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The Pro’s Process - Michael Bigger

I am very excited to be able to offer the thirteenth in my series of posts asking Pro Traders about their psychological processes.  Delving a little into how it feels to them when trading.  The good and the bad.  How this has changed over time and what preparation they do mentally for performing as a trader.

One of the key features for me was that I wanted traders with experience who have been through the mill over the years and of course those who were kind enough to broach this subject publicly.  This I hope gives developing traders more to learn from.  

I’m very fortunate to have a great line up and this week is: 

Trader: Michael Bigger

How long have you been trading?

I started on Wall St in 1992. I was trading the equity derivatives book for Citibank Canada. I stayed in Canada for 2 years and then I moved to New York. Before that I was trading my own account for another 5 to 6 years.

That’s 20-25 plus years’ experience. What style of trading or investing would you say you practice?

Everything.

I notice on your website that you are not just a trader but you’re also active in investing as well.

We trade, we invest, etc….. trading is about making money and opportunities are fleeting and they present themselves in different shapes and at different times. We do not have blinders on that say, oh you know, that we have to just trade value or something like that. We don’t look at the world in that fashion. Our model is that, and maybe we draw it from physics, that we are basically trading potential energy. That is basically what Buffet does. Buffet calculates the value of a company, comes up with an intrinsic value, and, if it’s below and if he likes the model of the company and stuff like that he goes ahead and buys it. So basically what he does is that he exploits a level of energy between its intrinsic value and the stock price. We do that in terms of value, in terms of statistical arbitrage, etc. We are always thinking about exploiting pockets of valuation. If we buy something, if it’s statistical, what else can we sell against it. If we buy a stock, what’s its intrinsic value, can we hedge it with the S&P. We try to rotate our inventory and do things of that nature.

Are you also market agnostic? Do you trade futures and stocks or are you stock market focused?

Yeah, I used to run big equity books so we basically do everything, but, we don’t touch commodities that much except for trading them with ETF’s.

So getting into the reality of when you are actually trading; how do you feel when a trade goes against you?

That’s a very good question. You know it doesn’t affect me like it would affect a lot of other traders. I’m not right or wrong because in the next 5 minutes something goes against me. We try to get ourselves in situations where if it goes against us we still feel good about the situation.

To give you an example: let’s say we have a stop, we would never have a stop that is so close to where the market is so that we would get pushed out of the situation. Usually we are in a situation where we are very confident of our facts and we let our positions run and it’s fine. We run big portfolios, they’re diversified so we’re not neurotic about a position in particular. We bought a lot American Apparel which is in a distressed situation, it went to 1.70 came back down to 90 cents, This reversal doesn’t affect me one bit. The thesis is still intact. If you are driven by the stock price you are going to go crazy.

Does this alter at all when you have your trading or your investing mindset in place? Obviously one has a longer term time frame and different parameters that you are thinking about. Does that effect your emotional feelings?

Aren’t they the same? We are looking at potential energy in situations. Whether it be a short term position or a long term position we don’t look at the world that way. We look at the world in terms of potential energy and where can we extract the energy out of the system. We don’t categorize in terms of ‘are we doing value investing here or there’, in a sense a little bit, but overall that is not what we are trying to do.

I think that makes a lot of sense.

We have backgrounds in physics. We have mathematicians working with us and PHD’s and so we look at the world from a physics kind of standpoint and where the energy is in the system and how we can exploit it. And you know what, I don’t care what category other people put on how things are trading, they can have their own stuff, we look at the world our own way and we’re very happy with that. It’s a little bit peculiar but that’s just the way we look at the world. So if we are valuing situations, we get those values, we look at the facts and act accordingly. And if we have to get out of a position because we are wrong we just do it but it’s never so related because the price went down or it goes up or goes against us or stuff like that.

I think that offers a very interesting perspective – especially the physics and the energy direction side of things. There is the flip side to the question about how you feel when trades or investments goes for you? Because obviously emotions are at play to some degree. How does that differ?

We try not to get influenced by it but you know mentally you are always influenced a little bit by your position especially when you have a big position on. If it goes in our favor you know we can be, maybe, a little overconfident but we know we have to manage that.

I’ll give you an example, when we traded CROC’s we bought the stock at about 90 cents it went up to 32 and then we sold a little bit, but it was just a tiny bit on the way up, and then it came down to 12 dollars. We have a very long term thesis on that company so we wish we would have sold more but we’re happy with the thesis and so it all really depends on your time horizon, it depends what you own and sometimes you wish you had sold more but that is easy to say when the stock price is down.

I could have done the same thing with Amazon when it went from 100 bucks to 34 bucks in 2008. We had that big gap down but man you look at the stock price now. On American Apparel we have a huge position in that name and we think the company is going to earn its stock price in basically 5-7 years from now so that puts the stock to 10-15 dollars if it doesn’t go bankrupt and bankruptcy is a potential. We have our own odds on that. Does it matter if the stock goes to zero? It doesn’t. I mean we are going to lose money but in terms of how you look at it right now and the probabilities and stuff like that you know what your bet is and zero is part of the scenario.

So Michael your very scientific based approach and viewpoint means that you never let your emotions override a thesis that you have?

Oh….. I don’t know. We’re very emotional. I’m a very emotional guy but I know what I’m dealing with. Like in the case of American Apparel the reality is that it could go to zero and it has potential of 10 to 15 dollars so we know that probability, so of course I am going to be emotional if we lose all that money and it goes to zero, of course, but that doesn’t change the nature of the bet that we made. I guess we are a slave to that bet unless the facts change for some crazy reason, which can happen too, and then we would unwind. But we’re emotional.

Michael I notice reading your bio you come from a very scientific background and obviously you have been speaking about science and physics with regards to your company’s way of trading but have your feelings changed over the course of your trading career or have you always had this sort of background where the emotions aren’t going to effect your models?

Well I think one of the best lessons I have learned was when I was in New York trading the single stock derivatives book, it was never my calling to say ‘oh Microsoft comes out today they want to sell say a million put on the stock and hey Michael do you want to buy them or……’ you have no choice. You have a market to make, you have a market for size to make, and, then you make your market. If you get hit because the companies sell puts now you own like a few million puts on Microsoft, I’m just giving you an example, or Dell or whatever the companies were in those days, so you have a huge position. So you have this huge position and most of the time you don’t like what you have because it’s big and it’s very hard to get out of it. So you get very very good when you have a big position like that, you get very very good at working your butt off and going to the market and trying to find other things you can sell against it or buy… you know what you need to do to reduce the overall exposure. So when you run big books like that you get very very good at dealing with having a position and then starting to work your way out of it or reducing the risk and things of that nature and that’s basically how we approach our trading. We have a lot of positions and we are trying to move value from one to the other. So for us it’s more about that process, exploiting value and sometimes not having the stuff you want to have but working very hard to exploit that potential of energy. It is very hard to explain in words but if you get dropped a massive position and you have to deal with it, I tell you, you learn very quickly. And you know the charts don’t matter and sometimes the volatility doesn’t matter if you have a huge position what matters is how the heck can I trade out of this, how can I find other opportunities to trade against it, if you buy something that is quite cheap or fair value what can you sell… this is a very different discussion to what many talk about like the chart looks good aghhh come on guys.

With a lot of that stuff, particularly having very large positions, obviously your internal system or your emotional system gets bombarded by it. Do you have any practices that you do away from the office or the trading screen to help handle things mentally or emotionally?

Well I play hockey and I do a lot of kite boarding.

Michael do you find that actually gives you a balance to your market operation? A mental or emotional balance?

Yeah, kind of. Well hockey is more like hustling. You have to hustle when you play hockey so it’s a little bit like trading as you have to make things happen, you have to produce. So that doesn’t get me too much away from the trading mental framework. The kite boarding is definitely more meditative: more of a meditation or relaxation as it is just such a totally different atmosphere.

Have you always had some sort of approach to balance yourself personally away from the markets? What about when you were back on Wall St?

Yes and no. I guess not really. You know we’re thriving in that commotion of trading the market and just going around and finding opportunities. So that is almost like a mediation too although it doesn’t sound like it. If you like it so much, and are passionate about what you do, for me it is like playing a hockey game you know?

Do you feel you are naturally attuned to the market game and the involvement in it? Is it something that just came naturally to you?

Absolutely. Another way to explain it is that when I came to Wall St, when they moved me from Montreal to New York, I asked the big big boss of the trading floor “What the heck, why did you guys hire me? There are so many people in the US etc?”. I mean there were pretty big books back then and 500 traders on the floor and I was just always puzzled why I was given that book in New York. Junaid Rubani told me how to play the game: “Look you’re a street fighter. You know we go into a fight and you go in there and you make things happen. You hustle, you make plays happen. That’s what it is.” You see it’s never the same and there are different fights that you have to fight. You have to create things. You have to make things happen on your own without resources. It’s like entrepreneurs… that’s trading. I think what he said captures the essence of trading, which is a little confusing for me as people approach trading saying it’s stop losses, and, set-ups and all that stuff. For me it’s not all that stuff. It’s more like, you know, walking down the street and getting attacked and you have to defend yourself. It’s a totally different thing. The last two weeks with the fiscal cliff made it a totally different ball game. You have to readjust how you see the market and do it very quickly.

I find it very interesting with your comments about a street fight and having to defend yourself as well as the context of the recent fiscal cliff. Do you find trading is more about having a good defense rather than an offense?

I think it is having a killer offense when people are panicking. That’s where the street fighting comes from. During the fiscal cliff episode when people start shaking you have to go into the market and if they need liquidity you have to provide it. That’s basically how I trade. What the charts look like and all that stuff is irrelevant. The money you take is the money you get from other peoples mistakes in one way or another; because they are mis-pricing securities. So when you sense that the market is nervous and is mis-pricing you have to go in there. You can’t wait for the sun to show up because it doesn’t work that way. You have to go in there and provide liquidity and extract money out of the system. That’s how we look at things.

This is brilliant stuff Michael. I am conscious though not to take too much of your time so let’s wrap up with: If you could give one piece of advice, with all of your years in the game street fighting in the markets, to aspiring traders about emotionally handling the market what would it be?

I think, maybe it’s going to surprise you, but I think if you can have a little bit of the emotion that the market has and be able to step out of it and look at yourself and how your emotional in that situation, it gives you a good read for how the market participants are acting. So it’s almost like you need to be emotional to get the vibe of the market and how fearful people are and then you are in a much better situation to exploit that. It’s almost like getting the good read on the emotional state of the market and then overriding your own emotion to take the proper position which is never easy. I have quite a bit of experience in the market and even during that fiscal cliff period when I had to buy futures and then it goes down against you, you get emotional and others are emotional but no one wants to get in there, just a few people want to go in there and buy the market. So it is a case of how do you go in there and override that emotion. It’s important to have that emotion because it gives you a good read on the market but you need to be able to override it and then just go and be confident in yourself. For me that’s how I approach it. I think this notion that you have to be a rational agent is rubbish.

The idea that you are some kind of Doctor Spock or Data from Star Trek with no emotions and very passive?

Yeah it doesn’t work that way! It’s impossible. I mean we’re people on that mission so we shouldn’t be too emotional.

So despite the fact that you’re a scientist and most of those that work for you are scientists you can’t take out the human emotion side of the market?

No you can’t take out the human factor. We have a little model that is called the ‘Levy flight’, you can search it on my blog as we wrote about it, it’s basically a mathematical model that represents how animals go and search for food and their random process that they use to gather food depending on the conditions of the environment. The model accounts for that and when we think about this we think about the news and journalists and the media. The media and those people are always looking for food as they have businesses to feed so they create a lot of anxiety etc and the Levy Flight is just a great model to use to visualize how things evolve in the media. Then you can look at that and then you can spot when the media moves, when the media goes totally all in, like with the Fiscal Cliff. That’s when you want to look to get involved as that’s when there are tremendous opportunities. You see that is one way we use science to understand emotion. We are all animals with that kind of instinct but we just try to use mathematics to model some of those things.

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I’d like to thank Michael Bigger for sharing about the way he tackles the market from an emotional / mental side of things and for his willingness to allow me to post this as a free resource in the hope that traders who have been in the market for less time or are thinking of entering can perhaps pick up some A-HA’s.

If you are interested in finding more out about Michael Bigger you can find him:

On twitter: @biggercapital

At his blog: http://biggercapital.squarespace.com/

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Previously in the series:

Charles Kirk - read it…..here

Matt Davio - read it…..here

David Blair - read it….here

Mike Bellafiore - read it….here

Mark Holstead - read it ….here

Brian Shannon - read it…. here

Mike Dever - read it…. here

Anthony Crudele - read it… here 

Derek Hernquist - read it … here

Ivan Hoff - read it… here

Brian Lund - read it… here

Greg Harmon - read it… here

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Disclaimer: Embrace The Trend / Richard Chignell does not provide investment, financial or product advice.  I trade my own capital exclusively.  I eat my own cooking as should you.  If you are going to trade / invest it’s at your own risk and you must take responsibility for your actions.

You Can’t Have An Advantage When Everyone Has The Same Information. Rubbish! Read why:

I often hear something like this in general conversations about the market: “everyone has the same information nowadays so how can you have an advantage”.

Let’s stick with this premise as being completely true and not think about those who may have access to specialised information that is not so readily available.  OK.

One of the main reason that this argument falls on its face is that not everyone uses the same information in the same way. 

I like simple real world common sense and so I’ll try and keep this firmly grounded in that.

My first example to try and debunk this idea is from the non trading world:

When I was a headhunter / recruiter the general way the business worked was that your company subscribed to job boards where people looking for new roles or interested in their options posted their most up to date CV creating a CV database.  In turn the job boards had a front end where jobs could be advertised by both companies and recruiters.

A decent size recruitment firm had access to the exact same database of CV’s and resources for advertising as everyone else.  So they had access to the same number of potential candidates to call and put forward for jobs they were recruiting for on behalf of companies and also the same methods for advertising for the companies they were working for.

However, results varied greatly between not only recruitment companies but also within companies.  I saw first hand some companies thriving whilst others went out of business during exactly the same period of time.  Equally within the firm I saw consultants (read salesmen) excelling and others being ‘let go’ for under-performance.

Those who make the argument that since everyone has the same information there is no advantage to be gained over the competition in the market I think have their eyes firmly closed.

Nowadays at a low entry point you can have access to live market data, excellent electronic execution platforms, training, community resources to bounce ideas off like forums or StockTwits etc, fundamental data…….. and results vary wildly.

Just like my recruitment example with the same access to market information you have traders with amazing performance, traders just about scraping by, and those that have blown their accounts out (and many more permeations in between).

Nothing beats having heavyweights weighing in to support your case and I have a video for you where Jack Schwager (of Market Wizards fame) talks about this in Michael Martin’s recent interview on his new book Market Sense and Nonsense: How the Markets Really Work (and How They Don’t). This argument, that if everyone has the same information no one can have an edge is planted in the Efficient Market Hypothesis and Jack from around the 06:00 mark clearly makes the case that this argument is flawed (click MartinKronicle interview with Jack Schwager). 

I know this post doesn’t help you get your advantage over the other participants in the market (for some clues on that you may look at some of my other posts on here) but I hope it does go towards closing the case that with the same information as everyone else you can’t be a winner.

For me it’s a case of real world common sense closing the case. 

Now back to trading.

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Disclaimer: Embrace The Trend / Richard Chignell does not provide investment, financial or product advice.  I trade my own capital exclusively.  I eat my own cooking as should you.  If you are going to trade / invest it’s at your own risk and you must take responsibility for your actions.

I Want To Help You By Giving You The No. 1 Stock Market Secret To Wealth Absolutely Free. Click the link:

You have no control over the outcome of your trades or investments.

Take it from me, right from the horse’s mouth, there is absolutely nothing you can do to control the outcome once you have put a trade on.

I know from talking to so many people now, that this is something that you don’t like.  It makes you feel all uncertain.

Well the unfortunate reality is that that is simply trading / investing.  If you are looking for certainty then you are in the wrong place.  Bernard Madoff gave you certainty and I hope you know how that ended.

I would like better for you and so I am going to save you a few miles of your journey by telling you that you have to embrace uncertainty.  By accepting that at the start you can begin what will still be a long journey but at least this time you will be heading in the right direction.

But don’t you worry, I am not going to leave you hanging.  I am going to let you into yet another secret (and not charge you even one cent for either of these secrets to stock market riches as I’m nice like that).

You have 100% control over how you start.

Starting the whole trade process is completely within your control.

How it all works out once you are in the market is out of your control.

Can you except that?

Are you willing to except that?

Trust me once you are and you start looking at ways of only entering the market when the conditions are absolutely optimum for you and managing your risk before you enter - you will be well on your way to being many times better at this whole endeavour than you have been up until this point. 

And just for the record: I know you may read this and think that it sounds so straight forward.  That you get it.  That I am teaching you to ‘suck eggs’.  Well, I am here to tell you that there is a ginormous difference between intellectually ‘getting it’ and emotionally ‘getting it’.  The practice of being able to negotiate this world of uncertainty in the trading world separates the boys from the men.  So don’t brush this off lightly.

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Disclaimer: Embrace The Trend / Richard Chignell does not provide investment, financial or product advice.  I trade my own capital exclusively.  I eat my own cooking as should you.  If you are going to trade / invest it’s at your own risk and you must take responsibility for your actions.

Got A Sore Ass From Trading? There Is A Reason And A Cure

I accidentally seem to have developed a theme this week on the importance of slowing down.  So I am going to roll with it and suggest that slowing down and reflecting could be the very best thing you do for you trading. 

Teddy Roosevelt apparently said:

"If you could kick the person in the pants responsible for most of your trouble, you wouldn’t sit for a month.” 

……and he was 100% correct.

One of the, if not the, most important things in trading is to take full responsibility for your outcomes.

You put the trade on.  No one forced you.  You should have calculated the risk you were willing to take if the trade went against you.  If you are now crying about it you are not in line with your system.

Traders who enter into personal stories about how the market is ‘against them’ or ‘should of done this’ or ‘should of done that’ are missing the point. 

If you are feeling pain and like you are being battered and bruised by the market the first place you should look is in the mirror.

As difficult as it can be to take responsibility for your losses it’s fully necessary.  If you don’t they will spiral out of control.

Once you have realized how you are getting in your own way, although often a painful experience, you can start working out a method of managing your risk in the market that feels more comfortable and is in line with expected parameters for you.

You will then be a lot closer to being comfortable sitting down at your trading computer and putting your trades on as well as taking your losses. 

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Dare I lead you to think that I talk about asses a lot on this blog but you may also like a former post of mine featuring, well, asses: Grinding It Out On My Leatherass a post on lessons from the movie Rounders.

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Disclaimer: Embrace The Trend / Richard Chignell does not provide investment, financial or product advice.  I trade my own capital exclusively.  I eat my own cooking as should you.  If you are going to trade / invest it’s at your own risk and you must take responsibility for your actions.

Have You Thought of Slowing Your Trading Down?

Have you thought about slowing down?

I recently wrote about the Tortoise and The Hare in relation to trading and I’d like to elaborate in a bit of a list form on that from personal stance: 

I was initially drawn to day trading.  I started trading off the 2 minute chart for entries, 10 minute for guidance, and 30 min chart for trend. 

It worked.

Yet, I started to slow down.  

Over time I moved to 10 minute for fine tuning my entry which was really based on the 30 minute bar, using the 240 minute for guidance and the daily for trend.

It also worked.

Yet, I’ve slowed down even more. 

Why?  I’m not completely clear on that yet but I have a lot of perhaps’s

=> Perhaps in part this was due to my idols and mentors trading using end of day date (EOD) and finding it hard to resist the internal dialogue of a slightly guilty nature - like day trading was a bit of a guilty pleasure.

=> Perhaps it was because when day trading you pay a great deal to your broker in the way of commissions compared to a slower approach.  I dislike that feeling.

=> Perhaps it’s because I like to hold trades and allow them to work.  I do that naturally when day trading yet capturing a trend on the daily time frame even with just a single contract can be very rewarding.

=> Perhaps it’s because of a belief that the real money is made by building a position in a trending market and sitting on your hands whilst it does it’s brick work. (If you don’t agree read: Reminiscences of a Stock Operator) 

=> Perhaps it’s because the weekly or daily data is ‘truer’.  It’s amazing how much noise and churn there can be when you are looking at short time frame bars which as soon as you flick out to the daily chart just disappears.  The cheeky HFT machines are also not a real consideration. 

=> Perhaps it’s because I’ve been slowing down myself with all my work on Tai Chi, Yoga, Meditation, Minimalism etc.

=> Perhaps it’s because I like being able to make decisions under more controlled conditions.  More controlled decisions = better decisions.  Following a plan is much easier when there is not a ticking clock like there is with shorter term time frames. 

=> Perhaps it’s because I realized that staring at the screen doesn’t necessarily increase my profitability.

=> Perhaps it’s because with the reduced screen time I can spend time studying things that I really want to (both directly and indirectly related to trading).  As well as doing things that I didn’t have time for before.  An example is the number of market related writing projects I’m now being able to enjoy).

=> Perhaps it’s because I realized that short time frame trading is emotionally draining for me and that there could be an unwanted toll for this down the line. 

=> Certainly it’s less stressful for me personally and that has a knock on effect to all areas of life.

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Now you have to do whatever feels good for you.  I suspect that can morph over a career as well.  I know that you only start to find what is right for you by actually exposing yourself to the process and the risk - otherwise it remains only acadmeic.  I am also not saying that end of day is the be all and end all.  

I am however suggesting that slowing down, whatever that means to you, may be beneficial and worth some investigation. 

Maybe investigate how your approach would vary and in what ways it may be better if you swap from execution off a 5 minute chart to a 10 minute chart, or a 10 minute to a 30 minute, or maybe go wild and see what would happen if you went end of day. 

Have a hypothesis and test it.  There’s a good market scientist. 

(NB: I’m not saying that all my trading will remain EOD ad infinitum or that I only look at charts once a day.  I am saying that for anything short of a couple of hours bar I will look to develop a trading system that I can automate rather than use up the mental / emotional energy myself)

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Disclaimer: Embrace The Trend / Richard Chignell does not provide investment, financial or product advice.  I trade my own capital exclusively.  I eat my own cooking as should you.  If you are going to trade / invest it’s at your own risk and you must take responsibility for your actions.

Two mistakes I made when finding a mentor

Finding a mentor is important in life but no more so than in trading.  Trading is an extremely hard profession and one that arguably many who set down the path of becoming a trader are not fully aware of.

Failure rates as a trader are very high.  You hear some quite shocking statistics over and over again.  80-90% of traders fail!  Nice huh?  Are you still sure that you want to trade?

One thing you have to remember is that you are likely considering trading or starting trading all on your own.  If you weren’t, considering a mentor wouldn’t be such a pressing concern, after all, most companies have spent a fair amount of time working out how they can leverage the more experienced members experience in order to bring along the newest employees in an ideal manner.  If you join a prop firm like SMB they have this down to a fine art.  But YOU probably are going to go it alone.

As such a real mentor is key to your development.

Adam Jowett wrote an excellent post the other day with 10 tips for picking an awesome trading mentor and I think it’s such a good post that you should click on over and read it.

I made two mistakes early on that I’ll tell you about so that you can avoid them.  In fact they are kind of linked to a degree. 

The first was that my mentor was a trading systems guy.  We are talking hardcore coding ability, design your own testing platform, design automated trading systems…. happy as a pig in the mud when working on getting the intricacies of a trading plan into computer code.

That’s just not me.  As it turns out I love designing trading systems, even testing them to see how effective they are but I am my happiest when I am in the creative design stage or actual execution stage.  I learnt a great deal from spending time with this trader but I didn’t realise, as like most people starting out, I didn’t know enough to know that we were a poor fit.

The second major thing was that we didn’t really cover something pretty integral to this whole discussion.  I / we didn’t express clearly that we were entering into a mentor / mentee relationship.  This is so obvious now but there was probably a lot of subtle miscommunication as I was hoping for a mentor and this trader was being more of a nice bloke or friend providing graciously a helping hand to another trader.

As Adam says in his article find a mentor who clicks with you, who has the war stories, and be clear that you would like him or her to mentor you and offer to pay for it.

You can find a great mentor for free but undoubtedly in life you often get what you pay for.  Another options you could consider is to find a way to help your mentor and be a trader… set up a trade that will get you some mentoring in return for what you offer.  After all traders trade.  You can play on that. 

Trading isn’t easy and whilst fierce independence is a fairly common trait for a trader, utilising social media for a virtual support network, and taking action in finding a mentor, is a very powerful step towards increasing your odds of being successful. 

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Disclaimer: Embrace The Trend / Richard Chignell does not provide investment, financial or product advice.  I trade my own capital exclusively.  I eat my own cooking as should you.  If you are going to trade / invest it’s at your own risk and you must take responsibility for your actions.

Commodities the things of life

We need these essentials of life as well as the commodities futures markets to set and regulate prices.  If it wasn’t for these markets the things we need in life would often be expensive and scarce.

(Image thanks)

Recently I’ve been working very hard at improving my writing.  Specifically my writing in the commodity space.  

I am thoroughly enjoying it and it is helping me further develop my understanding of the world’s markets.  I also find putting what I do know already and continue to learn into words helps me as well as I hope it helps others. 

I prefer commodities to currencies and equities.  The major reason for this is actually quite simple.  Commodities are real, as in actual things you can touch, feel, and indeed likely use on a daily basis.  

While they are not totally straight forward I feel that I stand a chance of understanding them in comparison to the complexities that affect currencies and the murky waters of companies accounting and reporting.  After all soy-beans are soy-beans, copper is copper and gold, well, gold.  These things of life are what they are.  It is the forces of supply and demand at their purest as well as desire for ownership that effect their price.

(Image thanks)

Maybe I am odd, I think many might think I am, but I actually get a kick out of learning about real products, the people involved in their production and distribution, the many players in the market space and there effect on companies that rely on them.

For me there is plenty of complexity to get an intellectual buzz from studying and learning about them.

Every morning you get up and use many of the things I’m learning how to write on.  Let me illustrate with a little story and include the commodity contract codes after each use (where possible I have used $ and _F around the standard codes which allows you to look at the community posts on http://stocktwits.com/):

You wake up and likely stumble into the kitchen and make yourself a cup of coffee ($KC_F).  Perhaps you like espresso and you make it the real way on the stove ($KC_F, $NG_F).  You perform your morning ablutions, dress for work put on your shoes ($CT_F, wool is traded on the ASX, rubber on the SGX).  You drink your coffee black with a spoon of sugar ($SB_F) whilst you get the rest of your breakfast ready.  At breakfast perhaps you have cereal ($ZC_F, $ZW_F) a glass of orange juice ($OJ_F).  You leave your place and get into the car and drive on your way to work (on SGX, $RB_F, $AL_F).  On the drive you stop at a convenience store and pick up a newspaper and a chocolate bar for your lunch break ($LB_F, $CC_F, DC). You sit down at your desk ($LB_F)…. I’ll stop there to avoid redundancy and as I suspect I got my point across.

(Image thanks)

I have chosen to specialise in commodities but there are two caveats to this:  

1) It doesn’t mean I am uninterested in companies.  Rather I find an understanding of companies that utilise commodities and the way this effects their business interesting and my way to get a view into the workings of the economy (an example of this can be seen in my recent post on Smithfield Foods here).

2) I am a trader who is interested in the fundamentals not a fundamentalist who invests (read why I don’t invest here).  I need to be explicitly clear though that I am almost 100% technical in my trading.  The fundamental understanding and views I have of the commodity market have very little effect on how I interface with the market.

All this being said I enjoy the intellectual pursuit of knowledge, understanding and writing on commodities.  I am grateful for the chance to write and be read on the subject and if you would like to read more you can find many of my posts at http://martinkronicle.com/

I will also start to do a link to my writing over there, on here, as a sort of round up of my commodity writing once a week probably on the weekends. 

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Disclaimer: Embrace The Trend / Richard Chignell does not provide investment, financial or product advice.  I trade my own capital exclusively.  I eat my own cooking as should you.  If you are going to trade / invest it’s at your own risk and you must take responsibility for your actions.

Get out, get out, get out!

Get out, get out, get out…… because you can always get back in.

A difficult concept to get your head around in trading is the need to be able to take a loss.  Not being able to take a loss leads to one of the most destructive behaviours to a trader or investors account…. letting you losses run.

We all know that it’s meant to be the other way round.  You’re meant to cut your losses and let your winners run.  However we also like to be right.  Our intellectual side said that this is a good trade or investment and when we look like being proved wrong it is all too easy to dig our heels in.  The intellect starts to fight what we know to be the right action (taking the loss).  We end up looking like a dog being pulled by its owner along a laminate floor.  Whether the intellect likes it or not the trade is going against us.  However much we dig our paws in nothing is going to change.

Here’s the thing.  As Mike Martin details in The Inner Voice of Trading taking a loss is the domain of emotional intelligence.  As I wrote in another post (here) the charge for getting into the market game is intellectual intelligence but it’s emotional intelligence that will keep you in the game.

An area I have found trying and I know others have is the feeling that I have to trade.  That I have to make money and as a result have to be active.  This is all based on a fear of missing out.  

The thing is that in reality the market isn’t going anywhere and the opportunities are always present.  There is no immediate need to trade right now.  You can wait.  I would suggest that in fact trading less will make you more profitable over time than trading more.

Paul Tudor Jones II

As Paul Tudor Jones says (image thanks): 

"If I have positions going against me, I get right out; if they are going for me, I keep them…. Risk control is the single most important thing in trading.  If you have a long position that is making you uncomfortable, the solution is very simple: get out, because you can always get back in." 

In the above quote he spells it out and it’s a lesson well worth listening to. 

If you want to put a trade or investment on in the market, prior to hitting buy or sell, decide on a point where your hypothesis is proved wrong.  You know that you can’t be right every time (or anywhere near every time) - the game just doesn’t work like that.  So calculate where you will be wrong and if the trade turns out to go against you allow your stop to take you out.  Don’t touch it, fiddle with it, adjust it - just take it.

Feel the feelings, the uncomfortable feelings but don’t allow those feelings to mess with your predefined plan.  If it was the right place to say you were wrong when you put the trade on…. it will still be the right place when the trade is going against you. 

Allow yourself to look only for great opportunities that offer you excellent risk reward.  If they aren’t around today then that is just the way it is.  This isn’t a job with normal hours, you aren’t punching the clock on your way in and out from work.  Accept that.  You aren’t any less of a person if you didn’t put a trade on today.  It doesn’t mean that you aren’t working.  You are just following your plan or rules.  In actuality you are a better trader for this.  You can be proud of yourself for your emotional intelligence level in your ability to do this.

As Paul Tudor Jones says when a trade is going for you if you feel bad about it then you can either get out fully or lighten up your position considerably (sell some of your stocks or contracts to the point where you can sleep at night).  You aren’t missing out anything by doing this.  A new opportunity lies right around the corner.  

He’s absolutely right although it took me a while to realise this, the market isn’t going anywhere, the opportunities will reappear sooner rather than later, you have to get out, get out, get out in order to stay in this game.  If you focus on that side of things the profits will take care of themselves.

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Disclaimer: Embrace The Trend / Richard Chignell does not provide investment, financial or product advice.  I trade my own capital exclusively.  I eat my own cooking as should you.  If you are going to trade / invest it’s at your own risk and you must take responsibility for your actions.

The Pro’s Process - Mike Dever

The seventh in my series of posts asking Pro Traders about their psychological processes.  Delving a little into how it feels to them when trading.  The good and the bad.  How this has changed over time and what preparation they do mentally for performing as a trader.

One of the key features for me was that I wanted traders with experience who have been through the mill over the years and of course those who were kind enough to broach this subject publicly.  This I hope gives developing traders more to learn from.  

I’m very fortunate to have a great line up and this week is: 

Trader: Mike Dever

1) How long have you been trading?

33 years

2) What style of trading / investing do you practice (technically driven, fundamental, systematic, a combination etc)?

After starting out as a discretionary trader, I quickly evolved into using systematic models for trading decision support. Following a multi-year research project in the late 1980s – early 1990s, during which I systematized my trading methods, I’ve traded pursuant to a fully-systematic, multi-strategy trading model.

3) How do you feel when a trade goes against you?

I assume you mean “when it loses money.” I never look at a trade as having gone “for me” or “against me.” That’s far too personal and anthropomorphizes each trade. As long as we’re “on model” I feel fine. It doesn’t matter whether any given trade is losing or making money.

4) How do you feel when a trade goes for you?

The same as I do in response to the question above.

5) How have these feelings changed over your trading career?  (Can you recall how you originally used to feel and elaborate on how this has changed over time?)

For the first ten years or so of my trading career I definitely felt an emotional pull that changed with the outcome of my trading. After making the full commitment to systematic trading I instead felt emotional satisfaction over developing sound trading strategies, and no significant emotions based on the outcome of the trading itself.

6) Do you have any practices that you do away from the trading screen to help you mentally and emotionally handle trading?

Enjoy my family. But nothing designed specifically to make me a better trader.

7) Have you always done this? 

No. I was far more involved with my work life throughout most of my career. I enjoyed what I did for work and that’s why I spent so much time on it, but it was behavior that some may have viewed as “workaholic.”

8) If not, how have you learnt to deal with the feelings that come up when trading?

N/A

9) Can you describe a time in your trading life which really rammed home the point that so much of trading comes down to psychological factors?

Too many to list all here. But I discuss one in chapter 11 of my book (Jackass Investing: Don’t do it. Profit from it.), where I describe an S&P trade I made in October 1987. But the main point I learned is the importance of reducing the effect that psychological factors have on trading. For me, following a disciplined, systematic trading model achieves that goal.

10) If you could give aspiring traders one piece of advice about emotionally handling the market what would it be?

Trade to make money, not to fill some other unfilled emotional hole.

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I’d like to thank Mike Dever for sharing about the way he tackles the market from an emotional / mental side of things and for his willingness to allow me to post this as a free resource in the hope that traders who have been in the market for less time or are thinking of entering can perhaps pick up some A-HA’s.

If you are interested in finding more out about Mike Dever you can find him:

On twitter: @mikedever

At his firms website: http://www.brandywine.com/

On the books website: http://www.jackassinvesting.com/home/ 

He is also the author of the excellent Jackass Investing: Don’t do it. Profit from it. You would be wise to check it out (click here)

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Previously in the series:

Charles Kirk - read it…..here

Matt Davio - read it…..here

David Blair - read it….here

Mike Bellafiore - read it….here

Mark Holstead - read it ….here

Brian Shannon - read it…. here

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Disclaimer: Embrace The Trend / Richard Chignell does not provide investment, financial or product advice.  I trade my own capital exclusively.  I eat my own cooking as should you.  If you are going to trade / invest it’s at your own risk and you must take responsibility for your actions.

George Soros……boring!

Not another George Soros post, ‘how boring’, I hear you say…  

Well we should always try and learn from the greats.  One of them is never going to be an unfamiliar name in the trading / investing space and his achievements are definitely far from boring……..George Soros.

(Image thanks)

In Winning Investment Habits of Warren Buffett and George Soros he says: 

"If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring."

Now as I said before I don’t invest (why = here) but I think that on the excitement or boredom front trading is very similar.

Now there is no doubt that only a special personality is not going to feel a little adrenaline or some form of body energy when they put a trade on intra-day.  However what is clear from the wealth of information out there on trading is that the best are very systematic, mechanical, rule based, check box ticking etc.

You can be a discretionary trader rather than an automated trader but still one way or another you need to develop a set of rules and a process that you can repeatedly execute.  One that, as Ed Seykota says in Market Wizards, is compatible with your personality.

Once you do - then trading really shouldn’t be so exciting.  It should be more a case of patience, waiting for the right conditions, execuction (pulling the trigger), monitoring (sitting back), and then exiting again under your pre-defined conditions.

 It’s not exactly glamorous and it does sound remarkably simple.  Perhaps the reason that so many struggle or fail trading is because they can’t get over the desire for excitement that they imagined trading to be about versus the boring reality of making consistent money by executing a plan with patience.

I still go in and out of emotional stability when trading but I always try to follow my trading plan particularly regarding the exits.

As my mentor says: this is about making money not excitement.  Georgey boy has certainly made plenty of that.

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If you liked this, you may also like:

The Art of War, Hot Girls! Tattoos, Livermore and Trading (here)

Habits and discipline (here)

A funny thing about trading rules (here)

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Disclaimer: Embrace The Trend / Richard Chignell does not provide investment, financial or product advice.  I trade my own capital exclusively.  I eat my own cooking as should you.  If you are going to trade / invest it’s at your own risk and you must take responsibility for your actions.