7 Things ‘The Big Short’ Can Teach You About Trading

Written by John Stuart on January 22nd, 2016

7 Things ‘The Big Short’ Can Teach You About Trading

I watched ‘The Big Short’ recently and have to say it’s one of the best money- movies I’ve seen in recent years!

If you trade the markets in any way, shape or form – You HAVE to see it!

The movie tails three American hedge funds as they made almost perfect trades to take advantage of the mortgage bond market imploding under defaults.

In essence, they bet against America!

And in doing so revealed seven crucial things I think every trader needs to hear.

Seven trading lessons that can make you a better trader…

(Warning: Spoilers ahead, if you haven’t seen the movie rather read this after you’ve done so)


7 Trading Lessons From The Movie ‘The Big Short’


We all know the crisis that hit the financial markets in 2008.

But ‘The Big Short’, once a book and now a Hollywood movie, spells it out in dramatic fashion!

And best of all, lying deep within the script, were a few golden trading nuggets…

Here they are…


The Big Short’s Big Lesson #1: Timing Is Everything

There are so many ‘market timing’ quotes & philosophies around it’s enough to make your head spin.

“It’s not about timing the market”

“Don’t try time the market, it’s a fools’ game”

“It’s about time in the market, not timing the market”

I think a lot of these depend on your situation, and how you approach the market.

Obviously the quote “It’s about time in the market, not timing the market” is aimed more at long investors than it is shorter term traders.

In fact, there are even popular market timing strategies too (if you could call them that).

Sell in May and go away.

The Santa Claus Effect.

The Halloween Indicator.

The January Effect.

Some of these are interesting, a large chunk of them are subjective, but most of them are hogwash.

But there was a timing gem hidden in The Big Short.

And that was that it’s possible to be right about a market move, but you could be too early to realize its potential.

One thing I find is a lot of traders look at the market from a certain perspective, but trade a time frame that doesn’t suit that very view.

In The Big Short, both Mark Baum (played by Steve Carell), and Michael Burry (played by Christian Bale) were fortunate enough to be able to hold until their positions showed them ridiculous fruits.

It’s a little different for traders, and having worked for a broker I’ve seen this first hand.

A lot of brokers will cut a client’s position short if it goes seriously south.

What you need to remember is that the broker is liable for that money if the client doesn’t (or can’t) pay.

So whilst Baum and Burry were able to see an opportunity before the rest of the world AND profit from it, things are a little different for everyday traders.

It’s entirely possible you see a “once in a lifetime” move, but it’s even more possible you’ve seen it too early.


The Big Short’s Big Lesson #2: Trading Too Big Is Dangerous

Trading bigger positions is dangerous.

You might be right on your call, but you could lose your money before you have time to be proven right.

It can lead to all sorts of scenarios you don’t want to be in…

Revenge trading, chasing trades, overtrading…

I like to think of trading positions bigger than you normally trade as ‘trading gluttony’.

Trading bigger positions comes with all sorts of risks.Trading bigger positions comes with all sorts of risk

If you haven’t collected the right data, or evaluated it properly, then increasing your position size will result in disaster!

The other side of that coin is risk.

By trading bigger positions you’re increasing your risk by exposing more of your portfolio to the market in fewer swings.

What I mean by that is if your positions are 10% of your portfolio, what happens when you hit a drawdown or losing streak?

You could kiss most if not all of your portfolio away in a matter of days or weeks depending on how you trade.

Is that a risk you need to take?

Play it safe and manage your risk accordingly.

Your adherence to your risk management rules will ultimately make or break you as a trader.

Don’t trade big because “it feels right” or you WANT to.

Stick to your system and avoid trading gluttony.

Remember, if you trade too big, you could lose all your capital before you have the time to be proven right!


The Big Short’s Big Lesson #3: Skin In The Game Makes You See Things Differently

Having skin in the game simply means that you’re invested.

It’s your money on the line.

I’ve seen this in brokerages, to hedge fund managers, and even top investors.

If you have skin in the game, you behave differently.

I like to think of this in two ways.

I love golf.

I’m not particularly good, but I love it anyway.

I remember when I first picked up some clubs and started going to the driving range.

I’d pick up a few buckets and just swing and swing until the sun went down.

Obviously I was practicing to get better.

But every shot I hit wasn’t going on a score card, or didn’t count for anything.

The second I stepped onto a course for the first time made me see the game completely differently!

Every shot counted.

I had skin in the game.

It wasn’t like the driving range where if I shanked a shot it didn’t matter.

Here, if I shanked, I shuddered!

And my handicap suffered because of it.

It’s the same when it comes to trading the market.

It’s very easy to look at other people’s trades, or make calls on things where your own money is not invested.

Demo accounts are another great example.

Don’t get me wrong.

I think demo accounts are the perfect starting place for traders just starting out, and even traders who want to test certain systems, strategies or ideas.

But let’s be honest…

When you trade in a demo environment versus when you step into the big bad market, well it’s a different thing entirely.

When you have skin in the game, you’re held accountable because it’s your money on the line.

Remember this next time you’re given a ‘hot ticket’, or you’re lured into an ‘opportunity’.

People with their own money on the line evidently believe in what they’re trading.

(Irrespective of whether they’re right or wrong I might add).

But at the end of the day, skin in the game will make you see things differently.


The Big Short’s Big Lesson #4: Consistency Is The Most Popular Currency

Winning traders…

Profitable investors…

Even top sportsmen…

They all know that the currency for success is consistency.

Investors & traders from all corners of the planet want consistent returns.

And obviously they avoid drawdowns like the plague.

When that happens is they tend to pull their money very quickly.

The problem here is that consistency is also a long term game, even for a trader.

Whether it’s a profitable account or a solid trading strategy, both need consistency to flourish.

Traders who hop from one system to the next will eventually blow their account(s) and move on from trading.

But smarter traders know better.

That, amongst the many other things needed to be a successful trader, means consistency is something on the top of most profitable trader’s lists.

In the movie Michael Burry was the first to spot the impending doom and went as far as creating a market and instrument for it!

Most of his clients responded somewhat negatively to this, and even his directors made their issues known in a few shouting matches in person and over the phone.

Burry eventually put a moratorium on clients being able to withdraw money, and when clients considered pulling their cash they couldn’t.

They were effectively forced to stay consistent with the move and eventually it paid off in an enormous way!

Despite what this movie may tell you, there’s no ‘one trade’ that has more importance in a series of trades.

It’s the consistency, discipline and patience over a large enough amount of trades that gives you your edge.

Remember this everytime you want to bet the farm.


The Big Short’s Big Lesson #5: Knowing Your Ratio’s Is Different To Betting Big

At one point in the movie there was talk of a 20 x return on their positions.

Traders who dabble in CFD’s aren’t too unfamiliar with these types of geared returns.

Either way, they can be risky!

Risk comes from not knowing what you're doingBut as the brilliant Buffett once said, “Risk comes from not knowing what you're doing”.

When you trade you want to have a decent risk/reward ratio on your trades.

So ‘betting’ R10 for a chance to make R200 can be a good trade...

But you need to know how to manage and handle your risk effectively to do this.

The problem I find is that most traders take the wrong approach.

They put the reward above the risk.

Any trader worth his salt will tell you that equation needs to be flipped.

You need to calculate your risk involved first, and you do this on every trade setup AFTER you’ve determined your stop loss level.

Once you’ve done this, you’re free to calculate your potential reward based on multiples of the amount risked.

Taking in to account that you have a strategy and you’re aware of things like your win rate, risk reward ratio, and position sizes, a winning trade should really have as little an impact as a losing trade on your future trades.

Simply because you know the expectancy of your trading system with those parameters.


The Big Short’s Big Lesson #6: Your Shoulder Is An Important Place


You read that right.

Your shoulder is an extremely important place in the financial markets.

For smart traders at least…


Well, if you’re not constantly looking over it, chances are you could be caught.

And no, not by the cops.

By the numerous shysters out there.

There is a lot of fraud in the financial world.

Whether we like it or not, it exists.

And unfortunately for a few honest people, they get caught by dishonest people.

It even happened to my grandfather!

He had no idea what he was getting himself into at retirement, and before he could wipe the muck from his eyes his R19million retirement pot vanished and all he’d received was a “sorry” from his advisor!

“Sorry” gets you a very different retirement than the one he had planned.

That’s why you need to understand what you’re doing.

You need to look over your financial shoulder.

And you need to make sure that you’re 150% certain of the risks you’re taking, and the positions you’re putting yourself into.

Look, I’m not saying everyone is out to get your money.

That’d just be silly.

But some brokers and advisors are plain greedy, and have no problem “skimming off the top” (that’s YOUR top might I add).

Others are flat out dishonest.

Just remember, if something’s too good to be true, well, I don’t think I need to finish that sentence do I?


The Big Short’s Big Lesson #7: Take Your Profits When They’re On The Table

If there’s one part of the movie where I got heated it was the moment Mark Baum took a call from an associate from his firm telling him it was basically “now or never”.

And Baum flinched.

He um’d and ah’d.

Don’t pretend you don’t know that feeling.

I certainly do!

And it’s something I’ve seen countless traders do time and time again.

They hesitate when things are too good.

It’s like a false sense of security.

Some have very good reasons (like solid well-gathered research), whilst most think there are more profits on the table.

“Don’t cut your winners”

We’ve all heard it over and over.

But in Baum’s case, overlooking central park in his fancy loft, it really bugged me.

I almost shouted at the screen, “CLOSE YOU FOOL!”.

In the end, after a lengthy conversation he was convinced to close, banking his firm almost a billion dollars in the process.

If Baum had waited any longer he could’ve lost everything he’d worked so hard trying to achieve on that one trade.

It was in that moment I also realized you have to take your profits off the table whilst they’re available.

They could disappear pretty quickly if you don’t…




Become A Better Trader In 7 Simple Steps


The Big Short is a great lesson for traders young and old.

The way you approach the market will dictate whether or not you’ll find the success you crave.

But whatever happens, let the crash of ’08 and The Big Short teach you a few trading lessons you’ll always need:

  • Timing is everything
  • Trading too big is dangerous
  • Skin in the game makes you see things differently
  • Consistency is the most popular currency
  • Knowing your ratio’s is different to betting big
  • There’s fraud in the financial world
  • Take your profits when they’re on the table

Know and stick to these seven lessons and I guarantee you’ll become a better trader.

Until then, here’s to profitable trading. 

John Stuart

John Stuart
Content Director
The Money Lab