How to Trade Like "The Lone Wolf of Wall Street"

We all know a guy like this – I just hope it isn’t you…

He chats your ear off about the perfect trade he pulled off. He tells you all about how he—against all odds—outfoxed the market and bought a tumbling stock at the perfect moment. Then miraculously he sold a few months later at the very top, booking a king’s ransom.

This guy wants you to think he’s a friggin’ genius. Except something about his story doesn’t jibe. As you listen to him yammering, it dawns on you…

This guy’s talking…junk.

After all, you know how difficult it is to perfectly time a trade or investment. So did Bernard Baruch, legendary New York financier who amassed a fortune before he was 30…

Josh Brown recently republished a neat piece on Baruch over at his Reformed Broker blog. And it features one of my all-time favorite investing quotes from the man known as “The Lone Wolf of Wall Street.”

“Don’t try to buy at the bottom and sell at the top. This can’t be done — except by liars.”

Why do I like this quote so much, aside from the fact it calls B.S. on that guy above?

For one, it keeps me grounded. Every trader in the world is looking for that perfect setup—and the picture-perfect trade to go along with it. But you must realize even your best trades aren’t going to follow a perfect script. The market is a viper’s pit of surprises. You can’t possibly account for them all. And the minute you start chasing the perfect trade, you’ll start second-guessing your every move.

Worse yet, you’ll bungle perfectly good opportunities because you’re trying to nail every last cent on that trade. That ain’t happenin’ Jack. Don’t shoot for perfection.

Since were talking Baruch today, here are three more of my favorite rules from his memoirs, along with my own comments:

Learn how to take your losses quickly and cleanly. Don’t expect to be right all the time. If you have made a mistake, cut your losses as quickly as possible.

Sound familiar?

That’s one of our cardinal rules—we always cut our losses before they become big losses. We can’t expect to get every trade right. But we can shake a loser loose before it drags us into the quicksand. That’s why we have no problem selling when the market tells us…

Always keep a good part of your capital in a cash reserve. Never invest all your funds.

Many traders think every dollar in their account always has to be off chasing some trade. They’re wrong. Some of the best trades are the ones you don’t make. Always keep a lot of cash in reserve.

And never, ever go “all in” on any given trade. It can be tempting when you think you’ve got a no-brainer on your hands, but don’t do it. The market has a funny way of turning no-brainers into losers. You can add to a winning position later, but keep your initial position small, no matter how enticing. You gotta have discipline.

Don’t try to be a jack of all investments. Stick to the field you know best.

There’s no need to swing at every pitch that crosses the plate. If you’re a commodities hitter don’t go swinging at tech stocks you know little about. And vice versa. Know what kind of trades work best for you – and stick to your “strike zone.” Just sit tight and wait for that room-service fastball you can crush. It’ll come.

Now start trading like a wolf.

Regards,

Greg Guenthner

for The Daily Reckoning

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