Market Wizards Lessons from the Greatest Traders Book by Jack D. Schwager
In any ‘must-read’ list of trading books, you will find this book by Jack Schwager. The book is set in the format of questions and answers. The author set out to answer the reason why some traders do so much better than the rest. He spent decades seeking out these answers from some of the best traders in the world. The book covers areas such as Scaling Methods, Risk Management, Confidence, and Patience.
A common theme in the interviews he has held with the top minds is the need to manage risk. Bruce Kovner who works at Caxton Associates, explain this issue quite well. He first determines when he will get out of each trade before he makes it.
He explains that this is because the moment before the trade is when you have total objectivity. After that, you will be prone to procrastination and try to rationalize a bad trade.
Another expert trader from COMAC Capital LLP also has similar views. Colm O’Shea states that it is not just about being right on a call; it is how you execute the idea. He tells a story of when he had a correct idea but still lost money. It was because small unimportant movements early on stopped him.
He explains that a trader has to risk enough to allow a trade to succeed. In his view, a trader needs to decide when they have made the wrong choice, and that will determine the stop level.
O’Shea is always on the lookout for something that will disprove his premise. He does not just choose a random pain threshold. As a result, O’Shea’s trading strategy is much like testing a thesis.
Steven Cohn is a proponent of scaling to manage risk. With this strategy, as the market moves against a trader and he is not sure of the reason, he should cut his position by half. Cohn sees this as a good strategy since the trader can put the position on later. He points out that the need to be 100% correct stop traders from conducting a partial liquidation. However, this might save their equity during drawdowns.
Dr. Van Tharp discovers that the thing that differentiates winners and losers was that winners had confidence in themselves. They also understand that mistakes are part of learning. Dr. Tharp says that a top trader know it is okay to lose money and they know they have won even before the game starts.
The book calls for patience. Seykota, an expert trader, did not want to know the movements in the intraday period since it might cause him to trade more than his method allows. He feels that looking at each tick causes one to overdo it. Jim Rogers, the renowned investor said that a good rule anybody needs to learn about investing is to do nothing unless there is something that needs to be done.
Jack Schwager has summarized ideas from some of the top minds in the trading world. This is a book that aspiring traders must read.