Steve Burns is an author and a trader who runs the website, NewTraderU.com. He is also one of the most active and helpful traders on any social media platform. The following is an edited transcript of a podcast interview I did with him in 2013.
In the interview, Steve stresses the importance of understanding the psychology of trading, the necessity of risk management, and properly utilizing a strategy that has an edge in the market. He also discusses the upcoming sequel to his book, New Trader, Rich Trader.
When did you start to develop an interest in trading?
I started as far back as I can remember. I don’t remember not being interested in stocks and trading.
I remember looking in the newspaper as a child, looking at all the numbers and the stock prices, and just pondering how it works, and most importantly, how can I make money by buying and selling?
What methods did you use back in those early days?
I’ve always just traded price, not even charts. From the very beginning, I started trading price action. I bought things that went up. I sold things that went down.
I’ve always had a huge aversion to losing money. If I lost money, I would sell stuff. I had no interest in holding anything that wasn’t going up.
So, would you say that you had a pretty good grasp on trading from the beginning?
That was just natural instincts. It’s something I’ve just always had.
Most people have a story about taking terrible losses and then that waking them up to realize that they need to change their system, but you seemed to have that locked down from the very beginning.
Yeah, the Internet bubble pop was the time I started really learning to play the short side, and that buying the dips doesn’t always work.
What were some of the things that you studied when you first got into the market?
I started where so many people do, with value investing, and Warren Buffett, and Graham Dodd, and balance sheets. I learned very quickly that I didn’t have the patience to buy something and wait for it to work out for me.
What was it that made you to shift gears there?
I think it was Nicolas Darvas. The simplicity of what Nicolas Darvas did and the fact that he made a fortune really got me thinking about momentum and growth stocks and trading things that go up quickly.
You actually wrote a book about that, right?
I actually wrote my very first book about how I used his methodology and his thought processes to do very well during the bull market from 2003 to 2007. It also got me into cash before the 2008 meltdown.
Can you give us a general overview of your current approach to trading?
I seek to capture trends, either long or short, using moving averages as my entry and exit points. I also trade price, but I’m looking for a break of a range breakout or breakdown.
I’ll enter on a breakout and I’ll use a trailing moving average as a stop. On some of the sharpest trends, I use a 5-day EMA. Then, my most popular is a 10-day simple moving average that actually will trail behind it as the trend is established. I’ll use an end-of-day stop.
I’ve also, in recent years, started using options to leverage my bets and control my risk. It makes for an easier way to control risk.
Could you give a little more detail on the options approach you use?
In 2012, when Apple broke out of a range it had been in for a very long time, I think it was 390 into 425, I actually started buying weekly at-the-money options in Apple and in-the-money options in Apple.
So for a few thousand dollars, I was controlling $40-50,000 worth of Apple stock, instead of buying 100, 200, 300 shares of Apple. I simply rolled the options every week as the trend accelerated, and it enabled me to do very, very well by simply using options.
It also worked buying puts on Groupon as it broke down in 2012. This year, Facebook and Google have been good winners as a trend, and the liquid weekly options allowed me play lots of leverage with a limited amount of capital.
You were very public about all of your Apple trades over that period of time.
I think I tweeted every Apple trade in 2012.
You also did a good bit of blogging about Apple back in that time too. Did you notice any effect that had on the outcome?
Yeah, it was interesting. I think the biggest thing is that it put a lot more stress on the dynamics. If your capital evaporates, it’s going to do so publicly in front of 10,000 people.
But it keeps you very honest, and it keeps your mind very sharp to not go into anything sloppy or messy. You have to stay disciplined when you have that many people watching you.
You can’t start doing anything silly or crazy or ego or fear or greed because everyone will be on you instantaneously.
You said in the very beginning you have a very, very strong focus on risk management and I have noticed through both your blogging and your books that you place a very high importance on risk management.
That’s more important to me than actually making money.
Aside from the trailing stops, what types of risk management do you implement?
My goal is to never lose more than 1% on any single trade, and never to expose myself to more than 6% open capital risk doing multiple positions at any one time.
I find that the more I trade, the longer I trade, the more risk averse I become, and that, coming from two 50% drawdowns in my trading career, it’s just too hard to come back from a drawdown, so I choose to not have them ever again.
People don’t understand that if you lose 20% of your capital, you have to make 25% just to get back to even. If it’s 25%, I think it’s 33% you have to make back just to get back to even. If you lose 50% of your capital, you don’t have to make 50% return to get back to even, you have to double your money just to get back to even.
If you go down 50%, for all intents and purposes, you blew up. I just have no desire to do that. It’s just too hard to make those kinds of returns to ever get yourself in that situation.
You said that you had two 50% drawdowns?
One of them was in March of 2002. I had a 50% drawdown in my main account.
Then, in one of my option trading accounts in 2012, I did have a 50% drawdown, but it was a wild equity curve because I was exposing myself to too much risk.
In one of my option trading accounts in 2012, I was up 75% on my capital at one point in the year, and then I was down 50% after my 75% return peak. So my 50% drawdown was still profitable for the year. Then, I turned back around from that and went back up and ended the year up over 50%.
I realized at that point that I really have to trade less and less options because of the volatility.
It sounds like a really wild ride.
If I would have just managed the risk, I would have had less open exposure with the options, and I would have had a much smoother equity ride.
How much time would you say you spend on trading on any given day? It’s probably hard for you to isolate the trading from the blogging and the social media.
I think part of the reason that I do social media for is that it is part of my trading exercise. It keeps me working, and it keeps me thinking.
I think, at minimum, I spend 2 hours a day, every day, on charts, set-ups, and reviewing my trades. Actually, the better the trends the less time I spend. Whenever I have a nice trend, a nice entry, and I’m way up in the money and I’m trailing my stop, that’s when I spend the least amount of time.
It was actually the bestseller on the stock market for a few months.
I think I wrote it more for myself, to isolate all my thinking and everything I have learned. I tried to isolate 18 principles that I’ve learned from reading a lot of what you have on your website with the Market Wizards, the Trend Followers, the Legendary Traders, and isolate what they did differently and why they were in the 10% that survived versus the 90% of new traders that don’t make it and aren’t profitable.
I tried to isolate it using sort of like a proverb. What the rich trader does, versus what the new trader does, and a lot of them are completely opposite.
I made 18 different chapters, and each had a lesson. Then, I explained the difference in a narrative and I gave a book recommendation to increase your learning on that principle along with a quote from a rich trader.
I think I brought it all together to solidify each lesson as the new trader reads through the book. I tried to create the book that I wish I would have had when I started trading.
You definitely hit on all of the key pitfalls that a lot of the trading books discuss, and it’s all neatly packaged in a narrative, like you said.
My favorite part of it was the narrative aspect, where you could actually picture the new trader going over to the rich trader’s house and saying, “This is a problem I’m struggling with…” and then getting advice on how to handle it. It’s kind of the adviser a lot of us wish we had.
No doubt. I tried to bring all the people in all the books I read together and make them one character.
The other thing you do is you literally write a blog post every single day on your site. I’ve never seen anyone do this as religiously as you do. You just always have something new up there, every single day.
What was your motivation for starting NewTraderU?
The funny part about it is that I had a buddy who makes websites, and he kept on pestering me about it, and I’m like, “Why would I want to mess with a website? That’s so much work to do. I have so much stuff I’m doing.” He kept on and said, “No, you have got to get what you do out there.” He finally just built it for me, handed it over to me and said, “Look, just do it.”
I ended up blogging because a guy that I knew built a website for me and said I really need to do that, and I ended up getting into it and actually doing it. It became my mission to try to give all the new traders a shortcut to avoid all the pitfalls that I went through the hard way.
Where do you draw from to come up with all the material for that? I mean literally every day you’re writing something. I can’t stress enough how difficult that is.
I think it’s because I cover so many areas. I’m so fascinated by psychology, and I’m so fascinated by risk management, numbers, returns and all the stories of the wealthy traders, along with the trading system entries, exits, and also self-improvement, self-help.
Every day is just something that I’m thinking about myself and dealing with. It’s almost like putting it in written form to help me learn as I grow, because I still think that trading, no matter where you’re at, even if you’re George Soros or Paul Tudor Jones, it’s a never-ending evolution of the trader and the system.
One of my trading buddies, Jonathan Keith said that once and that always stuck with me, so I’m always trying to grow and learn and NewTraderU is a place for me to put that down on the blog every day.
It’s sort of like how my book reviews on Amazon are really term papers on each trading book that I have read, so I could go back later and review it.
Going into books, what books do you recommend for new traders off the top of your head? Obviously, your own…
My New Trader, Rich Trader. Everybody asks me, “What book do I start with?” and I say, “I wrote it.” That’s the place you can start, and then you can branch off from there with the other books on each subject.
The best trading book that’s really changed my trading is Trend Following by Michael Covel. That’s some of the greatest free wisdom that you’re going to find from millionaires and billionaires put into a book form.
So many people think, “Oh there’s no meat, there’s no meat.” They always want the proprietary trading systems. That’s something that has to be built on your own, but Trend Following by Michael Covel gives you all the nuts and bolts.
I think Trade Like A Casino by Richard Weissman. He’s one of my Facebook friends. I’m sure you’ve seen him in the group. I learn everyday from him about new ways to trade.
William O’Neil’s book, How to Make Money in Stocks, of course is a great one.
Reminiscences of A Stock Operator by Edwin Lefevre.
I think those four are a good place to start.
Good foundation. Are there any non-trading books that you recommend that have helped you over the years?
There’s actually quite a few.
Maybe one of the top books I read out of a thousand was Antifragile by Taleb, explaining really how things work and trading was just one of those things.
Another one is The Power of Now by Eckhart Tolle. It really gets your mind settled down to be able to trade in the moment and not time travel emotionally into the past and future, because I think that’s what trips up so many traders. They just can’t handle the psychology of trading.
You run the Facebook group, “New Traders, Rich Traders, and Good Traders.” What’s the motivation there?
I wanted to network with other traders. I feel like you can amplify your learning if you’re with hundreds and hundreds of other good traders and you’re all sharing, and you’re all posting, and you’re all talking amongst yourselves. You can grow a great deal.
I think it really paid off. I mean, we have Michael Covel making guest appearances now and then in the trading group, and Richard Weissman is just one of the most generous, giving professionals I’ve ever seen. He always takes time to post something, or help someone, or answer a question and give freely of his 26 or 27 years of trading wisdom.
It’s a great, high quality environment, which is different than most of the Facebook trading groups I’ve seen that have just been ego trips, or a bunch of amateurs bragging about their trades to each other, or a bunch of spam. I wanted to have a good, high quality group for all the traders that want to be in it.
I’ll back you up on that. I can’t tell you how many positive comments and things of that nature I see in there.
Yeah, it’s a great change of pace.
You’re also very active on Twitter. I think you have close to 10,000 followers, so obviously you’re very supportive of social media all around.
I just think it’s fun. It’s just fun in a lot of ways. It’s fun to see how many retweets, or how many followers you get. I think it’s fun and entertaining.
It’s mind blowing for me to be able to meet, talk to, and discuss ideas with people that have been doing this for years and have a vast amount of knowledge, far more than I have. It has really increased my learning curve.
Me also, it’s amazing that I can now chat with Michael Covel or Richard Weissman. Tom Basso listened to my podcast with Covel and even gave me positive feedback. That’s incredible to me, some of my heroes and I get to chitchat with them.
Yeah, it’s crazy. I read Tom Basso in the Market Wizards book and now I see him commenting on the same feed I’m commenting on.
A lot of people point out the negatives of social media and sharing trading ideas and that kind of stuff, but I like that you actually take the counter approach to that.
I think it’s just like real life. The vast majority of people are positive, and supportive, and nice people. Then, there are always some trolls, just like in real life, and the negative people, and the people that want to tear somebody down because their own life is unhappy or they’re not trading well. But the block button is very handy too.
If someone likes what you have to say and they want to follow your approach, what’s the key ingredient that they need to focus on to become successful?
I think the first thing the trader needs to do is not trade for at least a year and do nothing but homework for at least year minimum.
If they want to open up small account and do some little Chihuahua trades, just to get the emotional feel of real trading, that wouldn’t be a bad thing to do. So many traders, they want to trade first and learn later, and that’s just disastrous.
With the free resources online, with your site, with my blog, with Facebook trading groups, social media, there’s so much free information out there. There’s no reason not to take their time and to read through and study and get some of the greatest books on trading, to listen to Michael Covel’s podcasts. It’s like a doctor showing up for medical school urgent to do a surgery when he hasn’t even gone to medical school yet.
The three elements the new trader has got to study, learn, and master before entering real money trades is psychology, their own psychology and the psychology of the other market participants; the risk management aspects, how quickly things can go wrong for you if you’re exposed at too much risk or trading to big.
The biggest thing new traders miss is the risk of ruin. If you start risking 3-5% of your trade account per trade, your risk of ruin is almost 100%. At 5% of your capital risked per trade, 10 losing trades in a row and you’re down half of your account and you’re ruined.
The 1% rule means that you should never risk to lose more than 1% of your assets under management on any one trade. It doesn’t mean to stop after 1% down.
The third is that you have to develop a method that you’re comfortable with psychologically and emotionally, with your risk exposure and with your drawdowns. You have to have a trading plan to give you your written entries, exits, and methodology, and it has to have an edge over the other market participants. A new trader has to study psychology, they have to study risk management, they have to get a trading method with an edge, and that’s what they have to have before they cast their first trade.
Psychology, risk management, trading method.
You have to have a robust trading method, while managing your risk with discipline and patience.
That’s funny, I bounce back and forth between the three on which one is the most complicated to figure out. I would say psychology is probably the most difficult, just because it constantly taunts you. Just when I think I’ve got my psychology down is when I find out that I’m not even close.
It’s crazy. Trading is some of the hardest “easy money” anybody will ever make.
But it is well worth it when you compound your money over a few years or have those few big up years. It’s amazing the amount of capital you can grow in just a matter of a few years.
Let’s talk about psychology for a minute because in my experience, which is rather limited and unsuccessful, the psychology has affected the risk management and the trading method.
You’re exactly right. I think somebody should develop some technical indicators for a trader’s psychology. It’s just bizarre. Even in the last couple of years, I think I have it and then learn whole new lessons after having a good 10-11 year solid, consistent track record.
The more confident a trader gets, the more likelihood their drawdown will coincide with their confidence. Traders will lever up their bets during a winning streak and usually that will coincide with the time that the winning streak will end.
It’s ironic, like you said, and then you have the whole style drift whenever your system does not work for months and months and you start getting down and you start trying to tweak your system. The moment you get your tweaks done, then the system you were using starts working and your tweaks no longer work. It’s a crazy journey in trading and consistency is one of the keys, like you said.
It’s just very similar to being on tilt playing poker.
There’s a lot of similarities.
Last summer, I had a big string of losses and it totally warped my mind, and I basically just stopped altogether because handling losses was very difficult.
I’ve got a poker buddy that’s won several tournaments and we sit and talk for hours about risk managements, psychology, and risk size. He’s talking about poker and I’m talking about trading, and we’re having a completely coherent conversation. It’s funny.
The similarities are amazing.
When someone has a good grasp on psychology, risk management, and a trading method, what do you think is the reasonable amount of capital to start with?
It depends. If you’re just trying to grow an account, you can start with a few thousand dollars and you can just do longer term trades and grow it.
If you seriously want to trade and make money, I think you have to have a minimum of $30,000, just to have a 5,000 drawdown if you want to do day trades. I think $30,000 is a great place to start for a serious trader.
I just noticed something last night while I was just cruising through the Facebook group. Are you working on New Trader, Rich Trader 2?
Yeah. It’s been about a year that my publisher has wanted me to write New Trader Rich, Trader 2. The title is going to be New Trader, Rich Trader 2: Good Trades and Bad Trades.
It is going to be the same format, except that it’s going to be the 18 parallels which show what a good trade is and what a bad trade is, and all different principles with psychology, risk management, and trading method.
I have been working on that. It’s slow going. I’ve written and published five books and this one is a slow-goer, because I’m really trying to take my time and make it a good one.
Any expected release date on that?
I’m hoping by early 2014. I hope to get some burst of writing enthusiasm hopefully to be done by December.
Do you need a burst of writing enthusiasm? You write more than anyone I’ve ever met.
I don’t know. Books are much harder than blogs or book reviews. Each chapter is long process of work.
It’s going slower than my past ones. I’m a trader trying to write a book. I’m not an author trying to be a trader. I’m a trader trying to write. It doesn’t come easy.
If anyone is interested in contacting you or learning more about you, what’s the best place to start?