notes on market wizards i

7/29/2019 Notes on Market Wizards I

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Tom Baldwin....................................................................................................................................2

Dr. Van K. Tharp..............................................................................................................................3

William O'Neil.................................................................................................................................4

Michael Marcus............................................................................................................................... 5

Bruce Kovner...................................................................................................................................7

Larry Hite.........................................................................................................................................9Brian Gelber...................................................................................................................................10

Richard Dennis.............................................................................................................................. 11

Gary Bielfeld................................................................................................................................. 13

Mark Weinstein..............................................................................................................................13

Paul Tudor Jones............................................................................................................................14

Michael Steinhardt.........................................................................................................................16

Ed Seykota.....................................................................................................................................17

Marty Schwartz..............................................................................................................................19Tony Saliba....................................................................................................................................20

James B. Rogers.............................................................................................................................22


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Tom Baldwin

T-Bond trader - one of the biggest - trades up to 2000 lots at a time, sometimes 20 thousand aday. Was a manager in a meat packing firm, quit his job with $25000 and leased a seat on theCBOT, and his wife was pregnant at the time. Hardarse ! He made a million within his first year.

Learning

Learnt to trade by standing in the ring and watching, six hours a day, waiting until hecould develop an opinion, then he would trade, just one lot. He would see the samescenarios developing over and over again. Became a pure scalper.

Masterplan

Seems to have an incredible knowledge of the market, experience of all the differentscenarios, dare it be said, a gut feel. The advice he gives is crap, as if he was assumingthat you had a gut feel too.

Psychology

This guy is a total hardarse. He is probably a robot.

As soon as you start to think you're infallible, you get slammed.

Never think of the money - when you're losing, but equally when you're winning. If youhave made a load of money, don't think about it, just concentrate on staying with the tradeuntil you get a signal to get out, don't think, "oh, I have made so much, I am going to cashit in and take my profit."

System

Scalper

Trades the fundamental economic figures when they come out - knows what he is goingto do if the number comes out one way, unchanged or the other way.

Excellence and Inspiration

The smarter you are, the dumber you are.


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He worked hard. He stood in the pit six hours a day, all day, every day.

Live by the sword, die by the sword.

Make your own luck. You work hard, put in the time and effort, and you get lucky.

General Knowledge

Dr. Van K. Tharp

PhD in psychology. Set up an Investment Psychology Inventory.

Psychology

The IPI has eleven measures:

Psychological factors -

i. well-rounded personal life

ii. positive attitude

iii. motivation to make money

iv. lack of conflict

v. responsibility for results

Decision-making -

i. solid knowledge of the technical factors in the market

ii. aptitude for making sound decisions without common biases

iii. ability to think independently

Management-discipline -

i. risk control

ii. ability to be patient

iii. intuition

Most losing traders need only have failings in part of the profile.

Anyone can win if they are committed to doing so.

The inability to admit that their beliefs may be wrong is the biggest obstacle.

People are risk-averse in profit-making situations and risk-seeking in loss-making situations.Thus they cut short their profits and let their losses run.


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When under stress, people tend to fall back on familiar tactics. The commonest is not actuallyto make any decisions.

You must reduce the stress. Develop stress protectors. Stress mostly comes from the perceptionof the situation. If you can change the way you think about the situation, you can avoidstress.

Make it OK to lose. You have to lose, and you have to accept that, to eliminate the stress in-volved.

You have to reconcile the parts of your mind, each of which has different intentions. There isno room for conflict. For instance, one trader could only make $75000 a year, and thisboiled down to the fact that his father was very successful but had become an alcoholic.To avoid this, this part of his brain would not let him become any more successful. Twomonths after the analysis, he had made $650,000.

Control your emotions, do not let them control your trading - you can do this by controllingyour posture, your breathing and muscle tension. Emotions are though only symptoms ofstruggles in your mind between conflicting intentions.

If you want to change your mental state, notice your posture, your breathing, your facial ex-pressions, and then imagine how you would look in the desired mental state and thencopy it.

If you want to nudge that thought out from behind a mental block, shift the direction of yourgaze. This opens other parts of your mind.

Top traders believe:

i. money is not important

ii. it is OK to lose in the markets

iii. trading is a game to be played by certain rules

iv. mental rehearsal is important for success

v. because they have rehearsed, they know all the possibilities and that in the longrun, they cannot lose. They have won the game before they start

If you are committed to becoming a great trader, then providence will help you. Events will justseem to occur to help you - they might be disasters, but they will help.

Own your problems. If you do not own your problems, embrace them, you cannot do anythingto solve them next time they happen. Problem solving is a process - you made a decisionat some point that made those results. Determine what that choice point was, which de-cision it was that lead to the problem, and then when you encounter a similar choice pointin the future, you will change the results you get.

All problems are mental state control problems - too much impatience, anger, fear, optimismetc.


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William O'Neil

Began as stockbroker in 1958. With 3 positions, short Korvette and long Chrysler and Syntex,and by pyramiding his profits, he turned $5000 into $200 K. Then he bought a seat on NYSE andformed his own firm. In 1983 founded 'Investor's Daily' in competition to WSJ. Makes 40%annually on his stock picks. Bullish on America.

Learning

Masterplan

(1) an effective trade selection strategy

(2) a rigorous risk control rule

(3) discipline to stick to the two rules above.

Psychology

Don't take unlimited risk - have a stop out point. Would you drive a car without brakes?

System

Buy stocks - CANSLIM:

C = current earnings per share must have risen 50% for the quarter compared to ayear before.

A = five year moving average of annual earnings must rise at over 24%

N = something new - a service, an change in the industry, new management

S = shares outstanding must be less than 25 million (average of the best per-formers is 11 mill)

L = leading stock - relative strength over 80 (relative strength is stock perform-ance better than 80 percent of other stocks)

I = institutional sponsorship - by the time all institutions own the stock, it is toolate to buy.

M = market-timing.

Only 2% of stocks at any point in time fit this formula. Only two out of ten turn out to be trulyoutstanding, although two thirds make a profit.

7% stop loss.


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Market tops: the average moves up to a new high, but on low volume. Demand for stocks ispoor. Or: volume surges for a few days, but there is little upside movement on mktcloses.

Market tops: the stocks leading the rally start breaking.

Tops: the Fed discount rate - the market runs into trouble after 2 or 3 hikes.

Tops: the daily advance/decline line will lag behind the market averages and fail to penetrateprior peaks, as less stocks are participating in the market advance.


Every thing is possible with persistence and hard work. It can be done and your own determina-tion is the most important element.

General Knowledge

Michael Marcus

He began his career as a commodities research analyst, was a compulsive trader, became a floor trader but wastoo shy to trade for himself. Gave that up to trade for Commodities Corporation. Lives in a bighouse by the beach in Southern California.

Learning

had $50,000, bought max. no. of contracts in corn and the market went limit down. He lost 80%of his equity. Second time, went long with major position in lumber and was almostwiped out. Was burnt twice before he learnt not to bet 100% on one position. DON'TOVERTRADE ! Bet less than 5% of your money on any one idea.

Follow your own light - don't trade other people's ideas - stick with your own methods andlearn how to deal with them, don't waste time on anything else, it just detracts.

Master Plan

had $50,000, bought max. no. of contracts in corn and the market went limit down. He lost 80%of his equity. Second time, went long with major position in lumber and was almostwiped out. Was burnt twice before he learnt not to bet 100% on one position. DON'TOVERTRADE ! Bet less than 5% of your money on any one idea.

Kept missing out because he had no system and would watch Ed Seykota making money on histrend following system.

Psychology


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Patience - to wait for a clearly defined situation where you are sure

If you become unsure about a trade, get out. When in doubt, get out and get a good night'ssleep.

When you are in a position, you can't think. When you get out, you can think clearly again.

ISemotional - gets hurt and loses his bottle. Has ego attached to trading, but is still very open-minded and says about losses 'I had hoped to make a lot of money in this trade, but it isn'tworking so now I am going to get out.'

When he loses, he cuts down his trading or even stops completely, sometimes for three or fourweeks at a time.

System

wait until you have all three factors on your side:

(1) Fundamentals

(2) Technicals

(3) Market tone: a bull market should shrug off bearish news and respond vigor-ously to bullish news. Use the sentiment indices. How many days has the marketbeen up or down in a row? When the news is wonderful and market can't go up,you want to be short.

Pick a point where you are going to get out before you get in. An exit point on every trade.


"I think to be in the upper echelon of successful traders requires an innate skill, a gift. It's justlike being a great violinist. But to be a competent trader and make money is a skill youcan learn."

" A good trader can't be rigid. If you can find somebody who is really open to seeing anything,then you have found the raw ingredient of a good trader. "

General Knowledge

Floor trading helps develop a better sense - gauging moves by the noise level and the orderflow, e.g. an active and moving market that gets quiet is a sign that it is not going tomove much further; also if it instead gets very loud, that is a sign that the market is run-ning into a greater amount of opposing orders.

Trading on the floor means being able to take on large positions at key intraday chart points,and if the trade didn't work, get out fast with only a 10 point risk compared to the pos-sible 300 - 400 point reward. Like surfing the crest of a wave. But today this techniqueprobably won't work because the TA is not so reliable.


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Bruce Kovner

In 1987, the year leading up to the interview, he turned $450 mill into $650 mill. He started atCommodities Corporation as a trader for Michael Marcus.

Learning

Rode $3000 up to $45000 on a soybean spread. At the top the market went limit up and he tookhis brokers suggestion to lift the short side. The market turned around and fell and he lost$23000 in 15 minutes to a limit down. He learnt that:

(1) You cannot disregard risk

(2) His discipline was much worse than he imagined

(3) He had lost his rationality in the panic situation at limit up

(4) The markets can take back as fast as they can give

Masterplan

Has a fundamental view and uses TA to clarify the picture - knows the markets. He tries toform many different mental pictures of what the world should be like and wait for one ofthem to be confirmed. You keep trying them one at a time and inevitably most will turnout to be wrong - only a few elements of the picture will prove to be correct. Then youwill find that in one picture, nine out of ten elements click.

He creates this scenario at least once a week and defines ranges for each currency and what todo if there is a break out of the range.

He has all the guru reports and when the market is not confirming the general bull/bearishness,then his contrarian opinion is confirmed.

Undertrade, undertrade, undertrade. Take only a 1 - 2% risk on any position.

Psychology

When something happens to disturb your emotional equilibrium, close out all positions relatedto that event.

You have to be willing to make mistakes. You make your best judgement and are wrong - youmake your second best judgement and are wrong - you make your third best judgementand you double your money.

Losses that are the result of sound trading techniques are not a problem, merely a test ofwhether you can conform to your system.


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The market does not hear when you say "I wish" or "I hope", that is a destructive thoughtpattern and takes attention away from the diagnostic process.

System

He often goes with breakouts - breakouts are not reliable per se because they can be

exacerbated by technical trading - but if a market consolidates and everybody believesthat there is no reason for a breakout, and it does breakout, then that is more reliable thana breakout caused by something, e.g. a WSJ article.

When an important fundamental development occurs, the initial direction of the market move isoften a good tip-off of the longer-term trend, e.g. the Canadian dollar broke out on theupside just as the US/Canada trade pact was being sealed in 1987. The market usuallyleads because there are people cleverer than you.

Whenever he enters a trade, he has a predetermined stop.

He places his stop beyond some technical barrier, at a point that will determine that the trade is

wrong, not based purely on a dollar loss.


You can make a million dollars. If you apply yourself, great things can happen.

You need the ability to imagine configurations of the world different from today and really tobelieve that it can happen. And you need to stay rational and disciplined under pressure.

If you don't work very hard, it is unlikely that you will be a good trader.

General Knowledge

The Heisenberg Principle in physics is that if something is highly observed, the odds are that itis going to be altered in the process. The less observed the market, the better the trade.Vice versa, if the market is very well observed, it can be prone to false breakouts.

Larry Hite

Just an average schooling, had many jobs, acting and screenwriter, into the music scene, metBrian Epstein at a party. Became a stock broker, then a commodity broker, before founding his

own trading firm with a computer designer and a statistician. From 1981 to 1988, they achieved30% annual return with very low drawdowns. Equity has flooded in - they aim to manage $2billion.

Learning

He took advice from a friend to trade corn, selling the old crop and going long the new crop.He thought it was a safe trade, because one offset the other, so he really loaded up. Thenthe government released a report showing surprise crops, and the old crop went limit up


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and the new crop went limit down. Learn:

(1) Don't trade on other people's advice

(2) Always heed market risk - or they'll carry you out. If you don't take a hardlook at risk, it will take you.

On "Wall Street Week" there was a panelist who was seventy years old. He said his father hadtaught him that bonds are the corner stone of a good portfolio. Since that guy had been inthe business, he had seen interest rates go down only once out of every eight years - buthe stuck to what his father taught him. Obviously the word "bonds" means a lot more tohim than the reality. Look hard at everything. Make sure that what you are seeing isreality.

Masterplan

Holding periods - to test profitibility. 90% of all 6 month periods, 96% of all 12 month periodsand 100% of all 18 month periods on his system test as profitible. What is the chance of

starting off without sufficient capital and the first six month not being profitible, andwiping out your capital? Work it out by back-testing.

Never risk more than 1% of equity. Keeping your risk small and constant is critical.

If a market doesn't respond to important news in the way it should, that is confirmation that itwants to go in the other direction. E.g. gold - when news of the Iran/Iraq war breaking outhit the headlines, gold moved a dollar higher when it should have rocketed. Soon afterthat it broke.

When a market makes a historic high, it is telling you that something has changed.

Psychology

His rigorously tested system is his edge. He has all the confidence in the world in it. He maynot know what is going to happen tomorrow, but he knows what is going to happen in thelong run.

There are four kinds of trades: good bets, bad bets, winning bets and losing bets. A losing betcan be a good bet. If the odds are 50/50 and the payoff is $2 versus $1 risk, that is a goodbet even if you lose.

System

When volatility measured over the last 10 to 100 days increases too much, he ceases tradingthat market.

Trend following and no exceptions.

Diversification - he trades nearly every futures market.


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General Knowledge

There are 3 categories of traders: the floor, the trade and the speculator. The floor has theadvantage of speed, no-one can be faster than the floor. The trade has the advantage of

knowledge and the best ways of getting out of positions - they can offset a futuresposition in the cash market. The speculator's advantage is that he doesn't have to play. Hecan choose to trade only when the odds are in his favour.

Brian Gelber

Started in 1976 as broker on CBOT, then floor manager, Tbonds, then simultaneously trading hisown account. Was very big trader and broker, if not the biggest on CBOT. Left floor in 1986. Hasclearing, brokering and money management firms.

Learning

Instead of thinking "I have an opinion and I want to express it in the market", he started asking"How do I make money out of all of this?"

Losing money on trades based on someone else's opinion taught him to disregard thoseopinions.

Masterplan

Never add to a loser

The average trader always overtrades and begs for tips.

On a losing streak, cut down on trading or take a break.

Psychology

When you don't care, you do well and when you try too hard, you don't do well.

You have to force yourself to be motivated with each new day.

System

Has technical systems, but combines them with his own discretionary trading

On the floor he would trade swings backwards and forwards.



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This guy seems to be a born trader.

General Knowledge

If you are a broker, you are not a trader. If you are a trader, you are not a broker.

Richard DennisStarted in late 1960s as a runner on the floor and traded at the same time. Then got a seat on theMid-Am and as he was under-age, his father traded for him. Then moved to CBOT and tradedsoybeans. In 1978 went to desk trading and in 1984 trained the "Turtles". In 1987 and 1988 helost perhaps 50% ($50 mill) of his equity and retired.

Learning

First bad trade lost $300, and since that was 10% of his equity it screwed him up and hereversed his position but continued to lose, so he reversed back to his original position

and lost again, losing $1000 in all - 30%. He learnt:

(1) certain losses can affect your judgement - get out if you finds a loss destabil-ising. When you are getting beaten to death, take your head out of the mixer.

(2) not to try to catch up or double up to recoup losses.

Trading is often so intense that you want to avoid thinking about it afterwards. But that isexactly when you should. It helps if you are obsessive.

Masterplan

Minimize losses by saving capital for trades in which you have confidence - don't throw it awayon sub-optimal trades.

Nothing is down to luck - it is only statistics. If something works 53% of the time, over thelong run there is a 100% chance of it working. It might be two years though before yousee profits.

Do not have your stop where everybody else has their stop - slippage will make the systemunworkable. Any good system has hard-nosed estimates for slippage built-in.

See how the market reacts to news. If you are looking for a trend, and the market goes up ongood news, then he will go in, but if the market goes down instead he will stay on thesidelines.

The secret to combating the false breakouts is to be as short term or as long term as possible, itis the intermediate term that picks up the vast majority of trend followers - the beststrategy is to avoid the middle like the plague.

Do not let long term views cloud your thinking - you will miss profit opportunities. If youignore a signal because of such a view, you risk missing a large profit, in comparison to a


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small loss if that view was actually right. Too rigid an idea destroys your risk/reward.

Psychology

You could print a really excellent trading system in the paper, but nobody would follow itsuccessfully because the key ingredient is confidence to take the losses, which is not

something that you can get from something in the paper.

Expect the extreme, expect the unexpected. The impossible can happen.

If you are having a losing streak, cut back. If it is really bad, get out completely.

You have to keep everything in perspective - do not let emotions get to you - neither the elationnor the damage. Even when the market gives you a good wallop, be as detached as pos-sible.

Focus on whether what you are doing is right, not on the random nature of any one trade'soutcome, especially when you do not want to think about it.

System

For a trend following system, if there is no profit after a week, then the signal was clearlywrong.

You should always have a worst case point that gets you out of a bad trade.


the need to succeed

anyone who is intelligent can be an excellent trader

General Knowledge

In 1988 he lost almost 50% of equity. Someone said to him, why not do the opposite of all yourtrades? That is the way to lose an infinite amount of money.

Gary Bielfeld

Started in 1965 trading one lot corn. Moved on to soybeans, cand then in 1983 to T-bonds. Waslong in a huge way since the bottom in '83 and rode the move to the top. Lives in small townPeoria.

Learning


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Masterplan

Primarily FA with a trend following system as backup to signal when to get out of a position.

A trending following system will provide the discipline to stay with the winners and close outthe losers.

Think through a trade thoroughly before putting it on. Have contingency plans. Don't getswayed by every piece of news that hits the market.

Don't trade too much - keep the number of trades down. Otherwise you lose too much incommissions on the poor trades.

Narrow your chances of losing by ditching bad trades immediately and take a small loss. Wheneverything is in your favour, be aggressive and leverage your position to the hilt.

Psychology

You need courage to go into the market, especially to fade market concensus

Have the patience for the right trade to come along.

System

Either takes signals from the system or has a trailing stop, so he always gets out, but not tooearly and never too late.


General Knowledge

Mark Weinstein

Started trading commodities in 1972, while working as a real estate broker. Lost all the money.Worked for six months really hard and saved $24,000, studied TA and opened a trading account.In a competition at CBOE, he turned $100,000 into $900,000 in three months on options. Trades

everything now.

Learning

Wanted to make $350,000 and put on a soybean position with that target in mind. The beanslocked limit-down against him five days in a row, and he was losing $125,000 a day.Prior to this he never went short, because he thought it was un-American. He learnt to goshort, learnt to respect risk.


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A friend advised him to buy some options shortly before expiration, and he lost $40,000. Hisfriend had done the opposite trade, and was using it to teach a lesson not to trust otherpeople's advice.

Masterplan

trades for small profits and tries to eliminate losses (in the options competition 100% of histrades were winning)

Always looks for a market losing momentum, and then goes the other way.

When J.F.K. was assassinated, the stock market fall dramatically, but then reversed and madeup to end higher. The market was bullish, and not even a dramatic piece of news couldchange that.

Psychology

Fear makes you a good trader, fear of the market, scared enough to wait until you are totallyconfident that a trade will work, afraid enough to do nothing until you have a can't losetrade.

Don't get arrogant, because then you forsake risk control, and get beaten.

Your strategy must be flexible enough to change when the environment changes.

Fear a larger loss and hope for a larger profit.

System

Elliott waves, Gann analysis, cycles, momentum. But you have to know when to use whichones.


General Knowledge

Paul Tudor Jones

Started out as a broker and made a million in commissions. Moved to the NY Cotton Exchangein 1980 and made millions there. In 1984 became a fund manager with $1.5 mill. Has doubledhis equity for five years in a row. In the Crash of '87 he made millions short SNPs and longbonds.

Learning


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The cotton market was trading between 82 and 86 cents and he was buying at the bottom, andwas long 400 contracts. The market broke to new lows, took out the stops and rebounded30 or 40 points. He thought the stops had lured the market down. On the rebound in anact of bravado he bid 8290 for 100, and immediately the Refco broker came runningscreaming "Sold". He realized the market was going to drop by the size of the tradingrange - to 78 - and he was long 600 contracts. The market was limit down in 60 seconds.Lessons:

(1) Never play macho man with the market

(2) Never overtrade - 4 cents would have been OK, but not with 600 contracts.

Masterplan

When he is trading poorly, he cuts his position size down. When he is doing well, he increaseshis position size.

Always think of your point of entry as the previous day's close. What you do should depend on

whether you are bullish or bearish today.

Play a great defensive, not an offensive. Define your maximum drawdown and place your stopsand then spend the rest of the day relaxed.

Other people's market opinions are not valid.

Psychology

You have to be able to handle getting your butt kicked, there are enormous emotional ups anddowns involved.

He tries to make himself as happy as possible. If he has positions going against him, he getsright out, if they are going for him, he keeps them.

He always thinks about losing money, not about making it.

Don't be a hero, don't have an ego, always question yourself and your skills. Don't ever assumethat you are good, the second you do, you are dead.

You can't ever beat the markets. Always maintain a sense of confidence, but keep it in check.

Be frightened, be scared. Success is ephemeral.

You must be able to change from bullish to bearish or vice versa totally and quickly. Don't letcomments you have made or put on the record affect your judgement. That is history andwhat is important is coming up ... Don't be loyal to your positions. Keep your horizonsopen and keep a clean slate for your market scenarios.

System

Mostly fundamentals. Has a trend following system, which looks for range expansion and then


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goes in in the direction of the expansion.

Doesn't just use a price stop, he also uses time stops.


To be a good trader, you have to be a contrarian - even though the market looks really good atnew highs, that is often the best place to sell.

General Knowledge

Michael Steinhardt

Father gave him 200 shares as bar mitzvah present. Studied at Wharton, Pennsylvania, started onWall Street at 19, in 1960 as analyst and journalist. 1967 formed his own firm. One thousand

dollars invested with this firm then would be worth $93,000 by 1988, after fees. Rules his firm oftraders and analysts like a captain of a sailing ship.

Learning

You have to find the right balance between confidence and humility, and that is only learntthrough experience and mistakes.

You have to learn how and when to step on the accelerator, for instance this guy went long 3-400% in Tbills near the market bottom in 1982, but six months to early. He stayed with

the position despite the pain. Where did he get the nerve, skill and conviction to perceivethis major trading opportunity? 15 years of experience.

Masterplan

Trades stocks. Sometimes closer to investment than trading.

Runs a "hedge fund" - both longs and shorts - but is on average 40% long.

Completely fundamental. Never looks at charts.

Strike when only some of the pieces of the puzzle are in place - that is as much as you can hopefor, because when they are all in place, it is too late.

Psychology

The guy on the other side of a trade has always got a perception radically different from yourown, the market has often got much more information than you have. You have to findout what that perception is, try to understand why


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Success carries the weight of its inevitable failure.

In order to win as a contrarian, you need the right timing and you have to put on a position thatis the appropriate size. If you do it too small, it is not meaningful, if you do it too big, youcan get wiped out if your timing is slightly off. The process requires courage,commitment, and an understanding of your own psychology.

System

He has a reason for every position, and when that reason is fulfilled or negated, he gets rightout without looking back.


All great traders are seekers of truth. You have to be intellectually honest with yourself andothers. You have to ask, why does someone want to take the opposite side of the trade?You have to admit that you have and will make mistakes.

General Knowledge

In treasuries, you can finance as much as 98% of your purchases, depending on maturity, sothere is no real constraint.

There is a shibboleth that you will get a higher rate of return from riskier investments. It is theother way around - it is riskier, therefore a higher rate of return is possible. You have tobe convinced that you can get the higher rate in order to play the game.

Ed SeykotaEverybody gets what they want. He has a degree in electrical engineering from MIT. In the early1970s he developed the first commercial computer trading system for the futures markets. Livesin Reno out in the mountains in California, and has no quote machine.

Learning

His first trading idea was to go long silver, in late 60's when the US Treasury stopped selling it.As soon as they stopped, the price fell. The market has discounted the news already.

Masterplan

He developed a computer system which his company marketed. The management kept onsecond guessing the signals though. The way they traded the system, it wasn't profitable.Don't second guess your system!

Trading a system is not cut and dried. The manager has to decide how much risk to accept,which markets to play, how aggressively to increase or decrease the size of the tradeswith respect to equity.


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The elements of good trading are:

(1) cutting your losses

(2) cutting your losses

and (3) cutting your losses

During a losing streak, cut down your trading and try to ride it out. Do not try to make up for itwith larger positions.

Be more aggressive after winning (in terms of the system) and less so after losing

Trade only 5 percent on each trade.

Psychology

Even he himself second guessed his system early on, because he didn't have confidence or trust

in it. He was looking for a system with which he was compatible. Sometimes he considers himself and the things he does as a system, which he always follows. It

probably doesn't help the profits, but he needs a creative outlet.

Being bullish and not being long is illogical.

Make sure your rules reflect your trading style, and then follow them without question.

Gut feel is important, and if ignored can come out in other ways and colour your logic. Dealwith it through meditation or reflection to determine what is behind it.

The strength of one's emotions in the market are inversely proportional to one's commitment tobeing a trader.

System

He picks spots to buy or sell by waiting for moments when the momentum is strongly in thedirection of his trade, to reduce the probable risk.

When a market gets wild, get out of the positions, don't wait for your stops to be taken out. Thiscuts down the volatility and emotional impact.

He always places his stops when he puts on a position, and then raises the stop as the trend de-

velops.


There are old traders and there are bold traders, but there are very few old, bold traders.

Let trading be your passion, your life, everything.


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The average trader should find an excellent trader, give him his money and go and findsomething he loves doing.

Everybody gets what they want out of the market. Losers want to lose and winners who fallshort of their goals fulfil some inner need to do this and not win.

General Knowledge

Marty Schwartz

Always wanted to be top in school, college. Graduated 1967. Joined marines. Jewish - a sergeantdrew a star of David on his forehead. Then did MBA at Columbia. Worked for ten years assecurities analyst. Bought a seat on the AMEX and traded options. Entered the US TradingChampionships and made on average 210% return for the 4 months of each contest. Ran $40,000up to $20 million.

Learning

In 1973 put his money into a system which used a mainframe. Lost $20,000 and his dreams ofglory.

On Election Day in 1982 the Republicans did much better than expected and the SNP lockedlimit up. He added to his position at the limit. The next day his wife told him to get smal-ler, and he had to take $60,000 losses in one day. Just shrink the trading size when youare losing, don't try to compensate by making bigger trades. Repair the psychologicaldamage by making good trades again, getting black ink, but do it with small amounts un-til your confidence returns.

Masterplan

when the market gets good news and goes down, it means it is weak. When it gets bad newsand goes up, it means that it is very healthy.

Don't increase your position size until you have doubled your money.

Decreases his position size after long winning streaks, because he gets too cocky. Sometimes hejust takes a break.

Psychology

As a loser he said, I figured it out so it can't be wrong, and he willed the market to move - "I'llget out when I'm even" - it protects the ego. As a winner he said, I figured it out, but if itgoes wrong, I'm going to get the hell out - "To hell with my ego, making money is moreimportant".

You know you can always do better, because you know how many times you screw up.


21/24

Don't freeze under fire. Keep thinking, or get out. It is always easy to put the trade back onagain, and being flat helps to clarify everything.

System

uses moving averages in general


"I am trying to earn infinity when I trade."

General Knowledge

Tony Saliba

Started out at the CBOE as a clerk in 1978 and after 6 months became a trader with $50000 bor-rowed from another broker. He nearly lost it all, but came back and made a fortune, in-cluding a streak of seventy consecutive $100,000 a month profits.

Learning

In his first week, he made $50,000 into $75,000 on volatility spreads. He thought that was easyand then he lost it all as the volatility vanished into air. The DC10 plane crash at O'Hare

airport, when loads of people died, was the low point. Learnt not to risk everything tryingto get a huge profit, but to chip away it, trying to make $300 a day, discipline, and thatyou have to work.

Masterplan

He has a net position that is risk neutral, 95% of the time.

He knows his worst case, he knows that his loss is always limited, no matter what happens.

Recap the day's trading and figure out what you did right and what you did wrong. Then go

through the next day's possibilities, think through all the what-ifs, anticipate and plan.

Does his homework every night, and doesn't let anything get in the way of his daily regimen.

Psychology

Traded one lots in the Teledyne options pit and everyone called him "One Lot" for about a year,and made his life hell. But he didn't let his ego get in the way and carried on trading theway he wanted to.


22/24

When you are in a boat and it springs a leak, you don't drill another hole to let the water out.

Clear thinking, the ability to stay focused and extreme discipline.

System

options, writing or buying spreads, butterfly spreads, scalping.


Takes his work with him on dates. If the conversation isn't about business, he isn't interested. Itis like an addiction.

General Knowledge

Don't disregard the extreme cases, such as an exchange going bust and swallowing your money

up.

David Ryan

Started investing in stocks when 13. 1982 Got a job with William ONeils company and wasmost successful employee. Rose to VP in 4 years. Won US Investing Championship stockdivision 3 times with 160, 161 and 150 % returns. Totally enthusiastic about trading.

Learning

Every time he buys a stock, he writes down the reason why he bought it. In 1983 - 84, he lostpractically 3/4 of his equity. He sat down and looked over what he had been doing andanalysed his mistakes. He went on the next year to earn 160% return.

Masterplan

Has a rigorous stock selection process. Even using this only 50% of the stocks actually performas expected. The secret lies in cutting out of the other 50% very quickly.

Psychology

Find the discipline to stay with your system, and never waver from it unless you want to lose.

His system and experience gives him the confidence to get out of losing trades very quickly.Trading is like a treasure hunt - finding the next big mover - and that leaves no room forstaying with losers.

System


23/24

Losing trades get taken out by the 7% stop loss rule.


If you learn from every trade you make, you are only going to get better and better.

General Knowledge

James B. Rogers

Began trading the stock market in 1968 with $600. Five years later he formed the Quantum Fundwith George Soros.

Learning

It is all part of a big three dimensional puzzle - stocks, bonds, currencies, commodities, gold,oil - which is always changing. You never stop learning, trying to understand, figuring itout.

You have to learn to think for yourself, learn to see that the emperor has no clothes.Conventional wisdom sucks.

Masterplan

You have to have a conviction - don't just do something for the sake of it, wait until you haveconviction.

Wait until there is money sitting there in the corner, and then just go over and pick it up. Don'twaste time trying to trade, trade for no other reason than the occurence of an opportunity.

Wait until you have an idea so right and a price so right, so that even if it is wrong you are notgoing to lose much money.

Psychology

The market is going to go higher than you think it will and lower than you think it can.

System

No system - pure fundamentals

sells hysteria - sold gold at $675 - $200 (but only 4 days) before it peaked

buy value


24/24

wait for a catalyst


"Common sense is not so common." - Voltaire

General Knowledge

The market has its own momentum - it will keep moving against all the fundamentals inhysterical blow-off situations.

notes on market wizards i

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