We recently began a 4-part series dissecting the 4 Secrets of Wealthy Traders.
In our first segment, we explored Secret #1 – Wealthy Traders are patient with winners.
We looked at John Paulson’s short of the home mortgage market in 2008, Pierre Andurand’s historic crude long up to its all-time high of $141 a barrel, and the methodical patience of Richard Dennis’s “turtle traders” in the late 1980s.
This week, we reveal the second secret to success:
Secret of Wealthy Traders #2: They only trade one market
Novice practitioners immediately reject such a thought.
“One market? Why limit myself? There are opportunities everywhere?”
I once felt the same.
But this knee-jerk response masks a deeper dilemma for amateur traders…
They’re not GREAT at trading anything.
They might be decent at picking growth stocks… pretty good at selling credit spreads… better than average at day trading crude…
But they don’t truly excel in any one niche.
If this sounds like you, don’t fret. It’s not your fault.
Every entrepreneur with a laptop and a domain name is hocking his own master system to beat the markets. And their approaches are as varied as their success rates.
Being hit by this flood of contradictions drives most to become a jack of all trades.
But wealthy traders… those rare individuals with decades of consistent profitability… all share a common trait – they only trade one market.
What About People Like Buffett??
Are there exceptions? Sure. But they’re rare.
But our goal is to be in the 3%… that top tier of traders who make a living behind the screen.
To be a master of multiple markets, you’re talking 1 in 1,000.
It would be easy to throw out the names of household billionaires to prove this point…
Buffett is the king of buy-and-hold value. Lynch focused on mid-cap growth. Greenblatt started in distressed debt.
But let’s get real.
Most of the top traders on wall street aren’t trading multiple markets.
We’re not running a 10-figure hedge fund. What we need to know is how “real” traders find success.
And there’s no better place to look than CTA’s.
What is a CTA?
If you’re not familiar, CTA stands for “commodity trading advisor” – managed futures as they’re often referred.
Not only are these often run by a single trader, but they’re also easy to set up… making this an achievable goal once your skills advance to a high level.
Generally, it works like this…
After passing a securities exam and opening a quick LLC, the CTA is in business.
He trades as a block, so instead of buying five contracts at a time like before, he buys fifty. Five go to his account, and the others are disbursed into the client accounts.
Unlike hedge and mutual funds, the monies are never pooled. The CTA trades the customer’s account, and he simply bills them a quarterly fee for his efforts.
Examples of Wealthy Traders
I recently sat down with an introducing broker who specializes in managed futures programs. His job is simple – find the best CTA programs for his customers, then monitor their performance like a hawk.
I hounded him for the top performers.
And unsurprisingly, almost every one specialized in a single market.
Trade marketing examples:
Tanyard Creek capital trades livestock and boasts a 20.9% annual rate of return.
Schindler Capital is known for its Dairy Advantage fund which has consistently outperformed benchmarks.
Blue Bar Futures has its Prime Ag program (trading agriculture futures, obviously). It returned an astounding 183.06% over the prior three years.
LJM Partners’ Aggressive Premium Writing program sells call and put options against S&P 500 futures.
Mifte Capital FX Alpha trades a small handful of technical patterns in the forex market.
Both have delivered more than 100% over the prior 5 years.
Final Thoughts on Trading Markets
The pattern is clear and undeniable – wealthy traders specialize in one market and trade it exceptionally well.
They don’t try to master every corner of the investing universe. They focus on one!
Review your P&L. Compare your performance across different markets, strategies and time frames. This will tell you where you have an edge.
Then focus on YOUR market… and trade it until you become a master at it.