Lessons You Can Learn From The Greatest Traders And Market Wizards

This post contains my personal notes from the book ” The Little Book Of Market Wizards by Jack Schwager”.

Although ostensibly, this book is about success in trading, in a broader sense, it is about success in general…most of the traits highlighted are equally applicable to success in any endeavour….there are some common principles of success, and I have simply discovered them through the perspective of great traders. – Jack Schwager

So here we go. Here all the lessons for trading success and probably success in anything – 

1. Failure is not predictive. Even great traders encounter repeated failures early in their career. Failure at the start is often the norm. So all novice traders should start with small amounts of cash because they can then pay less for their market education.

2. Persistence is instrumental to success. It is easy to encounter failure, give up and do something else. But only those who relentlessly persist finally discover their ultimate potential.

3. Trading success is not about finding some secret formula or system that uncovers winners based on price analysis or fundamental analysis. There is no single correct methodology. There is no single true path, single market secret, single correct way to trade the markets. Those seeking this one true answer are not asking the right question and therefore will never get the right answer. There are million ways to make money in the market and you can use all kinds of methods and time frames. Market success is a matter of finding the methodology that is right for you – and it will be different for everyone – not a matter of finding the one true methodology.

4. Successful traders find a methodology that suits their personality and beliefs. As Colm O’Shea puts it: ” If I try to teach you what I do, you will fail because you are not me. If you hang around me, you will observe what I do, and you may pick up some good habits. But there are a lot of things you will want to do differently.” Every trading system is going to have periods where it does poorly. Unless you find something that fits in with your methodology and stick with it for the long run, you will stop using the system when it goes through a bad period and you won’t be there when the system recovers.

5. Money management is not enough. You also need to have an edge. Having an edge means that you have a method. You need to have a specific methodology that you are able to describe in very specific, almost step-by-step terms or in more general terms. But the edge alone is also not enough. Once you have the edge, money management can mean the difference between success and failure.

6. The people who are really successful in trading are tremendously hard workers. We think trading is easy and brain surgery is difficult. It only seems so. For success in either, there needs to be a lot of preparation and hard work. But we think it is easy because the entry criteria are so lax and for a short while you can just succeed because of luck. This is not true of brain surgery. Because of this possibility we think trading is easy, while in reality it is at least as difficult as brain surgery.

7. The hard work in trading comes in the preparation. The actual process of trading should be effortless. There is a lot of preparation that goes on behind the scenes for a marathon winner. It is the same with trading. But the marathon winner makes running look so easy and spontaneous. A winning trader will do the same but he has done a lot of hard work behind the scenes. The perfect trade is one that requires no effort, but paradoxically there has been a lot of effort going on in the preparation.

8. When you encounter a lot of losses, the advice is to do two things. One, reduce your trading size, the amount you risk on each trade drastically. Two, stop trading. If you are in a losing streak, the solution is not trying harder, but rather the exact opposite: stop trading. When everything is going very well and you have a period of abnormally high profits, be extra cautious and cut your sizes if you start to lose.

9. Don’t focus on making money; focus on protecting what you have. Money management or risk control is very important to trading success than trading selection methodology.

  • You need to determine where you will get out before you get in. You need to specify your exit point when you get in. When you set an exit point, you need to know how much money you are willing to lose on this idea and also at what exit point you think you are wrong in your assessment. You should not place a stop too close, because that is likely to lead to multiple losses.
  • Some times, options can provide the same protection as stops.
  • At the portfolio level, it may also be prudent to specify a maximum loss from the starting stake for each year.
  • Be willing to get out quickly when you are wrong.
  • If you are not sure whether you are wrong or right and you have made a loss, partially liquidate 50%. If you continue to be wrong, liquidate 50% more. Then what is left is not a big deal.
  • When your losses are small, you will bet again. When your losses are big, you are afraid to bet and you lose great opportunities.
  • Never risk more than 1% of total equity on any trade is probably a effective money management tool for many.

10. You need to be disciplined and follow your own trading and risk control rules. Otherwise the market will punish you when you least expect it.

11. You have to be independent and follow your own style rather than copying others. If you listen to anyone else’s opinion, no matter how skillful or smart the trader may be, it will end badly. You cannot get ahead by listening to other people’s opinions. You have to follow your own light.

12. You have to have confidence in your own approach and ability to manage money. It is an internal thing and you will know it. If you are unsure, you are not there yet and you have move cautiously in committing risk capital. One sure sign you lack confidence is seeking the advice of others.

13. Losing is part of the process and understanding that is important. You need to have a methodology that you know will win in the long run. Yes, you may have losses along the way, but if you stick to your methodology, you are going to come out ahead. Then you have won the game of trading before you start, because you understand that taking a loss is part of the way of getting to the ultimate gain.

14. The process is important. Trades can be winning or losing. As long as the process of these trades was good, you will win in the long run. If the process is bad and you win a lot initially, then it is likely you will lose in the long run.

15. Patience is very important. You have to be patient and choose your spots to trade. You need to have the patience to wait for real opportunities and resist the temptation to trade all the time. End of day data is sufficient for most traders unless you are doing day trading. Do nothing, absolutely nothing, unless there is something to do. There are no called strikes on Wall Street. Skip companies you cannot analyze. The trades that are not taken are important to trading success. If the conditions are not right, or the return/risk trade-off is not sufficiently favourable, don’t do anything. Beware of taking dubious trades born out of impatience. You also have to patient with your winners. If you don’t stay with your winners, your are not going to be able to pay for your losers. Patience is a critical quality for a trader – both in getting into and in getting out of trades.

16. Do not be loyal to a position or opinion. Be flexible – change your opinion when it is warranted. When you are wrong, you get out. Good traders liquidate their positions when they believe they are wrong. Great traders reverse their positions when they believe they are wrong. Do not publicize your market calls because then your ego will become invested in that position and you will stay longer than needed and you will lose.

17. Bet size matters. Trade larger for higher-probability trades and smaller, or not at all for lower-probability trades. For example, higher probability trades may be those when the fundamentals, the chart pattern and the market tone( how the market responded to news) all were supportive to the trade. You have to be disciplined in sizing your positions correctly. The larger the position, the greater the danger that trading decisions will be driven by fear than by judgment and experience. One sure way of knowing you position is too large is if you wake up worrying about it. You can’t win if you are trading at a leverage size that makes you fearful of the market. Wait until you have doubled your capital before beginning to trade larger. But if you have really high conviction, you can trade larger( this requires experience). If volatility increases, then reduce your bet size. If your different positions are all correlated, then reduce your bet size.

18. What feels good is often the wrong thing to do. You have to do the uncomfortable thing. Getting a bargain, locking in a profit, holding out hope for avoiding a loss – is usually the wrong thing to do..if it is the comfortable thing to do. You must be ready to hold stocks that are painful to own, if you want to have the biggest winners. People are risk averse when it comes to gains but are risk takers when it comes to avoiding a loss. Even computerised trading that is optimised can lead to comfort and therefore poorer results. Avoid making trading decisions that feel good but are wrong on balance.

19. You need to emotionally detach yourself from the markets if you have to win. You should not feel bored or excited or desperate or impulsive to make trades and win. Intuition is different- it is often a subconscious recognition of similar past situations. The trick is to differentiate between what you want to happen and what you know will happen. This is difficult and that is why good intuition is so rare.

20. Adaptability is key. When the world of trading changes, you must be ready to change. You must also be adaptable in scaling in and out of positions, rather than buying or selling everything at once. Some expert traders also trade around positions: selling a bit when the market goes up a lot and buying a bit more when the market goes down in some form of a personalised strategy.

21. 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. This is because markets often anticipate the news and discount the impending event. You have to consider whether the market has already discounted your idea. The markets that have the highest relative strength are the winners.

22. Understand the value of mistakes. Mistakes provide the learning experience that lead to improvement. Learn from your mistakes- do more of what works and less of what doesn’t.

23. Sometimes the way you implement the idea matters more than the idea itself. Options and LEAPs may be useful to experienced people in this respect.

24. If you are very nervous about a position overnight, and especially over a weekend, and you are able to get out at a much better price than you thought possible when the market trades, you’re usually better off staying with the position. So if the market lets you off the hook easily, don’t get out.

25. For successful traders, it is not a matter of work. It is not a matter of getting rich. Rather, trading is something they love to do – an endeavour pursued for the fun of the challenge. So trade if you love to do it. If you do not love it, do something you love to do.


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