The Way of the Dollar

2) Don’t be arrogant. When you get arrogant, you forsake risk control.

3) Understand your limitations. (Trade within your capacity).

4) Be your own person. Think against the herd, as they must lose in time.

5) Don’t trade until the opportunity presents itself. Knowing when to stay out is as important as knowing when to be in.

6) Be ready to change your strategy with the environment. (The environment, not your strategy, is the data).

7) Don’t get complacent once you’ve made profits. The danger is you may question what you really want from trading and trigger a self-destruct process in which you wind up losing.

Does he have any final advice? “You have to learn how to lose.” Note that when asked to explain how he had such a big percentage of winning trades, MW replied “Because I have a real fear of markets… which has forced me to hone my timing with great precision… I also don’t lose much on my trades, because I wait for the exact moment.”

Trust your trade, or don’t trade

I think this is the most important rule of all, partly because it’s so difficult to observe.

In the final analysis, confidence is the key characteristic of winners –and it’s probably the key characteristic of those situations where each of us made big individual wins, if you think back. All wizard traders seem to agree that all their money was made in the relatively few trades where they followed their own rules 100%. When all the pieces fitted. On all the rest of their trades taken together –all those trades they couldn’t resist playing even though they were not 100 per centers – they more or less broke even. If wizard traders just break even on their second-line trades, you can see that the rest of us will lose again and again.

Confidence comes to us out of situations where we recognise winning combinations in the data that come to our attention. There is no reason why this data should not come from publications like Currency Bulletin. But what matters is that we should identify with the data, wherever it comes from. And the cases where we have come badly unstuck were usually occasions where we did not identify with the thinking. It didn’t become our own thinking: we just borrowed it.

Imagine that an acquaintance comes up with a trading system that has produced extraordinary results in the past. You trade it. How do you feel

if it comes to show you losses? You will give up pretty soon. Your tolerance level for bad experiences will be very low; whereas if you are following a tested approach in which you have confidence from your own experience, you will tolerate losses, and even persistent losing sequences, without despairing.

Confidence, in short, means knowing you’re going to win. It isn’t a magic quality which once possessed can never be lost. To be sure, regular winners will have an inner conviction that they must win over time, if they play to the rules. This is partly an inherent state of mind and partly the result of long experience of seeing the rules working. But no-one but a fool is convinced they can win just by playing. You win by doing your homework better, following the rules more closely, and acting more consistently than the other players. Winning gives you confidence and confidence helps you win.

That may sound like one of those trite virtuous circles: it’s nice work if you can get it… and if you can get it it’s nice work. But we come back to the rule: “if you can’t trade with confidence, don’t trade”. The closer you get to only trading when you’re confident you’ll win, the higher your win rate and your confidence will be.

This is the positional advantage of investors and speculators, and they must not throw it away. In commodities, as Larry Hite* (in Market Wizards) points out, “the trade” (commercials*) have the advantage of product knowledge; and “the floor*” ( the dealers and locals on the floor of the exchange) has the advantage of speed: you can never be faster than the floor. The speculator doesn’t have the product knowledge or the speed but “he does have the advantage of not having to play. The speculator can choose to only bet when the odds are in his favour. That is an important positional advantage.” If you take only one thing away with from this chapter, let it be this rule.

Confidence means knowing you’ll win, if you obey the rules

Listen to Mark Weinstein, again, explaining his astonishing success rate. “Most people will not wait for the environment to tip itself off. They walk into the forest when it is still dark, while I wait until it gets light. Although the cheetah is the fastest animal in the world and can catch any animal on the plains, it will wait until it is absolutely sure it can catch its prey. It may hide in the bush for a week, waiting for just the right moment. It will wait for a baby antelope, and not just any baby antelope, but preferably one that is also sick or lame. Only then, when there is no chance it can lose its prey, does it attack. That to me is the epitome of professional trading.”

We all know the kind of situation. We diagnose a proposition that fits all our criteria except price and say “if it gets to such and such a price, I’ll buy. But how often do we wait till it gets there, and only trade if it does? There’s a parallel with the greatest of all gambling games, poker. The founder of the Hunt fortune was a renowned poker player. Old father Hunt was able to claim he was the richest man in the world: by all accounts, he got there by backing what he saw as the best bets to the hilt. Gary Bielfeldt, a giant player in the US bond markets who started trading with just $1,000, attributes much of his success to applying the poker mentality he learned from his father to the T-bond futures market. “You don’t just play every hand… you play the good hands and drop out of the poor hands, forfeiting the ante. When you feel the percentages are skewed in your favour – you raise and play that hand to the hilt.” And listen to James Rogers:

Jack Schwager*: “Very few investors have been as successful as you have been over time. What’s the difference?”

James Rogers*: “I don’t play. I just don’t play… It happens all the time. I don’t do anything until all the pieces fit” (my italics).

To summarise, trading with confidence is to do with having a method which you have proved yourself, and which you know will win over time if you follow it consistently. That means being able to recognise the conditions which allow you to trade, and only trading when they are all present. This is comparatively easy with hindsight: when we’re actually there, we can see when all the pieces fit. But beforehand, we don’t know that all the pieces are going to fit: so we trade because we’re impatient and fear that this maybe the best we’ll get. Well, somehow we just have to get to be patient. Let’s face it, it calls for great discipline* .

It’s OK to lose

Peter Steidlmayer*, the well-known trader and market analyst, has made a nice analogy between futures trading and golf. Golf players –and spectators –are familiar with the phenomenon of the golfer who is unbeatable from tee to green, but falls to pieces when it comes to putting. What happens is that on the green, the subject is assailed by fear of failure. Steidlmayer contrasts the great Jack Nicklaus whom he holds up as a model for traders. First, Nicklaus was selective about the number of tournaments he played in. Second, “he prepares himself for each one so that he’s not mentally worn out. Next “he doesn’t shoot 64, then 78. He’s consistent. He shoots 70, 69, 71… he’s playing within his capabilities. He doesn’t try to kill each shot because he knows consistency is what counts.”

Finally, “unlike most traders, he doesn’t try to predict where his shot is going to land. He doesn’t care where it lands, because wherever it goes, he’s going to handle it. He doesn’t worry about it… He’s got confidence that he can handle the situation, no matter what happens”. The same thing could be said for some of the greatest