Richard Dennis is one of the most well know traders in the world. He began trading in the the early 1970s and for 15 years was considered one of the top traders on the planet.
Its said over the course of ten years Richard turned a $400 trading account into $200 million in profits, because of this he started his own fund which manged money for other people and ended up being very successful. Dennis was a trend trader whose method revolved around finding a trend and placing more and more trades in the direction of the trend at an increasingly higher leverage in order to make as much money as possible.
The 1987 crash caused Dennis to lose a significant amount of his and his investors trading capital. In the end he decided to stop trading for a number of years only to return in the mid 1990s with a new trading firm which he eventually closed in the year 2000.
Although Dennis was active in the markets a long time ago many of his quotes still reveal important lessons for us apply to the markets today. I’ve found 7 of his quotes which I believe are still relevant to today’s markets and will give you my explanations of them over the course of this article.
When you have a position, you put it on for a reason, and you’ve got to keep it until the reason no longer exists.
Dennis is touching on something important here which most traders fail to actually do.
When you place a trade, you must have a reason for why your taking the trade and you have to keep the trade open until you know for sure the reason why you placed the trade doesn’t exist anymore.
Large numbers of trader fail to do this because they don’t actually have a good enough reason for why they’re taking a trade in first place.
If you simply enter a trade because you feel like the price is going to move up or down, then that isn’t really a good reason to be taking a trade, because the market doesn’t move because of what you feel it moves because of what other traders are doing.
Before each trade you place ask yourself “is there a group of trades who will lose money if the market moves in the direction I’m placing my trade”?
If the answer is no then you don’t have a reason to be taking a trade.
The only way to make money on a trade is if you know there are going to be other traders who will lose money in the event of the market moving in the direction to which you have placed your trade.
If other trader aren’t going to lose, its impossible for you to win, which means the primary reason you need to have when placing a trade is: “are a group of traders going to lose money if the market moves in the direction I’m anticipating”?
Trading has taught me not to take the conventional wisdom for granted. What money I made in trading is testimony to the fact that the majority is wrong a lot of the time. The vast majority is wrong even more of the time. I’ve learned that markets, which are often just mad crowds, are often irrational; when emotionally overwrought, they’re almost always wrong.
The above quote sums up an important piece of advice lots of really successfully traders seem to give about trading.
Dennis say’s the conventional wisdom you here about how to trade financial markets is wrong most of the time and by following the conventional wisdom you’re putting yourself at risk of also being wrong and losing money.
If you want to trade successfully you need to be doing the opposite to what the conventional wisdom tells you to do. Always trading with the trend is one piece of advice which all traders have drilled into them from the beginning of their careers yet as I’ve shown in a few of my articles trading inline with the trend typically tends to be a bad idea because the methods used to define when a trend has begun are inadequate and will get you into a trend at the point where the price is about to reverse.
I learned to avoid trying to catch up or double up to recoup losses. I also learned that a certain amount of loss will affect your judgment, so you have to put some time between that loss and the next trade.
Trying to make back what you have lost is always the quickest way to suffer more losses, Dennis’s tip to combat this problem is to wait for a while after losing money on a trade as the loss, especially if it’s a big one, will affect your ability to make decent trading decisions.
Putting some time between a loss and your next trade means you’ll have given yourself enough time to forget about the loss and move on with your trading. If you lose a lot of money on a trade early in the trading day and continue trading afterwards your far more likely to make mistakes which will cause you to lose even more money.
There is another point that I think is as important: You should expect the unexpected in this business; expect the extreme. Don’t think in terms of boundaries that limit what the market might do. If there is any lesson I have learned in the nearly twenty years that I’ve been in this business, it is that the unexpected and the impossible
happen every now and then.
Unexpected and seemingly impossible events happen far more frequently in today’s markets than markets of the past.
Traders tend to have expectations on what they believe can happen in the market, when their trading they’ll usually say things to themselves like “the price can’t move here” or “surely it can’t drop any lower”?
These expectations mean the traders are putting limits on what the market can do. If they don’t believe the price can drop any more, they might buy under the impression the price is definitely going to move up, when it moves down the trader has his stop-loss hit and is caught off guard because he didn’t think the price would fall.
Another situation could be when the trader has absolute confidence of the price moving up or down from its current position and doesn’t think to put a stop on his trade.
When the market moves in the direction the trader didn’t expect he has no way his trade begin automatically closed and he ends up getting trapped in a losing trade.
Trading decisions should be made as unemotionally as possible
This is a tough one for many traders.
The only way to trade as unemotionally as possible is to not have any kind of connection or attachment with the money you’re putting at risk. If your trading with money you cannot afford to lose its impossible for you to make unemotional trading decisions because anytime you make or lose money, you’re going to be emotionally affected.
A trader who trades the market whilst also going to work will have a much lower attachment to the money he’s putting at risk because he knows there will be money still coming in because of his job.
For someone who doesn’t have a job and is trading without having any more money coming in, forex trading will be a roller-coaster of emotions. For him the emotions felt with each win and loss will be amplified and it will be much much harder for him to reach a level of consistency in his trading.
You should always have a worst case point. The only choice should be to get out quicker.
Dennis is saying no matter what trading strategy you use there should always be a point in the market where you close your trade because of the size of the loss you currently have.
Even if a trader uses a strategy which doesn’t require the use of a stop-loss there should still be a point where he knows he needs to cut his losses and exit the market. Failure to have either one of these means there is no limit to what the trader could possibly lose and he runs the risk of falling into the trap of holding onto a losing trade with the hope of the market coming back to the point of where he entered his trade which of course, doesn’t happen very often.
You have to minimize your losses and try to preserve capital for those very few instances where you can make a lot in a very short period of time. What you can’t afford to do is throw away your capital on suboptimal trades.
What Dennis is basically saying here is its better to wait and save money for high probability trades rather than waste money on taking low probability trades.
For most traders this is a problem because they do not know what their high probability trades are.
When a trader uses a strategy to trade the markets his usually assumes each of the signals he gets to place a trade are the same as one another. He see’s no difference between the trades and will usually risk the same amount of money on each trade that comes up.
In order to find which trades have a high probability of working out successfully the trader must have deep knowledge of the market and the trading system he uses. Without knowing why the strategy he uses results in him having successful trades there will be no way for him to determine between a low probability trade and high probability one so its impossible for him not to throw away money on sub-optimal trades because he has no knowledge on why they have a low chance of working out.