Notes On Market Wizards I

 

Tom Baldwin Baldw in.................................................................................................................................... ....................................................................................................................................  2  Dr. Van K. Tharp.............................................................................................................................. Tharp..............................................................................................................................  3  William O'Neil................................................................................................................................. O'Neil.................................................................................................................................  4  Michael Marcus............................................................................................................................... Marcus...............................................................................................................................  5  Bruce Kovner................................................................................................................................... Kovner...................................................................................................................................  7  Larry Hite......................................................................................................................................... Hite.........................................................................................................................................  9  Brian Gelber................................................................................................................................... Gelber...................................................................................................................................  10  Richard Dennis.............................................................................................................................. Dennis..............................................................................................................................  11  Gary Bielfeld................................................................................................................................. Bielfeld.................................................................................................................................  13  Mark Weinstein.............................................................................................................................. Weinstein..............................................................................................................................  13  Paul Tudor Jones............................................................................................................................ Jones............................................................................................................................  14  Michael Steinhardt......................................................................................................................... Steinhardt.........................................................................................................................  16  Ed Seykota..................................................................................................................................... Seykota.....................................................................................................................................  17  Marty Schwartz.............................................................................................................................. Schwartz..............................................................................................................................  19  Tony Saliba Salib a.................................................................................................................................... ....................................................................................................................................  20  James B. Rogers............................................................................................................................. Rogers.............................................................................................................................  22 

 

Tom Baldwin T-Bond trader - one of the biggest - trades up to 2000 lots at a time, sometimes 20 thousand a day. Was a manager in a meat packing firm, quit his job with $25000 and leased a seat on the CBOT, and his wife was pregnant at the time. Hardarse ! He made a million within his first year.

Learning •

Le Lear arnt nt to to trad tradee by stan standi ding ng in the the ring ring an and d watc watchi hing ng,, six six hour hourss a day day,, wait waitin ing g unti untill he could develop an opinion, then he would trade, just one lot. He would see the same scenarios developing over and over again. Became a pure scalper.

Masterplan •

Seem Seemss to ha have ve an inc incre redi dibl blee kno knowl wled edge ge of of the the mark market et,, expe experi rien ence ce of of all all the the diff differ eren entt scenarios, dare it be said, a gut feel. The advice he gives is crap, as if he was assuming that you had a gut feel too.

Psychology •

This guy guy is a total tal harda rdarse rse. He is prob robabl bly y a robo obot.

•

As so soon on as yo you u sta start rt to th thin ink k you you'r 'ree iinf nfal alli libl ble, e, you ge gett sla slamm mmed ed..

•

Neve Neverr tthi hink nk of the the mon money ey - whe when n you you're 're losi losing ng,, b but ut equa equall lly y whe when n you you'r 'ree win winni ning ng.. If you you have made a load of money, don't think about it, just concentrate on staying with the trade until you get a signal to get out, don't think, "oh, I have made so much, I am going to cash it in and take my profit."

System •

Scalper

•

Tra rade dess the the fun funda dame ment ntal al eco econo nomi micc fig figur ures es whe when n tthe hey y com comee out out - kno knows ws wha whatt he is goi going ng to do if the number comes out one way, unchanged or the other way.

Excellence and Inspiration •

The smarter you are, the dumber you are.

 

•

He work worked ed ha hard rd.. He He sto stood od in the the pit pit six six hou hours rs a day day,, aall ll da day y, eeve very ry day day.

•

Live by the sword, die by the sword.

•

Make Make yo your ur own own luc luck. k. You work work ha hard rd,, put put in the the ttim imee and and effo effort rt,, aand nd you you get get luck lucky y.

General Knowledge

Dr. Van K. Tharp PhD in psychology. Set up an Investment Psychology Inventory.

Psychology • The IPI has eleven measures: Psychological factors i. well-rounded personal life ii. positive attitude iii. motivation to make money iv. lack of conflict v. responsibility for results Decision-making i. solid knowledge of the technical factors in the market ii. aptitude for making sound decisions without common biases iii. ability to think independently Management-discipline i. risk control ii. ability to be patient iii. intuition • Most losing traders need only have failings in part of the profile. • Anyone can win if they are committed to doing so. • The inability to admit that their beliefs may be wrong is the biggest obstacle. • People are risk-averse in profit-making situations and risk-seeking in loss-making situations. Thus they cut short their profits and let their losses run.

 

• When under stress, people tend to fall back on familiar tactics. The co commonest mmonest is not actually to make any decisions. • You must reduce the stress. Develop stress protectors. Stress mostly comes from the perception of the situation. If you can change the way you think about the situation, you can avoid stress. • Make it OK to lose. You Yo u have to lose, and you have to accept that, to eliminate the stress involved. • You have to reconcile the parts of your mind, each of which has different intentions. There is no room for conflict. For instance, one trader could only make $75000 a year, and this  boiled down to the fact that his father was very successful but had become an alcoholic. To avoid this, this part of his brain would w ould not let him become any more successful. Two months after the analysis, he had made $650,000. • Control your emotions, do not let them control your trading - you can do this by controlling your posture, your breathing and muscle tension. Emotions are though only symptoms of  struggles in your mind between conflicting intentions. • If you want to change your mental state, notice your posture, your breathing, your facial ex pressions, and then imagine how you would look in the desired mental state and then copy it. • If you want to nudge nudg e that thought out from behind a mental block, shift the direction of your  gaze. This opens other parts p arts of your mind. • Top traders believe: i. money is not important ii. it is OK to lose in the markets iii. trading is a game to be played p layed by certain rules iv. mental rehearsal is important for success v. because they have rehearsed, they know all the possibilities and that in the long run, they cannot lose. They have won the game before they start • If you are committed to becoming beco ming a great trader, then providence will help you. Events will just seem to occur to help you - they might be disasters, but they will help. • Own your problems. If you do not own your problems, embrace them, you cannot do anything to solve them next time they happen. Problem solving is a process - you made a decision at some point that made those results. Determine what that choice point was, which decision it was that lead to the problem, and then when you encounter a similar choice point in the future, you will change the results you get. • All problems are mental state control problems - too much impatience, anger, fear, optimism etc.

 

William O'Neil Began as stockbroker in 1958. With 3 positions, short Korvette and long Chrysler and Syntex, and by pyramiding his profits, he turned $5000 into $200 K. Then he bought a seat on NYSE and formed his own firm. In 1983 founded 'Investor's Daily' in competition to WSJ. Makes 40% annually on his stock picks. Bullish on America.

Learning Masterplan (1) an effective trade selection strategy (2) a rigorous risk control rule (3) discipline to stick to the two rules above.

Psychology • Don't take unlimited risk - have a stop out point. Would you drive a car without brakes?

System • Buy stocks - CANSLIM: C = current earnings per share must have risen 50% for the quarter compared to a year before. A = five year moving average of annual earnings must rise at over 24%  N = something new - a service, an change in the industry, new management S = shares outstanding must be less than 25 2 5 million (average of the best performers is 11 mill) L = leading stock - relative strength over ove r 80 (relative strength is stock performance better than 80 percent of other stocks) I = institutional sponsorship - by the time all institutions own the stock, it is too late to buy. M = market-timing. Only 2% of stocks at any point in time fit this formula. Only two out of ten turn out to be truly outstanding, although two thirds make a profit. • 7% stop loss.

 

• Market tops: the average moves up to a new high, but on low volume. Demand for stocks is  poor. Or: volume surges for a few days, but there is little little upside movement on mkt closes. • Market tops: the stocks leading the rally start breaking. • Tops: the Fed discount rate - the market runs into trouble after 2 or 3 hikes. • Tops: the daily advance/decline line will lag behind the market averages and fail to penetrate  prior peaks, as less stocks are participating in the market advance.

Excellence and Inspiration • Every thing is possible with persistence and hard work. It can be done and your own determination is the most important element.

General Knowledge

Michael Marcus He began his career as a commodities research analyst, was a compulsive trader,

became a floor trader but was too shy to trade for himself. Gave that up to trade for Commodities Corporation. Lives in a big house by the beach in Southern California.

Learning • had $50,000, bought max. no. of contracts in corn and the market went limit down. He lost 80% of his equity. Second time, went long with major position in lumber and was almost wiped out. Was burnt twice before he learnt not to bet 100% on one position. DON'T OVERTRADE ! Bet less than 5% of your money on any one idea. • Follow your own light - don't trade other people's ideas - stick with your own methods and learn how to deal with them, don't waste time on anything else, it just detracts.

Master Plan • had $50,000, bought max. no. of contracts in corn and the market went limit down. He lost 80% of his equity. Second time, went long with major position in lumber and was almost wiped out. Was burnt twice before he learnt not to bet 100% on one position. DON'T OVERTRADE ! Bet less than 5% of your money on any one idea. • Kept missing out because he had no system and would watch Ed Seykota making money on his trend following system.

Psychology

 

• Patience - to wait for a clearly defined situation where you are sure • If you become unsure about a trade, get out. When in doubt, get out and get a good night's sleep. • When you are in a position, you can't think. When you get out, you can think clearly again. • IS emotional - gets hurt and loses his bottle. Has ego attached to trading, but is still very openminded and says about losses 'I had hoped to make a lot of money in this trade, but it isn't working so now I am going to get out.' • When he loses, he cuts down his trading or even stops co completely, mpletely, sometimes for three or four  weeks at a time.

System wait until you have all three factors on your side: (1) Fundamentals (2) Technicals (3) Market tone: a bull market should shrug off o ff bearish news and respond vigorously to bullish news. Use the sentiment indices. How many days has the market  been up or down in a row? When the news is wonderful and market can't go up, you want to be short.

• Pick a point where you are going to get out before you get in. An exit point on every trade.

Excellence and Inspiration • "I think to be in the upper echelon of successful traders requires an innate skill, a gift. It's just like being a great violinist. But to be a competent trader and make money is a skill you can learn." • " A good trader can't be rigid. If you can find somebody who is really open to seeing anything, then you have found the raw ingredient of a good trader. "

General Knowledge • Floor trading helps develop a better sense - gauging moves by the noise level and the order  flow, e.g. an active and moving market that gets quiet is a sign that it is not going to move much further; also if it instead gets very loud, that is a sign that the market is running into a greater amount of opposing orders. • Trading on the floor means being able to take on large positions at key intraday chart po points, ints, and if the trade didn't work, get out fast with only a 10 point risk compared to the possible 300 - 400 point reward. Like surfing the crest of a wave. But today this technique  probably won't work because the TA is not so reliable.

 

Bruce Kovner In 1987, the year leading up to the interview, he turned $450 mill into $650 mill. He started at Commodities Corporation as a trader for Michael Marcus.

Learning • Rode $3000 up to $45000 on a soybean spread. At the top the market went limit up and he took his brokers suggestion to lift the short side. The market turned around and fell and he lost $23000 in 15 minutes to a limit down. He learnt that: (1) You cannot disregard risk  (2) His discipline was much worse than he imagined (3) He had lost his rationality in the panic situation at limit up (4) The markets can take back as fast as they can give

Masterplan • Has a fundamental view and an d uses TA to clarify the picture - knows the markets. He tries to form many different mental pictures of what the world should be like and wait for o one ne of  them to be confirmed. You keep trying them one at a time and inevitably most will turn out to be wrong - only a few elements of the picture will prove to be correct. Then you will find that in one picture, nine out of ten elements click.

• He creates this scenario at least once a week and defines ranges for each currency and what to do if there is a break out of the range. • He has all the guru reports and when the market is not confirming the general bull/bearishness, then his contrarian opinion is confirmed. • Undertrade, undertrade, undertrade. Take only a 1 - 2% risk on any position.

Psychology • When something happens to disturb your emotional equilibrium, close out all positions related to that event. • You have to be willing to make mistakes. You make your best judgement and are wrong - you make your second best judgement and are wrong - you make your third best judgement and you double your money. • Losses that are the result of sound trading techniques are not a problem, merely a test of whether you can conform to your system.

 

• The market does not hear when you say "I wish" or "I hope", that is a destructive thought pattern and takes attention away from the diagnostic process.

System • He often goes with breakouts - breakouts are not reliable per se because they can be exacerbated by technical trading - but if a market consolidates and everybody believes that there is no reason for a breakout, and it does breakout, then that is more reliable than a breakout caused by something, e.g. a WSJ article. • When an important fundamental development occurs, the initial direction of the market move is often a good tip-off of the longer-term trend, e.g. the Canadian dollar broke out on the upside just as the US/Canada trade pact was being sealed in 1987. The market usually leads because there are people cleverer than you. • Whenever he enters a trade, he has a predetermined stop. • He places his stop beyond some technical barrier, at a point that will determine that the trade is wrong, not based purely on a dollar loss.

Excellence and Inspiration • You can make a million dollars. If you apply yourself, great things can happen.

• You need the ability to imagine configurations of the world different from today and really to believe that it can happen. And you need to stay rational and disciplined under pressure. • If you don't work very hard, it is unlikely that you will be a good trader.

General Knowledge • The Heisenberg Principle in physics is that if something is highly observed, the odds are that it is going to be altered in the process. The less observed the market, the better the trade. Vice versa, if the market is very well we ll observed, it can be prone to false breakouts.

Larry Hite Just an average schooling, had many jobs, acting and screenwriter, into the music scene, met Brian Epstein at a party. Became a stock broker, then a commodity broker, before founding his own trading firm with a computer designer and a statistician. From 1981 to 1988, they achieved 30% annual return with very low drawdowns. Equity has flooded in - they aim to manage $2 billion.

Learning • He took advice from a friend to trade corn, selling the old crop and going long the new crop. He thought it was a safe trade, because one offset the other, so he really loaded up. Then the government released a report showing surprise crops, and the old crop went limit up

 

and the new crop went limit down. Learn: (1) Don't trade on other people's advice (2) Always heed market risk - or they'll carry you out. If you don't take a hard look at risk, it will take you.

• On "Wall Street Week" there was a panelist who was seventy years old. He said his father had taught him that bonds are the corner stone of a good portfolio. Since that guy had been in the business, he had seen interest rates go down only once out of every eight years - but he stuck to what his father taught him. Obviously the word "bonds" means a lot more to him than the reality. Look hard at everything. Make sure that what you are seeing is reality.

Masterplan • Holding periods - to test profitibility. 90% of all 6 month periods, 96% of all 12 month periods and 100% of all 18 month periods on his system test as profitible. What is the chance of starting off without sufficient capital and the first six month not being profitible, and wiping out your capital? Work it out by back-testing. • Never risk more than 1% of equity. Keeping your risk small and constant is critical. • If a market doesn't respond to important news in the way it should, that is confirmation that it wants to go in the other direction. E.g. gold - when news of the Iran/Iraq war breaking out hit the headlines, gold moved a dollar higher when it should have rocketed. Soon after  that it broke. • When a market makes a historic high, it is telling you that something has changed.

Psychology • His rigorously tested system is his edge. He has all the confidence in the world in it. He may not know what is going to happen tomorrow, but he knows what is going to happen in the long run.

• There are four kinds of trades: good bets, bad bets, winning bets and losing bets. A losing bet can be a good bet. If the odds are 50/50 and the payoff is $2 versus $1 risk, that is a good bet even if you lose.

System • When volatility measured over the last 10 to 100 days increases too much, he ceases trading that market. • Trend following and no exceptions. • Diversification - he trades nearly every futures market.

 

Excellence and Inspiration General Knowledge • There are 3 categories of traders: the floor, the trade and the speculator. The floor has the advantage of speed, no-one can be faster than the floor. The trade has the advantage of knowledge and the best ways of getting out of positions - they can offset a futures position in the cash market. The speculator's advantage is that he doesn't have to play. He can choose to trade only when the odds are in his favour.

Brian Gelber Started in 1976 as broker on CBOT, then floor manager, Tbonds, then simultaneously trading his own account. Was very big trader and broker, if not the biggest on CBOT. Left floor in 1986. Has clearing, brokering and money management firms.

Learning • Instead of thinking "I have an opinion and I want to express it in the market", he started asking "How do I make money out of all of this?" • Losing money on trades based on someone else's opinion taught him to disregard those opinions.

Masterplan • Never add to a loser • The average trader always overtrades and begs for tips. • On a losing streak, cut down on trading or take a break.

Psychology • When you don't care, you do well and when you try too hard, you don't do well. • You have to force yourself to be motivated with each new day.

System • Has technical systems, but combines them with his own discretionary trading • On the floor he would trade swings backwards and forwards.

Excellence and Inspiration

 

• This guy seems to be a born trader.

General Knowledge • If you are a broker, you are not a trader. If you are a trader, you are not a broker.

Richard Dennis Started in late 1960s as a runner on the floor and traded at the same time. Then got a seat on the Mid-Am and as he was under-age, his father traded for him. Then moved to CBOT and traded soybeans. In 1978 went to desk trading and in 1984 trained the "Turtles". In 1987 and 1988 he lost perhaps 50% ($50 mill) of his equity and retired.

Learning • First bad trade lost $300, and since that was 10% of his equity it screwed him up and he reversed his position but continued to lose, so he reversed back to his original position and lost again, losing $1000 in all - 30%. He learnt: (1) certain losses can affect your judgement - get g et out if you finds a loss destabilising. When you are getting beaten to death, take your head out of the mixer. (2) not to try to catch up or double up to recoup losses.

• Trading is often so intense that you want to avoid thinking about it afterwards. But that is exactly when you should. It helps if you are obsessive.

Masterplan • Minimize losses by saving capital for trades in which you have confidence - don't throw it away on sub-optimal trades.

• Nothing is down to luck - it is only statistics. If something works 53% of the time, over the long run there is a 100% chance of it working. It might be two years though before you see profits. • Do not have your stop where everybody else has their stop - slippage will make the system unworkable. Any good system has hard-nosed estimates for slippage built-in. • See how the market reacts to news. If you are looking for a trend, and the market goes up on good news, then he will go in, but if the market goes down instead he will stay on the sidelines. • The secret to combating the false breakouts is to be as short term or as long term as possible, it is the intermediate term that picks up the vast majority of trend followers - the best strategy is to avoid the middle like the plague. • Do not let long term views cloud your thinking - you will miss profit opportunities. If you ignore a signal because of such a view, you risk missing a large profit, in comparison to a

 

small loss if that view was actually right. Too rigid an idea destroys your risk/reward.

Psychology • You could print a really excellent trading system in the paper, but nobody would follow it successfully because the key ingredient is confidence to take the losses, which is not something that you can get from something in the paper. • Expect the extreme, expect the unexpected. The impossible can happen. • If you are having a losing streak, cut back. If it is really bad, get out completely. • You have to keep everything in perspective - do not let emotions get to you - neither the elation nor the damage. Even when the market gives you a good wallop, be as detached as possible.

• Focus on whether what you are doing is right, not on the random nature of any one trade's outcome, especially when you do not want to think about it.

System • For a trend following system, if there is no profit after a week, then the signal was clearly wrong. • You should always have a worst case point that gets you out of a bad trade.

Excellence and Inspiration • the need to succeed • anyone who is intelligent can be an excellent trader

General Knowledge • In 1988 he lost almost 50% of equity. Someone said to him, why not do the opposite of all your trades? That is the way to lose an infinite amount of money.

Gary Bielfeld Started in 1965 trading one lot corn. Moved on to soybeans, cand then in 1983 to T-bonds. Was long in a huge way since the bottom in '83 and rode the move to the top. Lives in small town Peoria.

Learning

 

Masterplan • Primarily FA with a trend following system as backup to signal when to get out of a position. • A trending following system will provide the discipline to stay with the winners and close out the losers. • Think through a trade thoroughly before putting it on. Have contingency plans. Don't get swayed by every piece of news that hits the market. • Don't trade too much - keep the number of trades down. Otherwise you lose too much in commissions on the poor trades. • Narrow your chances of losing by ditching bad trades immediately and take a small loss. When everything is in your favour, be aggressive and leverage your position to the hilt.

Psychology • You need courage to go into the market, especially to fade market concensus • Have the patience for the right trade to come along.

System • Either takes signals from the system or has a trailing stop, so he always gets out, but not too early and never too late.

Excellence and Inspiration General Knowledge

Mark Weinstein Started trading commodities in 1972, while working as a real estate broker. Lost all the money. Worked for six months really hard and saved $24,000, studied TA and opened a trading account. In a competition at CBOE, he turned $100,000 into $900,000 in three months on options. Trades everything now.

Learning • Wanted to make $350,000 and put on a soybean position with that target in mind. The beans locked limit-down against him five days in a row, and he was losing $125,000 a day. Prior to this he never went short, because he thought it was un-American. He learnt to go short, learnt to respect risk.

 

• A friend advised him to buy some options shortly before expiration, and he lost $40,000. His friend had done the opposite trade, and was using it to teach a lesson not to trust other people's advice.

Masterplan • trades for small profits and tries to eliminate losses (in the options competition 100% of his trades were winning) • Always looks for a market losing momentum, and then goes the other way. • When J.F.K. was assassinated, the stock market fall dramatically, but then reversed and made up to end higher. The market was bullish, and not even a dramatic piece of news could change that.

Psychology • Fear makes you a good trader, fear of the market, scared enough to wait until you are totally confident that a trade will work, afraid enough to do nothing until you have a can't lose trade. • Don't get arrogant, because then you forsake risk control, and get beaten. • Your strategy must be flexible enough to change when the environment changes. • Fear a larger loss and hope for a larger profit.

System • Elliott waves, Gann analysis, cycles, momentum. But you have to know when to use which ones.

Excellence and Inspiration General Knowledge

Paul Tudor Jones Started out as a broker and made a million in commissions. Moved to the NY Cotton Exchange in 1980 and made millions there. In 1984 became a fund manager with $1.5 mill. Has doubled his equity for five years in a row. In the Crash of '87 he made millions short SNPs and long bonds.

Learning

 

• The cotton market was trading between 82 and 86 cents and he was buying at the bottom, and was long 400 contracts. The market broke to new lows, took out the stops and rebounded 30 or 40 points. He thought the stops had lured the market down. On the rebound in an act of bravado he bid 8290 for 100, and immediately the Refco broker came running screaming "Sold". He realized the market was going to drop by the size of the trading range - to 78 - and he was long 600 contracts. The market was limit down in 60 seconds. Lessons: (1) Never play macho man with the market (2) Never overtrade - 4 cents would have been OK, but not with 600 contracts.

Masterplan • When he is trading poorly, he cuts his position size down. When he is doing well, he increases his position size. • Always think of your point of entry as the previous day's close. What you do should depend on whether you are bullish or bearish today. • Play a great defensive, not an offensive. Define your maximum drawdown and place your stops and then spend the rest of the day relaxed. • Other people's market opinions are not valid.

Psychology • You have to be able to handle getting your butt kicked, there are enormous emotional ups and downs involved. • He tries to make himself as happy as possible. If he has positions going against him, he gets right out, if they are going for him, he keeps them. • He always thinks about losing money, not about making it. • Don't be a hero, don't have an ego, always question yourself and your skills. Don't ever assume that you are good, the second you do, you are dead. • You can't ever beat the markets. Always maintain a sense of confidence, but keep it in check. • Be frightened, be scared. Success is ephemeral. • You must be able to change from bullish to bearish or vice versa totally and quickly. Don't let comments you have made or put on the record affect your judgement. That is history and what is important is coming up ... Don't be loyal to your positions. Keep your horizons open and keep a clean slate for your market scenarios.

System • Mostly fundamentals. Has a trend following system, which looks for range expansion and then

 

goes in in the direction of the expansion. • Doesn't just use a price stop, he also uses time stops.

Excellence and Inspiration • To be a good trader, you have to be a contrarian - even though the market looks really good at new highs, that is often the best place to sell.

General Knowledge

Michael Steinhardt Father gave him 200 shares as bar mitzvah present. Studied at Wharton, Pennsylvania, started on Wall Street at 19, in 1960 as analyst and journalist. 1967 formed his own firm. One thousand dollars invested with this firm then would be worth $93,000 by 1988, after fees. Rules his firm of traders and analysts like a captain of a sailing ship.

Learning • You have to find the right balance between confidence and humility, and that is only learnt through experience and mistakes. • You have to learn how and when to step on the accelerator, for instance this guy went long 3400% in Tbills near the market bottom in 1982, but six months to early. He stayed with the position despite the pain. Where did he get the nerve, skill and conviction to perceive this major trading opportunity? 15 years of experience.

Masterplan • Trades stocks. Sometimes closer to investment than trading. • Runs a "hedge fund" - both longs and shorts - but is on average 40% long. • Completely fundamental. Never looks at charts. • Strike when only some of the pieces of the puzzle are in place - that is as much as you can hope for, because when they are all in place, it is too late.

Psychology • The guy on the other side of a trade has always got a perception radically different from your own, the market has often got much more information than you have. You have to find out what that perception is, try to understand why

 

• Success carries the weight of its inevitable failure. • In order to win as a contrarian, you need the right timing and you have to put on a position that is the appropriate size. If you do it too small, it is not meaningful, if you do it too big, you can get wiped out if your timing is slightly off. The process requires courage, commitment, and an understanding of your own psychology.

System • He has a reason for every position, and when that reason is fulfilled or negated, he gets right out without looking back.

Excellence and Inspiration • All great traders are seekers of truth. You have to be intellectually honest with yourself and others. You have to ask, why does someone want to take the opposite side of the trade? You have to admit that you have and will make mistakes.

General Knowledge • In treasuries, you can finance as much as 98% of your purchases, depending on maturity, so there is no real constraint. • There is a shibboleth that you will get a higher rate of return from riskier investments. It is the other way around - it is riskier, therefore a higher rate of return is possible. You have to be convinced that you can get the higher rate in order to play the game.

Ed Seykota Everybody gets what they want. He has a degree in electrical engineering from MIT. In the early 1970s he developed the first commercial computer trading system for the futures markets. Lives in Reno out in the mountains in California, and has no quote machine.

Learning • His first trading idea was to go long silver, in late 60's when the US Treasury stopped selling it. As soon as they stopped, the price fell. The market has discounted the news already.

Masterplan • He developed a computer system which his company marketed. The management kept on second guessing the signals though. The way they traded the system, it wasn't profitable. Don't second guess your system! • Trading a system is not cut and dried. The manager has to decide how much risk to accept, which markets to play, how aggressively to increase or decrease the size of the trades with respect to equity.

 

• The elements of good trading are: (1) cutting your losses (2) cutting your losses and (3) cutting your losses

• During a losing streak, cut down your trading and try to ride it out. Do not try to make up for it with larger positions. • Be more aggressive after winning (in terms of the system) and less so after losing • Trade only 5 percent on each trade.

Psychology • Even he himself second guessed his system early on, because he didn't have confidence or trust in it. He was looking for a system with which he was compatible. • Sometimes he considers himself and the things he does as a system, which he always follows. It probably doesn't help the profits, but he needs a creative outlet. • Being bullish and not being long is illogical. • Make sure your rules reflect your trading style, and then follow them without question. • Gut feel is important, and if ignored can come out in other ways and colour your logic. Deal with it through meditation or reflection to determine what is behind it. • The strength of one's emotions in the market are inversely proportional to one's commitment to being a trader.

System • He picks spots to buy or sell by waiting for moments when the momentum is strongly in the direction of his trade, to reduce the probable risk. • When a market gets wild, get out of the positions, don't wait for your stops to be taken out. This cuts down the volatility and emotional impact. • He always places his stops when he puts on a position, an and d then raises the stop as the trend develops.

Excellence and Inspiration • There are old traders and there are bold traders, but there are very few old, bold traders. • Let trading be your passion, your life, everything.

 

• The average trader should find an excellent trader, give him his money and go and find something he loves doing. • Everybody gets what they want out of the market. Losers want to lose and winners who fall short of their goals fulfil some inner need to do this and not win.

General Knowledge

Marty Schwartz Always wanted to be top in school, college. Graduated 1967. Joined marines. Jewish - a sergeant drew a star of David on his forehead. Then did MBA at Columbia. Worked for ten years as securities analyst. Bought a seat on the AMEX and traded options. Entered the US Trading Championships and made on average 210% return for the 4 months of each contest. Ran $40,000 up to $20 million.

Learning • In 1973 put his money into a system which used a mainframe. Lost $20,000 and his dreams of glory. • On Election Day in 1982 the Republicans did much better than expected and the SNP locked limit up. He added to his position at the limit. The next day his wife told him to get smaller, and he had to take $60,000 losses in one day. Just shrink the trading size when you are losing, don't try to compensate by making bigger trades. Repair the psychological damage by making good trades again, getting black ink, but do it with small amounts until your confidence returns.

Masterplan • when the market gets good news and goes down, it means it is weak. When it gets bad news and goes up, it means that it is very healthy. • Don't increase your position size until you have doubled your money. • Decreases his position size after long winning streaks, because he gets too cocky. Sometimes he  just takes a break.

Psychology • As a loser he said, I figured it out so it can't be wrong, and he willed the market to move - "I'll get out when I'm even" - it protects the ego. As a winner he said, I figured it out, but if it goes wrong, I'm going to get the hell out - "To hell with my ego, making money is more important". • You know you can always do better, because you know how many times you screw up.

 

• Don't freeze under fire. Keep thinking, or get out. It is always easy to put the trade back on again, and being flat helps to clarify everything.

System • uses moving averages in general

Excellence and Inspiration • "I am trying to earn infinity when I trade."

General Knowledge

Tony Saliba Started out at the CBOE as a clerk in 1978 and after 6 months became a trader with $50000 borrowed from another broker. He nearly lost it all, but came back and made a fortune, including a streak of seventy consecutive $100,000 a month profits.

Learning • In his first week, he made $50,000 into $75,000 on volatility spreads. He thought that was easy and then he lost it all as the volatility vanished into air. The DC10 plane crash at O'Hare airport, when loads of people died, was the low point. Learnt not to risk everything trying to get a huge profit, but to chip away it, trying to make $300 a day, discipline, and that you have to work.

Masterplan • He has a net position that is risk neutral, 95% of the time. • He knows his worst case, he knows that his loss is always limited, no matter what happens. • Recap the day's trading and figure out what you did right and what you did wrong. Then go through the next day's possibilities, think through all the what-ifs, anticipate and plan. • Does his homework every night, and doesn't let anything get in the way of his daily regimen.

Psychology • Traded one lots in the Teledyne options pit and everyone called him "One Lot" for about a year, and made his life hell. But he didn't let his ego get in the way and carried on trading the way he wanted to.

 

• When you are in a boat and it springs a leak, you don't drill another hole to let the water out. • Clear thinking, the ability to stay focused and extreme discipline.

System • options, writing or buying spreads, butterfly spreads, scalping.

Excellence and Inspiration • Takes his work with him on dates. If the conversation isn't about business, he isn't interested. It is like an addiction.

General Knowledge • Don't disregard the extreme cases, such as an exchange going bust and swallowing your money up.

David Ryan

Started investing in stocks when 13. 1982 Got a job with William O´Neil´s company and was most successful employee. Rose to VP in 4 years. Won US Investing Championship stock division 3 times with 160, 161 and 150 % returns. Totally enthusiastic about trading.

Learning • Every time he buys a stock, he writes down the reason why he bought it. In 1983 - 84, he lost practically 3/4 of his equity. He sat down and looked over what he had been doing and analysed his mistakes. He went on the next year to earn 160% return.

Masterplan • Has a rigorous stock selection process. Even using this only 50% of the stocks actually perform as expected. The secret lies in cutting out of the other 50% very quickly.

Psychology • Find the discipline to stay with your system, and never waver from it unless you want to lose. • His system and experience gives him the confidence to get out of losing trades very quickly. Trading is like a treasure hunt - finding the next big mover - and that leaves no room for staying with losers.

System

 

• Losing trades get taken out ou t by the 7% stop loss rule.

Excellence and Inspiration • If you learn from every trade you make, you are only going to get better and better.

General Knowledge

James B. Rogers Began trading the stock market in 1968 with $600. Five years later he formed the Quantum Fund with George Soros.

Learning • It is all part of a big three dimensional puzzle - stocks, bonds, currencies, commodities, gold, oil out.- which is always changing. You never stop learning, trying to understand, figuring it • You have to learn to think for yourself, learn to see that the emperor has no clothes. Conventional wisdom sucks.

Masterplan • You have to have a conviction - don't just do something for the sake of it, wait until you have conviction. • Wait until there is money sitting there in the corner, and then just go over and pick it up. Don't waste time trying to trade, trade for no other reason than the occurence of an opportunity. • Wait until you have an idea so right and a price so right, so that even if it is wrong you are not going to lose much money.

Psychology • The market is going to go higher than you think it will and lower than you think it can.

System • No system - pure fundamentals • sells hysteria - sold gold at $675 - $200 (but only 4 days) before it peaked • buy value

 

• wait for a catalyst

Excellence and Inspiration • "Common sense is not so common." - Voltaire

General Knowledge • The market has its own momentum - it will keep moving against all the fundamentals in hysterical blow-off situations.