I always wanted to do some mailbag type posts. It’s an easy way to knock down some writing. I am hopeful I can write a post once a week. Send any questions to firstname.lastname@example.org or just leave them in the comments and I’ll find it.
- What are some of the biggest weaknesses you see looking at today’s traders?
Everything is relative and case-dependent. I’m not running a prop desk or running a chatroom so I don’t know if I can address everything as they all come down to a handful of general problems.
One trader I know has backtesting issues and he’s blind to it. He’s constantly coming up with new systems for redundant concepts and every little tweak seems designed for perfection and leads to small sample sizes and ineffective forward testing. I think he’s searching for perfection when there is none.
One trader I know is too impulsive with trading size. He’s a trader whose made 8-figure amounts. He just gets caught up in the tape, gets emotional seeing short-term price action moves, and he piles in. It hasn’t been working. I have the same issue myself sometimes.
For anyone who has never sniffed sustained profitability… I think the most important thing is a strategy you believe in. Ask yourself if you have that box checked off. A lot of potential traders drop out of the game simply because they never reach this first fundamental stage. If it’s a discretionary trading strategy, you must know at least one trader succeeding with a consistent long-term track record using that strategy. If it’s a mechanical system, then you need robust, back-tested results showing a substantial long-term edge. That’s all you need, then you have to go out and get the money. You can’t switch around, you can’t make excuses.
2. What are some strengths you see in other traders that you envy?
Mental toughness. I’m currently reading the Mental Game of Poker and one of the first points made early on is that the mental game is a talent. Some people simply have a better aptitude or temperament for the game before ever starting out. I have to agree. I’m a bit on the fragile side. I think I’m mentally tougher than I give myself credit for but in the end I always thought mental fortitude has kept me back from achieving “Market Wizard” level gains. I am the ultimate frontrunner — I have to be consistently winning and near my high watermark or I feel like I’m going to fall apart and die. Heck I’m on a slightly-larger-than-median drawdown right now and it hurts to think about it. Others can dig bigger holes and then trade like nothing is wrong.
Risk tolerance — not just size but market exposure and trade diversity. I trade a few things at a time, day to day, and I want to close them out quickly. I am more than happy to close out risk. I cannot fathom trading an entire portfolio with 6-12 positions at the moment. I think it would just cause me to lose all my sleep and all my hair. Some people handle the stress better. Some people can risk a % amount as their portfolio continues to grow exponentially while I notice I have plateaued at a gross dollar amount that would still be a small percentage of my portfolio. Some people are just fucking aliens when it comes to risk tolerance and I’ve stopped obsessing over why I’m not one of them. It’s fine to be a mere human.
3. What trading books do you recommend?
I believe in the beginning, your initial interest in trading should be taken with a grain of salt. I don’t think you should be looking for a specific strategy in your reading. You might be inclined to study about stocks and their long-term fundamentals then 6 months later you’ll engage with something completely different like trading oil futures based on economic events. That’s how my trading development went. I studied long-term investing for about 6 months, then growth investing for another 3 months, then finally decided to try technical trading. So I believe in broad perspectives and I’m a big fan of interview series or profiling type books where you can get insight from all different kinds of market participants.
I want to say this about your reading: You don’t want to feel like you’re reading textbooks for a exam. You want to be in awe at the ingenuinity. The calamity and human folly. The up and down and the back and forth. The way things constantly repeat themselvse through out history. When you’re reading about the best traders ever, you need to be able to see yourself in the same shoes. Otherwise quit and do something else.
Interview/Profile style books
- Market Wizards series, all five (OG, New, Stock Market, Hedge Fund, Unknown)
- Traders of the New Era
- More Money than God
- Momo Traders
- Inside the House of Money
- The Quants
- Big Mistakes : The Best Investors and their Worst Investments
- The Stocktwits Edge
I specifically want to list all the interview segments that hit so hard I can recall them instantly.
- Druckenmiller in Mistakes — when a legend like Druck buys the absolute top and loses billions and then says he was just super emotional when he chased it–you know it can happen to anyone. Shit’s real.
- Paul Tudor Jones in the OG Wizards — he’s the prototype of a certain type of trader — aggressive, instinctive, competitive as fuck
- Ed Seykota in the OG Wizards— “Everyone gets what they want from the market.” Win or lose. Never fails to be true. I feel like this is the type of “nothing” statement that makes more and more sense the longer your trade.
- William Eckhardt in New Wizards — a must read for systems traders about the pitfalls of optimization and curve-fitting
- Jimmy Balodimas in Hedge Fund Wizards — the reckless prop trader who steps in front of freight trains, takes pain, and seemingly breaks all the rules
- Gregg Sciabica aka lx21 in Momo — sometimes the biggest wins come after the biggest losses–this is especially true shorting pumps/bubbles. Internalizing this lesson has led to some of my most dramatic trading moments (mostly good, a little bit of bad).
In the same spirit, I also like Biographies:
- The Man Who Solved the Market (Jim Simons)
- A Man for All Markets (Ed Thorpe)
- Principles (Ray Dalio)
- Black Edge (as close to a Steve Cohen biography as I can find)
- Any Soros or Buffett biography, they’re two of the GOATs in our profession
For traders with more experience looking to sharpen their Mental Game:
- The Daily Trading Coach
- Enhancing Trader Performance
- The Mental Game of Trading
- Trading in the Zone
For anyone with just a vague interest in markets and finance and simply wanting to develop their curiosity:
- Fooled by Randomness
- The Black Swan
- Fortune’s Formula
- Liar’s Poker
- The Big Short
- Dark Pools
- When Genius Failed
4. What are some goals do you have in 1/5/10 years? What are you doing to maintain your level of game so it doesn’t deterioriate?
These are two separate questions I’m combining. Here’s my view on setting goals: there’s absolutely no point in setting goals unless there’s real emotional charge and sincerity behind them. Goals are about change and you have to want to change. You have to be obsessed with achieving this goal. Otherwise they are just empty words on a piece of paper or your Notes app.
Here are my goals for trading: None. I have some fleeting wants and desires that float around my mind every now and then. Of course I want to trade more size and make more money. Of course I want to avoid these certain pitfalls I keep walking into. But actual goals to have the guts to write down and look at every day and go out and achieve–nope, I don’t have any. I can barely bring myself to record a daily trading journal and to review charts, which were two things I once considered sacrosanct to my trading process. That’s the answer to the second question–I am doing next to nothing maintain my level of trading.
Maybe the closest thing I can come up with a goal is to want to have goals again, in other words–to actually give a shit about trading. I want to believe I can achieve great things again. Right now it’s just a job for money. It’s been tremendously difficult finding that fire and motivation. Part of my desire to blog again is retrace my steps a little and wonder how I got here. I’ll let you know if/when I find it again.
As far as goals outside of trading, I’ll keep it short and leave out the specifics:
- Be a great husband and father
- Improve as a pool player
- Sleep better
5. Is trading psychology important?
The simple answer is yes. The slightly more naunced answer is that it’s far more important for discretionary “trade by the seat of their pants” traders than it is for mechanical, systems traders who are creating algorithms and black and white entry signals. It’s important for the quants too but in a different way I think. I am the discretionary trader so I will speak mostly from that vantage point.
There’s a lot of obvious reasons why trading psychology is important. You need to be focused, yeah. You don’t want to push the sell button instead the buy button because you zoned out. You need to avoid going on tilt and punting all your money when pissed the fuck off, yep absolutely. You have to be ready to take a trade rather than get scared because all you’re thinking about is losing and how everything can go wrong–yep, totally understand.
Here’s one of the more less obvious reasons: Instinct. Maybe the most important asset an experienced disretionary trader can have is his own instinct. It’s the ability to listen within. It isn’t fear, it isn’t panic, it isn’t greed or excessive wanting, it’s a quiet knowing type of feeling.
This post about George Soros kind of sticks with me. Yeah the guy wrote a big fat book about his so-called process aka “Reflexivity” but at the end of the day, all the most well-reasoned macro thesis are hit and miss. What seperates him from the rest is instinct. Just get out when your back hurts and then later you see the position would have gone against you.
Do you need instinct to be a consistently, profitable trader making an above average living? No, I don’t think so. Your playbook will work itself out in the long-run as long as there’s substantial edge, even past the common human mistakes you’ll inevitably make. But if we’re having a discussion about greatness… to be the best of best, truly world class discretionary trader, you have to be able to trust and listen your instincts. Have a playbook, have a process, have rules… and know when to throw all of it out the window.
Personally, I have had plenty of moments where the playbook gave me the green light on a trade to risk as much as I wanted. I sat in the position… I sat and sat and sat, and I absolutely hated it and I took it off before my stops were triggered. And a short awhile later, the stock would absolute blast off against my bias and I breathed a sigh of relief that I listened to that little voice inside.
Two of my best long-term exits in 2022 came from nothing more than just instinct. I am almost entirely a short-term trader so I have no “system” for long-term positions, there’s no carefully backtested exit signal. The responsibility is entirely on my own whim to get in and out. One position I held for a year and change and another I held for six years. I absolutely did not want to sell either position but I did it anyway, just after reflecting on a few quiet thoughts I had. I just had a feeling 2022 was going to be a bad year for certain asset classes. At the end of 2022, both assets declined 60% and 70% from my sell price, respectively.
Is it easy to tell when it’s fear or denial or stubborness versus real instinct or conviction that you need to listen to? Often, it is not. And after you solve fundamental problems like tilt or trigger fear or lack of discipline, that’s when the work really starts and it never ends.
To be continued
I’m going to keep answering some questions and I have barely edited this post but sometimes I just have an itch to publish before I go off to do something else and this post will likely be added upon/re-edited.