The New Market Wizards by Jack Schwager

[alvin]

Here are the excerpts from “The New Market Wizards” which are very useful tips from the top traders:

Randy McKay

“One very interesting think I’ve found is that virtually every successful trader I know ultimately ended up with a trading style suited to his personality… My trading style blends both of these opposing personality and put where it belongs: trading. And, I take the conservative part of my personality and put it where it belongs: money management. My money management techniques are extremely conservative. I never risk anything approaching the total amount of money in my account, let alone my total funds.”

William Echkardt

“What really matters is the long-run distribution of outcomes from your trading techniques, systems, and procedures. But, psychologically, what seems of paramount importance is whether the positions that you have right now are going to work. Current positions that you have beyond any statistical justification. It’s quite tempting to bend your rules to make your current trades work, assuming that the favorability of your long-term statistics will take care of future profitability. Two of the cardinal sins of trading – giving too much rope and taking profits prematurely – are both attempts to make current positions more likely to succeed, to the severe detriment of long-term performance.”

“Since most small to moderate profits tend to vanish, the market teaches you to cash them in before they get away. Since the market spends more time in consolidations than in trends, it teaches you to buy dips and sell rallies. Since the market trades through the same prices again and again and seems, if only you wait long enough, to return to prices it has visited before, it teaches you to hold on to bad trades. The market likes to lull you into the false security of high success rate techniques, which often lose disastrously in the long run. The general idea is that what works most of the time is nearly the opposite of what works in the long run.”

Stanley Druckenmiller

“The way to build long-term returns is through capital preservation of capital and home runs. You can be far more aggressive when you’re making good profits. Many managers, once they’re up 30 or 40 percent, will book their year [i.e., trade very cautiously for the remainder of the year so as not to jeopardize the very good return that has already been realized]. The way to attain truly superior long-term returns is to grind it out until you’re up 30 or 40 percent, and then if you have the convictions, go for a 100 percent year… Soros has taught me that when you have tremendous conviction on a trade, you have to go for the jugular. It takes courage to be a pig. It takes courage to ride a profit with huge leverage. As far as Soros is concerned, when you’re right on something, you can’t own enough.”

Richard Driehaus

“Since January 1980, the market has realized an average annual compounded return of 17 percent. OIf you were out of the trading market on the forty best days, which represent only 2 percent of the trading days, the return would drop to under 4 percent. The moral is that the penalty for being out of the market on the wrong days are severe – and human nature being what it is, those are exactly the days that most people are likely be out of the market.”
I believe systems tend to be more useful or successful for the originator than for someone else. It’s important that an approach be personalized; otherwise, you won’t have the confidence to follow it. It’s unlikely that someone else’s approach will be consistent with your own personality. It’s also possible that individuals who become successful traders are not the type to use someone else’s approach and that successful traders don’t sell their systems…You need the artistic side to imagine, discover, and create trading strategies. You need the scientific side to translate those ideas into firm trading rules and to execute those rules.

Victor Sperandeo

Do not outsmart the market – “Assume you’re a brilliant student who graduates Harvard summa cum laude. You get a job with a top investment house, and within one year, they hand you a $5 million portfolio to manage. What would you believe about yourself? Most likely, you would assume that you’re very bright and do everything right. Now, assume you find yourself in a situation where the market is going against your position. What is your reaction likely to be? “I’m right.” Why? Because everything you’ve done in life is right. You’ll tend to place your IQ above market action.”

Discipline is the key – “They lacked what I called emotional discipline – the ability to keep their emotions removed from trading decisions. Dieting provides an apt analogy for trading. Most people have the necessary knowledge to lose weight – that is, they know that in order to lose weight you have to exercise and cut your intake of fats. However, despite this widespread knowledge, the vast majority of people who attempt to lose weight are unsuccessful. Why? Because they lack the emotional discipline.”

“Many traders tend to set their stops at or near previous high or low. This behavioral pattern holds true for both major and minor price moves. When there is a heavy concentration of such stops, you can be reasonably sure that the locals on the floor are aware of this information. There will be a tendency for the locals to buy as prices approach a concentration of buy stops above the market. The locals try to profit by anticipating that the activation of a large pocket of stops will cause a minor extension as an opportunity to liquidate their positions for a quick profit. Thus, it’s in the interest of the locals to try to trigger heavy concentrations of stop orders.”

“In cases where there are valid fundamental reasons for the continuation of a price move beyond the previous high, the move will tend to extend. However, if the move to a new high was largely caused by local trading activity, once the stop orders are filled, prices tend to reverse, falling back below the prior high. In effect, the triggering of the stops represents the market’s last grasp.”

Blair Hull

“The experience of going through extensive losing periods and having the faith to stick with the system because I knew that I had the edge was something that helped me a great deal when I went into the pit. Also, the risk control experience was very beneficial. In blackjack, even if you have the edge, there are going to be periods of significant losses. When that happens, you have to cut back your bet size in order to avoid the possibility of ruin. If you lose half your stake, you have to cut your bet size in half. That’s a difficult thing to do when you’re down significantly, but it’s essential to surviving.”

Jeff Yass

“If you invest and don’t diversify, you’re literally throwing out money. People don’t realize that diversification is beneficial even if it reduces your return. Why? Because it reduces your risk even more. Therefore, if you diversify and then use margin to increase your leverage to a risk level equivalent to that of a nondiversified position, your return will probably be greater.”

Charles Faulkner

“An effective trading strategy will have the following characteristics. First, it will be automatic. Given a specific situation, the trader will know what to do without second-guessing himself. Second, a good strategy will be congruent – that is, it won’t create any internal conflict. Third, the strategy will incorporate Away From (an NLP technique) motivation by including some specific risk control plans. Fourth, part of the strategy will involve imagining the trade from the perspective of already being in the position and considering what might be wrong with the trade before putting it on. Fifth, an effective trading strategy will provide specific evidence that will allow the trader to evaluate the merits of a trade.”