DIALOGUES FROM THE NEW MARKET WIZARDS {JACK D. SCHWAGER}

This excellent book called “New Market Wizards” includes interviews with top American traders of the time. Pure words of trading wisdom that everyone should consider and adapt on his trading culture.  I recommend buying that book.

 

MORE: ◙ Paul Tudor Jones Tips | ◙ Hedge Funds Market Wizards 2012 | ◙ Market Wizards 1989 

 

William Eckhardt more on Wikipedia)

 

■ Traders who survive avoid snowball scenarios in which bad trades cause them to become emotionally destabilized and make more bad trades. They are also able to feel the pain of losing. If you don't feel me pain of a loss, then you're in the same position as those unfortunate people who have no pain sensors. If they leave their hand on a hot stove, it will bum off. There is no way to survive in this world without pain Similarly, in the markets, if the losses don't hurt, your financial survival is tenuous.

■ If a trader is losing money, I can address two situations. If a trader doesn't know why he's losing, then it's hopeless unless he can find out what he's doing wrong. In the case of the trader who knows what he's doing wrong, my advice is deceptively simple: He should stop doing what he is doing wrong. If he can't change his behavior, this type of person should consider becoming a dogmatic system trader.

■ As a general rule, losses make you strong and profits make you weak.

■ Basically, I would buy when weak hands were selling and sell when weak hands were buying.

■ Trading can be a positive game monetarily, but it's a negative game emotionally.

■ The market behaves much like an opponent who is trying to teach you to trade poorly.

■ Human nature does not operate to maximize gain but rather to maximize the chance of a gain. The desire to maximize the number of winning trades (or minimize the number of losing trades) works against the trader. The success rate of trades is the least important performance statistic and may even be inversely related to performance.

■ There is what I refer to as "the call of the countertrend." There's a constellation of cognitive and emotional factors that makes people automatically countertrend in their approach. People want to buy cheap and sell dear; this by itself makes them countertrend. But the notion of cheapness must be anchored to something. People tend to view the prices they're used to as normal and prices removed from these levels as aberrant. This perspective leads people to trade counter to an emerging trend on the assumption that prices will eventually return to "normal." Therein lies the path to disaster.

■ The major factor that whittles down small customer accounts is not that the small traders are so inevitably wrong, but simply that they can't beat their own transaction costs. By transaction costs I mean not only commissions but also the skid in placing an order. As a pit trader, I was on the other side of that skid.

■ You should try to express your enthusiasm and ingenuity by doing research at night, not by overriding your system during the day. Overriding is something that you should do only in unexpected circumstances -and then only with great forethought. If you find yourself overriding routinely, it's a sure sign that there's something that you want in the system that hasn't been included.

■ You shouldn't plan to risk more than 2 percent on a trade. Although, of course, you could still lose more if the market gaps beyond your intended exit point.

■ An old trader once told me: "Don't think about what the market's going to do; you have absolutely no control over that. Think about what you're going to do if it gets there."

■ One important application of robust statistics concerns a situation in which you have several indicators for a certain market. The question is: How do you most effectively combine multiple indicators? Based on certain delicate statistical measures, one could assign weights to the various indicators. However this approach tends to be assumption-laden regarding the relationship among the various indicators. In the literature on robust statistics you find that, in most circumstances, the best strategy is not some optimized weighting scheme, but rather weighting each indicator by 1 or 0. In other words, accept or reject. If the indicator is good enough to be used at all, it's good enough to be weighted equally with the other ones. If it can't meet that standard, don't bother with it. The same principle applies to trade selection. How should you apportion your assets among different trades? Again, I would argue that the division should be equal. Either a trade is good enough to take, in which case it should be implemented at full size, or it's not worth bothering with at all.

 

■ Karl Popper has championed the idea that all progress in knowledge results from efforts to falsify not to confirm, our theories. Whether or not this hypothesis is true in general, it's certainly the right attitude to bring to trading research. You have to try your best to disprove your results. You have to try to kill your little creation. Try to think of everything that could be wrong with your system and everything that's suspicious about it. If you challenge your system by sincerely trying to disprove it, then maybe, just maybe, it's valid.

■ I don't like to buy retracements. If the market is going up and I think I should be long, I'd rather buy when the market is strong than wait for a retracement. Buying on a retracement is psychologically seductive because you feel you're getting a bargain versus the price you saw a while ago. As a general rule, avoid those things that give you comfort; it's usually false comfort.

■ I think that eventually, cybernetic devices will be able to outperform humans at every task, including trading. I can't believe that just because we're made of carbon and phosphorus there are things we can do that silicon and copper can't. And since cybernetic devices lack many of our human limitations, someday they'll be able to do it better I have no doubt that eventually, the world's best trader will be an automaton. I'm not saying this will happen soon, but probably within the next few generations.

 

Randy McKay

 

■ When the trade was easy, I wanted to be in, and when it wasn't, I wanted to be out. In fact, that is part of my general philosophy on trading: I want to catch the easy part.

■ The up move was decelerating instead of accelerating. It's possible to see market weakness even when prices are still going up.

■ I watch the market action, using fundamentals as a backdrop. I don't use fundamentals in the conventional sense. That is, I don't think, "Supply is too large and the market is going down." Rather, I watch how the market responds to fundamental information.

■ There's a principle I follow that never allows me to even make that decision. When I get hurt in the market, I get the hell out. It doesn't matter at all where the market is trading. I just get out, because I believe that once you're hurt in the market, your decisions are going to be far less objective than they are when you're doing well.

■ The most important advice is to never let a loser get out of hand. You want to be sure that you can be wrong twenty or thirty times in a row and still have money in your account. When I trade, I'll risk perhaps 5 to 10 percent of the money in my account. If I lose on that trade, no matter how strongly I feel, on my next trade I'll risk no more than about 4 percent of my account. If I lose again, I'll drop the trading size down to about 2 percent. I'll keep on reducing my trading size as long as I'm losing. I've gone from trading as many as three thousand contracts per trade to as few as ten when I was cold, and then back again.

■ Successful traders tend to match their personalities. There are so many different trading styles that you can always find one that will suit your personality.

■ Every trader is going to have tons of winners and losers. You need to determine why the winners are winners and the losers are losers. Once you can figure that out, you can become more selective in your trading and avoid those trades that are more likely to be losers.

■ The markets started getting more difficult during the 1980s. The high inflation of the 1970s led to many large price moves and heavy public participation in the markets. The declining inflation trend in the eighties meant there were fewer large moves and those price moves that did occur tended to be choppier. Also, more often than not, the price moves were on the downside, which led to reduced public activity, because the public always likes to be long. Therefore, you ended up with more professionals trading against each other.

■ The big picture is probably the same, but the nature of the short-term price action is almost diametrically opposite to what it used to be. In order to get a rally, you need people on me sidelines who want to buy. When most market participants were unsophisticated, traders tended to wait until the market was in the headlines and making new highs before they started to buy. In contrast, professional traders, who dominate the markets today, will only be on the sidelines when there's a large move in the opposite direction. As a result, the price moves that precede major trends today are very different from what they used to be because the behavior of professional traders is very different from that of naive traders.

 

Bill Lipschutzmore on Wikipedia)

 

■ Stops are picked off by institutional players when the liquidity is shrinking and follow the direction of the greatest price vulnerability (up or down).

■ A fast market gives floor brokers a special license to steal, above and beyond their normal license to steal.

■ Foreign exchange is all about relationships. Your ability to find good liquidity, your ability to be plugged into the information flow it all depends on relationships.

■ Those of us who did well were generally the ones who were accepted by the interbank circle.

■ One day the foreign exchange market may be focusing on interest rate differentials; the next day the market may be looking at the potential for capital appreciation, which is exactly the opposite. [A focus on interest rate differentials implies that investors will shift their money to the industrialized countries with the highest interest rate yields, whereas a focus on capital appreciation implies that investors will place their money in the countries with the strongest economic and political outlooks, which usually happen to be the countries with lower interest rates.]

■ If you put in enough fail-safes, you don't make errors.

■ There are a lot of elements to risk control: Always know exactly where you stand. Don't concentrate too much of your money on one big trade or group of highly correlated trades. Always understand the risk/reward of the trade as it now stands, not as it existed when you put the position on.

■ When you're in a losing streak, your ability to properly assimilate and analyze information starts to become distorted because of the impairment of the confidence factor, which is a by-product of a losing streak. You have to work very hard to restore that confidence, and cutting back trading size helps achieve that goal.

■ Size is a huge advantage in foreign exchange. If a big buyer comes in and pushes the market 4 percent, that's an advantage. He still has to get out of that position. Unless he's right about the market, it doesn't seem like large size would be an advantage. He doesn't have to get out of the position all at once. Foreign exchange is a very psychological market. You're assuming that the market is going to move back to equilibrium very quickly, more quickly than he can cover his position. That's not necessarily the case. If you move the market 4 percent, for example, you're probably going to change the market psychology for the next few days.

■ You have to trade at a size such that if you're not exactly right in your timing, you won't be blown out of your position. My approach is to build to a larger size as the market is going my way. I don't put on a trade by saying, "My God, this is the level; the market is taking off right from here." I am definitely a scale-in type of trader. I do the same thing getting out of positions. I don't say, "Fine, I've made enough money. This is it. I'm out." Instead, I start to lighten up as I see the fundamentals or price action changing.

■ I'm a fundamental trader. I try to assemble facts and decide what kind of scenario I think will unfold. You can even argue further that playing out scenarios is something that I do all the time. That is a process a fundamental trader goes through constantly. What if this happens? What if this doesn't happen? How will the market respond? What levels will the market move to?

 

Al Weissmore on Wikipedia)

 

■ One of my keys in long-term chart analysis is realizing that markets behave differently in different economic cycles. Recognizing these repeating and shifting long-term patterns requires lots of history. Identifying where you are in an economic cycle, an inflationary phase versus a deflationary phase is critical to interpreting the chart patterns evolving at that time.

■ Although I employ technical analysis to make my trading decisions, there are a few important differences between my method and the approaches of most other traders in this group. First, I think very few other technical traders have gone back more than thirty years in their chart studies, let alone more than a hundred years. Second, I don't always interpret the same pattern in the same way. I also factor in where I believe we are at in terms of long-term economic cycles. This factor alone can lead to very substantial differences between the conclusions I might draw from the charts versus those reached by traders not incorporating such a perspective. Finally, I don't simply look at the classical chart patterns (head and shoulders, triangle, and so on) as independent formations. Rather, I tend to look for certain combinations of patterns or, in other words, patterns within patterns within patterns. These more complex, multiple-pattern combinations can signal much higher probability trades.

■ There are cycles in everything, the weather, ocean waves, and the markets. One of the most important long-term cycles is the cycle from inflation to deflation. About every two generations-roughly every forty-seven to sixty years mere's a deflationary market. Another important consideration in regard to cycles is that their lengths vary greatly from market to market. For example, in the grain markets, which are weather-dependent, you may get major bull markets about five times every twenty years. In the gold market, however, a major bull cycle may occur only three to five times in a century. This consideration could make a market such as gold very frustrating for traders trying to play for the next bullish wave.

 

Monroe Trout more on Wikipedia)

 

■ A successful trader is rational, analytical, able to control emotions, practical, and profit-oriented.

■ Make sure you have the edge. Know what your edge is. Have rigid risk control rules. Basically, when you get down to it, to make money, you need to have an edge and employ good money management. Good money management alone isn't going to increase your edge at all. If your system isn't any good, you're still going to lose money, no matter how effective your money management rules are. But if you have an approach that makes money, then money management can make the difference between success and failure.

■ A risk control methodology must be prepared to deal with situations that statistically might seem nearly impossible because they're not.

■ People like to put stops right above the high and below the low of the previous day. Traders should avoid putting stops in the obvious places. For example, rather than placing a stop 1 tick above yesterday's high, put it either 10 ticks below the high so you're out before all that action happens, or 10 ticks above the high because maybe the stops won't bring the market up that far. If you're going to use stops, it's probably best not to put them at the typical spots. Nothing is going to be 100 percent foolproof, but that's a generally wise concept.

■ If I want the price to move toward a certain level, I may put in a stop and then cancel the order once the market gets close. I do stuff like that frequently. Actually, I did it today. It worked today, but sometimes it backfires, and you find yourself the proud owner of some bonds you don't want.

■ I believe markets almost always get to the round number. Therefore, the best place to get in is before that number is reached and play what I call the "magnet effect." For example, I might buy the stock index markets when the Dow is at 2,950, looking for it to go to 3,000. When the market gets close to 3,000, things get more difficult. When that happens, I like to have everybody in the trading room get on the phone with a different broker and listen to the noise level on the floor. How excited does it sound down there? What size trades are hitting the market? If it doesn't sound that loud and order sizes are small, then I'll start dumping our position because the market is probably going to fall off. On the other hand, if it sounds crazy and there are large orders being transacted, I'll tend to hold the position.

■ The most liquid period is the opening. Liquidity starts falling off pretty quickly after the opening. The second most liquid time of day is the close. Trading volume typically forms a U-shaped curve throughout the day. There's a lot of liquidity right at the opening, it then falls off, reaching a nadir at midday, and then it starts to climb back up, reaching a secondary peak on the close. Generally speaking, this pattern holds in almost every market. It's actually pretty amazing.

■ One of my risk management rules is that if we lose more than 1.5 percent of our total equity on a given trade we get out. If we're down 4 percent on a single day, we close out all positions and wait until the next day to get into anything again. We have also a maximum loss point of 10 percent per month. If we ever lost that amount, we'd exit all our positions and wait until the start of the next month to begin trading again. We also have a fourth risk management rule: At the beginning of each month, I determine the maximum position size that I'm willing to take in each market, and I don't exceed that limit, regardless of how bullish or bearish I get. This rule keeps me in check.

■ We give our new traders three books when they start: your first book, The Complete Guide to the Futures Markets [Jack D. Schwager, John Wiley & Sons, 1984], The Handbook of Futures Markets, by Perry Kaufman [John Wiley & Sons, 1984], and The Commodity Futures Game: Who Wins? Who Loses? Why? by Richard J. Tewles and Frank J. Jones [McGraw-Hill, 1987].

 

Scans 24 Currency Pairs in 9 Timeframes..

 

Linda Bradford Raschke more on Wikipedia)

 

■ One of my favorite patterns is the tendency for the markets to move from relative lows to relative highs and vice versa every two to four days. This pattern is a function of human behavior. It takes several days of a market rallying before it looks really good. That's when everyone wants to buy it, and that's the time when the professionals, like myself, are selling. Conversely, when the market has been down for a few days, and everyone is bearish, that's the time I like to be buying.

■ I also track different indicators. I don't think the specific choice of indicators is that critical, as long as you have a good feel for interpreting the indicators that you use. Personally, I pay close attention to the tick [the difference between the number of issues whose most recent tick was up and those whose most recent tick was down], TRIN [a measure that relates the price and volume of advancing issues to the corresponding figures for declining issues], and premium [the premium, or discount, of stock index futures to the theoretically equivalent cash index price]. For example, if the tick is at an extreme level and falling- -480, -485, -490, -495-and then just pauses--495, -495, -495- and the other indicators I watch are also oversold, I'll often go in and buy at the market. Sometimes, I've actually bought the low tick of the day using this method.

■ As advice to novice traders, understand that learning the markets can take years. Immerse yourself in the world of trading and give up everything else. Get as close to other successful traders as you can. Consider working for one for free. Start by finding a niche and specializing. Pick one market or pattern and learn it inside out before expanding your focus. My favorite exercise for novice traders is picking one market only. Without looking at an intraday chart, jot down the price every five minutes from the opening to the close. Do this for an entire week. Be in tune with the patterns. Where are the support and resistance levels? How does the price act when it hits these levels? What happens during the last half-hour? How long does each intraday price move last? You won't believe how much you can learn from this exercise. Never fear the markets. Never fear to make a mistake. If you do make a mistake, don't complicate the position by trying to hedge it- just get out. Stay actively involved with the market. Don't just sit passively in front of a monitor, or simply stare at charts. Notice how many old-timers who have been successful for years still construct their own point-and-figure charts by hand intraday. They keep the same routine day after day. Develop your own routine for taking periodic market readings. Never be greedy. It's OK to leave money on the table. If you can't get in at a favorable price, let the trade go and start looking for the next trade. Finally, remember that a trader is someone who does his own work, has his own game plan, and makes his own decisions. Only by acting and thinking independently can a trader hope to know when a trade isn't working out. If you ever find yourself tempted to seek out someone else's opinion on a trade, that's usually a sure sign that you should get out of your position.

 

Mark Ritchie more on Wikipedia)

 

■ The magnitude of losses and profits is purely a matter of position size. Controlling position size is indispensable to success. Of all the traits necessary to trade successfully, this factor is the most undervalued.

■ The markets that go wild are the ones with the best opportunity. Traditionally, what happens in a market that goes berserk is that even veteran traders will tend to stand aside. That's your opportunity to make the money. As the saying goes, "If you can keep your head about you while others are losing theirs, you can make a fortune."

■ Five basic trading principles appear to be elemental to Mark Ritchie's trading success:

  1. Do your own research.
  2. Keep each position size so small that it almost seems to be a waste of your time.
  3. Have the patience to stay with a winning position as long as that position is working, even if it means keeping a single position for years.
  4. View the risk of open profits differently from the risk as measured from starting equity in a trade. The point is that to ride winning positions to their maximum potential, it is necessary to endure periodic losses in open profits greater than the risk level that would be advisable when a position is first implemented.
  5. Recognize and control your greed.

 

Victor Sperandeo more on Wikipedia)

 

■ Trading the market without knowing what stage it is in is like selling life insurance to twenty-year-olds and eighty-year-olds at the same premium.

■ The single most important reason that people lose money in the financial markets is that they don't cut their losses short. It is a curiosity of human nature that no matter how many books talk about this rule, and no matter how many experts offer this advice, people still keep making the same mistake.

■ Gambling involves taking a risk when the odds are against you. For example, betting on a lottery or playing a slot machine are forms of gambling. I think successful trading, or poker playing for that matter, involves speculating rather than gambling. Successful speculation implies taking risks when the odds are in your favor. Just like in poker, where you have to know which hands to bet on, in trading, you have to know when the odds are in your favor.

■ In the stock market, the one indicator I give the greatest weight is the two-hundred-day moving average (200 MA).

■ The median extent for an intermediate swing in the Dow during a bull market is 20 percent. This doesn't mean that when the market is up 20 percent, it's going to top; sometimes it will top earlier, sometimes later. However, what it does mean is that when the market is up more than 20 percent, the odds for further appreciation begin to decline significantly. Thus, if the market has been up more than 20 percent and you begin to see other evidence of a possible top, it's important to pay close attention to that information. I define "intermediate" as a price move lasting a minimum of three weeks to a maximum of six months. Once a price move exceeds its median historical age, any method you use to analyze the market, whether it be fundamental or technical, is likely to be far more accurate.

■ I analyze risk by measuring the extent and duration of price swings. For example, if the market has risen 20 percent in roughly 107 days, even if I'm still extremely bullish I'll have a maximum position size of 50 percent because statistically, we've reached the median historical magnitude and duration of an up move.

 

 

DIALOGUES FROM THE "NEW MARKET WIZARDS" {JACK D. SCHWAGER}

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