Market wizard Tom Baldwin started trading with $25,000 and grew it to an estimated $30 million. He shares 6 timeless trading rules that helped him reach millionaire status before his first year was through.
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It's not everyday that a product manager for a meatpacking company leaves his job behind to become one of the greatest traders in history. But that's exactly what Tom Baldwin, a legendary bond futures trader profiled in Jack Schwager's classic "Market Wizards," happened to do. "He was a millionaire before his first year was up and has never looked back," Schwager said. "Although he declines to discuss the extent of his winning, $30 million appears to be a conservative estimate. The true figure could be significantly higher." Unaccompanied by any previous trading experience — and starting with only $25,000 — Baldwin was able to turn his original stake (or "steak" if you're feeling punny) into a fortune. It all started when he took a commodities course in graduate school. "I wanted to trade, but I didn't have the money to buy a seat," he said. "In 1982, I found out I could lease a seat, and that's when I began." At first, Baldwin was a dedicated observer. He'd spend close to six hours a day on the floor of the Chicago Board of Trade developing an overarching opinion of the market and scouring for repeating patterns. Eventually, the market's volatile twists and turns started to make sense to Baldwin. Unlike most novice traders, Baldwin was profitable from the get-go, only experiencing small losses sporadically. Interestingly enough, he credits his success to his lack of experience. "You don't need any education at all to do it," he said. "The smarter you are, the dumber you are. The more you know, the worse it is for you." Early on, Baldwin learned that scalping — a style of trading aimed to realize profits from small price fluctuations throughout the day — would be his preferred strategy. When the original interview was conducted, 90% of Baldwin's trades were scalps. Although Baldwin's performance is clearly extraordinary, most of his ability to trounce markets stem from just a few overarching principles. Without further ado, here are the six trading rules that helped Baldwin reach legendary status. 6 rules for success 1. Reduce your risk "The object is always: Minimize your risk," he said. One of the reasons Baldwin grounded his trading strategy in scalping was due to his ability to control risk. His trade windows were often very short, only seconds to minutes. This way, if a trade moved against him, he'd only lose a small amount. He loved the ability to make moves at a rapid pace. 2. When in doubt, wait it out "Patience is an important trait many people don't have," he said. "They trade too much. They don't pick their spots selectively enough." Baldwin's wisdom mirrors that of Jim Rogers, the chairman of Rogers Holdings. In a separate interview with Schwager, Rogers said "One of the best rules anybody can learn about investing is to do nothing, absolutely nothing, unless there is something to do." 3. Don't focus on the money "Also, in our business, you have to have a total disregard for money," he said. "You can't trade for money." Baldwin says that a focus on dollars is a common fallacy that undermines neophyte traders. Soon, they start thinking about what that money can buy — a new house, car, vacation, etc. That connection clouds judgement and makes it harder for newbies to make the right decisions under pressure, since the money now has a material connotation. The focus shifts from the trade at hand to what that money can buy — a losing proposition in Baldwin's mind. "They don't like to lose $1,000 when they're getting paid $500 a week," he said. "Now, all of a sudden, they are thinking about the money." 4. Get out, but do it wisely This is where Baldwin's philosophy on trading differs from most. Legendary traders like Larry Hite, Mark Minervini, William O'Neil, Marty Schwartz, and Paul Tudor Jones, amongst others, mercilessly cut losses. Generally, most have a predetermined stop loss in place as soon as their position is established. Baldwin takes a more subjective stance on the matter. "If I know it is a losing trade, I wait for what I think is the optimum time to bail out," he said. "Never give up on a trade. Many traders who are in a losing trade will just get out because they were taught that you have to have discipline. Great. Those traders will always be around." Baldwin notes that if these types of traders gave their positions a little more breathing room, they may be able to get out at a better price. However, things can always get worse. 5. Plan By the time economic data is slated to come out, Baldwin has already thought through his reaction to a more or less opportune reading. In doing so, he's able to catch the majority of a move higher or lower, whereas more inexperienced traders may plow into a position at a top or bottom. "I know what I am going to do if a number comes out one way or the other, and I usually have the opportunity to be first," he said. 6. Check your ego at the door "To be a great trader, you have to have a big enough ego only in the sense that you have confidence in yourself," he said. "You cannot let ego get in the way of a trade that is a loser; you have to swallow your pride and get out." SEE ALSO: 'I'm basically going to be long growth': Billionaire investor Chamath Palihapitiya has hauled in a 997% return since 2011. He details the 5 sectors shaping his long-term investment playbook. Join the conversation about this story » NOW WATCH: How the suicide hotline saved my life
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