Monday, March 08, 2010

Meet Trader X

One of our favorite posts from our partners at T3

Meet Trader "X"

By: Evan Lazarus

I know and have worked with many traders around the world. Over the years, I met one individual who is by far, the best trader I have ever met. He is very consistent and makes an incredible amount of money as an active intraday trader. For the sake of anonymity, I will call him “Trader X.”

I still remember the day that I realized just how successful Trader X was at trading. Today I must admit that although I have met traders that make considerably more money, I still hold him in the highest regard as a trader and personal mentor, as he has never deviated from his path. I am lucky to know Trader X and have reaped many benefits from incorporating the lessons I have learned from him into my own trading over the years, so that now I play the part of mentor to many novice and even seasoned traders. I would like to share with you some of the lessons I have learned from him. Although he has never taught me formally (in a teacher/student capacity) as I do with others, these are lessons that I have acquired from observing him trade, that I continuously teach in our T3Live education classes.

1. Patience is Paramount
An important lesson learned from Trader X is that patience is everything. Profitable traders, like Trader X, wait for the perfect trade setup. 90% of all traders who do not consistently make money trade for the sake of trading, as I used to do. I used to look at the markets and ask myself "which way is market/stock going to go?" Now I look at the markets and say "Is there a low risk trading situation developing?" I have learned to be patient, and my profit factor has been consistent over time.

2. Never Follow the Herd as the Herd Consistently Gets Slaughtered
If you think about it, it makes perfect sense - the very best time to buy something is when everyone is convinced that the price is going to fall lower, and the very best time to sell something is when everyone is convinced the price is going to shoot to the moon. Trader X taught me the importance of trading against the crowd. The crowd is reacting to the market, and that is exactly why you must react to the crowd. This simple change in mindset can produce incredible profits if you are willing to look like a fool (in the eyes of others). Now, this is not code for counter-trend trading as a means to success, but rather a mentality I implore the same as when shopping for a car. When you go to a dealership or a car show, the cars all look beautiful and pristine. New car smell, nice paint job, shiny tires, but do you ever kick the tires or look under the hood? Is that beautiful car as healthy on the inside? Being a good technician means not getting caught up in the superficial.

3. Do One Thing, and Do It Well
If there is one simple thing that I have learned from my Trader X, the best trader I have ever known, it is this: to make money trading you only have to become an expert at one type of trade. There is no need to do ten things, or yet worse, ten things at once. Simply concentrate on one thing, and if you trade it well, you can become a very successful trader. Too many traders (especially the day traders) think they need to make multiple trades in a day, or to trade multiple stocks over the course of a day in order to make money. Chances are that the more you try to do, the less successful any of those trades will be--a “jack of all trades but a master of none.” As I tell all of my trading students, “it only takes one lemon to make lemonade.”

4. What’s YOUR Style?
How many times have you heard some expert say something like "technical analysis doesn't work" or "never trade on options expiration" or "scalping is impossible." One thing I have learned from my trading mentor (and from working with traders all over the world) is that the very best traders create their own trading style. This doesn't mean that you must reinvent the wheel to become a successful trader; it simply means that many successful traders have found their way to success by adapting trading strategies and making them their own. It is not important that you trade precisely as other successful traders do, but it is important that your style of trading makes sense to you, as this will ensure that you stick with it over the long haul.
Trader X has a completely unique trading strategy that he has crafted over time by exposing himself to many different ideas and many different traders. His system is unique because it is his, and it makes sense to him. This is important because it means that he is better able to maintain confidence through the drawdowns that inevitably occur.

5. Have An Extremely High Win Rate
There has been a lot written about win rates (what percentage of your trades are profitable), but what some traders do not seem to understand is that it is possible to have an exceptional win rate. 70%, 80%, even 90% is possible. This I have learned from Trader X- he has an incredibly high win rate, and I do too now because I have learned so much from him.

Trader X is continually improving as a trader. He is constantly figuring out ways to get better at what he does. He uses every loss as an educational experience - that is how he sees them. Every loss is a lesson that the market has handed him. I would not say that he embraces losing trades, but he certainly does learn from them.

6. Everyone Has a Bad Streak
Even my Trader X will have the occasional unlucky streak with several losses in a row. This is not that interesting to me, but what interests me is how he deals with these streaks. He does not lose confidence and continues to take the next trade setup, as it occurs, and never questions his strategy. He knows that anyone can flip a coin and get "tails" 4 times in a row, and that is precisely how he views a non-winning streak. He knows that in the long run he will make up the lost money, and then some, so there is no need to panic. He knows with the utmost of confidence that he “is an earner.” Over the long run, he will continually just earn.

7. Being Wrong is Being Human
Trader X taught me that even the best traders, like him, are sometimes caught on the wrong side of the market. There is no need to panic when this happens, but once it does, a very good thing to do is to simply get out. Once you realize that your trade was not a good idea, there is no need to wait for your stop loss to get hit. When you know you have made the wrong move you can simply get out of the market and wait for the next trade. While I always preach about managing risk and evaluating stops, remember, you are a professional speculator and if it seems apparently clear that something with your trade is obviously wrong don’t be afraid to pull the plug early.

8. Let the Trades Come To You (Be Patient)
If there is one thing I have noticed about how Trader X trades (and this is not a unique characteristic, many of the very best traders I have ever traded with also have this characteristic) it is that he does not go looking for trades, he waits for them to jump out at him. This may seem like a weird way to trade, but it is precisely how he takes so many profitable trades. He waits and watches, and when the market gives him an opportunity to jump in to a good situation, he strikes. He never trades simply because the market is open, and he sometimes sits in front of his charts for hours without making a single trade.

I have learned from him that successful trading means being ready for the market to offer you "easy money" - or ideal trading setups. When these setups come along, I know it because I feel like I must take advantage of the opportunity the market is offering. Remember though, these setups come along infrequently and most of the time Trader X spends trading is NOT TRADING. This is very counter-intuitive to what most traders do and how they act. This is also the reason I believe that the trading profession is “hard.” Most traders feel compelled to trade the same way sports gamblers can’t watch a football game without having “action.” In the end, it’s a losers game.

9. Continue The Educational Journey
Trader X has such a high win rate, and is so good at picking high probability trade setups that some people may assume that he knows that he has the markets "figured out." Not so. He is constantly learning, he has many trading books, trading magazines and we are constantly talking about trading strategies. He learns from some of the best institutions and research centers around the world because he has a constant thirst for knowledge. The fact that he is open to new ideas and the fact that he is an exceptional trader is probably not a coincidence. I think that many successful traders are open to new ideas. This doesn't mean that successful traders switch trading strategies every month (Trader X has been trading the same trading strategy for years), it simply means that many successful traders are open to new ideas and new ways of profiting from the markets.

I hope that you have learned something from Trader X, I know I have.