Jeff Saut: Was the Long Position a Bad Trade?

I asked the obligatory question: “How do you decide when to make a trade?” “Through experience,” he says, propping his foot up on a small fold-out seat screwed to his post. “Over the course of 18 years as a specialist, I’ve had every type of experience -- up market and down market, people getting shot, wars, you name it -- and you learn how to react based on those experiences. I guess I’ve had everything happen, and I guess you store it in the computer in your head. You don’t have a lot of time to decide, that’s for sure. And you have to anticipate. You have to look at the tape and anticipate -- two months or three months, maybe a day or so, maybe two or three seconds before someone else. That’s what makes you a good trader . . . People talk a lot about their bellies. I guess that has something to do with it too. You do feel something in your gut.”

He clears his throat with a loud harrumph and goes on: “You watch the tape. There’s a talent to reading the tape. Later today, either the market is going to go further down or it’s going to rally. It’s down 14 now, at 11:30. You have to anticipate when the rally will start and end. An outsider looks and sees the market down six points for the day. A student of the market looks at what the market was doing over the course of the day. Here, we live and die by the moment. The market is constantly breathing during the day. You have to breathe with it and sense its pulse. That determines whether you’re a successful trader or an unsuccessful trader.”

Do you ever hold on to a bad trade and hope for a rebound? I ask. “Live in hope,” Milton says ruefully, “and die in despair.” He goes on to say, “You try to stretch your profits and limit your losses. The worst thing you can do in this business is try to protect a bad trade. You do this and they carry you out of here. This reminds me of the kid who (poops) in bed and gets it all over his legs trying to kick it out of the crib. You see, a bad trade is like a diseased piece of meat. You don’t want any more of it. Throw it away. Bury it. Burn it, just get the damned thing away from your mouth. When you’re breaking in a new trader, the hardest thing to learn is to admit that you’re wrong. It’s a hard pill to swallow. You have to be man enough to admit to your peers that you are wrong and get out. Then you’re alive and playing the game the next day. A lot of traders don’t learn that and they fail.”

-- The Traders by Sonny Kleinfield (1983)

Late last week we asked ourselves the obligatory question, “Did we make a bad trading decision a few weeks ago by recommending a long position in the various indices because the equity markets didn’t seem to want to go down?”

Indeed, since the end of the third quarter of 2009 we’ve been cautious, but not bearish, worried that the upside vacuum created in the charts by the July-September “melt up” (we were bullish) might get “filled” to the downside once the third quarter’s window-dressing subsided.