The Last Car on the Train
One of the small pleasures in my life this summer is to take an hour long walk each day and listen to the Chat with Traders podcast as I walk around the Upper West Side. Like every middle aged American male I have become obsessed with doing my daily 10,000 steps and the podcast makes the time go by easy.
The podcast is trove of valuable trading info if for no other reason than it shows you just how many different ways you can make in the market. It has interviews with scalpers, swing traders, algo traders, futures traders, equity traders, discretionary traders, systematic traders, technicians, macro traders, stat traders and a whole lot more.
It’s like a digital age version of Market Wizards and if you are market junkie (which of course you are -- then this is great resource to enjoy on a sunny day.
I like all the interviews but perhaps my favorite is with a trader named Jeff Davis who is the least likely person you would imagine to be a successful trader. Davis is only a high school graduate who worked all of his pre-trading life in the Post Office. Yet his enthusiasm for the game and innate intelligence have taken him to the heights of success. He is a very good day trader in the ES (emini S&P) which is like saying he is a very good Olympian in the track and field. The ES is notorious for being one of the most difficult instruments to day trade and the fact that Davis is so good at it is a testament to his skill and discipline.
However my favorite part of the interview has nothing to do with tactics or strategy. The part I loved the most is Davis recollection of his early days of being a prop trader in New York. Like many traders who worked on Wall Street he commuted every day from the suburbs and grew friendly with many of the NYSE specialists who took the train in with him every morning. This was occurred before electronic trading laid waste to much of the profession but the lessons he took away from that experience were timeless.
The most amusing anecdote that he recounts is that every day all of his trading buddies always piled into the last car on the train. One day he asked them why they did this and they replied -- Have you ever seen a train piled up? The only people that survive are in the last car. As Davis notes they were thinking about risk way before the NYSE opening bell ever rang.
I love this story because it has nothing to do with the markets and yet it perfectly encapsulates the mindset of every profitable trader out there. Worry about risk first, foremost and always. Reward will take care of itself. Want to really understand why that is so important?
Take a look at the chart below. That’s one of my trading accounts for this year. What’s the reason for the difference in performance? In the first half of the chart I was stupid enough to pull my stops and kept buying the market lower until it finally broke me and I exited the trade at a massive loss. In the second part of the chart I just traded the BK Boomerang strategy that we developed in our chat room and I took every stop without fail.
But here is the most important takeaway.
It took me just 10 days to lose all that money and more than 40 days to make it back. That’s a pretty ratio to keep in mind. For every day that you abandon risk control it will take you at least 4 days just to get back to even. Think about that the next time you decide to pull a stop.