These trading tips will help you get yourself in the best possible condition mentally to perform at a peak level. They are not necessarily new, but they are critically important. So whether you've heard them before or not, now is the time to employ them into your trading and your life. Both will improve as a result.
I probably did 15 seminars with Tom Basso (who was featured in The New Market Wizards by Jack Schwager) in the early 1990's. We also talked endlessly over meals and I interviewed Tom twice in my monthly newsletter (back issues are available at www.iitm.com) During that time, one statement that Tom always made was “I'm a businessman first and a trader second.” His businesslike approach was always the key to his success, and I'd like to explore that approach in detail in this month's tip.
Robert Kiyosaki and Sharon Lechter, in their book The CashFlow Quadrant® explore four types of people. These types are separated by their cash flow patterns. People on the left side of the quadrant, the employee and the self-employed person, work for money. People on the right side of the quadrant - the business owner and the investor - have money working for them. The four quadrants are quite fascinating because they also perfectly describe various types of traders. The most successful traders are going to be on the right side of the quadrant. However, this week I'm going to talk about the majority of traders, those on the left side of the quadrant. I'll save the right side until next week.
The Employee Trader works for the system. If you work at a job (which just happens to be trading) and get paid a salary for doing it, then you are an employee trader. Kiyosaki doesn't really define the word “system” in his book, despite using it extensively. However, he gives many examples of systems. For example, the Marine Corp has a system that allows soldiers to accomplish their objectives with a minimum loss of lives. Soldiers either follow the system or they die. Similarly, McDonald's Restaurants has many systems - for food delivery, for greeting the customer, for advertising, for cooking french fries so they taste the same at every branch, for processing hamburgers quickly, etc. Each franchise runs on hundreds of systems and it is why McDonald's is successful. Employees either follow the system or 1) the franchise folds or 2) the employee is fired. Thus, remember that employee traders work for systems - they don't necessarily understand the systems. I believe this to be a key to why they are not necessarily good traders.
Bank traders, corporate traders, some mutual fund managers and even people who have a job and just happen to trade on the side are good examples of employee traders. These people are motivated by security and good benefits. Thus, a top bank trader might make $50 million for the bank. However, he doesn't make that money. The bank makes the money. This trader simply takes a salary and probably gets a bonus for doing well.
Employee traders work at a job. They get paid through a salary, which is taxed before it is given to them. They work in order to get paid, which is their primary motivation. They would like to get paid more by doing better quality work, but their primary thinking is that if I do “X” I'll get paid. For them, the “security” of their salary and “benefits” are more important than the “money.”
I once considered working with the Forex traders of a large New York bank. The treasurer gave me a good idea of what I was in for when he made the following statement: “I don't want any of our traders making over 20%. If they make over 20%, they could lose over 20%. Furthermore, they'd want huge bonuses and then they'd be making more money than me.” Even though this man was a key person in the bank, he was still an employee and had an employee mentality.
I've generally noticed that the worst traders I work with are Employee Traders. They have the least idea about what trading is about and they generally make very poor traders. Furthermore, people who have an employee mentality and a full time job (i.e., they are into security and benefits), also make poor traders when they try to do it as an avocation. For example, most people consider stockbrokers to be traders. However, stockbrokers are really employees (to the extent that they receive a salary) who are paid to sell stocks. They are self-employed (see next category) to the extent that they depend on commissions.
When employee traders approach trading, they usually bring the employee mentality into play. They want to be told what stocks to buy or what the market is going to do. They are used to being told what to do and they abhor making mistakes. Bank trading rooms, for example, usually hold daily meetings in which the employees are told what they should be doing during the day. That's the employee mentality and it doesn't fit trading.
The Self-Employed Trader is the system. This type of trader is someone who has quit his/her job to be independent through trading. They do not like to have their income dependent upon others. Instead, they want to rely on their own hard work. They want to control the situation and do it on their own. Most of the traders I work with usually have this sort of mentality toward trading.
The self-employed trader is quite often a perfectionist. Everything has to be perfect - they'll settle for nothing less. Thus, they need a perfect trading system and are always searching for something better. They are also likely to be into discretionary trading because a mechanical system cannot do it as well as they can do it.
Most self-employed traders are usually off searching for ultimate control - finding a Holy Grail system that perfectly predicts market tops and bottoms. The results are usually very unsuccessful. When the self-employed trader is taught certain principles such as expectancy, trading for large R-multiples, and position sizing, they have a chance to become very successful.
The successful ones usually realize that they have limited capital and thus start to manage other people's money. However, when you start to do that, many other systems come into play besides the trading system. The self-employed trader usually insists on doing everything himself and thus runs into severe limitations of time, know-how, and frustration. The result is usually failure. Most people who attempt to be professional money managers approach it from the self-employed mentality.
