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My Book Reviews

Category: Trader interviews
Published: 1992
Read: 1994
Reviewed: Jun 2010

This is the sequel to the Jack Schwager's classic, "Market Wizards". It features interviews with futures traders, hedge fund managers, former Turtles, options traders, and trading psychologists (Charles Faulkner and Robert Krausz). Stanley Druckenmiller is probably the most famous name.

Some readers think that this book is not as good as the first. They claim that the skill level of the traders is inferior, and that the strategies are merely derivative of other traders'. I disagree. I think that this entry in the Market Wizards series is just as strong as the first - and is also a 5-star book. Even if these traders are not necessarily pioneers, they have still been trading the markets for decades and are far superior to the supposed "super traders" who simply achieved a great 5-year track record that you often see interviewed in other books.

Also, some readers like to Google the traders in the book to see how they have done since the publication of the book. I don't think this has much value. If someone blew up after the book came out, that doesn't devalue any useful advice they had. Here are some interesting stories from the book:

  • Randy McKay's experience in the Marines and his views on war.
  • Randy McKay walking into a Merrill Lynch office and asking for the the least experienced broker - and then giving him $1 million.
  • Bill Lipshutz's experience with working with John Gutfreund.
  • Interesting trading stories from: Randy McKay (buying the top in gold, his Canadian dollar trade while on vacation), Bill Lipshutz (the Philadelphia options mispricing, his dollar trade during the G-7 meeting), Munroe Trout (trading the S&P trade during the Iraq war), Soros' yen trade during the Plaza Accord, Joe Ritchie's silver options trade.
  • Gil Blake's explanation of sector fund inefficiencies.
  • Victor Sperandeo's experience with attempting to train traders.
  • Mark Ritchie's boiler room experience.
  • Jeff Yass' analysis of "Let's make a deal".
  • Charles Faulkner's case study of the guy who who traded for excitement.
  • Gil Blake's muni bond fund timing strategy.

Here are some interesting quotes:

  • Jack Schwager: "By not wanting to trade, I had inadvertently transformed myself into a master of patience."
  • Jack Schwager: "Markets will often do whatever confounds the most traders."
  • Jack Schwager: "There are a million ways to make money in the markets. The irony is that they are all very difficult to find."
  • Bill Lipshutz: "Another important consideration is the evaluation of the best way to express a trade idea."
  • William Eckhardt: "[Indicators are] close to zero in terms of their profit expectations. What these patterns make during market consolidations, they lose during trends."
  • William Eckhardt: Indicators look better with the eyes than they really are.
  • William Eckhardt: "As a general rule, avoid those things that give you comfort."
  • William Eckhardt, on designing a trading system: "If the performance results of the system don't sock you in the eye, then it's probably not worth pursuing... as a general rule, be very skeptical of your results. The better a system looks, the more adamant you should be in trying to disprove it."
  • William Eckhardt: "You can be very promiscuous in your research, but not in your trading."
  • William Eckhardt: "Good systems tend to violate normal human tendencies."
  • William Eckhardt: "The majority of people trade worse than a purely random trader would."
  • William Eckhardt: "Even though money management is more important than the price model, mathematically, it's the more tractable problem."
  • William Eckhardt: "Trading size is one aspect you don't want to optimize. The optimum comes just before the precipice. Instead, your trading size should lie at the high end of the range in which the graph is still nearly straight."
  • William Eckhardt: "System trading has gone from a fringe idea to bring in new kind of orthodoxy.... what began as a renegade idea has become an element of the conventional wisdom."
  • William Eckhardt: "An old trader once told me: 'Don't think about what the market's going to do; you have absolutely no control over that. Think about what you're going to do if it gets there.' In particular, you should spend no time at all thinking about those roseate scenarios in which the market goes your way, since in those situations, there's nothing more for you to do."
  • William Eckhardt: "Trading is also highly addictive. When behavioral psychologists have compared the relative addictiveness of various reinforcement schedules, they found that intermittent reinforcement - positive and negative dispensed randomly (for example, the rat doesn't know whether it will get pleasure or pain when it hits the bar) - is the most addictive alternative of all, more addictive than positive reinforcement only. Intermittent reinforcement describes the experience of the compulsive gambler as well as the futures trader."
  • William Eckhardt: "The market behaves much like an opponent who is trying to teach you to trade poorly....This illusion is well founded. The market does behave very much like a tutor who is trying to instill poor trading techniques. Most people learn this lesson only too well."
  • William Eckhardt: "The markets go up and down. So in some loose sense of the word there are cycles. The problem is that you can fit sine waves pretty closely even to purely random patterns. If you allow cycle periods to shrink and expand, skip beats, and even invert - as many of these cycle theorists (or, perhaps more accurately, cycle cranks) do - then you can fit cycles onto any data series that fluctuates."
  • William Eckhardt: "If a betting game among a certain numbers of participants is played long enough, eventually one player will have all the money. If there is any skill involved, it will accelerate the process of concentrating all the stakes in a few hands. Something like this happens in the market. There is a persistent overall tendency for equity to flow from the many to the few. In the long run, the majority loses."
  • William Eckhardt: "The market likes to lull you into the false security of high success rate techniques, which often lose disastrously in the long run. The general idea is that what works most of the time is nearly the opposite of what works in the long run."
  • William Eckhardt: "What feels good is often the wrong thing to do."
  • William Eckhardt: "There is such strong competition in the systems trading niche that the trader has to develop systems as fast as he or she can to merely stay in place....That's why I'm willing to accept systems with somewhat lower theoretical performance if I think they have the property of being different from what I believe most other system traders are using."
  • William Eckhardt: "The people who survive avoid snowball scenarios in which bad trades cause them to become emotionally destabilized and make more bad trades. They are also able to feel the pain of losing. If you don't feel the pain of a loss, then you're in the same position as those unfortunate people who have no pain sensors. If they leave their hand on a hot stove, it will burn off. There is no way to survive in this world without pain. Similarly, in the markets, if the losses don't hurt, your financial survival is tenuous. I know of a few multimillionaires who started trading with inherited wealth. In each case, they lost it all because they didn't feel the pain when they were losing. In those formative first few years of trading, they felt they could afford to lose. You're much better off going into the market on a shoestring, feeling that you can't afford to lose. I'd rather bet on somebody starting out with a few thousand dollars than on somebody who came in with millions."
  • Randy McKay: "Trading has not only become much harder, but it has also changed. In the 1970s, the price moves were so large that all you had to do was jump on the bandwagon. Timing was not that critical. Now it's no longer sufficient to assume that because you trade with the trend, you'll make money... you also have to pay a lot more attention to where you're getting in and out. I would say that in the 1970s prognostication was 90 percent and execution 10 percent, whereas today prognostication is 25 percent and execution 75 percent."
  • Howard Seidler: "It's important to distinguish between respect for the market and fear of the market. While it's essential to respect the market to assure preservation of capital, you can't win if you're fearful of losing. Fear will keep you from making correct decisions."
  • Monroe Trout: "It's amazing what you can do when you have real money on the line."
  • Munroe Trout: "I sincerely believe that the person who has the best daily Sharpe ratio at the end of the year is the best trader."
  • Al Weiss: "By charting the markets you're merely converting human psychology into graphical representation."
  • Al Weiss: A "highly individualistic approach doesn't lend itself readily to generalizations."
  • Michael Carr: "In my opinion, a large segment of the population should never trade the markets."
  • Richard Driehaus: "Most people believe high turnover is risky, but I think just the opposite. High turnover reduces risk when it's the result of taking a series of small losses in order to avoid larger losses."
  • Richard Driehaus: "There are no universal decision rules."
  • Richard Driehaus: When it comes to charts, "I look at the total image. It's more the visual impression than whether the stock breaks a particular point."
  • Richard Driehaus: Most investors "look at all movement as negative, whereas I look at movement as a constructive element."
  • Gil Blake: "I rehearse the process of losing."
  • Gil Blake: "If you break a discipline once, the next transgression becomes much easier."
  • Gil Blake: "It's also important to have a blend between an artistic side and a scientific side. You need the artistic side to imagine, discover, and create trading strategies. You need the scientific side to translate those ideas into firm trading rules and to execute those rules."
  • Gil Blake: "Do your own thing (Independence); and do the right thing (discipline)."
  • Gil Blake: How can the markets be beat? "Certainly not by buying the answer."
  • Tom Basso: "As long as you learn something from a loss, it's not really a loss."
  • Tom Basso: "When I come to work each day, I know that the risk and volatility in my portfolio is exactly the same as it was yesterday, last week, and last month. So why should I let my emotions go up and down from if I'm in exactly the same exposure all the time?"
  • Tom Basso: "You have to enjoy trading, because if trading is a source of negative emotions, you have probably already lost the game, even if you make money."
  • Victor Sperandeo: "When you're trading large, you need to have an especially short fuse in regard to cutting losses."
  • Victor Sperandeo: "Besides trading, there is probably no other profession where you have to admit when you're wrong."
  • Victor Sperandeo: Most people "don't approach trading as a business."
  • Linda Bradford Raschke: "It's better to have the wrong idea and good timing than the right idea and bad timing."
  • Linda Bradford Raschke: "I've also found that it's my smallest positions that cause my biggest losses, because they tend to be neglected."
  • Linda Bradford Raschke: "Develop your own routine for taking periodic market readings."
  • Linda Bradford Raschke: "I believe that I can go into any market with just a quote machine and out-trade 98 percent of the other traders."
  • Linda Bradford Raschke: "My favorite exercise for novice traders is pick one market only. Without looking at an intraday chart, jot down the price every five minutes from the opening to the close. Do this for an entire week. Be in tune to the patterns. Where are the support and resistance levels? How long does each intraday price move last? You won't believe how much you can learn from this exercise."
  • Linda Bradford Raschke: "If you ever find yourself tempted to seek out someone else's opinion on a trade, that's usually a sure sign that you should get out of your position."
  • Mark Ritchie: "A lot of dishonesty in this business begins when people are dishonest with themselves."
  • Mark Ritchie: "If I protected open equity with the same care that I protected closed equity, I would never be able to participate in a long-term move. Any sensible overall risk control measure could not withstand the normal volatility in such a move....If you get too careful about not risking your gains, you're not going to be able to extract a large profit."
  • Mark Ritchie: "Always trade at a level that seems too small.... keep each position size so small that it almost seems to be a waste of your time."
  • Mark Ritchie: "Most people come into this business without a willingness to lose money."
  • Joe Ritchie: "The notion that the market will trade at its precise theoretical fair value implies that someone will hold it there without getting paid. Why would anyone do that?"
  • Joe Ritchie: "Just because all the information is in the market doesn't mean that one trader can't use it better than the next guy."
  • Blair Hull: "People have a basic need to be recognized.... the people who want to be recognized as the greatest traders are probably not the greatest traders. Egos get in the way of the process."
  • Blair Hull: Most traders are too interested in who's buying or selling.
  • Jeff Yass: "I learned more about option trading strategy by playing poker than I did in all my college economics courses combined."
  • Charles Faulkner: The difference between "toward motivation" and "away from motivation".
  • Charles Faulkner: "Trading actually tends to attract people who are ill suited to the task -- those who are enamored with making lots of money; people who are willing to take high risks; individuals who seek excitement or will react to the world with emotional intensity."
  • Charles Faulkner: "The best predictor of success is simply whether the person is improving with time and experience."
  • Charles Faulkner: "Many traders unconsciously acknowledge their lack of progress by continually jumping from one system or methodology to another, never gaining true proficiency in any. As a result these people end up with one year of experience six times instead of six years of experience."
  • Robert Krausz: The most surprising thing that he discovered about human behavior is "how ready we are to fool ourselves".
  • Jack Schwager: "Good trading should be effortless....Hard work refers to the preparatory process -- the research and observation necessary to become the trader -- not to the trading itself."
  • Jack Schwager: "I think one reason why so many people try to pick tops and bottoms is that they want to prove to the world how smart they are."
  • Jack Schwager: "Don't worry about looking stupid."
  • Jack Schwager: "Don't talk about your position."
  • Jack Schwager: "If the innate skill is lacking, hard work may provide proficiency, but not excellent."
  • Jack Schwager: "Losing is an intrinsic element in the game of trading."
  • Jack Schwager: "While I enjoyed the cerebral aspects of market analysis, I didn't particularly like the visceral characteristics of trading itself. The contrast between my motives and the activity resulted in very obvious conflicts."
  • Jack Schwager: Different indicators are like nonprescription sunglasses: "They change the view but don't necessarily improve the vision. The bottom line is that these methods seem to work only because the people who use them have developed some sort of intuitive experience about price."

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