In his interview with Steve Cohen from Stock Market Wizards, Jack Schwager described a large room with 60 traders each looking at 6-12 computer screens. That is the probably the furthest thing from my goal as a trader. However, like every Market Wizard, Steve Cohen was able to pack a ton of great wisdom into a relatively short interview. While his multiple trader approach wouldn’t suit my personality, he has built his success on many of the same principles I have studied.
Top Five Quotes From Market Wizard Steve Cohen
They taught you that 40 percent of a stock’s price movement was due to the market, 30 percent to the sector, and only 30 percent to the stock itself, which is something that I believe is true. I don’t know if the percentages are exactly correct, but conceptually the idea makes sense. – Steve Cohen
This is one of the earliest concepts I was exposed to when I began exploring trading approaches that were more involved than simple buy and hold. I have always been fascinated by the concept that a stock’s price movement was so dramatically impacted by the overall market as well as its sector.
Many times, a stock’s movement has nothing to do with the actual performance of its underlying company. Stocks can move up or down just because the sector that they are in becomes hot or cold. This is one of the reasons that IBD investors focus so heavily on sector rotation. I have always liked the concept of taking the individual stocks out of the equation and just trading sector based ETFs.
This is not a perfect game. I compile statistics on my traders. My best trader makes money only 63 percent of the time. Most traders make money only in the 50 to 55 percent range. That means you’re going to be wrong a lot. If that’s the case, you better make sure your losses are as small as they can be, and that your winners are bigger. – Steve Cohen
Cohen makes it sound like being profitable more than 50% of the time is disappointing. Anyone who has attempted to trade for any amount of time knows that being right more than 50% of the time is incredibly difficult. Many traders are shooting to be right 30% of the time.
Of course, Cohen is dead right about the fact that your winners have to be bigger than your losers. That is the foundation of any successful trading approach. You have to compare the probability that any given trade will be profitable with the amount you expect to profit on your winners and the amount you expect to lose on your losers.
I always tell my traders, ‘If you think you’re wrong, or if the market is moving against you and you don’t know why, take in half. You can always put it on again.’ If you do that twice, you’ve taken in three-quarters of your position. Then what’s left is no longer a big deal. The thing is to start moving your feet. I find that too many traders just stand there and let the truck roll over them. – Steve Cohen
What Cohen is addressing here is a major issue for traders who go into the market without the understanding that they will have losing trades. Many traders never even consider the possibility that a trade will go against them. Therefore, when faced with a losing position, they have no frame of reference for how to react.
Regardless of whether you plan to buy back a portion or all of a losing position, you absolutely must have a clearly defined exit strategy before you enter a position. This is the only way to ensure that you will not hang yourself out to dry by freezing at a critical moment.
You have to know what you are, and not try to be what you’re not. If you are a day trader, day trade. If you are an investor, then be an investor. It’s like a comedian who gets up onstage and starts singing. What’s he singing for? He’s a comedian. – Steve Cohen
I really liked this comedian comparison. Cohen is absolutely correct. First, you have to figure out what your approach is going to be. Then, you have to actually stick to that approach.
I personally believe that there are an infinite number of ways to take profits out of the markets. The Market Wizards books are littered with different approaches, all from people who have been far more successful than I ever need to be. What is interesting, however, is that they all have one thing in common. They know what approach works for them and that’s what they do.
You can’t control what the market does, but you can control your reaction to the market. I examine what I do all the time. That’s what trading is all about. – Steve Cohen
This is great advice for trading, as well as life in general. Things are going to happen, and most of the time they will be out of your control. You won’t be able to will a market higher, but you can certainly control your exit strategy. The market will never do what you tell it to do. You have to take what it gives you and respond in a way that returns profitable results.
The best way to improve those results is to constantly review and assess your decision making process. That is the fastest way to become a successful trader.