Ten fundamental rules of daytrading

As I am typing this, I about 30 minutes from beginning my daytrading livestream on Youtube. I thought I would take a few minutes to present Ten Fundamental Rules of Daytrading. As those rules were passed down to me by The Masters, I am now passing them onto you.

Those rules are what I consider to be the absolute basis of daytrading: no matter your strategy or objectives, these should be at the front of your mind at all times.

1) Any strategy that is not 100% centered around risk management WILL fail

This is the most important element of all times. Risk management should not only be your priority, it should be your ONLY priority.

It’s hard to explain to a newcomer who has never lost 10%+ of his portfolio in five minutes, so I will try to make this clear: when you daytrade, a single trade can wipe you out. I mean it.

Say you have $100,000 in your portfolio. You go long 10 oil futures @$40 per contract. While it might not look like it, you just placed $400,000. If oil crashes 25%, you’re wiped out. Just like that.

Think it can’t happen? Think again. In November last year, oil crashed 8.5% pretty much over the space of a minute. Had you been long on 10 contracts @ $60 (the price at the time), you would have lost $51,000. BOOM, just like that!

One minute – half your portfolio gone.

Understand that, when you daytrade, nobody is going to hold your hand. You are trading real money and there is a very strong probability that you will lose money. If you don’t manage your risk, any trade can bankrupt you.

Look: there is no way for me to convince you of the importance of a real, effective and complete risk management strategy. I could write an entire novel on it and chances are you would just shrug it off. It’s hard to explain, but when things go well, it’s easy to forget the basis and take some big risks. Remember that things can ALWAYS go wrong. Even though you might be 99% sure (in the real world, you will rarely be more than 60% sure), remember it only takes one case of the “1% scenario” to ruin you.

The most important element of any daytrading strategy is capital preservation. If you lose your capital, you can’t daytrade anymore. Period.

A basic risk management strategy should involve the following elements, on which I will expand on a separate post: 1) Max loss per trade 2) Max loss per day 3) Averaging down strategy 4) Taking gains strategy 5) Other considerations based on the particular nature of the product you want to trade. And, most importantly, never trade any product you do not understand 100% (more on that later).

My worst loss? $17,000 on copper futures five years ago. Had I followed my risk strategy and covered after a $1,000 loss, I wouldn’t have spent the six months that followed crying in bed after losing my entire student grant (a year of work gone in smoke).

Believe me: after a few successful trades, you will forget this rule. It will be reminded to you – painfully.

2) Never, ever, ever forget rule #1

It might look like I am being silly here, but I am serious. Dead serious. The truth is that the majority of traders lose money.

Let me tell you the story of one of my grad school teachers. He went from $5,000 to $50,000 within a month trading options. Then, he went from $50,000 to $500,000 within six months, and from $500,000 to $2.7M within a year. Then, he went from $2.7M to -$10M within a month. Hello, financial crisis. Yes, the guy had lost more than his original capital: not only had he lost his entire savings, he had to declare bankruptcy. This kind of situation happens all the time on the stock market.

The majority of traders lose money. However, I bet that if we took only the traders who did not go broke, the majority would be in the positive.

Look guys, I want you to have the following mentality in mine at any time: “It doesn’t really matter if you make money in a day if you didn’t manage your risk.” Even if you earn $1,000 in a day, if you took some inconsiderate risks, you should be angry. It’s much better to lose $250 with a risk management strategy than earn $1,000 without one.

3) Remember that you are trading SOMETHING THAT IS RANDOM

It is insane how many people don’t or won’t get that. Really, even at my age, I meet people who still don’t get this is basically a casino game (with several key differences, of course).

Guys: the stock market is random. That’s right: random, random. It moves up and down randomly. Go to the casino, go play roulette and imagine that being done continuously, every single second or every single fraction of second from 9:30AM to 4:00PM every day and this is basically what the stock market is.

A more correct term would be “stochastic,” but that’s basically saying the same thing. Any product on the stock market, any stock, any future, any whatever follows a stochastic process (a more accurate definition would be a “discretized stochastic process”). A stochastic process means that it moves RANDOMLY. PERIOD!

If you ever meet someone pretending he can predict the stock market, run. The very definition of randomness states you can’t predict it. This means that no matter your model, no matter your strategy, no matter how you daytrade, there is always, always, ALWAYS a chance things will move in the opposite direction.

Now, stochastic process are not pure randomness. Pure randomness would be a white noise. If the stock market was a white noise, nobody could make money daytrading (consistently, at least). The only winner would be your broker, due to commissions.

Every stock follows a stochastic process. The variables of the stochastic process, or even the actual stochastic process, are unknown. There is an infinity of possible stochastic process. However, very few lead to interesting models and very few have interesting properties.

The most important stochastic process is definitely the Geometric Brownian Motion, which states:

dSt= uStdt + oStdWt

Where:

St is your stock price

u is the drift, i.e. by how much the stock is expected to grow every year on average

o is the volatility, i.e. the square root of the expected deviation of move of the stock price when compared to the average.

Wt is a wiener process, i.e. a randomly generated number from a (0,1) Normal law

This simple equation leads to Black-Scholes, by the way, the most ubiquitous stock model there ever was (and ever will be). Notice the “randomly generated number from a (0,1) Normal law.” Again, RANDOMLY GENERATED.

You’d be shocked at the amount of traders, shareholders and even professionals that don’t get that. GET IT.

Now, just because a stock or a commodity follows a random process doesn’t mean that there aren’t trends, inefficiencies and other aberrations you can exploit. This is where your profit from daytrading will come.

For instance, according to Black-Scholes, the likelihood of the S&P500 crashing 8% over a day is basically zero. Yet it just happened a few days ago. This is an inefficiency you can exploit.

Similarly, events, such as earnings results, can push a stock upwards or downwards by a big amount. This is another inefficiency you can exploit.

Finally, there is a certain human element: remember that we are dealing with a DISCRETIZED stochastic process. For instance, say a large oil producer wants to hedge its oil production; it would need to go short on a LOT of contract and this would skew the futures price down. This is yet another inefficiency you can exploit.

Daytrading is all about noticing those prices mismatches and earning a profit from it. Say for instance Apple goes from $101 to $100 in a minute for no reason at all. Why? Most of the time, it will be because someone, somewhere decided to sell a large portion of his Apple shares for whatever reason, or no reason at all. If this thesis is correct, you would expect Apple to kick back upwards to $101 as, well, pretty much nothing has changed for the company. This is yet another inefficiency you can exploit.

Another source of inefficiency are all the morons who use technical analysis. Many people believe in floors and supports. I like to play contrarian play, i.e. buying a share when it slowly breaks through a support. Why? Because in my opinion, someone is trying to scare people into selling, and if it doesn’t work, I would expect the stock to kick back upwards. Similarly, many funds have a large position in big caps and any time the stock falls below a certainly value, they will mass buy it. This is yet another inefficiency you can exploit.

Do you start to get it now? Good. If not, let me sum it up: find something that is wrong for no reason and earn a profit from it.

4) Know the product you trade so well people will believe you two have been married for the last 25 years

 

For instance, if you buy low-expiration, deep OTM options, understand there is a strong probability, well over 50%, that you will lose 100% of your capital. You’d be shocked at the number of people who don’t get this simple fact.

Understand the market, how it trades, the bid/ask spread, the typical volume, the risks inherent to the product you trade, the kind of people who trade that product.

For instance, say you trade option. In order for someone to make money, someone else has to lose money. It’s that simple. If you buy a call for $2 at a strike of $10 and the stocks ends up being at $20, someone needs to sell you that stock at $10. Thus, he loses $10-$2=$8. There is no other way to see it. If you make money from trading options, someone, somewhere, has lost money. Sure, he might have entered that position with you to “manage a risk,” but the fact remains that this one trade will lose him money.

You’d be surprised at the number of people who don’t know the products they trade. They don’t know about the weaknesses of the Black-Scholes model, for instance, or the volatility smirk. You learn that kind of stuff after several years of studying advanced financial classes (or writing a thesis about it). If you don’t know what the storage cost of oil is, for instance, don’t trade it. If you don’t know how futures are priced, don’t trade them.

I know nothing about biotechs, literally nothing, so I don’t trade. Simple enough, right?

Look, guys: it doesn’t take 5 Ph.Ds to realize that no matter how good you are, there are some products you won’t master. If you don’t master a product, don’t trade it. Take forex, for instance. Can you name me 10 factors that influence the USDJPY? No? Then don’t trade it!

I know three things really, really well: real estate, oil and Apple. I can’t daytrade the first, so I daytrade the last two. End of the line. Every single time I tried to daytrade something else, like gold, copper, pork chops, coffee, whatever, it’s been a disaster. Simple enough, right?

5) Trading is TOTALLY different from investing.

I mean, the two worlds don’t even have anything in common.

Let’s say for example you had a crystal ball able to predict the future. Let’s say Apple is currently trading at $100, and the crystal ball said it would be at $200 in a year. Would you buy Apple stocks?

Sure you will, but remember one thing: even though you know the price a year from now, you have no idea what will happen to the price until then! The stock might kick to $200 tomorrow morning and stay there for 364 days. Or it might crash to $50 and remain there for 363 days, and then quadruple on the very last day. You don’t know that. Again, you have no idea what will happen and if anybody tells you “oh, a crash is coming” or “the market will plummet,” RUN.

I’m always amazed when I read a blog post or watch some show about an analyst who says the market will crash 10%, 20%, 30% or whatever. The truth is, these guys have no idea. They’re just guessing, yet they act like their guesses are a certainty. When they are right, they boast about calling it and how “obvious” it was. When they are wrong, which is the majority of the time, they just change the subject. The truth is, nobody knows what’s going to happen.

Back to our Apple example – an investors would not care at all about Apple falling to $50. Why? Because, crystal ball or not, he knows he made a solid pick and will stick with his thesis until he has a reason to change it. If anything, he will buy more as the share falls.

A trader, however, would use act in a totally different manner. He would seek to benefit from the drop to $50 just as much as from the rise to $200. See it like that:

Investor trader
BUYS at $100 sells at $200 Sells at $95 buys at $65 sells at $170
Total profit: $100 Total profit: $135

In our example, we assume the trader, following whatever system it was he used, actually bought a bit early (not at bottom) and sold too early (not at top). The truth is that no trader can buy at the bottom and sell at the top. I’ve never met a single trader who even pretended he could.

So, which strategy is better? None per se. Sure, the trader made more money, but just because he was kind of lucky. There is no guarantee his next trade will go as well. Yes, generally, good traders will earn more than investors, but they will also run more risk and have to put it more work overall.

 

6) SET YOUR LIMITS

This one might look simple, but I want to say this once and for all: if you are not extra-careful, daytrading can and will drive you crazy. It’s extremely easy to let daytrading run your entire life. Daytrading addiction is a very serious problem and I have had to deal with it in the past. I would wake up in the middle of the night to daytrade “just a few more dollars.” I’m serious. I’ve seen plenty of super-smart, super-dedicated people go totally insane over it.

If you don’t set limits, daytrading will consume you. It is EXTREMELY addicting, even more than slot machines. Until you’ve experienced the rush of earning $2,000 per day for 5 days in a row, you have no idea what I’m talking about. You feel invincible, unstoppable, godly. Then comes the surefire $6,000 loss, but that’s okay, because you’re still $4,000 up, and you can make that $6,000 back in no time. Then comes another $8,000 loss and now things turn serious; you gotta at least be positive. Then comes another $6,000 loss and now you don’t know what’s going on: you trade even more, you panic, you take more risk and BAM, YOU ARE BANKRUPT.

THIS HAPPENS EVERY SINGLE DAY AROUND THE WORLD. DO NOT LET IT HAPPEN TO YOU.

Seriously, I could write ten encyclopedias on the subject and you still wouldn’t understand how it is until you’ve experienced it. It almost happened to me. It happened to tons of people and it keeps happening every day. You know that big crash in the Chinese index? You know, when the index crashed 40%? Anyone with a 3:1 leverage has been wiped out. Gone, dead, goodbye, do not pass go, go back to square 0 or, when loans are involved, square minus -100,000.

Do you know what happens when someone wins a jackpot at a casino? The casino pays them the imperial suite and a 5-star restaurant, that’s what happens. The casino treats them like a big shot, with the Lamborghini, escorts and everything you can imagine. They call it “complementary package” or something like that. They want the guy to stick around and… play more, of course. They know that the more elated the guy is, the more likely he is to take stupid gambles because why not?

“I just won $500,000, sure I can play roulette at $10,000 per shot. Worst case scenario, I lose $50,000 and I walk away with a story.” That’s how people who won jackpot feel, especially the newbies.

“Oh, I just lost five out of seven of my last spin? Well, it’s time to bet $20,000 a shot.”
“Damn, I’m down $100,000. I can’t possibly always be this unlucky, I’ll kick it to $30,000 per spin. Now I just gotta win a few spins to break even. Yeah, I’ll break even and I’ll go.”
“Haha, I just won 5 out of 6 spins. Now I’m at $520,000 – I even made more money at roulette. This is so easy, hahaha. Just one more spin to make a round number and I leave.”
$490,000. Okay, just one more to get back to $520,000 and then I go.
$460,000. No big worries. I hit a bad streak, it happens. I might as well bet $40,000 and if I get back to $500,000, my original amount, I leave and I won’t have lost anything.”
$420,000. What the heck is going on?”
$380,000. Fuck, fuck, fuck. No stress – I’m still plenty above. Gotta raise the stack. I can’t always be this unlucky. I mean, I think I should win 48% of spins or something like that, and I won like 30% of my spins so far, so I’m due for a win. Might as well maximize the profit when I win.”
$430,000. There we go. Two more. Just give me my jackpot back and I’ll leave and never enter a casino again.”
$330,000. Have I really lost a hundred thousands in two roulette spins?”
$280,000. This is insane. How unlucky can I be?”
$230,000. I’ve lost four in a row. I’m due to win.”
$180,000. This is unbelievable. I’ve never seen anything so ridiculous in my entire life. Losing FIVE times in a row? This is impossible. What were the odds? Something like less than 8%! This is basically impossible! How the hell can this happen to me? And why now? Why couldn’t it happen back when I was betting $25 per shot instead? Why can’t I be lucky for one fucking time in my life! Life is rigged. I’ve already lost so much, I might as well go allin. I mean, I can’t keep losing forever, can I? I’m going to bet $90,000. I just need like… three wins and I’ll be break-even. Hell, I’ll take two wins and take it as a lesson learned  I just can’t keep losing like that, it’s just impossible. I’m due for a win.”
$270,000. One more and I’ll never play roulette again. Please let it happen, God, please! I don’t want to go home with the story that I lost $230,000 playing roulette!”
$180,000. GODDAMNIT. HOW UNLUCKY CAN I BE? I just asked for two damn little wins in a row in a game where I have a 48% chance to win and I can’t even get that? This is some fucking bullshit. . All my life, I’ve been unlucky. I must be cursed. You know what, I don’t even care if I lose all my money at this point. If I lose my entire stack, at least I’ll know the Universe hates me. I mean, just look at how many times I’ve lost. Something like like nine out of eleven spins. WOW!”
$90,000. I. Am. Dying.”
$0. This has to be some kind of nightmare or something. This can’t be happening. Just a few days ago, I had won a massive jackpot. It can’t be gone. It can’t really be gone. Yeah, I’m going to wake up in my hotel room tomorrow morning and this will have been a nightmare. Let me have at least $100,000, please. Just $100,000 please. This is so unfair. The entire world is against me. Fuck this, fuck life, this is so unbelievable, I’m the most unlucky guy in the world. Fuck life, fuck casinos and fuck you God. Why did you give me $500,000, huh? It was to better take it away. You must enjoy seeing people suffer. I should have known life never gives gift.”

Then, in a few days, it goes something like this: “Wait – was I really playing roulette at $90,000 a shot? Why the fuck did I do that? I earn $30,000 a year on my job so I was betting THREE years of my life on one roulette spin? Really? Three years’ salary on a 15 seconds event? I could have taken that $500,000 and pretty bought everything I wanted. Why the hell did I do that? Why wasn’t I satisfied with $500,000? Why did I keep playing?”

This kind of situation happens every day in Las Vegas. At least our player didn’t lose his house or something. Plenty of people kill themselves after losing everything they have (and sometimes, everything they borrowed).

The scenario exposed above has nothing to do with intelligence. If anything, smart people are even more vulnerable to it. And guess what? This kind of story also happens on Wall Street.

Plenty of traders go broke every day. Don’t be one of them, please.

Falling into the kind of mentality exposed in the story above has nothing to do with how smart, how skilled, how intelligent or how good you are. It has everything to do with human mentality. Casinos are experts at exploiting that facet of human nature. Again, you can be a genius and you would still fall for it.

Set your limits and respect them. I never trade after noon no matter what, no matter how much money I could make or the awesome, amazing opportunities that awaits. I only allow myself ONE exception per month. Once I make an exception, I can’t do it again for the rest of the month NO MATTER WHAT.

 

7) Maintain a stable lifestyle & have a hobby!

Obviously, you had understood by now that there is more to trading that the act of trading in itself. In fact, the act of sending orders in itself should only be a small portion of your day. Most of it will be spent analysing, studying, revising, reading the news, etc.

But there’s also the entire part of your life that has nothing to do with trading, at least directly.

Look: I know very few traders who spend more than a few hours per day in front of their computers. While you could wish you were a robot able to stick in front of your computer, the fact that your body is a complex machine with several needs that needs to be fulfilled, some of them more subtle and harder to detect than the others.

How you manage your own life, your needs and the events that happen around you will STRONGLY affect your results. Look, I won’t pass by four pathways: even the smartest guys in the world are affected by what goes on in their lives. For instance, let’s take a fictious super trader named “Alphatrader.” Let’s say Alphatrader has just been diagnosed with cancer; do you really think hecould trade at your best? Let’s say Alphatrader’s mother has just passed away. Do you think Alphatrader is going to be at his best on the market?

The answer is “no.” Look, even though you might be a genius, you are human and you have human limits. You’re not superman. You’re not God. If your body is tired, you won’t be able to trade well. Know what happened to the smartest guy I met in grad school? He killed himself.

To maintain a stable lifestyle is of critical important, to say the least. For instance, if I go out to drink one night, I never trade the following day. No exceptions there. If I anticipate something big the next day, a big trade or something, I never drink the day before.  Sure, it helps that the stock market is closed on Saturday and Sunday, but if a friend invites me out on a Tuesday, I’m not trading on the next day. Period.

Also, I would insist on the importance of having a hobby, something you like to do that has absolutely nothing to do with the stock market. If you don’t, you will fail. Believe me when I say that: daytrading can easily consume your entire life.

I’ve once spent 31 hours in a row trading stocks. No jokes. I started at 8:30 with the beforemarket, I stayed until the end of afterhours to follow some earnings release, then I realize the earnings would affect the forex market, so I traded the forex market until the Nikkei opened because the company I was trading had a lot of activities in Japan and I expected a good day for Japanese equities and I couldn’t miss that, and then Japan announced some kind of boosting measure, so of course I stayed to trade Europe equities, and then by the time I was done daytrading European equities, the US stock market opened and I might as well go back trading it, because what happened during the night of course affects the US market and…

After 31 hours, I basically collapsed. To make things worse, I hadn’t eaten more than an apple or a piece of toast here and there because why would I waste time cooking when I could be trading? Oh, I was severely dehydrated, but of course I was too focused on the stock market to notice.

The grand total gain for all that trouble? $55. Fifty-five fucking bucks. 31 hours of trading to make less than two bucks per hour. You have no idea how STUPID I felt. Near the end, I endured two giant losses and, had I not been lucky on a trade at the last minute, I would have been severely in the negative. In fact, that gain is the moment I realized just how stupid I had been.

But even when you are not in front of your computer, daytrading can quickly invades the other facets of your life. You’re having a date with a hot girl? Oh, let’s just check how the Shanghai futures are doing. Crap, they are done. What does this imply for tomorrow? I suppose should start some kind of volatility play. Then again, it depends. Chinese stocks are notoriously volatile and have a tendency to bounce back in the afternoon. Perhaps we could go home and play the Chinese index this one time? What do the DAX futures look like? Oh, they are up – this must me the Shanghai… Wait honey, where are you going? Our date just started!

8) Learn to disconnect

This is good advice for life in general, honestly. One of the best ways to disconnect is to get a HOBBY. Now, don’t take a hobby that is related to money. Don’t go into poker or something silly like that. There is nothing wrong with playing poker, but this is precisely the type of hobby you do not want to have when you daytrade. Go for… herbalism or something like that. Have a banzai garden. Or go do tai-chi if that’s your thing. But no matter what, make sure it has nothing to do with stock trading or finance in general.

As for me, it should be quite obvious what my hobby is: writing. I write stories to decompress after a hard day of trading. Yeah.

Ideally, have two hobby: one that is sports-related and one that is a bit more relaxed. For the sports hobby, make sure it’s sure something high intensity like running, biking, tennis, something like that. Don’t go for walking (then again, walking can be surprisingly hardcore) or something where your heart barely jumps like yoga or pilates.

Devote time to your hobbies EVERY. DAY.

Seriously – it’s critically important. Every single day. Again, I allow myself one exception per month, maximum. I write every single day, even if I don’t feel like it. It’s easy to fall into a pattern when you stop practicing your hobby one day, two day, three days, ten days… Know why most people who try to lose weight fail? Not enough consistency. I’m not going to make friends here, but losing weight is EASY if you follow a plan. There is nothing complicated or recondite when it comes to weight loss: you calculate a correct diet, you start a training plan and you stick to it. There are a few more rules, such as getting your macros, but that’s pretty much it. It doesn’t take 10 years of studying to understand that.

If you fail to develop hobbies, trading will eventually consume your entire life. Even if you are an excellent trader and make a lot of money, believe me, it’s not worth it. About six months ago, I was actually making a killing while trading. My trading profits were strangely consistent over time, i.e. for every hour of trading I did, I earned around $30 on average. So… why wouldn’t I maximize my profits by maximizing my trading time?

I ended up trading for ten hours per day, every single day, for three months in a row. Did I make a killing? Absolutely. Was it worth it? Heck no, those were some of the worst three months in my life. I barely left home and while everyone was out partying and I was so obsessed with the stock market I neglected everything else in my life.

Stock trading was literally the ONLY thing I did. And I feel even more silly knowing the only reason I stopped was a massive loss during my last day of trading. Had this loss not happened, I would most likely still be daytrading.

Yeah, but you made a lot of money!

I sure did and I would be a hypocrite I did not benefit from it. I enjoy a lot of freedom thanks to my gains daytrading and it would be sanctimonious of me to pretend I’m not happy about making money. If you take the good part of something, you must also take the bad part of it. But my point is that life is more than making money. This isn’t limited to daytrading, obviously, and a lot of people are consumed by their jobs, i.e. their job is the only thing that matters in their lives.

Your money isn’t going to hug you on your death bed

Go ahead and get a girlfriend. Start a family. Take a trip somewhere you always wanted to go. Buy a car and go camping if that’s your thing. Read a book, or write one in my case. People, please, if you could heed my advice: don’t waste your youth in front of a computer screen like I did. Again, it would be hypocritical of me to complain about it since I enjoyed so many benefits from it, but the truth is, I could have lived a much calmer, much less stressful and much more fulfilling life with 75% of my gains or 50% of my gains.

I have seen too many people trade from the moment they wake up to the moment they go to sleep. Profits or not, they end up burned out, depressed, alcoholic, drugged out and, all in all, totally gone. Some end up end broke, some end up rich, but believe me: it’s never worth it.

Working for a small prop trading firm, I watched a 40 year-old man spend 9 days without seeing his family. The man had three kids. It wasn’t that he was on a business trip or something – hell, his house was barely 30 mins from his work. No, he was just too stuck up on his trading. He didn’t even call them or anything. Believe it or not, this kind of situation is not rare in finance. If you don’t do it, you will be firmly informed that “your odds at getting a promotion are weak, and getting weaker.” This usually means they’ll dump you to hire someone more stupid. Believe me, it’s not worth it. I don’t know about you, but if I ever become a father, I hope to be present for them. This kind of lifestyle, while certainly exciting on paper, totally sucks. It’s artificial, bland and thoroughly unenjoyable.

Doing drugs is not a hobby and neither is binge drinking

Going back to my rant about hobby, I want to say that smoking weed, snorting cocaine or swallowing pills is NOT a hobby. You know all the clichés about traders all being on drugs? It’s not just a cliché, it’s true. From my experience, I would say 90% of traders are on something. Cocaine is still pretty popular and is so easy to get you end up feeling your firm is basically encouraging you to do it. I would go and say 50% of the traders I met were alcoholic, some closeted alcoholic, some openly. Let me give you a story from my time trading.

When I was a trader for a proprietary firm (biggest waste of time in my life), there was a bar just in front that had a “happy hours” super special; basically, two beers for the price of one and you got a shot or whatever you wanted (tiny selection, but whatever) for free. It was a cool special which ran from 5PM to 7PM.

On my very first day at my new job, I met this guy we’ll call Alex. After work, Alex invited me to that bar. We tchinked and drank our shot. By the time I finished my first beer, which wasn’t all too long, he had already ordered a second round for him and finished half his next bottle of beer. By the time I finished my second beer, without even asking me, he ordered another round. I tried to refuse, but he insisted. I finished the shot and decided to drink as slowly as I can. By the time I finished drinking, he had finished his fourth round and was pretty drunk.

All in all, I had fun. But the next day after work, he invited me out again. Not particularly wanting to drink, I invented a reason not to and left. He kept reinviting me every day after that. That’s when I understood Alex went to that bar every single evening after work. Every day. 12 or so drinks per day. I didn’t even think this was possible.

Some sneak some bottles in to drink at work. Some go to the bathroom while those lucky enough to have a bureau drink straight in it. But all in all, stimulants are even more overwhelmingly used. It’s so ubiquitous I wonder if it’s still worth talking about it. And that’s not including all the legal stuff too. My supervisor drank 4 Red Bulls a day, every day. My department manager drank at least 10 coffees a day. And if you add all the “gray stuff” such as Adderall, it’s so widespread it’s easy to say most people are on something.

Personally, I’ve never touched any drug and never will. But I have to admit it does help dealing with the swings. When you lose $10,000 in five minutes, which has definitely happened to me, all you want to do is forget. Alcohol helps, cocaine probably helps too, but as always, there’s a price to pay.

Another way traders fall into drugs, oddly enough, is after a big win. I’ve watched several of friends who were strong anti-drug advocates (like me) fall in it. When you win, you feel ecstatic and all you want to do is celebrate. Usually, people try cocaine once, sometimes to impress some rich customers or traders, and get hooked. When you go out with your boss and he starts doing cocaine in front of you, refusing to snort some cocaine with him usually leads to a demotion.

Once they tried cocaine once, from then on, it becomes a must. Every time they’re out having fun, it’s “less fun than it would have been with cocaine.” And when they lose, suddenly, they want to feel a little bit of this happiness. This means drug again.

Look, rehab clinics are filled to the brim already. Millions of people fall into that hell every year. Can you trade better with speed? Possibly, but again, it’s not worth it. Get a real hobby, something you really like to do that won’t lead you into a detox center.

A few more elements about “disconnecting.” When a trade is over, it’s over. Let go of it. You won money, you lost money, fine. It’s done. Sure, you will want to analyze the trader later, but give yourself a few hours cooling period. Think about something else. Go do something else.

Lastly, make sure you are 100% awake and ready to trade before you enter any position. You’d be shocked at the amount of traders still hangover when the market open. Make sure you are not hungry, thirsty, horny (yes, seriously) or anything that could distract or make you less efficient. To go to my next point:

9) Always remember you are fighting some of the smartest guys on the planet

I don’t think most people get how it is. There are people with literally BILLIONS behind them. These people have computers, servers and systems that would make your system look like something out of Sesame Street. I worked for a trading firm and I can tell you that these guys paid $10,000,000 to install a new system that would cut order execution by 0.05s. I’m not even kidding. And if those people spend $10M to cut 0.05s in execution time, it tells you just how unfair the game is.

These guys run algorithms that can send 50,000 orders by the time you click “sell.” They hire a team of 100 Harvard graduate just to study the effect of a 0.25% rise on interest rate. These guys know what they do better than you.

Or do they?

While you are certainly facing some of the smartest traders on the planet, you are also facing some of the worst. It’s no coincidence that hedge funds significantly underperform the market: there is nothing worse than someone who thinks he’s a genius, yet is a totally idiot. In my career in finance, I can tell you that the IQ of the average trader is somewhere between a dead rat and a lobotimized dog.

80% of mutual funds underperform the market. While I may make fun of all those guys buying index funds, buying an index fund is without a doubt one of the smartest thing you can do. Mutual funds are for suckers.

But going back to traders – remember that even geniuses fail. All the time. Look at LTCM, by far some of the top minds in finance:

LTCM

GG, bitches

But seriously, you are facing an armada of well-equipment, well-prepared, veteran traders who would wish for nothing more than steal your money. So how do you escape that?

Easy: there are plenty of traders worse than you.

And even if they weren’t, there’s a lot of money to be made from a) providing liquidity b) people looking to hedge risk.

Let’s say you were about to start a massive oil project that will provide 1M barrels of oil per day for the next 10 years. The cost per barrel is $30, aka if oil falls below $30, you are losing money on every barrel sold. It would make sense to “hedge” a part of the production at $40 per barrel so that even if oil falls to, let’s say, $20, you don’t go bankrupt.

You can make money from those people. Those people don’t care whether they hedge at $39.75 or $40. For them, it really doesn’t make a huge difference, as long as they can hedge. Remember: if they can’t hedge, the project won’t start.

But the difference, to an individual trader, is gigantic. Remember that futures are for 1,000 barrels at the time. For every future, there’s a possible $250 to be made here. Sell ten contracts and that’s $2,500 to be potentially made.

Do you start to get it? I guess all in all, I should say that “there is enough food for everyone.” Just because Mr. Pro with his $500,000 computer is trading doesn’t mean you can’t make any money with your $500 computer.

And, very frankly, the gap has been decreasing anyway

I have a $1,000 computer, yet I can run Skyrim on max and I can pretty much calculate everything I need to instantly with Matlab. The difference between my computer and the computers “pros” use is small at best. Similarly, having a 0.5s delay isn’t all that much worse than a 0.1s delay (depending on what you trade). Just because some people have better setups than you doesn’t mean you are doomed as a trader. And remember: for every elite trader there is, you can find at least 10 idiots who don’t know what they are doing.

Going back to hobbies and point 7: have a hobby and devote time to it religiously. NEVER sacrifice personal time for more daytrading. It will drive you insane. When the clock ticks at 4PM, or 8PM if you do afterhours, or whatever hour it is that you stop trading, STOP. Stop and go outside, take some sun in, think about something else. If you don’t, you will die.

10) No matter what happens, remember: YOLO

Everytime I say “Yolo” (You Only Live Once), people think I’m trolling. And to be perfectly fair, there is a tiny bit of that, but for the main part, I am dead serious.

Guys (and girls): Live is too short to waste it in front of a computer stressing over the price of oil, Apple, or no matter what is it you trade. Take the time to enjoy your life for it will be gone too quickly.

It might sound hackneyed, but you have no idea how true it is. If only you knew how much I miss my youth, wasted in front of a computer screen. While everyone was partying and having fun in college, I was daytrading Apple and losing nights of sleep over every possible crash.

I regret it amerly.

But then again… It would be hypocritical of me to pretend I don’t enjoy what daytrading has gotten me. Nothing I am today would have been possible without daytrading: no car, no condo, no scotch collection, etc. Overall, when you accept the positive part of something, you also have to accept the negative.

One more thing about #Yolo. I’d like to end this article with a quote from my mentor and best friend, GBM:

“If you have both your arms and both your legs attached to your body and you’re still ‘all there’ in your head, and you don’t have cancer or something serious like that’s slowly killing you, then you have no reason to complain.”

No matter how much you lose, or how much you are in pain, or the mistakes you make or how “ruined” you are, remember that you are alive, that you are well, and that at the end of thing, it’s the only thing that truly matters. Of course, you can’t exactly pay your landlord with your good health and positive mantras, but remember that money comes and goes while you only have one health.

Take some sun, enjoy some vacations, disconnect and don’t let daytrading burn a hole through your soul.

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