Lessons from Trading Wizards: There Are No Market Secrets

Grab a cup of coffee, find a comfortable chair, and settle in with some of the all-time trading greats courtesy of Jack Schwager, whose recently published The Little Book of Market Wizards: Lessons from the Greatest Traders offers a glimpse inside the minds of Warren Buffett, Paul Tudor Jones, and other noteworthies.

Through some five dozen interviews for his four Market Wizards books, Schwager gained insight into traits common among successful traders. Schwager offers some of his takeaways in the following Q&A.

Ticker Tape: Among your conversations with top traders, which struck you the most?

Schwager: Bruce Kovner, the founder of [hedge fund] Caxton Associates LP. He had the single most important advice I ever received: “Know where you will get out before you get in.” This can help prevent any single trade from causing real damage to your account. Why is making the exit decision before you get in so important? Because before you get in is the only time you have complete objectivity. Once you are in a trade, emotions take over, and you no longer have the clarity you had before you had the position.

TT: What are the key characteristics you found in successful traders?

Schwager: These are some of the key themes: (1) Money management is more important than methodology and is absolutely critical to trading success; (2) Trading success requires having no loyalty to your positions and the ability to turn on a dime when the facts dictate a need to do so; and (3) There is no secret to the markets. Success requires finding a methodology that suits you.

TT: You highlighted a quote from Paul Tudor Jones: “Don't focus on making money; focus on protecting what you have.” Why is this important?

Schwager:  Almost all the traders I interviewed placed more emphasis on controlling their losses than on making money. Perhaps the most common method great traders use is limiting the maximum loss on any individual trade. Some traders also limit the amount they can lose on the entire portfolio before they stop trading. Liquidating positions quickly when they realize they are wrong was another common trait among the traders I interviewed.

TT: Talk about the importance of matching a trading style to your personality.

Schwager: Developing a trading style that is consistent with your personality and beliefs is absolutely critical. There is no single correct trading approach, and the right approach will be different for every single person. Each person must figure out what is the right approach.

TT: What are some possible methods to consider?

Schwager: Some favor computerized approaches, while others prefer to make discretionary trading decisions. Some traders prefer fundamental analysis, others technical analysis, and still others a combination of both approaches. Some traders may favor focusing on long-term positions and major price moves, while others will feel more comfortable trading on a very short-term time frame. Getting the right approach will be a matter of experimentation and being cognizant of what feels right and seems to work for you.