The Finance Book Club

Michael Steinhardt

 

1. I have always tended to short stocks that were favorites and backed by a great deal of institutional enthusiasm. Generally speaking, I have tended to short too early and, therefore, have usually started off with losses in my short positions. (this seems like madness, especially nowadays)
2. Hedging creates two problems instead of one. Maybe your short stock will go up more; maybe the other stock will go up more. Who knows? If you have made a mistake, deal with the mistake; don’t compound it.
3. Doesn’t use charts, doesn’t use stop-loss orders. No rules about buying on weakness/strength. Doesn’t look at breakouts or breakdowns. (when you realize how contrarian some traders are, it becomes apparent that there is something more important than methodology to trading success. Steinhardt is still a billionaire according to Wikipedia.)
4. I try to assume that the guy on the other side of a trade knows at least as much as I do.
5. If the news was terrible and the stocks were up, I would try to understand why. Sometimes the market has more information and the variant action is really telling you something.
6. We in the world of money management do not have the ability to forecast trends in the stock market, which are functions of a host of variables that are largely beyond the consistent ability of individuals to anticipate.
7. I think there is a message in the fact that there is no real pattern: Anyone who thinks he can formulate success in this racket is deluding himself, because it changes too quickly. As soon as a formula is right for any length of time, its own success carries the weight of its inevitable failure.
8. Contrarian doesn’t imply victory. In order to win as a contrarian, you need the right timing and you have to put on a position in the appropriate size. If you do it too small, it’s not meaningful; if you do it too big, you can get wiped out if your timing is slightly off. The process requires courage, commitment, and an understanding of your own psychology.
9. On handling losing positions: There is nothing that can be articulated precisely enough to lead others in a certain direction.
10. I feel there is an element of gambling in this business.
11. Now there is a lot more competition; the people on the trading desks are much brighter. Another change is that retail buyers and sellers have diminished greatly in importance. The market has become institutionalized. Individuals buy stock through mutual funds. Brokerage firms don’t sell customers stocks so much as they sell those horrible mutual funds and other awful things they call “financial products.”
12. Perhaps the most important change is that the world has become much more short term oriented.
13. Recognize that this is a very competitive business, and that when you decide to buy or sell a stock, you are competing with people who have devoted a good portion of their lives to this same endeavor. In many instances, these professionals are on the opposite side of your trades and, on balance, they are going to beat you.
14. Good trading is a peculiar balance between the conviction to follow your ideas and the flexibility to recognize when you have made a mistake. The balance between confidence and humility is best learned through extensive experience and mistakes. There should be a respect for the person on the other side of the trade. Always ask yourself: Why does he want to sell? What does he know that I don’t?
15. You have to be intellectually honest with yourself and others. In my judgment, all great traders are seekers of truth.
16. One trait I have noticed among a number of the great traders is their willingness and ability to take on a particularly large position when they perceive a major trading opportunity.
17. There are no absolute formulae or fixed patterns.

William O’Neil

1. buy stocks that are coming out of broad bases and beginning to make new highs relative to the preceding price base. You are trying to find the beginning of a major move so that you don’t waste six or nine months sitting in a stock that is going nowhere.
2. Maximum 7% stop loss point.
3. If the stocks that have been leading the bull market start breaking down, that is a major sign the market has topped.
4. Usually, after the Fed raises the rate two or three times, the market runs into trouble.
5. A stock should never be sold short because its price looks too high.
6. The best chart pattern to short is one in which a stock breaks out on the upside of its third or fourth base and then fails. pullbacks to failed price bases also provide good timing for short sales.
7. Letting losses run is the most serious mistake made by most investors.
8. In bear markets like 1973–1974, you can lose 70 or 80 percent on your holdings
9. There is no correlation between dividends and a stock’s performance.
10. Diversification is a hedge for ignorance.
11. If you have five or six straight losses, you want to pull back to see if it is time to start moving into cash.

The stock market is neither efficient nor random. It is not efficient because there are too many poorly conceived opinions; it is not random because strong investor emotions can create trends.

David Ryan
A devotee of William O’Neil’s. He started working at his company and became a vice-president.

He figures 1988 is a different type of environment, where the potential for making money is limited.


Seems to me, he was wrong. Getting in after a crash is usually a great idea.

 

1. He recommends several books:
   1. O’Neil’s book and Darvas’ ‘How I made Two Million Dollars in the Stock Market’.
   2. Reminiscences,
   3. ‘How to Trade in Stocks’ by Livermore.
   4. Super Performance Stocks by Richard Love
   5. Profile of a Growth Stock by Zieg
   6. Winning on Wall Street by Marty Zweig (which I’ve read, and he is touted by many of the traders in this series)
   7. Secrets for Profiting in Bull and Bear markets by Weinstein
   8. Elliott Wave Principle by Frost and Prechter
   9. Super Timing by Beckman

2. “All these books are good but you learn the most from the market itself.”
3. Writes down the reasons for buying a stock every time he buys one. (I suppose this is a trading journal)
4. Avoid stocks under $10. Wait til they prove themselves by moving up to $15 or $20.
   1. Look at the 5 year earnings growth record
   2. Last 2 quarters of earnings relative to last year’s For example, a 30 percent growth rate over the last five years may look very impressive, but if in the last two quarters earnings were only up 10 percent and 15 percent it warns you that the strong growth period may be over. (good luck finding any stock that has earnings growth of 10 percent in a quarter these days (besides Covid beneficiaries), so these rules seem outdated, besides they are basically O’Neil’s rules.)

5. I generally rule out stocks that are overextended from their base. (Doesn’t this contradict O’Neil’s advice about buying stocks that are at ATH?)
6. Gets out when relative strength starts falling.
7. A lot of the stocks I buy have already doubled and tripled before I buy them. (wouldn’t it be more efficient to make a list of stocks that have done this rather than selecting 70 from 4,000 and then seven of those seventy?)
8. Cuts losers after 7% loss, and has a win rate of 50%.
9. Holding times: 6-12 months for big winners, 3 months for mediocre wins, and < 2 weeks for losers.
10. Exit when the stock runs up, builds another base, and then breaks down.
11. A stock at ATH has more of an open running field because there are no unhappy losers waiting to get out at the first opportunity. High volume improves the chances this move is real.
12. Sells 50% on any re-entry back to the ‘base’ (range). Stocks should be at a profit the first day you buy them.
13. Decreasing volume in consolidation is good. When the volume picks up again, it might be a sign of a blastoff about to occur.
14. The big clue that the market was really topping was after the Dow came off its high at 2,746, there was a very feeble, low-volume rally, and then the market got hit for another 90-point loss.
15. After eight or nine hours at work, I go home and spend more time on the markets. I have the charts delivered to me on Saturdays, and I go through them for three or four hours on Sunday. I think if you love what you are doing, you are going to be a lot more successful.
16. Learn from your mistakes.

Marty Schwartz

1. My attitude is that I always want to be better prepared than someone I’m competing against.
2. The company you work for never wants to pay you as much as a company trying to recruit you.
3. When the market gets good news and goes down, it means the market is very weak; when it gets bad news and goes up, it means the market is healthy.
4. The market spends the same amount of time going up as going down. Only the amplitude is different.
5. “Although occasionally there are situations where the market goes three standard deviations instead of two, based on the likelihood that 98 percent of the moves will stop at two standard deviations, I’ll take that bet any day of the week. And, if I am wrong, I am going to use risk control and stop myself out X dollars away. That is the most critical element.”
6. Admitting I was wrong was more upsetting than losing the money.
7. When I became a winner, I said, “I figured it out, but if I’m wrong, I’m getting the hell out, because I want to save my money and go on to the next trade.” By living the philosophy that my winners are always in front of me, it is not so painful to take a loss. If I make a mistake, so what!
8. I used fundamentals for nine years and got rich as a technician. (compare this to what Jim Rogers says later)
9. My philosophy was that if you make money every month, nothing bad is going to happen to you. So, you won’t be the richest person. You’ll never be the richest person anyway. What difference does it make?
10. I can’t stand most established institutions. I have a me-against-them mentality, which I believe helps me be a better, more aggressive trader. It helps as long as I maintain an intellectual bias in my work and discipline in money management.
11. Usually a down Friday is followed by a down Monday. (Is it? Let me know!)
12. One of the most suicidal things you can do in trading is to keep adding to a losing position. (In the ‘87 crash he loses $315k instead of $5M)
13. “Now is not the time to worry about making money; it is the time to worry about keeping what you have made.”
14. Whenever there is a really rough period, I try to play defense, defense, defense.
15. I’ve always had my biggest setbacks after my biggest victories.

Rules:

1. I try not to go against the moving averages; it is self-destructive.
2. Has a stock held above its most recent low when the market has penetrated the most recent low? That is a divergence to watch for.
3. Do I really want to have this position?
4. After a successful period, take a day off. It’s hard to sustain excellence for > 2 weeks in a row
5. Bottom fishing is the most expensive form of gambling
6. Before taking a position, always know the amount you are willing to lose.
7. When T-bonds and T-bills differ in respect to their individual relationship between price and the moving average—one above the moving average, the other below—have no position until one confirms the direction of the other.
8. Work, work and more work
9. Money management

1. When your worst fears aren’t realized, you probably should increase your position.
2. Don’t increase your position size until you have doubled or tripled your capital.

James B. Rogers, Jr.

1. Partner of George Soros in the Quantum Fund
2. Whenever I buy or sell something, I always try to make sure I’m not going to lose any money first. If there is very good value, then I’m probably not going to lose much money even if I’m wrong.
3. You always need a catalyst to make big things happen.
4. One of the best rules anybody can learn about investing is to do nothing, absolutely nothing, unless there is something to do. Most people have to be doing something.
5. I just wait until there is money lying in the corner, and all I have to do is go over and pick it up.
6. Trade as little as possible. Shoot fish in a barrel.
7. When I see hysteria, I usually like to take a look to see if I shouldn’t be going the other way.
8. Q:How do you pick the time to go against the hysteria?
   A: I wait until the market starts moving in gaps.
9. I’m not a good trader. I’m nearly always too early,
10. Just about every time you go against panic, you will be right if you can stick it out. The panic, the hysteria, in and of itself is only a catalyst to make me look to see what is going on. It doesn’t mean I’m going to do anything.
11. It is amazing how sometimes something important will happen, and the market will keep going despite that. Now, I am experienced enough to know that just because I see something doesn’t mean that everyone sees it. A lot of people are going to keep buying or selling just because that has been the thing to do.
12. Q:So, just because the market doesn’t respond to some important news, such as the October 1979 change in Fed policy, doesn’t mean that it isn’t important.
    A: All the better. If the market keeps going the way it shouldn’t go, especially if it is a hysterical blowoff, then you know an opportunity will present itself.
13. You had all these stories of young guys, three years out of school, making half a million dollars a year. That is not reality. Whenever you see that in a market, you are near a top.
14. Buying options is another fast way to the poorhouse. Someone did a study for the SEC and discovered that 90 percent of all options expire as losses. Well, I figured out that if 90 percent of all long option positions lose money, that meant that 90 percent of all short option positions make money. If I want to use options to be bearish, I sell calls.
15. Under those kind of conditions, if you are still solvent, you have to step in there and go against it. Maybe that was going to be the one time it was the end of the world, and I would have been wiped out too. But 95 percent of the time when you go against that kind of hysteria, you are going to make money.
16. I start by finding the anomalous years in a long-term historical chart. When I see a picture like the 1861 cotton market, I ask myself, “What caused that? Why did that happen?” Then I try to figure it out. From that, you learn an enormous amount.
17. I thought that, for many people, business school was a waste of time. I still think so.
18. There is no such thing as a paper loss. A paper loss is a very real loss.
19. If fundamentally you are basically correct, then you do nothing but sit there and let the market hysteria wash around you.
20. Q:Is that a general principle: When government measures are implemented to counteract a trend, you should sell the rally after the government action?
    A: Absolutely. It should be written down as an axiom that you always invest against the central banks. When the central banks try to prop up a currency, go the other way.
21. The market is nearly always wrong. I can assure you of that.
22. Never, ever, follow conventional wisdom in the market. You have to learn to go counter to the markets. You have to learn how to think for yourself; to be able to see that the emperor has no clothes. Most people can’t do it. Most people want to follow a trend. “The trend is your friend.” Maybe that is valid for a few minutes in Chicago, but for the most part, following what everyone else is doing is rarely a way to get rich. You may make money that way for a while, but keeping it is very hard.
23. Don’t do anything until you know what you are doing. If you make 50 percent two years in a row and then lose 50 percent in the third year, you would actually be worse off than if you just put your money in a money market fund.
24. I don’t play. I just don’t play.
25. Just don’t do anything until you know you’ve got it right. As an example, until you see American agriculture hit a low, then no matter what happens in the world—unless the world is going to stop eating—you can’t go wrong. You just watch American agriculture deteriorate, deteriorate, deteriorate, and then you buy. You may buy early or late. In my case, usually a little bit early. But, so what? The worst that happens is you bought it too early. Who cares?
26. I haven’t met a rich technician. (compare this to Marty Schwarz who basically said the exact same thing about fundamentals)
27. Charts give him the facts but he doesn’t even know what a reversal is and doesn’t want to know.
28. They have not changed the rules of supply and demand.
29. The ability to get away from conventional wisdom is not very common.

1. Buy value
2. Wait for a catalyst
3. Sell hysteria
4. Be very selective
5. Be flexible
6. Avoid conventional wisdom
7. If you overlooked an important factor, then get out as ‘the first loss is the best loss’; otherwise sit tight.

Mark Weinstein

 

1. The biggest mistake I made was having a specific target of what I wanted out of the trade.
2. I think the market should be totally free of restraints.
3. Q:In other words, you are saying that those who are expounding the idea of limits are really going to make matters worse for the small investor.
   A: It is absolute lunacy. It is a law that is being proposed for the benefit of sophisticated institutional investors.
4. I don’t believe anyone ever gets wiped out in the market because of bad luck; there is always some other reason for it. Either you were off when you did the trade, or you didn’t have the experience. There is always a mistake involved.
5. I have a real fear of the markets. I have found that the greatest traders are the ones who are most afraid of the markets. My fear of the markets has forced me to hone my timing with great precision.
6. My timing is a combination of experience and my nervous system. If my nervous system tells me to get out of the position, it is because the market action triggers something in my knowledge and experience that I have seen before.
7. I also don’t lose much on my trades, because I wait for the exact right moment. Most people will not wait for the environment to tip itself off. They will walk into the forest when it is still dark, while I wait until it gets light. Although the cheetah is the fastest animal in the world and can catch any animal on the plains, it will wait until it is absolutely sure it can catch its prey.
8. I do not believe in mathematical systems that always approach markets in the same way. Using myself as the “system,” I constantly change the input to achieve the same output—profit!
9. I am always looking for a market that is losing momentum, and then go the other way.
10. I look at the individual stocks; they all have their own personalities. For example, IBM and General Motors will usually rally before a major market bottom and fail to rally before a major market top.
11. I know floor traders that have made money for twenty straight years. You can’t call that gambling.
12. A market that is fundamentally and technically poised to move higher is not going to reverse direction because of a news item—even a dramatic one.

What are the trading rules you live by?

1. Always do your homework.
2. Don’t be arrogant.
3. Understand your limitations.
4. Be your own person.
5. Don’t trade until an opportunity presents itself.
6. Your strategy has to be flexible enough to change when the environment changes.
7. Don’t get too complacent once you have made profits.

 

1. You have to learn how to lose; it is more important than learning how to win. If you think you are always going to be a winner, when you lose, you will develop feelings of hostility and end up blaming the market instead of trying to learn why you lost.
2. Limit losses quickly. To paraphrase from Reminiscences of a Stock Operator, most traders hold on to their losses too long because they hope the loss will not get larger. They take profits too soon, because they fear the profit will diminish. Instead, traders should fear a larger loss and hope for a larger profit.
3. Don’t place blind trust in anyone, even a close friend.

Brian Gelber

1. Broker turned trader
2. Recommends Technical Analysis of Stock Trends by Robert D. Edwards and John Magee
3. I consider trading to be an unrewarding, unglamorous game.
4. As opposed to saying, “I have an opinion and I want to express it in the market,” I started asking, “How do I make money out of all this?” I had learned that an opinion isn’t worth that much. It is more important to listen to the market. I became a reactive trader as opposed to an opinionated trader.
5. BG lost money by listening to intelligent opinionated customers.
6. Read the tape and develop ‘instincts’.
7. Working hard has nothing to do with it. About two weeks ago, a very bright fellow who works for me said, “This is a very frustrating business. It doesn’t matter how hard I work; it has no bearing on whether I make money or not.”
8. Follow people who are hot, and fade those who are cold.
9. When you don’t care, you do well, and when you try too hard, you don’t do well.
10. Always understand the time horizon of other investors if you are going to listen to their advice. “Today, I have little regard for the views of portfolio managers, because their outlook tends to cover a much longer time perspective than mine.”
11. Most traders who fail have large egos and can’t admit that they are wrong. Even those who are willing to admit that they are wrong early in their careers can’t admit it later on. Also, some traders fail because they are too worried about losing.
12. I had never lost so much money, so fast, and it was because I did things differently than I normally do. I usually don’t trade that big early in the year. I like to make money gradually at first and then play with the money I have made. I was flabbergasted by the market action. I had forgotten that markets could run away like that. I couldn’t believe how wrong I had been.

Q: What is the key trading rule you live by?
A: Never add to a loser.

Q: What does the average trader do wrong?
A: He overtrades and begs for tips.

Q:When you are going bad, but still have some good positions on, do you liquidate them as well?
A:Absolutely. They are bound to turn against you too.

Tom Baldwin

1. You don’t need any education at all to do it. The smarter you are, the dumber you are. The more you know, the worse it is for you.
2. Holds trades for minutes or seconds because the risk is lower.
3. Also, in our business, you have to have a total disregard for money. You can’t trade for money.

Q: You you mean as long as you like the position, you stay with it? That you can’t think, “I’m losing $1 million on this trade, and with $1 million I could have bought a great house.” You can’t translate it into real terms.
A:Exactly. Most people do.

1. Winning traders have less fear than losing ones. (one reason it’s much easier to trade when already wealthy)
2. It is like any job, if you stand there long enough, you have to pick it up. It is just a matter of how long you can afford to stand there before you do. You don’t start any job and feel comfortable in the first six months.
3. You are never really confident in this business, because you can always be wiped out pretty quickly. The way I trade is: Live by the sword, die by the sword. There is always the potential that I could get caught with a big position in a fluke move with the market going the limit against me. On the other hand, there is no doubt in my mind that I could walk into any market in the world and make money.

Q: From your perspective, what does the average trader—that is, public trader—do wrong?
A: They trade too much. They don’t pick their spots selectively enough. When they see the market moving, they want to be in on the action. So, they end up forcing the trade rather than waiting patiently. Patience is an important trait many people don’t have.

 

1. Most people are probably ahead on their first few trades because they picked them carefully, but after making ‘free money’ they get careless and trade every day. Then they start losing and don’t know how to take a loss. Then they start hesitating. If I sell it here, I’m going to lose $1,000.” They don’t like to lose $1,000, when they’re getting paid $500 a week. Now, all of a sudden, they are thinking about the money.

Q:Once you think about the money, you are dead?
A: Yes. That is what usually happens to the public.

Q:What is your own way of handling losses?
A: Get out.

Q: Quickly?
A: If I can. My point is that I have a lot of patience and I wait. If I know it is a losing trade, I wait for what I think is the optimum time to bail out. Then I try and reverse.”

1. Never give up on a trade. Many traders who are in a losing trade will just get out because they were taught that you have to have discipline. Great. Those traders will always be around. But if they just had some patience and said, “Yes, it is going to be a losing trade, but instead of getting out here at 7, maybe if I wait and just sweat it out for another minute, I can sell at 10.” (this is completely contrary to what we’re usually told - just cut your losses, don’t hope?)
2. Schwager responds to this later “I don’t think Baldwin’s statement contradicts the rule. I believe he is saying that often the worst time to bail out of a position is during a violent price move against you. Baldwin’s point is that by bearing the pain just a little longer, you may be able to find a more favorable circumstance for liquidating."

Q: What kinds of things do you look for in a chart?
A: Key points such as the high and low for the week, the halfway back point, and consolidation areas.

1. Highly suspicious of trading systems. “They wouldn’t be there if they weren’t wrong.” They only exist because people aren’t confident in their ability.
2. Hard work makes its own luck.

Clemmo17 I love your messages its educating

Tony Saliba

1. There is a high correlation between the action on a Friday and the follow-through on the next Monday—at least on the opening. (Do you think so? Let me know!)
2. I always define my risk, and I don’t have to worry about it. I walk into the pit every day with a clean slate, so that I can take advantage of what is going on.I know my worst case. My loss is always limited.
3. Markets don’t just have to move up to make money. With futures, options, and the underlying markets, there are enough tools available to set up a game plan for any situation.
4. Clear thinking, ability to stay focused, and extreme discipline. Discipline is number one: Take a theory and stick with it. But you also have to be open-minded enough to switch tracks if you feel that your theory has been proven wrong. You have to be able to say, “My method worked for this type of market, but we are not in that type of market anymore.”
5. I scale in and scale out of my positions, so that I can spread out my risk. I don’t like to do all of a large order right up front.
6. Always respect the marketplace. Never take anything for granted. Do your homework. Recap the day. Figure out what you did right and what you did wrong. That is one part of the homework; the other part is projective. What do I want to happen tomorrow? What happens if the opposite occurs? What happens if nothing happens? Think through all the “what-ifs.” Anticipate and plan, rather than react.
7. In the majority of cases, exceptional traders owe their success to hard work and preparation. In fact, similar to Tony Saliba, many of the very successful traders will do their “homework” every night, not allowing leisure or other business from interfering with their daily regimen of market analysis. When they stray from that discipline, it usually ends up costing them money.

Dr. Van K. Tharp
In my opinion, Dr. Tharp is a controversial figure in the world of ‘trader education’. What’s known is that he doesn’t trade himself but he specializes in helping established traders. A good gig if you can get it.

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I think of the character of Wendy Rhoades in the tv show 'Billions', who potentially does as much harm as good but only the audience can see it. Then again, some people swear by the principles of trading psychology and both Wendy and Dr. T are highly regarded by many, I assume. So who am I to judge?

It does seem like he has some good ideas, and he knows his maths. I suppose if I deal with him here I can skip his book which is basically a psychology-heavy version of Penfold’s book, but Penfold does a better job of explaining the math, in my opinion.

1. The composite profile of a losing trader would be someone who is
   1. highly stressed and has little protection from stress,
   2. has a negative outlook on life and expects the worst,
   3. has a lot of conflict in his/her personality, and
   4. blames others when things go wrong.
   5. Disorganized
   6. Impatient

   
   

2. Such a person would not have a set of rules to guide their behavior and would be more likely to be a crowd follower.
3. Most people are risk-aversive in the realm of profits—they prefer a sure, smaller gain to a wise gamble for a larger gain—and risk-seeking in the realm of losses—they prefer an unwise gamble to a sure loss. As a result, most people tend to do the opposite of what is required for success. They cut their profits short and let their losses run.
4. Our brains have a limited capacity for processing information. If your mind is preoccupied with worry, that worry takes up most of the decision space, and you don’t have enough capacity left to perform effectively.
5. One aspect of the fight/flight response is that it causes people to narrow their focus. They revert to earlier well-practiced response patterns. For example, a common decision that people make under stress is not to decide. They do what they did when they were a beginner.
6. Most experts are unconsciously competent.
7. Generally, I find that top traders believe:
   1. Money is NOT important.
   2. It is OK to lose in the markets.
   3. Trading is a game.
   4. Mental rehearsal is important for success.
   5. They’ve won the game before they start.

   
   

8. “The moment that one definitely commits oneself, then Providence moves too.” -W.H. Murray of the Scottish Himalayan Expedition and while I was looking that up I found this couplet that Murray liked “Whatever you can do, or dream you can, begin it, boldness has genius, power and magic in it.” -Goethe
9. If you are really committed, then not only are you certain that you are doing the right thing, but somehow events just seem to occur to help you.
10. We have a natural tendency to blame something other than ourselves for what happens. Society promotes it. For example, the recent media coverage of program trading virtually implies that investors who lost money in the stock market did so because of this activity, rather than because of any fault of their own.
11. Now, I don’t mean that you should blame yourself for your mistakes either. I mean that at some point in time, for any situation, you made a choice that produced those results. Determine what that choice point was and give yourself other options to take when you encounter a similar choice point in the future.
12. When people own their own problems, they discover that their results usually stem from some sort of mental state. Common examples are:
    1. I’m too impatient with the markets.
    2. I get angry at the markets.

    
    

13. Mental state manipulation is what most people call discipline. I teach people a very simple procedure that they can use right away. For example, suppose you are at your desk and you become aware that you are in a mental state that you would like to change. Get up out of the chair. Walk away about four feet and then look at how you looked in that chair. Notice your posture, your breathing, your facial expressions. Then imagine how you would look if you had the sort of mental state you would like. When you can see that clearly, sit down in the chair again and assume the position that you just imagined. That exercise works for almost any situation as it involves several important principles—changing your body posture, seeing yourself from a more objective viewpoint, and imagining a more resourceful state.
14. I think the process of developing and testing some sort of model is probably very important.
15. Traders are very aware of their purpose in life and as a trader. They believe they are part of a “bigger picture” and they just go with the flow.

The two most difficult problems are

1. Not being committed as a trader
2. Not owning your problems

1. There are two reasons I don’t trade.
   1. The first is the reason you mentioned about objectivity with clients. If I’m helping someone trade and I have conflicting positions, then I may not be very objective about what they are doing.
   2. An equally important reason, however, is that I am fully committed to doing what I am doing. I love helping other people, writing, giving talks, and so on. I’m very happy doing that. It is also a sixty-hour per week job right now. If I wanted to start trading, then I would have to devote almost as much time to doing that, at least at the beginning. Why should I do that and give up what I already know I love doing? Player coaches, in the history of most sports, usually are not that effective at either coaching or playing.

   
   

Dreams
Schwager includes a chapter on his personal trading experiences, which I think mostly reflects what’s already been covered. He then goes into a section about dreams that are about trading. One interviewee declined to participate in the book but allowed him to publish his dream. The dream warned him that he was waiting too long to close his long position in corn, so he did, right at the high.

There is some cognitive science behind this idea. We know that the ‘default mode’ of thinking, or the non-focused thinking we do when we’re doing something else, walking, meditating, is an important part of learning and it does things that the focused mind cannot do. A lot of brilliant people have gone to bed with the desire to untangle a mystery and have awoken with the solution.

I’m sure the subconscious mind has a lot of influence on trading decisions and abilities, but I’ve never had a dream about trading, in fact I rarely recall much about my dreams, so it’s hard for me to say how important this is. What do you think? Have you ever dreamed about trading?

Final Word
Successful traders have:
1. Driving Desire to succeed
2. Confidence that their trading is the best investment
3. Discipline - stick to the system
4. Put in the time. Take it seriously.
5. Rigid risk control
6. Patience
And they:
7. Avoid the crowd
They know:
8. Losing is part of the game.

But in fact, that’s not the final word as he wrote a postscript to this chapter 22 years later in the revised edition.

What Jack Believes (22 years later)

1. A trade can still be good even if the outcome was bad; trading is a game of probabilities
2. Having the correct trade direction is less important than entering/exiting correctly; you have to know how to manage your trade
3. You don’t get paid for being right (basically same idea as above)
4. Stay out of the market when there is no good trade for you; be patient
5. Risk control > Methodology; limiting losses can be frustrating but is necessary
6. Trade Size > Entry point; if your position is too big your resulting fear could alter how you handle the trade; some trades fail due to bad luck
7. Use partial exits, don’t try to be right 100% of the time
8. Trade around a position; if long take partial profits on a rip, re-purchase on a dip
9. Don’t get married to an idea; be flexible; be able to change opinions on a dime
10. Take a break when losing
11. Volatility != Risk;
12. Intuition gets no respect, but it’s simply unconscious experience
13. The worst losses follow the biggest profits; watch out
14. If you benefit from a market panic consider getting out fast; bear markets can reverse abruptly
15. Where you enter doesn’t matter; the market doesn’t care where you entered; “ Why is getting out even so important? It is a matter of ego. If you can get out at even, you can say, “I was not wrong. I did not make a mistake.” If the trade is still valid, stay in.
16. Avoid annual targets; they encourage overtrading AND undertrading
17. There is no one method; find your own approach as it needs to match your personality

That’s the end of book 1 - a short break to focus on my own trading and then on to New Market Wizards.

New Market Wizards by Jack Schwager
This book was written after Schwager became well known for his first book. As a result there is no shortage of successful traders to interview and whereas in the first book he had trouble getting anyone to open up, now he can’t get them to shut up. So, once again I’m cutting mercilessly and leaving a lot of precious wisdom on the floor. If anything sounds good to you in these chapters I encourage you to read and re-read the whole book.

What Jack believes:

1. The markets are NOT random.
2. Because they are based on human behaviour (still?)
3. There is no holy grail
4. There are 1M ways to make money but they are all difficult to find
5. Markets are always changing and always the same
6. Secret to success lies within the individual
7. Talent + Hard Work
8. Success in trading is a worthy goal, but it will be worthless if it is not accompanied by success in your life

Misadventures in Trading
A short story where Schwager makes the usual mistakes common to all neophyte (and veteran) traders:

1. He is trying to save up risk capital but an opportunity in the British pound is too delicious to pass up
2. He notices that by ‘not wanting to trade’ he has accidentally transformed himself into a ‘master of patience’.
3. He trades when he is on holiday
4. He starts out by carefully picking his trades but ends up making trades hurriedly between appointments
5. He acts on a tip from a friend, (an EWT practitioner!)
6. He ignores his own rule to never hold a position that gaps sharply against him, because he is acting on a friend’s advice
7. He seeks out his friend’s advice when the trade starts going wrong
8. “This is just a wave extension”
9. He ignores the good news / bad moves rule (when news is good and price drops the market is sick, and vice versa)
10. “I’ve redone my analysis!”
11. He notes that one ‘trading sin’ allowed a ‘cascade of others’ (a bit like one beer/one cookie)
12. “the market is a stern enforcer that unmercifully and unfailingly extracts harsh fines for all (trading) transgressions.”
13. Ed Seykota’s magazine covers show turning points in the market (whatever the cover’s warning about is likely the end of that trend - Brent Donnelly has a great article about this)

The subsequent chapter is an analogy with Saddam Hussein’s ill-fated decision to invade Kuwait and trading, but I’m not sure there’s much to be gleaned from it, and then the first interview and one of the most interesting, because he was one of the first forex traders at the time when that market opened in the 70s.

Bill Lipschutz (the sultan of currencies)
I can’t take credit for the cute nicknames given to each trader - they are Schwager’s.

1. There are a lot of elements to risk control: Always know exactly where you stand. Don’t concentrate too much of your money on one big trade or group of highly correlated trades. Always understand the risk/reward of the trade as it now stands, not as it existed when you put the position on. Some people say, “I was only playing with the market’s money.” That’s the most ridiculous thing I ever heard.
2. Cut back during a losing streak to regain confidence
3. On large account size being an advantage in FX: “Foreign exchange is a very psychological market. You’re assuming that the market is going to move back to equilibrium very quickly—more quickly than he can cover his position. That’s not necessarily the case. If you move the market 4 percent, for example, you’re probably going to change the market psychology for the next few days.”
4. Scaling in and out of positions:

“I think it has enabled me to stay with long-term winners much longer than I’ve seen most traders stay with their positions. I don’t have a problem letting my profits run, which many traders do. You have to be able to let your profits run. I don’t think you can consistently be a winning trader if you’re banking on being right more than 50 percent of the time. You have to figure out how to make money being right only 20 to 30 percent of the time.”

1. If my perception that the fundamentals have changed is not the market’s perception, then there’s something going on that I don’t understand. You don’t want to hold a position when you don’t understand what’s going on. That doesn’t make any sense.
2. Banks don’t make money on directional trading in FX, but rather on the spread and on front-running large orders.
3. Even at Salomon Brothers, where there’s a perception that everyone is a trader, it came down to only about a half-dozen people who took real risk. The rest were essentially just making markets. That nuance is lost on most people.
4. Schwager surmises that the reason Lipschutz lost his entire personal account just before starting at Salomon Bros. was that he subconsciously didn’t want to split his attention between personal and business trading.

Schwager includes a mini-chapter dealing with the basics of Futures trading and I will be skipping it. We have dealt with this a bit in the book club, and if we want to delve into it in greater detail we can do that with a book dedicated to the subject. As he points out, the underlying instruments in futures are often the same as in stocks, and currencies.

Next up: Randy McKay

Randy McKay (veteran trader)

1. After Vietnam he got one of the first IMM division (currency futures) seats from his brother who was a CME floor trader
2. Currency futures trading began in May 1972. It was a slow market, with big price inefficiencies. Even though he only placed about 2 trades a day he turns his $2000 stake into $70k in one year
3. Never blew up an account
4. One of my goals at the time was to become a larger trader as quickly as possible, because I felt the business was just too damn easy and that it couldn’t possibly last forever. Fortunately I had that insight, because trading is much more difficult now than it was then.
5. The markets started getting more difficult during the 1980s. The high inflation of the 1970s led to many large price moves and heavy public participation in the markets. The declining inflation trend in the eighties meant there were fewer large moves, and those price moves that did occur tended to be choppier. Also, more often than not, the price moves were on the downside, which led to reduced public activity, because the public always likes to be long. Therefore, you ended up with more professionals trading against each other.
6. In the 1970s, the price moves were so large that all you had to do was jump on the bandwagon. Timing was not that critical. Now it’s no longer sufficient to assume that because you trade with the trend, you’ll make money. Of course, you still need to be with the trend, because it puts the percentages in your favour, but you also have to pay a lot more attention to where you’re getting in and out. I would say that in the 1970s prognostication was 90 percent and execution 10 percent, whereas today prognostication is 25 percent and execution 75 percent.
7. Canada dollar trade: Before Mulroney the BoC did not aggressively intervene in currency fluctuations. McKay used that to ride multi-year moves. After the loonie hits a low of 0.67 Mulroney delivers a speech about ‘Chicago gamblers’ and McKay gets out of the trade. When the trade was easy, I wanted to be in, and when it wasn’t, I wanted to be out. In fact, that is part of my general philosophy on trading: I want to catch the easy part.
8. When I get hurt in the market, I get the hell out. It doesn’t matter at all where the market is trading. I just get out, because I believe that once you’re hurt in the market, your decisions are going to be far less objective than they are when you’re doing well. And if the market had rallied 1,800 points that day to close higher, I couldn’t have cared less. If you stick around when the market is severely against you, sooner or later they’re going to carry you out.
9. His worst loss was another loonie trade where he had planned to make his ‘end-goal’ retirement amount of $50M. He sells at the exact bottom and misses the move back up that surpassed his original target. (ouch)
10. Trading on breakouts is a strategy that I no longer employ. I find that major trends are now frequently preceded by a sharp price change in the opposite direction. I still make my judgments as to probable price trends based on overall market action, as I always did. However, with a few exceptions, I now buy on breaks and sell on rallies.
11. Q: You make it sound like a chess game. When your opponent is a farmer or a dentist, you play one way, and when your opponent is a professional, you play another.
    A: No doubt about it. That’s exactly right. You have to keep adapting to changes.
12. The most important advice is to never let a loser get out of hand. You want to be sure that you can be wrong twenty or thirty times in a row and still have money in your account.

William Eckhardt (the mathematician)

1. Was Richard Dennis’ partner in the Turtles experiment
2. In retrospect, I’m not sure that my strategy had anything to do with my success. If you assume that the true theoretical price is somewhere between the bid and the offer, then if you buy on the bid, you’re buying the market for a little less than it’s worth. Similarly, if you sell on the offer, you’re selling it for a little more than it’s worth. Consequently, on balance, my trades had a positive expected return, regardless of my strategy. That fact alone could very well have represented 100 percent of my success. I think that the execution edge was probably the primary reason for my success as a floor trader.
3. Benoit Mandelbrot, the originator of the concept of fractional dimension, has conjectured that price change distributions actually have infinite variance. The sample variance [i.e., the implied variability in prices] just gets larger and larger as you add more data. If this is true, then most standard statistical techniques are invalid for price data applications.
4. If the variance is not finite, it means that lurking somewhere out there are more extreme scenarios than you might imagine, certainly more extreme than would be implied by the assumption that prices conform to a normal distribution
5. On using multiple indicators: in most circumstances, the best strategy is not some optimized weighting scheme, but rather weighting each indicator by 1 or 0. In other words, accept or reject. If the indicator is good enough to be used at all, it’s good enough to be weighted equally with the other ones. If it can’t meet that standard, don’t bother with it.
6. How should you apportion your assets among different trades? Again, I would argue that the division should be equal. Either a trade is good enough to take, in which case it should be implemented at full size, or it’s not worth bothering with at all.
7. From Schwager: My realisation of the inherent arbitrariness of slope-of-line methods is precisely why I’ve never been willing to spend even five minutes on Gann angles or works by the proponents of this methodology.
8. On Optimization: If you avoid optimization altogether, you’re going to end up with a system that is vastly inferior to what it could be. If you optimize too much, however, you’ll end up with a system that tells you more about the past than the future. Somehow, you have to mediate between these two extremes.
9. If the performance results of the system don’t sock you in the eye, then it’s probably not worth pursuing.
10. Your job is to follow the system. If the system does something that results in losses, that’s just an expected part of the system. Your judgment might be on the line over the entire performance of your system, but there’s no sense in which your judgment is on the line on any single trade.
11. however, if your system is any good, don’t override it, except when it’s clearly violating the intentions of its design. Don’t get into the habit of finagling the system day in and day out. Save your ingenuity and creativity for research.
12. Mechanical systems outperform humans
13. If you have the resources to evaluate systems, your time is better spent developing your own ideas.
14. On RSI and Stochastics and similar indicators: I think these indicators are nearly worthless. I’m not implying that you shouldn’t do research on these approaches—you can be very promiscuous in your research, but not in your trading. they’re close to zero in terms of their profit expectations.
15. On cyclical analysis, including the work done by Bachelier, Fourier: All this scientific research has failed to uncover any systematic cyclic components in price data. This failure argues strongly against the validity of various trading systems based on cycles. And, I want to stress that the techniques for finding cycles are much stronger than the techniques for finding trends. Finding cycles is a classic scientific problem.
16. The problem is that you can fit sine waves pretty closely even to purely random patterns. If you allow cycle periods to shrink and expand, skip beats, and even invert—as many of these cycle theorists (or, perhaps more accurately, cycle cranks) do—then you can fit cycles onto any data series that fluctuates.
17. I think that eventually cybernetic devices will be able to outperform humans at every task, including trading. I can’t believe that just because we’re made of carbon and phosphorus there are things we can do that silicon and copper can’t.
18. On a preponderance of system traders making the random walk hypothesis come true: System traders still have an important old ally: human nature. Human nature has not changed.
19. it’s much easier to learn what you should do in trading than to do it.
20. There is a persistent overall tendency for equity to flow from the many to the few. In the long run, the majority loses. The implication for the trader is that to win you have to act like the minority. If you bring normal human habits and tendencies to trading, you’ll gravitate toward the majority and inevitably lose.
    1. The bulk of normal habits consisting in the tendency to take ready profits but let losses run

21. Watch idly while profit-taking opportunities arise, but in adversity run like a jackrabbit.
22. For a losing trader: If he can’t change his behavior, this type of person should consider becoming a dogmatic system trader.

The next chapter is about the Turtles Trading experiment which was TOP SECRET when the book was published (no longer) and Schwager doesn’t really get much out of his interviews with former turtles because of their concerns about secrecy. Since we have covered the experiment in other stories at least somewhat, and since it is the subject of many books, I’m skipping it.

Monroe Trout (the best return that low risk can buy)

1. Where people like to place stops: right above the high and below the low of the previous day.
2. Also at round numbers - Trout calls this the Magnet Effect (show it to me, anybody)
3. Uses mental stops, advises against putting stops in ‘obvious areas’
4. I have a pretty good eye for picking out where stops are going to be, even from off the floor. I try to get in the market a bit before that point is reached, sometimes even trying to set the stops off myself—and then the market will be off to the races.
5. I sincerely believe that the person who has the best daily Sharpe ratio at the end of the year is the best trader.
6. I don’t pull out any money. I rent my condo and I drive a cheap car.
7. Secrets to success:
   1. (A) We do good research, so we have an edge.
   2. (B) We have a rational, practical approach to money management.
   3. (C) We pay very low commissions.
   4. (D) Our executions are among the best in the business.
   5. (E) Most of the people who work here keep a large portion of their net worth in the fund we manage.

8. I used to like to put on positions in the stock market in the same direction as the price movement two days earlier. For example, if the market was up on Monday, I would be prone to be a buyer on Wednesday. This is an example of a pattern that I don’t believe in much anymore.
9. A pattern has to make sense. For example, if I find that the price change of the British pound forty days ago is statistically significant in predicting today’s price in the S&P, I wouldn’t put any faith in it. Why would the British pound price forty days ago affect the S&P? So we toss out a lot of these types of patterns even if they have a high percentage of success.
10. On getting out: I wait until the market stabilizes a bit and then I start getting out—particularly if it’s past my pain threshold in terms of dollar loss.
11. If we’re down 4 percent on a single day, we close out all positions and wait until the next day to get into anything again.
12. I’ve been trying for years to get rid of anger completely when I lose money, and I’ve come to the conclusion that it is impossible. I can work toward that goal, but until the day I die, I don’t think I’m ever going to be able to look a big loss in the face and not get angry.
13. In general, I don’t sleep well at any time. Unfortunately, that’s one of the prices you have to pay for being a trader.
14. The bottom line is that you need an edge. One of the ways you can get an edge is to find a successful system. However, if you’re just a pure systems player and you start managing large amounts of money, you’re going to find that your transaction costs start to eliminate a good deal of your profits.
15. if I want the price to move toward a certain level, I may put in a stop and then cancel the order once the market gets close. I do stuff like that frequently. It worked today, but sometimes it backfires, and you find yourself the proud owner of some bonds you don’t want. (very interesting. However is it just randomness perceived as a pattern if it ‘sometimes doesn’t work’? Does it not work 50% of the time?)
16. Recommends
    1. The Complete Guide to the Futures Markets [Jack D. Schwager, John Wiley & Sons, 1984],
    2. The Handbook of Futures Markets, by Perry Kaufman [John Wiley & Sons, 1984], and
    3. The Commodity Futures Game: Who Wins? Who Loses? Why? by Richard J. Tewles and Frank J. Jones [McGraw-Hill, 1987]

17. Schwager: every trader I interviewed who displayed a combination of high return and very low risk invariably proved to be a discretionary trader (i.e., a trader who relies on his own internal synthesis of market information to make trading decisions, as opposed to using computer-generated trading signals)

Al Weiss (the human chart encyclopedia)

1. One of the keys in long-term chart analysis is realizing that markets behave differently in different economic cycles. Recognizing these repeating and shifting long-term patterns requires lots of history. Identifying where you are in an economic cycle—say, an inflationary phase versus a deflationary phase—is critical to interpreting the chart patterns evolving at that time.
2. Claims to have ‘pioneered’ the invention of the urethane skateboard wheel! But this contradicts https://dengenchronicles.com/who-invented-urethane-skateboard-wheels/#Who_invented_urethane_skateboard_wheels unless he was a backer or something?
3. In the history of markets, I can’t think of a single commodity that didn’t eventually move back to its base value
4. On Cycles:
   1. There are cycles in everything—the weather, ocean waves, and the markets.
   2. One of the most important long-term cycles is the cycle from inflation to deflation. About every two generations—roughly every forty-seven to sixty years—there’s a deflationary market. For example, in respect to the commodity markets, we’re currently in a deflationary phase that began in 1980.
   3. Over the past two hundred years, these deflationary phases have typically lasted between eight and twelve years.
   4. Since we’re currently in the twelfth year of commodity price deflation, I think we’re very close to a major bottom in commodity prices.
   5. Gold may have 3-5 bull markets in a century (true for the last century at least, although it really depends on what your time horizon is like)
   6. Grain markets may have bull markets five times in 20 years (again, depends on your definitions, but seems to be true)
   7. The essential element is that the markets are ultimately based on human psychology, and by charting the markets you’re merely converting human psychology into graphic representations. I believe that the human mind is more powerful than any computer in analyzing the implications of these price graphs. (still?)