Interview With A Trading Legend, Part IV: Maintaining The centre

In Part III of this Series, we learned about the “path of least regret”… the value of long-term chart patterns… the key to triple-digit up years (and single-digit down years)… and the vital importance of staying in the game.

In Part IV we hear more about protecting trade profits… staying “centered”… the characteristics of a big trade… the truth about a trader’s biggest opponent in markets… and the importance of removing the “emotional velcro” from money and trading.

This interview series is part of the Mercenary Vault, an archive of exclusive high quality materials available to Mercenary Dispatch subscribers. The Dispatch is our means of direct communication (via email) with Mercenary community members — and it’s free! Sign up here and don’t miss out on future exclusives.

On to Part IV…

 Note: This interview segement is Part IV of a series. Also available:

  • Interview Part I: Introduction to Peter Brandt
  • Interview Part II: Mental Milestones
  • Interview Part III: Staying in the Game

JACK SPARROW: Do you ever use trailing stops or anything of that nature?

PETER BRANDT: I just categorically do not like trailing stops. I think what ends up happening with trailing stops, if trading from the long side for example, is that you end up selling where you should have been buying. And that doesn’t make sense to me.

JACK SPARROW: What about the concept of moving your stop closer based on logical chart points?

PETER BRANDT: Yes, I will do that. I’m not going to give all of the profits in a trade back. I refer to trades when all of the profits are given back as “popcorn trades” in my recent book – you watch the popcorn kernel go up to the top of the kettle and then it goes right back down. I don’t want to get caught in popcorn trades. It just doesn’t make sense to increase risk like that.

So I’ve got some methods that I’ve built into my trading over time for taking trades off, and I use these methods. I keep an excel spread sheet that constantly shows me how the three or four trade management approaches I could use would have done on each trade. One of these approaches I monitor is the possibility of riding the trade all the way back to the starting gate – a popcorn trade. No matter which trade management method I end up using, I have a tracking of how all the optional approaches are doing. Having this information keep me centered.

JACK SPARROW: And you also stay centered by communicating with other traders.

PETER BRANDT: I’ve corresponded with a group of traders since 1980. I started with a one-page typed out sheet with graphs, and every Friday I would do it. The guys at Continental would want a copy, so I’d make 10 and put them on the front desk. Then I’d end up making 30 copies as other traders from the Board of Trade came around, and of course it eventually went to email. I have continued to do this over the years. I weekly send out a PDF document that comments on the trades I have done as well as the trades I am looking at for the future.

As part of this communications process, every year in early January, I do what I call the “10 best dressed list.” I look back over the previous year, trying not to be biased on what I traded, and it’s usually not 10 charts but around that number. Sometimes eight, sometimes fifteen. But the idea is just: “Oh, that was a really good chart. That was really a classical example of what charting is all about. It was a pattern, it was clear, it was big… it was on the weekly chart, it was on the daily chart, it broke out clean and ran the distance, never challenging the entry….” My intent for this annual best-dressed list is to identify the best examples of classical charting from the previous year.

Doing this every year also brings me back to the centre. It says “this is what I need to do as a trader.” Because without a clear reference point I’m likely to drift. I don’t want to drift. I want to bring myself back to what I really need to be doing. And that is looking for those patterns that are going to be on that list, because that is where my money is going to be made.

JACK SPARROW: So the best dressed list is like a north star for your profitability.

PETER BRANDT: Yes, I would say that over the years about 50% or more of my net profits have been from chart patterns that ended up on a best dressed list. It also goes back to controlling risk, and getting to where my head is in the game. When my thinking is ahead of the game, then I can see something on the charts and say, “OK, this market just can’t be set up any better. I know this chart is going to be on the best dressed list.” Intuitively I just know it. Of course, there are times when my intuitive thinking proves to be wrong.

So because I focus on finding big chart patterns, I am in a position to identify situations like that, and the chart breaks out a certain way, and the way it breaks out technically provides an opportunity for very small risk (chart risk), and a number of other factors line up. That’s when I say, “Back up the truck.” I even have a recording on my computer, the ‘beep beep’ noise of the truck backing up. I sometimes send it to another trader I work with – when I see something really good, I send him the link to the beeping truck.

So I get the trade set up, and the truck is beeping, and I say “I’m not going to risk 50 basis points… I’m not going to risk 100 basis points… I’m going to risk 200 basis points.” Not only that, but because of the chart risk I can have four or five contracts per unit of capital, where typically I may only be trading one contract per unit of capital

JACK SPARROW: Because you’ve got such a narrow band.

PETER BRANDT: Yes. Then we get a good strong day… it’s a good strong bar that breaks out and holds the breakout… the market may slightly back off for two or three days and volume just dries up to nothing… then you get what Wyckoff called a hinge day, super-small range day… a close in the middle of the trading range where you find out there was no volume at all… then I put some more on.

It is getting two or three trading situations like this that can give a trader a 100 per cent or better year. And it has been market setups like this that have given me my best years. For me, I have not had great trading years because I was right 50 or 60 per cent of the time. I have had the really great years when I was able to exploit two or three trades where I was really able to lean into the trade with my shoulder and push. It’s those gems that really pay the dividend. I know that if I’m going to finish with better than a 50 per cent return in a given year, it means I caught some really nice trades.

So, I always anticipate that around the next corner there’s going to be another great trade. I also anticipate that each and every year will offer me at least 10 charts that can wear the title of being on the best dressed list. And most years this happens, but not all years. I have to admit that there have been some years when either the really great trades did not happen, or they did happen and I missed them. I have been in a drought in recent months for really good trades.

JACK SPARROW: Back to this idea of being centered – what are some of the dangers that take you away from the centre?

PETER BRANDT: Bad spells come and go naturally in markets. What I don’t want to do is add to bad markets. In my way of trading I tend to look at markets a certain way, analyse markets in a certain way, and have certain ways I get in and get out. So it’s possible that the way I trade is out of sync with the markets. But it is also possible that I am out of sync with the way that I’m supposed to trade.

That is the quicksand I have to stay away from. I have to make sure I execute my game plan in the right way, which is just a matter of being disciplined, always questioning, “Is this a trade I ought to be doing,” not reading anything into the chart that is not there. As Reminiscences of a Stock Operator talks about, just reading the tape.

There are some trades that fall into a grey area. If you are a discretionary trader, which I am, you are going to have a certain number of trades that don’t fit neatly into a box. What do you do with those? You have to pay attention to the trades you have on.

The real opponent of a trader is himself. Not the markets, not other traders down the street, not some commercial house – my opponent in the market is Peter Brandt. Am I doing what I know I need to do to put myself in a position where I know I can either be down six per cent or up a hundred.

MIKE McDERMOTT: Going back to something earlier… you talked about having the “licence to fly” when you left the advertising agency, and following that, the point of critical mass where you felt you had truly become a trader. During that build-up phase, you had Campbell Soup as a customer helping to cover your bills. How did the financial stability of having that income affect the trading decision-making process?

PETER BRANDT: It was huge. The Campbell Soup income is what helped me become a consistent performer. By consistent performer, I don’t mean someone who is hitting their number every year. To me, a consistent performer is someone who can stay in that acceptable minus-five to plus-100 range and do what they need to do.

Consistent performance isn’t necessarily based on the dollars you make, but on the things you need to do to perform – repeating and repeating what you think are your best practices. The goal is to be a consistent performer and then let the money take care of itself.

This is a roundabout way to answer your question. But where the financial stability becomes important is that, if I feel like I need to make $4,000 this month for living expenses, or $8,000 this month or what have you… that my tax bill is due or that I need to put a new furnace in my home… or that my wife wants a new Subaru Outback… all of a sudden I’ve taken my trading capital and put dollar signs on it related to things that need to be bought. I’ve attached emotion to my capital. In my mind it is so important not to have any emotional propping up of trading capital. Trading capital needs to be just numbers, a way to keep score.

The subject of money has emotion. Money has as much emotion for a lot of people as do their wife and their kids and their parents. If you want to get people emotional, bring up the subject of money. So if you’re not just cold-hearted – and I’m not cold-hearted – then I have to find ways to move myself away from all the emotional stuff that sticks to money. Money just seems to have emotion-attracting velcro on it. I have to find ways to cut the velcro off. I have to view my capital as just part of the game. The degree to which I am emotional about my capital can be the degree to which I start trading defensively. And defensive trading usually goes in the wrong direction.

I also even need to detach myself from what I’m trading. I’m not trading corn, I’m trading price. It is also important for me to detach myself from price itself. It shouldn’t matter if I am buying beans at fifteen bucks or six bucks. All that matters is, are beans going to go up? If so, who cares where the price level is. Some of my worst trades have been talking myself into buying something that was cheap.

I do not want my trading capital to be assigned in such a way that: “This chunk has to go for rent, this chunk has to go for a car, this chunk has to go for education.” I want to get rid of all that, which is why it was so important to have the Campbell Soup revenue at that stage in my career, or to have had that back-up game plan of returning to advertising, because then I don’t have to worry about needing to use trading profits for living expenses.

To be continued…

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