Following the advice of others certainly won't make you
a rich trader if you limit yourself to just that. However, it can lead to some reflections that, if transferred to a concrete level, can trigger a change. This is why
following the advice of successful traders who have built an important career starting from trading is ultimately very useful.
In this article, we propose 4 tips from 4 millionaire traders (who are also very famous in the industry), mostly collected in the bestsellers of the "
Market Wizard" series by Jack D. Schwager, readings that all traders, beginners and experts, should do.
You Must Know How to Lose
The first advice, which is ultimately a quote, that we propose comes directly from
Paul Tudor Jones, a true authority in international trading. Founder of one of the largest hedge funds on the planet, he is also known for his sporadic but always enlightening activity as a trainer.
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If a position I have opened seems to be going against my plans, I exit. If a position instead seems favorable to me, I keep it. Risk control is the most important thing in trading. If you have a position that is currently losing and you are not comfortable with (technically ed.), the solution is very simple: exit. You can always re-enter".
It seems like an almost trivial quote. After all, it theorizes exiting when you are losing. All very clear, if we weren't talking about trading. In trading, a position can turn positive from one moment to the next. But on closer inspection, Paul Tudor Jones says much more. Between the lines - but also explicitly - one can read a small but great piece of advice:
let go when holding on is too difficult, or really risks leading to nothing. In short, he advises accepting losses when they come, and doing so immediately, before it's too late, before it's the
heavy erosion of capital that makes us open our eyes.
It's actually a difficult piece of advice to follow. After all, a good portion of traders fail not so much because they can't win, but
because they can't contain losses. And they can't do it precisely because of the dynamic, more psychological than technical, that arises from having to deal with a position that is generating losses. The dynamic consists of tying the fate of that specific position to one's own person, making it a buttress of pride. The second dynamic simply coincides with fear, that is, the fear of coming to terms with the erosion of one's capital. So, the trader prefers to wait in the hope that the market - beyond any reasonable technical consideration - will prove him right. In most cases, it ends badly, worse than you might think.
Following Paul Tudor Jones' advice, that is, making - when necessary -
a healthy strategic retreat can reduce losses. It's an opportunity to be seized, also because trading provides numerous tools to do so. Sometimes, it's enough to obey the stop loss that the trader himself has set in the phase before opening the position. As already mentioned, the difficulty is first and foremost psychological. Right here, in most cases, the "resilience of the trader" is at stake, i.e., his ability to stay in the market not so much in good times as in bad.
The Issue of Anxiety
The second piece of advice, this one really between the lines, is included in one of the most famous quotes by Bruce Kovner, hedge fund manager, chairman of CAM Capital.
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Every time I open a position, I set a stop loss. It's the only way to sleep peacefully. I always know when I will exit the market even before entering. The size of the position depends on the stop loss, and the stop loss is determined by technical evidence. I always set the stop loss beyond some technical barrier".
This quote is very rich, also because it actually contains not one but two pieces of advice. The first is of a psychological nature, the second is of a technical nature.
Regarding the first, the one of a psychological nature, it is underlined by the preposition "it's the only way to sleep peacefully". In essence, Bruce Kovner highlights
the need to keep anxiety at bay in trading, which, on closer inspection, is inherent in the investment activity. Well, the only solution to keep anxiety at bay is to set limits to the activity itself, in this case well represented by the stop loss. The sentence "I always know when I will exit the market even before entering" certifies exactly this reasoning.
The second piece of advice, the technical one, concerns the principles that should inspire
the identification of the stop loss. These principles first of all declare its importance and the link with another fundamental element, namely sizing; secondly, the objectivity of the stop loss itself. After all, it is "determined by technical evidence". In reality, the identification of the stop loss is quite subjective, or at least the method used is. The important thing is to assign it a certain subjective value. In any case, Bruce Kovner's approach is classic, and involves the use of supports and resistances.
Fortunately, Bruce Kovner's advice is already widely followed today. Setting a stop loss is a widely followed practice. The problem, if anything, lies in
how. There are those who show excessive caution and set a stop loss very close to the entry price, while there are those who want to guarantee themselves free rein and set it at a point too far away. In any case, these are two wrong approaches. The issue is more complex than one might imagine as it is susceptible to a certain subjectivity. And then there are the psychological dynamics that invalidate any caution, such as those presented in the previous paragraph.
Watch Out for Ambitions
Bill Lipschutz is famous for being one of the most profitable Forex traders. Moreover, he has had (and still has) an extremely long career: he started, immediately achieving success, in 1982 managing some shares he received as an inheritance.
One of Bill Lipschutz's most famous quotes is actually also the most cryptic. If read carelessly, and at a superficial glance, it even seems strange. It reports advice that doesn't seem like advice at all, which indeed appears almost counterproductive, as it is capable of curbing ambitions. The quote is as follows.
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If you want to become or continue to be a winning trader, I don't think you have to aim to be right most of the time. Rather, think about how to make money by being right 20 or 30% of the time".
What does Bill Lipschutz mean by this quote? That being right 20% of the time is better than being right 50% of the time? Obviously not, the reasoning behind his words is much deeper. It has to do with complex concepts, yet of fundamental importance for the trader, such as statistics, psychology, management of mental and emotional energies.
In reality, Bill Lipschutz's quote teaches many things.
You can't expect to be right "always" or even "often". Simply put, Bill Lipschutz advises not to waste time seeking perfection, or even wanting to achieve goals that are too high. After all, risk is a "fixed" component in trading, and therefore defeat as well. Everyone loses, even the greatest.
Get the best out of the opportunities the market presents you with. When Bill Lipschutz suggests aiming to make the maximum profit "being right 20% or 30% of the time", he simply advises getting the best out of the "few" opportunities the market offers. It's an invitation to optimization, which evidently can be the result of risk control and money management.
Don't give in to ambition. In truth, Bill Lipschutz also talks about psychology. Claiming to be right most of the time, that is, to dominate the market, is actually a presumption. There are those who do it, of course, but they are part of a very small hierarchy. The average trader, or rather the retail trader, however profitable, is better off not giving in to the temptation to presume, to believe
excessively in himself. Bravado in trading is harmful, as it reduces the space for caution and thus compromises lucidity.
The Importance of Forecasting
George Soros certainly needs no introduction. Among the top investors worldwide, author of famous high-speculation initiatives (legendary those of 1992 to the detriment of the lira and the pound), he is today a much-discussed character as he is the protagonist of conspiracy theories.
In any case, George Soros is also famous for some aphorisms, many of which concern trading or investing in general. The one that is perhaps most representative of his way of doing things is this: "
It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong".
Unlike the previous quote, this one is much clearer, even if the advice is more to be gleaned, to be read between the lines. What does Soros mean by these words?
Traders should be aware that the odds of losing are always high. Soros says it clearly: if your analyses are correct, it doesn't matter. Obviously, this is a provocation, but it is evident: the possibility of losing should be well internalized. So internalized as to come to terms with it, and to think precisely of a plan to cushion the loss. Above all, it is necessary to do so in advance.
A trader is not judged by defeats. Again, that "it doesn't matter" is not put there by chance. According to Soros, a trader really cannot be judged by the number of losses. It is not the number of wins that makes a trader a good trader. After all, trading is not a sport in which matches are won on points, but an activity in which one parameter assumes greater importance than all others: capital. Moreover, this conviction - this Soros does not say, not here at least but it is obvious - removes a specter that is always present in trading: namely the tendency to use a gambling or gambler's approach.
Predicting and managing... This is what matters. It is the crux of the matter. The most important lesson Soros wants to give with this quote. Event management is what counts most. A trader can even lose, but if he has prepared himself
also for defeat, the damage will be minimal. Implied, but at the same time implicit, is the reference to all those actions capable of containing risk and managing capital. Last but not least, the stop loss itself. Obviously, in a perspective of event management, Soros also considers the take profit important, i.e., the pre-set exit point in case of a winning position.
