Worth reading if you trade... "An Interview with Teresa Lo
from Innerworth.com
Teresa Lo’s discipline and unflinchingly realistic view of the world is the result of a father who was a career military officer and her mother’s constant critiques.
Although she’s not a household name, Teresa Lo’s success as a trader recently landed her on the cover of Online Investor magazine. She also wrote an article on risk management in the June 2000 issue of Active Trader. More recently, Lo was featured in the book The Guts and Glory of Day Trading, by Ingebretsen.
But Teresa Lo is no overnight sensation. When her boss at a brokerage firm in Vancouver, British Columbia, left in 1999 to start his own business, Lo retired to trade daily from her home. After 12 years as a stock broker, she was willing to go it alone. Trading from home, Lo focuses on the S&P Index futures market, playing the market in a moderate and controlled manner. With an average trading size of five S&P e-mini contracts (one-fifth the size of standard futures contracts), Lo makes about three round trip trades a day, each trade lasting about 15 minutes. She maintains her trading account at $50,000, and earns a minimum of 10% monthly. At the end of every month she drains her profits into more conservative treasury bills and begins again.
Disappointed with the online trading chat rooms that she found on the internet when she first became a solo trader, Lo started her own site, trendVUE.com. It has continued to blossom into a successful business venture. The website offers a high performance trading tool and a twice-weekly electronic newsletter focused on risk and money management strategies.
Lo has reached her goals by clearly defining what she wants from trading - a steady income and no surprises. Her formula for success is a combination of a conservative methodology that carefully limits risk, and a well-thought-out money management routine. For example, she has:
Shortened her time frame from overnight to day trades.
Drains profits from her account every month and places them into T-bills.
Defines a successful trader as someone who is a clear thinker, able to piece together several variables in real time, and who can view data objectively, without emotions or desires coloring perception.
Acknowledges that her trading edge comes from knowing her system inside and out, and knowing from the test of time that the system will work in different market conditions.
Has observed that most people have trouble following a trading system because they don’t have the necessary conviction that it works.
Knows that investors need to develop their own methodology so they understand everything about it and have confidence in it from testing it over time in many kinds of market conditions.
Believes that having the right motives for trading is an important indicator of success.
Observes that her male counterparts are likely to be influenced by their egos, jeopardizing their ability to make winning decisions.
Thinks that blaming others for poor performance is a sign of having lost control; but also believes that control can be regained through focusing on your own behavior, through such techniques as keeping a journal of your trades and studying your mistakes.
Manages problems with a mental technique of stepping back and determining the worst-case scenario.
Tools of the trade
One monitor
Two backup computers in case of computer failure.
Tradestation charting by Omega Research
ESignal level II data
Chart Indicators: price, volume, ADX, 20 EMA, 60 EMA
Pending proprietary swingtrading indicators available at website.
The Interview
When did you get started in trading?
I joined the brokerage firm in 1987. I’ve been in the business ever since.
It sounds like you’ve been successful in your trading.
It’s not like trading is very hard.
When you look at the statistics about how many people bail out in the first year, I think many would disagree.
You have to realize why those people fail.
Why do they fail?
They come into trading for all the wrong reasons. In the firm where I used to work, we had 500 to 600
brokers - and there were some fantastic traders. If you look at how they survived, it had to do with having a professional attitude. Most of these good traders didn’t go into the business wanting to be traders. They just sort of drifted into the business and had the right kind of personalities, where they could make decisions and cut losses.
Given the way the market was before April [2000], it looked like anyone who had any money could just sit down with the mouse, click, and all this money would come flying out. I think the market conditions attract a lot of people whose motivations to become traders were dubious at best because they figured, “I’ll just go in there and make some money.” But trading is not about making money. Making money is the side effect of a good trader. You can’t take someone who says, “I want to make money trading” and make them into a good trader, usually, because their motivation is not coming from the right place.
What would you say is the right place?
Coming from the right place is having the right qualities. Those qualities include someone who has reasonable intelligence, whose mind is very clear, who can make a certain number of decisions per unit time, and who can learn certain concepts.
The concepts are simple, but they must be applied to a moving target all the time. It’s easy to read textbooks and take 3,000-dollar courses where they say, “Look at this example and look at that example.” But, when the example is actually just forming, it’s not quite the same as in the textbook. We’re not talking about systems traders; we’re talking about discretionary traders who trade off whatever it is they’re looking at. They have to have very keen perceptions, and they can’t be too rosy or too bearish. They just have to see the world as it is.
I think very few people are so well balanced they can always see the situation as it really is. So I think that is a main reason for failure. Many people fail because of their biases, because in the market you can see what you want to see. But seeing it as it really is - that’s what you need to do.
It sounds like you believe that you can see things pretty clearly, without those biases?
Yes.
Were you born that way or did you evolve to it?
I think my family background had a lot to do with it. My dad was a career military officer, and his specialty was in the logistics of guerilla warfare, a very hazardous job. His attitude of preparedness pervaded our house. When we were young, he would always drill us to be ready. We had to know the setup in any given situation and have contingencies in case of this or in case of that.
Also, I was always interested in science and chemistry. In the labs, they tell you to write down what you see as objectively as you can. We were trained to go and find facts.
So being thorough and analytical is from your father and from science classes?
I believe so. Also, it was never a big deal for me to be wrong, because I was always being told by my mom that what I did was not good enough or that I was never right. In trading you have to learn how to be wrong. So I got good training.
How do you control your emotions? What tactics do you use to stay focused and clear-headed?
I have very clear rules of when I trade, so my biggest emotion during trading is that I am just bored. Half the time I’ve got my head down on my desk with my eyes closed, waiting for the next trade, or I’m lying on the couch. The only time that it’s not boring is if I were to take a position that’s way out of line with what kind of money I should be betting. But I learned a long time ago not to do that, because that is not the arena for professional traders. When you are a professional trader, at any given time, you’re only betting a very small part of your account, so no one trade is a big deal. Therefore, it all becomes really boring.
So your trading methodology is so structured that it reduces the ambiguity and takes out the emotions?
Yes. There’s nothing emotional, because if I am going to be wrong, it doesn’t matter. And whatever money I lose is not material. When I win a lot of money, I think to myself, “That was about time.” I think the big difference between professional traders and retail traders is that the professional traders look after their downside. All they ever care about is limiting risk and protecting capital.
If you talk to retail traders or new traders - the traders that blow out - they’re the people who came in thinking, “Oh, I can make a lot of money in the market.” But they’re undercapitalized. They don’t start with enough money, and then they make huge bets with what little money they have. They’re taking a huge risk with money, and if they blow it on one trade, they won’t be able to play anymore.
That situation makes trading terribly emotional. If you’re wrong, you might have to go to your wife and tell her that you lost your savings account, right? You’ve been to all those message boards. You’ve seen all those people pouring their guts out. Those are all the people who never controlled their risk.
How do you explain your boredom to those people who say they’re going to war everyday?
They can’t survive like that for 15 years doing this every day.
How much time do you spend preparing for a trading day?
I spend zero time preparing for one.
Zero time preparing?
Yes.
What markets do you trade?
I trade S&P 500 index futures. I don’t trade stocks anymore, although I spent years doing it. The market’s become so discontinuous and disjointed on an overnight basis that if you carry a position overnight, it might open up 5 or 10 dollars the other way, and it’s not very nice to wake up minus 50,000 dollars. It’s just no way to live. I decided I didn’t want that.
You can die from the stress of that kind of trading. I used to trade overnight, and I’d wake up to these losses. I’d get very mad. One day I decided I couldn’t go on that way forever, especially not every morning at 6:31. So I figured I’d just trade during the day.
How do you evaluate your performance? What goals do you set for yourself in this profession?
If I trade my setups and I have patience, that’s great. Sometimes the market allows you to make a lot of money; sometimes it doesn’t. Ever since the low in April, [2000] it’s been sort of grinding, and it hasn’t had any great trends. So we’re happy to get two points here and there. There’s been lots of stopping out at breakeven, and it’s annoying. But you have to know that this is part of life, right? And especially after the market’s been smashed like this. I think we can expect lower volume and drifting. We have to get used to these market conditions.
So, if you are trading according to market conditions, and not forcing yourself to trade when there is no reason to, then I think that’s a good definition for success. Not losing too much money 'You never learn until you have no net.'
would be good. If you do the things you are supposed to do, it becomes almost impossible to lose that much money.
What setups do you like to trade?
There are two setups that I like. I like to trade retracements in a trend, and I like to trade tests. If I do other goofy ones, then I know I am being goofy and, once I notice I am doing it, then I stop and go back into wait mode.
Is there any value in using win-loss ratios?
Many people in trading talk about win-loss ratios, but that has nothing to do with good trading whatsoever. You find a lot of people with very high batting averages who end up treading water or even marginally losing, because they try to finesse each trade so that they improve their win-loss ratio. But then they never catch any of the homeruns. So in the long term they can never really have a good performance.
Do you see any gender differences in trading?
Sure. Probably the majority of the traders you’ll talk to are men. They have this mentality that trading is a big battle, and they’re going to score. That’s the way it used to be at the firm, too. The guys got very angry and aggressive, throwing around their mice and keyboards.
I used to play squash a lot with men, too. I noticed that whenever the guys were in trouble, they used to try to muscle their way out by hitting the ball harder. I always thought that this charging mentality was silly, but that was just my own personal opinion. But, you see them trying to do that in stocks, too, trying to get heroic when it’s not working out and buying some more while it’s down. Many guys have to get so ballsy. It’s not necessary. It’s a finesse game.
Why do you think so many traders take unnecessary risks?
If you ask a lot of these traders where their income comes from, you will find that it is not from trading the market. Their livelihood does not depend on this. This is some sort of bizarre video game for them. They just don’t really take it seriously. But you never learn until you have no net.
Did you have to learn the hard way?
Oh, I did. I blew out my account twice when I was in my early 20s. Twice, not just once, because I wasn’t smart enough to get the message.
I blew out my account at the worst possible moment, too, because my dad had just passed away and he didn’t leave my mom with much money. So I was kind of under the gun to trade. I was trying to do too much at the same time, and I totally got my size out of whack in relation to how much money was in my account. There was a tiny little setback, and I was wiped out. I was faced with having the responsibility of paying my mother’s mortgage when my dad died. I had to work three jobs for a long time.
That experience illustrated to me the folly of not following all these instructions. I got it out of the way when I was young, so I didn’t have to do it when I was, say, 50 years old.
What did you learn from those two events?
I learned that you always have to control the size of your bet, and you have to be very careful in using margins. Do not bet the wad, and do not keep buying and buying on margin, because then a small setback wipes you out, and it’s game over.
Do you use margin at all now?
By virtue of trading futures I technically do, but my stop losses are so close that it’s irrelevant now.
Do you vary the size of your trades?
I have all my money in T-bills away from my trading account, so I can’t touch it. I always trade the same number of contracts, regardless of what I think of the market.
So even if you see the perfect setup, you won’t put more in?
No, because it’s impossible to foresee the future. Have you ever read The Market Wizards books? You know the interview with William Eckhardt? That was the best one out of them all. William Eckhardt talks about the market acting as an opponent and reinforcing bad habits. Since none of us can see the future, if it’s good enough to trade, then it’s good enough to go at full size. And if it’s not good enough to go, then don’t go. I totally agree with him. I follow that philosophy. I don’t stick in half a foot. I always bet the same size, which is derived from the size of my account. Every month I drain it out, so it’s at that same size so I never really increase it much or decrease it much.
Are you always very disciplined and controlled?
I don’t have the choice of coming home and telling my husband, my nanny, my mother, and my daughter that we’re broke. Just that thought is enough to keep me honest.
I’ve seen a lot of clients and brokers, and their families, destroyed because of this addiction to gambling. Clients lose their houses, because they refused to take a loss and kept on shorting something. I’ve seen guys who have battled the bottle from the stress of trading, and they hit bottom. Some of them manage to clean up and stop drinking, and they become phenomenal traders, better than they ever were.
I can just think back to what I had to do to get through the tough spots and just remember some people who were not so fortunate. It keeps me disciplined.
Despite blowing out twice, what made you stay in the business?
I knew I had made that much money already in my 20s. The reason why I blew out was not because I couldn’t trade, but because I bet too much. And that’s completely curable. If I could never make money trading because I could never find a technique, I probably would have given up. I wouldn’t have blown out in that spectacular fashion, either. I blew out a humongous six-figure account. For a 23-year-old that was not bad.
Has your methodology changed over the years?
Yes. In the early years, I wasn’t so set in my methodology. I would wing it much more than I do now. It took years to get to this point with my technique. At that time, I knew so little that I wouldn’t even have been able to tell you what a test or a retracement was. I was a very good tape reader, though, and because I worked in the business, I could watch the traders. I knew when the phones were ringing and when the orders were coming, which is a totally different way to trade. It had much more to do with the feel of the market than just looking at charts for price points, which I do now.
Do you think it would be fairly easy for someone else to come in and learn your method of trading?
I think the techniques themselves are very simple. But it’s hard for people to really believe in them until they try them for a period of time. And I think you just have to spend a certain amount of time watching
the market in order to cover various scenarios so you can avoid freezing. A lot of people just freeze. They know what they’re supposed to do, presumably, and when something happens, they just end up frozen. I’m at my best when the market’s going nuts. Sometimes the market will get going, and then it will come back one bar, and I’ll say, “Okay, let’s get in there. Let’s go. Let’s go!” Others can’t seem to react with any reasonable speed, because they have no conviction.
What is your trading edge?
My edge is that I made my own technique. I know why I do what I do, so when the time is right, I use it without hesitation. A lot of people are trying on the techniques of others without making them their own. You have to think about why it’s good, not because someone sold it to you for three grand. You have to know why a certain thing happens and why they say to do this or that. You have to believe you have a valid market model. Otherwise, you will always be filled with doubt and have no conviction. You have to have some sort of market model in your mind. It doesn’t have to be the same as mine, but whatever it is, it has to be tested somehow. As time goes by and you’re validated over and over, then you gain confidence and conviction.
Do you need to keep a balance in your life outside of trading, such as with your family or other hobbies, in order to maintain good trading?
I don’t spend hours and hours after the market closes preparing for the next trading day. My favorite hobby is cooking. I do a lot of that. I also work out.
Does having a fight or being upset about something in life outside of trading have an impact on your trading performance?
No.
How do you manage that? I have this way of thinking: If there is a problem, I say to myself, “What’s the worst thing that could happen?” And if the answer is not death, then it’s not really such a big deal. And if the answer is death, then I’ll say, “Well, when I’m dead, I won’t even know anymore.”
The second test is: Will throwing some money at this make it go away? If the answer is yes, then it’s not even defined as a problem. So I actually have very few problems - or maybe none.
Those sound like helpful techniques to put problems in perspective and deflate the emotional power they may have.
If you know how much money you have and you limit yourself to a certain size, what’s the worst thing that can happen? If you’re trading S&Ps, and you have a stop loss two points below, the worst thing that can happen is you can lose 500 dollars. Is that a big deal? No. And if it is a big deal, you’re trading too big, or you’re in the wrong market.
I suppose theoretically it’s possible to make 10 bad trades. At minus 500, that’s minus 5,000 dollars. Well, if you’re trading one contract, and you make 10 bad trades in a row - which I can’t ever remember doing, so you’re down 5,000, right? Five thousand out of a 50,000-dollar account - that’s hardly worth a mention. So why worry?
Do you get stressed about leaving money on the table that way?
No, because no one can see the future. You can’t predict when that’s going to happen, and if you miss a move, you just have to realize that it is no big deal, because the next trade is around the corner. It could be two minutes from now when you’re sitting here beating yourself up over missing that move. You can’t waste your time during market hours going should-have, would-have, could-have. It’s done so let’s move on. If you still have money, you’ll be there.
Look at where people assign blame. You never hear them saying, “It’s my fault because I didn’t know how to trade” or “It’s my fault because I bet too much.” It’s always, “You know, my neighbor gave me a bad tip” or “My broker gave me a bad fill” or “I walked away. I was in the bathroom, and the thing collapsed on me,” or whatever.
It’s always this outside locus of control thing. It’s never “I was wrong. I am responsible.” It’s always “them” and “they.” A lot of people trade futures, and they’re convinced that others, like the boys in the pit, are trying to manipulate orders. And to some extent, the rules and regulations of pit trading might have allowed them to legally steal half a point from you. That’s fine. But you knew that before you went in. None of it is reasonable thinking. Maybe in life, most people are just walking around in a fog anyway.
What do you mean?
In life you can walk around in a fog, and it doesn’t really affect your well-being. But trading unmasks all of those people, because you can’t dispute what happened in your account. Your account equity is alive and sitting there in front of your face every minute of the trading day. People get very distressed, because they can’t believe they can’t make this work. But I think it’s probably because this is their first encounter outside of their mentally constructed perfect self or idealized self. This is the first time in life they have to confront reality. Just to see the world as it is may require a whole lifetime’s worth of training for a lot of people. Some people say that traders are born not made, but I don’t think so. If you choose to be real and see the world as it is, you could trade tomorrow if you wanted to. "
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