METHODOLOGY

Ride Your Winners – Never Get Out Unless the Trend Changed

• One time, [Ed Seykota] was short silver and the market just kept eking down, a half penny a day, a penny a day. Everyone else seemed to be bullish, talking about why silver had to go up because it was so cheap, but Ed just stayed short. Ed said, “The trend is down, and I’m going to stay short until the trend changes.” I learned patience from him in the way he followed the trend.
• During the great soybean bull market, the one that went from $3.25 to nearly $12, I impulsively took my profits and got out of everything. I was trying to be fancy instead of staying with the trend. Ed Seykota never would get out of anything unless the trend changed. So Ed was in, while I was out, and I watched in agony as soybeans went limit-up for twelve consecutive days. I was real competitive and every day I would come into the office knowing he was in and I was out. I dreaded going to work, because I knew soybeans would be bid limit again and I couldn’t get in.
• If you don’t stay with your winners, you are not going to be able to pay for the losers.

Get Out When the Volatility and Momentum Become Absolutely Insane

• One way I had of measuring that was with limit days. In those days, we used to have a lot of situations when a market would go limit-up for a number of consecutive days. On the third straight limit-up day, I would begin to be very, very cautious. I would almost always get out on the fourth limit-up day. And, if I  had somehow survived with any part of my position that long, I had a mandatory rule to get out on the fifth limit-up day. I just forced myself out of the market on that kind of volatility.

Take Note of Intraday Chart Points

• I learned the importance of intraday chart points, such as earlier daily highs. At key intraday chart points, I could take much larger positions than I could afford to hold, and if it didn’t work immediately, I would get out quickly. For example, at a critical intraday point, I would take a twenty-contract position, instead of the three to five contracts I could afford to hold, using an extremely close stop. The market either took off and ran, or I was out. Sometimes I would make 300, 400 points or more, with only a 10-point risk.
• Although that approach worked real well then, I don’t think it would work as well in today’s market. In those days, if the market reached an intraday chart point, it might penetrate that point, take off, and never look back. Now it often comes back.

Take Only the Best Trades

• I think the secret is cutting down the number of trades you make. The best trades are the ones in which you have all three things going for you: fundamentals, technicals, and market tone.
• First, the fundamentals should suggest that there is an imbalance of supply and demand, which could result in a major move.
• Second, the chart must show that the market is moving in the direction that the fundamentals suggest.
• Third, when news comes out, the market should act in a way that reflects the right psychological tone. For example, a bull market should shrug off bearish news and respond vigorously to bullish news.
• If you can restrict your activity to only those types of trades, you have to make money, in any market, under any circumstances.

Avoid Trading Currencies

• It was very exhausting because it was a twenty-four-hour market. When I went to sleep, I would have to wake up almost every two hours to check the markets. I would tune in every major center as it opened: Australia, Hong Kong, Zurich, and London. It killed my marriage.
• Nowadays, I try to avoid the currencies, because I feel it is a totally political situation; you have to determine what the central banks are going to do.

Big Players Would Always Tip Their Hand

• I remember one time, during late 1978, the dollar was getting battered, falling to  new lows every day. One day, we [Bruce Kovner] noticed that the dollar got mysteriously strong. There was an intense price movement that couldn’t be explained by any known information. We just bailed out of our long currency positions like crazy. That weekend, President Carter announced a dollar support program. If we had waited until the next U.S. trading session, we would have been annihilated.
• That situation illustrates one the principles we believed in — namely, that the big players, including the governments, would always tip their hand. If we saw a surprise price move against us that we didn’t understand, we often got out and looked for the reason later.
• I believe, as a courtesy, the European central banks are notified about major changes we are going to make, and they often act ahead of U.S. policy announcements. Consequently, the price move shows up in Europe first, even if it is because of something we initiate.

Short a Laggard

• You absolutely want to put down a bet when a market acts terribly relative to everything else. When the news is wonderful and a market can’t go up, then you want to be sure to be short.

RISK MANAGEMENT

Don’t Bet the Farm

• Marcus got almost wiped out in two separate occasions where he betted everything on one trade
  • Bought maximum number of corn and wheat contracts betting that the crops will be attacked by blight that had survived the winter — didn’t happen.
  • Bought all in into lumber during the Nixon price freeze thinking that it will go up just like plywood futures, but Government stepped in and the market crashed.

Keep Your Risk to 5% Per Trade

• Always bet less than 5% of your money on any one idea…. I would emphasize that the 5% applies to one idea. If you take a long position in two different related grain markets, that is still one idea.

Use Stops

• Always use stops. Actually put them in, because that commits you to get out at a certain point.

Get Out if a Position Doesn’t Feel Right

• If a position doesn’t feel right as soon as you put it on, don’t be embarrassed to change your mind and get right out…. While you are in, you can’t think. When you get out, then you can think clearly again.

Cut Back or Stop When You Hit a Losing Streak

• In the past, I’ve sometimes tried to fight back by trading even heavier after I start losing, but that usually doesn’t work. Then I start cutting down very fast to the point of stopping completely if it gets bad enough. But usually it never gets that bad.
• The typical pattern is: Lose, fight like hell, lose again, then cut back, or sometimes stop, until I get on a winning track.
• I think that, in the end, losing begets losing. When you start losing, it touches off negative elements in your psychology; it leads to pessimism.

OTHERS

Have a Life Outside Trading

• If trading is your life, it is a torturous kind of excitement. but if you are keeping your life in balance, then it is fun. All the successful traders I’ve seen that lasted in the business sooner or later got to that point. They have a balanced life; they have fun outside of trading. You can’t sustain it if you don’t have some other focus. Eventually, you wind up overtrading or getting excessively disturbed about temporary failures.

Trading Is a Skill You Can Learn

• I think to be in the upper echelon of successful traders requires an innate skill, a gift. it’s just like being a great violinist. But to be a competent trader and make money is a skill you can learn.

All Markets Trade the Same

• I really feel that if you can trade one market, you can trade them all. The principles are the same. Trading is emotion. It is mass psychology, greed, and fear. It is all the same in every situation.