The Top 5 Lessons For Trading Anything

Authored by Nicholas Colas via DataTrekResearch,

“How did you feel when you bought that position?”

An odd question, perhaps, but I heard it every week during my first year at SAC Capital in the late 1990s. My inquisitor was Ari Kiev, who was the in-house psychologist there. He met with every trader in the room on a regular basis. For new guys like me, it was the toughest hour of the week.

We’d go down a list of every position I had traded and discuss each one in minute detail. What was my logic? What catalysts did I expect? Who had I spoken to?

But there was one question I hated the most…

“Why didn’t you get bigger?”

That question, in a nutshell, is the essence of trading. You make most of your gains from a handful of names where you owned enough to really generate an outsized return. Put on 20 ideas a week, and 1-2 really work. The trick is to identify those early enough and then buy or short as much as you can stomach. The rest of your ideas usually just net out to zero.

I bring all this up because I have noticed something strange in my conversations about bitcoin with many savvy Wall Street types: they don’t know/remember many old-school rules of trading. Perhaps the last +5 years of low volatility US equity markets have made those skills rusty. Or maybe they think crypto currencies are different from equities – more volatile, different fundamentals, whatever…

Fortunately for this discussion, I have the memory of an old embittered elephant – I remember everything, including plenty of things I should probably forget in order to live a happier life. Bad for me, but good for you. Because I remember those sessions with Ari like they were yesterday.

Here’s what I know about trading anything, from bitcoin to stocks and everything in between:

#1: Respect the trend. No one is bigger than the market. Early is the same thing as wrong. Don’t short new highs or buy new lows. Don’t buy or sell based purely on valuation.


Sorry for all the clichés, but they are all 100% correct. Trading means admitting you aren’t the smartest person in the market. Someone always knows more than you, and chances are good they are acting on knowledge you don’t have.


This is especially true with crypto currencies. They are – and will continue to be – extremely leaky in terms of information flow. You will never, ever, be the first to know anything.


#2: Plan your trade, then trade your plan. One thing I learned at SAC is to document everything I thought was important prior to entering a trade. Catalysts – events like earnings announcements, management presentations, trade shows – were on the list in minute detail. So were macro events that might move the stock, as well as market events like rebalances and options expiration.


Case in point: the bitcoin futures set to launch next week. I’ve heard plenty of people say these will be beneficial to bitcoin’s price. And with bitcoin ramping to new highs today, that seems to be right. But will that trend continue once the futures start to trade? That is an entirely different calculus. And I doubt anyone really knows what will happen.


#3: Set targets, stops, and time frames and write them all down before you buy your first share. This sounds simple, but the process is extremely helpful. You pair up your expected catalysts with price targets and time frames.


Remember the “Why didn’t you get bigger?” question… This is where it makes its appearance. You won’t always know how “right” or “wrong” you are until events start to unfold. But sometimes you really have it right, and that’s when you add to a position instead of just taking profits and moving on. You were right about something, but didn’t see just how powerful your observation was.


Writing everything down before you start eliminates some of the selective memory bias we all have, and keeps today’s “You” honest relative to “you” before you entered the trade. Those are two different people, and they need to be able to communicate honestly with each other.


#4: Don’t ever turn a trade into an investment. In the words of Bob Dylan, “If something’s not right, it’s wrong.” Even for a small position, if it is a loser you sell it. We’re not managing P&L here; we’re managing your time. Once you sell something you will spend no further time worrying about it. You can make more money – you can’t make more time.


#5: Know yourself. Everyone has different risk tolerances, so no two trading styles are exactly the same. Some traders can carry 10 positions and maxed out leverage and happily live with the resultant volatility. Others (myself included), like to limit drawdowns and always have gas in the tank in the form of unused capital.

In the end, that last point should inform all the others. Trading and investing are both manifestations of how we make decisions. That process is a function of our personality, risk tolerance and experience.

So when somebody asks me if they should trade/own bitcoin, my first answer back is “I don’t know… Tell me about yourself.”


hedgeless_horseman E5 Fri, 12/08/2017 - 12:26 Permalink


What do you do with that money then? 

Give some of it away...

6) Dave Ramsey's Financial Peace University $119 We have given this 9 week course as a gift to family and employees, always recommending the live classes over the online.  It works because Dave understands that getting out of debt and building wealth is not so much about knowledge, as it is about behavior.   mrs_horseman and I regularly use Dave's tactics for talking with your spouse about money, which alone is worth the price.

And maybe buy myself and mrs_h each another pair of Paul Bond custom boots...

11)  Paul Bond custom cowboy boots $1,000 and up   In Marfa, many of you asked where we got our cowboy boots.  For more than 30 years our answer has been and remains Paul Bond.  There is simply no better boot maker in the universe.  As a gift to yourself, send in your measurements, and have a pair custom made.  They will last you a lifetime, and you will never regret it.…

In reply to by E5

Decay is Constant hedgeless_horseman Fri, 12/08/2017 - 14:11 Permalink

I enjoyed this article as well.  I learn a lot from reading ZH.Being in the medical profession I can add #6.  Never take investing advice from a physician.That being said, bought a bit of a few different alt coins (staying away from the bitcoin) and hodling them.  Tried to do a bit of balancing between them as they grow/fall, but not sure that does much.  Transactions do eat some of the profits.Can't see how some of you folks make a living out of this.  The stress must be unbelievable.  Would much rather run a code.

In reply to by hedgeless_horseman

Provocateur Decay is Constant Fri, 12/08/2017 - 18:43 Permalink

I grew up poor, and I mean POOR...think eating road kill and illegal poaching poor.  Grew our own food, raised rabbits, my brother and i collected bottles, cans, as scrap poor.Money was EVERYTHING.  money was SACRED.But I joined the military, put myself through college, got a degree in Mechanical engineering.  Made damn good money, but never lost the "poor as dirt, money is everything" mindset.  Got divorced, lost a bundle.  My mindset changed.  I saw that Amazon, Ebay, and PayPal would survive the .com bust and grow, but had no funds to invest.  Decided I was gonna get over my fear of money either thenSo I rented my house and moved.  And did it again.  And again.  And again. Scared shitless, but it has served me VERY well.  2008 crisis sucked, on paper, but I've stuck with it, and never really felt it.  I had $100K in the market, but saw the crash comming, and got out at the top.Now, when I see an investment I like, I buy it.  I never risk money I would lose sleep over.But now, money is no longer something to be feared.  Now, whenever I lose, I say :"'s just money"And THAT is what let's me sleep at night. BTW, that $100K in 2008? It's now $600k.  Being scared of money is what's kept the rest of my family poor.And yeah, I stack phys, but I lost it all in a boating accident.

In reply to by Decay is Constant

JDFX Fri, 12/08/2017 - 11:49 Permalink

Remember / plan for the random element of price action. You just won't see it coming..... So implement measures to account for this on positions.   

N57Mike Fri, 12/08/2017 - 12:01 Permalink

“If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.”  Sun TzuThe Art of War

silverserfer Fri, 12/08/2017 - 12:21 Permalink

why  invest in others potental sucess? Invest in your family business, pay down your mortgage, start your own small home based busniess on the side. All of those are much safer investments. Truth is, people like to gamble and my suggestions are just to boring for most. 

Itch Fri, 12/08/2017 - 12:23 Permalink

"We’d go down a list of every position I had traded and discuss each one in minute detail. What was my logic? What catalysts did I expect? Who had I spoken to?"Riiiiiight, and who had you spoken to?

Brazen Heist Fri, 12/08/2017 - 13:41 Permalink

1. Go with your gut instinct, this is more often right than not.2. Don't get hung up about a trade if the market moves against you when you close your position. You already made a profit, or if not, try another day.3. FOMO trading is tempting, but put the emotion aside and see what the indicators are saying.4. Patience.5. Holding assets with stronger fundamentals will make you sleep better through the turbulence.

reload Fri, 12/08/2017 - 14:26 Permalink

I worked with some very successful futures traders in my time `back in the day`.They were the minority. Many blew out pretty fast, without ever tasting success. Some blew out later in spectacular fashion after eventually forgetting to leave their egos at the door one time too many. Others faded away when a new dynamic to their given market left them unable or unwilling to adapt.There were plenty also who chiseled away and mechanically tried to follow the rules to the best of their ability, risk appetite or tollerance as well as variance in ambition or work ethic leaves a lot of variance in this group.And of course there were a very few, who could follow the rules on any given day, and remain foccussed even in quiet, thin or trendless markets and almost always go home with a very respectable gain on their account, a TINY minority among them also had the ability to sense when something BIG was afoot, to read it right and to go immediately into risk on mode with no holds barred. It was how this tiny minority behaved on `the big days` that set their bank ballances so far apart from the rest of us. On such days I would reduce lot sizes to allow wider take loss / proffit points or to permit a small amount slippage in my entry prices. They would increase lot sizes, permit themselves to add to losers as well as winners while very agressively succeeding in takeing out offers or bids that were in the way of desired directional movement. On these big days they were comfortable with the idea that they may end with  P or an L, they adapted to the opportunity and traded well enough and unemotionaly enough to ensure that there were more P days than L days and tht the P days were mush bigger than the L days.For clarity - I did the majority of my trading the old fashioned way, in the archaic mayhem of `open outcry` So what set the consistantly successful, adaptable and ruthlessly effective traders apart? Noy being one of them I can not say for sure. But the two most common traits were an almost obbsessive concentration on what was going on accross the entire trading floor, particularly in the back month contracts. The other, as was pointed out to me by one such fellow was that `Bsically I trade a 1000 lot position, pretty much the same as a 1 lot possition` Even if your account size means that is mathematically possible, most humans simply dont have the balls or the energy !The mindset of somebody concentrating 100% on `trading well`in what he understands to be an oportunity rich environment is completely different to that of somebody simply trying to win big. If you `trade well` you will do well - how well depends a lot on your own sphyche and your understanding of it.If you want to strike it rich in a hurry, stick to lottery tickets and daydreams. It will hurt less than trading! 

adr Fri, 12/08/2017 - 15:29 Permalink

When I gamble, I start with $20. I look at a Roulette wheel and look for a pattern. Then I bet on red or black. I usually guess right, but sometimes I lose. If I win, I take the first $20 and put it my pocket. If I lose, I'm out $20. I then gamble with the rest always keeping the first win off the table. My rule is if I lose twice, I'm out.My record was up $2600. I lost $800 and was out. Keeping $1800 off $20 was pretty good. Now I could have gambled it all every time, maximum risk for maximum reward but I don't do that. I'm not going to make the maximum gain, but I'll never really lose.Investing is supposed to be hard, gambling is not. Much of what is called imvesting today is just gambling with bullshit to make it sound smart.

roodeetoodee Fri, 12/08/2017 - 16:04 Permalink

I read this with the french doors open on a sunny day. Just as i finished i farted and the wind from the open doors blew the oder back up and into my face. So I'd like to share my top 5 rules to avoid farting in your own face:So 1. Dont read2. French doors are gay - just go outside properly.3. Dont fart when your face is at the same height as your ass4. If you break rule #3, at least turn your head5. Dont break rule #3 

northern vigor Fri, 12/08/2017 - 16:43 Permalink

Two truths to trading....Grandad explained the hog business to me when I was six. "Sell when everyone else wants to buy, and buy when everyone else wants to sell." He said this rule worked for everything.Later when I stole my first farm from the banks in 1982, the realtor asked me what  was I going to do with it? I said I'd sell it as soon as it doubled in price. He said "well, no one ever went broke selling at a profit". 

DEMIZEN Fri, 12/08/2017 - 18:43 Permalink

you don't need a shaman, just buy the fucking dip. targets are yesterday. fundamentals are nonexistent. scalp. if the dealer doesn't let you ==> change the dealer.crowds are return-frenzy and it will stay that way for years to come.

Grandad Grumps Sat, 12/09/2017 - 09:04 Permalink

Bitcoin is not investing. It is gambling that the trend will keep going and that you will be able to sell your coin to a bigger sucker.

A. You have to be able to sell the coin.
B. There has to be a sucker who wants to buy.

All markets run by the banks are frauds.