Trading Wisdom from Market Wizards

Compiled Article from Market Wizards

Michael Marcus

“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 hte 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. If you can restrict your activity to only those types of trades, you have to make money, in any market, under any circumstances.”

“I think to be in the upper echelon of successful traders requires an innate skill, a gift. It’s just like being a great violinist. But to be a competent trader and make money is a skill you can learn.”

“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.”

Bruce Kovner

“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 nonspeculative activity, the greater the significance of technical breakouts.”

On asking which is better, technical analysis or fundamental analysis, he answered, “That is like asking a doctor whether he would prefer treating a patient with diagnostics or with a chart monitoring his condition. You need both. But, if anything, the fundamentals are more important now. In the 1970s, it was a lot easier to make money using technical anaylsis alone. There were far fewer false breakouts. Nowadays, everybody is a chartist, and there are a huge number of technical trading systems. I think that change has made it much harder for the technical trader.”

Advice to novice traders: “First, I would say that risk management is the most important thing to be well understood. Undertrade, undertrade, undertrade is my second piece of advice. Whatever you think your position ought to be, cut it at least half.” “They personalize the market. A common mistake is to think of the market as a personal nemesis. The market, of course, is totally impersonal; it doesn’t care whether you make money or not. Whenever a trader says, “I wish,” or “I hope,” he is engaging in a destructive way of thinking because it takes attention away from the diagnostic process.”

Richard Dennis

“when you start, you ought to be as bad a trader as you are ever going to be.”

“I always say that you could publish trading rules in the newspaper and no one would follow them. The key is consistency and discipline. Almost anybody can make up a list of rules that are 80 percent as good as what we taught people. What they couldn’t do is give them the confidence to stick to those rules even when things are going bad.”

“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.”

“There will come a day when easily discovered and lightly conceived trend-following systems no longer work. It is going to be harder to develop good systems.”

“The secret is being as short term or as long term as you can stand, depending on your trading style. It is the imtermediate term that picks up the vast majority of trend followers. The best strategy is to avoid the middle like the plague.”

Paul Tudor Jones

“First if all, never play macho man in the market. Second, never overtrade. My major problem was not the number of points I lost on the trade, but that I was trading far too many contracts relative to the equity in the accounts that I handled.”

“Risk control is the most important thing in trading. For example, right now I am down about 6.5% for the month. I have a 3.5% stop on my equity for the rest of the month. I want to make sure that I never have a double-digit loss in any month.”

“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.”

“The most important rule is to play great defense, not great offense. Everyday 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 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.”

“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.”

“… I believe the very best money is to be made at the market turns. Everyone says you get killed trying to pick tops and bottoms and you make all the money by catching the trends in the middle. Well, for twelve years, I have often been missing the meat in the middle, but I have caught a lot of bottoms and tops. If you are a trend follower trying to catch the profits in the middle of a move, you have to use very wide stops. I’m not comfortable doing that. Also, markets trend only about 15% of the time; the rest of the time they move sideways.”

“Don’t focus on making money; focus on protecting what you have.”

Gary Bielfeldt

“The best thing anyone can do when starting out is to learn how a trend system works. Trading a trend system for a while will teach a new trader the principle of letting profits run and cutting losses short. If you can just learn discipline by using a trend-following system, even temporarily, it will increase your odds of being successful as a trader.”

“I think to be viable, a trend-following sustem has to be medium to longer term. The more sensitive systems just generate too much commission.”

“The most important is discipline – I am sure everyone tells you that. Second, you have to have patience; if you have a good trade on, you have to be able to stay with it. Third, you need courafe to go into the market, and courage comes from adequate capitalization. Fifth, you need a strong desire to win.”

“You should have the attitude that if a trade loses, you can handle it without any problem and come back to do the next trade. You can’t let a losing trade get to you emotionally.”

Ed Seykota

“Systems don’t need to be changed. The trick is for a trader to develop a system with which he is compatible.”

“The profitability of trading systems seems to move in cycles. Periods during whuch trend-following systems are highly successful will lead to their increased popularity. As the number of system users increases, and the markets shift from trending to directionless price action, these systems become unprofitable, and undercapitalized and inexperienced traders will get shaken out. Longevity is the key to success.”

“I set protective stops at the same time I enter a trade. I normally move these stops in to lock in a profit as the trend continues. Sometimes, I take profits when a market gets wild. This usually doesn’t get me out any better than waiting for my stops to close in, but it does cut down on the volatility of the portfolio, which helps to calm my nerves. Losing a position is aggravating, whereas losing your nerve is devastating.”

“I feel my success comes from my love of the markets. I am not a causal trader. It is my life. I have a passion for trading. It is not merely a hobby or even a career choice for me. There is no question that this is what I am supposed to do with my life.”

“a) Cut losses b) Ride winners c) Keep bets small d) Follow the rules without question e) Know when to break the rules”

“I consider trend following to be a subset of charting. Charting is a little like surfing. You don’t have to know a lot about the physics of tides, resonance, and fluid dynamics in order to catch a good wave. You just have to be able to sense when it’s happening and then have the drive to act at the right time.”

Larry Hite

“People don’t change. That is why this whole game [trading] works. In 1637, tulips in Holland traded for 5,500 forins and then crashed to 50, a 99% loss… So you go to 1929 and find a stock like Air Reduction which traded at a high of $233 and after the crash fell to $31, a decline of 87%… Move ahead to 1961 and you find a stock called Texas Instruments trading at $207. It eventually dropped to $49, a decline of 77%… look at silver prices, which in 1980 reached a peak of $50 and subsequently fell to $5, a 90% decline… 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.”

“I have a friend who has amassed a fortune in excess of $100 million. He taught me two basic lessons. First, if you never bet your lifestyle, from a trading standpoint, nothing bad will ever happen to you. Second, if you know what the worst possible outcome is, it gives you tremendous freedom. The truth is that, while you can’t quantify reward, you can quantify risk.”

“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. If the odds on a bet are 50/50 and the payoff is $2 versus a $1 risk, enough of those trades or bets, eventually you have to come out ahead.”

“Ed Seykota actually explained his philosophy one day: “You can risk 1% of your capital, you can risk 5%, or you can risk 10%, but you better realize that the more you risk, the more volatile the results are going to be.” And he was absolutely right.”

“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.”

Michael Steinhardt

“Good traing 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. 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? Finally, you have to be intellectually honest with yourself and others. In my judgement, all great traders are seekers of truth.”

William O’Neil

“So the first thing I learned about how to get superior performance is not to buy stocks that are near their lows, but to 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.”

“Most investors think that charts are hocus-pocus. Only about  to 10 percent of investors understand charts. Just as a doctor would be foolish not to use X-rays and EKGs, investos would be foolish not to use charts. Charts provide valuable information about what is going on that cannot be obtained easily any other way. They allow you to follow a huge number of different stocks in an organized manner.”

“If you hit a losing streak, and it is not because what you are doing is wrong, that tells you the whole market may be going bad. If you have five or six straight losses, you want to pull back to see if it is time to start moving into cash.”

David Ryan

“I would go over our charts. I studied the company’s past recommendations. I studied historical models of great winning stocks to ingrain in my mind what a stock looked like before it made a major move.”

“If, during the bull phase, the leaders start losing, it indicates that a bear market is developing. If I have five or six stocks in a row that get stopped out, a caution flag goes up.”

“Because I am doing something that I love to do and find fascinating. 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.”

Marty Schwartz

“That’s another example where my Marine training came into play. They teach you never to freeze when you are under attack. One of the tactics in the Marine Corps officer’s manual is either go forward or backward. Don’t just sit there if you are getting the hell beat out of you. Even retreating is offensive, because you are still doing something. It is the same in the market. The most important thing is to keep enough powder to make your comeback.

“After a devastating loss, I always play very small and try to get black ink, black ink. It’s not how much money I make, but just getting my rhythm and confidence back. I shrink my size totally – to a fifth or a tenth of the position that I trade normally.”

“After a successful period, take a day off as a reward. I’ve found it difficult to sustain excellent trading for more than two weeks at a time. I’ve had periods where I can be profitable for twelve days in a row, but eventually you just get battle fatigue. So, after a strong run of profits, I try to play smaller rather than larger. My biggest losses have always followed my largest profits.”

“Before taking a position, always know the amount you are willing to lose. Know your “uncle point” and honor it. I have a pain threshold, and if I reach that point, I must get out.”

“The most important thing is money management, money management, money management. Anybody who is successful will tell you the same thing.”

“My philosophy has always been to try to be profitable every single month. I even try to be profitable every single day. And I’ve had some extraordinary runs – over 90% of my months have been profitable. I’m particularly proud of that fact that, in virtually every year, I didn’t have a losing month before April. I probably don’t make as much money as I could because of that, but I’m more concerned about controlling the downside.”

“What is the ultimate rationalization of a trader in a losing position? “I’ll get out when I’m even.” Why is getting out even so important? Because it protects the ego. I became a winning trader when I was able to say, “To hell with my ego, making money is more important… Learn to take losses. The most important thing in making money is not letting your losses get out of hand. Also, don’t increase your position size until you have doubled or tripled your capital. Most people make the mistake of increasing their bets as soon as they start making money. That is quick way to get wiped out.”

Jim Rogers

“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.”

“One of the best rules anybody can learn about investing is to do nothing, absolutely nothing, unless there is something to do. Most people – not that I’m better than most people – always have to be playing; they always have to be doing something… I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up.”

“I don’t think people should go to business school. I still think so.”

“There is no such thing as a paper loss. A paper loss is a very real loss.”

“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.”

“Look for hysteria to see if you shouldn’t go the opposite way, but don’t go the opposite way until you have fully examined the situation. Also, remember that the world is always changing. Be aware of change. Buy change. You should be willing to buy or sell anything. So many people say,”I could nvever buy that kind of stock,” “I could never buy utilities,” “I could never play commodities.” You should be flexible and alert to investing in anything.”

“Wait fo something to come along that you know is right. Then take your profit, put it back in the money market fund, and just wait again. You will come out way ahead of everybody else.”