Interview With a Trading Legend - Mercenary Trader

Interview With a Trading Legend
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The other thing is to focus on adaptation as a deep survival skill. Sometimes you have to shift with the
times… or alternatively if you don’t want to shift, you have to lighten up and cut back on your risk. Cut
back and cut back until conditions have moved back in your favor, or until you have pinpointed the
problem and solved it.
I think when guys who were longtime success stories go over a cliff, part of the problem is that,
instead of cutting back and becoming more contemplative, their past success made them arrogant and
bullheaded. They pushed it and forced it when conditions were unfavorable, and wound up in that area
of compounding mistakes that you talked about earlier.
So another thing just goes back to self awareness and knowledge of surroundings. Knowing your
methodology, knowing your environment and knowing yourself.
MIKE McDERMOTT: In this business more than any other in the world, you get your report card on a
day by day or month by month basis. And that report card is supposed to tell you something, to help
you see whether you are in sync with the markets or not. So first of all, with every position you put on
you should know the risk. As you have been saying repeatedly, risk control is the dominant factor in
what makes a good trader.
And as Jack was saying, if your report card comes back and you aren’t getting good grades, you have
to adjust and adapt. It may mean that your methodology is out of sync with the markets right now. And
there is nothing wrong with that, but you don’t drive the plane into the ground while you’re waiting for
things to improve. You have to dial back and protect your capital, or else you put yourself out of
business.
PETER BRANDT: Boy, that’s a common theme with successful traders isn’t it? It just comes up again
and again. Risk management. Manage your risk.
Another question: In recent years there has been a proliferation of day trading in the stock and forex
markets. Do you think that is more a function of technology, or does it more speak to the mentality of
instant gratification for the generations in play?
JACK SPARROW: I would say it is a combination of both. For a certain mindset, day trading (or night
trading for forex) is highly attractive because it offers a vision of not taking risk home, where you just
go in and make money and get out. It sounds sexy to the beginner’s ear, so people gravitate to it. For
many I think day trading has become a waking dream, a modern day escape.
We are close friends with some highly successful day traders and have a deep respect for what they
do. But I think it is an increasingly tough game, especially now, because the shorter your time frame
the closer you get to fighting with supercomputers. If Goldman Sachs goes out and spends $20 million
on a new row of SPARC supercomputers every quarter, trying to hone that millisecond edge even
further, I don’t want to be in the same niche with those guys.
So one of the reasons we love swing trading, and jockeying for multi-week or even multi-month
positions, is that supercomputers can’t play that game. There is no computer that can analyze the
complexities of the global economy from a 10,000 foot view, sifting through the noise for that one area
of opportunity where a trader can “get a hunch and bet a bunch.” That remains the forte of the human
trading mind.
I expressed the opinion a few years ago that computers are slowly taking over at the low time-frame
end of the spectrum. First we saw computers replacing runners and floor clerks. Then we saw
computers directly replacing floor traders, to the point where various exchanges went 100% electronic.
And now with High Frequency Trading (HFT) they are gunning for daytraders and scalpers. And we
just don’t have a lot of personal enthusiasm for trying to compete in that particular niche of the market
ecosystem.
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