The New Market Wizards: Conversations with America's Top Traders (37 page)

I couldn’t agree more.

What would you say to the trader who says, “I’m making money overall, and I’m using stops to limit my losses, but I still have a lot of anxiety about trading. I still can’t stand to lose.”?

I would tell that trader to think of each trade as one of the next one thousand trades he’s going to make. If you start thinking in terms of the next one thousand trades, all of a sudden you’ve made any single trade seem very inconsequential. Who cares if a particular trade is a winner or a loser? It’s just another trade.

Do you do any mental exercises to relax, or is that not necessary now that you’re fully computerized?

I probably do more mental exercises now than I ever did. Each morning while I’m driving to work, I make a conscious effort to relax. I mentally rehearse any conflict that might happen that day. The process of mentally organizing and relaxing before I get to work helps me start my day in a very positive frame of mind.

In effect, are you visualizing all possible crises or tensions that might occur and how you would respond to them, so that if they do arise, they’re not stressful?

Exactly.

Can you give me an example in which that mental attitude was put to the test of fire?

A good example is the recent Gulf War. On the evening of January 16, 1991 [the night the United States launched the air war against Iraq], I had come into the office to do some computer work. While I was there, the news of the war broke, and crude oil prices shot up to $40. I happened to have a substantial long position at the time. My first thought was…

“We’re going to have a great day tomorrow.”

Actually, I think my most immediate thought was, “We’re going to have a lot of volatility and risk control alarms going off tomorrow, and we better be prepared.” I called our managing director, George, at home to make sure he was aware of the situation.

He said, “I know, it’s on all three networks. I’ll be in early.”

The next morning, I was drying my hair after coming out of the shower, while my wife was watching the news in the next room. I thought I heard the newscaster say that crude oil prices were at $22. Of course, I couldn’t believe the number. I thought to myself, “Was that $42? Or maybe $32?” I walked into the bedroom and asked my wife, “Did he say $22?”

“I’m sorry,” she said, “I didn’t hear it.”

I waited for the story to come back on and found that the price was indeed $22. I called up George and asked him, “Did you see the news? We’re really going to have our work cut out for us this morning.”

We both got in early, ran all the programs, worked out all our risk alarms, and called in all the orders before the openings. We did everything we had planned to do. By 9:30, everything was done—all our orders had been placed, we had received our execution prices, and we had our new position balances figured out. I sat back, let out a sigh of relief, and asked George, “What do you think we lost on this today?”

“I would guess about 15 percent,” he answered.

“Yeah, I would guess about the same amount,” I said.

I sat there for a moment and thought about all the events and actions of the previous evening and that morning. I realized that there was not a single thing I would have done differently. Despite having just lost 15 percent in our portfolios overnight, I felt phenomonally good at that point.

Because you had done everything that you were supposed to do?

Exactly.

When you went to sleep the night before, was the market still trading above $40?

Yes.

Did you assume it was still going to be up the next morning?

Sure.

It must have been a great shock then to discover that crude oil prices had gone from being up $8 the night before to being down $10 the next morning. What were your gut emotions when you realized that your profits of the previous evening had suddenly been transformed into a gargantuan one-day loss?

I wondered how my programs were going to deal with the volatility in crude oil going from $1,000 per day [per contract] to $18,000 per day. I was both excited and horrified at the thought of how my programs would handle the situation. I hoped that I had done a good job in preparing for a catastrophic event.

But on the inside, didn’t you have any hurt or depressed feelings?

No, I was more curious.

That is exactly the attitude I find so fascinating. Your portfolios went from being up sharply the night before to a 15 percent loss the next morning. Most people would have some very negative emotions in that type of situation. How were you able to respond with such emotional aloofness?

You have to put it into perspective. I’m fond of thinking of trading in terms of scores of years. If I live long enough, I’ll trade for fifty or sixty years. I figure that, over that time span, I’ll see devastating declines, spectacular advances that I virtually can’t believe, and everything in between. If you have done mental rehearsals to see how you would react in different catastrophic situations, then when such an event occurs, you become curious.

Curious to see if you’re going to follow your mental rehearsal?

Exactly. You feel like you’ve already seen this movie once before, and you wonder whether it’s going to come out the same way.

How do you handle such situations in your mental rehearsal?

My mental rehearsal for a catastrophic event is to picture a doctor in a triage situation. He’s in a battlefield emergency operating room. In come fifty bodies. Some are going to live; some are going to die. The doctor has been trained to handle the situation. He’s going to make all the necessary decisions. “This patient goes to operating room number one.” “This patient gets pushed aside.” He’s calm and collected, not nervous. He knows that he has the best chance of saving the maximum number of lives. He knows that he can’t save them all, but he’s going to do the best he can with what he has.

You just stay focused on what you have to do.

Exactly.

Does that focus actually shut out any negative emotions that might arise?

Who knows? You don’t really think about it at that point. You don’t get thrilled at the gains either.

Actually, being thrilled about the gains isn’t so desirable. One trader described the emotional flux to me as follows: “When I’m losing money, I’m upset because I’m losing. When I’m making money, I’m anxious because I worry that I won’t be able to keep it up.”

I liken emotions in trading to a spring, with emotions being stretched up and down, up and down. While it’s going up and down, it’s kind of thrilling, but eventually the spring wears out. Burnout sets in, and you realize that maybe it isn’t so much fun to be on this emotional roller coaster. You find that if you can just keep your emotions in balance in the middle, it’s actually a whole lot more fun.

How do you achieve that balance?

I focus my total attention on trading well, and let the results take care of themselves.

It sounds almost as if you’re viewing yourself from the outside, completely detached.

When I was in high school I had an extreme fear of getting up in front of the class and talking. My knees would literally tremble. I eventually learned to deal with the situation by disassociating and observing myself. I was able to have this observer show up in times of stress. When I found myself shaking, my observer would say, “Why are you shaking, Tom? Just relax. You’re talking too fast. Slow down a little bit.”

Eventually, I found that the observer was there all the time. If you’re watching yourself doing everything, you get pretty close to watching a movie. The observer is watching you play a role in this movie called
Life.

Is this advice that you give to people in general—try to be an observer of yourself?

Absolutely. I couldn’t recommend it more. If instead of saying, “I’m going to do this trade,” you say, “I’m going to watch myself do this trade,” all of a sudden you find that the process is a lot easier.

How does having this observer help your trading?

The observer is able to say, “You’re getting greedy on this trade, watch out.” You might be straining and struggling because some of your indicators are bullish and some are bearish, and you don’t know what to do. The observer might say, “How about doing nothing? You don’t have to trade.”

This concept is something I would recommend not only for trading but for life in general. There’s no reason why you have to struggle and strain and claw your way through life.

But if you’re observing your life, you’re not living it. It sounds so detached.

That’s what a lot of people think, but it’s not like that at all. Think of life as a movie in which you’ll see what you’re seeing right now only one time. You’ll never see it exactly the same way again. Absorb it; be aware of it; enjoy it.

What advice would you have for people who feel stressed out?

First, keep things in perspective. The universe is overwhelming. It was here before you were born, and it will be here after you die. In the general scheme of things, your problems are not that important. Also, it helps if you view your life as a movie. If you go to a video store and rent a horror movie, you’re voluntarily letting yourself be horrified, and it’s not stressful because deep down you know it’s just a movie. What if you had the same attitude about life?

Earlier you mentioned that you envisioned yourself trading for about fifty or sixty years. Do you really expect to continue trading all the way through old age? Have you ever considered an earlier retirement once you reach some specified monetary goal?

Actually, I briefly toyed with the idea of retirement several years ago. My wife asked, “What would you do if you retired?”

“Well, I would set up my computers and quote screen at the house,” I answered. “I would do some trading and spend most of the time on research developing new systems. I would take some time each morning to read the
Wall Street Journal
and other financial periodicals.”

My wife listened patiently and said, “That sounds exactly like what you’re doing right now. The only difference is that now you have a staff to back you up when you want to go on vacation.”

Of course, she was right. I realized that I was really doing what I loved to do and would be doing it anyway if I were retired.

Your trading approach is obviously heavily computerized. Is it entirely mechanical or do you still make some discretionary decisions when entering trades?

My intuitive feelings about the markets are probably right more often than they are wrong. However, having observed myself as I do, I notice that sometimes the trading signals that I’m intuitively most nervous about turn out to be the best trades. Therefore, over the long run, I think my performance is best served by following my systems unquestioningly.

There’s another aspect to why I prefer a purely systematized approach. I find that using systems gets the monkey off your back. If you lose money today, it’s not your fault; it’s the system that had the problem. There is an element of disassociation involved. Even though you designed the system, you start taking losses less personally. At least that’s what happened to me. Once I was fully computerized, I found that I was less and less emotionally involved in each trade.

I now have much more time available to pursue a variety of work projects and personal interests because I’m not tied to a quote machine watching every tick go up and down. In the process, life has become much more fun.

If you were starting out as a trader today, knowing what you know now, what would you do differently than the first time around?

I started out by worrying about the system I was going to use to trade. The second factor I worked on was risk management and volatility control. The third area I focused on was the psychology of trading. If I had it to do over again, I would reverse the process completely. I think investment psychology is by far the most important element, followed by risk control, with the least important consideration being the question of where you buy and sell.