We discover what makes great traders tick! My ‘10 Trading Questions With…’ guest today is Jack Schwager author of ten widely acclaimed financial books including the iconic Market Wizards series and the exhaustively comprehensive Schwager on Futures series.
Schwager is also the cofounder and Chief Research Officer for FundSeeder, a technology provider that allows traders to create real-time verified track records as well as access multiple tools that help analyze and monitor performance and risk. He also recently designed a set of proprietary indicators for TradeShark.
His prior experience includes 10 years as a partner in a hedge fund advisory firm and 22 years as Director of Futures Research for some of the leading Wall Street firms, most recently Prudential Securities.
Well let me set the record straight. Although I may be a leading chronicler of great traders, I am not a trader first and foremost myself. For me, trading has always been more of a hobby and secondary endeavor; never my primary occupation. There are several reasons for this. But essentially it comes down to the fact that, in contrast to the traders I interviewed for my books, I don’t consider myself a skilled trader nor do I love trading. In fact, the only reason I am even net profitable as a trader is that I have picked up so much experience and knowledge (much of it through doing the Market Wizards books) that it compensates for my lack of any innate trading talent.
How did you first get involved with the financial markets?
I was just out of graduate school with an economics degree looking for my first job. All I knew was that I wanted a job that was both analytical and nonrepetitive. I got an interview for a futures research analyst position. Although I knew absolutely nothing about futures and very little about financial markets, the job description sounded like a good fit. I liked that the job required a combination of analysis and writing and that the focus of that that research—the markets—were always changing.
What was the turning point that really propelled you towards trading success?
Learning to use stops to limit the possible loss on a single trade. Prior to that point, although playing with small sums, I would invariable let one bad trading idea lead to a wipe-out.
My best trade ever was a losing trade. I had just started using protective stops as an integral part of my trading methodology. At the time, after a long slide, the Deutsche mark (this is a while ago) had settled into an extended sideways range, which I interpreted as an evolving bottom. I went long in this range, anticipating an eventual upside breakout and up move. I placed a sell stop moderately below the range to limit my loss in case I was wrong.
A week or two after I got into the trade, the market broke below the trading range, and I was stopped out for a moderate loss. The great thing was that after I was stopped out, the market just kept going down. If I had not had a stop, instead off a small loss, I could have experienced an account-killing loss. That trade made a great impression on me, which is why I say that it was my best trade ever.
What are your personal trading goals?
My foremost trading goal is never to lose much from my starting stake. That was one of the few things I did correctly right from the onset.
Whenever I start trading (I go through periods when I trade and don’t trade—for example, I don’t trade if I am very busy with other tasks), I either start with a small account or decide that I will risk only some moderate amount before I stop trading. Once I get ahead a bit, I raise my account liquidation to breakeven, and if I win more, my account liquidation point rises into net profitable territory.
I don’t have an objective of making some amount of money. And, in the past, whenever I have started to think about reaching certain net profit goals (a mindset that has only occurred after large gains), it has led to a large surrender of profits. So I only focus on keeping account losses small from starting level or limited if I am well ahead of the game.
What trading mistake have you learned the most from?
I would mention two:
- Not having a stop-loss on any individual position.
- Becoming too lax with risk control after large gains.
What are the main trading strategies and markets that you trade?
I primarily trade futures either based on chart analysis or using a systematic approach. I have done both. Occasionally I trade stocks or ETFs, either directly or via options.
What 1-3 trading books should every trader read?
I will interpret this question as excluding my own books. I think two books every trader should read are Reminiscences of a Stock Operator by Edwin Lefevre, which was an inspiration for my Market Wizards books, and Fooled by Randomness by Nassim Taleb, which contains some very important insights about markets and trading, particularly in regards to erroneous inferences related to trading results. Chart oriented traders should read Diary of a Professional Trader by Peter Brandt. Anyone who wants to understand options should read Option Volatility and Pricing by Sheldon Natenberg.
[Editor’s Note: All of the books Jack has written are extremely valuable resources. While he is obviously too modest to include them in his recommended list of Trading Books, you will see here that I have included some of them in my top 3 list. Check out all of Jack’s books here – A.R.]
If you had 1 minute with someone who wants to learn how to trade in stocks, what would you say?
These are some of the absolute essentials:
- There is no single right methodology, but there is a right methodology for each trader, and it will be different for every trader. The first job of a trader is to find his or her methodology.
- Risk management is more important than the trading methodology.
- Know your maximum portfolio risk before you start trading.
- In regards to individual trades, in the words of Bruce Kovner, “Know where you will get out before you get in.”
What separates the average from the very best traders?
What separates a virtuoso musician from a marginally competent one? Answer: Some combination of innate talent and tremendous hard work. It’s the same for traders. Great traders also have traits that average traders don’t, such as an ability to change their opinion in a flash if the facts dictate they are wrong.
How do you ensure your trading will continue to be successful in the future?
You can’t ensure future success but you can greatly improve your chances for success by making risk management an integral element of your trading methodology and by having the discipline to follow your trading rules and methodology, even when it may be painful to do so.
Bonus Question: If you were not a trader, what would you do?
Well I can answer that as a non-hypothetical question since I don’t define myself as a trader. My alternatives to trading have been pursuits that I am both more skilled at and enjoy more—those two attributes are probably related. Those endeavors have essentially fallen into two categories: writing and analysis. The latter item is broad and includes such tasks as market analysis, trading system design, portfolio construction, and performance measurement.
Jack Schwager’s Bio:
Mr. Schwager is a recognized industry expert in futures and hedge funds and the author of a number of widely acclaimed financial books. Mr. Schwager is one of the founders of Fund Seeder (FundSeeder.com), a platform designed to find undiscovered trading talent worldwide and connect unknown successful traders with sources of investment capital. Previously, Mr. Schwager was a partner in the Fortune Group (2001-2010), a London-based hedge fund advisory firm. His prior experience also includes 22 years as Director of Futures research for some of Wall Street’s leading firms, most recently Prudential Securities.
Mr. Schwager has written extensively on the futures industry and great traders in all financial markets. He is perhaps best known for his best-selling series of interviews with the greatest hedge fund managers of the last three decades: Market Wizards (1989), The New Market Wizards (1992), Stock Market Wizards (2001), Hedge Fund Market Wizards (2012), and The Little Book of Market Wizards (2014). His other books include Market Sense and Nonsense (2012), a compendium of investment misconceptions, and the three-volume series, Schwager on Futures, consisting of Fundamental Analysis (1995), Technical Analysis (1996), and Managed Trading (1996). He is also the author of Getting Started in Technical Analysis (1999), part of John Wiley’s popular Getting Started series.
Mr. Schwager is a frequent seminar speaker and has lectured on a range of analytical topics including the characteristics of great traders, investment fallacies, hedge fund portfolios, managed accounts, technical analysis, and trading system evaluation. He holds a BA in Economics from Brooklyn College (1970) and an MA in Economics from Brown University (1971).
For further information on Jack please refer to http://jackschwager.com
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