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Stocks: How Do You Win In Choppy Markets?
Trading is only easy when the market is going up.
Take a look at this chart:
It's a 5-day chart of the S&P 500, a benchmark U.S. stock index. The S&P's 'mini' futures contract (or E-Mini) is the most popular equity futures trading vehicle in the world.
But how in the world are you supposed to make money in a market as choppy as this?
Trading is only easy when the market is going up. That's not been the case lately; I remember watching CNBC during the Internet craze of the late 1990s, when they would sometimes go to a college campus and interview "day trading whizzes" that were "making a killing" trading tech stocks. I sometimes wonder what happened to them. Did they make their millions and retire young? Did they graduate and continue trading for some hedge fund?
Learn the Tricks of the Trade From a Man That's Been in the Markets for More Than 35 Years
Legendary trader Dick Diamond will hold his next 4-day trading course July 13-16. This is a rare opportunity to get tips from a time-tested professional trader. Learn more now.
Or did they simply go bust – as about 90% of market speculators do – when the NASDAQ crashed in 2000?
Which brings to mind another memory. Last summer, I got to attend a 4-day intensive trading course by a friend of EWI and a legendary trader, Dick Diamond. He started trading for his personal account in 1965. In the 1960s, he said, market conditions were similar to the 1990s mania: everything was going up. He used it to his advantage and “rode the wave,” as he puts it, between 1965 and 1968.
In 1968, he made $900,000.
The next year, the bull market ended and Dick lost 70% of his capital.
That’s when he realized that for a trader, knowing how to short the market was just important as knowing how to be long. Choppy or bearish markets are not “bad”; it's a part of the markets' natural cycle. The trick to making money trading consistently, said Dick, is to play both long and short sides. And he should know: He's made a living trading futures for over 40 years – which, statistically, is practically a miracle.
Here’s what Dick told us on the first day of his course:
“Most of you will not succeed as traders. I can teach you everything I know, but most of you will not follow my advice. And those of you who will try won’t have the emotional discipline to stick with it.
“Learning to trade is like learning about weight loss. Every weight loss book out there says basically the same thing, yet only 12% of dieters lose weight, and only 2% will have the discipline to lose it permanently. For futures traders, the success figure is roughly 5%. Main problem for dieters and traders alike is not the lack of knowledge – it’s the lack of discipline to do the right thing.”
I appreciated Dick’s honesty. After all, his 4-day course was not a pep rally, and setting realistic expectations was key.
The reason successful traders win when 90% of others don’t is because the winners have the mental toughness to stick to their trading rules. Dick’s trading rules, for the most part, are very “conventional.” But two of them stuck in my mind as different – and very wise:
- Dick likes to take only what he calls 80/20 trades – that is, only those trades where his odds of winning are at least 80%.
- His second rule is: be defensive. Offense will take care of itself. Take small gains and "come back for seconds."
I can relate to both of these rules – and so can you, most likely. Some people say that speculating in the markets is just gambling. Not so, says Dick. The difference between a trader and a gambler is control. When a gambler throws the dice, he gives up control over his future. A good trader never does, choppy markets or not.
Learn the Tricks of the Trade From a Man That's Been in the Markets for More Than 35 Years
Legendary trader Dick Diamond will hold his next 4-day trading course July 13-16. This is a rare opportunity to get tips from a time-tested professional trader. Learn more now.