Editor’s note:As Larry has said, finding a mentor you trust and becoming an expert on a handful of stocks are two ways to find discipline as a trader.
Today, he reveals the third way you can use discipline to your advantage as a trader… by finding consistency.
Daina Schnese: How can a new trader practice consistency?
Larry Benedict: A lot of the problem with traders and consistency is they end up letting one or two trades define them. That’s an emotional approach.
I have always looked at trades very mathematically. I’m thinking less about how a trade reflects on me, and more on how it’s affecting my overall P&L.
Traders make mistakes when they make emotional decisions and divert from the mathematical plan. They second-guess themselves. But being consistent just means always putting a P [profit] on the page.
For me, consistency has always come out of grinding out positive P&L [profits and losses]. Which is different from what I see most traders doing… They go for home runs. I’m not a home-run guy. I am looking for singles, doubles, and driving runs in…
Daina: Do you ever make the mistake of pressing a little too hard… and getting off-track with your consistency?
Larry: Yeah, of course. Here’s a good example…
I’m in a trade now and I was up a decent amount of money on it. I was probably up around $70,000 on this one. But, I got greedy. And now, what looked like a really nice profit is now a loser.
Instead of cashing out of the trade when I hit my profit target on the upside, I decided to keep pressing.
Daina: Why did you decide to press?
Larry: Like I said, I got greedy on that one. But I’ve been doing well recently. I had built-up P&L… so I took the risk. That’s an example of earning your risk.
Of course, that doesn’t always pan out… I’m going to likely lose money on this trade.
But, I never would have pressed this if I were on a losing streak. I would have taken the profit right away when I saw $70,000.
So, I am a little upset about it. But not as mad as I’d be if I had been down already… I have the chip pile and this trade didn’t even come close to wiping me out.
Daina: That all seems so simple. Where do most traders go wrong?
Larry: It’s a mistake I’ve seen a lot in the trading business over the years, and it’s not anything new. A lot of guys who are trading for a living will have one great year… let’s say they make $750,000… and they go out and buy a boat. Or a mansion.
The mistake is they think they will just make the same amount next year. That they’d have the same income, year after year. And they just blow through all of their money.
That’s terrible money management. And if you are going to be successful as a trader, or at anything you do in life, you have to have responsible money management skills.
That might sound strange, but it’s true. Being a successful trader for the long haul is just as much about what you do when you’re NOT trading…
Consistency is what made me unbeatable. I could risk a million on a trade and it didn’t matter. Because I earned it by building up a strong base of capital.
You have to look at the long term as well as the short term. Don’t change your lifestyle just because you had one great trade, one great month, or a great year. I always tell the guys who trade or work for me… if you have a good year, buy yourself one thing and save the rest of the money.
Saving money and making sure you always have a solid pile of capital is the foundation of consistency. The best traders are the guys that keep slowly building every year. They will keep getting bigger and bigger as they go.
The worst ones are those who assume lightning will strike twice, and that they can depend on the same result over and over to fund higher levels of risk – and irresponsible spending.
Successful traders implement consistency by looking at the big picture… which is what I call the time value of money.
Daina: That’s all the time we have for today, Larry. But, we can pick back up with your concept, the time value of money, the next time we chat.
Larry: Thanks, sounds good.
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About Larry Benedict
Larry is a former hedge fund manager with over 30 years of investing experience. He’s also known as one of the world’s best traders… and for good reason.
From 1990 to 2010 – when he was actively running hedge funds – Larry never had a single losing year.
Larry’s market commentary is frequently featured in Bloomberg, Barron’s, and The Wall Street Journal, among other major news outlets.
Source: Opportunistictrader.com | Original Link