I was a trader, but didn't understand it was a business.
When I started trading, the internet was just becoming something that was rare to find other people using. Forget coffee shops of laptops, the computer lab at a university was likely the only place to get on-line. AOL was just starting to be an "access layer" to the internet.
Back then you had to call your orders in, there was no online trading.
Then we got online trading. I actually woke up at 4:30am, worked out, got dressed and drove 45 minutes to an actual trading floor.
It was different than the trading floors you see in these old movies where people are screaming at each other, throwing elbows, running back and forth to computers and phone banks.
The trading floor I went to was just rows and rows of big monitors (not flat screens), and people at desks. Oh there was yelling from time to time, mostly it was the sound of CNBC and keystrokes.
I thought I was a genius, I would buy some random tech stock, it'd go up and I'd sell at some random number I made up.
The same random tech stock would go down for a few days, I'd eventually buy again (because it was at such a "discount") and magically, the price would go back up, I'd make more money and of course re-proclaim my genius status!
This worked quite well for me for a year or two. There were some blow ups, I lost plenty of money, then made it back and would lose it again.
One month it'd be weekend trips, lavish meals, new clothes. The next I'd be ordering off the dollar menu.
Eventually the Dot Com bubble popped and trading got a lot different.
Prior to the "bubble popping", I was beginning to be mentored by a more senior trader. I don't know what I did to be brought under this traders wing, but I was happy to be there.
For the first time I was taught about planning, technical analysis, risk management, emotions, really this is when I learned that I can do this for a living.
Trading is a profession. It's a real job and provides a real service to the markets.
So what is a Trader?
Traders make money by buying and selling.
Traders protect their capital so they can live to trade another day.
Traders know the odd's of winning or losing on a trade and accept losses just as readily as wins.
Traders never risk more than they can lose on 20-30 trades in a row. (Yikes!)
Imagine if you wanted to sell your position and there was no one else to sell it to, you'd have to keep offering at a lower and lower price. Traders are those who step in and buy when the world is collapsing.
Who do you think sold you Bitcoin at 17k when everyone was proclaiming it's going to 25k before Christmas? Yep, the trader.
There is a saying "Everyone is a Genius in a Bull Market!"
I was the epitome of this. Then the market starting showing some cracks and we'd get some big sell offs that had a lot more intensity than before.
As I progressed, I learned more about short selling. Being on the trading floor I was well accustomed to short selling, but I only did a little bit of it. In my mind, the market would sell off a little bit, then rally. Why risk it?
There really wasn't a trading plan, a trading style, at that point in my early trading career, I'd just hunt the biggest price changes and jump on for the ride on big up days, or buy the biggest sellers on the down days. Worked until it didn't.
Eventually I worked my way on to my mentors trading desk. He is what we'd call today, The Whale, and he had rules for me.
1- I could only trade the stocks he told me to trade, when he told me to trade them, and how he told me to trade them.
"Buy 1 unit Softie at 33 1/16 and offer for a teenie"
Let me break that down;
1 Unit = 10,000 shares
Softie = Microsoft
1/16 (back then we traded in fractions and 1/16 was the smallest fraction you could do)
Offer for a teenie = Sell at 33 1/8 capturing a "teenie" was 1/16th also $62.50 per 1,000 shares.
Same for short selling
"Short 1 unit Softie at 33 1/16 buy at a teenie"
I would dutifully execute this entire trade for a total profit of $625 in about 30 seconds time.
We weren't right all the time, but at the end of the day we were up more often than we weren't.
In California, the market opened at 6:30 am and we'd be done by 8 am. You DID NOT trade any more that day.
Nowadays this sort of "scalping" is done by algorithmic trading, and they are scalping .001 (or less) in microseconds. But back then, we had very limited exposure to the market for the few minutes that cash was actually deployed. We'd trade hundreds, thousands of times per day in that little 1.5 hour window.
Our risk was very limited, we had lighting fast computers and connections (for the time), our minds were sharp and we rarely were exposed to any big event risk. If Alan Greenspan was going to talk, or PMI was coming out, we'd just not trade for that 5-10 minute window.
Then the party started to end. Fellow day traders were flooding the market, the easy profits weren't there, and just like all trading, we had to adapt to a new market.
My days changed from trading frantically for a few hours to manually studying charts, getting taught technical analysis and arduously filling out spreadsheets.
We were looking for repeatable, predictable patterns. When I thought I had one, I'd have to put it up on the big screen and present my findings.
It typically went something like this...
"This is a 5 minute chart, a 15 minute chart, a 30 minute chart and a 60 minute chart. Using RSI, Stochastics and MACD all in a general sell position buy RSI is still above 80, we short sell at this price and ride the trade for 15 minutes until it looks to retrace and cover at market"
Everyone on the trading desk would then build the same layout and we'd start manually back-testing our strategies.
Eventually we'd discover trading strategies that were often mixed and matched from everyone's presentations and back-testing. We all became damn good at technical analysis due to the sheer amount of back-testing and research on trading strategies we did.
Nowadays we can back-test 100,000's of data-sets in seconds to come up with a high performing strategy, but I must say, the manual part of digging through charts, writing down thoughts, creating hypothesis, then stepping through each candle one by one is still the best way I know to get a feel for the market.
We were looking for a couple of things, and to this day I still rely on the same basic principles.
- 4:1 risk/reward, if we were going to risk $1,000 win, we had to only lost $250 in losses over time. Typically over 1,000 trades.
- Repeatable - these patterns, risk/reward would repeat over time across different asset classes.
- Predictable - we could know when a trade was setting up, before it actually happened.
- Max Draw down < 20%
Really simple requirements, very hard to find, and maintain over time.
The result is I learned how to become a professional trader. After about a year working on the trading desk, being mentored and trading along side some of the best traders I'd ever meet, and making myself a good pile of money off of the partnership's capital, I eventually went back out on my own.
Crap! I forgot that I don't have millions of dollars to trade with. I gotta get use to making only $50, $100, $250 per day and losing money every 3rd or 4th day.
The one thing that I didn't learn was to create a trading plan. My mentor had a very thorough and well thought out trading plan, but I didn't realize it. He always talked about trade to the plan, I just thought he meant the plan that we all created and agreed upon.
After out on my own for a bit, my mentor and I met for coffee one afternoon. I told him that it's been a bit of a struggle, I'm trading well but I feel like I'm just treading water. He asked to see my trading plan and we could go over things.
"Uhhhh, well my plan is to buy or short this % of total equity when a, b, c or d happened. Not to trade news events, and not to trade past 8am."
He then showed me his trading plan. Yes he carried it with him. It actually was a printed and bound document marked up with pencil notes, screen shots of charts, spreadsheets showing the financials, risk management, what if he lost >10% in one month and so on. It was a very detailed business plan for trading.
Literally, since that day I have not looked back. I've been a professional trader, hedge fund manager and developer ever since. Without the trading plan I don't know where I'd be. But with the trading plan (which I continue to update constantly) I know where I am and have a pretty predictable idea of where I'll be in the future. Right now Cryptocurrencies have the majority of my attention as an asset class, just like S&P 500 did, just like FX did, just like Energy did, just like Tech Stocks did...in the past.
I will be writing about what it takes to be a professional trader over time, perhaps market analysis and certainly open to offering my insights into the world of finance, cryptocurrency, hedge funds and trading for a lifetime.
