New Market Wizards


The second market wizards book, named simply New Market Wizards was actually published before the Hedge Fund Market Wizards book, a bit older but as the saying goes… oldies but goldies.

Part 1 - Trading perspectives

Misadventures in trading

  • making few thousands $ in one thousands $ a few times
  • never break through and make a killing
  • the only way to stop trading is loosing all
  • started with confidence but not with the desire

Hussein makes a bad trade

  • author trading coincide with Hussein invading Kuwait
  • a good trade for Hussein until market change and USA step in
  • he was like a trader who held on loosing position
  • moral: if you can't take a small loss, sooner or later you will take the mother of all loses

Part 2 - The world's biggest market

Bill Lipschutz: The sultan of currencies

  • he views trading as an engaging game that will do it for free
  • always scale in to avoid missing the move
  • always scale out to bank some profits and hold of opportunity
  • avoid the conception that you should be right 100% of the time
  • bite the bullet on strong conviction: buy/sell on extreme strength/weakness
  • stay with position is market does not sustain the move against you
  • he lost the entire amount invested in stocks in a a few days

Part 3 - Futures - The variety-pack market

Futures - understanding basics

  • futures market has the origin in agricultural market
  • 60% - currencies/interest rates/stock indexes
  • 20% - energy/metal
  • in 1991 total futures volume in USA: ~263M contracts

Randy McKay: Veteran trader

  • find the trading style that suits trader's personality
  • scale up when winning/scale down when losing - McKay's trend
  • immediately get out of loosing position
  • unconventional fundamentals: does not think in bullish/bearish, focus on market response to fundamentals
  • price moves based on psychology of the traders
  • buy on breaks and sell on rally's, wait for reaction with the risk of missing the move
  • review winner/losing trades

William Eckhardt: The mathematician *

  • what feels good is usually the wrong thing to do
  • lock in profits instead of accept the gamble with a higher expected payoff
  • gamble with a loss even when that has worst expected outcome than a sure loss alternative
  • the call of the counter trend: sell on strength and buy on weakness
  • excessive concerns about current positions: take profits before target, hold positions beyond loss level or cut positions before stop-loss is reached because fear of loosing
  • great results are consequences of error or naive methodology
  • system designers should believe their results after they did everything possible to disprove them
  • doing what is comfortable lead to even worst than random results
  • human nature tries to find patterns and forget bad results
  • never think where market goes, think what you should do if market gets there
  • reprogramming behaved to do what is correct rather than what is comfortable

The silence of the turtles

Monroe Trout: The best return that low risk can buy

  • technical systematic style with discretionary execution
  • major factor is timing the entry/exit
  1. you have to have an edge, everything else is second
  2. you must stress test the system
  3. risk control is essential
  • magnet effect around round numbers, critical points

Al Weiss: The human chart encyclopedia

  • market are based on human psychology, not fundamentals
  • find classical patterns in higher level structures
  • highly technical trader
  • research further back in history, as far as 150 years ago

Part 4 - Fund managers and timers

Stanley Druckenmiller: The art of top-down investing

  • two key elements to success:
  1. preservation of capital - avoid losing years, score a few high, double/triple digits
  2. home runs - take full advantage when you have a hot hand - apply leverage - "it takes courage to be a pig"
  • if you make a mistake, respond right away - from long to short before the 1987 stock crash
  • valuation analysis for price
  • liquidity analysis and technical analysis for timing
  • counter to classic fund management - not always invested in stocks, move to cash, even net short
  • flexibility of going long/short, diversification in bonds/currencies (queen in chess that moves in all direction is more powerful than the pawn)
  • you can't win if you have to win

Richard Driehaus: The art of bottom-up investing

  • price follows growth and the key is to pick companies with growth potential
  • trade fundamentally, confirm technically
  • naturally, humans want to buy low or low P/E and perform poorly
  • act right away on strong moves, never wait, buy stocks on extreme strength following bullish news
  • small percentage of huge winners
  • take large position (home runs), holding longer to realize all potential
  • developer your own philosophy, research/verify cycle

Gil Blake: The master of consistency

  • do your own thing (independence), do the right thing (discipline)
  • mind changing personality - dogmatic or rigid personality fails in the market
  • adaptability - change strategies as markets evolve
  • amazing consistent track record, markets can be beat
  • no shortcuts: find non-random market patterns then devise your trading rules then follow

Victor Sperandeo: Markets grow old too

  • trading is the game of odds
  • market can be like a 20 or 80 years old
  • pyramid trade sizes
  • when trading large it is essential that market go in your favor to ensure financial survival
  • training 38 people to trade - intelligence was not important, ability to admit mistakes is key

Part 5 - Multiple-market players

Tom Basso: Mr. Serenity

  • psychology is critical for success in trading
  • fear, depression, anxiety in trading/life is wrong even, if you are successful, especially when you are not
  • enjoy trading, if it is the source of negative emotion, you lost the game, even if you make money
  • combine enthusiasm, energy, focus, discipline to become the best trader you can be
  • once you don't that, don't worry about small details, news, etc
  • learn for your loses
  • don't take you problems to personally

Linda Bradford-Raschke: Reading the music of the markets

  • understanding and learning the market takes years, find a niche
  • pick one market only: be tune with the patterns everyday, where are s/r levels, never fear
  • high confidence
  • she believes that short term prediction can be quite accurate, but long term forecasting is not possible
  • see patterns that other don't, trade short term price swings, few days
  • if you need a second opinion on a trade is a sign that trade has to be liquidated
  • characteristics:
  1. passion
  2. self-reliance
  3. willing to take risk
  4. ability to correct mistakes
  5. patience

Part 6 - Money machines

CRT: The trading machine

Mark Ritchie - God in the pits

  • best trade: long soybean meal/oil and roll over for 5 years
  • 5 principles:
  1. do your own research
  2. keep position size small that it looks like wasting your time
  3. have the patience to stay with winning position as long as it is working
  4. allow larger drawdown in open profits than in equity for #3
  5. recognize and control your greed

Joe Ritchie - The intuitive theoretician

  • intuitively vs. analytically
  • humility - admin when they are wrong
  • give people responsibility and pay what they are worth
  • good teams/management makes CRT successful
  • policy: shared responsibility, shared profit

Blair Hull - Getting the edge *

  • good money management with poor strategy will make you loose money slowly
  • the longer you play with negative edge, the greater the probability of ruin
  • a good system is a system with an edge, leak
  • money management are good for good models
  • even a good system with bad money management can loose money
  • trading vs. betting - trading without a method is gambling
  • can't listen to the news, go with the facts
  • small profit instead of home run
  • chess - blackjack players are good traders
  • listening to rumors is a weakness
  • option price related to each other
  • arbitrage trader
  • directional trades:
  1. strong when you have a strong idea
  2. trade the opposite side of news stories
  3. time your trade with an event that has a climax potential

Jeff Yass - The mathematics of strategy

  • prices are skewed OTM puts >> OTM calls because of higher prob of huge downside
  • conditional probabilities - Monty Hall problem
  • proper betting strategy
  • maximizing gains not the number of wins
  • obvious impressions are wrong
  • professional options arbitrage trading

Part 7 - The Psychology of trading

Zen and the art of trading

Charles Faulkner - The mind of an achiever

  • 5 principles of NLP:
  1. the map (thoughts, feelings) is not the territory (reality)
  2. experience has a structure - change the structure of thoughts and experiences will change automatically
  3. if one person can do it, anyone else can learn to do it - model successful people
  4. the mind and body are part of the same system - change your mind/change your body and change your body/change your mind
  5. people have all resources they need
  • 5 conditions for a goal to be achievable:
  1. the goal must be stated in positive terms - I want to protect my assets instead I don't want to loose money
  2. the goal must be yours
  3. the goal must be specific - the more details, the better
  4. the when, where, whom
  5. anticipating the effects of the goal
  • 6 key steps:
  1. use toward and away from motivation
  2. have a goal of full capability+
  3. break down overwhelming goals into chunks
  4. focus on the task at hand then the long term goal
  5. personal involvement rather than relying on others
  6. self to self comparison to measure progress
  • towards the motivation - achievers
  • away from motivation - problem solvers
  • successful traders have learned to avoid risk, not seek it
  • calm, detached emotional from trading, get the excitement from life

Robert Krausz: The role of subconscious *

  • major factors: lack of confidence, fear of loosing and poor execution
  • not having a trading plan
  • backtest the method
  • subconscious believes will dictate actions
  • once a trading plan is developed is is critical to convince the subconscious
  • "We become what we believe" - R. Krausz

Part 8 - Closing bell

Market Wiz(ar)dom

  1. make sure you want to trade
  2. examine your motives
  3. match trading to your personality
  4. always have an edge
  5. derive a method
  6. take no shortcuts - developing a method is hard work
  7. skill vs. hard work
  8. good trading should be effortless
  9. money management and risk control
  1. trading plan
  2. discipline
  3. you are the only responsible
  4. the need for independence
  5. confidence
  6. loosing is part of the game
  7. timeouts
  8. the urge to seek advice
  9. the virtue of patience
  10. the importance of sitting
  11. developing an low risk idea
  12. the importance of varying bet size
  13. scaling in and out of trades
  14. being right is more important than being genius
  15. don't worry about looking stupid
  16. action is more important than prudence
  17. catching parts of the move is just fine
  18. maximize gains not the number of wins
  19. learn to be disloyal
  20. pull out partial profits
  21. hope is a dirty word
  22. don't do the comfortable thing
  23. you can't win if you have to win
  24. think twice when the market let you the hook easily
  25. a mind is very terrifying to close
  26. markets are an expensive place to look for excitement
  27. the calm state of a trader
  28. identify and eliminate stress
  29. pay attention to intuition
  30. life mission
  31. the elements of achievement
  32. prices are not random, market can be beat
  33. keep trading in perspective

Trade long and prosper!!!