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Unknown Market Wizards

Peter Brandt: Strong Opinions, Weakly Held

Most people think that the method of entering a trade is the most important part of being a successful trader. However, for Peter Brandt, it is one of the least important factors. He feels that classical chart analysis has virtually lost its entire edge. What’s important is risk management.  


Chart analysis is just a tool to identify points that are susceptible to Brandt’s risk management approach. His methodology comprises identifying asymmetric trade opportunities—trades where the anticipated upside potential significantly exceeds the basic risk.


It is confusing that Peter Brandt used a protective stop strategy that reduced his overall returns instead of using an approach to maximize returns. The reason is that an approach that increases return but also increases risk by a greater amount is insignificant. 


Peter’s primary mentor relied on fundamental analysis however, he himself developed a trading approach strictly based on technical analysis. It involved taking trades of much shorter duration. Brandt learnt the importance of money management from his mentor but developed a trading procedure strictly on his own.


Brandt has been very disciplined about trading his method all through his career with one major exception. In 2013, after months of net losses when his approach seemed to be out of sync, Brandt got influenced by general talks of technical traders. In a moment of weakness, he renounced the approach that had helped him well for so many years and started experimenting with techniques that were not his own. Such involvements simply extended his losses. As a result, he ended up with his only losing year since he started trading again in late 2006. He turned a 5% drawdown into a 17% one.


Human emotions and instincts will often lead traders to do the wrong thing. Brandt admits that he is an impulsive person and that if he watched the screen and followed his instincts to enter trades, he would self-destruct. He believes that he is successful only because he uses a precise process in placing trades and it excludes his emotional responses.


Brandt selects trades that meet specific criteria, and the timing of those trades is well-defined to the entry day. Once he is in a trade, he has a predetermined exit point if he starts losing money and a plan to book profits if the trade is correct.


Many traders, particularly novice, fail to understand the critical difference between bad trades and losing trades. Brandt says that the determinant of a good trade is whether you followed your method, not whether the trade made money. The reality is that no matter how good the approach is, some percentage of trades will lose money and there is no prior way to know which will be the winning trades.


Many traders have a comfort level regarding the trading size. They may do well with smaller sizes but they see a substantial deterioration in their performance at larger sizes, irrespective of the markets being liquid. He suggests that the increase in position size should be gradual.


Some traders may be comfortable trading their own money and may do well but their performance falls apart when trading other people’s money. This phenomenon can occur because, for some traders, a sense of guilt in losing other people’s money may distort their normal trading decision process. It is not a coincidence that when Brandt managed other people’s money it was his worst decline. 


Interestingly, the month when Brandt returned all investors’ money was the low point of his decline and was followed by 20 winning consecutive months. Success in trading one’s own account does not necessarily mean being successful in managing money.


Brandt improved his performance by eliminating “popcorn trades”— trades that have a significant profit but are then held until the entire profit is surrendered or turned into a net loss. This negative experience prompted Brandt to establish rules to avoid such outcomes:


  • If he has a net profit equal to 1% of his total equity, he will take partial profits.
  • Once a trade reaches 30% of his profit target, he will assign a much closer stop.

Another trading rule is: If an open trade shows a net loss on a Friday close, simply get out. The reason here is that carrying a position over the weekend involves more risk than holding the position overnight on a weekday. Liquidating the position in this scenario is sensible risk management. 


According to Brandt, winning streaks lead to contentment, and contentment leads to sloppy trading. In the strongly winning periods, it is least likely for the trader to consider what might go wrong. 


One thing Brandt regrets is that he did not keep a log. Discretionary traders should categorize their trades and monitor outcomes, so they will have the hard data to know what works and what doesn’t.


Patience is a common trait among successful traders but not necessarily an inherent one. In Brandt’s case, he was impatient but had the self-discipline to enforce patience. He avoids the temptation of taking every trade and waits for the one where the upside prospect is three to four times greater than the required risk. 


According to Brandt, Trading for a living may look appealing but it is far more difficult to achieve. Most aspiring traders are undercapitalized. They underestimate the time it takes to develop a profitable methodology. According to Brandt, it takes three to five years for the same.


Brandt’s motto is: Strong opinions, weakly held. A trader must have a strong reason for taking a trade, but once he is in a trade, he should be quick to exit if the trade doesn’t behave as per expectation. There is nothing wrong with being wrong if you exit the trade with only a small loss. don’t worry about looking foolish because of changing your opinion. Reversing an opinion on a market reflects flexibility which is not a weakness but the trait of a trader.


One of the main characteristics of successful traders is that they love to trade. Be sure you want to trade. They should not get confused between wanting to be rich and wanting to trade. Unless the endeavour is loved, success is unlikely.

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