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Major Points on Schwager’s Market Wizards Interview with Michael Marcus

  
  Education
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MUST READMETHODOLOGY

Ride Your Winners – Never Get Out Unless the Trend Changed

  • One time, [Ed Seykota] was short silver and the market just kept eking down, a half penny a day, a penny a day. Everyone else seemed to be bullish, talking about why silver had to go up because it was so cheap, but Ed just stayed short. Ed said, “The trend is down, and I’m going to stay short until the trend changes.” I learned patience from him in the way he followed the trend.
  • During the great soybean bull market, the one that went from $3.25 to nearly $12, I impulsively took my profits and got out of everything. I was trying to be fancy instead of staying with the trend. Ed Seykota never would get out of anything unless the trend changed. So Ed was in, while I was out, and I watched in agony as soybeans went limit-up for twelve consecutive days. I was real competitive and every day I would come into the office knowing he was in and I was out. I dreaded going to work, because I knew soybeans would be bid limit again and I couldn’t get in.
  • If you don’t stay with your winners, you are not going to be able to pay for the losers.

Get Out When the Volatility and Momentum Become Absolutely Insane

  • One way I had of measuring that was with limit days. In those days, we used to have a lot of situations when a market would go limit-up for a number of consecutive days. On the third straight limit-up day, I would begin to be very, very cautious. I would almost always get out on the fourth limit-up day. And, if I  had somehow survived with any part of my position that long, I had a mandatory rule to get out on the fifth limit-up day. I just forced myself out of the market on that kind of volatility.

Take Note of Intraday Chart Points

  • I learned the importance of intraday chart points, such as earlier daily highs. At key intraday chart points, I could take much larger positions than I could afford to hold, and if it didn’t work immediately, I would get out quickly. For example, at a critical intraday point, I would take a twenty-contract position, instead of the three to five contracts I could afford to hold, using an extremely close stop. The market either took off and ran, or I was out. Sometimes I would make 300, 400 points or more, with only a 10-point risk.
  • Although that approach worked real well then, I don’t think it would work as well in today’s market. In those days, if the market reached an intraday chart point, it might penetrate that point, take off, and never look back. Now it often comes back. (more…)

Do Losers Average Losers

  
  Education
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Do losers average losers?
Averaging down is usually compounding your loss had been my experience.

Or, throwing good money after bad money.

Averaging in or out looks a lot like hedging/scalping the gamma of an options position. Counter trend if you’re short, trend following if your long.

How you amend your position with respect to some factor (be it equity, time, what-have-you) is imho the next frontier, and the most productive, to-date, endeavor in portfolio management (and little understood because people had not crafted the tools to study it).
Adding to losing positions is portfolio insurance in reverse. The points bad of portfolio insurance, are points good now in this exercise and vice versa. There is an enormous, fertile, ocean-sized domain to be explored and exploited here, and there is the opportunity to step beyond mere aphorisms in this regard.
Ralph, as I understand what he does is the worlds master of averaging positions—but not for short term trades—only trades where he knows the position will show a profit…unlike we short term traders that often buy at all time highs, etc.

Just because a trade goes against you initially, doesn’t mean the trade isn’t good. If the conditions that got me into the trade in the first place still exist and I didn’t go all in with my full package initially, I’ll add to my position. All it means is I was a little early on my initial execution, and when the trade is working, I’ll add aggressively.

Yes indeed. (more…)

Managing your luck

  
  Education
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You absolutely must have an edge. In the short run, you can get lucky and make money doing something that has no edge, but expected value will catch up with you. Don’t gloss over this point, because it might just be the single most important thing we can say about trading–you have to have an edge. 

You must be consistent. You must trade with discipline. Nearly everyone who writes anything about trading says these things, but the why is important: you must be consistent because the market is so random. You cannot change your approach based on short-term results because those short term results are confounded by the level of noise in the market. In other words, you can lose doing the right thing and make money doing the wrong thing. Too many traders make adjustments based on evaluating a handful of trades, and this is likely a serious (fatal) error. See point 1: have an edge, and, now, apply that edge with consistent discipline. Markets are random; you don’t have to be.

Luck matters. There’s no denying that, but so does skill and so does edge. In fact, the more skillful you are as a trader, paradoxically, the more luck matters. (See Mauboussin book and video link near the end of this post.) You can be successful without luck, but the wildly successful traders (who are outliers) always have some significant component of luck. If the overall level of investment skill in the market is rising (far from a certain conclusion, in my opinion), then performance will converge and luck will play a bigger part for the top performers.

If you understand the part luck plays in your results, you will realize that emotional reactions to your results are largely inappropriate. Yes, that sentence sounds like something a Vulcan (from Star Trek) would say, but it’s true. Too many traders ride the emotional roller coaster from euphoria to depression based on their short term results, and this really doesn’t make sense because you’re letting luck (random fluctuation) jerk your emotions around. (It is worth considering, though, that this works for some traders and may actually help their performance.)

MOST IMPORTANT RULE OF TRADING

  
  Education
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The most important rule of trading is to play great defense, not great offense. Every day I assume every position I have is wrong. I know where my stop risk points are going to be. I do that so I can define my maximum possible drawdown. Hopefully, I spend the rest of the day enjoying positions that are going my direction. If they are going against me, then I have a game plan for getting out. – Paul Tudor Jones

Most important rule of trading

Timeline — from Thomas Edison to the unwinding of GE Capital

  
Analysis, Education
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1890 — Four companies representing inventor Thomas Edison’s interests merge to form the Edison General Electric Company.

1932 — GE Credit Corporation begins to offer credit to customers to buy General Electric appliances.

1981 — Under chief executive Jack Welch, GE Capital begins a dramatic ascent. Between 1986 and 1993 profits double to $1.5bn and assets to $155bn. GE Capital becomes the world’s largest car-leasing company, the world’s largest ship container leasing company and the biggest private mortgage insurer.

2004 — GE Capital buys Dillard’s credit card unit for $1.25bn.

2008 — As the credit markets seize up, GE announces its first fall in quarterly profits for five years. In September, chief executive Jeff Immelt calls Henry Paulson, the then Treasury secretary, to say GE “was finding it very difficult to sell its commercial paper for any term longer than overnight”.

2011 — GE buys MetLife Bank, an online retail banking arm.

2013 — Mr Immelt sets a target that GE Capital should provide no more than 30 per cent of group earnings.

2014 — GE Capital has $7bn of net income, assets of $499bn and more than 35,000 employees. It operates in 40 countries. In the US, GE takes Synchrony Financial, its store credit card arm, public in a $2.88bn initial public offering.

2015 — Mr Immelt announces plans to sell the bulk of GE Capital over the next two years and return the company to its manufacturing roots.

22 Rules For Day Trading

  
  Education
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1.Time horizon is one year, not one day
2.Sangfroid wins.  Equanimity is more important than anything else
3.Make your own decisions; listen to yourself
4.When you sell a long, consider a 180 and shorting it (and vice versa)
5.Don’t buy a stock right ahead of an earnings call
6.Your performance is better when you don’t listen to underperformers.
7.Listen to analysts only for potential stock ideas- and do my own work
8.Don’t agree and don’t argue (when you differ in opinion)
9.Be humbly confident when things go your way.  Say “I got lucky this time”
10. Ego has no place here.  Trade to make money, forget pride.
11. Act without full information, while doing efficient work
12. It’s OK to make mistakes.
13. Correct mistakes early- sell on missed earnings/changed thesis, and buy back something you’ve sold if things change. 
14. Learn every day- build a new sheet – read filings- listen to calls
15. Don’t worry too much about what the crowd thinks
16. Don’t waste too much time on big Macro
17. “Sometimes you have to let the other guy make some money too”
18. Worrying is not doing
19. Don’t be a second-guesser or let them hover around you
20.  Sometimes you have to suffer first before you win.
21.  Just because the majority agrees on something doesn’t mean they’re right.
22.  Focus on The Game

5 Basic Tasks Necessary To Become A Winning Trader

  
  Education
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  1. Develop a competent analytical methodology.
  2. Extract a reasonable trading plan from this methodology.
  3. Formulate rules for this plan that incorporate money management techniques.
  4. Back-test the plan over a sufficiently long period.
  5. Exercise self-management so that you adhere to the plan. The best plan in the world cannot work if you don’t act on it.

Successful Traders are Having 3 Things

  
  Education
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1)  Resilience – Successful traders take risk.  Successful traders are sometimes wrong.  Successful traders take hits.  Successful traders learn from the hits, get up, and move on.  They are resilient.  They succeed, as Churchill observes, by moving from failure to failure with enthusiasm.
2)  Selectivity – Successful traders have clear criteria for what makes good trade ideas.  They also have separate criteria for what turns good ideas into good trades.  They don’t watch everything, and they certainly don’t trade everything.  They wait for good ideas to become good trades.
3)  Calling – Successful traders have an uncanny sense that this is what they’re meant to be doing.  It’s not a job, and it’s not a career for them.  It’s a calling.  That’s the only thing that can keep people searching and re-searching, banging away for good ideas and good trades.  And it’s the only thing that enables them to gain the immersive pattern recognition experience that separates them from average traders.
To be sure, there are other success ingredients, from discipline to creativity.  What I see among the traders listed above, as well as those I work with, is an unusual combination of these three factors.  It’s a pleasure and a true education to study successful people.  There is much more to success than avoiding failure.

40 Great Quotes of Ed Seykota (Must Read )

  
  Education
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Ed Seykota, first featured in the book  Market Wizards has one of the best records of all time for any trader. Ed Seykota’s returns on capital compares to those achieved by Warren Buffett, George Soros or William J. O’Neil. He is among the trading gods with no doubt. What does he find important in trading success? Mr. Seykota has a keen focus on trader psychology above all other trading dynamics. Seykota’s website Trading Tribe spends more time advising it’s readers on proper trading  psychology than anything else. Most traders are not concerned with their own psychology and instead focus on entries and exits, with trading systems and making money, not their mind and emotions. This is generally their undoing. The longer you trade and the bigger your account grows the more I see the crucial importance of mindset in the trader’s success or failure. When a losing streak sets in the trader finds out what his underlying issues are and how he handles losing is the key to his long term success. The traders ego management determines his success as much as his trading system and risk management. An an ego can cause you to let losers run and bet far too much on any one trade. An unchecked ego can destroy your account. The market is a terrible place to learn about internal issues by losing money. Here are some quotes that changed how I thought about trading early on and have kept me on the right path to consistent profits. (more…)

1 Thing Critical To A Trader's Success

  
  Education
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I think more than anything it has to be discipline. Because as important as finding a suitable methodology, developing a strategy, sound risk management, and position sizing is, it will be for nothing if you don’t have the discipline to consistently execute it and follow your rules.

Discipline is an integral part of all trading, whether systematic or discretionary, day trading or buy-and-hold, across all asset classes. I don’t believe you can be consistently successful without it.

Risk control based on risk per trade, risk control based on sector, risk control based on total portfolio.

You must know how much you can lose on a given trade, and the maximum loss to your entire portfolio at any one time. Only then can you take the necessary measures to manage these risks.

Almost equally important is correct trading psychology. Being able to accept trades that do not work. Staying focused and strong in the complete uncertainty of trading.

Because even the best trading system will have losing periods and this is when you need to remain discipline and continue executing your trades.

A trader must have many different ingredients to be successful in trading, but what is absolutely critical is that you must love the type of trading you do.

Many people think they have a passion for trading but the reality of trading; watching charts, managing risk all day, is not as exciting as many believe. If you are a day trader then you must actively enjoy this process.

If not, you must find another form of trading (or profession) that suits your style. That might be swing trading, automated trading, systems trading, whatever. But what you must have is passion!

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