Last month Jack D. Schwager released book #5 in his Market Wizards series, Unknown Market Wizards.
The first book in the series, Market Wizards was published in 1989.
Nassim Taleb said the following about the original book:
I’ve read Market Wizards at several stages of my career as it shows the staying power of good down-to-earth wisdoms of true practitioners with skin in the game. This is the central document showing the heuristics that real-life traders use to manage their affairs, how people who do rather than talk have done things. Twenty years from now, it will still be fresh. There is no other like it.Nassim Taleb
Each chapter in Unknown Market Wizards contains an interview with a Futures or Options trader. The lessons and tactics shared by these traders are practical and actionable. I’ve implemented numerous tactics from the book into my trading process.
Chapter 1 contains an interview with Futures trader Peter L. Brandt.
Here are some quotes that stood out:
Before I read Edwards and Magee’s Technical Analysis of Stock Trends I had no idea what I was doing. Where do you get into a trade? I didn’t have a clue. It also gave me a way to establish where to protect myself on a trade and an idea of where the market might go. That book is what brought me into charting.
Advice from trader who was a chartist. He said, “Peter, you have to have an edge to make money, and a chart pattern does not give you an edge.” That was a sobering comment at the time, and it didn’t make complete sense to me then, but it did about five years later.
The charts have become much less reliable. It was much easier to trade on charts in the 1970s and 1980s. The patterns were nice and neat. There were fewer whipsaw markets. [A whipsaw market is a market in which prices swing widely back and forth, causing trend-following traders to be positioned wrong right before the market abruptly reverses direction.] Back then, if you saw a chart pattern, you could take the money to the bank. The patterns were so dependable.
Know that one thing both you and I agree on is that when a chart pattern fails, that is a more reliable signal than the chart pattern itself.
There were probably two things that turned the process around. First, I learned that you have to use stops because you can’t afford to take significant losses.
Risk management. While he was buying into weakness, he wouldn’t just put on a full position and hold it. He would probe the market for a low. He would get out of any trade that had a loss at the end of the week and then try again the next time he thought the timing was right. He kept probing, probing, probing.
Dan used to say, “There are two parts to a trade: direction and timing. And, if you’re wrong about either one, you’re wrong on the trade.”
He took much smaller positions than he could. The lesson I learned from Dan was that if you could protect your capital, you would always have another shot. But you had to protect your pile of chips.
It’s only when I override my instincts through the process of disciplined order entry that I put myself in the position where what I do with charts can work for me. I have to be so intentional in the way I trade. My edge comes from the process. I am a glorified order enterer; I am not a trader. Some of the orders I place go against my natural inclination in a market. They are hard orders to enter.
The majority of his trades will result in a quick loss. He succeeds, nonetheless, because his average gain is much larger than his average loss.
There can also be periods where I am out of sync with my approach. I am not being disciplined. I’m not being patient. I’m jumping the gun on trades. I’m taking positions before the market confirms them. I’m taking trades on inferior patterns. And, of course, you can have periods where both conditions exist: My methodology is out of sync with the markets, and I am out of sync with my methodology.