The Treasure HunterThird, go out and watch the movie:Million Dollar Babyand
listen to Clint Eastwood’s rule number one for becoming a Million
Dollar Baby: “Protect yourself!” No capital, no trading, no life.
Fourth, you need intellectual freedom and flexibility to be suc-
cessful in this arena. Go back and reread the part of this interview
where I described the best trade I ever had. Jesse Livermore once
said: “Our job in speculating is not to be on the bull side or the
bear side, but on the winning side.”
Finally, there are two pieces of advice in commodity trading
legend which has been passed down through the ages as gospel.
One: “You must cut your losses and let your profits ride!” Two:
“Losers average losers!” Both are conceptually correct, yet the
logic of both has been blown out of proportion, if not twisted, over
time. Today it is considered a sin for any self-respecting trader to
not cut losses quickly, sometimes too quickly. Today it is also a
trading sin to average losing trades. We need to reexamine these
ideas with a greater level of maturity and sophistication in order to
continue to be able to win at trading in the future.
In 1974 Muhammad Ali in the “Rumble in the Jungle” against
George Foreman in Kinshasa, Zaire, used a strategy in boxing that
was considered a boxing sin at the time to become Heavyweight
Champion of the World against great odds. It was the so called
rope-a-dope strategy. The theory at the time was that lying on the
ropes was wrong because it exposed a fighter to more punishment
than if he moved around the ring. This did not discourage Ali
from using the strategy against Foreman. Foreman was a harder
puncher than Ali. Most analysts felt that Ali would have to stay
away from Foreman to beat him. Instead, Ali started to lie on the
ropes by the end of the first round and used the ropes for the rest
of the fight. Foreman’s strategy, which was totally obvious (just
like cutting losses and letting profits run in trading) was to cut off
the ring, get Ali to the ropes and hit him. Since Ali was willingly
lying on the ropes, Foreman would plant himself in front of Ali
and punch as hard as he could. Foreman landed constant blows to
the body, but due to Ali’s focus on protecting himself had trouble
landing to the head. Ali scored on Foreman with an occasional jab
or series of jabs as Foreman tried to reposition himself or catch
his breath. Foreman began to tire from all this activity (in trading