Recently, while driving my two mick sons (Aedan and Colin) to soccer practice, I shared the ol’ axiom bout working smart and not hard. Well, being 10 and 9, they have transitioned from blindly accepting to carefully scrutinizing the bits of wisdom adults (which they refer to as “dolts,” aptly so…) like to shower upon them… myself included.
So, they called me on the fact I had told them just five minutes prior that hard work was critical and to go out during practice and work their butts off or I’d personally chase em down in front of everyone. Ouch…. hoisted by my own petard, it would seem.
Ego bruised from the comeuppance and keenly aware that the denuding of my invincibility was now firmly underway, I proceeded to explain that while working smart often involves hard work, hard work is not always performed in smart fashion.
Sorta suspect they didn’t quite grasp the subtlety involved. Same holds true for us dolts… Seems lots of traders seem bent on going it the hard way. They fall into the trap of believing that possessing superior intelligence, logging long hours and willfully undergoing stomach-churning rollercoaster rides on a daily basis will inevitably lead to nirvana as a trader. Were that only true a whole mess of peeps that have come and gone would have stuck and been successful. Just ain’t so…
Now don’t misunderstand me…I’m not advocating the flipside—the stupid and lazy approach. Plenty of peeps out there constantly searching for black boxes, gurus and short cuts, but it’s counterproductive to spend time dwelling on the “fools and their money ” approach. No, working smart in trading is found in the middle ground—where your efforts are streamlined and craftily simplistic. You’ve a good plan in place and your time, like that of any good management team, is spent executing to plan.
So, how do you go about working smart in trading? Well, that’s a bit subjective and you’ll get lots of answers from peeps who’ve been around, but there are some key areas you should definitely ponder upon, be you a newb or someone who’s been giving it a go for a while.
Lose the Preconceptions
Pretty normal to come into the biz with certain perceptions bout what trading is and entails. Most do, myself included years back. They can range from a belief that you need to know the markets inside-and-out to the vision of the successful trader as a gunslinger. Lose em. You’ll never know the markets completely…nor do you need to. And the perception of the slick Wall Street trader with six guns blazing, nerves of steel and an emotionless approach to the markets…strutting round kickin booty and taking names—is bunk.
There are myriad others and you know best the ones you harbor…lose em. Trading is not what we read about in many books, nor is it what we see portrayed in movies. Done right, it’s boring and methodical…much like shopkeeping. It’s a business that revolves around a solid plan…and success is predicated on the ability to execute to that plan time and again for as long as you remain in the biz…period.
Leggo that Ego
A lot of peeps come into trading with inflated egos…
Well, yes, it’s true. K, nothing wrong with a little ego, but you have to check it at the door when trading. That feeling of superiority will kill ya. If you haven’t figured it out yet, you’re not gonna outwit the market, no matter how many marbles you got rolling round in your noggin. I don’t care if you’re Stephen Hawking, you’re not gonna come to decisions faster than the computers that control the markets nowadays…period.
Here’s the deal—if you plan to invest then use those extra marbles and get to know everything you canabout a company (good luck!), but as a trader it’s not your job. Whatever you do, tis best to recognize what you’re up against—trade desks, hedge funds and research teams with super computers and deep pockets that are constantly culling information in fractions of milliseconds—seeking to arbitrage what they know ahead of others. So to take the approach of becoming the expert just plays into their hands. You will keep feeding their bank and not your own if your plan is predicated on being the smartest man on the block.
Moreover, though it seems counter-intuitive, being too smart about a particular stock or market or the macro picture can be a hidden detriment. Back in the late 90s I had a friend who knew the banks—especially BofA. He did well for a long period…so much so that he got
into the position of managing a good-sized sum of money in a hedge fund for other traders and friends/ families… Eventually though, he fell hard and lost almost everything. All the while he was going down the tubes he bitched that the market and traders simply did not understand the real story or the locked up value of BofA. Believe me, it was painful to watch it all play out over time…and a big lesson to me and others.
Do yourself a favor and accept that trading for the individual is about getting in the way of moving money— pure and simple. Not guessing or beating the big players to the mark…nor always understanding why this or that is happening.
Now I’m not saying smart is bad…but too smart can be a real problem! Just sayin…
Lots of peeps believe you gotta be prepared to trade many different types of markets/instruments/securities from one day to the next, due to the ever-changing nature of the market. Today it’s crude futures because of the inventory numbers due out, yesterday it was options on several Semi stocks and a couple networking companies, and tomorrow is looking like currencies given the scheduled… yadayadayada……….
Wow, that just sounds…busy…and nuts. A jack of all trades simply loses money in many different markets. Just like you can’t know everything, you can’t trade everything. And why would you want the brain damage? Fact is part of designing a good business plan is determining what makes sense for you in terms of the instruments you trade, as well as the focus of those instruments. If you’re gonna do stocks or options, learn a handful and follow em each day—get to know their patterns and nuances. Or go with ETFs or futures on the big indices and commodities (don’t start with crude, trust me on that one…), currencies via Forex, etc.
One huge mistake many traders fall into after they’ve gotten their feet wet is to feel they need to spread their wings and use some of the knowledge they’ve accumulated…test different waters, as it were. To do so they start to incorporate screening programs using the “wide-cast net” approach. They screen for all kinds of stuff daily and nightly, and then trade different strategies/ markets/instruments based on whatever comes back via their screens. I’ve seen many peeps screen for up to 30 to 40 different setups and scenarios daily—I’ve seen few do so successfully. Frankly, it’s way too much work and senseless to boot for most.
Keep it simple. Create a plan…then trade what fits your plan exclusively. Trading smart is not about staying busy or keeping your money at work; it’s mostly about trading when you should be and doing so in areas where you’ve created an advantage for yourself through familiarity… period.
Lean and Hungry
When it comes to funding your deck, capitalize your account with enough to allow for what your plan calls for; but don’t overdo it. You gotta learn to trade lean until you get good and comfortable and have proven your system to the point where you completely trust it. Then ramp it up and trade large…
Not something most books will tell ya, but putting a bunch of money in an account can actually create some nasty little habits and issues for you. You end up feeling you have to put the money to work, whether you can effectively do so or not. Till you really get it down and have logged some serious trade hours, trying to manage multiple trades/positions is tough. When the markets getup and move, sh_t happens quickly and it’s easy to watch two or three positions and forget about the other five trades you got on…or worse, freeze as the pucker factor takes hold and miserably stand by as your positions all jump on the Silver Bullet train to Hades.
Another major issue is that too much cushion gives you a false sense of security. While some scoff at this, I’ve seen it at play. A large deck makes peeps feel somewhat bullet proof. It opens them up to carelessly accepting loses and slippage. “Ah, that was a stupid trade…oh, I thought I cud catch the…big deal, I’ll get it back on the next…dang, another fat finger trade…shoot, I shudda used a stop—I swear I will next time… .” I could provide myriad examples, but you surely get the picture—if you offer up free dollars to the market, it will oblige you and liberate them from your account in short order.
My suggestion is that if you have $50k to fund an account with, do so for $5k. Whatever amount you’re working with (down to $5k…in which case you have to be extremely disciplined), break it up in similar fashion. Better to learn the lesson of trading lean and sweating it out…even blowing up the account. And then doing it again, again and again. You’ll learn more from blowing up four $5k accounts then you will ever learn from drawing down $20k against a $50k deck. The bloke who loses four times is four times the wiser, while the guy who’s lost $20k from the $50k deck is just starting to experience the pucker factor…and sure to lose more!
Trading lean focuses your trading by forcing you to be efficient and discerning in your actions. You think about every trade…and think twice again before ever pulling the trigger. You don’t accidently get caught up in stupid trades. Same holds true for not using your stops or blithely accepting slippage. You either make good decisions and execute good trades more often than not, or you’re done.
Really quite simple—if a good trade doesn’t work, then you move forward and no harm. Good plans are predicated on this very premise. If you make lots of stupid trades, even if some work (which they will statistically), then you are headed for the door whether you know it or not.
Just like the shop-keeper, you don’t want to be overly cheap, but you do have to be smart and somewhat frugal, with a sharp eye always focused on containing costs, executing to plan and maximizing margin in a balanced fashion.
The markets are big and complicated animals, no doubt. So it’s not surprising that peeps can get completely absorbed when it comes to trading. You can learn for a lifetime and still have much to learn thereafter. Spending hours on end each day and night in front of charts, back-testing, forecasting and creating plans… only to later find yourself readjusting plans because of the unexpected…not fun. Now I’m not saying there aren’t long hours and lots of learning and many charts to map… Certainly not saying jump in without knowledge. But there is the practical aspect. You’re not gonna learn it all in a day (or ever), nor will you become successful or rich in a day. But you can lose it all in a day…or burn out in a day—seen it happen; almost had it happen to me one day, as some of you might recall me mentioning a few months prior.
The reality is that you have to learn when to trade and when to step away. Fact is that most of the day, with relatively few exceptions, you shouldn’t be in the market. Aside from Forex peeps, for the most part you should plan to be active mornings and afternoons leading into the close. Most other times the market is ripe for manipulation and nothing more than noise; so if you’re sitting there staring at a screen, you will inevitably succumb and make stupid trades, bar none.
Just like you shouldn’t have the tube on while trading, get out from in front of your computer when you shouldn’t be trading…period To balance effectiveness against burn out, set a reasonable amount of time daily to do your tradingrelated work—no more than a couple hours. Use this time to do your research, study charts, review the macroeconomic picture, review news accordingly, apprize yourself of important issues or upcoming events (earnings, specific conference, etc.), attend to your P&L, etc.
And leave it at that!!!
If you don’t, you will find yourself sucked in… I’m reformed, so I say this from experience. Trust me, there’s no for reward or special recognition for spending countless waking hours and sleepless nights tethered to the market. Moreover, you lose something that you’re supposedly working to gain—happiness and quality of life.
Bottom line, you have to approach trading like the marathon runner versus the sprinter…pace yourself. The goal is to work the least amount of time and undergo the least amount of frustration while paying the bills, obtaining goals you’ve set and experiencing quality of life…period!
While lots of this seems boring and common sense in nature, the fact is that the vast majority of people who attempt to trade blow out…and the vast majority of those peeps crash due to not exercising common sense and working smart versus just working hard. Do yourself a favor…Work Smart!
Louis entered the biz in the late 80s and spent over a decade working as a trader, instilling him with unique insight into trading and the markets. In 1998 he switched gears to become the group editorial director for a large network of award-winning, trading-focused newsletters. In 2002 he became the founding editor-in-chief for two financial trade magazines—each served approx. 40,000 independent financial advisers nationwide. He’s appeared on business TV, in the business press and on numerous biz-focused radio programs in the past. He writes market commentary and analysis most days and trades on a daily basis.