The New Market Wizards interview with Randy McKay was really interesting. He went into great detail on a number of his trades, both good and bad. It is fascinating reading an extremely successful trader walk through some of his biggest wins and losses. Despite being a futures trader, most of the trading philosophies McKay discussed can be applied to just about any type of trading, which again, is the theme of all of Schwager’s interviews.
Top Five Quotes From Randy McKay:
“When the trade was easy, I wanted to be in, and when it wasn’t, I wanted to be out. In fact, that is part of my general philosophy on trading: I want to catch the easy part.”
This is the kind of thinking that is discussed in great detail in Michael Covel’s books on Trend Following. The basic idea is that it is an enormous waste of time trying to perfectly time a top or bottom in a given market. It is a much easier concept to learn to identify a trend and then catch the middle chunk of it.
This approach is built into O’Neil’s CANSLIM method. We look for stocks that have a decent uptrend, form a solid base, and then break out of that base on significant volume. We don’t waste our time guessing when a falling stock will bottom and turn around. We only buy stocks that are already in uptrends.
We also generally sell a stock after a 20-25% gain because that is the historical average increase of a leading stock in an upward trending market. We don’t use guesswork or fancy technical over-analysis to find our sell points. They are predetermined.
“I never try to buy a bottom or sell a top. Even if you manage to pick the bottom, the market can end up sitting there for years and tying up your capital. You don’t want to have a position before a move has started. You want to wait until the move is already under way before you get into the market.”
This also goes hand in hand with what O’Neil teaches. A stock could sit in a base or consolidation for anywhere from a few weeks to a few years. Rather than believing we are smart enough to guess when the timing is right, we prefer to let a stock show us the time is right by breaking out in volume.
“When I get hurt in the market, I get the hell out. It doesn’t matter at all where the market is trading. I just get out, because I believe that once you’re hurt in the market, your decisions are going to be far less objective than they are when you’re doing well.”
This is easier said than done. When you take a significant loss in the market it can really hurt. It’s a blow to your ego and sometimes can leave you in a state of shock where you just sit in front of the screen with your mouth open watching the stock fall further. Granted, this should never happen to a CANSLIM investor with proper discipline and a 7-8% stop-loss order, however even the best of us can have temporary moments of insanity.
I can really relate to the part about your decisions being less objective. Taking losses in the market is very much like a poker player being on tilt. Bad decisions can compound on themselves creating a downward spiral that can take you for broke. It can be very helpful in these situations to get out of all of your positions and take a break from the markets until you can regain your composure.
“You need to determine why the winners are winners and the losers are losers. Once you can figure that out, you can become more selective in your trading and avoid those trades that are more likely to be losers.”
Carefully evaluating each and every trade you make is one of the most important things you can do to improve your personal batting average. What similarities can you find among your losers? What about your winners? It can also be very helpful to print out the charts of each one of your trades, write what you did right or wrong on them, and hand them in front of your desk.
One thing that really helped me improve the effectiveness of my post-trade analysis was that I made a rule that I couldn’t use “poor general market” as a reason for a poor trade. In fact, I make sure that everything I note about each trade is something that I can personally control, good or bad. General market may be a legitimate reason that a trade didn’t work out, but that won’t help you improve your trading. Look deeper.
“When you’re trading well, you have a better mental attitude. When you’re trading poorly, you start wishing and hoping. Instead of getting into trades you think will work, you end up getting into trades you hope will work.”
This is another area where trading is very similar to poker. When you’re on a roll, the cards seem to fall your way and everyone folds to your bluffs. This is one of the reasons McKay recommends trading smaller when you are on a losing streak. You need to reestablish your confidence and get the positive ball rolling again.
I went through a patch like this last summer. At one point, I was buying multiple stocks at a time hoping that by dumb luck at least one would go up so I could hang my hat on something. They all went down and it made everything worse. Anytime you catch yourself using the word “hope,” you had better do some serious self analysis.