Tips from The New Market Wizards

Bill Lipschutz

I don’t think you can consistently be a winning trader if you’re banking on being right more than 50 percent of the time. You have to figure out how to make money being right only 20 to 30 percent of the time.

Everyone should read the above quote again, and again. I have preached the fact that you can lose on the majority of your trades and still make money in many articles, yet I still get emails everyday from new traders who seem to be looking for the “holy-grail”. The truth is, many pro traders are not winning more than 50% of the time, but because their money management is so good, and their understanding of risk reward is so deep; they still make a sickening amount of money in the markets. Once you can learn that winning percentage doesn’t really matter and throw your ego in the garbage…you will probably start doing a lot better.

Randy McKay

I never try to buy a bottom or sell a top. Even if you manage to pick the bottom, the market can end up sitting there for years and tying up your capital. You don’t want to have a position before a move has started. You want to wait until the move is already under way before you get into the market.

This quote by Randy McKay speaks to the fact that trying to pick the top or bottom of a trend is futile, yet many traders try to do it. Indeed, it almost seems to be a part of our evolutionary wiring to want to try and be the “hero” and constantly pick the top of a big up trend or the bottom of a down trend. It’s far easier and more lucrative to wait for a trend to get underway and then trade with the trend until it ends.

William Eckhardt

Either a trade is good enough to take, in which case it should be implemented at full size, or it’s not worth bothering with at all.

William Eckhardt was Richard Dennis’s trading partner and colleague for the Turtle Trader experiment. Eckhardt challenged Dennis’s belief that trading could be taught to anyone by saying that he thought trading success was more of an innate thing that could not easily be taught. Eckhardt admits in The New Market Wizards that he was wrong and Dennis was right; trading can indeed be successfully taught even to complete beginners.
In his quote above he is talking about something I have long believed in; either you take a trade or you don’t…I don’t like reducing my position size because I don’t fully believe in my trade. If I don’t fully believe in a trade setup than I simply don’t take it, and if I do believe in it then I risk my standard amount per trade.

I haven’t seen much correlation between good trading and intelligence. Some outstanding traders are quite intelligent, but a few aren’t. Many outstandingly intelligent people are horrible traders. Average intelligence is enough. Beyond that, emotional makeup is more important.

This quite is pretty self-explanatory; you don’t have to be smart to be a trader. Intelligence helps for sure, but emotional makeup and discipline is far more important.

The desire to maximize the number of winning trades (or minimize the number of losing trades) works against the trader. The success rate of trades is the least important performance statistic and may even be inversely related to performance.

In the above quote, Eckhardt is talking about how many traders tend to take small profits because they are more concerned with “winning” than with their long-term profitability. He also says that “While amateurs go broke by taking large losses, professionals go broke by taking small profits. The problem, in a nutshell, is that human nature does not operate to maximize gain but rather to maximize chance of gain”. In other words, it’s against our human nature to want to let our profits run into large winners, it’s easier and it certainly feels better temporarily to take smaller gains. This, of course, puts traders in a very tough position of having to have a high winning percentage of their trades to succeed long-term.

Monroe Trout

I don’t pull out any money. I rent my condo and I drive a cheap car.

The above quote by Mr. Trout is a good example of my minimalist approach to trading and life that I recently wrote about. Clearly, I am not the only person who has had this idea or who finds it appealing.

First, many people get involved in the markets without any edge. They get in the market because their broker told them that the market is bullish. That is not an edge. However, to tell the truth, most small speculators will never be around long enough to find out whether their system could have worked, because they bet too much on their trades, or their account is too small to start.

In this quote, Trout is right on in saying that many people begin trading without any edge. I get emails from traders everyday who clearly have not mastered any type of trading strategy (edge) yet are telling me they’ve already lost thousands of dollars in the markets. You have to have a trading method that gives you a high-probability edge in the market and you have to stick to it and not risk too much per trade, especially if you have a very small account. Otherwise, you won’t be around very long in the markets.

Stanley Druckenmiller

I’ve learned many things from him [George Soros], but perhaps the most significant is that it’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.

The above quote is reference to George Soros who mentored Druckenmiller for a while. This quote fits perfectly with an article I wrote recently about how you don’t have to be right to make money trading. Most traders get far too concerned about the number of winners they have compared to losers when really they should totally forget about that number and instead focus on their overall risk / reward. In other words, how much money are they making for every dollar they have risked.

Victor Sperandeo

When he finally got out, he felt a sense of relief – which is somewhat ironic since he had just lost 70 percent of his money. There’s nothing logical about this process. It’s all an emotional pitfall. Planning where to get out before putting on the trade is a means of enforcing emotional discipline.

In the above quote, Sperandeo is talking about the psychological process involved when a trader doesn’t have a predetermined stop loss and when the trade goes into negative territory and they keep thinking the market will turn around so they can get out at breakeven. He goes on to say that very often the trader exits when he feels the “onset of panic” and he can’t take anymore open losses against him…and typically it’s around that time or shortly after that the market reverses back in his favor. He talks about “emotional discipline” in other parts of the interview too, and it goes to underscore the fact that we need to take proactive steps to manage our emotions as we trade, otherwise they can very easily get out of control.

Tom Basso

My reinforcement came when my losses gradually became smaller and smaller. I was getting very close to the breakeven point. I also kept my losses at a manageable level. I always traded a very small account – an amount that I could afford to lose without affecting my life-style.

The above quote is one of the key points that I talk about in regards to money management and risk management; never risk more than you are emotionally OK with losing. Basso is saying that when he was starting out he traded a small account that even if he blew-out it would not affect him or his lifestyle. I see many traders coming into the markets risking money they clearly can’t afford to lose, and this puts them behind the curve right out of the gate because they feel a strong emotional attachment to the money and thus to every trade they take.

I would tell that trader to think of each trade as one of the next one thousand he’s going to make. If you start thinking in terms of the next one thousand trades, all of a sudden you’ve made any single trade seem very inconsequential. Who cares if a particular trade is a winner or a loser? It’s just another trade.

The above quote was Basso’s response to a question from Schwager about what he would say to a trader who says he can’t stand to lose. Learning that any individual trade is really inconsequential in the long-run, is one of the main realizations that will help you detach yourself emotionally from your trades. Also, if you really understand and believe this, you should not have any desire to over-leverage your trades…because you know that it’s the series of trades over time that matters, not any one in particular.

Linda Bradford Raschke

It never bothered me to lose, because I always knew that I would make it right back. I always knew that no matter what happened, I could go into any marketplace, with any amount of money, and make a living.

The above quote by Linda Bradford Raschke was the main one that I remembered from her interview when I first read The New Market Wizards about five or six years ago. It is really a very motivating quote, because it basically says that once you have mastered your trading strategy, you should have the ability to go into any market and make money. This is especially true for a price action trader, since price action strategies can be applied to any market; once you master them you really can trade any market you want.

Al Weiss

The essential element is that the markets are ultimately based on human psychology, and by charting the markets you’re merely converting human psychology into graphic representations. I believe that the human mind is more powerful than any computer in analyzing the implications of these price graphs.

In the above quote, All Weiss describes the essence of price action trading; trading from the “graphic representations” of human psychology in the market, as well as other variables that affect a market. These “graphic representations” of different market variables are what I call price action, and a market’s price action reflects all the variables that influence it.