% accuracy versus a 20 or 30% chance of taking place.

So for me, it is second nature to select the upper accuracy whatever the quantity of the reward, as a result of my job as a dealer is to only earn cash, and my job as a dealer is simply to build up earnings and I wish to do it in essentially the most methodical, low-risk method attainable. My job just isn’t to enter the on line casino and gamble and hope that I will make $1,000. So I take it from a really methodical method, and I feel that is what’s made me an excellent dealer as a result of not solely am I it from a chance perspective, but when one thing’s not figuring out, Indre, I am slicing my losses and I am simply dropping the commerce.

Most individuals go into buying and selling and their solely purpose is to earn cash or to outperform the S&P, for instance. My purpose is to make 1% per week, and as soon as I’ve achieved that 1%, then I am targeted on defending my earnings. After which, I try this many times. And I feel it from that perspective, 1% would not appear a lot, nevertheless it’s unlevered. And naturally, leverage comes with threat, nevertheless it accumulates over the course of time as a result of that may very well be 3 to 4% a month, 30 to 40% a 12 months. Clearly, there’s going to be losses in there, that is why it is 30 to 40%. So taking it from a methodical method, I feel minimizes the feelings. And with the ability to get out of the trades after they’re not figuring out shortly additionally permits me to verify the feelings on the door and to concentrate on simply making these pips and maintaining them.

Dr. Indre Viskontas:

However that is one thing that is actually arduous to try this individuals need to be taught. We name it loss aversion, that it is actually arduous to form of eliminate the factor that you simply had been hoping was going to make you cash, however is not figuring out. And that is quite a lot of the world the place emotion is available in and folks make buying and selling errors.

Kathy Lien:

You are completely proper. The emotional facet of buying and selling might be the toughest half as a result of on the finish of the day, I feel each single dealer has had the expertise the place they could be up so much they usually let the commerce fully reverse after which go into losses, they usually’re pounding the desk and say, “I want I took my earnings.” And with the ability to acknowledge that and to mainly take steps to forestall that taking place, I feel is without doubt one of the most necessary points of buying and selling as a result of anybody can earn cash, maintaining the cash is de facto key, and I feel that is the important thing to longterm buying and selling success.

Dr. Indre Viskontas:

So how did you develop that? Is that this one thing that you simply really feel such as you had been naturally wired at first or is that this one thing that you simply truly took the time to develop as a talent?

Kathy Lien:

It got here to be, to be trustworthy. I imply, I traded at first. I began buying and selling in ’99 through the go-go days of the dot-com increase. It was all about large, triple-digit earnings. And I feel with time and in addition shifting markets to overseas alternate and currencies the place the instrument is way more levered, and so, the ups and downs might be extra important, I feel it is necessary to take a methodical method. So I assume goal-setting simply got here to me, nevertheless it’s via an extended profession of buying and selling that I’ve come to comprehend that having that purpose might be one of many pivotal components and transformational components of my buying and selling as a result of only a few individuals take into consideration that, they only take into consideration making a living, they usually simply take into consideration correct commerce choice.

And that is why I additionally at all times inform those who the exit, your targets and your stops needs to be simply as necessary as your entry. Nearly everybody focuses all their efforts on their buying and selling technique, on tips on how to enter the commerce, when to select the suitable prime and backside. They focus little or no effort on tips on how to exit the commerce. When must you exit? Are you going to double down? Are you going to scale in, scale out? Are you going to take a revenue earlier than the market shut? Only a few individuals take into consideration that. They simply take into consideration, “I wish to earn cash.”

Dr. Indre Viskontas:

Mm-hmm.

Kathy Lien:

After which they see, and that is notably harmful when we now have a bull market that turns right into a bear market the place you see everybody floating these important earnings they usually do not wish to take their earnings for a wide range of totally different causes, then they begin to see the earnings eroded as we get a bear market taking place. And essentially the most harmful facet of that’s that when you may have a bear market, the strikes are a lot extra aggressive and a lot extra intensive and a lot sharper towards you that it prevents you from performing since you freeze and also you assume, what ought to I do? Ought to I take the loss or ought to I hope that it should get better once more? After which, they find yourself blowing up their account.

And with buying and selling, I feel that is way more necessary than investing as a result of with investing, corporations have worth, with buying and selling, particularly while you’re buying and selling a levered instrument, your worth is barely the scale of your account. And so, that is why having my goal and getting out and ensuring we simply construct that slowly, has been the actual transformational a part of my buying and selling.

Dr. Indre Viskontas:

You employ the phrase freeze, which is so apt as a result of the amygdala, which is certainly one of these areas of the mind which are concerned in am ambiguity and uncertainty, when it is activated, it could trigger literal freezing. We see this in rodents that we examine, they actually freeze, they do not know what to do. And once I see that while you’re making these selections, that’s not into play, look, possibly our job is not the perfect illustration of what you do, nevertheless it makes quite a lot of sense to me and it makes me take into consideration how this has been wired up over time for you.

I do have a query as a result of it seems to be like you may have these sturdy govt functioning networks, govt management networks which are activated concurrently. So did you play a musical instrument rising up or be taught a second language?

Kathy Lien:

I performed piano, not nicely. I do not keep in mind tips on how to play piano now, however I do communicate Chinese language. I like overseas languages. I communicate a little bit little bit of Italian and French, and none of them nicely apart from Chinese language, however I do love overseas languages.

Dr. Indre Viskontas:

As a result of it seems that the bilingual mind additionally has this characteristic, have all these excessive govt functioning abilities that get developed via the event of a second language. In order that’s actually attention-grabbing.

And I feel if you happen to go to NYU and also you’re 13, it’s a must to be fairly goal-oriented or it’s a must to have these networks in place to have the ability to hold observe of all the assignments and all the issues that 13-year-olds on the whole are fairly unhealthy at.

Kathy Lien:

Truthfully, I did not even give it some thought. I imply, I used to be simply one other pupil and I had the identical homework, the identical duties, the identical deliverables as each different pupil, and that is the one method that I checked out it. And I really feel prefer it simply got here second nature.

Dr. Indre Viskontas:

Mm-hmm. So getting simply again to this exit technique that you simply talked about how necessary it’s to have that technique laid out, one of many issues I feel might be actually painful about loss is while you pull out of the market since you’ve made your 3 or 4% and now you see the inventory or the commerce go up a lot extra, how do you take care of that ingredient of FOMO?

Kathy Lien:

That is an excellent query as a result of I imply, that occurs to everybody. I simply transfer on. It occurs to me, truly, every single day. It occurred to me as we speak the place I had a commerce and I took my revenue, it went a lot additional. However I discover aid and I discover consolation in that I caught to my purpose and I exceeded that purpose already this week. And so, I could not have made 100% of the earnings, however on the finish of the day, I went dwelling with more cash than I left. And that’s my solely job, which is to make the earnings, hold them, after which do it once more each single day.

I do not commerce in a method the place it is simply concerning the large winners, it is concerning the constant, regular winners. And they are going to be smaller than the ten, 20, 30% beneficial properties that you’ve got held for a 12 months for, however they’re repeatable. And that, I feel, is crucial facet of it, since you do not wish to simply get fortunate. That is true of athletics. That is true of just about something somebody is sweet at. You discover one thing that works and also you simply do it over and over.

Dr. Indre Viskontas:

In order you’ve got discovered to control your feelings, is there some place that you simply set free steam? Do you are taking a sledgehammer to a wall infrequently or one thing like that?

Kathy Lien:

No, I do not assume that may work out very nicely, however I shut down by way of buying and selling at very particular intervals of the day, and in addition, intervals of the week. And I do not have a look at it once more till I’ve to restart.

So a part of my buying and selling course of is I commerce the atmosphere that works finest for my technique, which is mainly the market opens. And so, mainly, I commerce from 6 A.M. New York time to about 9:30 New York time. After which I commerce the Asia open between 8 P.M. To 11 P.M. after which, that is it. Between there, I do not have a look at the markets in any respect. I will watch some information, now, possibly I will do some evaluation, however I will simply work on different issues. And are available Friday at 9:30 A.M. proper after the New York fairness market open, all the things’s digested, I am just about finished. I’m doing different issues, catching up on different work. So I solely concentrate on the intervals which are best for my technique, and I simply step away from the markets some other time.

Dr. Indre Viskontas:

Nicely, I can actually see that strategic pondering in your mind activation. And I simply wish to thank Nina Dolfen and Lila Davachi at Columbia for serving to me get these scans, and Yoed Kennett for the Alternate Makes use of and Alternate Questions Job. And naturally, Kathy Lien, thanks for lending us your mind and telling us how you utilize it.

Kathy Lien:

Thanks for having me.

Dr. Indre Viskontas:

Be a part of us subsequent time as we contained in the minds of good merchants.