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Market Wizards

This fourth book in the Market Wizards series includes 15 interviews with hedge fund traders. It details many variations regarding which markets to trade in, what time frame to incorporate, and how to use information. The wizards trade in all markets, including futures, options, equities, and bonds.

market wizards

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Material that does successfully capture the essence of how speculators think is the Market Wizards series by Jack D. Schwager. These books are neither cookbooks nor testimonials but question-and-answer conversations with traders who talk about their thought processes, how they entered the business, their trading styles, and market battles they have undertaken. These interviews provide a sense of realism about how traders think. The interviewees are not always extraordinary individuals; often, they are simply hard-working professionals who manage the anxieties and uncertainties of trading by developing styles that work within the comfort of their skills and personalities.

The information the traders use in generating forecasts depends on the trading style. Quantitative traders estimate expected returns and well-defined odds of success on the basis of historical relationships. Short-term traders measure flow and sentiment to determine price behavior. Longer-term traders, who are often theme based, try to set bounds on risk in an uncertain world through economic logic and scenario analysis. Schwager manages to tease out how each trader goes about these complex tasks in many different markets.

Controlled behavior is critical for success. All the wizards present an image of unflappability. The interviews convey an atmosphere of no drama, no broken phones, and no excessive jubilation. The air of professionalism is such that accepting failure is second nature and part of the game. Mistakes are recognized, and the unexpected is dealt with unemotionally and without remorse. The level of detachment among the wizards suggests that traders have a distinctive psychological makeup, a subject that would be interesting to explore further.4

Like the fourth installment of any good thing, this newest Market Wizards book suffers from diminishing marginal utility, and at more than 500 pages, it contains some repetition. The hedge fund wizards do not sound much different from the traders of one or two decades ago.

Bruce is discussing the importance of having a predetermined stop loss in place whenever entering a trade. We talked about how to place stop losses according to the market structure in a recent article, and it agrees with what Bruce is saying that you should place your stop according to the technical picture of the market.

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

When I read the above quote, the first thing I thought of was demo trading and learning to master your trading strategy before you try to trade it live. People who can apply more patience and discipline in learning and mastering their trading method before they go live will naturally have a far easier time making money in the markets than those who just jump in head-first with no plan of action.

First, many people get involved in the markets without any edge. They get in the market because their broker told them that the market is bullish. That is not an edge. However, to tell the truth, most small speculators will never be around long enough to find out whether their system could have worked, because they bet too much on their trades, or their account is too small to start.

It never bothered me to lose, because I always knew that I would make it right back. I always knew that no matter what happened, I could go into any marketplace, with any amount of money, and make a living.

The above quote by Linda Bradford Raschke was the main one that I remembered from her interview when I first read The New Market Wizards about five or six years ago. It is really a very motivating quote, because it basically says that once you have mastered your trading strategy, you should have the ability to go into any market and make money. This is especially true for a price action trader, since price action strategies can be applied to any market; once you master them you really can trade any market you want.

Nial, I read those books about 10 years ago and then moved onto daytrading ignoring many of those principles. My thinking was it was all stuff that worked decades ago and that the markets had changed. After reading your article it makes me laugh at how everything I am doing now, which is working, is all the advice those Market Wizards had given. Thanks for this reminder, such a terrific article. I always read your articles and move on never to revisit them, but I will re-read this one every 6 months because it contains everything that works in Trading. Thank you.

Nial you are truly the best. Honestly believe that your course is the best on the market and I look so forward to receiving your weekly email lessons. I purchased The Market Wizards ebook and I am going to read it over and over until it sinks in. Thanks and God bless.

Great staffMarket wizards inspire me and its a good idea that beginner traders read one or so of market wizard books before putting any dime in the markets .Its how these pros approach the markets ,control risk/manage their money and how they think as they trade which inspire me .

I bought around handred books about trading the stock market and traded for about 10 years.I did not improved my trading method or my trading way. but after I started reading your article, I am marching toword my goal. May God bless you and your family.

High Risk Disclaimer and Warning: Forex, Futures, and Options trading has large potential rewards, but also large potential risks. The high degree of leverage can work against you as well as for you. You must be aware of the risks of investing in forex, futures, and options and be willing to accept them in order to trade in these markets. Please do not trade with borrowed money or money you cannot afford to lose.

there are also far fewer opportunities now than back in 2013 and 2014. Back then, many things were still relatively new, like quantitative easing and forward guidance. There was more uncertainty about what the central banks were going to do and how they were going to do it. Whereas now, the markets have central banks so nailed down that there is not as much opportunity to make money on central banks as there once was. The markets now are good at pricing in events before they happen. I make money by pricing in a surprise, and with fewer surprises, there are fewer opportunities. (p. 100)

There will be periods in the markets where opportunities dry up, and there will be nothing to do. In those nothing periods, if you are looking for something to do, that is when you can create real damage to your account. (p. 129)

For instance, a mean-reverting pattern may give way to a momentum pattern. As this transition takes place, most market participants are caught off guard, and they will make costly mistakes. This sort of errors is the basis for many profitable strategies, because the actors on the losing side will typically become aware of their mistake once it is too late. Before they accept their losses, they will act irrationally, try to hold the position, and hope for a comeback. Sometimes they will even increase a losing position, in desperation. Eventually they will be forced to stop loss or stop out. Structural breaks offer some of the best risk/rewards. (p. 249)

Quick, what is the world's largest financial market? Stocks? No, not evenif you aggregate all the world's equity markets. Of course, it must be bonds.Just think of the huge government debt that has been generated worldwide.Good guess, but wrong again, even if you combine all the world's fixed-incomemarkets. The correct answer is currencies. In the scope of all financialtrading, stocks and bonds are peanuts compared with currencies.

It is estimated that, on average, $1 trillion is traded each day in theworld currency markets. The vast majority of this currency trading doesnot take place on any organized exchange but rather is transacted in theinterbank currency market. The interbank currency market is a twenty-four-hourmarket, which literally follows the sun around the world, moving from bankingcenters of the United States, to Australia, to the Far East, to Europe,and finally back to the United States. The market exists to fill the needsof companies seeking to hedge exchange risk in a world of rapidly fluctuatingcurrency values, but speculators also participate in the interbank currencymarket in an effort to profit from their expectations regarding shiftsin exchange rates.

In this huge market, there has been only a handful of high-stakes players. Ironically, although these traders sometimes take positions measured in billions of dollars-yes, billions-they are virtually unknown to most of the financial community, let alone the public. Bill Lipschutz is one of these traders.

The interviews I held with Lipschutz were conducted in two marathon sessions at his apartment. Lipschutz has market monitor screens everywhere. Of course, there is the large TV monitor in the living room, receiving a feed of currency quotes. There are also quote screens in his office, the kitchen, and near the side of his bed, so that he can roll over in his sleep and check the quotes-as indeed he does regularly (since some of the most active periods in the market occur during the U.S. nighttime hours). In fact, you can't even take a leak without literally running into a quote screen (there is one conveniently located, somewhat tongue in cheek, at standing height in the bathroom). This fellow obviously takes his trading very seriously.

We met at a Soho bar, and after downing several French beers (no joke, the French actually produce some excellent beers) Lipschutz said, "I think you'll find the story of how, in less than a decade, Salomon Brothers grew from a zero presence in currencies to becoming perhaps the world's largest player in the currency market an interesting tale." Besides feeling a sense of relief, since that comment obviously reflected a consent to the interview, his statement certainly whetted my appetite. 041b061a72


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