What lessons can we learn from the ‘market wizards’? – Guest Editorial

Patrick Foot is a freelance financial writer contributing on behalf of IG Group, a world-leading trading and investments provider. His work covers a broad range of topics, including investment outlooks, technical analysis and options trading.

Today, Patrick speaks about Jack Schwager, author of ‘Market Wizards’, who discussed why learning from losses is important, whether to use trading systems and what surprised him most from talking to top traders in his interview with IG’s Sara Walker.

Over 30 years ago, Jack Schwager interviewed 13 top traders to gain a better understanding of what it took to be a ‘market wizard’. His write up of those interviews is still influencing traders – and was recently chosen as one of the top trading books by IG, a leading CFD trading provider.

You wrote the book to get an understanding of what it takes to be a top trader. But was it actually more about understanding barriers to success?

Well, it turned out to be that way. I thought I was going to interview people about how they trade, and to some extent, it is about that. But the main message is really that the elements of success are more to do psychology than methodology.

How has a book written so long ago remained so relevant?

To be honest, that was actually my objective. A book that I had read recently at the time – which many of the traders I interviewed mentioned — is ‘Reminiscence of a Stock Operator’, written in the early 20th century. It would have been about 65 years old when I read it.

Even though it was archaic in terms of references to pocket shops and things of that sort, the actual trading concepts were still totally relevant. And so my goal was to do a modern version. I used a different format, but I did have the objective to write, to capture truths about trading that would still be true a century from when I was doing it, as well as at the present moment.

In his interview, Paul Jones says ‘don’t ever feel that you’re good. The second you do, you’re dead’. That just resonates throughout the whole book, doesn’t it?

It does. I’m doing interviews for a new book now, and it’s ironic that you mention that particular quote because just yesterday I interviewed a trader in London who had done very, very well. Things were going so well that he did a trade that was completely outside the scope of what he normally does and in some larger size, and it ended up being one of his worst losses. And it was exactly that.

The most dangerous times are when you’ve done really well. You’re most likely to do something different and stupid. And from my own experience, some of my own worst mistakes have come when I’ve done well. You end up getting complacent, then you end up giving back a lot more because of that mindset. Well, it’s the market’s money, but it’s a bad mindset to have. So you need to be extra cautious when you’ve done very well.

You do say in the book that the biggest turning point for you was actually a big loss.

Right. And that ability, that willingness to lose is actually essential. And the trade you mentioned, it wasn’t so much a big loss, but it was a loss. But if I ever get asked what my best trade is, that’s the trade I think of. And it may sound ironic that it’s a losing trade, but the reason why it’s one of the best trades is because I was wrong on the market.

I had learned to use money management, at least to some extent. I entered the order, it was one of those situations where the market was forming a base, I thought it was the bottom.

I put a stop in a bit below the low just to make sure that it doesn’t get touched slightly when the market reverses and then about a week later I got stopped out. I’d lost money, but the great thing was as soon as I got stopped out the market just went down a ton. And so the idea that I took a small loss being dead wrong on a trade was actually a good lesson, a good feeling.

You’ve been interviewing ‘new wizards’ recently. What are the differences between the two generations?

There’s a lot of similarity. I found that they put a lot of emphasis on being self aware in the newer interviews. Some traders actually use their own emotional responses, tracking that day by day and relating it to their trading.

Almost every trader mentioned that. It came up in the earlier wizard books, but probably even more so now.

Do trading systems come up more now? They were mentioned a lot in the original market wizards and a lot of people disagreed with them.

They actually came up less. I’m finding it very, very difficult to find systematic traders who have exceptional return to risk today. They’re almost invariably discretionary traders.

In fact, I have a whole list of people I have to interview or have interviewed. Only one is a systematic trader. And his performance is not quite on the same par as the others – although he’s been successful for a period of 23 years, which makes a difference too. If you do it for that long, that itself is an achievement, and his numbers are still quite good. But that was the only trader that I found that was purely systematic.

I think it’s gotten very difficult to trade systematically because so many people are trying to do the same thing that worked at one time, but too many people do the same thing and it no longer works.

So it’s more important to make sure you’re doing your own research so you understand what it is you’re trading?

Yeah, basically. The system trader who I did get, the reason he succeeded is because he changed his system every five, six years when it stopped working.

In fact, he showed me this first system that he did for the first eight, nine years. It was phenomenal, and then it just stopped working. Then he showed me what happened in the years after and he’s lucky he’s changed because it just kept on degrading.

What surprised you when you were doing all these new interviews?

I interviewed these traders like Marcus and Kovner and Paul Tudor Jones and these guys were doing almost triple-digit returns year after year. Those are just incredible records. And I thought it would be impossible now to find people with those track records today. And the most surprising thing is I have. So they’re still out there, and it’s still possible to have those incredible types of results.

Head over to IG.com to listen to the full interview, which includes when to cut losses and how to remove emotion from trading.

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