How This Master Trader Got His “Edge”

Editor’s Note: Lauren Wingfield here, Larry’s managing editor.

Larry has been churning out wins in his options advisories. Over the past week, his Opportunistic Trader recommendations have brought gains like 66%, 57.5%, and 113%.

That’s why we hope you enjoy the trading insights in these pages, drawn from Larry’s 40-year career.

Below, Larry and fellow editor Chris Lowe cover several key moments in Larry’s history… including hard lessons he had to learn to succeed as a trader.

As Larry explains, you can boost your odds of success by following several key steps…

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Chris Lowe: Your trading record is legendary. Between 1990 and 2010, you didn’t have a losing year as a trader. That included 2008, the worst year for the economy since the Great Depression. Millions of investors lost their shirts. But that year, you made $95 million at your hedge fund.

We’ll come back to how you did it in a moment. First, for newer readers, let’s talk about your early career. What was your first job as a trader?

Larry Benedict: In 1984, I got a job as a clerk at the Chicago Board Options Exchange (CBOE). It’s one of the world’s largest options exchanges.

Clerks answered the phones, wrote down orders, and ran them out to the “pit” – the floor of the exchange – for the traders to execute.

Larry (right) on the floor of the CBOE in the mid-1980s

My boss was a big-shot trader. He had another clerk training me. This other clerk warned me, “Look, you’ll get fired every day. But don’t worry. Come back tomorrow, and everything will be fine.”

Chris: Did your boss fire you?

Larry: Yes. On my first day. And every day after that for about eight months. I didn’t know the ins and outs of working on a trading floor. And on day one, my boss threw me right into the fire.

He was giving me hand signals for what trades I should be making from the pit. I had them written down on a sheet of paper. But learning them was like learning sign language. And the ticker tape looked like scrolling gibberish.

Inevitably, I messed up an order. My boss went ballistic. He told me I was an idiot… and he fired me. But I came back the next day.

It was a high-strung, high-intensity environment. But as miserable as it was to get fired every day and return with my tail between my legs, I kept coming back.

Not a lot of people can handle that kind of environment. It was hard knocks. But you learn that way. You get knocked down, and you get back up.

I loved the energy of it. It was like playing competitive sports. And I had that fire in me. I’m extremely competitive. So getting knocked down wasn’t an issue for me.

Chris: What was your next step?

Larry: After that, I got a job trading for a company run by Steve Fossett, the record-setting aviator and adventurer. But the Black Monday crash in October 1987 hit me hard.

Then I got a bunch of other trading jobs. And I just kept blowing through my capital. But I kept at it. I didn’t give up.

Then, in 1989, I got a job with a well-known trading firm at the time called Spear, Leeds & Kellogg. That’s where I learned about the importance of sticking to a trading discipline.

After Goldman Sachs bought the company in 2000, I set up my own trading firm, Banyan Capital Management.

Chris: To say you’re cautious as a trader is an understatement. You place huge importance on managing your risk.

Larry: That’s right. I think a lot about discipline. I’ve managed hundreds of traders in my career. I always ask them the same question: What makes a great trader?

The answer is discipline.

I was net profitable for 20 years as a trader. Few people can make that claim. Most traders take on too much risk. Yet I’ve always made sure my trading account isn’t too far below zero.

One way I discipline myself is by using “stop-loss orders.” Once a trade goes against me… I’m out.

Everyone’s portfolio is different. And the amount of money they’re trading with varies. But when I ran my hedge fund, if my account was down more than 2% month-to-date on any day, I’d clear out all my trades… take a break… and start again.

What I learned early on is that you can make a lot of trades. So you don’t have to let one trade define you. If a trade goes against you, that’s fine. You can just move on to the next one. There’ll be other opportunities.

It may sound crazy. But I’ve often made 200 – and sometimes as many as 500 – trades in a day. I learned to accept losses and to keep them small. This is key for new traders.

Chris: In your trading advisories, you talk about “earning your risk.” What do you mean by that?

Larry: It means you shouldn’t take on much risk until you’ve had a string of smaller winners. When you do that, you build a pile of capital you can speculate with.

If you don’t have a big enough base of capital, you shouldn’t take on any high-risk trades. You start by targeting 5%… 10%… 25% returns… and grabbing these smaller wins when you can.

You never go broke taking a profit. That’s why I say you should always look to put a “P” (for profit) on the page. Once you’ve built a strong foundation of capital, you’ve earned the ability to take on more risk.

I made several big mistakes early in my career. It cost me all my money on several occasions. It came down to a bunch of silly mistakes.

One of them was making bets with too big a lump of capital. You should always stick with an amount you feel comfortable with. That means being okay with losing 100% of the money you risk on each trade.

Chris: That’s not the way most people approach trading. They want to knock the lights out on every trade.

Larry: I know. That’s why I tell my subscribers to start small. You can develop an edge as a trader, but it takes time. So starting small is critical.

Chris: Does greed never tempt you?

Larry: I’m guilty of getting a little greedy sometimes. But I’ll only ever do that when I’ve built up a stack of cash by grinding out some wins first. Then I’ve earned my risk. I can make more aggressive trades because I’ve got a nice cash pile to fall back on if they don’t go my way.

People often ask me, “What’s the biggest gain you’ve ever made on a trade?” And I honestly can’t remember. I’m not looking for big gains on every trade. I’m in grind mode. I’m churning out one profit after another.

One of my most memorable trades was the first day I made $1,000. I think that happened in 1986. It made me see that I was able to be successful as a trader. A thousand bucks doesn’t seem like much, but it stands out for me because it gave me the confidence to keep going.

Chris: What else can readers do to boost their odds of success?

Larry: The first step is to find a mentor. Someone like me, who’s been at this a long time and can teach you the fundamentals.

The next step is to become an expert at one thing. Pick one stock… or one index like the S&P 500… and get to know it inside and out. Tom Brady wasn’t training to become the next major league pitcher. He was a seven-time Super Bowl-winning quarterback because that’s what he lived and breathed.

The last step is to be disciplined. Earn your risk. Build up a cash pile with smaller, lower-risk trades. You can swing for the fences – but only when you know you can afford to take a loss if the trade goes against you.