Introduction

About the book

Market Wizards: Interviews with Top Traders is a collection of interviews conducted by Jack Schwager (author). The objective of the interviews was to find a common pattern in thinking among the best traders who are hugely successful and consistent winners. 

The author wanted to find out the answer to a common question-"What separates the most successful traders from others"? Through his interviews, the greatest perceptions which he found amongst the successful traders were:

• Desire
• Discipline
• Commitment 
• Patience
• Independence 
• Risk control 
• Acceptance of losses

About the author

Jack Schwager is currently the Managing Member of Market Wizards Funds, L.L.C., in Vineyard Haven, MA. His prior experience includes 22 years as the director of futures research for some of Wall Street's leading firms. He is also a frequent seminar speaker and has lectured on a range of analytical topics with a particular focus on the characteristics of great traders, technical analysis, and trading system evaluation. 

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Future And currencies

(Part -1)

Michael Marcus-Blighting never strikes twice:

Michael Marcus was such a successful trader that his all-time profits were higher if compared to all his colleague’s earnings combined together. He had learnt from Ed Seykota, another legendary trader because Marcus wasn't such a great success initially. 

During his first few trades, which he executed with a fellow colleague John, he lost money. First he bought soybean, then corn and then wheat. The outcome of his initial trades was negative.

The author firmly believes that everyone must start somewhere and be happy that they don't have huge amounts of money to start with. He also emphasises on the importance of taking your own decisions while trading. Even if you have friends who are doing great in markets, don't take their advice regarding specific stock picks because every trader has his own strengths and weaknesses.

If you keep taking advice, then you may end up picking wrong stocks from your friends list as well as yours. You also have to realise if you opt for this strategy, then you will never be able to become a good investor yourself one day. 

Marcus also talks about the courage one must have to hold on to a position and accept the risks that are attached to it. If you are in a trade because of your friend, then you'll not be able to stick to it in adverse situations.

He believes that the best trades are the ones in which you have all 3 things working in favor of you: 

1.The Fundamentals of the company
2.The Technicals of that company
3.The general market tone

Firstly, the fundamentals should signify that there is a demand-supply imbalance which can result in a major up or downturn. 

Secondly, a chart must indicate that the market is moving in the direction that the fundamentals suggest. 

Thirdly, When a news hits the market, it should be reflected in the psychological tone of the investors. When a trade meets all the criterias, one should enter a trade with 5-6 times the position size he/she was doing on his/her previous trades.

One of the rules of Michael was to close transactions when the volatility and momentum became absolutely insane. The more volatile a stock is, the more are your chances to book profits on it but at the same time, the more will be your chances of suffering losses on that trade. His advice to beginners is to always bet less than 5% of your money on any one idea.

When a stock doesn't go up in value in spite of wonderful news then you must go short on that stock.

He suggests that a person's gut feel is very important. Being a successful trader also takes courage; the courage to try, fail, succeed and also to keep on going when the going gets tough. This all comes down to experience. 

All successful traders have a balanced life. A trader himself is willing to take in information that is difficult to accept emotionally but he knows is true. For fundamentals and market action, he confirms momentum from charts. He prefers trading in little stocks because they are not influenced by the big professional players. He also emphasizes the commitment to exit from every trade.

Bruce Kovner- The World Trader

When this book was written, Bruce Kovner had an average return of 87% on equity, per year for 10 consecutive years. For example, if you invested $2000 with him in early 1978, you would have ended up having 1 million dollars after 10 years. 

For Bruce, the road towards becoming a market wizard wasn't easily laid out. He started his adult life as a teacher and later had a run in politics. He thought that his studies and experience in economics and politics would help him become a better fundamental analyst.

And guess what? He was correct.

Bruce believes risk management is the most important thing for a novice trader. He has often advised beginners to undertrade. This means whatever you think your position ought to be, cut it into half. He himself never risks more than 1% of his equity in a single trade and recommends no more than 2% maximum. 

Bruce also watches all the positions in his portfolio to check that the bets he places aren't too correlated. For example, if you risk 2% of your capital and bet on 10 different oil stocks, you can't really say that you are risking 2% on each of the positions because these stocks will move in sync with the oil prices. So it basically means that you are risking 15-20%. 

In short, if you have 10 highly correlated positions, then you are really trading one position that is 10 times as large.

Bruce Covner also says that if he gets confused by whatever the market is doing or if his emotional equilibrium is disturbed, he closes all the positions regarding the event that is confusing him. This is his first rule of trading.

He believes that you should not get caught in a situation where you can lose a great deal of money for reasons that you don't understand. For him, such a situation was a market meltdown (Black Friday) on 19-10-1987. He temporarily closed all his positions for that day and the day after.

Another rule that he follows is staying rational and disciplined under pressure. He believes successful trainees are strong, independent and contrary in the extreme. They are able to take positions that others are unwilling to take. They are disciplined enough to take positions with the right size.

He believes that technical analysis is a great way to trade but he doesn't hold a position if he doesn't understand the market movement. Every position he takes has a fundamental reason behind it. In short, he thinks technical analysis often clarifies the fundamental picture and it is very crucial to study charts as it alerts him about the potential changes.

He thinks when price patterns are followed in a more in-depth manner, they can give false signals. He believes in taking a position with a predetermined stop. He knows where he will be getting out before he gets in. One should place the stops at a point that will indicate that the trade is wrong, not at a point that shows how much they are willing to lose.

Another thing that Bruce believes is that a trader should have control over his emotions and if he takes losses personally, he shouldn't trade.

Overall, he says that the most important thing to understand is risk management. One must always under-trade and work extremely hard to become a good trader. Lastly, one should not make the mistake of thinking of the market as a personal rival because the market doesn’t care whether you make money or not.

Richard Dennis- A Legend Retires

Richard Dennis was called the ‘Prince of the Pit’ because of his performance in the trading pit in Wall street in the 1970's. According to the estimates he started with $400 as his initial capital (which he borrowed from his parents), and eventually turned it to $200 million. 

He firmly believed that trading is a skill that can be taught. However, his friend and fellow trading partner William disagreed. To settle this, he recruited 21 men and 2 women to teach them a simple trend following system. He called them ‘the Turtles’, which is named after the turtle farms in Singapore. He believed they could grow trades just like they grow turtles. This experiment turned out to be a great success for Dennis. The most promising turtle traders were given their own accounts to trade with money ranging from $25000 to $2 million. 5 years later, these traders had earned a profit of $175 million. They proved to be extremely fast in accumulating wealth. 

The most interesting aspect from Richard’s story is that he believes in a pure technical and trend following approach. He believes that patterns tend to reappear in many different types of securities. Also, he can easily trade in a market without knowing its type.

He shares his most dramatic emotional trading experience in which he made a trade and lost about $300. He then added to his mistake by reversing his position and again losing money. To make things worse, he went back to his original position to lose a third time. By the end of the day he had lost $1000 , 1/3rd of his entire capital. This taught him to get out of trade when you experience destabilising losses. One should never try to double up to recover losses. There should be a time gap in between losses and the next trade because a certain amount of loss affects judgement for a period of time.

The key to successful trading is consistency and discipline. Anybody can make a list of rules but what’s important is to teach the confidence to stick to those rules even when things are bad.

Richard Dennis has always been analytical about trading which most of the traders don't do. They don't understand what actually worked for a particular trade.

On the extremes, there are academic types who research before trading and lack the knowledge necessary to develop a good trading system.

He says not to limit the market boundaries. Always expect the unexpected from the markets. There were traders who went short on Soybean at $4 in 1973, thinking it cannot go higher just as sugar price can't go lower than 4 cents. But soybean traded at $12.97 in just a matter of 4 to 5 months.

Dennis also explains how a trader can understand if a major position is wrong. He says, if there is a loss on a trade after a week or two, then the trade is clearly wrong. Also if it is at break even but a significant amount of time has passed, it's wrong too. 

He suggests that the best strategy is to avoid a stock in the middle of a trend.

Richard Dennis is the most successful trader of all time but he decided to quit trading once in 1988 following the year of Black Monday. He made a comeback years later only to close all his operations again after the loss following the dot-com crash in 2000.

Paul Tudor Jones- The Art Of Aggressive Trading

Paul Tudor Jones is the manager of Tudor investment Corp which is a Hedge Fund. He came to the limelight when he predicted Black Monday, the worst performing day of the stock market in American history. Not only did he survive the crash of 20%, but he also thrived from it by securing a return of 62% that month.

He always focuses on risk control. He always thinks about losing money rather than about gaining it. He uses stop-loss, both with respect to the price of the security and time. For example, if he is long on a stock which is down by 10%, he would step out and if it doesn't move the way he is expecting, then after waiting for a certain time frame, he moves out again.

Another rule he follows is putting a stop on all trading activities if it reaches negative double digits in a single month. This risk control has helped him to time many of the turning points of the market.

He recalls how he lost 60-70% of his equity in a single trade in 1979 in the Cotton market. That's when he decided to become disciplined and business-like about trading. He always thinks of being short from the previous nights’ close.

He is a firm believer that one should reduce position sizing when you're cold in the market.

He also suggests keeping a firm check on your ego and self confidence. His biggest hits were only after his biggest victories when he started to believe that he knew something.

Paul attributes his success to the Elliott Wave approach and believes that the best money can be made only when the market turns. Rest of the time (85%) it only moves sideways. 

One of his greatest strengths is he doesn’t get emotionally involved with the market. If he made a mistake even 3 minutes back, he doesn’t care. Instead he focuses on what he is going to do next.

His advice to traders is not to focus on making money but to focus on protecting your initial capital.

Gary Bielfeldt: Yes, They Do Trade T-Bonds In Peoria

Gary Bielfeldt always tries to rely on fundamental analysis. But, because it is very difficult to know all the fundamentals, he started using technical analysis as well. He prefers to use his own trend following system to ascertain the exit point in a position.

Learning how a trend system works is the best thing to start learning about trading  because it teaches a new trader the principle of letting profits run and cutting losses.

Gary says that the economy is the most important factor for fundamentally evaluating the T-bond market. The other 4 elements are:

A. Inflation Expectation,
B. The Dollar ($),
C. Trade Balance, and,
D. The Budget Deficit.

He suggests that a trader should develop a plan of strategies for various contingencies. This will help them to escape the impact caused by every news that causes price fluctuations.

He believes that the traits found in a successful trader are discipline, patience, and courage which comes with adequate capitalization, willingness to lose and a strong desire to win.

People usually judge their success by measuring their performance and thus, a trader can judge his success by the fact whether he wins or loses in the market.

He compares trading to poker and says that his father taught him the concept of playing the percentage hands. One should play good hands and drop out the poor ones. This same principle increases the odds of winning significantly in trading.

Ed Seykota: Everybody Gets What They Want

A pioneer of computerised trading systems, Ed Seykota graduated with a double degree in Electrical Engineering and Management from MIT. He was hired by a major brokerage firm where he developed the first commercially used computer trading system for managing the client’s money in the security market. 

After a while, when he became an independent trader, he believed in keeping losses to a minimum, much like Paul Tudor Jones. When asked about the key elements of good trading, he said it is cutting losses, cutting losses and only cutting losses. To be a long term survivor in the market, one must have great money management skills.

He assessed that there are old traders and bold traders, but there are very few old and bold traders.

On any particular trade he doesn't allocate more than 5% of his equity, although he has lost more than 5% occasionally on the major news that caused the market to jump through his stop losses. This is a common mistake that can arise when being too confident about the back testing of one’s trading system. Never expect that there cannot be a move sharper than what you have observed previously. The worst and the best moves are yet to come. This can make or break any trading system, so be sure to design your systems to cope with such moves.

According to Ed, the key to long-term survival in trading has a lot to do with the money management techniques incorporated into the technical system. In order of importance those are: 

• the long-term trends, 
• the current chart pattern, and 
• picking a good spot to buy or sell.

He finds fundamentals to be useless because the market has already discounted the price. However, if one catches it before others believe, it can prove to be valuable.

While buying, he tries to identify the market momentum to be strong in the direction of the trade, to reduce probable risk. He doesn't try to pick a bottom or a top.

He turns bullish instantly when his buy stop is hit and stays bullish until his sell stop is hit.

He admits that his biggest slips occur right after he got emotionally involved with positions. Pride, hope, fear and greed should not be a part of trading. He attributes his success to his passion and love for trading.

His trading rules in short are to cut losses, carry winning positions, keeping % of bets small, following rules without question and knowing when to break the rules.

His advice to an average trader is that he should let a superior trader do trading for him and then he should do what he really loves to do.

He believes psychology motivates the quality of analysis and puts it to use. The winning traders have usually been winning at their fields for years.

Another idea that he presented is being truly provocative. He suggests looking for the companies owned by institutions which are the top performers of the asset management company and where the number of institutions owning that stock has increased in the last year. A person’s trading performance reflects their priorities more than they would like to admit.

Larry Hite: Respecting Risk

Larry Hite started his career as an Actor and Screenwriter. He later switched to become a Rock Promoter to a Broker and eventually to a Trader. According to Larry, The very first rule that he follows when trading is not to lose more than 1% of total equity on any trade. Secondly, he always follows the trends and never deviates from his methods. In fact, he was into a written agreement that he can never countermand the organisation's system. 

Thirdly, he diversifies in 2 ways. He and his company used to trade in more markets worldwide than any other money manager. They also used lots of different systems ranging from short term to long term. 4th is tracking volatility. When the market volatility increases a lot, it adversely skews the expected return/risk ratio; so they stop trading in that market.

Larry believes if the market does not respond to important news in the way that it should, it is telling you something very important. Also, when a market makes a historic high, it is again telling you that something has changed.

He suggests that a trade has to work if the risk is controlled and it is going with the trend.

He lays out 2 basic rules for a beginner trader:

1) If you don't bet, you can't win
2) If you lose all your chips, you can't bet

Larry Hite’s system never trades counter to the market trend.

Mostly Stocks

(Part-2)

Michael Steinhardt: The Concept of Variant Perception

Michael Steinhardt graduated from college at the age of 19 and later found an investment firm named ‘Steinhardt Partners’. During the period of 1967 to 1988, Steinhardt Partners achieved a remarkable compounded annual growth rate of over 30%, especially considering that the S & P 500 market index only grew at about 9% per annum on the same timeline.

According to the author, the best trading advice that he gave in his interview is the concept of Variant Perception. Variant Perception is the fundamental view of what will happen in the market or to a specific security. It is a contrarian view or the opposite of the current market consensus.

Steinhardt prefers to stick with a position as long as his variant perception remains true. This sometimes helps him in long and profitable runs where fundamentals later prove to be right. But it's a double edged sword, which means he could also be too early in a position or sometimes just playing wrong and not too quick enough in cutting losses. 

For example, he thinks, because of new evidence published regarding health issues and its relatedness to smoking, the tobacco industry will take an additional hit. At the same time, the general view of the market is that tobacco consumption will go slightly up in the coming years. In this situation, he might go short on a basket of tobacco companies as his perception of reality is a variant of what the market is currently expressing. He will also stay with this position for as long as he holds this view. But at times he has changed his perception, when new data is presented and the market has gone too far against it.

His advice to traders is that they should realise that trading is a very competitive business and there are people who have devoted a good portion of their lives to this same endeavour. 

William O’Neil: The Art of Stock Selection

William O'Neil is the author of the book “How to make money in stocks”. He is also the founder of a business newspaper Investor's Business Daily. He is the inventor of the CAN SLIM trading system. The rules that he emphasizes on as the most important ones are CAN SLIM, which represents specific conditions that should be met before William can buy a stock.

The rules of his ‘CAN SLIM’ model are as follows:

• ‘C’ signifies the current earning per share of a company. The quarterly earnings per share must be up by at least 20-50% on a year to year basis.
• ‘A’ signifies annual earnings per share. He concluded that the best performing stocks have an increase of 24% on a year to year basis and ideally each consecutive year has beaten the year before..
• 'N’ means something new. New refers to either a new product or change in the industry or a new management of the company. It makes sense that for a stock to reach new highs, something new must happen or has happened recently to support that price increase.
• ‘S’ means shares outstanding. Most companies have less than 25 million shares outstanding at the time of their greatest performances.
• ‘L’ means Leader or Laggard. If a stock is a leader, it has been out performing most of the other stocks during the last 12 months. If it's a laggard, it has on the contrary, been performing worse than the rest of the pack.  He suggests picking only leaders that have been out performing at least 80% of its peers.
• ‘I’ means Institutional Sponsorship. The biggest source of demand comes from the institutional investors. He suggests looking for the companies where there are institutional owners who are among the top performers in the Asset Management Industry, and where the number of institutions owning the stock has increased when compared to the previous year. When a firm establishes a new position, chances are that it will add to that position later which will cause an increase in the price.
• ‘M’ means market direction. 3 out of 4 stocks will go in the same direction as the market averages. It is therefore very useful, according to O'Neil, to learn how to interpret price and volume in the market averages to look for times the market has topped or bottomed.

He tells us how to differentiate between a market top and a normal bull market correction.

First, the average moves up to a new high, but with a low volume. This shows that the demand for stocks is poor at that point and that the rally is vulnerable. 

Second, volume surges for several days, but there is very little increase in the closing price. In this case, there may not be an increase in volume when the market initially tops, because the distribution has taken place on the way up. Another way to understand the market direction is to focus on how the leading stocks are performing. A major sign the market has topped is if the leading stocks of the bull market start breaking down. Another important factor is the FED discount rate. Usually, after the FED raises the rate, the market runs into trouble. The daily advance/decline line is a useful indicator which gives signs of a market top.

While talking about Relative Strength, he thinks the key point is how far a stock has extended beyond its most recent price base. One must buy stocks that have a high relative strength and are just beginning to emerge from a sound base-building period. However, He doesn't generally buy a stock with a high relative strength that is already more than 10% beyond its prior price base.

He advises that a stock should never be sold short because its price looks too high. The idea is not to sell short at the top, but at the right time. Short selling should only be done after the market shows signs of a top. The best pattern to short is one in which a stock breaks out on the upside of its third or fourth base and then fails. Before selling any stock short, the price to cover the short position should be decided if a loss occurs.

William sticks to a rule of never losing more than a maximum of 7% on any stock that he buys on the basis of Price to Earnings or P/E ratio. He condemns from the belief that a stock is undervalued because it is selling at a low P/E ratio. The average P/E ratio of the best- performing stocks at their early stage was 20, compared to an average P/E ratio of 15 for Dow Jones during the period of 1953-1985. At the end of their expansion phase, the same stocks had an average P/E ratio of 45. This means that if, in the past, you overlooked stocks with above-average P/Es, you missed most of the best performing securities. A common mistake that investors make is to buy a stock only because the P/E ratio looks cheap. Similar mistake is selling stocks with high P/E ratios.

He also says that there is no correlation between dividends and a stock’s performance. According to him, if a company pays more dividends then it may have to pay high interest rates to replace the funds.

Finally, he says that successful trading requires 3 key elements. An effective trade selection process, risk control and enough discipline to stick to the first two rules.

David Ryan: Stock Investment As A Treasure Hunt

David Ryan has been the U.S. Investing Champion for 3 times and also worked for William O’Neil. He admits that whenever he buys a stock, he writes the reason for doing so because it helps him to identify the characteristics of a winning stock. It also helps him to learn from his mistakes. He believes that being disciplined will help one do better in the market.

While selecting stocks, he avoids stocks under $10. He goes through about 4000 charts every week and lists down the stocks with strong technical action.

He then evaluates the five-year earnings growth record and the last two quarters of earnings with the previous year’s levels. The quarterly comparisons show whether there is any decline in the earnings growth rate. For example, a 30% growth rate over the last 5 years may look very impressive, but if in the last two quarters earnings were up by only 10% and 15%, it warns you that the strong growth period may be over.

He suggests that the relative strength of a stock is very important and it must be at least 80, preferably above 90. He prefers not to pick stocks that are over-extended from their base because many times stocks with highest relative strength continue to outperform the market for a long time. He prefers going with relative strength of 99 rather than 95. When the relative strength starts falling, he gets out of the stock.

He looks for stocks with less than 30 million shares and preferably only 5 to 10 million shares. Stocks with more than 30 million shares have already split a few times. It is a demand supply case: because you have more supply, it takes a lot more money to move those stocks.

For cutting down from 70 stocks to 7, he picks those stocks that have all the characteristics plus a great-looking base pattern. In short, he looks for stocks that are strong both in terms of earnings and technicality.

He prefers the parameter of relative strength over EPS because many times the relative strength takes off before the earnings report comes out.

He believes in cutting losses very quickly. He usually holds the big winners for about 6 to 12 months, stocks that aren’t that strong about 3 months, and the losers less than 2 weeks.

When explaining about the volume he says, if the volume of a stock doubles one day and the stock moves to a new high, it is indicating that a lot of people are interested in the stock and buying it. If the stock moves to a new high, but the volume is only up by 10%, one must be wary. When a stock starts consolidating, you want to see volume dry up. You should see a decrease in volume. Then when volume starts increasing again, it means the stock is ready to blast off.

So, during the consolidation phase, decreasing volume is good. If you continue to see very high volume, it is a potential top because it shows that a lot of people are getting out of the stock.

David Ryan has a rule to cut the position by at least 50%, if the stock re-enters its base. He believes stocks should be at a profit the first day you buy them and it is one of the best indicators that the trade will be successful.

He advises traders to learn from their mistakes and that's the only way to become successful. If you love what you are doing then you’ll be a lot more successful.

Marty Schwartz: Champion Trader

Before being a successful trader, Marty Schwartz spent almost a decade losing money. Today he puts in about 12 hours into work everyday, calculating many mathematical ratios and oscillators and posts his own charts. He does so to be better prepared than someone he is competing against.

He shares the rigorous training at the U.S. Marine corps gave him the confidence to believe that he could perform beyond his previous expectations. The two experiences of Amherst College and Marines, convinced him that he could do almost anything if he worked hard enough.

When in spite of good news the market goes down, it means the market is very weak; when it goes up in spite of bad news, it means the market is healthy.

He turned into a winner from a loser because he was successful in separating his ego from money making. 

He believes in playing defensive and protecting what you have during rough times. If someone is adding to a losing position, then it's one of the most suicidal things one can do in trading.

He says that after making good profits, he tries to play small because he has experienced the biggest setbacks only after his biggest victories.

Marty thinks there is no better tool than Moving Average (MA) and he seldom goes against it. If a stock is trading above its recent low even when the market is penetrating to further lows, then the stock is healthy.

He believes in diversification and that is why he has several bank accounts and few safe deposit boxes with gold and cash.

He says that the most important thing is controlling losses. One should not increase position size until he has doubled or tripled his capital. As soon as people start making money, they start increasing their bets and quickly get wiped out.

A Little Bit Of Everything

(Part-3)

James B. Rogers, Jr.: Buying Value and Selling Hysteria:

James started trading with $600 in 1968 and eventually formed the Quantum Fund with George Soros in 1973 and retired in 1980.

He believes in shorting hysteria-the exaggerated price. Sometimes, the market charts show incredible spikes, up or down. It reflects hysteria. He thinks if a trader goes against panic, he will be right if he can stick to it. They scale out as the market goes up which makes the market choppy.

While talking about the financial collapse in Oct 1987, he said he was expecting it. The stock markets in the world were at an all time high and money was flooding everywhere. He says that whenever such situations arise in a market, believe that it is the top. Hence he positioned himself for the collapse.

He says he has learnt from the very few mistakes he made. He learnt not to do anything if you have no idea of what you are doing.

While talking about losses he says that the first loss is the best loss if there was going to be a major fundamental change. But if your fundamentals are correct then you just have to sit doing nothing and let the market hysteria wash out.

An adage should be that you always invest against the central banks. When the central banks try to prop up a currency, you should go the other way.

James says that he is totally flexible and open to everything without any boundaries. But, he uses charts every week to know what is going on in the world.

To sum up, Roger’s investment approach consists of the following:

• If one buys value, then he will not have much to lose even with wrong timing.
• One must wait in bottoming markets until there is a catalyst to change the market direction.
• Selling hysteria.
• One should be flexible and not be biased against certain markets or types of trades because it can limit your field of opportunity.
• Never follow conventional wisdom.
• One should know when to hold and when to liquidate a losing position.

Mark Weinstein: High-Percentage Trader

After a short duration of being a real estate broker, Mark Weinstein chose to become a full time trader. After his early failure, he decided to seriously study the market and earn by trading.

In the old days, commodities followed chart patterns much more than they do now. The markets were much orderly as very few people knew about technical analysis. He got a break by learning technical analysis at a time when it worked very well.

He employed his own custom made computer system to monitor technical indicators to measure market momentum, rather than using the standard values for those indicators. He used his own values and frequently adjusted it according to the market conditions. He combined these real time data with charts, Fibonacci retracements,  Elliott Wave analysis and an uncanny sense of market. Only when he feels that everything is lining up correctly, he puts on a trade considering it to be the perfect time.

Many times when he is sure of the market going up, he doesn't try to pick the bottom and he is out before it tops. He likes to trade the mid range because of high momentum.

He always used forms of technical analysis but interpreted them through gut feeling. He always looks for a market that is losing momentum and then goes the other way.

He shares that the stock market doesn't give a meaningful trend to enjoy as the commodity market. This is because when institutions start selling, they don't do it at one price level. They scale out as the market goes up which makes the market choppy.

His reason for winning consistently in the market is that he doesn't try to figure out where the market is going, instead he allows the market to him. With so many kinds of technical inputs, a trader will always get a signal before the market is about to do something.

Mark believes that each stock has its own personality. For example, he has never seen a good rally without the utilities leading the market. When the interest rates are expected to go up, utilities go up and when the interest rates go down, portfolio managers jump into stocks.

According to him, one of the biggest misconceptions people have is that they always expect the market to react to news. It happens that when bad news has come out, the market initially goes down but then quickly rebounce. People fail to realize that if the market is fundamentally and technically fit to move higher, it will not reverse its direction because of a news item.

He lists his rules of trading which is mentioned below:

• One should always do his homework.
• Do not be arrogant. The best traders are the most humble people one can ever meet.
• Avoid trading until an opportunity is presented.
• Keep your strategies flexible enough to change with the environment. People often make mistakes by trading with the same strategies all the time.

His advice for a trader is that he has to learn how to lose. If he is always winning, then on losing he becomes hostile and blames the market instead of learning why he lost. 

The View From The Floor

(Part-4)

Brian Gelber: Broker Turned Trader:

Brian Gelber started his career as a broker and after successfully advising institutional clients, he started trading for his own account. He was one of the most prominent brokers on the floor and also one of the largest local traders.

He shares his experience of buying just because CitiBank was buying. He did not interpret it as reallocation of assets or changing the duration of the portfolio. However, today he knows the characteristics of various institutions. He pays little attention to the view of portfolio managers because they have a longer term outlook than Brian’s.

He believes he is successful because he was attentive and had good instincts. He has been so consistent because he has been a great listener. He talks to almost 25 traders each day who don't want to listen but just want to tell their opinions.

He also believes that when one doesn't care, he does well and when he tries too hard, it doesn't work for him.

He calls himself a discretionary trader and uses technical analysis and systems as trading tools only. They developed a particular system related to volatility because he believes that volatility offers clues to trend direction.

He thinks most traders fail because of their large egos. They can't admit that they were wrong. Some traders fail because they are too worried and if you start being afraid, the game is already over.

He doesn't straight away trade big early in the year. He likes to make money at first and then gradually ply with that money.

He advises traders not to overtrade and beg for tips.

Tom Baldwin: The Fearless Pit Trader

Tom Baldwin is the largest individual trader in the T-bond pit. He worked extremely hard and stood there six hours every day. He believes patience is an impish trait that many people don't have. Average traders trade too much. For successful trading, traders have to be very selective and patient.

From being just a pure scalper, he has evolved as a combination of scalper and speculator. He averages 4 ticks profits on big positions and tries to keep the holding time short to minimize risk.

He uses bar charts of the past six months to look for key points such as high and low for the week, the halfway back point and consolidation areas. He also takes into consideration the important fundamentals numbers that come out.

Tony Saliba: “One-Lot” Triumphs

Tony Saliba worked as a clerk for 6 months in CBOE. He got $50000 from another trader for trading and after losing most of this money, he became a spread scalper trying to make a quarter or an eighth of a point on a trade. He strictly stuck to his goal of earning $300 daily and it was working. This period taught him to be regimented and disciplined. Even today he follows these rules of hard work, homework and discipline.

He considers himself a matrix trader. He trades everything on the screen as they are all inter-related to each other. His basic strategy was buying butterflies. Go long on the wings because risk is limited, and if the market does not move widely, time decay works in your favor. He uses butterflies in the front month, where time is working for him, and the explosion position in the mid or back–month. He then scalps the position to help pay for the time decay in the explosion position.

He was a millionaire before he was 25 and decided to retire when he was 30. But his retirement lasted for 4 months because he missed the markets and the excitement it brought.

He believes that there is a high correlation between the action on a Friday and the follow-through on the next Monday. At least on the opening and he is always hedged and prepared for it.

According to him, the elements of good trading are clear thinking, ability to stay focused, and extreme discipline. Discipline is the most important. He says to pick a theory and stick with it and you also have to be open-minded to change if your theory is wrong. One should always respect the marketplace. Do your homework. Recap the day. 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.

He is not afraid of hardwork and can do anything. This is what makes him different from others.

The Psychology Of Trading

(Part-5)

Dr. Van K. Tharp: The Psychology of Trading:

According to Dr Van, the 3 most important factors for investment success are psychological factor, management and discipline factor, and decision-making factor.

The psychological factor has 5 aspects: 

• A positive attitude 
• Good personal life 
• Motivation to make money 
• Lack of conflict
• Responsibility for results

Decision-making comprises having a sound knowledge of technical factors in the market, an aptitude for making sound decisions without being biased, and the ability to think independently.

Management discipline means risk control and ability to be patient.

He believes that anyone can win if he wants to. He also admits that it is difficult to make money in day trading or trading in a short time frame, so he is skeptical about helping anyone to trade successfully.

What usually happens is that people approach the markets along with their personal problems.

The first problem being  how to deal with risk? The two primary rules of successful trading are cutting losses short and letting profits run. The rules of trading should be reviewed at the beginning of the day whereas the trades should be reviewed at the end of the day.

Second problem is how to deal with stress. Stress has 2 forms, biological fight and worry. If one’s mind is preoccupied with panic, it uses up the decision space, and doesn't let one perform effectively. A common mistake that people make under stress is they don’t make their own decisions. They tend to follow the crowd and that's a sure way of losing money in the market. 

He believes that winners typically differ from losers in terms of attitude about losses. Most people become anxious about losses, yet successful speculators have learnt that to lose money is absolutely ok for winning. 

The third problem is dealing with conflict. For example, someone might have a role to earn money, a role to protect him from failure, a role to make him feel good about himself, a role which looks after the well being of the family, etc. Now, once you establish these roles, it operates subconsciously.

Another problem is that many people control their trading through emotions. An easy method one can adopt is to control posture, breathing and muscle tension.

The last major problem is making decisions. The solution to this is to adopt a trading system that gives signals to act. But most people with a trading system continue to apply their normal method of decision making.

He reveals that top traders whom he worked with began their careers with an extensive study of the markets. They developed and refined trading models. They mentally rehearsed what they wanted to do until they believed that they would win.

Final Word

The methods covered by the wizards cover the entire spectrum from technicals to fundamentals and everything else in between. The duration of their trades ranges from minutes to years. They all have different styles of trading but the common things among them are:

• They had a driving desire to become successful and hence, they could overcome all obstacles to reach their goal.
• They had different trading styles but they were confident enough to consider their own trading as the best and safest.
• Each of them found a way that worked for him and remained true to that approach. Discipline is the most frequent word they use.
• They all put in a lot of hard work by devoting substantial amounts of time in market analysis and trading strategy. They take trading very seriously.
• One of the key elements for them was rigid risk control.
• They also emphasised on the importance of being patient to wait for the right opportunity.
• They acted independently and did not follow the crowd.
• They knew that losing is a part of the game.
• They all loved doing what they did.