Unknown Market Wizards: The best traders you've never heard of

 

There is no way for any traders to miss out on Jack D. Schwager's book. This latest edition from my favorite author attracted me a lot since it is about "unknown" market wizards like me, LOL... so, the topic itself sounds really appealing to me!

As usual, Jack D. Schwager never disappointed us. This book is full of insights and numerous live trading experiences from the so called "unknown". As expected, the author with his usual excellent interviewing style did his best to dig out informative side from traders. We as readers and traders surely benefited by reading this book.

There are few that featured in this book really caught my attention. First, Jason Shapiro. I love his contrarian way... a way that I had been practicing for so long without realized that it is a contradict way of life! His contrarian ways are best explained in the book on the topic of bubble. When everyone is talking about a bubble and nobody actually owes it, the bubble is there to stay. When somehow everybody started to owe the bubble, the bubble will burst without a hint. (Splendid idea on contrarian!) So, it is not the price that makes the market bottom on bearish or vice versa. It is all about participation. Make sense!!!

Reading Jack D. Schwager's books is always a nice thing to do. However, we as traders tend to have problem reading it. The main thing is we are sort of bias in our own way. Everything that moves along with our existing strategy tends to stay favor while we reading this book. In opposite, we will find hard to those ideas that never sounds appealing since day one. As such, a reader for Market Wizard series must stay focus and read this book with neutral state of mind. Having said that, the author as usual did well in his interviews. At times, the question asked can be some good point to be taken by readers. A good example is this: I actually find trendline breakout to be one of the most unreliable signals. But that perception is a consequence of knowing where to draw the trendline with the benefit of hindsight. Another good point from this book (which the previous series of market wizards also pointed out same perspective) is there are some opposite techniques being used by two different traders. Yet, it proved to work since the trades presented in this book are all successful traders. A good example is the contradict approach on  trendline by Peter Brandt (use only horizontal breakout and never use trendline breakout) versus Jeffery Neumann (use only trendline breakout). End of the day, both methods work. That is the best part of trading. There is simply no single correct trading method!

Having read all market wizards by this author, I actually prefer all previous version compared to this. As usual, I will list out some good points below which are extracted from the book. However, this time around, I omitted few traders for the first time. This never happened when I read other market wizards. Well, there are two reasons. First, I simply do not agree with some of the idea presented. Secondly, I am in my 18 years into trading. So, perhaps I evolved along the way (I hope I am, haha) and there is nothing new under the sun. In view of that, I am going to rate this book at 6/10. Well, this book still served as one of the book that traders must read. However, one round of reading is adequate and there are not much surprises. Last but not least, listed below are some nice quotes from the book: 

Peter Brandt:

He took much smaller positions than he could. If your could protect your capital, you would always have another shot.

A popcorn trade is what I call a trade that you have profit on and then ride it all the way back down to where you got in. I try to avoid popcorn trades now. 

I used to trade patterns like symmetrical triangles and trendlines, which I no longer do. I only trade patterns where the breakout is through a horizontal boundary.

I don't want to know my open trade equity. So, I graph my equity based on closed trades only.

Optimizing your trading approach for the last series of trades is not a solution. I try to keep trading the same way. That's the only way I'll come out of a drawdown and get back on track. 

Strong opinions, weakly hold. Have a strong reason for taking a trade, but once you are in a trade, be quick to cut if it doesn't behave as expected.

Jason Shapiro:

To make a contrarian trading approach work, a method for timing entry into the markets:

1. Taking positions counter to the extremes of speculator market positioning.

2. Timing the entry into such positions based on market action.

Watching financial TV programs can be useful in your trading - as a contrarian indicator!

Have stop loss on every positions.

Managing increased risk of higher correlation markets by reducing overall positions size and by seeking inversely correlated trades to add to the portfolio.

You know you can identify traders or commentators who are reliably wrong - a task far easier than finding those who are reliably right - then their opinions could well be useful in a contrarian sense. 

Richard Bargh:

I used to have a habit that whenever I lost money in the market, I would spend less money. That type of attitude only causes your mindset and body to get tight, which stop you from trading well because you don't want to take any risk. A counterintuitive concept is to spend more when losing.

You don't have to exit a profitable trade all at once. Even if a trade reaches your target, it may make sense to keep a small portion of the positions, so you get some additional profit if the market keeps moving in the direction of original trade. 

Missed trades can be more painful and more expensive than trading losses.

The damage from a bad trade often extends well beyond the loss on the trade itself. By shaking up a trader's confidence, such trades can lead to missing winning trades the trader would otherwise taken. The resulting missed profits can often exceeded the loss on the original trade.

Amrit Sall:

I now know that 90% of the time, the market is not going to provide any opportunities, and 10% of the time, I will make 90% of my profits.

In the past, I have tended to implement trading ideas in a single market. I now try to execute trade ideas in multiple correlated markets.

Traders have to ask themselves whether they can handle being right only 30% of the time, or do they feel they have to be right day after day? 

Daljit Dhaliwal:

The reward/ risk ratio of a trade is dynamic and can change dramatically as the trade is held. Consider that you implement a trade, looking for a 300 point gain and risking in 100 point loss. If the market then moves 200 points in favor of the trade, the reward/ risk is now drastically different than when the positions was implemented. Dhaliwal manages the dynamic nature by taking partial profits. He argues that holding the entire position until it is exited is an attempt to be 100% right, at the risk of being 100% wrong. Taking partial profits as a trade moves in your favor not only responds to the fact that the reward/ risk of the trade is changing, but it is also another risk management tool. Another way of adjusting to the changing reward/ risk of a trade is to tighten the protective stop.

John Netto:

I want to be focus and still feel some anxiety when adding positions. In contrast, if I exhale in relief after a positions has gone my way and feel too relaxed, that is a warning sign of a possible impending market reversal. 

When you lose money in the market, let it go. Be on guard against the urge to make money back by taking previously unplanned trades. 

Jeffrey Neumann

Neumann enters his trade at the very point of breakouts from long downtrend lines - the earliest possible technical signal of a trend transition. Of course, this type of entry point often results in buying multiple false breakouts before a valid breakout occurs. But, Neumann gets out immediately if the breakout doesn't follow through.

Hedge Fund Market Wizards

I read this book in year 2013. It was an excellent book that I promised myself I will read it every year. However, time flies and five years later, I am finally free to reread this book.

Well, five years passed... and amazingly, this book still one of the best!!!

One thing I notice... five years ago, I recorded tons of nice quotes extracted from this book. This time around, the quotes being picked are obviously less. So, it might be a good sign. It is either I improved for the past five years or simply because I gain more knowledge and wisdom via the cruelty of the trading market.

At the same time, when I flip back the previous post, I notice that my level of appreciation towards this book never reduces. I still think this is one of the best books that traders all over the world need to reread frequently. After all, the variety of traders featured in this book are all elite in their profession. So, this book helps us by revealing tons of different methods towards trading. In another words, we are effectively lectured by the world's most successful traders. However, remember this: pick up something that suits your character!

For a full rating of 10, I have no hesitation to rate this book at 10/10. Five years ago, this book helped to shape into who I am today. This time around, I hope this book will make my trading journey smoother and longer for the next five years. I am convinced that this book will help me achieve this. Loved the book!

Last but not least, some excellent quotes from the book:

Colm O'Shea:

One of the biggest mistakes people made was to join in the bubble, but to do it in positions for which there was no exit. All markets look liquid during the bubble, but it's the liquidity after the bubble ends that matters.

This is what strikes me about really good money managers - they don't get attached to their ideas.

You learn from everyone around you, but you have to do what makes sense for you, even if it's the opposite of what makes sense for other people.

I think the natural way to trade a market that is in the bubble is from the long side, not the short side. You want to be long the exponential upmove without taking on the gap risk of a collapse. Therefore options provide a good way of doing this type of trade.

Perseverance and emotional resilience to keep coming back are critical because as a trader you get beaten up horribly. Frankly, if you don't love it, there are much better things to do with your life. If successful traders were only motivated by the money, you would stop after five years and enjoy the material things.

I use risk guidelines, but I don't believe in rules that way. Traders who are successful over the long run adapt.

Ray Dalio:

By holding uncorrelated assets, I can improve my return/risk ratio by a factor of five through diversification.

For any trading strategy, we can look back at when it won, when it lost and under what circumstances. Each strategy develops a track record that we deeply understand and then combine in a portfolio of diversified strategies. If a strategy is not performing in real time as expected, we can reevaluate it, and if we agree it is desirable, we might modify our systems.

Timeless means that we look at strategy during different times and universal means that we look at how a strategy worked in different countries. There is no reason why a strategy's effectiveness should change in different time periods or when you go from country to country.

There are limits in terms of position size, but not in terms of price.

It is something like the World Trade Center getting knocked down, then yes, we may exercise a discretionary override. In most cases, such discretion would be a matter of reducing risk exposure. I would say probably less than 1% of trades might be affected by discretion.

Larry Benedict:

You always have to manage money for yourself, not your clients. Once you started adjusting your trading to fit what your investors want, you are in trouble.

Scott Ramsey:

Just a simple exercise of measuring which markets were the strongest during a crisis can tell you which markets are likely to be the leaders when the pressure is off.

Ramsey will buy the strongest market in a sector for long positions and sell the weakest market in sector for short positions. Many novice traders make the error of doing the exact opposite. They will buy the laggards in a sector on the typical mistaken assumption that those markets haven't yet made their move and therefore provide more potential and less risk.

Jaffray Woodriff:

The transition to greater diversification also helped improve performance. By 1994, I was trading about 20 markets and I was no longer using market-specific models. These changes made a big difference.

Systems that work well across many markets are more likely to continue to work in actual trading than systems that do well in specific markets.

Edward Thorp:

Suppose you have a bankroll of $1 million and your maximum tolerable drawdown is $200,000; then from the Kelly criterion perspective, you don't have $1 million in capital, you have $200,000. So, you apply the Kelly criterion, but apply to $200,000.

If you bet half the Kelly amount, you get about three-quarters of the return with half of the volatility. So it is much more comfortable to trade. I believe that betting half Kelly is psychological much better.

There is an important distinction between trading and playing blackjack. In blackjack, you can know the precise probabilities. But, in trading, the probability of winning is always an estimate. Moreover, the amount of extra gain forgone by betting less than the Kelly criterion is much smaller than the amount that would be lost by betting more than the Kelly criterion by the same percentage. Given the uncertainty of the probability of winning in trading combined with the inherent asymmetry in returns around the Kelly fraction, it would seem that the rational choice is to always bet less than Kelly criterion, even if you can handle the volatility. In addition, there is the argument that for virtually any investor, the marginal utility of and extra gain is smaller than the marginal utility of an equal percentage loss.

Overbetting is really punishing - you get lower growth rate and much higher variability. Therefore, something like half Kelly is probably a prudent starting point. Then you might increase from there if you are more certain about the probabilities and decrease if you are less sure about the probabilities.

We tracked a correlation matrix that was used to reduce exposures in correlated markets. If two markets were highly correlated, and the technical systems went long one and short the other, that was great. But if it wanted to go long both or short both, we would take a smaller position in each.

My view on trend following was that I could never be sure that I had an edge. So, I wanted to have a safety mechanism. Whereas for a strategy like convertible arbitrage, I had a high degree of confidence as to the payoff probabilities. So reducing exposure on drawdown was unnecessary.

Michael Platt

Systematic trend following strategy is built on market trends and diversification. It doesn't have any economic information.

We want people to scale down if they are getting it wrong and scale up if they are getting it right.

I don't interfere with traders. A trader is either a stand-alone producer or gone. If I start micromanaging a trader's position, it then becomes my position. Why then am I paying him such a large percentage of the incentive fee?

Platt will express a trading theme, say an expectation that interest rate will decrease, by implementing the trade in a way that minimizes risk relative to the same return potential. Thus, Platt will rarely implement directional trade ideas as outright long or short positions. He will be much more likely to use long options or complex spread structures that will provide equivalent return potential, but with theoretically constrained risk.

Steve Clark

I was so inexperienced that  didn't have the fear - the fear that cripples people who have been in the business too long. Very few people maintain their ability to take risk throughout their career Most don't. Most can't. They have had too many bad things happen to them, too many fat tails, and it damaged people.

I decided to look at what I did as a trader. Where did I make money? That was the point at which I started to move to event-driving trading.

Price is irrelevant. It is size that kills you. If you are too big in an illiquid stock, there is no way out.

Nearly all the successful traders I have known are on trick ponies. They do one thing, and they do it very well. When they stray from that single focus, it often ends in disaster.

I think deep down inside they know they are one trick ponies, and that one thing could end. But successful traders who are on trick ponies, when that trick stops, they learn another trick. But, some traders will change while their one trick is still working and destroy it.

Martin Taylor

If someone comes to you and says they only invest in risky assets, but guarantee you limited downside volatility, they are either extraordinary geniuses - and there are probably only two of them n the planet - or they are liars.

RSI doesn't work as an overbought indicator because stocks can remain overbought for a very long time. But, a stock being extremely oversold is usually an acute phenomenon that lasts for only a few weeks.

Tom Claugus

If you have a 10 year time horizon, you can make good decisions and make a lot of money. If you have 3 year time horizon, you could probably still do well. But if you have only 3 month time, anything can happen.

Just because you make money doesn't mean you were right, and just because you lost money doesn't mean you were wrong. It is a matter of probabilities. If you take a bet that has an 80% probability of winning, and you lose, it doesn't mean it was a wrong choice.

A good trade follows a good process that will be profitable (at an acceptable risk) if repeated multiple times, although it can lose money on any individual trade. A bad trade follows a process that will lose money if repeated multiple times, but may make money on any individual trade. As an analogous example, a winning slot machine is still a bad bet because if repeated multiple times, it has a high probability of losing money.

Joe Vidich

As the head portfolio manager, I am also the risk manager and have to follow all the positions. He was hired to help me save time, but I was spending more time following his positions, which interfered with following my own positions. Training someone to think like I do about the market, which is more like a stream of consciousness, is very difficult. It is totally different from the way they learn to think in business school.

I try not to sell on the way up; I try to sell on the way down.

When you are undecided between liquidating a losing position and gritting your teeth and riding it out, remember that there is third alternative: partial liquidation.

If you are going to control your losses, there will be time when you will get out just before the market turns around. Get used to it.

Kevin Daly

For managers, the discipline to turn down additional investor assets when they believe it would impede their performance is an important element in longer term success. 

A Complete Guide to the Futures Market: Technical Analysis, Trading Systems, Fundamental Analysis, Options, Spreads, and Trading Principles

This is actually a long time book. As usual, when I got not enough stocks on books to read, I tend to reread some of the books that helped me in the past. Well, this book acts as a beginner guide when I started my career. The fact is, every trader starts somewhere somehow with books from Jack D. Schwager. We all love the series of "Market Wizards" by the said author. So, here I am with one of his "classic" book with the hope that it can helps to refresh my memory and help me further in the future.

First of all, this is a revised version. It was released last year with some changes. Overall, the book is revised and updated. However, the materials are weirdly updated too, LOL. Frankly, this is a lousy book to flip through. The paper is so thin and it sticks with pages. To make things worse, my blurry vision (well, I am getting old, no doubts) did not helps as the wording are obviously too small. As a result, I tried to read it under the light. Yet, the reflection was there all the time making my reading worse. I do not understand the intention of using such materials. This is supposed to be one of the greatest books in the past. Now, the materials are causing all sorts of problems.

Back to the book... well, unfortunately this book failed to inspire me this time around. After more than 15 years in this industry, this book sounds too simple to me. This is a beginner book for those who want to explore in the futures market. I lost the wow effect that I had when I first touched the first edition of this book. Having said that, I am going to rate this book at 4/10. Well, this is an excellent book overall. But, I think I improved over the years (which is not a bad thing, LOL) and this book no more serving its purpose on me. Last but not least, for those who are keen, please avoid the printing version. Go ahead with the digital version, so that you can enjoy this classic book. 

Market Sense and Nonsense: How the Markets Really Work (and How They Don't)

Jack D. Schwager... wow, my all-time favourite author behind Michael Covel... This book ate up a lot of my time. The moment I started it, I just cannot put down. However, the ending was actually very disappointing (LOL). To sum it up, I think I was misled by the topic of this book, haha...

The title of this book made me genuinely curious. As I flipped through the few chapters, I am attracted by the tons of investment misconceptions. Some good examples are listed below:

People are risk averse when it comes to gain, but are risk takers when it comes to avoiding a loss. It explains why traders tend to let their losses run and cut their profits short.  

Bankrupt stocks continue to trade at some level meaningfully above zero for quite some time before finally fading into oblivion. Why? Because even though the likelihood of the stock eventually going to zero is virtually 100%, people will rationalize: "I bought it at $30 and it is down to $1. I have already lost $29, and the worst case is only a $30 loss. I might as well take a chance." People are risk takers when it comes to trying to avoid a total loss, a fact that explains a lot of market behavior. 

In a chess tournament, all the players know the same rules and have access to the same chess books and records of past games by world champion, yet only a small minority excel. There is no reason to assume that all players will use the same information with equal effectiveness. Why should the market, which in sense represent an even more complex game than chess (there are more variables, and the rules are always changing) be any different?

Some market participants, however, are not seeking to maximize profits, but are operating on different agendas. We consider two such classes of market participants: hedgers and government. 

Although it is open possible to identify when the market is in a euphoric or panic state, it is the difficulty in assessing how far bubbles and panics will carry that makes it so hard to beat the market. One can be absolutely correct in assessing a fair value for market, but lose heavily by taking a position too early. 

The best prospective years for realizing above average equity returns are those that follow low-return periods. Years following high-return periods, which are the times most people are inclined to invest, tend to do slightly worse than average on balance.

The reason why risk assessments based on the past track record so often prove to be fatally flawed is that they are based only on visible risk - that is losses and volatility evident in the track record - and do not account for hidden risks - that is, sporadic event-based risks that failed to be manifested during the track record period. 

Good performance is not necessarily a positive attribute. Sometimes superior past performance may reflect the willingness to take on greater risk rather than manager skill.

It should be noted that because of their much more greater high frequency of trading, hedge funds account for a much larger portion of each market's trading activities. Big fish can do very well in a small pond, but if there are too many of them, they will starve. So, the advice that investors should include hedge fund allocations in their portfolios will remain valid, as long as this advice does not become too popular.

Investors always seem to ask hedge funds the question: How much leverage do you use? This question is flawed on two fundamental grounds. First, the question is meaningless, given that it ignores units of measurement: the underlying investment (that is, what is being leveraged). Second, it implicitly assumes that there is a direct connection between leverage and risk. Not only is this assumption false, but it is even possible - in fact, entirely common - for a higher-leveraged investment to have low risk.

A maximum leverage constraint applied uniformly to all prospective investments regardless of portfolio content is analogous to a traffic law that applies a 40 miles per hour speed limit to all roads, in all conditions. 

Increasing leverage can increase risk if leverage is used to increase net exposure to the market. If, however, leverage is used for hedging to reduce the portfolio's next exposure, then it actually reduce risk.

Although leverage can be dangerous, the knee-jerk reaction many investors have to leverage can lead to nonsensical investment biases. Investors need to focus on risk, not leverage.

There is a common belief that hedge fund managers will object to managed accounts because they will be concerned about the confidentiality of their positions. This perception is based on faulty logic. How many hedge fund managers don't have a prime broker? Presumably zero.

A portfolio with a small number of uncorrelated holdings is effectively more diversified than a portfolio with a large number of significantly correlated assets.

With such a long list of great examples, this book must be super good to me? The answer is no. As I mentioned above, I was misled by the topic of this book. I thought it is a pure rational versus irrational stuff in regards to financial markets. Ended up, I think the author mainly focus on investing in hedge funds. This is the main thing that disappointed me at the end. After finished the book, I have a weird feeling that the author is pushing hard for hedge fund in general and fund of funds in particular.

Overall, this is still a nice book to explore. At least, the 55 investments misconceptions will get readers to think (think hard) and there are definitely certain values behind it. As such, for a full rating of 10, I am going to rate it at 8. Frankly, I prefer Jack D. Schwager's other books... 

Hedge Fund Market Wizards

After so many years, Market Wizard series are still one of my favorites. The latest “Hedge Fund Market Wizards” was on my shelf since it was published and available in Malaysia market. Finally, I got time to sat down and enjoy this book. What a marvelous and excellent write up. Before I move on, allow me to rate this book at 10/10! Zero flaws and simply perfect!!!

This book reminds me on a lot of concepts and techniques that I personally experienced for the past 15 years. In fact, it is not only about good stuff. Those bad experiences and failure stories sound familiar too. End of the day, no matter which type of trader and which method you apply, the flow of the stories do not differentiate too much. It is the same old stories… stories with joy and pain along the way.

Final conclusion with 40 pieces of wisdoms is fantastic. Furthermore, it was nice to end with Zachary Schwanger (son of the author)’s thought on Market Wizard series. This is how the son rates his father: “My dad is one of the kindest, humblest, and most generous people I have ever come across. I would much rather be as great a person as he is than to be as successful as he is.” What a nice quote to end this book!  End of the day, life itself is not only about money, trading and successes. We have family, friends and lessons to support us in leading a meaningful life. I very much appreciate series of market wizard. It certainly helps in shaping what I am today. Thumbs up and well done once again to Jack D. Schwager!

Fantastic quotes from fellow traders:

Colm O’Shea:

Until I started my hedge fund, I believed in myself more than I believed in Warren Buffet.

I constantly getting in and out because I was scared of losing money. The rational trade hypothesis was beautiful. The implementation was entirely emotional and stupid. I realized that you have to embrace uncertainty and risk.

It took me a while to realize that those trading books are counterproductive because the rules are generic and not specific. Most trading books are designed for people who have the error of excess optimism and are in emotional denial of their losses. Trading books are designed to protect traders who are gamblers.

All the traders you write about have a method that is personal and fits them. You learn from everyone around you, but you have to do what make sense for you, even if it’s opposite of what makes sense for other people.

In those early days, I wasn’t setting stops at levels that made sense based on the underlying hypothesis for the trade; I was setting stops based on my pain threshold, and the market doesn’t care about your pain.

Trading skill can’t be taught, but it can be learned.

Perseverance and the emotional resilience to keep coming back are critical because as a trader you get beaten up horribly. Frankly, if you don’t love it, there are much better things to do with your life. You can’t trade if you think it is a way to make a lot of money.  

I think trading books that provide specific rules can be quite dangerous. They can lead to the illusion that you are in control and being disciplined. And it is true that you are restricting yourself from a single catastrophic loss, but it doesn’t prevent repeated losses on the same idea.

Ray Dalio:

In trading, you have to be defensive and aggressive at the same time. If you are not aggressive, you are not going to make money, and if you are not defensive, you are not going to keep money. I believe anyone who has made money in trading has had to experience horrendous pain at some point.

Diversification is the holy grail of investing.

We test our criteria to make sure that they are timeless and universal. Timeless means that we look at strategy during all different times, and universal means that we look at how a strategy worked in all different countries. There is no reason why a strategy’s effectiveness should change in different time periods or when you go from country to country.

Larry Benedict:

The growing influence of high frequency trading has changed the behavior of the market and has made it more difficult for someone like me who is a pure tape reader looking for clues in the market action.

One of the hard things about managing client money is that although I am very patient, the clients aren’t very patient.

Scott Ramsey:

The reality is that I am not being paid to be right. I am being paid to make money. Whenever I talk to my investors, I make it clear to them that whatever I say today about the markets may or may not reflect the positions I have tomorrow or the next day. I recently reviewed a presentation I gave about six months ago, and I realized that everything I had predicted didn’t happen- and yet, I made money in almost every month since then.

Jaffray Woodriff:

I started out using market-specific models. I ended up realizing that these models were far more vulnerable to breaking down in actual trading because they were more prone to being over fitted to the past data. In 1993, I started to figure out that the more data I used to train the models, the better the performance. I found that using the same models across multiple markets provided a far more robust approach. So the big chance that occurred during this period was moving from separate models for each market to common models applied across all markets.

Systems that work well across many markets are more likely to continue to work in actual trading than systems that do well in specific markets. The lesson is: Design systems that work broadly rather than market specific systems.

Edward Thorp:

If you have a really strong conviction about your edge, then the best thing to do is sit there and take your lumps. If however, you believe there is a reasonable chance that you might not have an edge, then you better have a safety mechanism that constrains your losses on drawdowns. My view on trend following was that I could never be sure that I had an edge, so I wanted a safety mechanism.

Jamie Mai:

We are comfortable losing 100 percent of our premium four times in a row, as long as we believe that a 25 times payout is likely to occur if we make the same bet 10 times consecutively.

Michael Platt:

If the market is going up today, your forecast is going to be that it will continue going up because it is how you feel at the moment that is the most important thing. Today becomes how you felt in the past because you misremember. So, everything is about today. In this sense, financial markets become self-referential.

That’s the type I want ~ someone who understands an edge. Analysts, on the other hand, don’t think about anything else other than how smart they are.

The problem always comes down to ego. You find that analysts and economists have big egos, which just gets in the way of making money because they can never admit they are wrong.

I hate losing money more than anything. It’s the fact that it messes up your psychology. You lose the bullets in your gun. You feel like an idiot, and you are not in the mood to put on anything else. Then the elephant walks past you while your gun’s not loaded. It’s amazing how annoyingly often that happens. In this game, you want to be there when the great trade comes along. It’s the 80/20 rule of life. In trading, 80 percent of your profits come from 20 percent of your ideas.

In this game, you have an option to keep 20% of your P&L this year, but you also want to own the serial option of being able to do that every year. You can’t be blowing up.

When queried about systematic trend following, Platt mentioned two key factors. First, their system will liquidate positions when trends get overextended without waiting for trend reversal signals. Second, there is continuous ongoing research and implementation of changes to improve the system. System trading is a dynamic rather than static process. In Platt’s words, system trading is a research war.

Steve Clark:

Charts are simply the record of how things have traded in the past. That’s it. I am not a big believer in chart analysis. It is extremely appealing to think that you can take a data set from the past and predict what will happen in the future…To say that you can predict the future from past data is patently untrue. You can talk about percentage probabilities of what might happen next, but you can’t go any further than that.

Let me tell you the trouble with trading. There is no career in trading. You are only as good as your last trade, and that is it. You build nothing; you just trade. The day you stop trading, it’s gone. So, what you have spent doing for X hours every working day of your life has ended, and there is nothing left to show for it, except for money.

Being a trader was fun, and you could walk away. But, when you have business, you can’t walk away. So, it becomes prison in some ways, whereas being a trader was very free.

I found it was critical to find things to involve yourself in. It is a very good thing to be busy when you are a prop trader because you don’t want to have much time to stare at the screen… Once you have positions on and are waiting for the market to do what it needs to do, what are you going to do in the interim? Staring at the price is not going to tell you very much. You will start to overprocess and overtrade.

Some traders will change while their one trick is still working and destroy it. You need to be a bit obsessive to do the same thing 10 hours a day. People who are obsessive can become very good traders.

The market is not about facts. It’s all about people’s opinion and positions. Consequently, anything can be at any price, any time. Once you understand that, you realize you need to have protective stops.

Martin Taylor:

If someone comes to you and says they only invest in risky assets, but guarantee you limited downside volatility, they are either extraordinary geniuses – and they are probably only two of them on the planet – or they are liars.

I am trying to get away from that tyranny in hedge funds: monthly performance… You end up in this situation where you are obsessed with monthly returns, which can influence poor long-term investment decisions…I am trying to stop caring about what my clients think. I want to continue to invest money the same way but have the freedom to take a longer view.

We have never had and would never use any form of quantitative risk control because all quantitative risk control models use historical volatility. It is like driving by looking in the rearview mirror. If you use volatility as a guideline, and volatility suddenly increases, you will – Doh!

RSI doesn’t work as an overbought indicator because stocks can remain overbought for a very longtime. But, a stock being extremely oversold is usually an acute phenomenon that lasts for only a few weeks.

You need to understand what you invested. If you don’t understand why you are in trade, you won’t understand when it is the right time to sell, which means you will only sell when the price action scares you. Most of the time, when the price action scares you, it is a buying opportunity, not a selling indicator.

I consider my pattern of taking quick profits in 2009 a dreadful error that I think came about because I had lost a degree of confidence due to experiencing my first down year in 2008, even though the loss was consistent with the expected loss given the magnitude of the market decline.

Tom Claugus:

The responsibility of having other people’s money really weighs on me. If you have a 10 year time horizon, you can make good decisions and make a lot of money. If you have three year time horizon, you could probably still do well. But if you have only a three month horizon, anything can happen.

Just because you made money doesn’t mean you are right, and just because you lost money doesn’t mean you are wrong. It is all a matter of probabilities.

There are many reasons why airlines are widely considered to be poor investments. They are capital intensive, they are people intensive; they are difficult to manage; they have to rely on inefficient government air traffic control system; and if, despite all of that, they ever manage to make money, the unions start asking for more wages, so they don’t make money then, either.

Trading is a matter of probabilities. Any trading strategy, no matter how effective, will be wrong a certain percentage of time… A good trade can lose money, and a bad trade can make money. A good trade follows a process that will be profitable if repeated multiple times, although it can lose money on any individual trade. A bad trade follows a process that will lose money if repeated multiple times, although it can lose money on any individual trade.

Joe Vidich:

Most people are afraid of making money than losing money.

The next time you are undecided between liquidating a losing position and gritting your teeth and riding it out, remember that there is third alternative: partial liquidation.

If you are going to control your losses, there will be times when you will get out just before the market turns around. Get used to it. This frustrating experience is an unavoidable consequence of effective risk management.

Kevin Daly:

I have seen managers who did so well while trading smaller asset levels, but then experienced significant performance deterioration when they allowed their assets to grow beyond the optimal level for their methodology. For managers, the discipline to turn down additional investor assets when they believe it would impede their performance is an important element in longer-term success.

Jimmy Balodimas:

The beliefs have always kept me making money and not playing the short term moves that I don’t really trust. The markets are such a greater fool’s game. I don’t want to be the greater fool.

All I think about is making money, not being right.

Joel Greenblatt:

If I wrote a book about a strategy that worked every month, or even every year, everyone would start using it, and it would stop working. The market doesn’t always agree with you… over the short term, which sometimes can be as long as two to three years, there are periods when it doesn’t work.

People don’t fully appreciate the importance of not losing money. Negative compounding is very difficult to overcome.