The concepts and ideas discussed in this lesson are going to completely transform the way you think about professional trading. Hopefully the knowledge you learn here today will inspire you to change the way you trade, how you think and how you act into the future. If you learn and apply these concepts, you will dramatically improve your trading performance.
This is by far one of the most inspirational and insightful articles I’ve written since I started writing back in 2008. I have immensely enjoyed producing it and I must humbly thank my good friend Larry for his assistance with research as well as Jack Schwager and the numerous traders he interviewed, who are of course the true inspiration behind this article.
Enjoy… Nial Fuller – Australia.
Today’s article was inspired by the Market Wizards Book Series by Jack D. Schwager; one of my favorite authors. In the Market Wizards books, Schwager interviews various pro traders and picks their brains about how they became successful. One of the most intriguing aspects of the books that Schwager discusses at the end of The New Market Wizards book is that despite having vastly different trading styles, there are “certain principles that held true” for all the traders he interviewed. We will discuss some of these principles and more from the Market Wizards books in today’s lesson.
There really is a lot to learn from these two books and much of what they discuss is relevant to the style of trading we practice here at Learn To Trade The Market, i.e., position / swing trading on higher time frame charts. There are also a lot of relevant and helpful points on money management and trader psychology, these parts of the books are what I found the most fascinating.
To write today’s lesson, I had to get reacquainted with much of what’s in both of these books because it’s been a while since I first read them. Note: this article is a lot longer than most of my lessons, so make sure you have an extra thirty minutes and your favorite coffee or energy drink before you begin if you want to read it one sitting.
Below, I have provided some of my favorite quotes from the pro traders that Schwager interviewed followed by a synopsis of what I feel are the most important points to take away.
In the preface to The New Market Wizards, Schwager says
“In conducting the interviews for this book and its predecessor, Market Wizards, I became absolutely convinced that winning in the markets is a matter of skill and discipline, not luck. The magnitude and consistency of the winning track records compiled by many of those I interviewed simply defy chance.”
This quote, and the ones that follow, should provide you with a lot of motivation and insight into how professional traders think.
Tips From The Market Wizards
“If trading is your life, it is a torturous kind of excitement. But if you are keeping your life in balance, then it is fun. All the successful traders I’ve seen that lasted in the business sooner or later got to that point. They have a balanced life; they have fun outside of trading. You can’t sustain it if you don’t have some other focus. Eventually, you wind up over-trading or getting excessively disturbed about temporary failures”
The above quote by Michael Marcus from Market Wizards, fits perfectly with our style of trading here at LTTTM. We focus on end of day trading methods and “part-time” trading. Essentially, what Michael is saying here is that if you let trading overtake your life, you will end up over-trading and getting too attached to positions. Just like anything else, you need a healthy involvement with trading, not an addiction to it.
Position size. He traded much too big. For every one contract I traded, he traded ten. He would double his money on two different occasions each year, but still end up flat.
In the above quote, Bruce is talking about a trader he knew who he said was a “brilliant trader” but could never keep any of the money he made. He never kept the money he made simply because he traded too big of a position size for his account all the time. This leads to fear, greed and all kinds of emotional trading mistakes.
Whenever I enter a position, I have a predetermined stop. That is the only way I can sleep. I know where I’m getting out before I get in. The position size on a trade is determined by the stop, and the stop is determined on a technical basis.
Bruce is discussing the importance of having a predetermined stop loss in place whenever entering a trade. We talked about how to place stop losses according to the market structure in a recent article, and it agrees with what Bruce is saying that you should place your stop according to the technical picture of the market.
The problem with developing expert systems for trading is that the “rules” of the trading and investment game keep changing. I have spent some time working with expert system developers, and we concluded that trading was a poor candidate for this approach, because trading decisions encompass too many types of knowledge, and the rules for interpreting the information keep changing.
This quote supports the belief that humans make better traders than machines, or trading “robots”. In my article on the human mind vs computers in forex trading, we discuss how due to changing market conditions and other variables that are very difficult to put into computer code, humans still make the best traders. That is, at least until we develop some advanced form of artificial intelligence that can develop the type of discretionary chart reading skills that a human can, but to date that has not happened.
First, I would say that risk management is the most important thing to be well understood. Undertrade, undertrade, undertrade is my second piece of advice.
Kovner sounds like me in the above quote; I’m always preaching about trading less, not over-trading, simplifying your trading, etc. Clearly, this idea is not new, but beginning traders loooove to over-trade, and as you read on in this article you will see quotes from other market wizards who essentially preach the same “don’t trade unless there’s an obvious reason to” philosophy.
They personalize the market. A common mistake is to think of the market as a personal nemesis. The market, of course, is totally impersonal; it doesn’t care whether you make money or not. Whenever a trader says, “I wish,” or “I hope,” he is engaging in a destructive way of thinking because it takes attention away from the diagnostic process.
In the quote above, Kovner is basically saying that when you are “hoping” and “wishing” about a trade, it essentially means you’re trading with too much emotion and this clouds what should be an objective and logical chart analysis process.
Paul Tudor Jones
That was when I first decided I had to learn discipline and money management. It was a cathartic experience for me, in the sense that I went to the edge, questioned my very ability as a trader, and decided that I was not going to quit. I was determined to come back and fight. I decided that I was going to become very disciplined and businesslike about my trading.
In the above quote, Paul Tudor Jones is reflecting on a very bad trade that he lost a lot of money on and how it drove him to be more disciplined and focus more on money management. You don’t have to wait until you have a near account-blowout trade (or an account blowout) to start managing your money properly and being disciplined. You can learn from other traders and start treating your trading as a business today.
The most important rule of trading is to play great defense, not great offense. Every day I assume every position I have is wrong. I know where my stop risk points are going to be. I do that so I can define my maximum possible drawdown. Hopefully, I spend the rest of the day enjoying positions that are going my direction. If they are going against me, then I have a game plan for getting out.
Don’t be a hero. Don’t have an ego. Always question yourself and your ability. Don’t ever feel that you are very good. The second you do, you are dead. My biggest hits have always come after I have had a great period and I started to think that I knew something.
The above quote talks about how Paul Tudor Jones focuses more on defending his capital and managing risk than on how much money he can make. If you focus on risk first then the profits will tend to take care of themselves. Also, in the second quote, he is talking about how becoming over-confident or arrogant after a series of winning trades is often the kiss of death for traders.
My major problem was not the number of points I lost on the trade, but that I was trading far too many contracts relative to the equity in the accounts that I handled. My accounts lost something like 60 to 70 percent of their equity in that single trade.
In the above quote, Tudor Jones discusses how if you risk too much relative to your account, you can lose almost all, or all of your account on one single trade. So, you’re not alone if you’re losing money, even the pros lost money while they were learning and improving. The difference is, will you learn from your big losing trades or will you continue to make the same mistakes? Pro traders like Paul Tudor Jones and others don’t typically make the same big mistake twice.
It was an intellectual experiment. We trained them as well as we could. That was the way to do the experiment right, I thought. I tried to codify all the things I knew about the markets. We taught them a little bit about probability, money management, and trading. It turned out I was right. I don’t say that to pat myself on the back, but even I am surprised how well it worked. It’s frightening how well it worked.
In the above quote, Richard Dennis is referring to the famous “Turtle Traders” experiment conducted by him and his trading partner William Eckhardt in the 1980s. Dennis is saying that the experiment proved that you could indeed teach complete beginners how to trade successfully with a simple set of trading rules and some insight from their mentors. This is more confirmation that forex trading can be taught successfully to people who are willing to be disciplined, even complete novices.
The key is consistency and discipline. Almost anybody can make up a list of rules that are 80 percent as good as what we taught our people. What they couldn’t do is give them the confidence to stick to those rules even when things are going bad.
On any individual trade it is almost all luck. It is just a matter of statistics. If you take something that has a 53 percent chance of working each time, over the long run there is a 100 percent chance of it working. If I review the results of two different traders, looking at anything less than one year doesn’t make any sense. It might be a couple of years before you can determine if one is better than the other.
In the above two quotes, Dennis is referring to the fact that many traders give up on their trading method the minute they hit some adversity. One thing you can’t do is ditch your trading method just because you hit a few losers. Any method or system will have losing trades, you measure the success or failure of a particular trading method over a large series of trades, not 3 or 4. So, you have to give any legitimate strategy enough time to play out before you cast judgement on it. Not having the discipline to stick to a trading plan or a trading method drives many traders to their trading “graves”.
I’ve certainly done it – that is, made counter-trend initiations. However, as a rule of thumb, I don’t think you should do it.
Richard Dennis was famously a very successful trend-trader and in the above quote he is stating his feelings on trading counter-trend. Interestingly, this is pretty much how I feel about trading counter-trend; sometimes it’s warranted, but most of the time it’s not, and it takes a skilled trader to be able to trade counter-trend successfully.
The key to long-term survival and prosperity has a lot to do with the money management techniques incorporated into the technical system. There are old traders and there are bold traders, but there are very few old, bold traders.
The quote above by Ed Seykota refers to the fact that you won’t stick around very long if you continue to trade too “bold”. By “bold” he basically means risking too much per trade and / or over-trading…you can only be overly bold in the markets for so long…it will eventually catch up to you.
Fundamentals that you read about are typically useless as the market has already discounted the price, and I call them “funny-mentals”.
I am primarily a trend trader with touches of hunches based on about twenty years of experience. In order of importance to me are: (1) the long-term trend, (2) the current chart pattern, and (3) picking a good spot to buy or sell. Those are the three primary component of my trading. Way down in a very distant fourth place are my fundamental ideas and, quite likely, on balance, they have cost me money.
In the above quotes, Seykota is talking about how he doesn’t really use fundamental data to make his trading decisions; he is almost purely a technical trader. I agree with this totally and my price action trading strategies and trading philosophy reflect the belief that all fundamentals are factored into price and you can save a lot of time and stress by just learning to analyze price and avoiding forex news and fundamentals.
I prefer not to dwell on past situations. I tend to cut bad trades as soon as possible, forget them, and then move on to new opportunities.
Essentially, Seykota is saying “Don’t become emotional about losses”. Dwelling on a lost trade is only going to cause negative emotions and tempt you to try and “make back” the money you lost. Forget about your last losing trade and move on.
I feel my success comes from my love of the markets. I am not a casual trader. It is my life. I have a passion for trading. It is not merely a hobby or even a career choice for me. There is no question that this is what I am supposed to do with my life.
Whilst you don’t need to be glued to your screen all day and night, you do need to have some passion and interest in trading and markets, otherwise you will be forcing yourself to trade just because you want to make money. People who succeed at trading are those that have a genuine interest in the markets and in the art and skill of trading.
Having a quote machine is like having a slot machine on your desk – you end up feeding it all day long. I get my price data after the close each day.
Here, Seykota is talking about end of day data. I’ve been teaching traders the power and simplicity of trading “end of day” for years. It’s the perfect option for most traders, especially those first starting out or those who want to trade successfully with a day job.
Win or lose, everybody gets what they want out of the market. Some people seem to like to lose, so they win by losing money.
Seykota is talking about how people tend to indirectly let their emotions control their trading. He talks about one trader who “seems to get in near the start of every substantial bull move and works his $10 thousand up to a quarter of a million in a couple of months. Then he changes his personality and loses it all back again. This process is repeated like clockwork.” Many traders don’t even know that their emotions are guiding their trading more than logic or rationality, thus, they cannot keep their winnings or control their losers…because they are doing what feels good…thus they are “getting what they want”, if only temporarily.
While the speculator doesn’t have the product knowledge or speed, he does have the advantage of not having to play. The speculator can choose to only bet when the odds are in his favor. That is an important positional advantage.
In the above quote, Larry is referring to the fact that smaller retail traders have the advantage of being able to sit out an wait patiently for the best opportunities. Bigger institutional traders have to trade more and whilst they might have a speed advantage, the retail trader has to use his advantage of being able to trade like a sniper to its fullest.
Frankly, I don’t see markets; I see risks, rewards, and money.
The above quote stresses the importance of seeing each trade as a risk reward ratio, rather than just a potential profit opportunity. Pro traders calculate their risk first and then their reward, if the risk reward ratio of a trade doesn’t make sense then they don’t trade.
I always laugh at people who say, “I’ve never met a rich technician.” I love that! It’s such an arrogant, nonsensical response. I used fundamentals for nine years and got rich as a technician.
In the above quote, Marty is clearly supporting the use of technical analysis over fundamental analysis. At the time the Market Wizards books were written; late 80′s early 90′s, technical analysis was not as widely accepted as it is today. As Schwartz said “I got rich as a technician”….it’s because all the fundamentals are factored into price, as I mentioned earlier. As most of you know by now, I strongly believe traders should study charts and should avoid trading news & fundamentals like the plague.
Learn to take losses. The most important thing in making money is not letting your losses get out of hand. Also, don’t increase your position size until you have doubled or tripled your capital. Most people make the mistake of increasing their bets as soon as they start making money. That is a quick way to get wiped out.
Learning that you HAVE to take losses and HOW to minimize them are two very critical lessons you have to learn before becoming a pro trader. Also, I think what he says about increasing position size is interesting; it supports my view on measuring risk in dollars, not percentages…and he is also saying that you shouldn’t increase your position size too soon..build your account up a bit first.
James B. Rogers, Jr. (Jim Rogers) ‘The man in the bow tie’
One of the best rules anybody can learn about investing is to do nothing, absolutely nothing, unless there is something to do. Most people – not that I’m better than most people – always have to be playing; they always have to be doing something. They make a big play and say, “Boy, am I smart, I just tripled my money.” Then they rush out and have to do something else with that money. They can’t just sit there and wait for something new to develop.
I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up. I do nothing in the meantime. Even people who lose money in the market say, “I just lost my money, now I have to do something to make it back.” No, you don’t. You should sit there until you find something.
I really like the part above where Jim Rogers says “I just wait until there is money lying in the corner…” because that really sums up what I try to teach my students as well as my own personal trading style. Rogers is dead on with the above quotes; most traders do WAY too much…there is nothing wrong with doing nothing if there isn’t anything to do! In other words…don’t force a trade if an obvious one isn’t there, it’s better to save your capital for a solid opportunity that’s just around the corner.
It is experience and gut feel. I use all forms of technical analysis, but interpret them through gut feel. I do not believe in mathematical systems that always approach the markets in the same way. Using myself as the “system,” I constantly change the input to achieve the same output – profit!
In the above quote, Market Weinstein is referring to his style of trading which is based on technical analysis combined with “gut feel”. I talk about gut feel and discretionary trading skill and it’s really an important thing to develop as a trader. As you learn price action or any other strategy, you will naturally develop more “gut feel” and discretionary skill for applying that strategy in the market. Over time, this will increase your ability to select winning traders over losing trades.
Dr. Van K. Tharp
The top traders that I’ve worked with began their careers with an extensive study of the markets. They developed and refined models of how to trade. They mentally rehearsed what they wanted to do extensively until they had the belief that they would win. At this point, they had both the confidence and the commitment necessary to produce success.
When I read the above quote, the first thing I thought of was demo trading and learning to master your trading strategy before you try to trade it live. People who can apply more patience and discipline in learning and mastering their trading method before they go live will naturally have a far easier time making money in the markets than those who just jump in head-first with no plan of action.
Tips from The New Market Wizards
I don’t think you can consistently be a winning trader if you’re banking on being right more than 50 percent of the time. You have to figure out how to make money being right only 20 to 30 percent of the time.
Everyone should read the above quote again, and again. I have preached the fact that you can lose on the majority of your trades and still make money in many articles, yet I still get emails everyday from new traders who seem to be looking for the “holy-grail”. The truth is, many pro traders are not winning more than 50% of the time, but because their money management is so good, and their understanding of risk reward is so deep; they still make a sickening amount of money in the markets. Once you can learn that winning percentage doesn’t really matter and throw your ego in the garbage…you will probably start doing a lot better.
I never try to buy a bottom or sell a top. Even if you manage to pick the bottom, the market can end up sitting there for years and tying up your capital. You don’t want to have a position before a move has started. You want to wait until the move is already under way before you get into the market.
This quote by Randy McKay speaks to the fact that trying to pick the top or bottom of a trend is futile, yet many traders try to do it. Indeed, it almost seems to be a part of our evolutionary wiring to want to try and be the “hero” and constantly pick the top of a big up trend or the bottom of a down trend. It’s far easier and more lucrative to wait for a trend to get underway and then trade with the trend until it ends.
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.
William Eckhardt was Richard Dennis’s trading partner and colleague for the Turtle Trader experiment. Eckhardt challenged Dennis’s belief that trading could be taught to anyone by saying that he thought trading success was more of an innate thing that could not easily be taught. Eckhardt admits in The New Market Wizards that he was wrong and Dennis was right; trading can indeed be successfully taught even to complete beginners.
In his quote above he is talking about something I have long believed in; either you take a trade or you don’t…I don’t like reducing my position size because I don’t fully believe in my trade. If I don’t fully believe in a trade setup than I simply don’t take it, and if I do believe in it then I risk my standard amount per trade.
I haven’t seen much correlation between good trading and intelligence. Some outstanding traders are quite intelligent, but a few aren’t. Many outstandingly intelligent people are horrible traders. Average intelligence is enough. Beyond that, emotional makeup is more important.
This quite is pretty self-explanatory; you don’t have to be smart to be a trader. Intelligence helps for sure, but emotional makeup and discipline is far more important.
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.
In the above quote, Eckhardt is talking about how many traders tend to take small profits because they are more concerned with “winning” than with their long-term profitability. He also says that “While amateurs go broke by taking large losses, professionals go broke by taking small profits. The problem, in a nutshell, is that human nature does not operate to maximize gain but rather to maximize chance of gain”. In other words, it’s against our human nature to want to let our profits run into large winners, it’s easier and it certainly feels better temporarily to take smaller gains. This, of course, puts traders in a very tough position of having to have a high winning percentage of their trades to succeed long-term.
I don’t pull out any money. I rent my condo and I drive a cheap car.
The above quote by Mr. Trout is a good example of my minimalist approach to trading and life that I recently wrote about. Clearly, I am not the only person who has had this idea or who finds it appealing.
First, many people get involved in the markets without any edge. They get in the market because their broker told them that the market is bullish. That is not an edge. However, to tell the truth, most small speculators will never be around long enough to find out whether their system could have worked, because they bet too much on their trades, or their account is too small to start.
In this quote, Trout is right on in saying that many people begin trading without any edge. I get emails from traders everyday who clearly have not mastered any type of trading strategy (edge) yet are telling me they’ve already lost thousands of dollars in the markets. You have to have a trading method that gives you a high-probability edge in the market and you have to stick to it and not risk too much per trade, especially if you have a very small account. Otherwise, you won’t be around very long in the markets.
I’ve learned many things from him [George Soros], but perhaps the most significant is that it’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.
The above quote is reference to George Soros who mentored Druckenmiller for a while. This quote fits perfectly with an article I wrote recently about how you don’t have to be right to make money trading. Most traders get far too concerned about the number of winners they have compared to losers when really they should totally forget about that number and instead focus on their overall risk / reward. In other words, how much money are they making for every dollar they have risked.
When he finally got out, he felt a sense of relief – which is somewhat ironic since he had just lost 70 percent of his money. There’s nothing logical about this process. It’s all an emotional pitfall. Planning where to get out before putting on the trade is a means of enforcing emotional discipline.
In the above quote, Sperandeo is talking about the psychological process involved when a trader doesn’t have a predetermined stop loss and when the trade goes into negative territory and they keep thinking the market will turn around so they can get out at breakeven. He goes on to say that very often the trader exits when he feels the “onset of panic” and he can’t take anymore open losses against him…and typically it’s around that time or shortly after that the market reverses back in his favor. He talks about “emotional discipline” in other parts of the interview too, and it goes to underscore the fact that we need to take proactive steps to manage our emotions as we trade, otherwise they can very easily get out of control.
My reinforcement came when my losses gradually became smaller and smaller. I was getting very close to the breakeven point. I also kept my losses at a manageable level. I always traded a very small account – an amount that I could afford to lose without affecting my life-style.
The above quote is one of the key points that I talk about in regards to money management and risk management; never risk more than you are emotionally OK with losing. Basso is saying that when he was starting out he traded a small account that even if he blew-out it would not affect him or his lifestyle. I see many traders coming into the markets risking money they clearly can’t afford to lose, and this puts them behind the curve right out of the gate because they feel a strong emotional attachment to the money and thus to every trade they take.
I would tell that trader to think of each trade as one of the next one thousand he’s going to make. If you start thinking in terms of the next one thousand trades, all of a sudden you’ve made any single trade seem very inconsequential. Who cares if a particular trade is a winner or a loser? It’s just another trade.
The above quote was Basso’s response to a question from Schwager about what he would say to a trader who says he can’t stand to lose. Learning that any individual trade is really inconsequential in the long-run, is one of the main realizations that will help you detach yourself emotionally from your trades. Also, if you really understand and believe this, you should not have any desire to over-leverage your trades…because you know that it’s the series of trades over time that matters, not any one in particular.
Linda Bradford Raschke
It never bothered me to lose, because I always knew that I would make it right back. I always knew that no matter what happened, I could go into any marketplace, with any amount of money, and make a living.
The above quote by Linda Bradford Raschke was the main one that I remembered from her interview when I first read The New Market Wizards about five or six years ago. It is really a very motivating quote, because it basically says that once you have mastered your trading strategy, you should have the ability to go into any market and make money. This is especially true for a price action trader, since price action strategies can be applied to any market; once you master them you really can trade any market you want.
The essential element is that the markets are ultimately based on human psychology, and by charting the markets you’re merely converting human psychology into graphic representations. I believe that the human mind is more powerful than any computer in analyzing the implications of these price graphs.
In the above quote, All Weiss describes the essence of price action trading; trading from the “graphic representations” of human psychology in the market, as well as other variables that affect a market. These “graphic representations” of different market variables are what I call price action, and a market’s price action reflects all the variables that influence it.
I hope you’ve enjoyed this overview of some of my favorite quotes from Jack Schwager’s Market Wizards books. I actually had to leave out a few of the traders who were interviewed because this article was just getting way too long. But, I highly recommend everyone read the Market Wizards Series of books at some point in the future, because there’s a lot more to learn from them. You can buy these books here. Jack Schwager has also released a new edition to the series called Hedge Fund Market Wizards.
In all of my trading courses and teachings I draw great inspiration from the very same techniques, principals and philosophies put forward by the famous traders interviewed in the Market Wizards series. If you want to learn how to read the “graphic representation” of human psychology on the charts as mentioned by Al Weiss in his quote above, as well as more about the principles discussed today, checkout my price action trading course and traders community.