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

March 24th, 2009

Gary Bielfeldt – Yes, They Do Trade T-Bonds in Peoria

Bielfeldt says that the most important element of trading is to have a method for staying with your winners and getting rid of your losers.  Discipline is important.  He also says that its important to think through a trade thoroughly before putting it on and develop  a plan with various contingencies if things don’t work out.  That way you won’t get swayed by every news item that hits the press.

Bielfeldt says that most traders lose because they overtrade, which means they have to be very right very often to overcome the spreads and commissions.

Ed Seykota – Everybody Gets What They Want

Seykota offers his elements for good trading:

  1. Cutting losses
  2. Cutting losses
  3. Cutting losses

He says, “If you can follow these three rules, you have a chance.”

Slightly more seriously, he adds:

  1. Cut losses
  2. Ride winners
  3. Keep bets small
  4. Follow the rules without question
  5. Know when to break the rules

Seykota also says that trying to trade yourself out of a losing streak by ‘cathing up’ is lethal.

Larry Hite – Respecting Risk

My favorite quote from Larry Hite is: “I have noticed that everyone who has ever told me that the markets are efficient is poor.”

Hite says two indicators that are particularly valuable are:

  1. How a market responds to news.  If a market doesn’t respond to news the way you think it should, that is very telling about the market’s general trend.
  2. When a market makes a new historic high or new historic low, that is telling you something.  Its telling you something has changed.

Hite recounts a lesson he learned from one of his first bosses, Jack Boyd.  Boyd said to him, “Larry, if you want to know where the market is going, all you have to do is this.”  He threw his charts on the floor and jumped up on his desk.  He said, “Look at it, it will tell you!”  What he meant is that its the big trends, not the micro-movements and noise, that show where the market is headed.  A good trader must trade with the big picture trends.

He offers final words of investing advice:

  1. If you don’t bet, you can’t win.
  2. If you lose all your chips, you can’t bet.

Hite controls risk by following four basic principles:

  1. Never trade counter to the market trend.
  2. The maximium risk on each trade is limited to 1 percent of total equity.
  3. Diversify to an extreme.  Across markets and tradeables (stocks, bonds, commodities, currencies, rates, etc).
  4. Liquidate or temporarily suspend trading in markets where the risk / reward exceeds well-defined limits.

Michael Steinhardt – The Concept of Variant Perception

Michael Steingardt sums up his advice on trading with the following quote:

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.  The balance between confidence and humility is best learned through extensive experience and mistakes.  Finally, you have to be intellectually honest with yourself and others.

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