Famed financial author and futures & hedge funds expert Jack Schwager defines a stock trader as someone who is as likely to go short as long, and who is willing to change positions with more frequency than someone who might be called a long-term investor.

“If one is making quick decisions on when to go in, out or reverse positions, that’s a trader, as opposed to a long-term investor who says, ‘I want to have 50 per cent of my money in equities. I’m going to buy an index. I’m going to stay for 40 years’,” Schwager said in an interview whose video is now available on YouTube.

Schwager is an eminent industry expert and author of a number of critically acclaimed financial books, including
The Market Wizards series. He was one of the founders of Fund Seeder. Previously, he was a partner at a London-based hedge fund advisory firm, the Fortune Group (2001-2010). He has also been a Director of futures research for some of Wall Street’s leading firms.

Mistake that amateur traders make

Schwager says amateur traders tend to believe it is just a matter of finding the right formula or a single right technique to become a successful trader, which is in fact far from truth.

According to him, the truth is that in order to become a successful trader in the long run, it is essential to put in some dedicated effort to improve trading skills.

Find a trading approach that suits you
Schwager says there are many different paths to success in trading, as there is not a single way that works continuously. Even if there was one, it would stop working anyways because everyone would follow it.

“The very first thing one should figure out is the right trading method that suits him, as there is no right size common approach that can guarantee success to everybody,” says he.

“A person has to know whether he is comfortable with fundamental or technical, long term or short term, certain types of markets, wider risk or less risk… You can go through a whole checklist of things and find out it’s different for each individual. It’s a discovery process, an evolutionary process,” he says.

Giving an example, he says Jim Rogers was never able to make money using technical analysis. On the other hand, Martin Schwartz could not profit using fundamental analysis. Yet both of them did very well using the approach each was comfortable with.

“There are people like Jim Rogers who have complete disdain for technical analysis. He’d say the only people he’s met that made money in technical analysis are those who sell their technical analysis services, that’s his take on it. On the other hand, you’ve got people like Martin Schwartz who’ve done phenomenally well using technical analysis and would say: ‘I spent a decade as a fundamental analyst, but I got rich as a technician’,” says he.

Trading approach should have an edge

Schwager says it is important that whatever approach one adopts should have an extra edge that can set him apart from others.

A trading approach may be reasonable, but if it lacks an edge, it may not be able to provide success. “It can make all the sense in the world. On paper, it might sound reasonable, but markets do not pay off for approaches that sound reasonable. They pay off for what works, and what works may often be very counter-intuitive,” he says.

According to Schwager, one needs to have the confidence that the approach he has chosen to follow will work in the long run. This confidence, he says, comes when one starts making more money than what is lost.

“By work, I don’t mean it’s a money machine. I just mean that over time it’s making more than it’s losing. That’s the edge,” says he.

Manage risk properly
After developing a method that has an edge and that suits a trader’s personality, the next step should be to plan appropriate risk management.

Schwager says proper risk management is extremely important as traders run the risk of losing a lot of money. A method that has an edge is of no use if risk management is not taken very seriously.

“A good approach could be sabotaged by a few mistakes. You never want that. You never want to be at the mercy of having a few mistakes knock you out of the game,” says he.

Follow strict discipline
Schwager says traders need to follow strict discipline to properly implement their trading strategy. Those who follow a disciplined trading approach are more likely to achieve success in the long run.

“You need the discipline to take your method, with the edge and the risk management, and stay true to it. There are trades that are going to look scary and you’re going to really not want to take them, but if it’s part of your methodology, you take them. There are times your methodology, or your risk management, tells you, ‘here’s where you’re out’. You may hate to get out, but that’s your methodology, that’s your risk management, you get out. You have to be strict on the discipline part,” he says.

Be flexible
Flexibility is another key trait that separates great traders from the ordinary ones, as they’re able to adapt and take decisions according to the prevailing situations.

“That flexibility to be able to change your mind and not hope that your position is right is an essential ingredient,” he says.

Importance of sitting still & being patient

Schwager says the key to trading success is the space between trades. Sometimes it’s not just a matter of making the right trade, but also not doing anything even when things aren’t going right. He says there are times when the market is not conducive for making trades and that’s when successful traders show a lot of patience and wait for things to get better.

“When opportunities are not good, simply do not invest or do so very lightly. Instead of losing money, tread water,” he says.

Good and bad trades
Traders make the mistake of distinguishing between good and bad trades by the amount of money the trade has earned.

Any approach that a trader follows gives instances of winning or losing, but if one has an effective approach, he makes more money than he loses, says he.

“If you take a trade that follows your process exactly and if that trade loses money, that is not a bad trade. It’s a bad trade only if you deviate from your process and lose money. I would go further and say if you deviate from your process and make money, it’s still a bad trade. People have to differentiate between trades that are consistent with a winning strategy, and trades that are inconsistent. That’s the mark of good and bad trades,” says he.

Admit to mistakes
Schwager says successful traders have the ability to quickly admit that they’re wrong. Also, regardless of their personality, they are also quite flexible and can adapt to situations. On the contrary, ordinary traders do not show much flexibility.

Bouncing back from failures
Many successful traders have actually had multiple failures in their early trading days, but they managed to bounce back from those failures due to their self-belief.

When most average traders simply give up on trading after experiencing a few rounds of negative experiences, successful traders tend to have absolute belief in their abilities to make things right in the end.

Schwager says every good trading strategy goes through ups and downs and how successfully one deals with these bad times is what would separate them from the rest.

Schwager believes accepting losses as part of the trading game is a critical mind-set that traders must have. When one has this belief built into his mind, it gets easier to deal with small losses decisively and take necessary action to prevent them further.

No loyalty to a particular stock
Successful traders do not show loyalty to any particular stock and treat it merely as a tool to making money.

Schwager says if a trader starts becoming too loyal to a stock, then it could spell danger. He advises them to not hesitate to dump a stock if it is not making money.

Ability to make bold decisions
Successful traders always make tough trading decisions that are contrarian and uncomfortable which an average trader hesitates to take.

Tips for individuals who want to trade

  1. Schwager advises individuals who want to pursue their career as traders to first do extensive reading. He doesn’t recommend any book in particular, but encourages individuals to just go and explore different books. Check on the web, go to a library or go to a bookstore, if you can still find one these days. However you do it, just pick up different things. Look at different things. See what they’re saying. Once you figure out where you’re gravitating to, read more on that,” he says.
  2. He also advises traders to start thinking about ideas based on what they have read and how they could implement them in the market.
  3. Then he recommends traders to evolve those ideas into some sort of a methodology for which they can define the rules and come up with a risk management plans.
  4. Traders can practise dummy trading to check whether their methodology has the required edge to become successful.
  5. Finally, once traders feel they have an edge, they can start trading with small amounts of money and implement their strategies. Gradually if one is trading with real money successfully, then one can increase the amount as per his comfort.


(Disclaimer: This article is based on
Jack Schwager’s ‘The Market Wizards’ series
).





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