Trading With Other People’s Money
‘Really, how hard can it be…trading with other people’s money is the easiest job in the world.’
Did I just hear someone say trading was easy? I was speechless.
It was 2007. The mining boom was in full flight and day trading was all the rage.
You couldn’t help but make money punting on anything to do with mining. Many stocks were doubling, trebling and more…it was truly a remarkable time.
Booms make it all seem so easy. They condition people to think trading requires little discipline.
You see, booms are great at covering up mistakes. The market bails out many poor trading decisions as it charges higher. Making money becomes a formality.
It’s around this stage of the cycle that interest in trading careers peak. A string of easy wins convinces many that professional traders make millions simply by turning up.
And if you can get a job trading someone else’s money…well, surely you’ve got it made.
This brings us back to my opening quote. It’s a comment made to me at an investment seminar at the height of the mining boom.
I was mingling with guests after giving a talk on trading. A young man in his 20s came up to introduce himself…let’s call him Harry.
Harry was an aspiring trader. He was an advertising salesman by trade. But a taste of day trading success had him thinking of career change.
Now, I have no problem with trying new things. One of my favourite sayings is ‘have a go – see what happens’. You don’t achieve anything unless you try.
That said, success takes planning — and lots of it.
Harry didn’t seem to be much of a planner. His trading style was to take a few large positions in exploration stocks. He would then hold them until he had a 50% profit.
There was no plan B if it all went wrong.
This type of boom time trading strategy always ends in tears. It may work for a while. But it’s a disaster waiting to happen.
It was around this time that Harry made his classic statement: ‘…trading with other people’s money is the easiest job in the world.’
I was lost for words. Harry’s complete lack of understanding was breathtaking.
A market saying comes to mind: ‘There are old traders and there are bold traders, but there no old bold traders.’
My young friend Harry was a bold trader with a carefree attitude towards risk. His prospects of being let loose with a bank’s money — or anyone else’s for that matter — were low.
To be fair, Harry wasn’t alone. Quite a few people have said to me over the years that it must be much easier trading with the bank’s money.
People seem to think it’s a case of all care but no responsibility.
I’ve been on both sides of the fence — trading for a global investment bank and for myself.
And I can tell you this. Trading with the bank’s money is no free lunch…it’s highly stressful.
Here’s the thing — banks don’t take kindly to traders losing their money. Loss making traders quickly become out-of-work traders.
We knew this as the ‘revolving door’ policy at Bankers Trust. The rules were simple. Make money or you were out the door.
You learn to live with the reality that you’re only as good as your last trade. But the constant insecurity makes it far from the world’s easiest job.
This had its challenges when I was a young trader in my mid-20s. I had a six-figure salary but zero job certainty. Not exactly ideal for planning a mortgage.
A bank’s intolerance to losing streaks is actually an excellent method of developing top traders. Sure, plenty of traders fail. But those who adapt thrive.
You see, planning becomes very important. Successful traders realise this and work hard at developing a method that works for them.
They then add consistency and discipline to the mix. It’s no good having a great approach if you only follow it occasionally.
My approach is to trade trends. The simple explanation is this. I get into markets or stocks that are moving…and then let them run.
Prices often move further than people initially think possible. This is where the big money is made. And trend trading is an ideal way to capture these large moves.
Here’s the thing. Big trends take time. Traders have to stay with the trend to make the super profits.
This means holding on through the ups and downs along the way; markets rarely move in a straight line.
My way of dealing with this is through what we call a trailing stop. This is an exit point that rises with the market price.
The idea of a trailing stop is that it protects part of your profits, while keeping your upside open.
Letting your winners run is one of the key elements to trading success.
This brings us to the most important thing of all — cutting loses.
The failure to cut losses early is responsible for many trading disasters. Countless private traders fail because they do not efficiently cut their losses.
The inability to cut losses has also been the downfall of many corporations…for example: Barings Bank, Enron, and Lehman Brothers.
It’s really quite simple…if you’re wrong, GET OUT. Take a relatively small loss and move on to the next idea.
You won’t survive if you consistently take large losses.
Trading isn’t about being right…it’s about making money.
Small mistakes don’t matter — you shouldn’t worry about them. A few big winners will pay for these many times over.
What matters is that you don’t make BIG mistakes that take you out of the game.
Trend following, trailing stops, and cutting losses are cornerstones of my trading style. It’s an approach that grew from necessity — the sink or swim culture of an investment bank.
Every trading system I design has my trading style at its core. My system for ASX stocks — Quant Trader — is no exception. You can read more about it here.
Harry was partly right. Trading other people’s money can create great traders. Although not because it’s easy — but because it’s hard.
The thought that your next trade could be your last is a motivator like no other.
Until next time,
Editor, Quant Trader
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