, , ,

Jack Schwager’s Market Wizards is a must read for any trader who wishes for success in trading. The premise is this: learn from the best in business which includes Ed Seykota, who realised over 250,000 percent return over 16 years. While any two traders in the book may differ drastically on implementation their visions, they all exhibit similar characteristics. Since its first publication in 1990, these lessons still relevant today. With minor alteration, I would suggest further that these lessons are applicable to life as well.

  1. Do your homework: No one becomes an expert without hard work. The same can be said about trading. There is no get-rich-quick trading strategy. There are strategies that can increase your capital quickly AFTER you become an expert. Those who say that they have a strategy are either deliberately lying to you or ignorance. Good traders do their homework!
  2. Discipline: Once they have done their homework, it is viral to have discipline in trading. Daily market movement is not deterministic, but it is not entirely random either. Even you are correct with your assessment, the market can remain irrational for a long period of time. During these times, what separates an amateur and a master is discipline. This generally involves developing a trading system and following it religiously. Richard Dennis (Turtle trading) remarked that he can publicise his trading rules and traders will still fail because they couldn’t follow them when things go against them. This leads to.
  3. Importance of having a system that agrees with your personality: There is no point in having a great trading system if you cannot follow when shit hits the fan. Having a mismatch trading system is like owning F1 car but you are ill-equipped to drive it. You are better off having an SUV that you can drive consistently. You don’t want to second guess your system in a highly stressed period.
  4. Capital Preservation: Warren Buffet has two rules in investing:
    No. 1: Never lose money.
    No. 2: Never forget Rule No. 1.
    Suppose that you lose 50 percent in a trade. That means in order to get back to breakeven point, you must achieve a 100 percent return on the next trade. And that is hard to achieve consistently. With this in mind, a behavioural pattern amongst these masters is that they will get out of their positions WITHOUT QUESTION if the trading condition changes and they don’t understand it. “Get out first, ask question later.” If you don’t understand the situation you are in, get out. There will always be tomorrow to trade. Otherwise, you are gambling.
  5. Respect the risk: Do you know the risk involved in your account? If you don’t, you are gambling. Most of these masters had, at some points in their trading careers, blew up their accounts. While many simply give up, they learn the crucial lesson and that is the importance of risk management. They will only invest/trade within their tolerable limit on risk, even if it is the once-in-the-lifetime trade! This means understanding the risk involved, but also, that future risk can be underestimated. This leads to.
  6. Position sizing: Our mums always tell us not to put all your eggs in one basket. The same is true in investing world. Even these experts are occasionally wrong. Ask yourself: what do I stand to lose if I am wrong? If the answer is “I don’t know” or “infinite”, you are gambling. If you can blow up your account, your trade size is too big. A rule of thumb is:
    NEVER put more than 2% of your principal on each trade.
    That means you can wrong 50 times before you are out, if you lose 100 percent on each trade. On a related note, if you have a streak of bad trades, reduces the size of your next trade. That way you are limiting your loss if you are wrong. See No. 4.
  7. Taking responsibility: These masters all believe in taking ownership of their decisions and that they can change their destiny. When things go wrong unexpectedly, they DON’T BLAME the market, but take responsibility for taking that decision in the first place. By taking ownership, they are on a path towards complete mastery. On the contrary, amateur BLAMES other and therefore don’t believe that they have the power to change.
  8. Treat trading like a game: A number of masters sited Ed Thorp’s Beat the Dealer as their inspiration. They see that trading is like playing a game. Money is just a way of keeping the score. It is a mistake to see the trading in real term. By this I mean associating your account value with objects of equivalent value in the real world. For example, if every time you lose $20,000 in a trade, you think to yourself that with that money you can get a new car, you will not survive as a trader. You will be ruled by emotion. Your emotion will force you out when thing gets tough even if your analysis is sound. Key message: disconnecting money from things. It is just a number.
  9. Treat trading like a business: Running a business has operational cost. Unnecessary cost put a damper on your performance. Same with retail investors, costs, management fees and taxes reduce your return. These traders minimised their operational cost in different ways, but they are essentially the same.
  10. Everybody gets what they want out of the market -Ed Seykota: It pays to understand the inner working of our subconscious. It might be working against us. In Seykota’s words: “people’s trading performance probably reflects their priorities more than they would like to admit.” What are your priorities? Work those out before letting the market work them for you.
  11. It is ok to be wrong: Someone said to me: do you want to be right or do you want to make money? Even experts in this book, consistently commit to wrong trades. They admit that they are wrong and move on quickly. It is not the number of times you are right that counts, it is how large your each win is. People often stumble on this one. I do too. By admitting that we are wrong, it hurts our ego. Longevity in trading depends on how comfortable you are with being wrong.