Profit from Peter Brandt’s 45 years on Wall Street

This post explores the valuable wisdom offered by trading legend Peter Brandt from his 45 years as a proprietary trader on Wall Street.

About Peter Brandt

In over his 45 years as a proprietary trader Peter Brandt has amassed an impeccable record of success and accomplishment. Since 1980 when he founded his prop trading firm Factor Trading Co. Peter has compounded money at an average rate of 42%. In his best year he saw a 600% gain. Most remarkably during this time Brandt only had 3 losing years where his draw downs were never more than 8%.

Brandt makes his living as a classical chartist. And while that may not be your thing, Brandt has a wealth of wisdom gathered over years on the street to share with we aspiring traders. Below is a one hour interview with Peter made about 4 years ago on “Chat with Traders” podcast.  I have listened to the interview multiple times and have taken good notes so you don’t have to. Take a listen.

Peter Brandt’s thumbnail Bio

From www.peterlbrandt.com

Peter L. Brandt entered the commodity trading business in 1976 with ContiCommodity Services, a division of Continental Grain Company. From his start in the commodity industry, Peter’s goal was to trade proprietary funds. But, he first needed to learn the business.

From 1976 through 1979, Peter handled large institutional accounts for Conti, including Campbell Soup Company, Oro Wheat, Godiva Chocolate, Swanson Foods, Homestake Mining and others.

In 1980, Peter founded Factor Trading Co., Inc. In his capacity as CEO, Peter was primarily engaged in trading proprietary capital. Factor Trading also produced market research and managed the trading activities of several large institutional clients. Among Peter’s institutional trading clients was Commodities  Corporation (“CC”) of Princeton, NJ, at the time one of the world’s largest trading houses.

In 1990, Peter published his first book, titled Trading Commodity Futures with Classical Chart Patterns. 

In 2011, John Wiley and Sons published Peter’s 2nd book, Diary of a Professional Commodity Trader. The book became Amazon’s #1 ranked book on trading for 27 weeks. His first book, Trading Commodity Futures with Classical Chart Patterns, was published in 1990, is considered a classic by many traders.

Chat with Traders: Peter Brandt   1 hour

Getting started in the business

  • Having a job in a trading firm allowed Peter to rub shoulders with a wide variety of traders which a great advantage in the beginning. He could observe different trading styles. Peter notes that with the advent of electronic trading, new traders don’t get that experience of having a trading community. Social media can only go so far in that regard. Talking about trading over a beer or at lunch is better
  • Over the course of 5 years, Peter tried to copy a wide variety of trading styles and methods. During this period he blew up a number of accounts. He’d save up $5000, blow it up. Save again, blow it up. He says he blew up 10-12 accounts during this time.
    • Over this time he tried all manner of trading styles, time frames etc with differing  money management methods
    • Brandt says learning trading is a problem solving process; making a lot of mistakes, then finding a trading style / method that suits your own particular personality
    • The light bulb went off when a trading buddy introduced him to classical charting as a trading method.
  • When asked what kept him going, Brandt says “Having a job”.   The job afforded him the time to experiment and learn the craft of trading without the added pressure of needing trading income to pay the bills.
    • Brandt firmly believes that no aspiring trader should be quitting their job to trade the markets until they have at least 2 years of living expenses saved up AND a trading account large enough to support the yearly expenses plus a profit. Brandt goes on to say that the trading account should be built from trading gains, not from an inheritance or some other outside source.
    • Brandt freely admits that some early monster wins put him in business and that if they had went the other way he might not have made it.
    • Brandt believes aspiring traders should expect it to take 3 to 7 years before everything clicks.

Trading as Craft

  • Brandt views trading as a craft. The aspiring trader must pass through apprenticeship to  journeyman to hopefully a master after decades of work
    • The beginner’s luck phenomenon can be the curse of the beginning trader.
    • It plants the seed that trading is easy which leads to poor risk management which in turn leads to a blow up.

Trading Style and Methodology

Classical Chart Reading

  • Brandt cites 2 books as foundations of his work.
    • Richard W. Schabacker’s “Technical Analysis and Stock Market Profits”
    • and the Edwards and Magee classic “Technical Analysis of Stock Trends”   Both are available on Amazon.
  • Views chart reading, and trading in general, not as an art or a science but a craft.
    • Favors patterns with horizontal boundaries.  ( Rectangle consolidations,  Ascending or descending right triangles, Head and Shoulders formations)
      • Brandt does NOT use any indicators. Trades strictly by the price action. ( Why use a second derivative of price when you can use price itself )
    • Brandt dislikes trend lines and diagonal boundaries in general because in his view they are much less reliable than a horizontal boundary.
  • Brandt’s go-to set up is a pattern that forms over 8-12 weeks although he has seen set ups years in the making.
    • The longer it takes for the pattern to set up, the more reliable they become.
    • The effect of algos is largely negated when using longer time frames. 
  • Views himself as a momentum trader looking for breakouts / breakdowns from big reliable patterns
  • Looking for 2-4 clean set ups on any one instrument over the course of a year

Time Frames

  • Brandt prefers to use weekly charts for signals and the daily charts for timing entries.
  • Observes that the advent of HFT and algo’s produce tons of intra-day “fake” volatility as algos hunt stops.
    • Views intra-day trading as a huge trap for retail traders
    • Longer time frames are harder to manipulate than lower ones
  • Usually is in trades 3-5 weeks but regularly sees trades last a couple of months and as long as 6 months on a big trending market

Instruments / Trading vehicles

  • Futures and FX are 90% of his trades with 10% being equities
  • Brandt watches all global indexes and currency pairs

Prices

  • Focuses exclusively on end of day and end of week prices. Does not even look at intra-day markets.
  • Keep in mind there is a 12 hour difference between US and Asia. While our market is open, he is focusing attention to how Asia closed in the markets he is trading
  • Most of the work is done outside regular trading hours using closing prices
  • Pays special attention to how prices close prior to a 3 day holiday.
    • Shows special commitment by traders who are willing to risk being in a market over a long break.

Trade Management

  • Only has a win rate of 40% but losses on losing trades are small 
    • The 80 / 20 rule is in full effect.  20% of the wins generate 80% of the profits. 
  • Notes his best trades work right away and never look back.
  • Does NOT use trailing stops.

Risk Management

  • Most trades are 1% of trading equity; Never risks more than 2% on any one trade and these are few and far between.
    • Often times after a trade starts to work and has progressed, he will take 1/2 off and then trade around the remaining core.
  • Trade the market, not your equity balance
    • Says that most traders always have one eye on their equity balance and one eye on the charts.
    • Believes if you keep two eyes on the market that profits will take care of themselves and that you’ll be far less apt to be scared out of positions
  • Rarely does equity at risk exceed 15% of total trading capital any one time. 
    • Brandt observes most novice traders over-extend their positions compared to their capital
  • Strong opinions; weakly held. 
    • Enters trades with strong opinions but if a trade goes against him, he quickly pulls the plug.

Observations and Advice for Aspiring Traders

  • Trading is a marathon, not a sprint.  Remember, it will take 3-7 years to become proficient
  • When you are out of sync with the market
    • There will be times when your system does not work all that great.
    • Don’t abandon your system and hunt for a new one
    • Back off on position sizing and trade frequency
    • Become very picky on what set ups you take
    • Maintain your diligence.
    • Traders need to be hyper-vigilant on maintaining trading capital
  • Novice traders place way too much emphasis on trade identification.
    • Says primary emphasis should be on maintaining capital and risk management
  • Don’t seek perfection, seek progress. 
    • Play the long game.
    • Focus on process and repetition
  • Purposeful Preparation
    • Approach each trade as a pilot approaches his pre-flight checklist.
    • Purposely go down the prerequisites for your trade and check each one off; if even one criteria is not met, no trade
      • Create a written pre-trade checklist and use it every time
    • A pilot knows one oversight could lead to a catastrophe.  Same holds true for the trader.
  • Observes most aspiring traders are afraid to lose and take a failed trade personally.
    • Shrug it off, learn from it, move on
    • Brandt assumes his trades will fail.
      • Losing is his default position. Then if he loses, he is not disappointed, it was expected.
      • If your default position is to lose, you approach and view risk with more respect
  • Traders can only grow and succeed after they take true responsibility for their actions
  • Role of Providence and Luck
    • Brandt, like most traders, thought intelligence, studiousness, hard work, determination and effort would be enough to fuel his success. It wasn’t.
    • Brandt believes that one needs a fair degree of providence and luck in order to succeed.
    • Brandt freely admits that in the beginning there were a few critical trades that went his way that enabled him to amass a trading account big enough to branch out on his own. If those key trades went the wrong way, he may not have made it.

Pulling it together

There is a ton of practical information here for the aspiring trader to absorb. Although most certainly each trader must find their own way to a process that works for them, I think it’s a mistake for aspiring traders to think they’ve got to recreate the wheel by themselves. The “Market Wizards” like Brandt and others shine a bright light on the path to success with trading principles that have stood the test of time.  For me, the principle that rises above all others is risk management. No matter what trading process you have, when you run out of trading capital, game over. Do we really need to spend the next decade blowing up accounts to come to that realization?  Pick and choose the above ideas to experiment with. Incorporate the principles that make sense for you, then tweak them and make them your own. You’ll become a better trader for making that effort.

 

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