‘i don’t come to work to earn a living, I come to make money.’
l Enjoyment as a precondition to good trading
l Learning to push your luck
l The qualities of a great trader
l Handling losses
l Handling profits
In researching this book, I asked numerous traders ‘whom should I interview, who are the biggest, most successful traders in the City?’ One name was repeated far more than any other. That name was Kyte.
When only 24 years old David Kyte formed his own trading company with a mere £25,000. Today, at 36, he is the chairman of the Kyte Group Ltd and Kyte Broking Ltd, supervising gross profits running into millions. None of the boys on a school visit to the London Stock Exchange half a lifetime earlier could have predicted this path for their contemporary.
David Kyte is quietly spoken. This was not what I had expected of a man whose work involved being surrounded by competition. He speaks in restrained public school tones (which may or may not say a lot for grammar school State education) and seems subdued in manner and deliberate in speech. Here is someone who regularly spends hours shouting and who annually risks millions of dollars. Yet, as is often the case with a man at the height of his profession, he exemplifies calm and control. He is moderately above medium build and slightly taller than average height. His hair is short, French Foreign Legionnaire in style. It is a common misconception that young self-made multi-millionaires are readily discernible by their appearance alone. But in fact it is they who are the least readily discernible, for they have nothing to prove.
It is difficult to think of a more central and convenient location for a group of LIFFE traders. The Kyte Group is barely a minute’s walk from the LIFFE building. Part of a relatively small pre-1980s office block, the Kyte offices are necessarily unassuming. Upon leaving the elevator on the second floor, a discreet Kyte Group logo points in the direction of the reception area, which is small and functional, almost dental. It has the ubiquitous ‘laddish mags’ on male grooming, soccer and women and surprisingly little financial material.
David Kyte’s office is through just another door in a series of doors along a narrow corridor. It is glass-fronted with venetian blinds affording some privacy. If offices in any way mirror the professional stereotypes of the individuals who use them, then I was receiving conflicting signals. This is not Gordon Gekko. The office is not designed to impress. It is small, sparsely furnished and practical. It is there solely to serve a purpose.
Behind an uncluttered, unmemorable modern desk, on which there are two monitors and two phone handsets, is a shredder resting on a plastic bin. Above this are several photos including one of Kyte meeting the Queen, adjacent to which is a photo of Kyte meeting Bobby Charlton. Although framed, they conveyed an impression to me that they had been tacked to the wall almost as an afterthought, perhaps in an attempt to resolve the conflicting desires of pride and nonchalance. In the minimalist and pragmatic decor, Kyte revealed more of his personality than he intended.
The making of a great trader
‘[My interest in the markets] dates back to an economics “A” level school trip in my lower sixth. I was about sixteen years old. We went to visit the London Stock Exchange; at that time there was no futures exchange in London. Just the fact that there were opportunities to create wealth in a seemingly easy manner sparked my interest and everything carried on from there really.
‘I did nothing about it initially. That’s all there is to it. The visit had created an interest. I went to do accountancy after my “A” levels, but after a year decided it was not for me. I started to look around for opportunities, of which there were far more then than now. Eventually I got a job in a firm of stock jobbers in 1979; I was just a clerk in an office. It was a standard school-leaver type job in a firm called Smith Brothers, which became Smith New Court, now Merrill Lynch. I was a typical pushy young man; “I want to get on to the Stock Exchange floor”, “Sorry we’re having a rough time at the moment, there are no vacancies at this time”, “Well I really want to go, I’m fed up in the office and ‘There were opportunities to create wealth in a seemingly easy manner.’doing clerical work, this really isn’t for me”. After three months of this I took a job at a firm of stockbrokers, Gilbert Elliot. They gave me the opportunity, in January 1980, to become a “blue-button”, which is a dealer’s assistant on the Stock Exchange floor. I stayed there until I went from being a blue-button, became a dealer in the Stock Exchange to a trader on the floor.
‘Like most people, the drive was to get a greater salary. You hear about all these rises when you’re younger, certainly when I was younger, about people earning a fortune. You hear about stock- brokers living in their lovely houses, and they all made their money trading shares, and that was what attracted me in the first place. Then, after becoming a Stock Exchange dealer within the same firm, I was thinking this is great; I’m checking the prices all the time, dealing and improving, but I want to get the orders in and create the brokerage (earn commission through buying and selling on behalf of others), which is how your income is derived. I want to be in command of my own destiny. I don’t just want to be checking for someone else. So I went to the office, started speaking to the clients, and getting the orders.’
The start of LI(F)FE
‘I was there for two and a half years when I heard about this new LIFFE market. I tried to convince the partners of the stockbrokers to buy a seat. Unfortunately, they said “it’ll never take off, all these fellas with their colored jackets; it’ll never work, not in the City of London”. So they obviously ducked the issue. I really wanted to get involved and at this time I saw this advert in the FT: “company seeks trading skills, LIFFE”. I thought it sounded interesting. I had a couple of interviews. No one had experience in LIFFE – it didn’t exist. The people who had the real experience in futures were commodity traders in cocoa, sugar, coffee, oil. These guys were the sharp cookies. Stockbrokers were pedestrian by comparison. I managed to get a job, which was fantastic, getting 50 per cent more than I was earning at the stockbrokers. I thought it was great. I was trading up to go on to the floor when it opened in September 1982. I spent the summer trading on the sugar floor just to get some experience and became a blue-button.
’30 September 1982, we were there, all in one pit, there was only one pit in those days – eurodollars. If you made $200 in a day you were a star, if you lost $100 in a day you were a disaster. That was how LIFFE started – two ‘f’s for the institution and one ‘f’ for me. I was trading for clients and trying to get some business. They then introduced the short sterling contract soon after and then the three-month interbank rate. Over that period I developed a reputation and interest in spread-trading, which is basically buying and selling one month against another. I was creating brokerage and, from the execution point of view, clients knew they got a good fill. That caught my interest and attracted other people’s interest in me. They saw what I was doing and I started to get lots of brokerage from the big houses. It was nothing major in comparison to today.
‘Then after about three months I was head-hunted by one of the other companies on the floor with whom I had been dealing. They asked me to join them, which I did, and they doubled what I was previously being paid. Through that period of time we started making prices as well as trading for our own account and doing deals for the client. This enhanced our reputation because it meant we were the market, we made the market and we also got the brokerage. If we were 1 bid at 3 whereas others were 1 bid at 4, we would say “Okay, we will work your 2 offer” and we were then 1 bid at 2 offered, so it worked both ways. That worked well, with the client often getting an improvement. After a couple of years of doing that – making good money for the company not only in brokerage but also in the trading account supported by the bonus I received – I thought if I’m any good at this I’d better do this by myself. That’s when, in 1985, I became an own account local trader.
‘I couldn’t afford to purchase a seat because at that time I only had a small pot of money. Seats were £30,000, I only had £25,000, so I needed that as my equity. However, I had an agreement with the original firm, Sucden, with which I went on to the market that I would do their brokerage at a reduced fee and they would give me a seat for a nominal amount. It worked both ways: they were getting something in execution, enhancing their reputation for low cost and also selling me as a product, and I did their business and carried on doing what I was doing at the same time.
‘[The Kyte Group] started as me by myself in 1985, then just developed, not really through any particular great planning or idea as to the future. We are now 100 traders strong. We did reasonably well, brought another trader in and he did reasonably well so we brought another trader in who also did reasonably well and so on.
‘Initially I was involved in market-making – buying and selling all the time. When you’re spread trading you’re buying and selling both months, you’re trying to take a point here and a point there. Say the market’s 1 to 2, we’ll try to work things a little bit better than that, and keep notching up $500, a $1000, keep notching, and by market-making give the client the opportunity to get out and at the same time making money for ourselves. If you do 20 trades like that, $500 becomes $10
‘[Today] the bond spread trading comes in one week a quarter, so the rest of the time you have to be on your toes – that’s at the longer end. At the shorter end you could do spread trading all day every day. At the moment, when interest rates haven’t moved higher for such a long time, the volatility tends to be at the longer end.
‘[Other than spreads it’s] just positional trades we do. When I was first doing spread trades, interest rates were 14 per cent in the US, so the markets were volatile. Nowadays you just don’t see that kind of volatility. For one, I think it will change again and when it does I’ll go back into the short end of the market. But for the moment at the longer end we look to make more than we lose.
‘[A typical day involves] market-making, that is buying and selling all day and trying to build up a position around the market-making. We are always giving people the opportunity to get in and out, but at the same time we are really trying to create something. By creating a market, in and out, we are creating profitability. My profits, 50–60 per cent come from buying at 6 and selling at 8, buying at 8 and selling at 9, and that gives me the opportunity to build up a position that I can really go for, if it goes right. It also reduces the pain when it goes wrong, because I’ve built up some profits along the way. So I may well be a seller when I’m long the market, but one’s a long-term situation and one’s a short-term situation.’
It can be difficult making a market and trying to develop a position. If a market-maker wants to be long bunds because he thinks the price is going to rise and he gets a call asking him the price of bunds, he may end up having bunds taken off him. This is because a market-maker is obliged to quote bid–offer prices without first knowing if the caller is a purchaser or seller. The caller can choose whether or not to deal at the market-maker’s prices or go elsewhere, but if the caller does decide to deal, then the market-maker must accept the deal at the price he quoted.
You’re good because you enjoy it, you enjoy it because you’re good
Kyte exhibits the attributes necessary for success in all endeavors in general and for trading in specific. Commitment, perseverance and discipline are second-nature traits. A prerequisite to these qualities is passion for what one does. Kyte is enthusiastic and energized about what he does. Kyte possesses self-belief in the achievement of his goals. When this happens it is difficult not to be passionate. In fact Kyte does not even consider what he does ‘work’.
There are two aspects to his passion: what he does and his form of employment. Many people dislike what they do because they are not self-employed and not direct beneficiaries of their labors, and many people dislike their form of employment but not what they do. For Kyte both aspects are synchronized, not through good fortune but through design. As George Bernard Shaw said, “take care to get what you like or you will be forced to like what you get”. (1903) Christopher Morley may have been speaking of the same thing when he said, “there is only one success – to be able to spend your life in your own way”.
‘[Today I work in] any pit on the Financial Futures Exchange. Currently I am specializing in the longer end, ten-year bonds, gilts, bunds (German government bonds). That’s where the fun tends to be. That’s where the volatility tends to be. I don’t come to work to earn a living, I come to work to make money, and to enjoy myself.
‘I like the thrill of going it alone. The fact that you’re your own boss, in command of your own destiny. It is down to me. Trading is very simple; either you make money or you don’t make money. I wasn’t depending on anyone else. When you work for someone else, if you make money somebody gives you a bonus and if you lose money somebody else pays your salary. When I was working for myself, it was the ultimate meritocracy, I was worth exactly what I made, no more, no less.
‘The beauty of trading is that if I want to go and play golf tomorrow, I can. And I don’t know what’s going to happen tomorrow. Whereas for the average person in this country, whether professional or not, their day is the usual same old routine. I think the day you come in and it’s a chore, is the day the enjoyment goes out of the window and that’s the day I’ll probably pack it in.’
David sees himself, with other traders, as a special breed apart – people who don’t want to be working on the fiftieth floor of an office block, almost clone-like, knowing their salary when they are going to retire, etc.
‘It’s like the elite of any profession, take barristers earning seven figure sums, the top traders can earn a lot. Though I doubt whether barristers have as much fun as traders. And then yes, there is pressure and no there isn’t pressure. The pressure is intense when it’s there but when it’s gone it’s gone. You can create your own pressures by having huge positions, then you start worrying about what’s going to happen overnight, in Hong Kong or Tokyo. But generally you can have control as long as you’re sensible. I’ve got positions on now which if other traders had, they wouldn’t be able to sleep, they’d be uncomfortable, but for me, I’m comfortable with it. If I wasn’t comfortable I would think twice about it. If I’m relaxed about it then whatever happens, happens. I know what I’m thinking, whether it will happen I don’t know, only time will tell. It’s something I can cope with. I’m going out tonight with a guy who imports meat, he doesn’t want to know that I’m short Footsie and long gilts, he doesn’t care.’
Yet for all his passion, Kyte does ‘switch off’, considering this an important aspect to his work. It is tempting for those passionate about their work to desire to do it all the time, and eventually to ‘Trading is very simple; either you make money or you don’t make money.’become exhausted. Resting the mind and the body avoids this hazard. But they must be careful they do not in fact dislike their work or their form of employment and so convince themselves that they are switching off when in fact they are avoiding what they dislike.
‘It is important on a daily basis, to be a good trader, to be able to switch off. If you’re struggling on the floor, the other traders will zero-in. They don’t do it intentionally, just subconsciously. You just think they are trading against you because you’re going through a bad time. You also need to switch off to give your mind a rest. I think that makes for a better trader. Even the Bothams (Babe Ruth) and Richards (Joe Di Maggio) didn’t play or think about cricket (baseball) all the time.’
Pushing your luck to make a killing
The great traders are able to push their luck. If they are in a good trade, they will not stand in its way. This may well mean buying on extreme strength. They will push for profits, and apply full throttle with confidence.
‘One big day I can remember is the 1987 market crash, “Black Monday”. I was having a great, fantastic morning. I was thinking I am going to go home, I didn’t want to hang around. Then one of my brokers had an error, well a dispute, with a House that cost $780,000. It was just as well I hung around to see what was going on. Now, what had been my best day by 10am turned out to be my worst day ever because I was responsible for the whole thing. Here was I, “here you go fantastic”, but a couple of hours later it’s like, “oh no!”. We managed to sort it out, and fortunately I am still here to tell the tale. That tainted my view of brokerage as a business. I’m slowly coming round but you can understand why I am not a great fan of the brokerage business.
‘Until 10am I just traded the market superbly, everything I did turned out just right. I was one of the people who managed to get in ‘If I wasn’t comfortable I would think twice about it.’on the Friday despite the bad weather. It was not that I particularly saw what was going to happen, it was just a wild, wild day, and I called it right. Similarly in 1994, when the market was really wanging around, by which time the market was more mature and so I had the opportunity to get in and out in larger size, I had a couple of very good days.
‘Those great days and trades weren’t luck. I think in some respects it’s a matter of “make your own luck”. If you buy near the bottom of the market, it’s very easy to get out soon thereafter. If you hear, on the bunds, the market’s fallen to 47 with a low and I bought at 50, most people get out at 52, in and out. That’s your luck for buying at 50. You make your luck by pushing it, and if it goes from 50 to 60 to 70, then maybe you get out at 80. That’s pushing your luck. And that’s the difference between a good trader and an average one. Pushing your luck, by, if you’re fortunate to get into a good trade, just keeping going and trying to squeeze every last penny out of it. It’s not just waiting to see what happens, it’s also having a feel for what will happen.’
Traders quote points to each other and not the big figure. For instance, if the $:DM rate is DM 1.7417– 1.7420, then the big figure is DM 1.74 and the points are 17–20. DM 1.7405 is ’05’ (pronounced ‘zero-five’) and DM 1.7400 is ‘figure’.
‘You don’t stand in the way of a train that’s going at full steam. It’s all right to stand in the way of a trade running out of steam, but if it’s going at full steam, get on it, have a ride, but the train is not going to go on forever, eventually it’s going to start going uphill and slowing down, and you have to say I want to get off here because when it starts rolling back down the hill it’s going to be coming back at a similar pace. That’s when it’s right to be a contrarian (someone who holds a polar view to that of the majority). It’s knowing when. I don’t really analyze it, but it must be that I get it right more often than I get it wrong. That’s why I’m here.
‘I think in some respects it’s a matter of “make your own luck”.”You don’t stand in the way of a train that’s going at full steam.’
‘If you buy at 10 and it gets to 20, should you get out, or should you say, “it’s reached this target rather quickly, I’ll sell half and push the other half to 30”. At times you might say, “I’ll get out at 20 and if it goes to 30, well hey”. It depends how you feel.
‘Scalpers see a small profit and they take it. It’s not that they are bad traders, it’s how they trade. There is a difference between somebody who goes from one step to the next, from one level to the next. I think you either have it or you don’t. You can’t teach it. It is either in your system or it isn’t.’
When he’s in a good trade, (i.e., one which shows a strong profit on a sound advance), Kyte will not get in and out of the trade all at once. He scales the amount of money risked in accordance with his perception of the probability of further profits. This way he is pushing for profits and increasing them proportionately with the advance.
If a trader buys at 15 aiming for 20, and the next day the price jumps to 20, he may well buy more at 20 aiming for a final target of 30. This is where the trader needs speed and flexibility of mind and decisiveness. A trader cannot afford to procrastinate or to be stubborn.
Of course this means Kyte is willing to risk a large proportion of his equity on one trade. Kyte does not follow the conventional rule of diversification and allocating a maximum percentage of his equity to any one trade (usually 5–10 per cent). For Kyte, there are no rules; if the trade is right then it is right, and the great trader will nail it.
The qualities of a great trader
For David Kyte, the prime quality of a great trader can be encapsulated in one word:
‘Profit. Greater the profit, greater the trader, it’s as simple as that. There are no great traders out there unless they make great profit. Take cricket, the great cricketers are the internationals. Those who play for the counties are good, but they’re not great. The great ones are Botham, Richards. They are the ones who have ‘Greater the profit, greater the trader, it’s as simple as that.’ done it at the top level. There’s no point defining greatness in the market other than by profits. That’s the name of the game.’
Whoever has the most money when they leave is the winner. There are no points for beautiful hand signals or colorful jackets – only money.
‘Is Botham a “better” bowler (pitcher), or Richards a “better” batsman (batter)? There are lots of people with good technique, but they just don’t fulfil it on the big occasions. The big occasions here are when the markets are wild – that’s your big occasion. That’s when you have to perform, and performance is seen in terms of the money you make. There are a lot of great technical analysts out there, but they’re not good traders though. You say to them here’s some money, trade it, and they can’t make it. They know where to aim the gun but they can’t pull the trigger.’
Kyte defines success and greatness in trading solely in terms of money made. After all, making money is the sole purpose for which the trader trades. The most popular alternative definition of trading success is in terms of the number of correct trades made. However, to me, this is a deficient definition, as it ignores the profit motive. What is the point of being correct 99 times out of 100 if you end up making a loss? What is the point of being technically proficient, if your inability to make money means you have to stop trading?
The quick (minded) and the (brain) dead
‘Speed of mind is everything. The ability and flexibility to change from buying to selling. Speed of mind, the ability to change your mind, and having the ability to stick with your decision. Push things when you get it right. The larger traders, if they’d bought the 50s we spoke about, Mr Average would be selling 55s, but the good trader will be buying 60s and 70s, maybe not in the same quantity, but he would be looking to sell them all out perhaps at 90. Pushing things as long as they’re going his way.’
Another major characteristic of success exemplified by Kyte is leadership. He emphasizes the importance of decisiveness and speed of mind. The trader has to move fast and decisively, yet he has to be open-minded when the time is right to re-evaluate his position. Just as the leader needs courage, the trader needs the courage to hold large positions.
What the Kyte Group looks for in its traders
David Kyte is clear that discipline and commitment can compensate for talent.
‘In the people we hire, I am looking for traders who have discipline and physical fitness. People who are committed usually have a good chance of success. If they don’t succeed it’s not usually for a lack of trying. We don’t want the type of guy who turns up late for the cricket team, doesn’t come to nets, doesn’t concentrate on his batting, and then can’t understand why he doesn’t get any runs. Whereas if he’s got the ability, it’s particularly frustrating. You, however, may be the guy who’s not outstandingly talented, but you’re always on time, come to nets, you get your eye in, know your game. You always get the 30s and 40s, the uncommitted guy may get the hundreds, but he’ll get as many ducks. When you look at the averages at the end of the year it’s you who’s ahead. We would rather have you who’s steady and notches up. You’ll sleep better. You might not have as much fun, and as many stories to tell, and you may be viewed as boring, but so what? We’re not interested in wild cards. We’re not interested in the gung-ho and impulsive. We want the stable and steadfast.’
Is greatness born or made?
For Kyte the great traders are born not made, they are innately talented. Nevertheless, there is hope in what Kyte says for the innately inept. He agrees that trading improves with experience and that commitment and passion count for a lot. For the rest, I do ‘We’re not interested in wild cards. We’re not interested in the gung-ho and impulsive.’not think his message is to pack your bags and go do something else. I believe trading discipline can be conditioned. With discipline and a set of trading rules comes self-belief, confidence and ultimately success.
‘I think you either have innate skill or you don’t. It’s just the way you are. I’ll look at certain technical matters, but that won’t be all-consuming; I like to know what the other people are looking at, then I’ll take it from there. I’ll look at them, I won’t follow them. If it suits me, then I will; if it doesn’t, then I won’t. I might have an economic view, but they tend to be wrong nine times out of ten! I think the best traders are those who don’t read the newspapers, because the newspapers have yesterday’s news. You’re there, you’re creating tomorrow’s news, so why read yesterday’s? What will it tell you that everybody does not know? You’ve got as much chance of getting it right as from reading The Sun and seeing what way the page 3 girl’s tits are pointing. Somebody used to say Coronation Street [an English TV soap opera] was good last night, that means the market’s going up.
‘It’s also taking a stock of the flows. Some people are Elliot Wave theorists, some are Gann, some are Relative Strength, Market Profiles, depends on the flavor of the month. At the end of the day what you can’t take away are highs and lows. You know that the market is as ever approaching a new high or a new low. It’s up to you to see if you can push it through, whether it’s a good location to go with the market or to go against the market. It’s up to you. It’s up to me at the time to make the right decision. You get a gut feeling.’
Kyte is telling us that he forms his opinion from pure observation, and thinking for himself, rather than following someone else’s interpretation, to determine what will happen next in the market. Is there a buying weakness at this new high? Are the others edgy? Is the price volatile? Have the bulls run out of steam? Do the bears look ready for a counter-offensive? The way the price has moved and reacted to news, the levels it has reached and the length of time it has stayed there all provide useful market information.
‘I think the best traders are those who don’t read the newspapers.’
But how do you know when to push your profits? How do you know when things are turning bad? How do you know when to get into a trade and when to get out? As with most individuals who are innately talented, Kyte says he gets a ‘feel’. He gets this feel for prices through an examination of a multitude of factors. The reasons for him not using one method exclusively over another are several. First, Kyte himself can affect whether the price will break new ground. He himself is therefore a factor which would not be internalized in the indicators. Secondly, Kyte makes numerous daily floor trades; physical impossibility denies him the opportunity to sit down with a PC and analyze the fast-moving markets. Added to this is a further factor: few would deny that prices are affected by the variable influence of numerous factors, fundamental and technical. Consequently, it makes sense that the starting point for attempting to predict future price movement is an examination of the various indicators of these possible factors, and not to focus exclusively on a few.
‘There are lots of good traders around, but you are what you are and you can’t really change it. I think there is no substitute for ex- perience. And having seen it before gives you the opportunity to take advantage of your experience if it happens again. Sometimes it takes years and years before it happens again. Sometimes you might have forgotten the last time it happened. But, it’s something you have within you. Some traders will be highly profitable and make good money, but they will never be great traders because they haven’t got it in them. I think everybody reacts. It’s how you react that matters. They haven’t got the balls to put everything on the line, or a large percentage on the line. They are happy just taking a little bit at a time. And then there are others who push it. There are others as well who put their balls on the line but aren’t good traders and they promptly have them taken off them.’
I wanted to know the deep-rooted psychological causes of David Kyte’s innate trading ability. Was it childhood experiences, or ‘There are others as well who put their balls on the line but aren’t good traders and they promptly have them taken off them.’parental influences or what? I was disappointed not to find out. After several attempts at phrasing the question differently, it became clear my pursuit of this issue would be fruitless. Kyte has a tendency to repeat the same answer to questions phrased too similarly. He will stare at his cross-examiner and leave pregnant pauses which place the burden on the interviewer to move on. It is probably in accordance with his personality that he would not want to postulate romanticized, pseudo-psychological causes of trading ability based upon ill-remembered, idealized childhood experiences. My whole interview experience with David Kyte could be described as a cross between the Sex Pistols and a Nike advert: Never Mind the Bollocks – Just Do It.
If you want to know about losing, ask a winner
It is almost certainly the case that experts in losing are not life’s losers, but life’s winners. Winners have far more experience of losing, because they get up over and over again. A loser only loses once, that’s why he is a loser – he never gets up.
‘I’m an expert on losing. I’ve lost more than most people. I would say I get more disheartened, more pissed off with myself if I lose than I am happy if I make. I believe I should make money, and you get annoyed at yourself if you let your disciplines go.’
As a leader Kyte exhibits confidence in his ability to succeed. As Emerson (1803–82) said, ‘self-trust is the first secret of success’. Kyte confesses he gets angry at himself when he fails to make money because he believes he should make money. It is probably the case that his success and his confidence in his ability to succeed feed off each other.
‘And yes, you should lose, and I know I can lose and should lose, it’s just a question of quantity. If you lose more than you should have done, that’s when you get into trouble. It’s a lack of discipline in sticking to what you decided you were going to do that causes difficulties. A lot of traders don’t focus on their targets and fail to block out emotions like hope, fear and greed.
‘You just know how much you were prepared to risk, and it’s always annoying when you lose more than you were prepared to risk. Let’s say I want to risk £1000 on this trade. If you lose £3000, that was wrong. I only wanted to risk £1000, but I ran it and let emotion get the better of me and knew I was hoping. That’s what annoys me, I think “shouldn’t have done it, should have stuck to my discipline”.’
So, for Kyte, losses are the result of inadequate discipline which leads to inadequate focus on targets and a distraction by emotions. The first step to resolving any problem is recognizing its existence. Many non-professionals deny the existence of a problem. It is a mark of his professionalism that Kyte can speak with ease about the causes of loss, without making excuses. One technique David Kyte uses to correct whatever went wrong is self-analysis and self-talk.
‘There are always lapses, it’s just a case of correcting them early. We run a school for traders, so they come to us for advice, and we advise them. Who do I go to for advice? I have conversations with myself: “what are you doing? Just get back to basics. Just take it nice and easy.” It’s a mental battle. You just say bugger it, and walk away for another day. That’s the way it goes. It’s just something you have to accept. Just make sure you have more good days than bad days. I think it’s your losses you have to handle more than your profits. The profits take care of themselves. You can run profits forever. You can’t run losses forever. They say the same in every manual you ever read. And it’s the people who don’t manage their losses that end up going bust. It’s just cutting your losses and running your profits. It’s a saying that has always been good for me. We try instilling this in our traders.’
When Kyte does lose money, his positive attitude allows him to walk away. He does not destructively dwell upon his losses, but healthily returns to his trading disciplines. It follows from Kyte’s trading method that he doesn’t need to be right a majority of times to do well. Since he has the discipline to get out when things are bad and push profits when they are good, he can afford to be right only a minority of times.
‘You just say bugger it, and walk away for another day.’ Another useful technique in loss prevention involves trade planning and effective risk management. It is when a large part of his equity is involved in one trade that the trader needs courage. If he has made a mistake, he must turn it around quickly. If he has growing profits, then he needs the courage to stand firm. It is far more difficult to stand firm in the face of growing profits than in the face of mounting losses. How often does the failed trader becomes paralyzed in the face of his escalating losses – frozen through fear, greed, hope, pride? And how often, with growing profits, does the trader snatch the silver medal and turn tail? It is discipline in trading strategy, such as pre-defining an acceptable loss, that produces confidence and courage.
‘We try and instill in our traders an attitude that is useful. Set yourself a target of how much you are prepared to lose on a daily or monthly basis; when you’ve lost it, stick to it. Don’t hope. There are a lot of people who turn a poor day into a bad day into a terrible day because of lack of discipline. Those are the people who go bust. If it’s been a bad day, say it’s been a bad day, but I’ll be back tomorrow. You can afford to have a lot of bad days if you’re disciplined. Don’t tell yourself how much you’re going to make in a day. If you’re making £500, £1000, don’t say all right I made £1000 I’m going home now. Go for £2000, or £4000, if it’s your day, stay in there. You might make it your best ever day.’
The loser who does a U-turn
Often, if you hold on to a losing position, the volatility often makes it into a profitable one. What should you do?
‘It could do, yes. It depends how heavily involved you are. Well, if you buy 50 at 10, are you still happy to be long the next day when they are 5? It depends. Do you average? You may be happier buying 12s and adding to a good position. Everybody differs. The hard and fast rules are that there are no hard and fast rules. It’s just quickness of mind and flexibility.’
The hard and fast rules are that there are no hard and fast rules. It’s just quickness of mind and flexibility.’
Kyte goes beyond the usual trading rule of cutting losses short because he recognizes that that rule is only a part of the more general rule of getting out of the market if you’re wrong. While a paper loss usually indicates one is wrong, it does not necessarily do so. You may be correct about the eventual price movement, but it is taking longer to develop. In that case, if the price moves against you, it may be better to actually buy more at the cheaper price. The trick is to know when the move is temporarily against you and will move back up, and when the move indicates you are wrong. The answer for Kyte comes from his intuitive feel of what is going to happen.
But what Kyte calls a ‘feel’, is in fact a trading system. His system is more intuitive than mechanical. The important thing is to have a system with which one is comfortable, and to execute it with discipline. There is no one correct system.
Learning to handle profits
It may seem an unusual topic to discuss, after all we all think we can handle winning, but Kyte is quite clear – handling profits is as important as handling losses. Many people, when trading, see a flow of income and treat it as a salary, almost as if they have a right to it.
‘Handling profits, setting them aside for when you have losses, it is something I feel very strongly about. A lot of people, they’re making money and they go around driving these nice fast cars around the city:
“Look at me I drive a £45k car and live in a £200k house.”
“What’s the mortgage?”
“Well, what are you trying to say?”
“How well I’m doing.”
“And what happens when you lose? The car goes back, the house gets re-possessed.”
That’s the problem with a lot of people, they’re great when they’re making money. “Oh, by the way, the tax man needs some money.” But they don’t think about that. They think they can pay that next year, but next year they don’t make any money. The way I’ve always operated is that the money’s there, but until I walk out of here it’s not mine, I’m just looking after it for the market.
‘Generally, I believe in as high a maintenance of funds as possible. It doesn’t have to be in your trading account either as long as it’s liquid. It’s the people who’ve spent it all and have the rough ride that have problems.’
On profits, Kyte expands on the usual rule that profits will take care of themselves; profits are not the same as cash. Many seem to confuse the two and overspend, thinking they have a right to a stream of profits. The moral is to spend carefully. The market is a capricious and jealous guardian of her cache – should she grant a loan, she may require full repayment with usurious interest at any moment.
l Trading should not feel like work. You should be enjoying it. If you don’t enjoy it, find out why.
l Remember to ‘switch off’ and recharge your batteries.
l If you are in a good trade, recognize it and push your luck by staying with it.
l Scaling in and out, depending on the probability of further profits can be a good way to protect profits already made and yet still take advantage of future gains.
l Be flexible enough to change from being a seller to being a buyer.
l Discipline and commitment can make up for a lack of innate talent.
l Observe the market to get a ‘feel’ of what is likely to happen. Compare it with what does happen and store the experience.
l Trust yourself to succeed.
l Keep a firm discipline when it comes to losing positions.
l Plan a limit to your losses beforehand.
l Losses take more handling than profits.
l If you lose, move on. Focus on the future not the past.
l Be aware of the power of profits to change.