"Money and position management-- waiting for entries (triggers), the use of protective stops, trailing stops, and profit taking--is crucial to your long-term success as a trader. A simple money management system is to take at least half of your profits when they are equal to or exceed your initial risk. You then move you protective stop on your remaining shares to breakeven. This way, barring overnight gaps, you have a "free" position that has the potential to turn into a homerun (through the use of trailing stops)." - Dave Landry
"Believe it can be done. When you believe something can be done, really believe, your mind will find the ways to do it. Believing a solution paves the way to solution." - David J. Schwartz
Jesse Livermore was perhaps the most famous stock trader of the early 20th century; he made and lost millions of dollars in his day. And, for the record, that was a lot of money 100 years ago. Livermore was most famously immortalized in Edwin Lefevre’s thinly veiled biography Reminiscences of a Stock Operator, probably one of the best and most helpful books on trading and investing ever written. One of Livermore's trading rules was “Be right and Sit Tight.” He also said this is one of the hardest lessons for any investor to learn. In other words, Livermore suggested jumping on board a major trend and then having the courage to hold on to make the really big gains.
"A prerequisite of a high level of success is a high level of resilience with respect to loss and defeat." - Brett Steenbarger
"Nothing is impossible; there are ways that lead to everything, and if we had sufficient will we should always have sufficient means. It is often merely for an excuse that we say things are impossible." - Francois De La Rochefoucauld
``Markets know more than you,'' says Jim Rogers, a founding father of the hedge-fund industry.
``The market is right and you are wrong,'' says Yra Harris, who has traded in Chicago's futures pits for almost three decades.
``Markets are very humbling,'' says Sushil Wadhwani, a former Bank of England policy maker who runs his own fund.
Christian Siva-Jothy, the former head of proprietary trading at Goldman Sachs Group Inc., went from making $100 million in 1993 to losing $40 million in a single day in 1994. He lost as much as $200 million when the British pound fell against the yen. ``I was a bit full of myself,'' he says. ``The market found me.''
Humility, it seems, helps top investors to dodge disaster. ``I'm really humble about my ignorance,'' says Jim Leitner of Falcon Management Corp., who estimates he's made more than $2 billion for investors and employers in his trading career.
``Many traders I've met over the years approach the market as if they're smarter than other people. I have found this approach eventually leads to disaster when the market proves them wrong.''
Getting out of losing trades fast, throwing as much money as possible at winning trades and recognizing that you can be right and still lose all your capital are essential tactics. In 1992, for example, George Soros's Quantum Fund made more than $1 billion betting that the peg between the British pound and the currencies of Europe would break.
``Shorting the pound was Stanley Druckenmiller's idea,'' says Scott Bessent, who was then running Soros's London office. ``Soros's contribution was pushing him to take a gigantic position. George used to say `if you're right in a position, you can never be big enough.'''
Knowing when to fold is important. ``However strongly you believe in something and however coherent the case is, you need to be willing to accept that you might be wrong,'' says Wadhwani, the former central banker.
``The stop-loss is by far the most important aspect to a trade,'' says John Porter, who runs Barclays Plc's cash positions. By setting a limit on how much money a trade is allowed to lose, ``you'll never blow up.''
As the hedge-fund industry matures, it may be sowing the seeds of its own destruction. Investors are becoming less willing to take big risks to make big money.
``In general, people aren't trying to make money nowadays,'' says Bessent. ``A lot of these guys have huge asset bases, so they're running a business, not a hedge fund. That's what's interesting about Soros. If he was up 20 percent in June, he would try to be up 100 percent by December. Most people today will close out their positions and take the rest of the year off if they're up 10 percent in June, and that's what their investors want them to do.''
``In trading, like golf, it's how you play the bad shots that really matters,'' the trader says.
``Recognizing when you're right is as hard for some people as recognizing when you're wrong. I find it comical to see people cut their profits and run their losses, but it happens all the time.''
He's less than complimentary about books on trading. ``They're all obvious rubbish, full of stupid things that probably don't work anymore.''