The Tycoon Report

A Tale of Three Traders

This was a story submitted by Mark Scheel in a contest we ran a couple of months back - fantastic article Mark!

Some time back I attended one of those ubiquitous trading seminars offering yet another variation of software promising the “holy grail” to trading riches.

Something about this particular program did seem cutting edge, however, and so I sprang for the package. But after many months of sub par results and gnashing of teeth, I located and joined a support group of other traders who had purchased the same program. My hope was to share experiences (or more precisely, to commiserate) and together hone those skills necessary for success.

Indeed, it has proven to be a fascinating ride and quite a firsthand education.

While some in the group have stayed close to shore by paper trading with little or no exposure to the actual market, three members have served as peerless models as to what to do and what not to do in the world of Wall Street. I believe their experiences are well worth scrutiny.

Chester

One trader – I’ll call him Chester – selected an overnight trading style that captured a late-day up-move and the early follow-through-at-the-open the following morning.

He worked out the specifics of his strategy and indicators carefully, perfected it paper trading, and began the actual trades with small positions. His wife monitored his progress and touted his successes to the group – a potential red flag right there. He took a few other traders under his wing, inviting them to his home and sharing his trading-room arrangements. Month by month his account was growing nicely.

One evening Chester and his wife returned from dinner out, and he casually pulled up the after-hours market on his computer. On impulse he decided to trade. However, when he entered his order, he mis-keyed one number. The trade executed immediately, and within the bat of an eye, he'd lost $8,000 ... nearly as much as his total profits over six months.

That one mistake completely destroyed Chester's self-confidence. It ate at his emotions and eroded his psychological quiescence. He became afraid to trade.

Eventually he quit attending group meetings and, at his wife's insistence, took a day job.

Cleave

Cleave, on the other hand, was a "plunger" from the get-go.

He had an impatient personality and an aggressive style. He knew his software and the markets, but he was always pushing to make another nickel or dime on the exit.

He began trading call options with a good rate of success. Then he upped the number of contracts and the number of simultaneous positions he held as well as utilizing margin. For several months running, he was clearing between five thousand and eight thousand dollars per month on a $120,000 account.

One month he was holding 20 positions with 10 contracts each, margined to the hilt, when the market began to move against him. He felt certain it would come back, so he didn't honor his stops. It didn't. By the time he closed out, he'd lost $70,000. Cleave, too, no longer attends group meetings and has taken a new job.

Roger

Finally, there's Roger, a bush pilot and a motorcycle enthusiast. He owns a small business, and approached the challenge of trading as another business.

Roger kept a journal of his trades and studied what worked and what didn't. He started small and traded with great discipline, sticking to stocks he knew well. Following his indicators and trading plan, he always honored his stops and profit targets.

At one meeting, Roger exclaimed to the group, "You know, I've come to believe that I could let a monkey pick my trades, and so long as I practiced flawless money management and kept my stops tight, I'd end up making a profit." And that assertion has so far been borne out. Later this month Roger is organizing a workshop on "trading live in the market."

Witnessing people I know either flame out or soar to success has driven home lessons far beyond those gleaned from any book. And it's convinced me of certain inviolable trading principles.

As many gurus have opined, including the famous trader and trainer Alexander Elder, trading rests on a three-legged stool: technical mastery, individual psychology and money management. Take away any one of those and the effort collapses. As it did with Chester when he lost his confidence. As it did with Cleave when he ignored money management principles.

When trading, I believe it paramount to keep the following in mind ...

• Only trade with amounts you can afford to lose: Only take positions that allow you to sleep at night.

• Always trade with a stop loss: Always honor the stop.

• Don't become overconfident and careless after a series of winners: There's always a losing trade waiting.

• Treat your trading like a business: Keep books on what you do.

• Test and retest your strategies paper trading before putting money on the line.

• Learn from what others are doing around you: Mistakes are always the most expensive when you make them yourself.

• Get to honestly know your own psychological strengths and weakness and your individual emotional tolerance for risk.

In fact, I’ve coined my own trading mantra of sorts: Success doesn’t lie in any software or proprietary system; rather, it resides in mastering one’s own psychology.

Oh, and one other thing about controlling emotions:

It couldn't hurt to have the coolness of temperament of a bush pilot landing with a dead engine whenever you're tracking an open position. It certainly seems to have served Roger well.