If we see higher risk assets further over-valued, do not chase the move, but rather sell into price ...
Learning from Traders that Made It (Part 10)
03/28/2008 12:00 am EST
Dave told me that this was when traders were most likely to ‘blow up’, when they ‘needed’ the market to give them money. They generally threw away the good trading practices they worked so hard to perfect—even though these good trading practices had made them so much money in the past. He suggested I watch him carefully for the next couple of days and if he started on a losing streak of any magnitude, I should bring him up to speak with him before he did too much damage.
The next two days were not kind to Bob and we went to visit Dave mid-morning on the second day. I explained the situation to Dave while Bob listened, as if this was the first time Dave and I were discussing it. Dave listened and then asked Bob a few questions about his trading style and how he had changed it in the past week. After hearing him out, Dave asked Bob just how large a bonus he’d need to buy the house his wife was looking at. When Bob told him, Dave asked Bob if it were possible, would Bob buy the house immediately. Of course, Bob told him. Dave picked up the phone, called the mortgage department and told them he was coming downstairs to see the department head. Then he took Bob with him and I went back down to the trading floor.
About two hours later, Bob came back. He was a little pale. I asked him if everything was ok and he told me that Dave was in my office and wanted to see me. I went into my office and Dave shut the door. Dave asked if I really felt Bob was on the verge of starting a large losing streak. I told him my instincts told me Bob was in real danger as a trader. Dave told me he agreed with my assessment and then told me he was going to offer a solution to Bob, if I was also willing to accept it: the bank would write a contract with Bob, issuing Bob the mortgage on the new house at current rates. Against this new mortgage, Bob would place his bonus to be paid at the end of the year. I asked Dave how we were going to manage Bob’s trading the rest of the year, to insure he didn’t lose a substantial amount of the money he had already made.
Dave smiled and told me that Bob was now officially on vacation for the rest of the year. He hadn’t told Bob yet what he was going to offer him; he had simply taken him to the mortgage department to be certain Bob’s credit was adequate if he could manage the down payment. But Bob knew something was up, since Dave had walked him through the mortgage area and process.
Here’s what we offered Bob: we gave Bob the rest of the year off. He was having a record-trading year and might earn enough for the down payment on the house his wife loved. If he stopped now, the bank would have a great deal of net profits that were no longer at risk. In the contract, we specified that if his bonus fell short, Bob would owe the balance against future bonuses. We also gave Bob two tickets to the Caribbean, where he and his wife usually went at the end of every trading year.
I called Bob in and with Dave listening, made him the offer. He was speechless for quite some time and then asked me if I didn’t believe he could continue to make money the rest of the year. I told him I felt he had been put in a dangerous situation, which also put the bank’s profits in a dangerous situation. It was not a matter of me believing or not believing—it was a matter of risk management. Dave had simply come up with a way to manage the bank’s risk and reward a senior trader that was having a career year.
Bob learned a valuable lesson that day: the market gives you what the market gives you. If he had been working for a different bank, they might have let him continue trading for the rest of the year and he might have learned the same lesson by giving up a great deal of the money he had worked so hard to make all year—and not get the house [making his wife extremely angry].
Then I told Mary about the single best trader I knew. He was worth nearly US$1 billion dollars, had made all the money trading and didn’t make it taking heavily leveraged positions. Instead, he had a high probability trading entry he looked for and he took it over and over again. Since he always practiced good money management, he regularly made money—in fact, he regularly made a great deal of money. When he traded, he called it ‘slicing sausage’, because his style was to take bits out of the market here and there and at the end of the month, he’d have a nice pile of money [or sausage] in front of him. I also told her I called my trading style ‘making donuts’, because to me, it was methodical work taking money out of the market each day.
I suggested Mary concentrate on finding a trading tool that fit her personality and then learn it inside and out. Then she should master the concepts of solid money management. Once she did this, she should couple high probability trade entries with solid money management and only take trades with good risk reward ratios. If she could do these things over and over, she’d be a successful trader and the market would eventually reward her with a living.
After sharing e-mails back and forth for several months, Mary began timidly asking questions on the forum when she didn’t understand someone’s post about a winning or losing trade. Soon she was asking detailed questions about the trading techniques other people were showing on the forum. And within a year, she was posting her own winning trades. Before my very eyes [well, my ‘internet’ eyes], I watched a person that had never traded before blossom into a very talented trader. Mary is still single. She makes a very nice living trading from her home. She was able to watch her little ones grow up at home and now they are doing well in school while she trades at home all day. She is a frequent contributor—she believes as I do that you get back 1000 percent what you give, so she generously shares her time and thoughts and ideas with other traders, whether they are new traders or old professional traders like me!
There are many success stories in the markets. But they always come down to hard work, overcoming your own weaknesses and taking what the market gives you. Throw in some solid money management and you generally have a recipe for success.
|I wish you all good trading!||Part 1 | Part 2 | Part 3 | Part 4 | Part 5 | Part 6 | Part 7 | Part 8 | Part 9|
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