Tom Basso - On How to Trade Stress Free For Bigger Profits

At the end of the interview, Jack Schwager said - if he was to pick a trader as a role model, from all the trading legends he had interviewed it would be Tom Basso. Lets look at his trading strategy and what makes him a great trader.

Tom Basso has been a successful fund manager and has written two books - “Panic Proof Investing” and the “Frustrated Investor” When Jack Schwager first met him, he said:

I was immediately struck by his incredible ease about trading”

Hence the nickname Mr Serenity. Tom Basso is a very relaxed trader and this comes from, his total confidence in what he's doing. Below I have listed some quotes from him which I think are great advice for any trader, who wants to improve their trading strategies performance. Let's get some great tips and insight from Tom Basso.

The Importance of Developing Your Own Trading Strategy

"In the end, I think every trader should develop his or her own strategy for buying and selling, for money management and for dealing with him or herself. I think there are people out there, Especially when you've got the fixed overhead of commissions every day as opposed to, in my case, I might hold a position for two or three months. It's a lot easier to overcome the cost of trading."

A good point at the end - you dont just have to overcome trading losses, you also have to overcome commision and pip impact and the more you trade the more this cost is and this is a major reason day trading and scalping should not be done. You have no chance of winning anyway in our view due to the low odds of success in short time frames but commisisons kill the account as well. 

We have stressed this throughout our education on this site and a huge amount of the best Forex traders we have done profiles on have said the same – trading success comes from within you. You can never delegate your trading to someone else and I think the quote below neatly sums up why. Anyone who is considering buying the vast amount of automated trading systems online would be wise to heed the words below:

On System Followers

If I gave you my exact system, I’m sure that within a month you would be making changes to fit your own ideas. For one reason or another, you probably wouldn’t be comfortable with what I gave you. It would be even worse if I gave you the system as a black box [a computer program that generates buy and sell signals based on undisclosed rules]. That would drive you crazy. Since you wouldn’t have any idea what went into the program, the first time the system had a losing streak, you would probably abandon it altogether. You would say, Tom may be a nice guy, but how do I know he just didn’t develop this system off of some well-chosen examples?”

Well chosen examples” Applies to most of the get rich quick trading systems sold online with their heavily curve fitted track records. Even if a system is soundly based, it will still have long periods of drawdown and losses and if you don't understand, the methodology behind the trading signals – you won't stay with the system, long enough to see the drawdown period end.

A system like Richard Donchian's Rule is an example, of a system that works but will have drawdown in the short term but because the logic is revealed and based on known facts, about trending a user would have the confidence to stay with it. Most traders especially beginners, have problems trading even good automated systems because they can't accept short term losses and focus on the long term.

Leading on from the above quote this is really why system trading is so hard for most traders:

That is precisely the reason why I believe people almost invariably fail to make money on trading systems they buy. Even if they are lucky enough to purchase a system that works they almost never have the confidence to stay with the system when it hits its first major drawdown period-and every system in the world will have a drawdown.”

Drawdown is part of trading and if you don't accept it then you should really not bother trading the currency markets because in order to win, you need to learn to lose first without letting losses run out of control. Traders will always look to find a trading strategy, with little or no drawdown but its a fruitless search so best to accept losses and just keep those losses small until the big profitable trends come around again. 

Confidence from Knowing Yourself

"In my case, I know exactly the reasons why I do what I do. I know exactly the Achilles heel of everything that I do. So I know when I 'm having losses, exactly why I should be having losses and I have to have a belief in myself that these losses are not going to continue forever because the markets are doing what they normally do and nothing is out of whack here and don't go panicking and changing anything. Just 'keep on keepin' on."

This is a a trader who knows his edge, knows how to lose and not worry about losses and knows that his edge will kick in and give him profits on his trading strategy longer term. The quote simply shows what you need to do to win – just persevere, stay clam stay disciplined and profits will come.

Focusing on the Longer Term

I would tell that trader to think of each trade as one of the next one thousand he’s going to make. If you start thinking in terms of the next one thousand trades, all of a sudden you’ve made any single trade seem very inconsequential. Who cares if a particular trade is a winner or a loser? It’s just another trade.”

This was a quote in response to how traders should cope with losing and its sound advice - simply detach yourself emotionally from your trading strategy. One trade or a few trades losing or winning means nothing – your playing a long term averages. Your profits and losses in the short term mean nothing. Your trading Edge will only work over the long term and losing trades are just part of the game and nothing to get excited about.

Money Management

Stops, in my opinion, should be a violation of the reason why I wanted to get into the trade in the first place. And yes, I always have a way to get back into the trade. My stop is a function of the market and what it’s doing. It’s only in directly related to risk – unless the risk is too big for me to even take a position. I control risk as part of my position sizing.”

The stop he places is what ever trader does – put it somewhere, where if the level is hit you are wrong on the trade and shouldn't be in it. Many trader argue with the market price and move stops which shows emotions coming into play and this leads to disaster. Also what traders forget a lot of the time is if you get out – you can always get back in the market again but when you do, you will see the market without emotion and be able to execute your trading signal with discipline and not clouded by emotion.

Final Words

Tom Basso talks total sense and is perfectly at ease with his trading strategy – he's confident and sees trading for what it is – he has a trading edge with his system and knows it will win over the long term so why get stressed out?

All traders can learn a lot from Tom Basso's trading tips and insight on trading and as Schwager said he makes the perfect role model – check out more on Tom Basso and read the excellent interview with him in the New Market Wizards.