David Greenberg is a former board member of NYMEX with more than 22 years of trading experience. This is the first tip of his successful trading series.
Trading Tip #1 – Leave Your Ego at the Door
In my past role as President of NYMEX Clearinghouse Sterling Commodities, our firm’s risk management included a nightly ritual of analyzing trading accounts from the previous day. It was essential to review each trader’s patterns in order to step in if necessary, letting them know it was time to pull back or even take a few days off to regroup. You could also tell when traders were feeling confident. It was relatively simple to predict when they were about to move to the next level of trading in both position size and risk. At these times it was essential to offer guidance to make sure they were making the decision at the right time, given their trading experience and financial position.
The ability to see how everyone trades and their styles had its drawbacks mentally. Being a medium size trader myself, I had to deal with the issue. While I might have made 25k on a good day, there were traders that made 50k, 75k, and a few that would make hundreds of thousands of dollars on a major event day such as an OPEC statement, a hurricane, or other world events. I remember how, at first, I would question my own trading while comparing myself to some of the biggest crude oil traders in the world who cleared through Sterling. I quickly learned that all traders need to trade within the parameters of their comfortable levels.
I remember the first time I made the cardinal mistake in the pit. It was one of those crazy days when the action was high and my pulse was higher. News had just come out and the market was flying! We loved trading in days like that. I saw a paper broker get an order from his clerk and he quickly tuned in to the pit and asked for a quote in November/December spread. I pushed my way through a few people to be first and screamed, “68 bid!”
He looked right at me and yelled as loud as he could, “SOLD!!!” As I was wiping his spit off my face I realize I had royally messed up. (As floor traders, we are taught to always say the amount you’re willing to take. For example, 68 bids for 50.) However, even more stupidly I screamed, “BUY EM!!!” I saw there were bids that came in to other brokers around the pit and felt like a big shot. He answered, “400!”
Well, I could have said, “No, I'll take 75-100 contracts,” which was my normal self-imposed limit. I would have looked like an ass and risked him telling me to never buy with him again, or I could just taken them. So I took them. There was also the ten-lot rule in the pit. If you didn’t put a number on your bid or offer, you were held to ten contracts. Most traders didn’t take just ten. Do that enough times and no one will ever trade with you or trust your bid or offer again.
What many traders need to realize is that, at times, you end up in positions you didn’t always plan on. Sometimes someone bigger, smarter, and with more money wanted you in and fooled you into taking more than you wanted. This could be done in many ways. However, the way it happened that day was that there were a flood of bids in the spread that hit the pit. Orders were put in different areas of the pits to the largest paper brokers. Large companies often used multiple brokers around the ring to help disguise what they were doing - with the flood of orders hitting the pit, I felt I was safe to take them all. Well, once the broker got off the rest of the 1000 lot order to a few locals (traders who trade their own accounts), all the bids in the spread got pulled and the spread collapsed. Yes, there was order stuffing back in the old days of pit trading.
The lesson learned is to stay within your own comfort levels.
Only step up your size when you feel you’re ready and not because someone you went out to dinner with the night before told you how much they made. What I was able to learn by knowing everyone’s positioning in the clearing house was that many traders (ok, almost all traders) exaggerate what they make. This is the rule of listening to others when it comes to money - whatever they tell you they make, cut it in half and take some more off. There are two things that most men lie about. The size of their position, and, well, you know the rest.
So, stay in the size level you feel that you will not lose sleep over and realize that many medium and small traders ended up making more money than the traders who had the need to trade huge every trade. Medium to small traders can stay light on their feet. They tend to be able to change positions faster with less emotional attachment.
In the end it all adds up.
Another case in point. Trader 2 was what I called an ego trader. He had to trade big. Every day he would be up and down. Up 20,000 on Monday and down 30,000 on Tuesday. Down 20,000 on Wednesday and up 35,000 on Thursday. Friday he'd be up 10,000. He paid huge commissions and had emotional swings all week to end up making 15k for the week. I, on the other hand, chipped out about 2,500 a day, and after commission I made more than him. I once went over to him saying, “If you traded 20 to 30 contracts at a time and chipped it out you could make $4000 a day.”
He answered, “Of course I could.”
I replied, ‘That’s over 800k a year with less stress, less commission and less mood swings.” But he didn’t care.
So, my main point of Trading Rule Number 1 is this: Don’t try being a hero. They often wind up getting blown up and blown out. Stay within your limits and at times, test trading larger positions - but only when and if the time and the markets are right. Trust me, you'll end up in a much better place.
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