TRADING LESSONS FROM MARTY SCHWARTZ
The Market Wizards series is a collection of books written by Jack Schwager that captures the philosophies, traits, experiences, and advice of great traders, seeking to draw out lessons that could help all traders from novices to professionals. The following is an excerpt from Jack about Marty Schwartz. A new never before seen video recalling this interview will be hosted to FundSeeder later this week.
In Market Wizards, the first book of the series, Schwager interviewed Marty Schwartz, a short-term technical trader who had run a $40,000 account into over $20 million while never realizing a drawdown of more than 3% (based on month-end data) in the process. Schwartz took pains to point out that his two worst months—losses of 3% and 2%—were the months his children were born and he was unavoidably distracted. During this period, he had entered ten public trading contests. Nine of these were four-month contests in which he averaged a 210% return nonannualized! In his single one-year contest, he scored a 781% return. The following excerpts from Market Wizards focus on Schwartz’s trading rules and his advice to traders.
From time to time, you have alluded to your trading rules. Can you list them?[Reading from a list and extemporizing] I always check my charts and the moving averages prior to taking a position. Is the price above or below the moving average? That works better than any tool I have. I try not to go against the moving averages; it is self-destructive.
Has a stock held above its most recent low, when the market has penetrated its most recent low? If so, that stock is much healthier than the market. Those are the types of divergences I always look for.
Before putting on a position always ask, “Do I really want to have this position?”
After a successful period, take a day off as a reward. I’ve found it difficult to sustain excellent trading for more than two weeks at a time. I’ve had periods where I can be profitable for twelve days in a row, but eventually you just get battle fatigue. So, after a strong run of profits, I try to play smaller rather than larger. My biggest losses have always followed my largest profits.
This next rule is a major problem for me; I’m always trying not to break it. The rule: Bottom fishing is one of the most expensive forms of gambling. It’s OK to break this rule on occasion if you have sufficient justification. For example, today, I bought the S&Ps when they were down sharply. Two weeks ago, I had written down the number 248.45 as the best entry for the S&P. The low today was 248.50. Consequently, I was able to buy into weakness today and make a good deal of money. I had a plan, I carried it out, and it worked. It doesn’t always work. It was risky, but I wasn’t pyramiding wildly into it, and I knew how much I was risking.
That brings me to my next rule: Before taking a position, always know the amount you are willing to lose. Know your “uncle point” and honor it. I have a pain threshold, and if I reach that point, I must get out.
When T-bonds and T-bills differ in respect to their individual relationship between price and the moving average—one above the moving average, the other below—have no position until one confirms the direction of the other. [Generally speaking, a price above its moving average implies a price uptrend, while the reverse case implies a price downtrend.]
Then, the last words I have at the bottom of the page are: Work, work, and more work.
Is there anything to add to that list?
The most important thing is money management, money management, money management. Anybody who is successful will tell you the same thing.
The one area that I am constantly trying to improve on is to let my gains run. I’m not able to do that well. I’m always working on it. To my dying day, I’ll probably still be working on it.
Is that because you do something wrong?
I just love to take profits. I hear music when the cash register rings. The irony is: How can I be willing to risk 400 points on the downside and only take 200 points of a 1,000-point move on the upside?
On the risk side, you have a method, a plan. Have you experimented with trying to use similar discipline on the profit side?
Yes, but I haven’t been able to perfect it. I have had varying degrees of success, but it is my greatest criticism of myself.
Why the difficulty in this area?
I think it all relates to my fears of some cataclysmic event. I’m like W. C. Fields: I have several bank accounts and a few safe deposit boxes with gold and cash. I’m extremely well diversified. My thought process is that if I screw up in one place, I’ll always have a life preserver someplace else.
Any other rules you can think of?
Yes. If you’re ever very nervous about a position overnight, and especially over a weekend, and you’re able to get out at a much better price than you thought possible when the market trades, you’re usually better off staying with the position. For example, the other day I was short the S&P and got nervous because the bond market was very strong on the night session. The next morning, the stock market was virtually unchanged. I was so relieved that I could get out without a loss, I covered my position. That was a mistake. A little later that day, the S&P collapsed. When your worst fears aren’t realized, you probably should increase your position.
Have you ever tried training people to be traders working for you?
I hired four people, but nobody lasted. They all became intimidated. I tried to clone myself and it didn’t work. I taught them all my methodologies, but learning the intellectual side is only part of it. You can’t teach them your stomach.
Why do most traders lose money?
Because they would rather lose money than admit they’re wrong. What is the ultimate rationalization of a trader in a losing position? “I’ll get out when I’m even.” Why is getting out even so important? Because it protects the ego. I became a winning trader when I was able to say, “To hell with my ego, making money is more important.”
What do you tell people who seek your advice?
I always try to encourage people that are thinking of going into this business for themselves. I tell them, “Think that you might become more successful than you ever dreamt, because that’s what happened to me.” I have the freedom I always wanted, both financially and structurally. I can go on vacation at any moment. I live in Westhampton Beach half of the year and in New York the other half. I have a wonderful lifestyle. My kids think all fathers work at home.
What is the best advice you can give to the ordinary guy trying to become a better trader?
Learn to take losses. The most important thing in making money is not letting your losses get out of hand. Also, don’t increase your position size until you have doubled or tripled your capital. Most people make the mistake of increasing their bets as soon as they start making money. That is a quick way to get wiped out.
The Undiscovered Market Wizards Search
Jack Schwager is one of the cofounders of FundSeeder (fundseeder.com) a new online technology company that provides traders with a free graphic and analytics platform, as well as offering traders worldwide the opportunity to get discovered. FundSeeder’s technology allows traders to verify their track records, benefit from performance analytics and risk management tools, access an emerging manager support structure, find potential trader employment opportunities and, if regulated, connect with investors.
As the Chief Research officer of FundSeeder, Schwager plans to select traders discovered via FundSeeder as interview subjects for his next Market Wizards book, tentatively titled Undiscovered Market Wizards. If you would like an opportunity to be featured in this book or to be selected to manage investor capital, or if would just like to enjoy a great trading analytics platform free of charge, click on the link below to sign up for FundSeeder today.
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