I previously wrote a post about Market Wizards: Interviews With Top Traders. This post is the first in a series of curated interview questions and responses from the notes that I took while reading the book.
Who is Michael Marcus?
Michael Marcus previously worked as a trader at Commodities Corporation, an investment management firm that was later acquired by Goldman Sachs. Reportedly, Michael Marcus was able to increase his account 2500-fold from $30,000 to $80 million over a span of 20 years.
Did the thought ever enter your mind that maybe trading was not for you?
No. I had always done well at school, so I figured it was just a question of getting the knack of it. My father, who died when I was fifteen, had left $3,000 in life insurance, which I decided to cash in , despite my mother’s objections.
On the secret to successful trading:
I think the secret is cutting down the number of trades you make. The best trades are the ones in which you have all three things going for you: fundamentals, technicals, and market tone. First, the fundamentals should suggest that there is an imbalance of supply and demand, which could result in a major move. Second, the chart must show that the market is moving in the direction that the fundamentals suggest. Third, when news comes out, the market should act in a way that reflects the right psychological tone. For example, a bull market should shrug off bearish news and respond vigorously to bullish news. If you can restrict your account activity to only those types of trades, you have to make money, in any market, under any circumstances.
Did these losses have any of the emotional impact of losses in the market? The reason I ask is that you seem to talk about these investment losses very dispassionately.
Yes, it hurt to realize what a fool I had been, but I have learned not to be as attached to material things. I accepted it as a life lesson. I learned that I don’t have to own a house in every beautiful place in the world; I can stay at a hotel and walk on the beach or climb a trail there.
Do you think being a great trader is an innate skill?
I think to be in the upper echelon of successful traders requires an innate skill, a gift. It’s just like being a great violinist. But to be a competent trader and make money is a skill you can learn.
Having been through the whole trading experience from failure to extreme success, what basic advice could you give a beginning trader or a losing trader?
The first thing I would say is always bet less than 5 percent of your money on any one idea. That way you can be wrong more than twenty times; it will take you a long time to lose your money. I would emphasize that the 5 percent applies to one idea. If you take a long position in two different related grain markets, that is still one idea.The next thing I would advise is to always use stops. I mean actually put them in, because that commits you to get out at a certain point.
When you place an order to get into a position, is it accompanied by an order to get out?
You also have to follow your own light. Because I have so many friends who are talented traders, I often have to remind myself that if I try to trade their way, or on their ideas, I am going to lose. Every trader has strengths and weaknesses.
On exiting a position:
That’s right. Another thing is that if a position doesn’t feel right as soon as you put it on, don’t be embarrassed to change your mind and get right out. f you become unsure about a position, and you don’t know what to do, just get out. You can always come back in. When in doubt, get out and get a good night’s sleep. I’ve done that lots of times and the next day everything was clear.
Do you sometimes go back in right after you get out?
Yes, often the next day. While you are in, you can’t think. When you get out, then you can think clearly again.
What other advice would you give the novice trader?
Perhaps the most important rule is to hold on to your winners and cut your losers. Both are equally important. If you don’t stay with your winners, you are not going to be able to pay for the losers. Both are equally important. If you don’t stay with your winners, you are not going to be able to pay for the losers. You also have to follow your own light. Because I have so many friends who are talented traders, I often have to remind myself that if I try to trade their way, or on their ideas, I am going to lose. Every trader has strengths and weaknesses. Some are good holders of winners, but may hold their losers a little too long. Others may cut their winners a little short, but are quick to take their losses. As long as you stick to your own style, you get the good and bad in your own approach. When you try to incorporate someone else’s style, you often wind up with the worst of both styles. I’ve done that a lot. n the final analysis, you need to have the courage to hold the position and take the risk. If it comes down to “I’m in this trade because Bruce is in it,” then you are not going to have the courage to stick with it. So you might as well not be in it in the first place.
I assume that we are talking about very talented traders, and it still doesn’t make a difference. If it is not your own idea, it messes up your trading?
Right. You need to be aware that the world is very sophisticated and always ask yourself: “How many people are left to act on this particular idea?” You have to consider whether the market has already discounted your idea.
What kinds of misconceptions about the markets get people into trouble?
Well, I think the leading cause of financial disablement is the belief that you can rely on the experts to help you. It might, if you know the right expert. For example, if you happen to be Paul Tudor Jones’ barber, and he is talking about the market, it might not be a bad idea to listen. Typically, however, these so-called “experts” are not traders. Your average broker couldn’t be a trader in a million years. More money is lost listening to brokers than any other way. Trading requires an intense personal involvement. You have to do your own homework, and that is what I advise people to do.
Interview questions and responses are from Market Wizards: Interviews With Top Traders by Jack D. Schwager. If you enjoyed this post, follow Curated Alpha via Email, RSS, or Twitter . You can also purchase Market Wizards at Amazon.