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Market Wizard Lessons Jack Schwager. The 4 Types of Trades.

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Presentation on theme: "Market Wizard Lessons Jack Schwager. The 4 Types of Trades."— Presentation transcript:

1 Market Wizard Lessons Jack Schwager

2 The 4 Types of Trades

3 Implementation is as Important as Idea How Colm O’Shea played 2000 peak in Nasdaq

4 STOPS: PAIN VERSUS PROOF O’Shea on misguided stop selection

5 Adjust Exposure to Changing Volatility  Manger to O’Shea in 2008: “I cut risk in half”  “That’s quite a lot”  “Yes I cut leverage from 4 to 2”  “Do you realize volatility has increased fivefold?”

6 Money Management Can be Counterproductive if Inconsistent with Trade Hypothesis  Martin Taylor’s biggest position (20%) and responsible fro drawdown was AAPL  Gave back 75% AUM so didn’t have to manage to monthly returns

7 Mistakes Provide Path to Improvement Ray Dalio: Mistakes provide trading lessons and opportunity to improve.  Trader’s notebook  Mindset—Respect for mistakes will mean you will know you can be wrong and plan for being wrong  Education system—geared to not making mistakes (regurgitating facts) instead of learning from mistakes

8 The Losing Trade Dilemma Worried about getting out right before turn, but don’t want to risk open-ended loss Steve Cohen: Cut in half and cut in half again—pretty soon you don’t have to worry about position Vidich—harvesting losses

9 Caution Against Trading to Meet Profit Goal Benedict in trying to get to 10% target for year ending up with suboptimal trade and further from goal

10 Buy Strongest; Sell Weakest Scott Ramsey looking for upside reversal in $ at end of QE2 chose Turkish Lira because it couldn’t rally even when dollar weak My experience in inadvertent long FXI/short XRT BUY SELL

11 Failure to Respond to Correlated Market Move Ramsey: September 2011 equity prices rallied, but commodity prices (e.g., HG) weakened. Bear signal for commodities

12 Effective Money Management Can be Simple: The Bluecrest Model Down 3% Midteen returns; Maximum drawdown < 5% Down 3%

13 Systems that Work on Many Markets are Stronger Jaffray Woodriff: Systems that work across many markets are more likely to continue working

14 Betting More on High Probability Hands Can Even Transform Negative Edge

15 Don’t Trade Beyond Comfort Level or Fear Will Dominate Your Decisions

16 Option Prices Assume Equal Probability of Prices Going Up or Down. Identifying when this is Wrong Leads to Opportunities  Jamie Mai Korean stocks selling below net cash balances

17 Volatility Does Not Equal Risk  Low volatility can be high risk—e.g., short out-of-the-money options  High volatility can be low risk: Jamie Mai shorting subprime CDOs

18 Underappreciated Reason for Avoiding Large Losses: Mentally Impede Trader and Result in Missed Winning Opportunities Michael Platt: You take big loss and then you’re standing there with your rifle unloaded when the elephant walks by

19 If Market News Is Adverse to Position and You Don’t Lose Much—Add, Don’t Liquidate Michael Platt: Expected 2/10 curve to widen. Repeated news favorable for flattening did not impact market. He thought, “Yield curve can’t get flatter.,” and quadrupled position—spread went from 25 to 210; best trade of the year

20 Traders Go Wrong by Diversifying Away from their Expertise Steve Clark’s dictum

21 Do More of What Works and Less of What Doesn’t Steve Clark's advice to traders; traders go wrong by diversifying from their expertise

22 You Can’t Turn a Losing Streak Around by Trying Harder

23 Position Size Can Be More Important than Entry Price Entry Price Position Size The larger the position, the greater danger of exiting on meaningless price move Also important trading larger than normal when everything lines up

24 The Mindset of a Good Trader “It’s definitely going up”“It’s definitely going down”  One Minute Later Steve Clark observation. His own experience with Euro Disney

25 Music Is the Space between the Notes Successful Trading Is the Space between Trades Kevin Daly up 800% for 12-year period S&P flat despite being primarily long only (shorts less than 10%)

26 The Advantage of Trading around a Position Balodimas can be flat or even up by trading around positions Treats trades as dynamic rather than static. Taking profits before objective can add return Will increase staying power on pullbacks Only downside: gives up some windfall profits in straight line moves.

27 Greenblatt’s Three Rules of Value Investing Magic Formula Deciles: 1 > 2 > 3> 4> 5> 6> 7> 8> 9> 10 Why not buy 1 and sell 10 instead? 1. Value investing works 2. Value investing doesn’t work all the time 3. #2 is why #1 is true. Gotham fund 50% average return in 10-year period. Worst year +28%

28 You Don’t Have to Trade. “There Are No Called Strikes in Trading”* *Greenblatt quoting Warren Buffet

29 Flexibility 1.Mai and dry bulk shippers 2.O’Shea bearish Spring 2009 changed hypothesis (Asia led recovery)

30 The Trader and the Guillotine


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