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Jeremy Frommer, CEO of Hedge Fund LIVE Jeremy Frommer has 20 years of industry experience and is currently responsible for general management and leadership of the General Partner. Previously, Mr. Frommer was a Managing Director and Head of the Global Prime Services Group (“GPS”) at RBC Capital... More
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  • Flash Back to the Flash Crash 0 comments
    Nov 19, 2010 8:43 AM

    I just had a flash back to the day of the flash crash.  I had an “ah ha” moment that day.  To provide the full context of my anecdote, I had only been on the desk for one month at that point.  I had no trading experience whatsoever from day one.  So I wasn’t really on the keys at that point in time- maybe a few executions here and there, but that was pretty much it.  Being off the keys (and thank God for that since I probably would’ve gotten run over like it’s nobody’s business) gave me the advantage of being able to monitor all of the senior traders’ PnLs very closely.  They didn’t have all that shabby a day actually, but one of the traders actually left an impression on me that I probably will never forget.  Imagine that a group of traders are all having decent up days PnL-wise, but one is clearly outperforming them all.  While PnLs tick higher, there is one PnL that is growing at a noticeably faster rate.  Well, that’s what I had observed.  I was definitely impressed by his trading performance that day and I wanted to know just how he was able to take the lead like that.  What I noticed in that hectic last hour or so of the trading session was that while everyone had very strong trades in certain names, they also had a few, but huge losing positions on their pads.  What had allowed this trader to so clearly outperform, however, was that in his losing trades, he was only down very small.  That was the day when I truly grasped the concept of limiting your losses.  And I believe that is the key to achieving consistent profitability in trading.

    Though he is no longer at this firm, he did leave some educational content behind of his trading methodology, which I’ll share below.  They are very basic, and to a seasoned trader should sound very cliche, but we all need to bear these rules in mind, regardless of whether you have been in the business for a few months or a few decades.  He told me that those he mentored used to print these rules out and tape it near their monitors.  Now I know he wasn’t kidding.

    1) Control your downside and limit your lossses
    2) Maximize your gains and upside when appropriate
    3) Beginners should buy strong stocks on pull ins with a defined loss limit and short weak stocks on rallies where there is a saturation point for loss protection
    4) Always be composed and disciplined when trading
    If outside factors affect your mood, avoid trading until you are back in the zone
    5) The trend is your friend
    Going with the flow of the stock will keep your blood pressure down-bucking the trend is a recipe for disaster
    6) Do not get married to a trade or to a direction
    Be flexible and feel the market to determine direction
    7) Money management is a key to success
    Never let a winning trade turn into a losing trade

    Disclosure: none
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