Market Wizards

by Jack D. Schwager (Goodreads Author)

Maxim Shilo's review May 26, 2018

Best read so far on trading!

The second key element that finally put me into the winner's column
was the realization that risk control was absolutely essential to
successful trading. I decided that I would never again allow myself to
lose everything on a single trade—no matter how convinced I was of
my market view.
I think the secret is cutting down the number of trades you make. The
best trades are the ones in which you have all three things going for
you: fundamentals, technicals, and market tone. First, the
fundamentals should suggest that there is an imbalance of supply and
demand, which could result in a major move. Second, the chart must
show that the market is moving in the direction that the
fundamentals suggest. Third, when news comes out, the market
should act in a way that reflects the right psychological tone.

While you are in, you can't think. When you get out, then you can
think clearly again.
Perhaps the most important rule is to hold on to your winners and
cut your losers. Both are equally important. If you don't stay with
your winners, you are not going to be able to pay for the losers. You
also have to follow your own light. Every trader has strengths and
weaknesses.
Gut feel is very important. I don't know of any great professional
trader that doesn't have it. Being a successful trader also takes
courage: the courage to try, the courage to fail, the courage to
succeed, and the courage to keep on going when the going gets tough.
Albert Einstein said that the single most important question is
whether the universe is friendly. I think it is important for everybody
to come to a point where they feel inside that the universe is friendly
for them.
I think that, in the end, losing begets losing. When you start losing, it
touches off negative elements in your psychology; it leads to
pessimism.
I am very open-minded. I am willing to take in information that is
difficult to accept emotionally,
but which I still recognize to be true. For example, I have seen others
make money much faster than I have only to wind up giving
everything back, because when they started losing, they couldn't stop.
When I have had a bad losing streak, I have been able to say to
myself, "You just can't trade anymore."
Trading is emotion. It is mass psychology, greed, and fear. It is all the
same in every situation.
For most great traders, early failure is more the rule than the
exception. Despite an incredible long-term performance record,
Michael Marcus began his trading career with an unbroken string of
trading losses. Moreover, he wiped out not just once, but several
times. The moral is: Early trading failure is a sign that you are doing
something wrong; it is not necessarily a good predictor of ultimate
potential failure or success.
Never EVER commit more than 5 percent of your money to a single
trade idea.

At that moment, I realized that the markets were truly capable of

taking money away every bit as fast as they gave it to you. That made
a very strong impression on me.
You have to be willing to make mistakes regularly; there is nothing
wrong with it. Michael taught me about making your best judgment,
being wrong, making your next best judgment, being wrong, making
your third best judgment, and then doubling your money.
I'm not sure one can really define why some traders make it, while
others do not. For myself, I can think of two important elements.
First, I have the ability to imagine configurations of the world
different from today and really believe it can happen. I can imagine
that soybean prices can double or that the dollar can fall to 100 yen.
Second, I stay rational and disciplined under pressure.
They are strong, independent, and contrary in the extreme. They are
able to take positions others are unwilling to take. They are
disciplined enough to take the right size positions. A greedy trader
always blows out. I know some really inspired traders who never
managed to keep the money they made. One trader at Commodities
Corporation—I don't want to mention his name—always struck me as
a brilliant trader. The ideas he came up with were wonderful; the
markets he picked were often the right markets. Intellectually, he
knew markets much better than I did, yet I was keeping money, and
he was not.
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.Whenever I enter a position,
I have a predetermined stop. If the market is in the midst of a trading
range,it makes no sense to put your stop within that range, since you
are likely to be taken out. I always place my stop beyond some
technical barrier.First of all, a loss of money itself slows me down, so
I reduce my positions.
The only thing that disturbs me is poor money management. Every so
often, I take a loss that is significantly too large.

It is a tremendously exciting game. There are opportunities all the

time. Forgetting trading for a minute, one of the reasons I am in this
business is that I find the analysis of worldwide political and
economic events extraordinarily fascinating.
It doesn't feel like work, except when you lose—then it feels like work
[he laughs]. For me, market analysis is like a tremendous
multidimensional chess board.
Through bitter experience, I have learned that a mistake in position
correlation is the root of some of the most serious problems in
trading. If you have eight highly correlated positions, then you are
really trading one position that is eight times as large.
The general rule is: The less observed, the better the trade.

If you don't work very hard, it is extremely unlikely that you will be a
good trader.
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. Whatever you think your position ought to be,
cut it at least in half. My experience with novice traders is that they
trade three to five times too big. They are taking 5 to 10 percent risks
on a trade when they should be taking 1 to 2 percent risks.
I didn't know what I was doing. The advantage was that at least I got
to do it with small amounts of money. I like to say the tuition was
small for what I learned. You shouldn't be too surprised if you really
screw up.
Since then, I have learned that when you have a destabilizing loss, get
out, go home, take a nap, do something, but put a little time between
that and your next decision. When you are getting beat to death, get
your head out of the mixer. Looking back, I realized that if I had had
a trading rale about losses, I wouldn't have had that traumatic
experience.
I always say that you could publish trading rules in the newspaper
and no one would follow them. The key is consistency and discipline.
There is another point that I think is as important: You should expect
the unexpected in this business; expect the extreme. Don't think in
terms of boundaries that limit what the market might do. If mere is
any lesson I have learned in the nearly twenty years that I've been in
this business, it is that the unexpected and the impossible happen
every now and then.
If you feel too good when things are going well, then inevitably you
will feel too bad when they are going poorly. I wouldn't claim that I
realized that after three years of trading, but after you've done it for
twenty years, it either drives you crazy, or you learn to put it into
perspective.
Being a trader is like being a boxer: Every now and then, the market
gives you a good wallop. After twenty years you get a bit punch-
drunk.
At the beginning trade small because that's when you are as bad as
you are ever going to be. Learn from your mistakes.

He taught me that trading is very competitive and you have to be able

to handle getting your butt kicked. No matter how you cut it, there
are enormous emotional ups and downs involved.
First of all, never play macho man with the market. Second, never
overtrade. 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.
"Mr. Stupid, why risk everything on one trade? Why not make your
life a pursuit of happiness rather than pain?"
I am always thinking about losing money as opposed to making
money. Risk control is the most important thing in trading.
Don't ever average losers. Decrease your trading volume when you
are trading poorly; increase your volume when you are trading well.
If you have a losing position that is making you uncomfortable, the
solution is very simple: Get out, because you can always get back in.
There is nothing better than a fresh start.
The most important rale of trading is to play great defense, not great
offense. Every day I assume every position I have is wrong.

Always question yourself and your ability. Don't ever feel that you are
very good. The second you do, you are dead.
Everything gets destroyed a hundred times faster than it is built up. It
takes one day to tear down something that might have taken ten
years to build.I know from studying history that credit eventually
kills all great societies.Don't focus on making money; focus on
protecting what you have.“In trading, just as in archery, whenever
there is effort, force, straining, struggling, or trying, it’s wrong. You’re
out of sync; you’re out of harmony with the market. The perfect trade
is one that requires no effort.”
The most important thing is to have a method for staying with your
winners and getting rid of your losers.

The most important is discipline—I am sure everyone tells you that.

Second, you have to have patience; if you have a good trade on, you
have to be able to stay with it. Third, you need courage to go into the
market, and courage comes from adequate capitalization. Fourth, you
must have a willingness to lose; that is also related to adequate
capitalization. Fifth, you need a strong desire to win.
You should have the attitude that if a trade loses, you can handle it
without any problem and come back to do the next trade. You can't
let a losing trade get to you emotionally.
When you are starting out, it is very important not to get too far
behind because it is very difficult to fight back. Most traders have a
tendency to take risks that are too large at the beginning. They tend
not to be selective enough about when they take risks.Because I knew
I wanted to be in the business, and I didn't care what I did, or what I
got paid.
My biggest slip-ups occurred shortly after I got emotionally involved
with positions.The elements of good trading are: (1) cutting losses,
(2) cutting losses, and (3) cutting losses.
I handle losing streaks by trimming down my activity. I just wait it
out. Trying to trade during a losing streak is emotionally devastating.
Trying to play "catch up" is lethal.
Psychologically, I tend to alter my activity depending on
performance. I tend to be more aggressive after I have been winning,
and less so after losses.
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.
a. Cut losses.
b. Ride winners.
c. Keep bets small.
d. Follow the rules without question.
e. Know when to break the rules.
Charting is a little like surfing. You don't have to know a lot about the
physics of tides, resonance, and fluid dynamics in order to catch a
good wave. You just have to be able to sense when it's happening and
then have the drive to act at the right time.
Many are called and few are chosen. Society works by the attraction
of the many. As they are culled out, the good ones are left, and the
others are released to go try something else until they find their
calling. The same is true for other fields of pursuit.
A losing trader can do little to transform himself into a winning
trader. A losing trader is not going to want to transform himself.
That' s the kind of thing winning traders do.A winning trader has two
traits:
1. Не/she loves to trade; and
2. Не/she loves to win.

People' s trading performance probably reflects their priorities more

than they would like to admit.
I don't judge success. I celebrate it. I think success has to do with
finding and following one's calling regardless of financial gain.
One of the world's largest coffee traders invited me to his house in
London. When I walked into his library, I noticed he had just about
every book ever written on power. He took me to one of the finest
restaurants I have ever
been at. At dinner, he asked me, "Larry, how can you know more
about coffee than me? I am the largest trader in the world. I know
where the boats are; I know the ministers." "You are right," I
answered, "I don't know anything about coffee. In fact, I don't even
drink it." "How do you trade it then?" he asked. I told him, " I just
look at the risk." Well this great meal lasted for several hours.
Five times he asked me what I did, and five times I told him that I
managed the risk.
Three months later I heard that he had blown $100 million in the
coffee market. He obviously didn't get the message. And you want to
know something? He does know more about coffee than I do. But the
point is, he didn't look at the risk.
So the very first rale we live by at Mint is: Never risk more than 1
percent of total equity on any trade. By only risking 1 percent, I am
indifferent to any individual trade.
Risk is a no-fooling-around game; it does not allow for mistakes. If
you do not manage the risk, eventually they will carry you out.
While the speculator doesn't have the product knowledge or the
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 and important positional advantage.
Throughout my financial career, I have continually witnessed
examples of other people that I have known being ruined by a failure
to respect risk. If you don't take a hard look at risk, it will take
you.About risk:
Larry, when you are on a motorcycle, never argue with a car. You will
lose."
The same lesson applies to trading: If you argue with the market, you
will lose.
Not only didn't he take the sell signal, he actually wound up going
long. Sure enough, the market went down.
I told him, "Get out!" but he insisted, "The market will come back."
Well, he didn't get out, and he lost the mansion and everything else.
Now he lives in a rented box on a street with a hundred other ticky-
tacky houses. To this day, I still remember the name of his estate:
"Beverly." He is still one of my best friends, and his loss of that huge
house had an enormous emotional impact on me. He had it and lost
it all! And all because of one trade. The irony is that if he had
followed his system, he would have made a fortune on that trade.

We don't trade markets, we trade money. Frankly, I don't see

markets; I see risks, rewards, and money.
When a market makes a historic high, it is telling you something. No
matter how many people tell you why the market shouldn't be that
high, or why nothing has changed, the mere fact that the price is at a
new high tells you something has changed.
I have two basic rales about winning in trading as well as in life: (1) If
you don't bet, you can't win. (2) If you lose all your chips, you can't
bet.
All I bring to the party is twenty- eight years of mistakes.
Good trading is a peculiar balance between the conviction to follow
your ideas and the flexibility to recognize when you have made a
mistake. You need to believe in something, but at the same time, you
are going to be wrong a considerable number of times.
Anything is possible with persistence and hard work. It can be done,
and your own determination to succeed is the most important
element.
Yet, it is one of the great paradoxes of the stock market that what
seems too high usually goes higher and what seems too low usually
goes lower.
The secret for winning in the stock market does not include being
right all the time.The key is to lose the least amount of money
possible when you are wrong.
Letting losses run is the most serious mistake made by most
investors. The public doesn't really understand the philosophy of
cutting losses quickly. Would you drive your car without brakes?
One day, he had a dozen turkeys in his box. Then one walked out,
leaving eleven. "I should have
pulled the string when there were twelve inside," he thought, "but
maybe if I wait, he will walk
back in." While he was waiting for his twelfth turkey to return, two
more turkeys walked out. "I
should have been satisfied with the eleven," he thought. "If just one of
them walks back, I will pull the string." While he was waiting, three
more turkeys walked out. Eventually, he was left empty- handed. His
problem was that he couldn't give up the idea that some of the
original turkeys would return. This is the attitude of the typical
investor who can't bring himself to sell at a loss. He keeps expecting
the stock to recover. The moral is: To reduce your stock market risk,
stop counting turkeys.
I remember selling a $100 stock one time and it eventually went to
$1.1 didn't have any idea it was going down that far, but what would
have happened if I had held on to it? One mistake like that and you
can't come back.

First-time speculators want to make a killing in the market. They

want too much, too fast, without doing the necessary study and
preparation or acquiring the essential methods and skills. They are
looking for an easy way to make a quick buck without spending any
time or effort really learning what they are doing.
The majority of unskilled investors stubbornly hold onto their losses
when the losses are small
and reasonable. They could get out cheaply, but being emotionally
involved and human, they keep waiting and hoping until their loss
gets much bigger and costs them dearly.
The single most important advice I can give anybody is: Learn from
your mistakes. That is the only way to become a successful trader.
The greatest thing about the market is that it is always fun to be
looking for that next big winner— trying to find the stock with all the
characteristics that are going to make it have a big move.
To me it is like a giant treasure hunt. Somewhere there is going to be
a big winner, and I am trying to find it.
When did you turn from a loser to a winner?
When I was able to separate my ego needs from making money.
When I was able to accept being wrong. Before, admitting I was
wrong was more upsetting than losing the money. I used to try to will
things to happen. I figured it out, therefore it can't be wrong. When I
became a winner, I said, "I figured it out, but if I'm wrong, I'm getting
the hell out, because I want to save my money and go on to the next
trade."One of the most suicidal tilings you can do in trading is to keep
adding to a losing position.
Whenever you get hit, you are very upset emotionally. Most traders
try to make it back immediately; they try to play bigger. Whenever
you try to get all your losses back at once, you are most often doomed
to fail. That is true in everything—investments, trading, gambling.
After a devastating loss, I always play very small and try to get black
ink, black ink. It's not how much money I make, but just getting my
rhythm and confidence back. I shrink my size totally—to a fifth or a
tenth of the position that I trade normally.
I've always had my biggest setbacks after my biggest victories. I was
careless.The great thing about being a trader is that you can always
do a much better job.
As a trader, you are forced to confront your mistakes because the
numbers don't lie.Before putting on a position always ask, "Do I
really want to have this position?"
The rale: Bottom fishing is one of the