How I Trade For A Living – Gary Smith

How I Trade For A Living by Gary Smith was (and still is) a popular trading book. We bought the book just days after it was published in 1999, in the midst of the dot com frenzy, and we have reread it at least a couple of times. We regard How I Trade For A Living as one of the best trading books.

There are plenty trading books out there, but this is absolutely one of the better ones. The book is truly authentic and Mr. Smith documents his trading results. Gary Smith took a $2,000 account, which he struggled with for 19 years, to a $700,000 account in a few years. The book is not about how to strike it big in trading, but it’s about the grind every day. A lot of traders can relate to Smith’s personal story. 

Who is Gary Smith?

Mr. Smith is a full-time home-based retail trader. He’s one of the few writers that actually documents his track record, and it’s quite impressive although he is far from any “trading star”. For that, his gains are too moderate, but assuming his track record is correct, he has a very impressive trading style in terms of consistency and small drawdowns.

When the book was published, Gary Smith had managed to increase his trading account from 2 000 to 700 000. That amount might not be so impressive, but keep in mind that this is 30 years ago and Smith has had very few losing months. His results are very consistent.

Presumably, Mr. Smith has performed even better in the years that have passed since he wrote the book. This is what Mr. Smith’s writes about himself on Amazon:

Instead, it has come from trading junk corporate, junk municipal, emerging markets, and securitized bond mutual funds. The last 12 years since 2009 have been the most profitable. During that span through June 2021, I have made over $2,700,000 with less than a 1% drawdown along the way. That averages out to some $225,000 annually and a long ways away from my initial stake of $2200 in the Spring of 1985. It just demonstrates the power of the compound effect of consistently and persistently compounding one’s capital over time. My attraction to the bond funds are their trend persistency over long periods of time combined with their low volatility. I have always preached that traders need to find their own trading niche. I found mine in the bond funds and using the same momentum indicators I used while trading the stock index futures and equity funds.

What is How I Trade For A Living about?

This is a very personal book. Smith describes his journey where he spent 19 years dreaming of making it rich as a trader, but ultimately failed every time he tried. He goes through his 19 losing years until he in 1985 finally sat down and analyzed where he had gone wrong all these years.

After describing how he ended up down for the count, he describes how he managed to put it all together to become profitable:

• Trading is a profession
• How he uses trading filters
• Which tools and indicators he uses
• What kind of seasonalities he employs
• Which risk management techniques

The book ends with three chapters about his three main trading vehicles: mutual funds, junk bonds, and stock index futures.

Takeaways from Gary Smith’s How I Trade For A Living

Don’t let its age scare you. Despite being in its third decade, you can learn a few tips and tricks. For example, how many traders are trading mutual funds and junk bonds? Needless to say – very few do. Gary Smith has found his niche in these instruments and it seems to suit him perfectly.

The four main takeaways are these:

Know yourself as a trader

Smith didn’t make any money until he took the responsibility for his own actions. He sat down and thought about his personality traits and what makes him tick as a trader. And it’s never too late to try. He didn’t really analyze where he went wrong until he had been a failed trader for 19 years.

Sadly, no one but YOU can ever figure it out.

This is what Smith writes:

I believe reading as much as you can about trading and the stock market is part of the process of becoming a successful trader yourself. However, at the end of the day you need to figure it out yourself.

(We have written an article based on the personality test for traders made by Brett Steenbarger.)

Persistence and consistency are important

Perhaps Gary Smith’s greatest message to any struggling trader is never to give up. There is always light at the end of the tunnel if you take the time to analyze both your trades and your behavior:

For the first time in 19 years as a trader, I decided to find out where I had gone wrong. Isn’t that amazing? Throughout my trading career, I just assumed that someday I would strike it rick, that dreams always come true simply dreaming. Never once did it occur to me that achieving my dream of trading for a living would require hard work, planning, and discipline. It also requires persistence. But that was one trait I didn’t seem to be lacking. Aftr all, even though I never succeeded in the game, here I was 19 years later, still plugging away.

This speaks for itself.

Prudence and modesty

Smith decided to cut down his spending in order to have as little detachment to money as possible. He moved from high costs in California to rural and cheap Kentucky (!). As a trader, you want to have as little attachment to money as possible.

Rigor and trading records

Smith describes his methods but they were all the result of his trading journals. Always keep a trading journal!

For your convenience, we made a trading journal example.

Seasonal trading strategies:

Another important takeaway from the book is that Smith uses seasonal trading strategies, just like we do on this blog. He mentions three effects or biases specifically that we have touched upon earlier:

• The turn of the month trading strategy (end of month effect)
• The options expiration week effect
• How to use the weekday effect in trading

Quotes from Gary Smith’s How I Trade For A Living

We end the summary with some random quotes from the book:

I’m also a very emotional trader who operates with a complete lack of confidence-losing trades eat away at me for days, sometimes weeks, at a time. That runs counter to the conventional wisdom of the psychological trading gurus on what it takes to be a successful trader.

Some people may dismiss these trading achievements by attributing them to a particular innate talent or ability. Poppycock! That’s simply an excuse for believing they can’t emulate my trading results. The years of adversity I endured prior to becoming successful should dispel the notion that I have any special trading skills.

There are no experts in the trading arena, and if you ever hope to be a success, you have to do the work yourself.

All gamblers die broke and most of them become degenerates along the way.

If you get anything out of this book, I hope it’s a recognition of the need to scrutinize each and every one of your trades for clues to its failure or success.

In March 1985, I set a trading goal that still guides me today: to be profitable every month of the year.

…To succeed, traders need to capitalize on every edge and bias possible. What better edge is there than awareness of this historic upward bias in the stock market?

I’ve offered my views on what it takes to succeed in trading: extensive academic knowledge combined with intensive, real-time trading experience.

Trading is a game of uncertainties. Yet most traders seem to have a psychological need to make these uncertainties appear certain. The result is an overreliance on various indicators that purport to detect changing conditions.

It’s a good thing I’m not one for trading my opinions, but, instead, let the market tell me what to do.

I operate under the theory that extreme strength leads to more strength, and extreme weakness leads to more weakness.

I also believe that if you are to become a successful and disciplined trader, you must practice discipline in aspects of your life beyond the trading arena.

FAQ:

What are some key takeaways from Gary Smith’s trading journey?

The book is a personal account of Smith’s 19-year struggle as a trader. It covers his analysis of past failures, the realization of trading as a profession, and details about trading filters, tools, indicators, seasonalities, and risk management. Key takeaways include the importance of self-awareness for traders, the significance of persistence and consistency, the value of prudence and modesty in spending, and the necessity of maintaining rigorous trading records.

How did Gary Smith turn his trading around after 19 losing years?

Smith turned his trading around by taking responsibility for his actions, analyzing his personality traits, and understanding his behavior. He emphasizes the need for hard work, planning, discipline, and persistence in trading. Smith acknowledges being an emotional trader with a lack of confidence, and losing trades affect him deeply. He challenges conventional wisdom about psychological traits for successful trading.

How does Gary Smith view the use of indicators in trading?

Smith operates under the theory that extreme strength leads to more strength, and extreme weakness leads to more weakness, reflecting his belief in trend persistence. Smith suggests that trading is a game of uncertainties, and relying too much on indicators to make uncertainties appear certain can be counterproductive. He emphasizes the importance of letting the market guide trading decisions.