The new market wizards conversations with americas top traders

THE NEW MARKET WIZARDS CONVERSATIONS WITH AMERICA’S TOP TRADERS JACK D SCHWAGER Dedication TO MY FAMILY Jo Ann Daniel Zachary Samantha Who are all very special to me With love Epigraph More is learned from one’s errors than from one’s successes —PRIMO LEVI I must create a system or be enslaved by another man’s —WILLIAM BLAKE Contents Cover Title Page Dedication Epigraph Preface Prologue PART I Trading Perspectives Misadventures in Trading Hussein Makes a Bad Trade PART II The World’s Biggest Market Bill Lipschutz: The Sultan of Currencies PART III Futures—The Variety-Pack Market Futures—Understanding the Basics Randy McKay: Veteran Trader William Eckhardt: The Mathematician The Silence of the Turtles Monroe Trout: The Best Return That Low Risk Can Buy Al Weiss: The Human Chart Encyclopedia PART IV Fund Managers and Timers Stanley Druckenmiller: The Art of Top-Down Investing Richard Driehaus: The Art of Bottom-Up Investing Gil Blake: The Master of Consistency Victor Sperandeo: Markets Grow Old Too PART V Multiple-Market Players Tom Basso: Mr Serenity Linda Bradford Raschke: Reading the Music of the Markets PART VI The Money Machines CRT: The Trading Machine Mark Ritchie: God in the Pits Joe Ritchie: The Intuitive Theoretician Blair Hull: Getting the Edge Jeff Yass: The Mathematics of Strategy PART VII The Psychology of Trading Zen and the Art of Trading Charles Faulkner: The Mind of an Achiever Robert Krausz: The Role of the Subconscious PART VIII Closing Bell Market Wiz(ar)dom A Personal Reflection Appendix Glossary Acknowledgments About the Author Praise Other Works Other Books Credits Copyright About the Publisher Preface H ere’s what I believe: The markets are not random I don’t care if the number of academicians who have argued the efficient market hypothesis would stretch to the moon and back if laid end to end; they are simply wrong The markets are not random, because they are based on human behavior, and human behavior, especially mass behavior, is not random It never has been, and it probably never will be There is no holy grail or grand secret to the markets, but there are many patterns that can lead to profits There are a million ways to make money in markets The irony is that they are all very difficult to find The markets are always changing, and they are always the same The secret to success in the markets lies not in discovering some incredible indicator or elaborate theory; rather, it lies within each individual To excel in trading requires a combination of talent and extremely hard work—(surprise!) the same combination required for excellence in any field Those seeking success by buying the latest $300 or even $3,000 system, or by following the latest hot tip, will never find the answer because they haven’t yet understood the question Success in trading is a worthy goal, but it will be worthless if it is not accompanied by success in your life (and I use the word success here without monetary connotation) In conducting the interviews for this book and its predecessor, Market Wizards, I became absolutely convinced that winning in the markets is a matter of skill and discipline, not luck The magnitude and consistency of the winning track records compiled by many of those I interviewed simply defy chance I believe the Market Wizards provide role models for what it takes to win in the markets Those seeking quick fortunes should be discouraged at the onset I have strived to reach two audiences: the professionals who have staked careers in the markets or are serious students of the markets, and the lay readers who have a general interest in the financial markets and a curiosity about those who have won dramatically in an arena where the vast majority loses In order to keep the book accessible to the layperson, I have tried to avoid particularly esoteric topics and have included explanations wherever appropriate At the same time, I have strived to maintain all core ideas so that there would be no loss of meaningful information to those with a good working knowledge of the markets I think this book should be as meaningful to the layperson as to the professional simply because the elements that determine success in trading are totally applicable to success in virtually any field or to achieving any meaningful goal Prologue The Jademaster ne cold winter morning a young man walks five miles through the snow He knocks on the Jademaster’s door The Jademaster answers with a broom in his hand “Yes?” “I want to learn about Jade.” “Very well then, come in out of the cold.” They sit by the fire sipping hot green tea The Jademaster presses a green stone deeply into the young man’s hand and begins to talk about tree frogs After a few minutes, the young man interrupts “Excuse me, I am here to learn about Jade, not tree frogs.” The Jademaster takes the stone and tells the young man to go home and return in a week The following week the young man returns The Jademaster presses another green stone into the young man’s hand and continues the story Again, the young man interrupts Again, the Jademaster sends him home Weeks pass The young man interrupts less and less The young man also learns to brew the hot green tea, clean up the kitchen and sweep the floors Spring comes One day, the young man observes, “The stone I hold is not genuine Jade.” O I lean back in my chair, savoring the story My student interrupts “OK OK That’s a great story I don’t see what it has to with making money I come to you to find out about the markets I want to learn about the bulls and the bears, commodities, stocks, bonds, calls and options I want to make big money You tell me a fable about Jade What is this? You…” “That’s all for now Leave those price charts on the table Come back next week.” Months pass My student interrupts less and less as I continue the story of The Trader’s Window —from The Trader’s Window, ED SEYKOTA About the Publisher Australia HarperCollins Publishers (Australia) Pty Ltd 25 Ryde Road (PO Box 321) Pymble, NSW 2073, Australia http://www.harpercollinsebooks.com.au Canada HarperCollins Publishers Ltd 55 Avenue Road, Suite 2900 Toronto, ON, M5R, 3L2, Canada http://www.harpercollinsebooks.ca New Zealand HarperCollinsPublishers (New Zealand) Limited P.O Box Auckland, New Zealand http://www.harpercollinsebooks.co.nz United Kingdom HarperCollins Publishers Ltd 77-85 Fulham Palace Road London, W6 8JB, UK http://www.harpercollinsebooks.co.uk United States HarperCollins Publishers Inc 10 East 53rd Street New York, NY 10022 http://www.harpercollinsebooks.com * The Elliott Wave Principle, as it is formally called, was originally developed by R N Elliott, an accountant turned market student Elliott’s definitive work on the subject was published in 1946, only two years before his death, under the rather immodest title: Nature’s Law—The Secret of the Universe The application of the theory is unavoidably subjective, with numerous interpretations appearing in scores of volumes (SOURCE: John J Murphy, Technical Analysis of the Futures Markets, New York Institute of Finance, 1986.) *This interview was conducted several months prior to the government bond-buying scandal that rocked Salomon Following this development, I asked Lipschutz if he still wished to maintain the terms honesty and integrity in his description of Salomon, as the words now had an ironic ring in light of the latest revelations Lipschutz, however, felt strongly about maintaining his original description, as he believed it reflected his true feelings Queried about how he reconciled this image of integrity with the apparent ethical lapses in the bidding procedures at several government bond auctions, he replied, “I believe it was more a matter of ego on the part of a single individual, which ran counter to the qualities embodied by Gutfreund and the firm.” *As proposed by Ed Seykota in Market Wizards *Technically speaking, there would be a slight variation because the risk-free return (e.g., T-bill rate) would also enter into the calculation Note: For a few sections of this interview, a basic understanding of option terminology would be very helpful Readers totally unfamiliar with options may wish first to read the primer provided in the Appendix Note: This chapter was adapted from Jack Schwager, Market Wizards (New York: New York Institute of Finance, 1989) Note: Readers unfamiliar with options may wish to read the Appendix in order to understand the trading-related references in this chapter Note: Readers unfamiliar with options may wish to read the Appendix in order to understand the trading-related references in this chapter *Hull is referring to the hook Security Analysis by Graham and Dodd, which is considered by many to be the bible of fundamental analysis in the stock market *The object of blackjack is to get a total card count greater than the dealer, but not higher than twenty-one Each card has a point value equal to its face, except for picture cards, which each have a value of ten, and aces, which can be counted as either one or eleven at the option of the player A blackjack is a two-card hand consisting of an ace and a ten-card If a player is dealt a blackjack he wins one and one-half times his bet, unless the dealer draws the same hand, in which case the result is a tie If the dealer alone draws a blackjack, all players lose automatically A player may draw as many cards as he wants as long as his total remains under twenty-one If his total exceeds twenty-one, he loses automatically The more concentrated tens and aces are in the deck, the better the odds for the player Note: Readers unfamiliar with options may wish to read the Appendix in order to understand the trading-related references in this chapter Note: In several instances in this interview, where I thought it would help clarify or expand the information, I supplemented Faulkner’s responses with adapted excerpts from the Nightingale-Conant tape series NLP: The New Technology of Achievement NLP, for which Faulkner was the program designer and principal coauthor Note: This Appendix was adapted from Jack D Schwager, A Complete Guide to the Futures Market (New York: John Wiley & Sons, 1984) ... Reading the Music of the Markets PART VI The Money Machines CRT: The Trading Machine Mark Ritchie: God in the Pits Joe Ritchie: The Intuitive Theoretician Blair Hull: Getting the Edge Jeff Yass: The. .. enough, the date of the magazine cover was in near-perfect synchrony with the bottom of the bond market At another point, he pulled out a cover with an ominous picture of farm fields withering... exceptional traders have these two traits most of the time; for the rest of us, they may come together only on an occasional basis In my own case, I had started out with the confidence but without the