V.11:11 (451-456): The Traders' Psyche: Tom Basso by Thom Hartle

The Traders' Psyche: Tom Basso by Thom Hartle

Why do traders trade? Is it for the potential profit? Is for the love of the hunt? Or is it simply for the challenge? Jack Schwager, who interviewed Tom Basso, president of Trendstat, for his book The New Market Wizards, dubbed the trader "Mr. Serenity" for his approach to trading, managing to be profitable while maintaining peace of mind. Basso, who has $65 million under management, has a trading philosophy that more individuals should embrace: simply, enjoy what you do. Stocks & Commodities interviewed Basso on topics ranging from risk management to diversification and knowing your own trading style.

In general, there are three key issues for traders — systems design, money management and trading psychology. Which one do you think new and old traders should focus on?

Investment psychology. If a trader doesn't have a good feeling about what he's doing as a trader, he won't successfully implement his game plan. If he's not completely comfortable with the trading system, then he'll run into pitfalls. That will stand in his way of being successful at trading.

Did you start out feeling comfortable with the trading systems that you were using?

Absolutely not! When I first started, I was trading a few contracts of corn and I ended up losing money on those trades. I had no money management, no risk control and almost no idea of what I was doing. It's been a long evolution for me, making mistakes along the way and paying what I refer to as the tuition of the college of trading. I've learned that building a set of risk and volatility controls and developing knowledge of the way I react to markets is the key. Traders have to feel comfortable with their approach.

How does one go about developing a comfortable trading style beyond just back-testing a trading system?

Simple back-testing is defined as throwing a bunch of numbers in the computer and out comes the answer and you either like the answer or you don't. You may try testing again and again until you get the answer that you want. Back-testing can be useful, but I recommend you go one more step. Print out the gory details.

How much? Or how far?

If it's 10 years, print out 10 years. Sit there and wade through the day-by-day details. Plot each trade and make believe you are actually trading this market and let your thoughts go through your head uninhibited. This should give you a sense of what you'll be facing in the real world of trading. Be very honest with yourself. That's where you'll find some of the types of trades that will challenge you on a personal level. Otherwise, you may short-circuit applying that trading strategy without good knowledge of how you're going to react under stressful situations. That's when trading tends to fall apart.