Jack Schwager Market Wizards Lecture

market_wizards_by_jack_schwager I just watched a video lecture by Jack Swager, author of trading classics Market Wizards and The New Market Wizards.   If you haven’t heard of them, in each book Schwager interviews top traders and picks their brains about trading, the markets, and what made them successful.

The reasons these works are revered as classics is not because he gets the Market Wizards to reveal their “magic” strategies.  In fact not one says explicitly how to profit trading and they all have different methods.   What we do get is insight into what makes them tick.  See below for a partial list of traders mentioned in the video.  Its a very accomplished group.

In the lecture, Schwager pulls together the common traits of these elite traders and distills them into critical success factors.  All are important ingredients for success.  The one I want to highlight as critical is Schwager saying that none of the wizards would do something like “la-de-da today looks good to buy bonds”.   They all had some sort of pre-planned strategy, that strategy gave them an edge in the market, and they knew what to do with it.  Schwager also pointed out that by entering the market without a plan, the amateur trader can do worse than chance.

Schwager touches upon the paradox that trading seems easy yet requires a tremendous amount of work to master – I can definitely relate!

 The video (and the books) are somewhat dated.  I doubt the traders Schwager mentions are today getting chart books delivered to their homes on the weekends.   These days, the web and services like Market Club offer charts on about every market that moves so we can all pour over thousands of charts like the masters.   Or, we can program our computers to scan for us.   Schwager’s comments on computerized trading is another area that is outdated.

Even so, many of the traits and behavioral patterns that made these traders great can offer us timeless lessons towards success.    Here’s who I heard Schwager cite as Market Wizards: Jim Rogers, William O’Neil, Ed Seykota, Michael Marcus, Marty Schwatrz, Paul Tudor Jones, Monroe Trout, Linda Raschke, Van Tharp, William Eckhardt, Stanley Druckenmiller (worked with George Soros).

Click here to watch this complimentary video  

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Trading System Definition

Trading System refers to the whole set of rules, practices, and habits that make up the process of trading.    This includes market selection, portfolio selection, when to trade, which trading strategies to use when, entry signals, exit signalssizing, record-keeping, risk management.   The whole enchillada.

Extra Insight:

Even though I often use the terms interchangably, I think Trading System is bigger than Trading Strategy.

A Trading System is said to be either mechanical, discretionary, or a mixture of the two. 

Most mechanical systems are run by a computer, but they need not be.  A person could conceivably make manual calculations and monitor trades according to rigid rules.   Even in a fully automated mechanical system, the human element is present — someone must decide which system, when to turn it on, how to keep the computers running, etc.   However, backtesting is an obvious step in the development of a mechanical trading system. 

For discretionary traders, modern trading also relies on computers acting according to fixed rules.  For example, many people, wheither they consider themselves traders or investors, fundamental or technical, consult stock charts populated with their favorite analysis techniques and indicators.   Backtesting can inform the judgement of a discretionary trader by outlining the potential performance of various strategies and indicators.

Ed Seykota often says that a trader’s system is really the set of emotions he/she is unwilling to feel.  (See Sat, 17 July 2004 in his Trading Tribe FAQ).   I feel like dodging by saying the emotional side is beyond the scope of this blog.  

Now that I think about it, its not so hard to backtest a general example with software.    For example, the Rational Choice book cites a few studies that prove our human tendency for loss aversion.  To codify that, write a system with: 

  • no stops in order to avoid the pain of taking a known loss,
  • close targets to avoid the pain of giving profits back, and
  • quick file deletion to avoid the pain of knowing its unprofitable. 

(Backtesting Blog is an Amazon Associate.)

Updated 11/13/08.