What Steve Cohen Would Tell You About The Stock Market and How To Trade | Exploring Markets

What Steve Cohen Would Tell You About The Stock Market and How To Trade

Steve Cohen is considered a trading legend. However some say he has become a legend because of inside information and other unethical trading practices. But let's put that aside for a few minutes and look into the theories that made him so successful in the first place. He was once profiled and interviewed in the book Stock Market Wizards by Jack Schwager and these are the insights that stand out.

1. On how Cohen thinks stock prices move

"They taught you that 40 percent of a stock's price movement was due to the market, 30 percent to the sector, and only 30 percent to the stock itself. Which is something that I believe is true. I don't know if the percentages are exactly correct, but conceptually the idea makes sense."

2. His greatest strength in trading is this

"You better be able to do that – turn on a dime when you're wrong. This is not a perfect game. I compile statistics on my traders. My best trader makes money only 63 percent of the time. Most traders make money only in the 50 to 55 percent range. That means you're going to be wrong a lot. If that's the case, you better make sure your losses are as small as they can be, and that your winners are bigger."

3. A lesson for all new traders

"They make trades without a good reason. They step in front of freight trains. They short stocks because they are up, as if that were a reason. They'll say, "I can't believe the stock is so high," and that's their total research. That makes no sense to me. My response is: "You have to do better than that.""

4. This is how all traders should be - focus on one area!

"Most traders want to trade everything. One minute they are trading Yahoo, the next Exxon. They're traders! My place operates very differently. I want my traders to be highly focused. I want them to know a lot about something, instead of a little about everything."

5. One of his favorite sentiment indicators

"It's going to end badly; it always ends badly. Everybody in the world is talking stocks now. Everybody wants to be a trader. To me that is the sign of something ending, not something beginning. You can't have everybody on one side of the fence. The world doesn't work that way."

6. Self-control and self-reflection are key

"You can't control what the market does, but you can control your reaction to the market. I examine what I do all the time. That's what trading is all about."

7. You have to love what you do

"A lot of people get scared and think that since they made a lot of money they'd better protect it. That's a very limiting philosophy. I am just the opposite. I want to keep the firm growing. I have no interest in retiring. 

First, I have nothing else to do. I don't want to go play golf. You know the old saying: "Golf is great until you can play three times a week, and then it's no fun anymore." Second, I enjoy what I'm doing. 

I've grown the company in a way that has kept my interest. We've expanded from just traditional trading to a whole range of new strategies: market neutral, risk arbitrage, event driven, and so on. Also, my traders teach me about their sectors. I'm always learning, which keeps it exciting and new. I'm not doing the same thing that I was doing ten years ago. I have evolved and will continue to evolve."