The Little Book of Market Wizards

Lessons from the Greatest Traders

Book by Jack D. Schwager

Article and Review by GlobalMacroForex

Jack Schwager is known for his Market Wizards book series where he interviews legends in the business.  This short summary book provides some of the highlights of his research and interviews.  I also read the original full Market Wizards book, and I highly recommend both.  In this short summary, we’ll cover topics including:

·      Risk Management

·      Scaling Methods

·      Confidence

·      Patience

Let’s dig right in…

Risk Management

One of the themes among many of the interviews from Market Wizards is the need for risk management.  Bruce Kovner of Caxton Associates uses a strategy of determining when he will get out of the trade before he makes the trade.

“Because before you get into the trade is the last time you have complete objectivity.  Once you get into the trade, you lose objectivity, which makes it easier to procrastinate by rationalizing a losing position.”

Colm O’Shea of COMAC Capital LLP presents similar views in stating how it’s not just about being correct on the market call, but the execution of that idea.  He recalls a story of having a correct idea, but still losing money.  This was because he was stopped out very early on by small unimportant movements.  O’Shea says that traders have to be willing to risk enough to allow the trade to work.

“You need to decide where you are wrong.  That determines where stop level should be.”

He says he looks for something that disproves his trade premise, not just some arbitrary pain threshold.  In this sense, O’Shea’s trading is like thesis testing.

Bruce Kovner tells us,

“You can’t win if you are not willing to lose.”

Scaling Method

Steven Cohn advocates using a scaling method for risk management.  Under this strategy, as the market is moving against the trader and he (or she) is unsure of the underlying reason, he cuts his position size in half.  Cohn believes this is a good idea because the trader can always put the position on again.  Cohn points out how the need to be 100% right stops traders from doing partial liquidation, which is what will save their equity on drawdowns.

Confidence

Dr. Van Tharp found the difference between winning and losing traders was the winners believed in themselves and that mistakes were okay as part of the learning process.

“First, top traders believed it was okay to lose money in the market.  Second, they knew they had won the game before they started.  Now, if you know you have won the game of trading before you start, then there is no problem taking a loss because you understand that is just part of the way of getting to the ultimate gain.”

Author Jack Schwager teaches us that a good trader has to be confident that they will succeed in the long-term and that a short-term loss is a necessary part of the process.  Trader Marry Schwartz points out how people hold on to losing trades to protect their ego.  He says the ego is not important; it’s about making money.

“The irony is that amateur traders lose money because they try to avoid losing.”

Jack Schwager teaches us that there’s a difference between good trades and winning trades. 

“A good trade follows a process that will be profitable (at an acceptable risk) if repeated multiple times, although it can lose money on any individual trade.”

Patience

This book advocates the extreme importance of having patience.  Expert trader Seykota didn’t even want to know about intraday market gyrations, as it could only provide a temptation to trade more frequently than dictated by his methodology.  He felt that watching every tick leads to overtrading.  Legendary investor Jim Rogers said, “One of the best rules anybody can learn about investing, is to do nothing, absolutely nothing unless there is something to do.”

Mark Weinstein teaches us the importance of waiting patiently for the right opportunity.

“Although the cheetah is the fastest animal in the world and can catch any animal on the plains, it will wait until it is absolutely sure it can catch its prey.  It may hide in the bush for a week, waiting for just the right moment.  It will wait for a baby antelope, and not just any baby antelope, but preferably one that is sick and lame.  Only then, when there is no chance it can lose its prey, does it attack. That, to me, is the epitome of professional trading.”

Conclusion

Jack Schwager has summarized some of the best advice from his various interviews and research.  Not only do I recommend this shorter summary book, The Little Book of Market Wizards, but also his original Market Wizards Top Interviews with Legendary Traders.  The original book will provide more context and depth to the advice through the stories of the best in the business.