I came across a good article (link here) of an interview with Bill Lipschutz, former MD and Global Head of Foreign Exchange at Salomon Brothers. The article noted that Bill made more than half a billion dollars for Salomon over 8 years.
I highly recommend people to follow the link above to read the full original article. Some of my takeaways from the interview are captured below.
Recently I have been noticing this repeated point that Bill also made about how the really great traders are simply absorbed in the trading game. They get into a state of ‘flow’ with trading. Bill made an interesting point that for such people, they don’t really think about the price that they are paying (or sacrifices that they are making) because to them, they are simply loving every moment.
Don’t Be in the Market When There Is No High Probability Trade
- The whole game of trading is to continuously work for an edge. Continually take the high probability bets. Take those all the time, and by definition you will come out ahead, as long as your risk of ruin is low enough so that you do not get blown out with any one or two or three bad bets, a bad streak.
- If most traders would learn how to sit on their hands 50% of the time, they would make a lot more money.
Always Look for a Good Risk / Reward Ratio
- Of course when you first put on a trade you do have target levels, levels at which you think you are wrong.
- With a trade you always look at a multiple upside to downside. But how much greater? A good rule of thumb for a short-term trade – 48 hour or less – is a ratio of three to one. For the longer-term trades, especially when multiple leg option structures are involved and some capital may have to be employed, I look for a profit to loss ratio of at least five to one.
Find the Best Structure to Express Your Trade Idea
- There are a million ways to structure the trade and the devil is in the detail. You could have the dead right idea and lose money. If your timing is slightly off, you could lose. You have to structure your trade in a manner that increases your probability, your upside, and decreases your downside.
- For example, there are a lot of ways to be long the yen. You can buy the yen, buy calls or sell puts. If you want to be long the yen and yen volatility is very low, then buying calls is going to be very attractive. If volatility is very high, then maybe selling puts is very attractive. But if the volatility is extremely high, then selling puts may not be the best thing – maybe just buying the underlying asset may be the best thing.
Source for Other Perspectives on How the Market Will React to a Piece of Information
- You develop a fairly robust network where, particularly in foreign exchange, different people in different countries will have different perspectives and you can tap into that.
- The benefit of pyramid information is not that it saves you work – there is no substitute to your own analysis – but rather, you can cover a wider quantity of material. Moreover, pyramid information allows you to get a ‘second opinion’ on your own analysis, thereby providing you with a safety net.
Consider Factors That Will Affect Market Participants’ Perceptions Even if You Don’t Believe in It
- I have always been a discretionary trader with my analysis based on fundamentals…. Whatever kind of a trader you are, you have to be aware of perceptions in the market place, that can influence the participants’ behavior. If a lot of people are charting and they think that a certain level is a key level for whatever reason – lunar, astrological, who the hell knows – then you have to be aware of it. Because it is going to cause a certain number of market participants to react and you have to be aware of it. You have to understand how that is going to affect your position.
- You have to be aware of all these technical techniques, such as momentum, because a lot of market participants use them and so they can affect the market.
Options Are Not Appropriate as an Insurance Policy
- I have always felt that using options as an insurance policy is probably not appropriate for the professional trader. It may be appropriate in market sectors where there is not much liquidity or if price movements are often discontinuous. However, as neither is the case in foreign exchange, a professional trader who is ‘close to the market’ at all times that he is carrying an open position will be able to cut the position and get out if it goes against him. Only in the infrequent case of a professional who carries extremely large positions which alter these price characteristics of the market would I favour the use of options as insurance.
TRADING TIPS: THE SOFTER ASPECTS
Talent and Industry Are the Key to Trading Success
- You very seldom see very bright, insightful people who are also really hard-working, with a real work ethic. You look among the top traders – they are both. They are very smart, insightful and very hard working, and very organized. They may appear to be scatterbrained, but they are not.
- You see plenty of really bright people who don’t make it as long-term successful traders because they are not willing to put in the time.
Truly Successful Traders Are Insanely Focused on the Game
- If a trader is motivated by the money, then it is the wrong reason. A truly successful trader has got to be involved and into the trading, the money is the side issue… The principal motivation is not the trappings of success. It’s usually the by-product – simply stated ‘the game’s the thing’.
- Most of the top traders have a child-like fascination with the game. Whether it’s the psychological elements of the game, the technical elements of the game, whether it’s the nameless, faceless aspect of a market, or them as single individuals against the market, or beating their brains against everyone else’s.
- There’s a kind of almost insane focus you must have to achieve trading excellence… I think people in our own industry do not understand the importance of this type of focus. You will always get people who will look at a trader and think, “God, he’s up at 5.30am every morning, always working at the weekends. He has no life. I’m outta here. I’m taking my vacation. I’m going to Switzerland for three weeks.” Now I am not saying people should not take vacations, but the thing is, the very best traders don’t take a lot of time off. They don’t want to.
- The price of phenomenal success is not one many are prepared to pay. For others, a lack of talent means they do not have the currency with which to pay the price in any event. For those with insane focus, there is virtually no price to pay – they love what they are doing.
You Have to Know What It’s Like to Feel Pain, but You Can’t Be Afraid of It
- When you go through a losing streak all the self-doubts come out and you do get very reluctant to pull the trigger. There is nothing you can do that is right. Just every single thing you do is wrong. That is something you just have to learn to control. You really have to learn how to control that fear. You have to feel the pain of a bad trade, or a wrong trade. If you don’t, and are numb to it, then it’s over.
Having a Solid Team is Important
- Obviously trading is stressful; we are all human beings. To have colleagues who you can absolutely depend on, not only to watch a position, but for ideas, for enthusiasm, for energy, is very important.
Having Great Mentors Is an Important Part of Success
- So in my case I was very lucky to have had a lot of mentors on a lot of different things, not just about “this is how you buy them and this is how you sell them”. They were mentors on the more human aspects of how you survive in this business. For me personally that has really been part of the success.
- That’s why luck plays such a big role. All these things coming together. It’s quite amazing actually. When you meet someone who is good for you, your whole life goes down a different path and it’s like a tree whose branches make contorted shapes as the tree grows. You could never pick that contorted route you are ultimately going to take.