DIALOGUES FROM "MARKET WIZARDS" {1989, JACK D. SCHWAGER}

“Market Wizards” includes interviews with top American traders. I recommend buying and reading that book, but until then, here are some important quotes taken from the dialogues within.

 

MORE: ◙ Paul Tudor Jones Tips | ◙ New Market Wizards 1993 | ◙ Market Wizards 1989

 

Larry Hite (» Larry Hite on Wikipedia)

■ I don't see markets; I see risks, rewards, and money.

■ In trading, you can define three categories of players: the trade, the floor, and the speculator. The trade has the best product knowledge and the best ways of getting out of positions. For example, if they are caught in a bad position in the futures markets, they can offset their risk in the cash market. The floor has the advantage of speed. You can never be faster than the floor. While the speculator doesn't have the product knowledge or the speed, he does have the advantage of not having to play. The speculator can choose to only bet when the odds are in his favor. That is an important positional advantage.

I have two basic rules about winning in trading as well as in life:

(1) If you don't bet, you can't win.

(2) If you lose all your chips, you can't bet.

■ What makes this business so fabulous is that, while you may not know what will happen tomorrow, you can have a very good idea what will happen over the long-run.

■ When I get together with other traders and they start exchanging war stories about different trades, I have nothing to say. To me, all our trades are the same.

■ There are really four kinds of trades or bets: good bets, bad bets, winning bets, and losing bets. Most people think that a losing trade was a bad bet. That is absolutely wrong. You can lose money even on a good bet.

■ We diversify in two ways. First, we trade more markets worldwide than any other money manager. Second, we don't just use a single best system. To provide balance, we use lots of different systems ranging from short term to long term.

■ The point is that because people are the same if you use sufficiently rigorous methods to avoid hindsight, you can test a system and see how it would have done in the past and get a fairly good idea of how that system will perform in the future. That is our edge

■ I have noticed that everyone who has ever told me that the markets are efficient is poor.

■ Although I don't really trade off of indicators, there are two indicators that come to mind.

  • First, if a market doesn't respond to important news in the way that it should, it is telling you something very important.
  • The second item is, when a market makes a historic high, it is telling you something. No matter how any people tell you why the market shouldn't be that high, or why nothing has changed, the mere fact that the price is at a new high tells you something has changed.

Applying four basic principles:

  1. Never trade counter to the market trend. There are no exceptions and always follow the system.
  2. The maximum risk on each trade is limited to 1 percent of total equity.
  3. Diversification to an extreme
  4. Volatility is continually tracked in each market in order to generate signals to liquidate or temporarily suspend trading in those markets where the risk/reward ratio exceeds well-defined limits.

 

 

Paul Tudor Jones (» Paul Tudor Jones on Wikipedia)

Markets trend only about 15 percent of the time; the rest of the time they move sideways.

When you are trading size, you have to get out when the market lets you out, not when you want to get out.

■ Even though markets look their very best when they are setting new highs, -That is often the best time to sell. To some extent, to be a good trader, you have to be a contrarian.

■ First of all, never play macho man with the market. Second, never overtrade.

■ Don't ever average losers. Decrease your trading volume when you are trading poorly; increase your volume when you are trading well. Never trade in situations where you don't have control. For example, I don't risk significant amounts of money in front of key reports, since that is gambling, not trading.

■ Don't be too concerned about where you got into a position. The only relevant question is whether you are bullish or bearish on the position that day.

Every day I assume every position I have is wrong. I know where my stop risk points are going to be. I do that so I can define my maximum possible drawdown. Hopefully, I spend the rest of the day enjoying positions that are going in my direction. If they are going against me, then I have a game plan for getting out. Don't be a hero. Don't have an ego. Always question yourself and your ability.

■ I have very strong views of the long-run direction of all markets. I also have a very short-term horizon for pain. As a result, frequently, I may try repeated trades from the long side over a period of weeks in a market which continues to move lower.

■ Τhe importance of time: When I trade, I don't just use a price stop, I also use a time stop. If I think a market should break, and it doesn't, I will often get out even if I am not losing any money.

I really don't care about the mistake I made three seconds ago in the market. What I care about is what I am going to do from the next moment on.

■ When we came in on Monday, October 19, we knew that the market was going to crash that day. As the previous Friday was a record volume day on the downside. The exact same thing happened in 1929, two days before the crash.

Everything gets destroyed a hundred times faster than it is built up. It takes one day to tear down something that might have taken ten years to build.

 

Bruce Kovner Bruce Kovner on Wikipedia)

■ The first rule of trading is to don't get caught in a situation in which you can lose a great deal of money for reasons you don't understand.

■ You have to be willing to make mistakes regularly;

■ I have the ability to imagine configurations of the world different from today and really believe it can happen. I can imagine that soybean prices can double or that the dollar can fall to 100 yen.

■ The market usually leads because there are people who know more than you do. My point is that there are thousands of difficult-to-understand mechanisms that lead the market, which come into play before the news reaches some poor trader sitting at his desk.

■ The more a price pattern is observed by speculators, the more prone you are to have false signals. The more a market is the product of the non-speculative activity, the greater the significance of technical breakouts.

Whenever I enter a position, I have a predetermined stop. That is the only way I can sleep.

One of the jobs of a good trader is to imagine alternative scenarios. I try to form many different mental pictures of what the world should be like and wait for one of them to be confirmed.

■ We create a scenario for every currency at least once a week. We define the ranges we expect for each currency and what we will do if it breaks out of these ranges.

I generally try to keep my trading confined between 8 A.M. and 6 or 7 P.M. The Far East is very important, and if the currency markets are very active, I will trade the Far East, which opens at 8 P.M. The A.M. session in Tokyo trades until 12 P.M. If the markets are in a period of tremendous movement, I will go to bed for a couple of hours and get up to catch the next market opening. It is tremendously interesting and exciting.

Market analysis is like a tremendous multidimensional chess board.

■ If you see that most of the members on your guru list are bullish at a time when the market is not moving up, and you have some fundamental reason to be bearish, you feel stronger about the short-trade. I like to know that there are a lot of people who are going to be wrong.

■ I try very hard not to risk more than 1 percent of my portfolio on any single trade. Second, I study the correlation of my trades to reduce my exposure.

Whatever you think your position ought to be, cut it at least in half. My experience with novice traders is that they trade three to five times too big. They are taking 5 to 10 percent risks on a trade when they should be taking 1 to 2 percent risks.

■ Important is the idea of trading long in one market against short in a related market. In all my trading, if I am long something, I like to be short something else.

■ A violent and quick breakout is much more reliable than a typical breakout.

■ There a lot fewer people paying attention to the cross rates. The general rule is The less observed, the better the trade.

■ The stock market has far more short-term countertrends. After the market has gone up, it always wants to come down. The commodity markets аre driven by supply and demand for physical goods; if there is a true shortage, prices will tend to keep trending higher.

 

Scans 24 Currency Pairs in 9 Timeframes..

 

Richard Dennis (» Richard Dennis on Wikipedia)

It is important not to have a short position with a loss on Friday if the market closes at a high, or a long position if it closes at a low.

Judgments you make looking at prices on the screen aren't as good as those made in the pit watching what is going on. In the pit, there are indicators that you learn subconsciously,

■ You should expect the unexpected in this business; expect the extreme. Don't think in terms of boundaries that limit what the market might do. The uUnexpected and the impossible happen every now and then.

If you have a loss on a trade after a week or two, you are clearly wrong. Even when you are around breakeven, but a significant amount of time has passed, you are probably wrong too.

■ Whatever method you use to enter trades, the most critical thing is that if there is a major trend, your approach should assure that you get in that trend. If I see a trend developing, I know eventually I'll have to get in. The question is whether I get in earlier or later, and that might depend on how I see the market reacting to the news. If a market goes up when it should go up, I might buy earlier. If it goes down when it should go up, I'll wait until the trend is better defined.

■ My research on individual stocks shows that price fluctuations are closer to random than they are in commodities. Demonstrably, commodities are trending and, arguably, stocks are random.

Trading to me is like betting on independent roles of the dice that you think are loaded a little bit in your favor, because you know some statistical things about the market.

As an advice to Novice Traders: Trade small because that's when you are as bad as you are ever going to be. Learn from your mistakes. Don't be misled by the day-to-day fluctuations in your equity. Focus on whether what you are doing is right, not on the random nature of any single trade's outcome.

 

Michael Marcus Michael Marcus on Wikipedia)

The best trades are the ones in which you have all three things going for you: fundamentals, technicals, and market tone. First, the fundamentals should suggest that there is an imbalance of supply and demand, which could result in a major move. Second, the chart must show that the market is moving in the direction that the fundamentals suggest. 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. If you can restrict your activity to only those types of trades, you have to make money, in any market, under any circumstances. There will always be trades that meet those requirements, but there may be fewer of them, so you have to be much more patient.

■ When the news is wonderful and a market can't go up, then you want to be sure to be short.

■ You develop an almost subconscious sense of the market on the floor. You learn to gauge price movement by the intensity of the voices in the ring. For example, when the market is active and moving, and then gets quiet, that is often a sign that it is not going to go much further. Also, sometimes when the ring is moderately loud and suddenly gets very loud, instead of being a sign that the market is ready to blast off, as you might think, it actually indicates that the market is running into a greater amount of opposing orders.

The trend-following systems approach doesn't work anymore. The problem is that once you have defined a trend and taken a position, everyone else has taken a position as well. Since there is no one left to buy, the market swings around in the other direction and gets you out. One reason we don't have many good trends anymore is that the central banks are preventing currency moves from getting out of hand by taking the other side of the trend.

■ Nowadays, I try to avoid the currencies, because I feel it is a totally political situation; you have to determine what the central banks are going to do.

The big players, including the governments, would always tip their hand. If we saw a surprise price move against us that we didn't understand, we often got out and looked for the reason later.

■ Always bet less than 5 percent of your money on any one idea.

■ If a position doesn't feel right as soon as you put it on, don't be embarrassed to change your mind and get right out. If you become unsure about a position, and you don't know what to do, just get out.

■ Perhaps the most important rule is to hold on to your winners and cut your losers. Both are equally important. If you don't stay with your winners, you are not going to be able to pay for the losers.

■ Always ask yourself: "How many people are left to act on this particular idea?" You have to consider whether the market has already discounted your idea. You can evaluate that by using the classic momentum-type indicators and observing market tone. How many days has the market been down or up in a row? What is the reading on the sentiment indexes?

■ I don't trade the Dow stocks. I prefer the little ones because they are not dominated by the big professional traders who are like sharks eating each other. The basic principle is that it is better to trade the Australian dollar than the Deutsche mark, and the small OTC stock than the big Dow stock.

 

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DIALOGUES FROM THE "NEW MARKET WIZARDS" {JACK D. SCHWAGER}

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