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Like many traders, I read Market Wizards as a kid. If you donât know it, itâs a collection of interviews with the most legendary traders of the 1980s.
Back when I first read it, I really had no idea what the hell I was doing. I read it, thought I got it and moved on.
But I didnât get it.
The reason was simple. I didnât have the life experience and wisdom to understand it. That would take many, many more years.
A few months ago I picked up my old, dog eared and highlighted copy and started thumbing through it. I expected to snag a few quotes and move on but pretty soon I found myself hooked, reading it cover to cover all over again.
Two things struck me immediately.
- First, Iâd highlighted all the wrong things.
- Second, I saw instantly how much these men were alike.
No matter where they came from or how they got started, they all remembered one devastating loss early in their career. They all started with little to no idea what they were doing. All of them transcended false beliefs and developed an amazing ability to adapt and change their minds in a flash.
Their styles, politics and temperament all varied widely but the rest of their lives followed a remarkably similar path.
Thatâs when I realized I was seeing something bigger, a meta-pattern, a pattern of patterns.
Call it the journey of the great trader.
So what is that path and how can you follow it?
Letâs take a close look.
Number One: Start Out Clueless
No matter how good anyone gets at something they always start out clueless. Maybe trading is some innate gift but that doesnât matter at all at first. Everyone starts at step one.
Nobody starts off a superstar.
This Wizards excerpt from Michael Marcus is typical of most traders.
âQ: Did you know anything at all about what you were doing? Had you read anything about commodities or trading?A: No, nothing.Q: Did you even know the contract sizes?A: No, we didnât.Q: Did you know how much it was costing you per tick?A: Yes.Q: Apparently, that was about the only thing you knew.A: Right. Our next trade, in wheat, didnât work either. After that, we went back to corn and that trade worked out better; it took us three days to lose our money. We were measuring success by the number of days it took us to lose.â
You see the same story again and again. Somebody hears about how they can get rich quick in the market. Their friend tells them or they read a story about some king of Wall Street or the newly crowned crypto rich and they leap in hoping to make a quick buck, their eyes filled with stars.
Even if they do have some idea about the basic rules, like setting good stops and choosing a position size that wonât wipe them out they almost always ignore it.
Paul Tudor Jones, a super aggressive, hard charging trader, tells the tale of a horrible early trade where he made a spur of the moment âmacho manâ cotton buy leaving him seriously vulnerable. Immediately the other pit traders knew his mistake and he did too. The big whale of the cotton market started dumping on him almost instantly, driving the price down hard and locking him in.
He learned the hard way âNever play macho man with the marketâ as he wiped out 70% of his equity in a single trade.
Every single person thinks theyâre smarter than the market. Even if they read the time honored rules of the best of the best theyâre thinking âthose donât apply to me, Iâm different.â
And that takes us to step two.
Number Two: Make the Same Mistakes as Everyone Else
Think youâre immune to making the same mistakes everyone else does?
Youâre not. But donât worry, youâre in good company.
Nobody is immune.
Inevitably new traders donât understand why the rules are there to protect them even if they know the rules. Maybe after their clueless stage they read a few books or listen to some smart sounding traders on Twitter or take a course.
The problem is they donât really understand what theyâre reading and hearing. They canât process it yet because they donât have the experience to see the wisdom in it, even if they understand it partially at the intellectual level. Knowledge canât be passed on passively. It has to be earned through personal experience.
And when you donât understand the rules, what happens?
You screw up.
And what are some of those rules?
1) Donât overtrade.
2) Keep your position sizes small.
3) Set stop losses.
4) Donât make snap decisions.
5) Donât get too high or too low emotionally.
Those are just a few of the essential pearls of wisdom that every trader eventually figures out.
Eventually.
The hard way.
In the beginning everyone just glosses over them.
Legendary currency trader Bruce Kovner tells a classic story about snap decisions. Kovner made his original money hedging spreads on contracts. Heâd be long one contract and short another to reduce the risk but as soybeans rocketed to new highs in the 1970âs his broker got caught up in the euphoria and called him wild with greed:
âSoybeans are going to the moonâŠYou are a fool to stay short the November contracts. Let me lift your November shorts for you, and when the market goes limit-up for the next few days, you will make more money.â
He agreed. Limit-up is a circuit breaker on the markets. If they went too high or too low the contracts locked and nobody could trade them. You were stuck. Limit-up meant you were making the absolute most money possible. Limit-down? You were losing the most money possible and even worse you were stuck and you couldnât sell out.
Kovner perfectly describes the crazy euphoria every early market apprentice feels:
âIt was a moment of insanity. Fifteen minutes later, my broker calls me back, and he sounds frantic.âI donât know how to tell you this, but the market is limit-down! I donât know if I can get you out.â I went into shock. I yelled at him to get me out.â
By sheer luck he managed to get out when the markets ticked up past limit-down for a few minutes but not before eating a massive loss.
Afterwards, Kovner talks about the sickness every trader feels when they make a horrific trade and the market eats them alive.
âI was up about $45,000. By the end of the day, I had $22,000 in my account.â
And that brings us to our very next step on the journey of trader enlightenment.
Number Three: Take a Big Loss
Every single trader will eventually experience a catastrophic, heart breaking loss. Many of the best traders went completely belly up, more than once. The original great speculator, Jesse Livermore, lost multiple fortunes.
Kovner tells us the gut wrenching sickness of losing big money in the market.
âI went into emotional shock. I could not believe how stupid I had beenâââhow badly I had failed to understand the market, in spite of having studied the markets for years. I was sick to my stomach, and I didnât eat for days. I thought that I had blown my career as a trader.â
Michael Marcus tells a similar story of a disastrous sugar trade.
âQ: How much did you lose on the trade by the time you liquidated?A: I lost my own $30,000, plus $12,000 of the $20,000 my mother had lent me. That was my lesson in betting my whole wad.â
Every trader has a story like that to tell. For me it was NEO. I got in late in the bull run and bet big. I just knew it was going to the moon and a few days later I was riding high and I nearly doubled my money.
And then the empire struck back.
China started threatening the big exchanges. It seemed every single weekend there was a brand new story attacking crypto, a big banker saying it was worthless or insane, China cracking down, or another country looking to ban trading.
It didnât take long for the markets to panic.
And there was no worse coin to hold at the time than a Chinese coin. Thatâs exactly what NEO was, red Chinese through and through.
I watched my wins vaporize over the course of two days and I just froze. I panicked. I liked the coin and the project, I thought it would turn around so I just hung on as it went down and down and down.
In the end I lost 68% of what I put in.
I was sick to death. I couldnât sleep or eat for days. Working out didnât help. Getting a massage didnât help. Alcohol didnât help. Whacking it didnât help. Nothing helped.
Only one thing could fix it. The next step.
Step Four: Reflect and Come Back Stronger
Once you finally experience that soul crushing loss itâs not long after that you realize it was the absolute best experience of your trading life.
If youâre smart and youâre focused you start looking at everything you did wrong. You go over it with a fine tooth comb. You question all your beliefs and ideas. No longer are you willing to just take things at face value. You want to know what works and what doesnât and so you finally get serious.
Paul Tudor Jones remembers reflecting on his mega-loss and getting so depressed he wanted to quit. But then it hit him:
âIt was at that point that I said, âMr. Stupid, why risk everything on one trade? Why not make your life the pursuit of happiness rather than pain?âThat was when I first decided I had to learn discipline and money management. It was a cathartic experience for me, in the sense that I went to the edge, questioned my very ability as a trader, and decided that I was not going to quit. I was determined to come back and fight.â
Real loss equals real wisdom.
Without that loss none of the lessons make any sense to you whatsoever. Youâll think youâre different and that the rules donât apply to you.
But they do. They apply to everyone. No exceptions.
Step Five: Learn the Age Old Lessons the Hard Way
What is it about the human mind that makes us learn all our lessons the hard way? We read the great wisdom of the ages and promptly ignore it.
Maybe thatâs just the meaning of life? We all have to go through the same struggles and make our own mistakes and live the great story again and again.
After my big NEO loss I reflected on everything Iâd done wrong and it hit me like a diamond bullet between the eyes. I realized I didnât know how to make decisions when I was under fire. I just froze like a deer in headlights. I knew the market had turned and that NEO was going down and I should get out but I couldnât pull the trigger.
Internally, I just couldnât accept the loss. I was in denial. I was a good trader and careful or at least I thought I was but now I was faced with a new reality.
I wasnât as good as I thought I was. And I couldnât accept the reality in front of me. I couldnât put it behind me and move on.
I should have sold that NEO shit stack long before it cost me a big chunk of change. Instead I road that loser all the way into Hell instead of cutting my losses.
As Tudor Jones says âlosers average losers.â
People love to hang onto losers. They love the pain. Oh they wonât admit it but they do. Pain is drama. And people love drama.
Either that or they imagine the market merely lost its mind for a minute. The project is a good project. Things will turn around.
Except more often then not they donât turn around or they turn around too late and because you held so long you canât make up that loss.
And it doesnât matter if gold is good or a company is good or a project is good. Sometimes that doesnât mean a damn thing to the market and it just tanks. Saddling up that bomb and cowboy riding it to the bottom is always a disaster.
NEO taught me the most important lesson of all.
More importantly I now understood the lesson:
âCut your losses, let your winners run.â
Step Six: Money Management
The ancient wisdom really boils down to two words: Money management.
Cutting losses is one of those key principals that everyone has to learn. Itâs not enough to simply trade the market, you have to know youâre going to get things wrong a lot of the time. And that means you have to protect your money at all costs.
Thatâs just basic probability.
Paul Tudor Jones says âI am always thinking about losing money as opposed to making moneyâŠI have a mental stop. If it hits that number, I am out no matter what.â
Money management comes down to a few critical principals:
1) Keep your position sizes small to minimize risk
2) Ruthlessly cut your losses.
3) Always use stops.
4) Donât use too much leverage
5) When you start losing, start trading smaller.
6) When you go on a bad streak, get out of everything and take a break.
7) If you get in a bad trade, get out immediately because you can always get back in later.
All of these principals work in tandem to protect your money.
Donât throw good money after bad
I learned this the hard way yet again just the other day, when I went a little to heavy on a leveraged position after a strong winning streak.
The mistake was easy to see in retrospect.
What blinded me at first was that Iâd gotten masterful at setting my stops. One of my tricks is to set a limit stop price far above or below the trigger so it always gets filled. Iâd never had a stop not fill and Iâd never gotten liquidated. I donât get liquidated because I use just enough leverage to make a difference but not enough that the market would only have to move a few percentage points to kill me off.
I put in my trade, set my stop and went to bed.
When I woke up in the morning and checked in I saw I was down 29%. My stop never triggered. I wasnât liquidated because I hadnât over-leveraged but it didnât matter.
I was sick to my stomach.
So what did IÂ do?
Number two, ruthlessly cut loses.
After a few minutes of feeling sorry for myself and thinking I should hold on because maybe it would come back I shut that stupid voice up and sold. I cut that loss immediately. I took it and moved on.
Thatâs when I understood once more that all the principals work together in concert.
If the position size had been smaller the overall loss would have been smaller. But because I hadnât used too much leverage I hadnât gotten liquidated so I was still very much protected.
Low leverage, small positions and stops all work as one. Sometimes one of these risk management tools fail you and the others kick in to help. Itâs like the seat belt and the airbag.
Sometimes the seat belt isnât enough but the airbag is there to save you.
Step Seven: Stop Following Others
It may seem strange to say that I donât follow other traders or the news but I donât follow any of them anymore. I may occasionally glance at a chart of a trader who I really respect and see if it matches with my sense of the market but itâs incredibly rare. I might also check in with a trader who I know well and whoâs had success over the long run.
And then I just do what I want anyway.
In the end you have to follow your own light.
You have to get so good that you trust your own analysis above all else. When you make a mistake you need to know youâre strong enough to figure out what it was and fix it the next time.
If youâre meant to be a good trader you will be. Itâs as simple as that.
Ed Seykota is one of the best traders profiled in Wizards. He says is best:
âIt is a happy circumstance that when nature gives us true burning desires, she also gives us the means to satisfy them.â
If you have that burning desire to trade and to win, youâll find a way and you wonât need to follow anyone else once you get your feet wet.
I have my school of traders but my main lesson to them is simple. Learn from me and then move on. Become your own master. Donât sit at the feet of gurus your whole life.
As for the news? Nothing but poison. Turn it off as fast as you can.
I highly, highly recommend every single human being take a news fast for a month. Disable anything related to news on your phone feed. Unfollow everyone on Facebook. Donât read the Twitter stream. Get a site blocker for when youâre working and use it frequently.
I guarantee you, you will not miss out on anything. If something really, really big happens youâll hear about it because people will talk about it. If itâs not big enough to be on everyoneâs lips itâs not worth hearing about.
Hereâs another thing I guarantee. You will be mentally, emotionally and spiritually healthier by an order of magnitude. Your anxiety will decrease as will your confusion and fear.
Youâll probably end up extending the news fast indefinitely. I know IÂ did.
I could care less about Google News or which coin some random person on the Internet thinks is going to the moon tomorrow based on astrology and hope. Probably the last time I followed news was during the China crisis. And if I had to do it all over again, I wouldnât read a word of it this time. I do occasionally read one magazine that I like with strong, consistent journalism but even that is less and less frequent, maybe once a month or every few months and mostly because there is one story I want to read in depth.
When you give up on the news youâll be in fine company.
Ed Seykota said âeventually I became more confident of trading with the trend and more able to ignore the news. I became more comfortable with the approach.â
I have not met a single good trader who is a news junky even though the average trader is a hopeless news junky. They want a reason for the market to go up or down. They canât face that itâs random chaos and the push/pull of a billion emotional monsters.
So writers come up with a good reason for why the market made a move. Interest rates changed. A trade war looms. A big soybean shortage struck. Some of these are probably factors but itâs really impossible to use that news in any effective way 99% of the time. The other 1% of the time it is but so what? Is it really worth watching 99% white noise to get that?
Even worse, news is about conflict and tragedy. Itâs about pain and suffering. Itâs about extraordinary events.
But the more you watch it the more you think those extraordinary events are normal events.
Plagues happen every day. People get shot up around the corner every few seconds. A baby is butchered every ten minutes in your town.
If youâre born in an insane asylum and everyone is screaming all the time you think itâs normal.
It ainât normal.
Youâre hearing about statistical outliers and it does nothing but warp and derange your mind.
The news is poison.
Bite your arm, suck that venom and spit it out for good.
Step Eight: Develop Your Own Style
If you make it this far, youâve come to the final step on the journey of trading mastery.
Whatâs that?
Develop your own system.
I used to study Kung Fu. I noticed that most people were obsessed with lineage. Who was the great master that taught their great master in an unbroken line over five hundred years? Did the system change? Was it passed down perfectly and directly?
I soon realized this kind of thinking was total madness. Of course the system changed. Each master learned new lessons through his own life experience and added that to the system. It he didnât, he was no master. In fact, he probably sucked horribly if he just photocopied what his teacher taught him and passed it down to you.
And I also found myself thinking about the first person in that line of legendary martial artists. If you go back far enough, eventually you get to someone who started the system. That brings up one inevitable question:
Who taught them?
The answer is obvious.
Nobody.
They taught themselves.
And that is what the absolute best of the best do in all fields. They donât follow. They create.
The old Kung Fu masters didnât just learn from someone else and regurgitate it. They took what they learned and modified and improved it. They studied nature and themselves. They watched the movement of snakes and birds and they tried to tease out the secrets of those animal powers. They wanted to move as fast as a snake and strike like a tiger. They had everything they needed by observing the world around them.
You must become the master. When you get there youâll find thereâs nobody handing out a belt. Youâll be the final judge in your journey.
And that means eventually youâll need to develop a trading style that perfectly fits your own personality, your own strengths and weaknesses. If youâre just following someone elseâs picks blindly you wonât have to strength to stay in a trade when the going gets really rough. That kind of confidence only comes from within.
To do that youâll have to look deep inside and figure out what you really want from the world.
As Ed Seykota says, âEveryone gets what they want out of the markets.â
Some people like to lose. Some people like to play the Martyr. Some folks like to be popular. Others love to be contrarians and bet against the crowd. Still others like to sound smart at parties. But they donât like to make money. They might even think itâs dirty or evil and they self sabotage.
Whatever your weakness the market will happily feed it to you. If you love the excitement of winning big and then losing it all and making it back again, youâll get that too.
Ed went further: âI think that if people look deeply enough into their trading patterns, they find that, on balance, including all their goals, they are really getting what they want, even though they may not understand it or want to admit it.â
But the best traders do want to make money. They have a deep passion for the markets and a burning desire to win. To do it they all come to the same understanding eventually by reflecting deeply and transcending their own human limitations to become the best of the best.
And when they do theyâre ready to walk their own path, a lonely path, but a joyous one too:
Yoda from The Empire Strikes Back
The path of the master.
They no longer need to read any more books or listen to anyone else or follow anyone elseâs star.
They become their own guiding light.
They live and die by their own decisions. When they win they donât get too high. When they lose they donât blame anyone but themselves.
And they donât need any outside validation or praise or judgement.
Thatâs because after all that time and effort and suffering, they finally know what theyâre doing. Itâs not arrogance. Itâs an internal compass that is unflinchingly accurate, developed only through dedication, perseverance, persistence and passion.
Itâs earned over time. A long time. Nothing else can give it to you.
It canât be bought, bargained for, or cheated. There are no short cuts and there never will be.
And all the praise and validation the legendary trader will ever need will show up in the only place that matters.
Their bank account and crypto wallet.
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A bit about me: Iâm an author, engineer and serial entrepreneur. During the last two decades, Iâve covered a broad range of tech from Linux to virtualization and containers.
Readers have called my breakout nanopunk novel, The Scorpion Game, âthe first serious competition to Neuromancerâ and âDetective noir meets Johnny Mnemonic.â
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The Eightfold Path of the Legendary Trader was originally published in Hacker Noon on Medium, where people are continuing the conversation by highlighting and responding to this story.
Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.