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How to Trade

Jesse’s thoughts on secrets to successful trading. (And if you missed my interview with my favorite restauranteur, it’s here.) – Ilene  

How to Trade

Jesse's Americain Cafe Courtesy of Jesse’s Café Américain

"A reporter once asked me what were my most important attributes as a speculator. I replied, ‘Nerve…it takes nerve to speculate in futures…and being stubborn, refusing to be satisfied with small profits. But it does not matter if they are paper profits when you lose them..when you lose you sweat blood. Confidence in yourself is something you must have if you are going to be a successful speculator.

To be able to stick in a risky position without shattering your nerves, you must have a continuing confidence in the judgment that caused you to take that position in the first place.’ I knew that I would never get rich by scalping the markets for small swings, so I was constantly striving to sense the broad swings of the markets and to understand the reasons for them.

The way to make money is to be slow in taking profits. Let your profits pile up as high as they would go. This is the way to reduce the odds against you — by consistently holding on when a market is running favorably for you.

My main strength was in my ability to take a position and stick with it.

I was never an in-and-out trader. (A friend said, ‘He got in at the beginning of a long bull market, and he stuck, and stuck, and stuck.’) I have overstayed markets at times, but this is not, for me, really a failing. Because most of my success has been due to my hanging on while my profits mounted. There is the big secret. Do with it what you will."

Arthur W. Cutten, the commodities trader from the 1920′s.

Of course all great traders will tell you the same thing essentially. Find your bull market and then hang on to it, never losing your positions completely. If you have a mind to it you can buy weakness and sell some on strength to improve your cost basis and for tax purposes, but only if you hold the position while the bull market is intact.

Jesse Livermore said the same thing. "The market does not beat them. They beat themselves, because though they have brains they cannot sit tight."

Jim Sinclair, who I consider to be a great, classic trader of our day, says the same thing as well.

As you may recall, Arthur W. Cutten eventually went into a decline, because he did not follow his own advice. Also, most traders develop ‘difficult’ personalities and occasional medical problems because of the continuing stress of the markets, and eventually fall into some personal decline and habits that have a negative effect on their trading. Jesse Livermore was one of these. Some start thinking they are bigger than the markets, and lose their edge and take the big hit and never recover, as in the case of ‘tech bull’ William C. Durant.

The best gains I have ever made have been in positions held for a long bull market, some of which I still hold.

The greatest quick gains I have made were by being short in an obviously declining market. The profits are fabulous. They are too good. Being short the market is an occasional thing, less than 20% of the time is a short position appropriate. But the gains are so intoxicating that the bearish trader can never sit tight and wait, and fritters away those big gains in the long drifting markets through small losses and transaction fees.

People who have lost their positions in a bull market completely will try to shake you out of yours; misery loves company, and there is nothing more miserable than to have been right, but then to have outsmarted yourself and lost your place, and not profited from what you had known is right. And the agony of the decision of when to buy back can be quite stressful.

Find your bull market, understand why it is valid, a genuine article, and then stick with it until it is no longer valid, even through corrections which all bull markets must experience. This requires you to develop some basic knowledge of trends and charts. Would your drive if you did not know how to read a map?

Most people, about 95% or so, cannot trade actively even on weakness and strength, and should stick to the long trends in markets only, sitting out in cash when appropriate. Emotions are powerful things, and can cause the mind to rationalize almost anything, any data. Nevery try to be the first in or the last out of a trend.

The market makers and insiders can see what you are holding and have better access to capital and information than you can have. Trying to beat them in the short term is foolishness, even though you might get lucky for short periods of time, you will give it all back and more.

Most people’s opinions on the markets are worthless, even damaging, because they run with the herd, or may be jealous of your success and wish to drag you down into their own perceived personal failures. If a person cannot show data that you understand to justify their position, even after you query them and they explain it, then ignore them, because they do not know anything useful, even though they may claim great results, and show the occasional ‘hit’ in their calls.

Making incessant market calls are a way for failed traders to try and get back some of their broken ego. They will write their successes in marble, and their failures in sand. Making a bad market call and then repeatedly revising it, and revising it, to eventually be correct is the worst sort of self-deception.

There is no greater waste of time than trying to find the perfect system, a mechanical means of predicting the future. Look for the big trends, and then learn to patiently trade them with sound money management and a willingness to learn from the market and new information.

This is what I consider to be the ‘secret’ of being a successful trader.

And nine tenths of it is not in the knowing, but in the discipline of doing it, day in and day out. Mastering your self, your ego and emotions, even boredom, is the greatest challenge to successful trading, and it never ends.


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