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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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There are plenty of traders I know who show track records with an amazing cumulative winning percentage==== Once you get out, even though youve taken a loss, do you feel better because youre out? ==== Yes, because the pain is over, and I know exactly what Ive lost. Theres a bit of a feeling of relief. ==== Is it meaningfully tougher to lose 4 percent when you are trading $100 million than when youre trading $1 million? ==== It is tougher. Dollars have a lot to do with it, too. There are plenty of traders I know who show track records with an amazing cumulative winning percentage. Ive seen situations where they might be up 1,000 percent over a five-year period, but if you examine their track record in terms of net dollars made or lost, you discover they are actually down. ==== Because they made the large percentage returns with small capital and then lost money when they were managing large sums? ==== Exactly. Im not in the business of picking CTAs. But if I were, one of the first screens I would use would be a persons total dollar profit- how many dollars did the CTA pull out of the market. If that number were negative, I would eliminate the CTA from consideration, regardless of the percentage return. ==== Did your 4 percent maximum daily loss rule help you on January 9? ==== On that particular occasion, no. We actually would have been better off gritting our teeth and holding on for a while longer. ==== But doesnt that change your faith in the rule? ==== No, because if you dont have that type of rule, you can end up being long the S&P on a day like October 19, 1987, when procrastinating in getting out would have been a disaster. ==== So far youve mentioned a 1.5 percent maximum loss limit on a single position and 4 percent on the entire portfolio for any given day. Are there any other risk management rules you use? ==== We have a maximum loss point of 10 percent per month. If we ever lost that amount, wed exit all our positions and wait until the start of the next month to begin trading again. Thankfully, that has never happened. We also have a fourth risk management rule: At the beginning of each month, I determine the maximum position size that Im willing to take in each market, and I dont exceed that limit, regardless of how bullish or bearish I get. This rule keeps me in check. ==== Do you use charts? ==== I look at charts primarily to figure out where traders are going to get interested in a market. I know the types of patterns they like to look at. ==== You use both discretionary and system trading. Do you have anything to say about the merits or drawbacks of each approach? ==== The bottom line is that you need an edge. One of the ways you can get an edge is to find a successful system. However, if youre just a pure systems player and you start managing large amounts of money, youre going to find that your transaction costs start to eliminate a good deal of your profits. In general, its probably best to be somewhere between a pure discretionary trader and a pure system trader. As I mentioned before, you can help your systems by using some discretion in the entry and exit of positions. ==== Have you looked at commercial systems at all? ==== Sure, weve bought lots of them. I used to evaluate the systems myself, but now I have other people in the office do it. We have never used any of these systems as is; we use them to give us ideas in constructing our own systems. ==== Do you have any advice for the public about systems offered for sale? ==== Join Club 3000. [This organization issues a newsletter composed of members letters that discuss systems and other aspects of trading. The name derives from its origins. Club 3000 was formed in frustration by members who had paid approximately $3,000 for a system they felt was essentially worthless and decided to get together to share information about various systems.] I would also subscribe to such publications as Futures, Technical Analysis a / Stocks and Commodities, and Commodity Traders Consumers Report for their reviews on systems. Also, once you buy a system, make sure you test it on your own data. ==== In other words, dont take the vendors word for it. Do you think that many of the claims for systems are overblown? ==== Yes. ==== Is that because of deliberate misrepresentation or are most of the vendors actually fooling themselves? ==== Some of the system claims may actually be partially legitimate. However, I usually find these systems dont have enough observations to be statistically significant. Also, frequently, the systems base their percentage return claims on the minimum exchange margin requirements. ==== I understand. Doing that gives the systems extraordinary leverage and the ads only talk about the return side; they dont discuss the risk side. ==== Right. I made the same mistake in my senior thesis. I based my percentage returns on the assumption of an account size equal to double the exchange minimum margin requirement, which was a grossly inadequate sum. hi reality, if you ever tried to trade that way, you would go broke, because the drawdowns are too big. ==== Do you basically believe that if somebody developed a really good system they wouldnt be selling it? ==== To some degree, I believe that. Sure, its possible that a system developer may not have any money, but if the system is that good, he should be able to convince friends, family, anybody to put some money into the system and trade it. ==== Are there any technical indicators in the public domain that you find useful? ==== Moving averages are useful. Theyll work if you watch your risk management. I believe you can make an above-average return by using moving averages, if youre smart about it. ==== Any indicators that yon consider overrated? ==== Most of the common ones: Fibonacci retracements, Gann angles, RSI, and stochastics. I havent found anything there for any of these indicators. ==== If you have a streak when youre doing very well, day after day, do you get to the point where you say, This jnst cant keep on? And do you start reducing your position because of that? ==== Actually, the better Im doing, me bigger I play, and the worse Im doing, the smaller I play. ==== So you believe in streaks? ==== Yes, not just in trading, but in most things in life. If a team has won eight games in a row, you dont bet against mem winning their ninth game. ==== Are there trading errors that youve learned to avoid? ==== In general, I dont like placing stops. If youre a big player, you really have to be careful about putting stops into the market. ==== Did yon learn that by getting burned in placing stops? ==== I never placed a lot of stops throughout my entire career, but I used to place more than I do now. ==== If you did place the stop, did you find there was a higher tendency of getting hit? ==== If I put a large stop order in the market, not only is it going to have a tendency to get hit, but when it does get activated, prices are likely to run. So I will not only get stopped out, but I will get filled at an average price significantly worse than my stop. ==== At your current trading size, I would assume that you probably avoid entering explicit stop ordersaltogether.==== Right. Sometimes, if I want the price to move toward a certain level, I may put in a stop and then cancel the order once the market gets close. I do stuff like that frequently. Actually, I did it today. It worked today, but sometimes it backfires, and you find yourself the proud owner of some bonds you dont want. ==== You seem very confident about your ability to trade the markets profitably. Have you always had that confidence in trading? ==== Probably for about four years. ==== Not speaking about yourself now, but in general, would you say there is a strong correlation between the degree of confidence and success in trading? ==== There is some correlation, but its nowhere near 100 percent. Some people are just confident, but if they dont have an edge in the market, it doesnt matter; theyre still going to lose money. ==== What youre saying is that not all confident people are going to be good traders. However, are nearly all good traders confident? ==== Yes, I would think that virtually all good traders are probably confident in their trading ability. ==== Do you remember when you really became confident as a trader? Is there some transition point that you can recall? ==== I guess by the time I decided to go off on my own I was fairly confident. I knew I had to make money just to pay my rent. ==== Was that confidence derived from the consistency of your retnrns? ==== Yes, I knew I was. getting statistically significant results. ==== You come from an academic background and even did your thesis on a subject related to the markets. Im sure youre quite aware that most of the academic community still holds to the efficient market hypothesis. Obviously, what youre doing couldnt be done if that theory were right? ==== The markets are clearly not a random walk. The markets are not even efficient because that assumption implies you cant make an above-average return. Since some people can do that, I disagree with the assumption. |
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