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Market Wizards: Interviews with Top Traders by Jack D. Schwager

March 24th, 2009

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Market Wizards Jack Schwager

Market Wizards Jack Schwager

Market Wizards: Interviews with Top Traders

by Jack D. Schwager

Originally Published in 1989

Key Takeaways

Market Wizards is an investing classic.  One of a handful of books considered a ‘must read’ by top traders.  The book is divided into four parts.  Each part includes interviews with traders from different niches of the market, including: Futures and Currencies, Mostly Stocks, A Little Bit of Everything, Floor Trading, and the Psychology of Trading.

Schwager interviews legends such as Paul Tudor Jones, Ed Seykota, William O’Neil, Jim Rogers, and many more. Reading this book gives you a glimpse into their mindset and psychology.  It also helps you to learn more about yourself as you relate to their successes and failures.  The biggest takeaway I had from the book is that nearly every single trader went bust several times before making it big.  Going bust numerous times at the start of a trading career was the rule.  However, each man stuck with his craft after numerous failures and adapted his style before eventually achieving great success.  The other takeaway is that each man was obsessive about risk management.  This risk management took many different forms, but was a constant throughout most of the trader’s styles.

What follows are the best ideas and takeaways that I noted in the book.

Michael Marcus – Blighting Never Strikes Twice

Michael Marcus got wiped out several times before achieving success.  He provides several lessons on how to win by not losing.

Never bet all your equity on one trade, no matter how sure you are.  Always diversify yourself into several uncorrelated and/or hedged trades.  He learned this lesson after being wiped out once, and then being nearly wiped out a second time.  During the second time, he would come into the office shaking, on the verge of a nervous breakdown.

Marcus, like several of the other traders in this book, reference Ed Seykota who advises traders to let profits run and to stay with a trade if it is part of a long term trend.  He mentions that Ed Seykota would never get out of a trade unless the trend had changed.

Marcus advises that the best way to make money is to cut down on the number of trades that you make and only trade when you have all three things going for you: fundamentals, technicals, and market tone.  The fundamentals should suggest that there is an imbalance of supply and demand, which could result in a major move.  The chart must show the market is moving in the direction that the fundamentals suggest.  And, third, when news comes out, the market should act in a way that reflects the right psychological tone.  For example, a bull market should shrug off bearish news and respond vigorously to bullish news, and a bear market should shrug off good news and continue to sell off.  He says, “if you can restrict your activity to those types of trades, you have to make money, in any market, under any circumstances.”

Marcus also suggests bailing immediately if he sees a surprise price move against him that he doesn’t understand.  This usually means somebody knows something and is tipping their hand.  Don’t wait around and take the risk.  Just get out immediately.

When asked what basic advice he would give to a beginning trader, Marcus says:

(1) Always bet less than 5 percent of your money on any one idea.  That way it will take you a long time to lose your money.  (Being long two different stocks from the same sector does not constitute two different ideas.)  (2) Always use stops.  Actually put them in, immediately after entering a position. (3) Hold on to your winners and cut your losers.  (4) Follow your own light.  Just because another trader trades successfully in one way or makes a particular trade, that does not mean you should do the same. When you try to adopt someone else’s style, you often wind up with the worst of both styles. Also, don’t listen to brokers.  Good brokers are good salesmen, not necessarily good traders.  You have to trade your own way.

Marcus also suggests traders get out of the market for a few days or weeks when the hit a losing streak.  Losing begets losing and it touches off negative elements in your psychology.  Eventually you lose your perspective on the market and it becomes  a downward spiral.  He says, if you are losing, “you just can’t trade anymore.”

(be sure to scroll through additional pages below)

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