I loved my 15 years worth of trading experience on Wall Street. I thrived on the energy, competitiveness, and discipline critically important to generating long term profitability.
While many media outlets focus on the energy and competitiveness involved in trading, rest assured the real key to successful trading and investing is discipline. In my opinion, this characteristic receives far less focus and attention than it deserves.
I believe discipline is both an intrinsic and acquired trait. In fact, often the real benefits from a disciplined approach are the lessons learned from being undisciplined. Believe me, I learned many of these lessons early on and throughout my career on Wall Street. I accrued plenty of losses in the process.
How did I develop and maintain a disciplined approach during my 23 year Wall Street career? Very simply, I kept a written list of ‘trading rules’ on a piece of paper typically taped to my computer terminal.
High five to AS with whom I developed these rules back in the mid 1980s. These rules not only helped me generate profits, but more importantly kept me from making trading mistakes and thus avert losses.
Let’s review the rules that I applied to trading mortgage-backed securities in the 1980s and 1990s. In many respects, I continue to apply a semblance of these rules today.
LD’s Rules of Trading
1. Market Goes in the Direction Which Hurts the Most People
I would check the stochastics regularly to monitor when the bond market (typically the government bond market) was approaching an overbought or oversold condition. Assessing this measure is decidedly more challenging currently given the presence of Uncle Sam in the marketplace.
2. Never Short a Specified Bond
How often I would see traders short specified bonds without any appreciation for the available float. Initial short sales may appear to be profitable only to turn into nightmares when the trader had to find the bond for delivery to the buyer.
3. Never Set Up for a Trade
This rule specifically addresses a trader’s inclination to establish a trading position based upon color from a client that the client himself planned to enter into the trade. Experience taught me that often the client would find a reason not to execute the trade and now the trader was stuck with the position.
4. Know Your Customer . . . as Certain Accounts Lie
I would work tirelessly at developing strong customer relationships in order to transact quality business. That said, there were more than a handful of clients who would intentionally misrepresent situations. These customers typically viewed trading strictly as a zero sum game. I would treat them accordingly.
5. Greater Fool Theory
Just because somebody would buy or sell a security at a certain price does not necessarily mean the trader is fully informed and the price is reflective of real value. Similarly, I would not pretend to believe that my opinion was always fully informed. Humility never hurts. Combining these thoughts: never buy something just because somebody else is. Do your homework.
6. Stay Out of Meetings
The point of this rule is that meetings detract from focusing on the markets. If I were involved in a meeting, I would work to keep it brief and on point. I abhorred people who spoke at length in order to hear themselves talk. I would intentionally establish the premise of a meeting prior to sitting down and attempt to drive to the conclusion as quickly as possible. In that manner, I could return to focusing on the markets and trading.
These rules were invaluable. I would never generate the most money that came from swinging for the fences, but by continually hitting singles and doubles I was able to score plenty of runs.
Discipline does not necessarily generate excitement, but it is the key to long term success.