Interview: Kevin Cook on teaching “Probability for Traders”

Feb 23, 2011

Kevin Cook is OptionsProfits Contributor at TheStreet, and was previously Education Manager and Retail Instructor at the Options News Network ( He will be teaching a course entitled “Probability for traders: Survival training for speculators”, at the Northwestern University’s School of Continuing Studies in Chicago, beginning March 1st. He spoke with Sarah Rudolph about what the course offers traders and about the lessons he has learned in the industry.

Q: What instruments does the course involve? I see that forex and stocks are mentioned, but can it be applied to options as well?

A: The course really applies to all kinds of traders, because I’m teaching fundamental risk management over the long term. I don’t promote it directly to options traders because I don’t want to suggest I’m talking about volatility strategies. I’m not teaching that. I am teaching something that enables people to be successful in the long term by understanding what’s under the hood of the way they trade — what their hidden land mines might be.

My article for SFO Magazine, “The Mental Model of Financial Sabotage” is required reading for the course. In the article, I tie together what I learned as an institutional trader and what I learned from the “Market Wizards”. One theme all the Market Wizards talk about is how trading is a mental game. What makes it one of the hardest professions? Behavioral finance and neurofinance talk about the fact that people tend to be irrational. My solution to that is to teach probability trading — to help achieve the patience and discipline it takes to be successful over the long run — which is counterintuitive for most people.

Q: Why is probability so hard for most people to grasp and utilize…why do people have, as your course description puts it, “a natural irrationality when it comes to money and risk”?

A: I’m no expert on the brain, but put together with behavioral finance, our brains evolved to be good at short bursts of athletic activity, such as hunting and competing to find food. We’re good at making snap judgments and quick decisions, which can help us in the short term, but when it comes to risk decisions we operate under fear and greed. Those are hard things to overcome. I don’t know if I can change a trader’s personality, but I can teach people how to think with a probability-based mindset that can override that natural irrationality. I give people the experience of losing and winning and how probability makes the difference.

We tend to overreact to the market in emotional ways that make our money go away from us. Take the average citizen who has trouble paying credit cards or saving, and imagine how that gets amplified when you have a position on with leverage and you say, “Oh my, there is a $500 profit right there — do I take it? Or you see a loss and wonder if you should get out right away. I don’t teach pattern recognition skills or charting. I want to go underneath that and build a foundation that can make any method work for the long run.

Q: What kind of folks do you expect to enroll in the class?

A: When I first developed the course, it was for professional traders, because one thing I learned at the CME and on the Interbank currency desk was that even “professional traders” can shoot themselves in the foot and fail spectacularly. In the SFO article, I profiled some rogue traders — Barings, Sumitomo, LTCM etc., because even though most of us aren’t dishonest like Bernie Madoff, what those folks do to a billion dollars, we can do to our own accounts, if we let our emotions get the best of us. Sometimes the emotion is just ego or hubris.

Q: How are you able to teach both advanced and beginning traders at the same time?
A: In the same classroom I can have pros sitting next to novices because I create a level playing field for the simulation. I use Monte Carlo simulations – which are often used in financial mathematics to find expected value, the probability of a certain outcome over many trials. Whatever level of experience anyone brings, they can take it as far as they want to. The pro will take to a different level than the novice, but they’ll be able to gauge where they want to go with it.

Q: Have you taught at Northwestern before?

A: This will be the first time I’ve brought this course to Northwestern: the first time the course is being taught at the University level. I am excited because I know some people in the Futures and Options program there, and they all have great things to say about it. The class is offered online simultaneously, though I will be in a classroom at the downtown location.

Q: How many people can the course accommodate?
A: I think the limit is around 30, but it may be larger. It’s great to have a lot of people, because they balance ideas off each other as they see how the whole thing is unfolding.

Q: You taught at ONN tv, the media arm of Peak6. What experience did that give you?

A: I was part of the online education community. I created content and seminars with daily trade ideas. That’s one way I increased my knowledge of probability and risk, being immersed in that culture of professional options traders, who see the world in bell curves and probability.

Q: You have been an institutional forex trader and traded options on the CME floor. Can you mention a lesson you learned from that experience that you bring to your students?
A: One of the best things about being an institutional trader trading high volume is that I was forced to learn to take losses. I ended up taking thousands of losses. It became an ingrained habit in me to be able to say okay, this is a bad decision, I’m getting out. We don’t want to lock in negative P&L, but you have to. Buffett’s #1 rule for investing is, “Don’t lose money”. But that’s not really possible in short term trading. We have to learn to take losses.

Q. You studied philosophy and education at the University of Illinois. Is there anything you took away from your study of philosophy that helps you in trading, or teaching trading?

A: I did not come into the business until I was 29 years old when I started at the CME I knew nothing about markets or finance. But when I came on the floor I realized that the pits were the front lines of capitalism — front line entrepreneurs acting out what they believed every day, trying to have a sense of discipline in their own mini-empires. I fell in love right away. This is a world where you can take what you believe, for example in philosophy and psychology, and make it happen in the real world.

The golden rule of trading is “Cut your losses short, and let your winners run.” Every trader knows that, it’s very simple, but it’s so hard to learn to follow. I’m not sure I have the best answer for disciplining oneself to follow the golden rule, but I’m sure I have a very good way to get one step closer. The students’ experience with trading simulations and diving down into a trading system helps to internalize the golden rule.

You form new neural pathways in your brain when you learn something new. These new pathways remind you that this is how it works in the long run. You need to learn to love your losses, because they are the building blocks of long term profits.

The course is offered in downtown Chicago and online.
Link to register for the course:

John Lothian Newsletter

We visit more than 100 websites daily for financial news (Would YOU do that?)

“John Lothian and Company… our industry intelligence.”

Rick Lane

CEO, Trading Technologies

Past Options Newsletters

Pin It on Pinterest

Share This Story