December 12, 2019

From 2012-2017 I worked in fixed-income trading at Bank of America. My experience managing repo and government bond trading books, as well as my personal portfolio, have taught me a few rules to follow. In 2016 I wrote down nine of these. Here they are along with some supporting quotes from books I have read.

1. Have a plan. Put a stop and target on it. Keep a journal with the reasons for a trade and the P&L associated with it.

2. Is the trade in alignment with your longer-term view? If not the valuation needs to be exceptionally compelling.

3. Wait for high conviction trades, and be big. They only come along once every so often. Do not feel like you need to trade if you do not have conviction.

4. When the consensus is all one way, the market has already moved, and will not move further in that direction even if an economic release or event occurs as expected. “Big price movements happen when market participants evaluate prejudices, not when world the changes that much.” (Colm O’Shea, Hedge Fund Market Wizards)

5. Is the thing you are trading sufficiently correlated to what view you want to express? “When things are going badly for reasons you don’t understand, cut the trade.” (John Porter, Inside the House of Money)

6. Take risk in liquid instruments.

7. Markets have a tendency to trend. “One of the only things I could say with certainty was that markets trend because I can observe trends in any financial market, in any time era.” (Michael Platt, Hedge Fund Market Wizards)

8. If you really like a trade, get in it even if it costs you a tiny amount. “Don’t be a dick for a tick”.

9. If you disagree with the market, on what basis is this? Economists and market participants are smart people and likely know more about forecasting and economics than you do.