Lessons from market wizards – then and now

I read Market wizards book some 11 years ago and remember highlighting so many points that made sense to me those days. After someone talked about Jack Schwager recently, i thought i should read that classic book once again.

This blogpost (long one) is just a small earnest attempt to register my reactions by then and now for the same highlighted statements made by great traders.

Bruce Kovner

1. “I never had lot of difficulty with the process of losing money, as long as losses were the outcome of sound trading techniques”

2. “A common mistake a novice trader makes is to think of the market as a personal nemesis”

My initial reaction as a new trader

1. Why would anyone want to lose money? If i want to lose money, why i would i choose this ‘lucrative’ profession? Losing money is for traders who dont have enough knowledge. If i learn more about the markets, a trader will never lose. Top of that, losing means ‘am wrong’ and i am not a loser.

2. Yes – sometimes i feel, market operates just to get to me. The whole market is conspiring against me and i guess it is fair for me to take revenge back at the markets.

My reaction now

1. It is a known fact that nobody enters a trade with the idea of losing money. But, let me assure you something – Losses are like ‘breathing out’. You cant survive just by ‘breathing in’ right?..we need to breathe out..So, losses are natural part of trading and the sooner we embrace it, better it is for our trading account. Trading has a lot more to do with repeatedly admitting that you are wrong (and also OK with it) than with trying to make huge amount of money.

2. Being accountable for our actions is a big step – both in life and trading. More on this topic at the fag end of this blogpost.

Richard Dennis

“Being consistent and making sure you do that all the time is probably more important than the particular characteristics you use to define the trend”

My initial reaction as a new trader

How can one make money without knowing where the market is gonna go next minute/hour/day? Many analysts and traders are doing it all the time. After all, this profession is all about prediction 🙂 . Once we figure out where the market is gonna go, all it takes is place an order and laugh all the way to the bank !!

My reaction now

This statement makes so much sense now as there is no way to know what’s gonna happen in the market next. Even though we enter a long position with a predilection that the market will move higher, there is absolutely no way to know if its gonna happen. We are just risking our money to know if the market wants to move in our direction. If it does not, then we move on to the next trade – simple thought.

As a popular saying goes – ‘Only two sets of people know where the market is gonna go next – God and liars’

Ed Seykota

1. “I dont think traders can follow rules for very long unless they reflect their own trading style. Eventually, a breaking point is reached and the trader has to quit or change, or find a new set of rules he can follow”

2. “Everybody gets what they want out of the market”

My initial reaction as a new trader

1. This guy is talking rubbish. All i need to do is attend a workshop/read a book/follow someone in twitter(and nag him for his system) and once i get hold of an another trader successful(?) system, then i can quit my job and trade sipping pinacolada in the beaches of the world. So, pursue (without giving up) traders/workshops/forums to get the best system. After all, if it works for him, it should work for me as well.

2. Ofcourse. People come into trading to make money and they get ‘money’ out of trading. Everyone i know makes money easily in trading. This one makes lot of sense. Little did i know about the profoundness of this statement actually.

My reaction now

1. What a true statement. The system and the trader should be like lock and key – a perfect match. Psychology of every trader is like a fingerprint and what works for person A will definitely not work for person B. Reason is very simple – a person following a trader’s system(methodology to the dot) will not have the same level of conviction, statistical comfort (based on backtesting) and mental-makeup to start taking the trades. Once he gets 3-5 losers in a row, he will start tweaking the system to avoid those losses/or find new rules set to make sure that the losses are minimal(according to his perception on losses).

This is exactly why i urge new traders to understand the concept behind a trader’s methodology and not go for his complete system. If we blindly follow another trader’s sytem (assuming the trader shares it), it is going to be a great disaster. I was aghast looking at trainers teaching system(with all exact entry/exit rules) as even a 5 year experienced(profitable trader) will completely accept what Ed is saying here. They are actually doing a disservice to the participants by spoonfeeding them a system as it almost always leads to disaster in the long run.

2. This statement gives me goosebumps every-time i read it. It is not as innocuous as it looks.

Ed was just alluding that if one cannot sort out those innermost negative traits one carries, it will be reflected through our trading. Trading is very much a mind game and one which does not come naturally to most people. Once you trade, we are pulled in the direction of what you really want. You may want to win at trading but, for example, there may be the belief lurking below which tells you that maybe it’s luck this time and that good luck always runs out. Some people win by losing. Some people win by winning.

If one is looking for thrill (adrenaline rush) in trading , market is a great place to get it. If one is looking for self-pity, you will have plenty from the market. If one is looking for ‘ego-inflation’, market will give so many opportunities to announce to the whole world how big your ego is…Now, read the statement again – “Everybody gets what they want out of the market”

Marty Schwartz

“What is the ultimate rationalization of a trader in a losing position? – I’ll get out when am even. Why is getting out even so important? Because it protects the ego. I became a winning trader when i was able to say – to hell with my eog, making money is more important”

My initial reaction as a new trader

What is wrong in removing the SL once in a while as i have seen market coming back to breakeven point more often than not (after hitting my stoploss). When i have done hours of analysis before getting into the position, how can it go wrong? I have applied my brain in so many difficult situations in life and came out with flying colors. Why trading should be any different? Mind has been fully applied, due diligence is done and this trade is a sureshot winner. So, why keep stoploss or why not change the SL when the market comes close to it?

My reaction now

Nobody wants to be wrong and that is why a simple argument eventually gets out of hand and makes two people nemesis to each other (we see this often in social media). “i’ll get out even’ usually stems from the fact that the trader has not accepted losses mentally. He knew that losses are part of the game but has not accepted it internally. On top of that, market reinforces bad habits and he would have seen market market moving in his favor after hitting his SL. So, why bother to have SL? If we dont have SL, it serves 2 purpose – satisfy our ego by not taking a loss(and thereby proving our analysis right) and gets us out at breakeven.

Amateurs resort to hope and sometimes prayer to save their trade. In life, hope is a powerful and positive thing. In trading, resorting to hope is like placing acid on your skin—the longer you leave it there, the worse the situation will get.

Van Tharp

“The composite profile of a losing trader would be someone who is highly stressed and has little protection from stress, has a negative outlook on life and expects the worst, has a lot of conflict in his/her personality, and blames others when things go wrong. Losing traders are usually disorganized and impatient”

My initial reaction as a new trader

This is partially true as i understand a losing trader will be stressed out but what does negative outlook in life has got anything to do with trading the markets? What does our personality got anything to do with our success in trading?

It does not make any sense to think that ‘taking responsibility’ for my actions has any bearing on my trading results. This is some bunch of BS because i make a bad trade in the market(despite my wonderful analysis) due to the following reasons –

1. The market makers (operators) were fishing for my stop losses
2. I was on the phone, and it collapsed on me.
3. My twitter guru gave me a bad tip.
4. The forums caused this one to pump and dump.
5. FIIs are just manipulating the markets to take me out.

My reaction now

Trading results have everything to do with our mindset and attitude. Having negative frame of mind or exposing ourselves to negativity stifles us from learning anything worthwhile. Learning and negativity cannot co-exist. Professional traders very well know that blaming others for their bad trades is such a ridiculous thing to do. So, when they have a bad trade, their thought process sounds like –

1. It is my fault. I traded this position too large for my account size.
2. It is my fault. I didn’t stick to my own risk parameters.
3. It is my fault. I allowed my emotions to dictate my trades.
4. It is my fault. I was not disciplined in my trades.
5. It is my fault. I knew there was a risk in holding this trade into a big event, but I didn’t fully comprehend it when I took the trade.

The obvious difference here is accountability. For amateurs, everything having to do with the market is ‘outside their control’ That is not reasonable thinking and really just points to individuals who have, probably for the first time, had to confront their “real self” as opposed to the perfect self or idealized self that they have constructed in their mind. People can drift through life in their own private world, where they are pretty special and can do no wrong.

Unfortunately, trading rips off this mask, because you cannot dispute what has happened to your account. For many people, when they start trading, they are suddenly confronting reality for the first time in their lives. Just to see the world as it really is requires a lifetime of training, and for many people, trading the stock market is their first real step on this journey.

Happy trading all !!

Workshop Agenda

Morning Session Topics – the trading strategy

1. Why price action based trading? – They say ‘Price is the king and it precedes everything’. Is it really true?
2. Market structure – Basics.
3. Rallies and declines
4. Details of structural pivot high/lows – how to mark them mechanically (to avoid subjectivity)
5. Trends – what constitutes the trend
6. Analyzing trends based on price action structural pivots
7. Positional price action concept with multiple set of mechanical (rule-based) entry/exit rules. Participants can choose the best set of rules based on their psychological comfort level – some are comfortable with profit booking(targets) and some are comfortable with trailing stoploss.
8. Intraday price action concept with multiple set of mechanical (rule-based) exit/entry rules. Participants can choose the best set of rules based on their psychological comfort level
9. Useful price action tips and tricks on having small stoploss and letting the profits run – the core essence of trading !!

Afternoon Session Topics – executing the strategy to trade profitably (albeit consistently)

1. What is an ‘edge’ in a system? How to quantify an ‘edge’? Do I really have an edge in my system?
2. How to efficiently backtest a strategy – what to look for and pitfalls?
3. How to evaluate backtesting results to find the optimal risk to be taken per trade?
4. Why taking 2% risk per trade will not work for everyone (like the way it is suggested in popular books)?
4. Money management in trading – how to tailor made money management based on the backtested results?
5. Trading journal and its importance
6. The real holy grail of trading – Execution
7. Part time trading vs Full time trading – Differences and their effect on our P/L

8. Role of psychology in trading – will be covering the below mentioned points in psychology
a) How to create a consistent equity curve so you can get off the roller-coaster ride and sleep at night.
b) How to dramatically ‘level up’ your consistency and escape the ‘Sneaky Mental Trap’ that sabotages your profitability when things get ‘too good’
c) The little-understood way to handle fear that separates successful traders from those who are doomed to fail (Finally, operate at your true potential!)
d) How to become a better trader by becoming a better version of yourself (and why market conditions have very little to do with your results)
e) How to know if your mind is tricking you into taking lame trades with low profit potential and holding you back from the results you truly desire

Additional perks of attending the workshop

Telegram support group for the attendees (1 month duration) to clear out workshop related doubts.