People always ask me on the trading floor and in the chat room, how do you maintain such control and restraint? I may not be the smartest trader in the room, but over the course of my career I have learned what it takes for me to make money on a consistent basis month to month. I know when to push it and when to take a step back, and my ability to read the market is what has allowed me to be successful.
There is a saying I like to throw around that goes: “You make 70% of your money during 30% of the year.” While the numbers may not always be exact, I think this concept is very important to understand. You have to be able to recognize when the market is not giving you the type of action you want and need. When the market does not mesh with your style of trading, you have to, first, be able to recognize that fact and, second, have the restraint to change the way you are trading.
I often use the trading floor as my barometer for how the market is trading. When I hear other traders complaining about thin stocks and bad trading, I take note of it. When action is more unorthodox and volume dries up like it has this summer, you have to lower your risk and expectations. Preserve capital and live to fight another day.
The difference between good and not so good traders is not earning potential, but rather the ability to limit losses. When times are good, experienced/successful traders make money and less experienced/mediocre traders also make money. When times are tough, experienced/successful traders do not give back previous gains, while less experienced/mediocre traders dig themselves a big hole. Your focus should be on not losing, and in the process if you eke out some winning days in there, then that is a bonus. During my career I have seen so many potentially good traders drive themselves out of the business because they did not have the restraint to slow down when the market dictated it. Looking for big follow-through moves in a choppy market, for example, is suicide.
Losing money trading has two consequences: a loss of capital and a loss of confidence. That is why losses are so important to avoid, especially careless ones. Not only should you strive to preserve capital when the market is not cooperating, you should also lighten up for the sake of keeping your psyche and confidence intact. If you beat yourself down so much during those bad times, you will not have the mental capacity to push it and make that 70% of your money when the market is ripe for the picking.
You must have more discipline than ever and cut your money management parameters in times like these. If your usual limit is $1,000, cut that in half. If you are up in the morning, don’t give back more than 25% of your money in the afternoon. Take the time to restore some mental health and get away from the trading desk if you have to. You don’t have to be the first to the party. When things get better, I will begin to hear it from the traders around me, and I will adjust my strategy accordingly. I keep track of my numbers religiously, and I am making most of my money in the morning during these light months. I have done this by cutting size and being more patient. In the process I got to enjoy the beautiful weather this summer and train for another triathlon.
While you should gauge the mood around you, don’t ever fall into the trap of worrying what the person next to you is doing. Ultimately, you have to follow your own rules to have sustained success in this business. Life is the same way; you can’t get caught up in what other people are doing, you have to do whatever works for you. You must be realistic with yourself and be happy with the money you make.
In closing, I just want to give you an idea of what my blog will be like going forward. I will share charts, stories, and lessons based on my observations of the market—whatever it is I think is worth sharing with you. I hope you guys can interact, ask questions, make comments and make this a rewarding experience for all of us. Happy trading!
-Mike Lee
