The energy level for position traders is almost nonexistent. You put on passive positions, and then you sit and you watch them. Position traders have simple rules that every novice quickly becomes familiar with: Don’t add to losers. Only add to winners. Cut your losses short. Let your winners ride! It might sound easy, but every wannabe futures trader has memorized these four rules of the game; however, only a handful of the millions who trade around the globe have the ability to be real players. Many position traders will tell you that it’s much more difficult to deal with a winning position than a losing position. It’s easy to know where to get out of a losing position by limiting your risk to a certain level, but dealing with a winning trade becomes, at times, harder for the trader to handle because of the element of the unknown.
The best of the position traders will tell you that they will not get into a trade unless they know exactly what they want out of the trade. In other words, they have a target in mind before they even pull the trigger. Disci- plined investors understand that placing stops on losses is an important part of smart money management, but when they’re winning on a trade and, more important, adding to the position, they’re letting it run, which immediately creates new disciplinary guidelines. It’s a very difficult thing to digest as a new trader because it’s a very easy way to trade—putting on
a position and just holding it. But to do it successfully time and time again and consistently come up with high-percentage trades that are profitable is a very, very difficult thing to do.
One of the best position traders to come out of the Chicago markets is a gentleman named Steve Helms. A product of Burlington, North Carolina, and Davidson University, Helms came to Chicago in the hope of learning the world of commodity trading, to which he had been introduced back in North Carolina. He came to Chicago with modest means, but he intu- itively picked up on the markets and became one of the finest position traders in the agricultural markets at the CME. Helms moved on to the S&P 500 futures pit, but he always has positions on in many different mar- kets simultaneously. What made Helms a great trader on the floor and what makes him a great trader to this day is his ability to detach emotionally from the trade.
I spent hours talking with Helms, and his eyes never made contact with mine, as he stared constantly at the quote boards or the Quotron headline screen, looking for his next trade. Helms’s strength as a trader, aside from being one of the most intelligent market observers known, is that he has the patience of Gandhi coupled with the guts of a riverboat gambler. Once a position is established, traders can no longer be neutral; they have opinions, they have researched those opinions, and, most important, they have put their money at risk based on those opinions.
What makes Helms and other successful position traders different from the rest is their ability to do the homework and put on high-percentage trades but remain as objective to the market condition as humanly possible. This is not only a question of forming a methodology based on a combination of fundamentals and technicals; it’s also a matter of having an intuitive feel for the marketplace. Many position traders look at their technical work and form an opinion that the fundamentals might justify, but the gut feeling tells them it’s the wrong trade. Most of the time traders faced with a conflicting gut feeling will not make the trade even if their homework tells them it’s the right trade to make. All successful traders will tell you that they’re better off not making the trade that feels wrong because it would be hazardous to future trading decisions.
As Bing used to say to me, when you’re scalping sometimes you have to leave your brains at home. I think that, as a position trader, the op- posite is true. Your brains are working all the time when you have these trades on, and if you fall asleep at the wheel, you could crash. In fact, the most successful position traders tell me that they go home and mon- itor the markets at all times. They watch business television into the wee hours of the morning and play around with positions in overseas markets while the rest of us are sleeping. What they are looking for is something that might change—a news event, a corporate event, anything
that gives them an informational edge and might drive the market one way or the other.
A good example is the speech given in the mid-1990s by former Fed- eral Reserve chairman Alan Greenspan in which he referred to “irra- tional exuberance.” At the time he gave the speech, there was a roar- ing bull market and monetary policy seemed to be well maintained. In short, the market was not ready for it. Chairman Greenspan might have been right about the state of the market in the long run, but he was way too early in his assessment of the situation. We saw the market re- act immediately to the downside, but it was a very short-term break. Im- mediately the market turned around and we saw a rally of biblical pro- portions, which lasted throughout the next four years and took both the S&P 500 and the Nasdaq indexes to record highs. The position trader who monitored the “irrational exuberance” event realized there was some- thing significant that could be read from the action. The fact is that the market did not want to go down. It was a clear warning signal for any- one looking to try the short side of the market that this was no ordi- nary bull. The best traders got the message loud and clear—when the chairman of the Federal Reserve tells you equities are a little too high and yet the market rallies, all bears must hide! There were many sharp traders who made a fortune being long over the course of the next few years because they realized that, as a result of the Y2K phenomenon, we were entering a period of prolonged earnings growth that would be unparalleled.