Trader Talk 1.20.2012
Michael Lydick - www.backtothefuturetrading.com
John Forman – www.theessentialsoftrading.com
Geof Smith – www.dtitrader.com
How did you get your start in the markets?
John – I go back a ways, I’ve been around for a while. I got started after the crash in 1987. The crash really sparked my interest. There was something interesting and fun and scary about it. I got into the stock market in 1988. I took a professional job as a market analyst. I’ve been trading as a market analyst since then. The stuff that I do is day to day real time market analysis.
Geof – I got started in my late teens. My father had my brother and I start learning about the market. He sent us down to Tom Busby’s office to learn how to trade. He let us go throughout college trying to figure out the markets. At the crash of 87, I had just gotten out of a college class, and was thankfully flat that day. I had just gotten out of some stocks about a month before then. I got a few degrees in engineering, was a pipe line engineer for a while, I was trading the European markets. In 2000, I started working and trading for DTI.
Michael – I’ve always been interested in how things work. About six and a half years ago, I had designed a large portfolio for a machine equipment company in New York. He used a term called Fibonachi, my OCD kicked in, I went home and researched Fibonachi, and I hit the grown running from that point.
In your experience, what are the habits that all successful traders have in common?
Michael – They all actually share several commonalities. First is they’ve blown out an account and taken a hiatus from trading completely, they usually have no more than two or three charts and indicators on their screen. We find that their system is matched to their personality. People that are successful are the most laid back, relaxed, and while trading, boring people ever.
Geof – Michael hit some of them right on the head. One thing that you’ll find in trading is more along the psychology of things. You learn who you are. Trading has allowed me to see capabilities, limitations, fears, frustrations, and angers. Most successful traders have learned to tame the animal within. They are persistent, consistent; they change the rules only on weekends. They take losses because that is part of the game; they try to overcome the loss by learning from it. A big part of trading is discipline and understanding what you did wrong. Create a rule, stick to the rule. They learn from what they’ve done, they’ve dumped several accounts, but yet the still vow that they will overcome what has conquered them.
John – First, they have a bigger picture objective and they know what they’re working toward and they know what they need to do to move them toward that objective. They aren’t taking trades that will move them away from that objective. They make sure that everything they do is aimed in one direction and not scatter shot all over the place. Successful traders are adaptive. They are always staying on top of what’s going on in the markets. Whether it be day to day or market to market. Markets are always changing. Certainly, we can talk about the markets that were in place, the late 80s are different from now. Successful traders think first in terms of risk.
What is the biggest struggle that you have faced as a trader and how did you overcome it?
John – Listening to other people’s opinions on the markets. Not just CNBC, for me its actually getting into the thought process of everyone else. And allowing it to become part of my own thinking. I can’t let myself be influenced by other people’s trading and thinking. It never works out, its never a good situation for me to be in. I have to make a conscious effort to not let it sink in. I do hear the stuff, but I compile it as something that doesn’t affect my own trading.
Geof – Not trading is my biggest struggle. I get a jittery feeling and its very, very addicting. To be able to be in it, make money lose money, the thrill of victory or savage of defeat. My biggest struggle is not trading. I’ve gotten around that by getting older. When you see a market like today with the S&P stuck between 1309 and 1305, the day is going nowhere. I always step back and see what I can do not to trade. You do have to watch risk, and if you look at what you have to do risk wise to get long or short, you go back and do a check. Are you willing to take the risk and how long is it going to take to get a return on investment. Does the return outweigh the risk? Once I start seeing a market like this, I shut down my trading platforms. I still watch the market, but I have had to slow myself down so I can step back and analyze the market.
Michael – I know it may sound strange, but there is an inverse relationship between analysis and trading results. I went through a learning curve where if I had a good day, I would imagine what if I knew everything. What you end up discovering is that more is less. The more you try to learn and the more you try to incorporate, the more disparaging it is. You experience the trader’s death spiral. You start to double up size, take trades every other bar, and jump in after a missed opportunity. The one thing I would tell to everybody today is to resist the urge. More is not better.
John: Why is psychology and discipline just as important as or more important than a trading strategy?
I wouldn’t call it more important. It is as important though. Basically, trading success is founded on a psychology of principals. It doesn’t matter how strong your discipline is, you can’t turn a bad system into a good system. You can’t weigh one higher than the other. If any one part of that triangle is weak, performance is going to be weak as a result.
Michael: What advice would you give a trader struggling to form a trading plan?
One of the things I want to encourage you to do is go to our website and email me. We have an 8 hour video series that I put together and send to people for free. It is made to shake them to the core and scare them, and then help them to understand things like positive expectancy. Trading is as personal a journey as any I’ve ever been on. I’ve spoken to thousands of people about struggling with a trading plan. There is a sense that if you walk away you fail. You can lose relationships, houses, marriages, trading. Stop and breathe. The number one mistake that every person makes is the sense of relief that I can run into this and do it right away. The average learning curve across the board is 3 to 5 years. From day 1 to today (3-5 years) is how long it took me to understand who I am, how I trade, etc.
Geof: With the market opening up so strong this year are you looking to initiate long or short positions?
The market has basically erased what we’ve done since last August. The markets have turned back around now, pulled back up, and gapped from the year close last year to the year open this weekend. You go back and start looking at things, the market looks like its arguing that it wants to go higher. Portfolio wise, I wouldn’t put more than 15 percent in the equity market now. You can probably find a needle in a haystack, but I think the metals have more promise than the equities. There will be bumps in the road. You have an election this year, uncertainty in Europe, and you don’t know what the Middle East is going to do. That’s why you protect positions and use stops. You’re only in the first month of the year, I think the people who have lived over the past 10 years have found that it is very unpredictable and you need to take it a little at a time. Looking at economic data, things look better, even though the data is weak. I’d put 30 to 40 percent in the metals side of things. I think the metals are oversold and are due for a bounce. You won’t make anything off of CDs unless you do currency CDs. I think a lot of people are putting a lot of expectation in the upcoming election. One bad comment out of somebody might hurt the market a little bit. I’m still looking at the long side at this point in time.
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