Elite Trader Insights: Tom Basso
Episode 19: The Sweet Balance Between Risk and Reward
Each week we try to unlock the collective wisdom of the Trading Elite. Strategies and unique insights from hours of interviews with top traders, sliced into bite-sized pieces and delivered to your inbox for your pleasure.
Tom Basso, affectionately known in the trading community as "Mr. Serenity," is a retired money manager and a veteran futures and currency trader. Known for his calm and collected trading demeanor, Tom has been featured in Jack Schwager's renowned "Market Wizards" series. With a background in chemical engineering, Tom’s methodical and disciplined approach to trading has made him a figure of notable respect in the financial markets.
Key Learnings and Takeaways from the Interview
1. Embrace Hedging:
Tom emphasizes the importance of hedging to protect against significant market downturns. He advocates using instruments like S&P futures as a hedge against long stock portfolios to mitigate risk during bear markets.
2. Systematic Trading:
He highlights the importance of having a systematic approach to trading, which involves adhering to a set strategy regardless of emotional impulses. This approach helps in maintaining consistency and rational decision-making.
3. Diversification Across Asset Classes:
Tom advises traders to diversify across different asset classes, including stocks, futures, and currencies. This diversification helps in reducing risk as these assets often do not move in correlation.
4. Importance of Non-Correlation:
Seeking assets that do not move in tandem can enhance a portfolio's performance, especially during turbulent times. Tom looks for assets with low to zero correlation to balance out the risk.
5. Position Sizing:
Proper position sizing is crucial according to Tom. It ensures that no single trade can significantly impact the overall portfolio, thus managing risk effectively.
6. Behavioral Economics:
Understanding the psychological and behavioral aspects of market participants can provide an edge. Tom uses principles of behavioral economics to anticipate potential market movements based on typical human reactions to economic changes.
7. Awareness and Emotional Control:
Tom places high value on maintaining awareness and control over one’s emotions. He believes that being overly affected by the ups and downs can lead to missed opportunities and poor decisions.
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8. Longevity in Trading:
He advises traders to think long-term, emphasizing that a few significant trades can make or break a year. Consistency and patience in executing many trades are key to discovering these opportunities.
9. Adaptability:
The markets are always changing, and strategies should evolve too. Tom suggests continually assessing and adjusting strategies to align with current market conditions.
10. Life Beyond Trading:
Tom advocates for a balanced life, where trading is part of one’s activities but not the entirety. This balance helps maintain a healthy perspective and reduces the risk of burnout.
Cheers
Marto