Great traders and true value investors know that it’s not only the return function that dictat...
Learning From Traders That Made It (Part 6)
03/24/2008 12:00 am EST
Trader Two: Letting It All Go
I did some research in 2003 and 2004 because I was curious how successful professional traders making a living trading as floor traders were once they began to make the transition to 'off floor' traders that sit in an office and trade while watching charts. With the help of the Chicago Exchanges and the four largest clearing firms of floor trading 'locals', I found a fascinating correlation: professional traders leaving the floor and starting fresh as off floor screen traders had about the same success [or failure] rate as the general public. According to the NFA, well over 90 percent of the people that open $10,0000 accounts lose all of the money in their account within three months-and professional floor traders moving to off floor trading had the same success: 90 percent of them were failing!
Once the research was finished, I decided to see if I could put together a seminar or class to help professional floor traders successfully make the transition. I began teaching weekly seminars at the Chicago Mercantile Exchange and the Chicago Board of Trade and also offered these professional traders one on one mentoring, which allowed me to monitor their progress on a trade-by-trade basis. Well over 300 professional traders took the seminars in 2005 and 2006 and signed up for the mentoring, giving me a huge number of professional traders to watch and observe. And the access to their trades, once they learned my trading methodology, was a great research tool that has allowed me to improve my own teaching and trading methods.
As I was preparing to teach the very first Market Maps Seminar at the CME, I decided to keep notes on each of the traders that attended the seminars and if I noticed any particular character traits, I noted them down for my records. For example, one trader in an early seminar told me three times in front of the other attendees that 'stops are for losers' and no matter how I approached the subject of the importance of always using stop loss orders, he scowled and repeated his statement. I diligently noted this and sadly, within three months he had lost all the money in his seven figure trading account. But this article is about traders that 'made it.' Let's look at another:
Andy was a veteran floor trader with more than twenty years experience. He attended my first Market Maps Seminar held at the CME. While we waited for all the participants to sit down and get ready, I was asking people how things were going on the floor. Most of the responses were guarded-most traders said things like 'things were slower now that electronic trading had become so dominant, the flow was not what it used to be, the spreads and ranges had narrowed so it was harder to make a good living'.
But Andy laid it right out on the line: 'Tim, I've been doing this for more than twenty years and the last two or three years have been hell! I hate it! I can't make money like I used to and I can't go on like this. I'm ready to make the change. I'm never going back to the floor. I'm really looking forward to this.'
After the seminar, I spoke with several of the owners of the clearing firm that had sponsored the seminar at the CME. I asked each of them which attendee they thought would make it, based on what they knew about them and what they had seen today. After they made their picks, I chose Andy.
Why did I choose Andy? Andy was ready to let his old methods go, clear his head and start over again. In my opinion, he was ready to pay the price to learn how to trade all over again. I knew it wouldn't be easy for him-it's never easy for anyone to start over again-but I felt he had made an internal commitment to clean the slate and start over. And that can be half the battle.
The most common mistake I see professional floor traders make when they start trading off floor is their instinct to aggressively enter a trade they see-in other words, they tend to enter before the trade entry set up plays out, because they think they are seeing a valid entry before the rest of the market sees it. On the floor of the exchanges, that can give them an edge, since they are making many trades a day and trying to make small profits per contract per trade. But off floor, this anticipation can be deadly. Traders just learning often find themselves entering many trades they thought had valid set ups but in reality, were only fulfilling some of the trade entry qualities. I call these 'look alike' setups and generally, they have a lower probability of success and can be very frustrating.
Andy's first obstacle was overcoming anticipating trade setups. Some market professionals teach that they always come into a day with a bias and then they only trade from that side. I teach exactly the opposite: let the market show you where it is going and then look for a high probability trade setup that you can recognize over and over. After writing up a trade plan that details all your thoughts and orders, execute the plan.
|More on part 7 Tomorrow||Part 1 | Part 2 | Part 3 | Part 4 | Part 5|
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