“Prince of the Pit”

One of our favorite stories about trading is the story of Richard Dennis.

Dennis was born in Chicago and, at an early age, became an order runner on the trading floor of the Chicago Mercantile Exchange. He began trading before he was legally allowed to (at age 21) by hiring his father to trade for him.

Starting with just a borrowed $1600 in the early 1970s, he built it to a $350 million fortune over the next few decades.

The story is that Dennis believed that successful trading could be taught. To settle a debate with a friend and fellow trader (William Eckhart), he decided to take two groups of novice traders (he called them “Turtles”) and teach them to trade in just two weeks. (Trading Places anyone?)

After the two weeks of training, he gave them a one-month trial trading period using his capital. Eventually, he seeded them with stakes ranging from $250,000 to $2 million of his own money.

The story says that five years later, they had parlayed those stakes into an aggregate profit of $175 million!

Who knows if the exact numbers of the story are accurate, but it is an excellent testimony that great trading CAN be taught.

That is one of our goals here at HX Research. Taking our experience and helping you – our reader – become a great trader.

It also helps to have a brilliant trader mentor you, and today, in HX Daily, we are going to share some of Dennis’ wisdom. Enjoy.

“It is misleading to focus on short-term results.”

This is one of the most important lessons for new traders.

It is very easy to extrapolate quick gains (or losses) and decide what you are doing is (or isn't) working.

The reality is that any good trading system needs weeks (or months) to play out.

Be patient and develop a process that churns out returns over time.

“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.”

The entire quote is valuable, but we really like the second part.

We always emphasize the importance of SELECTIVITY.

Remember that you don’t HAVE TO trade. You don’t have to do anything with your hard-earned capital.

You should only put down bets when you know the odds are in your favor.

“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.”

This is another quote where we want to emphasize the second part.

With a strategy – and in particular with an individual stock or position – it is often valuable to take a step back and NOT trade anymore. It is also one of the most challenging things for a trader to do.

“In the real world, it is not too wise to have your stop where everyone else has their stop.”

We see this happen with the traders using the moving averages very often.

If a stock is trading toward a moving average, it almost always trades THROUGH that moving average.

This is because unsophisticated traders put their stops AT the moving averages. Experienced traders understand to look at a range around the moving averages.

“I always say that you could publish trading rules in the newspaper, and no one would follow them. The key is consistency and discipline. Almost anybody can make up a list of rules that are 80 percent as good as what we taught people. What they couldn’t do is give them the confidence to stick to those rules even when things are going bad.”

This reminds us of one of our favorite Warren Buffett quotes – “Investing is simple, but not easy. The key is to have patience and discipline.”

What works in investing also works in trading.

It is not just about knowing the right moves but putting yourself in a psychological position to execute them when the market moves against you.

Plan the Trade, Trade the Plan.