15 Trading Tips From Jack Schwager’s
1) There is no single true path to becoming market wizards.
From his interviews with the market wizards, Jack said he realized that there is no single way to become a proficient trader or investor.
To prove his point, he talked about two extreme traders whom he interviewed, namely Jim Rogers and Marty Schwartz.
Jim Rogers is a billionaire fundamentalist investor who co-founded Quantum Fund with George Soros many years back, while Marty Schwartz is a trading wizard who had an audited trading record of consistently averaging 25% profit EVERY MONTH for many years.
Jim Rogers had commented in his interview with Jack, that he only sees technicians making a living selling ideas but he has never personally met a rich technician before who made his fortune from trading.
Subsequently, this was what Marty Schwartz said in response to Jim Rogers’ comments during his interview with Jack,
“I always laugh at people who say, I’ve never met a rich technician. I love that! It is such an arrogant, nonsensical response. I used fundamentals for nine years and got rich as a technician.”
The truth is that both of them are proven traders / investors in their own rights and extreme of these two personalities, with totally different methodologies, trading with different horizons.
Just this occurrence alone proved that there are many different paths to trading success.
And from here, Jack went on to his next point, which was:
2) Use a strategy that suits your personality.
Jack’s point here was that there are many strategies that worked for different traders with different personalities.
If you try to use any “black box” method that does not fit your personality, chances is that you will second guess the trading signals you get from the system that you adopted.
You will end up cherry picking the signals you get and as such, result in inconsistent returns even thou that strategy is profitable in the long run.
3) Use a trading strategy that has a positive edge.
From his interviews with the market wizards, Jack realized that every single one of these top traders uses a strategy that has an edge.
The edge is what helped them remain profitable over the long run and over many trades done.
One example he gave to illustrate a strategy without an edge.
Someone who bets his money on the roulette, in the casino, do not have an edge.
If you only bet on a single colour at any point in time on the roulette, you have only a 47.5% probability of being right because of the additional 0 and 00 slots that do not belong to either colours.
Meanwhile, the casino has a 52.5% probability of winning in any single bets.
In the short run, you might be lucky to win a few initial rounds betting on a single color.
But over the long run and over many bets, you will DEFINITELY lose money on the roulette table because your betting strategy has a negative edge.
Since the payout is just 1 to 1, you will never make money when you bet your money with a negative edge such as this, guaranteed.
4) Hard work is necessary.
Jack said that one common trait he noticed in all the top traders interviewed is that they are all very hard working.
They embrace the effort they need to put in order to become a proficient trader.
In some extreme cases, a few of the market wizards even spend 20 hours a day trading and honing their trading skills.
5) The Paradox: a surgeon versus a traderJack posed this question to the audience on the floor,
“Have you ever met someone who goes to a bookstore on a Friday, buys a book on surgery, read it over the weekend and attempt to go into the operating theater on Monday and start to operate like a real surgeon?”
Every single one of the audience agreed there is a zero chance that this man could perform a successful surgery just by reading a surgery textbook over the weekend.
However, Jack went on to ask the next question,
“Have you ever met someone who goes to a bookstore on a Friday, buys a book on trading, read it over the weekend and attempts to head into the market on Monday and start to trade like he is a professional trader?”
The audience giggled upon Jack’s second question, which probably suggested that this example of a aspiring trader is a common occurence.
The fact, as Jack explained, is that anyone with zero experience in surgery will almost definitely fail in his first duty as a surgeon.
But someone who has zero experience in trading could still potentially make money (sometimes a lot) on his initial trades!
This paradox gives people a general false feeling that trading is and can be very easy for any newbie.
According to Jack, the truth is that in order to be a profitable trader in the long run, you will have to put in effort in honing your trading skills.
The effort will be as much as a trainee surgeon who spend years of his life learning how to become a proficient surgeon.
When a newbie trader’s beginners luck runs out, he will start losing a lot of money, usually much more than the amount he made during his lucky winning streak.
So, if you are a amateur trade and if you want to become a proficient trader over the long run, there is simply no short cut way for you.
You will have to spend years honing your trading skills until you become one of those market wizards.
6) Good trading is effortless.
According to Jack, trading should be effortless for a proficient trader.
The reason is that all top traders should have worked out a trading plan and strategy even before they put on any trade based on the circumstances that arises.
And if you have your trading plan in place and you are disciplined enough to follow through, putting on trades and taking off trades should be an effortless endeavor.
If you struggle physically, mentally or emotionally when opening a trade or closing a trade, you need to head back to the drawing board to refine your trading plan into one that you can follow with ease.
7) Risk management is more important than methodologies“Always know where you will get out even before you get in a trade.”
This was the opening statement Jack made to bring his point across on the concept of risk management.
To put it more simply, this means that even before you enter a trade, you must first decide where and when to cut your loss should you make a wrong judgement.
If you do not decide your exit plan before you enter, your emotions will usually throw your objectivity and rationale out of the window once you money is in the trade.
And that to him, is the worse form of risk management.
Also, Jack emphasized that it is extremely important for a trader to risk NOT more than a certain percentage (eg. 0.5% to 2% max) of his capital on any single trade.
This ensures that if something unforeseeable result in a huge price plunge in any of your stock, you will not get wiped out by a single catastrophic trade.
8) DisciplineThis part of his talk emphasized on the need to cut loss when you have to.
The single trait that makes most people fail as a trader is their lack of discipline in devising a trading plan and follow their trading plan.
Most average traders do not have the discipline to let their profit run when they should and also do not have the discipline to cut their losses short when they have to.
If you have a lack of discipline, you will definitely fail as a trader.
9) IndependenceJack Schwager commented that many retail traders like to ask around for tips and views, and also like to share their views about the market freely with their friends.
This kind of interaction result in a trader losing his independence in analysing the market in a way that suits his trading experience and personality.
Jack Schwager shared a true personal experience to illustrate this point:
Many years back, Jack’s friend approached him and asked him about his view about a certain currency pair.
Based on Jack’s usual analysis methodology, he told his friend that he thinks the currency is likely to depreciate further.
However, Jack’s friend insist that Jack is wrong and the currency should appreciate from there.
When the exchange was over, Jack had to travel for a business trip. Ironically, as a result of this interaction and views exchanged with his friend, Jack decided not to short this currency pair, “just in case” that his friend is right.
Guess what? When Jack Schwager returned from his trip, he realised that the currency pair which he was bearish about, actually did plunge a few hundred pips while he was away.
And when Jack and his “helpful friend” got back together one day, his friend told him that he had listened to Jack’s advice and short the currency pair and made a big pile of profits from that trade.
This was one of the painful lesson that Jack Schwager learned personally (this experience was also related in his book) and to end off this point with a quote, he said this:
“When two best traders comes to trade together, they will both lose money in the end”.
10) ConfidenceThis is another important trait that Jack noticed in all of the market wizards that he interviewed.
Many of the market wizards actually had multiple terrible failures as an amateur trade in their early days.
Most average traders would have simply given up on trading after experiencing a few rounds of negative experiences as a money losing trader.
However, one trait that differentiates these top traders from average traders was that they had absolute belief in their abilities to make things right in the end.
They persisted in honing their trading skills despite multiple failures because they had the kind of confidence in themselves, which average people do not have.
They were confident enough to try and try and try again until they made it in the end.
11) Losing is part of the game.
This was a fact as concurred by all the market wizards; that you have to accept that losing is part of the game.
Very often, amateur traders often held their ego as high as the moon in the sky.
When a position an average trader puts on, starts to turn into paper losses, he will continue to hold on to that trade.
He is hoping that the market will reverse back in his anticipated direction and prove him right that his analysis was the right one.
But when the market continues to go against his direction (it usually does), the average trader will lose all his rationality about his capital bleeding away and the opportunity costs he is constantly incurring by holding on to a losing trade.
All he cares about is wanting to be proved that his original analysis was right. Finally, when he realises that he was wrong, it was already too late and he has to cut his trade with a huge loss.
As such, Jack Schwager believes that accepting losses as part of the game is a vital mind-set that a good trader must have.
When a trader has this belief built into his mind, he will be able to take his small losses decisively and with a pinch of salt and.
However, there is an even bigger picture to this point according to Jack.
The reality is that every good trading system and strategy will have a period of time when it wouldn’t work and result in frequent losses.
If a trader is not able to accept this and continue to stick to his system during these down periods, he will not be present to continue using that system when the much better and good times comes back subsequently.
12) Patience is gold.
Patience is another key attribute that Jack Schwager had observed of the top traders.
He provided a quote by Jim Rogers to explain this point:
“I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up. I do nothing in the meantime.”
It is true that you need to have patience to be a successful trader or investor.
Whether you trade short term or long term, there will be times when the market is not conducive for making trades.
If you can have the patience to do nothing when the market is giving nothing, then you are already way ahead of most amateur traders.
Jack also used a quote by Jesse Livermore to explain further:
“”There is the plain fool who does the wrong thing at all times anywhere, but there is the Wall Street fool who thinks he must trade all the time.”
13) The important of sitting still.
This point is a bit similar to the earlier point, except that this point is more applicable to those open trades that you are already in.
There is a tendency by traders to want to take quick profits once there are any to be taken.
And Jack used this quote by Jesse Livermore to illustrate this point:
“It never was my thinking that made big money for me. It was always my sitting. Got that? My sitting tight!”
According to Jesse Livermore, the best chance to reap big profits is to learn how to let the stock price run its full course.
When the stock is still going in the direction of your trade, then you need to have the discipline to hold on to your chair and sit tight with your position.
Get out only after the stock has shown signs of starting to turn against you.
14) Loyalty is a disaster.
Jack Schwager said that a good trader should not have any loyalty to any stocks that he is in.
A stock is merely a tool to make money from and if any trader starts to become too loyal to his position or to the stock that he owns, he will not do the right thing (which is to cut the position), when bad things happen.
To illustrate this point, Jack shared a quote by Jesse Livermore again:
“As I said before, a man does not have to marry one side of the market until death do them part.”
A stock or a trade position is not your wife, neither is your friend. If it is not working out for you and making you money, never hesitate to dump that position.
15) The comfort thing.
This was a very enlightening point that Jack brought out.
According to him, we as human are designed so poorly to trade, such that when an average human make a trading decision, his chances of winning is less than a random chance.
What is the reason for this?
Jack carried on to explain that for most average people, it is a natural human instinct to seek comfort in the way they go about doing their daily work.
As such, it is also naturally for you to make trading decisions that gives you comfort but not profits.
Some examples that I can personally think of is:
1) Dollar Averaging down on a stock as it becomes cheaper and cheaper is a form of comfort.
2) Not willing to take a loss is a form of seeking comfort as well.
3) Choosing to quickly take small profits is a form of comfort seeking as well.
As a conclusion, Jack said that they market do not pay you to do comfortable things.
And top traders always have to make trading decisions that are contrarian and uncomfortable to the average trader.
Maybe, that is why they are successful in the first place.
From his interviews with the market wizards, Jack said he realized that there is no single way to become a proficient trader or investor.
To prove his point, he talked about two extreme traders whom he interviewed, namely Jim Rogers and Marty Schwartz.
Jim Rogers is a billionaire fundamentalist investor who co-founded Quantum Fund with George Soros many years back, while Marty Schwartz is a trading wizard who had an audited trading record of consistently averaging 25% profit EVERY MONTH for many years.
Jim Rogers had commented in his interview with Jack, that he only sees technicians making a living selling ideas but he has never personally met a rich technician before who made his fortune from trading.
Subsequently, this was what Marty Schwartz said in response to Jim Rogers’ comments during his interview with Jack,
“I always laugh at people who say, I’ve never met a rich technician. I love that! It is such an arrogant, nonsensical response. I used fundamentals for nine years and got rich as a technician.”
The truth is that both of them are proven traders / investors in their own rights and extreme of these two personalities, with totally different methodologies, trading with different horizons.
Just this occurrence alone proved that there are many different paths to trading success.
And from here, Jack went on to his next point, which was:
2) Use a strategy that suits your personality.
Jack’s point here was that there are many strategies that worked for different traders with different personalities.
If you try to use any “black box” method that does not fit your personality, chances is that you will second guess the trading signals you get from the system that you adopted.
You will end up cherry picking the signals you get and as such, result in inconsistent returns even thou that strategy is profitable in the long run.
3) Use a trading strategy that has a positive edge.
From his interviews with the market wizards, Jack realized that every single one of these top traders uses a strategy that has an edge.
The edge is what helped them remain profitable over the long run and over many trades done.
One example he gave to illustrate a strategy without an edge.
Someone who bets his money on the roulette, in the casino, do not have an edge.
If you only bet on a single colour at any point in time on the roulette, you have only a 47.5% probability of being right because of the additional 0 and 00 slots that do not belong to either colours.
Meanwhile, the casino has a 52.5% probability of winning in any single bets.
In the short run, you might be lucky to win a few initial rounds betting on a single color.
But over the long run and over many bets, you will DEFINITELY lose money on the roulette table because your betting strategy has a negative edge.
Since the payout is just 1 to 1, you will never make money when you bet your money with a negative edge such as this, guaranteed.
4) Hard work is necessary.
Jack said that one common trait he noticed in all the top traders interviewed is that they are all very hard working.
They embrace the effort they need to put in order to become a proficient trader.
In some extreme cases, a few of the market wizards even spend 20 hours a day trading and honing their trading skills.
5) The Paradox: a surgeon versus a traderJack posed this question to the audience on the floor,
“Have you ever met someone who goes to a bookstore on a Friday, buys a book on surgery, read it over the weekend and attempt to go into the operating theater on Monday and start to operate like a real surgeon?”
Every single one of the audience agreed there is a zero chance that this man could perform a successful surgery just by reading a surgery textbook over the weekend.
However, Jack went on to ask the next question,
“Have you ever met someone who goes to a bookstore on a Friday, buys a book on trading, read it over the weekend and attempts to head into the market on Monday and start to trade like he is a professional trader?”
The audience giggled upon Jack’s second question, which probably suggested that this example of a aspiring trader is a common occurence.
The fact, as Jack explained, is that anyone with zero experience in surgery will almost definitely fail in his first duty as a surgeon.
But someone who has zero experience in trading could still potentially make money (sometimes a lot) on his initial trades!
This paradox gives people a general false feeling that trading is and can be very easy for any newbie.
According to Jack, the truth is that in order to be a profitable trader in the long run, you will have to put in effort in honing your trading skills.
The effort will be as much as a trainee surgeon who spend years of his life learning how to become a proficient surgeon.
When a newbie trader’s beginners luck runs out, he will start losing a lot of money, usually much more than the amount he made during his lucky winning streak.
So, if you are a amateur trade and if you want to become a proficient trader over the long run, there is simply no short cut way for you.
You will have to spend years honing your trading skills until you become one of those market wizards.
6) Good trading is effortless.
According to Jack, trading should be effortless for a proficient trader.
The reason is that all top traders should have worked out a trading plan and strategy even before they put on any trade based on the circumstances that arises.
And if you have your trading plan in place and you are disciplined enough to follow through, putting on trades and taking off trades should be an effortless endeavor.
If you struggle physically, mentally or emotionally when opening a trade or closing a trade, you need to head back to the drawing board to refine your trading plan into one that you can follow with ease.
7) Risk management is more important than methodologies“Always know where you will get out even before you get in a trade.”
This was the opening statement Jack made to bring his point across on the concept of risk management.
To put it more simply, this means that even before you enter a trade, you must first decide where and when to cut your loss should you make a wrong judgement.
If you do not decide your exit plan before you enter, your emotions will usually throw your objectivity and rationale out of the window once you money is in the trade.
And that to him, is the worse form of risk management.
Also, Jack emphasized that it is extremely important for a trader to risk NOT more than a certain percentage (eg. 0.5% to 2% max) of his capital on any single trade.
This ensures that if something unforeseeable result in a huge price plunge in any of your stock, you will not get wiped out by a single catastrophic trade.
8) DisciplineThis part of his talk emphasized on the need to cut loss when you have to.
The single trait that makes most people fail as a trader is their lack of discipline in devising a trading plan and follow their trading plan.
Most average traders do not have the discipline to let their profit run when they should and also do not have the discipline to cut their losses short when they have to.
If you have a lack of discipline, you will definitely fail as a trader.
9) IndependenceJack Schwager commented that many retail traders like to ask around for tips and views, and also like to share their views about the market freely with their friends.
This kind of interaction result in a trader losing his independence in analysing the market in a way that suits his trading experience and personality.
Jack Schwager shared a true personal experience to illustrate this point:
Many years back, Jack’s friend approached him and asked him about his view about a certain currency pair.
Based on Jack’s usual analysis methodology, he told his friend that he thinks the currency is likely to depreciate further.
However, Jack’s friend insist that Jack is wrong and the currency should appreciate from there.
When the exchange was over, Jack had to travel for a business trip. Ironically, as a result of this interaction and views exchanged with his friend, Jack decided not to short this currency pair, “just in case” that his friend is right.
Guess what? When Jack Schwager returned from his trip, he realised that the currency pair which he was bearish about, actually did plunge a few hundred pips while he was away.
And when Jack and his “helpful friend” got back together one day, his friend told him that he had listened to Jack’s advice and short the currency pair and made a big pile of profits from that trade.
This was one of the painful lesson that Jack Schwager learned personally (this experience was also related in his book) and to end off this point with a quote, he said this:
“When two best traders comes to trade together, they will both lose money in the end”.
10) ConfidenceThis is another important trait that Jack noticed in all of the market wizards that he interviewed.
Many of the market wizards actually had multiple terrible failures as an amateur trade in their early days.
Most average traders would have simply given up on trading after experiencing a few rounds of negative experiences as a money losing trader.
However, one trait that differentiates these top traders from average traders was that they had absolute belief in their abilities to make things right in the end.
They persisted in honing their trading skills despite multiple failures because they had the kind of confidence in themselves, which average people do not have.
They were confident enough to try and try and try again until they made it in the end.
11) Losing is part of the game.
This was a fact as concurred by all the market wizards; that you have to accept that losing is part of the game.
Very often, amateur traders often held their ego as high as the moon in the sky.
When a position an average trader puts on, starts to turn into paper losses, he will continue to hold on to that trade.
He is hoping that the market will reverse back in his anticipated direction and prove him right that his analysis was the right one.
But when the market continues to go against his direction (it usually does), the average trader will lose all his rationality about his capital bleeding away and the opportunity costs he is constantly incurring by holding on to a losing trade.
All he cares about is wanting to be proved that his original analysis was right. Finally, when he realises that he was wrong, it was already too late and he has to cut his trade with a huge loss.
As such, Jack Schwager believes that accepting losses as part of the game is a vital mind-set that a good trader must have.
When a trader has this belief built into his mind, he will be able to take his small losses decisively and with a pinch of salt and.
However, there is an even bigger picture to this point according to Jack.
The reality is that every good trading system and strategy will have a period of time when it wouldn’t work and result in frequent losses.
If a trader is not able to accept this and continue to stick to his system during these down periods, he will not be present to continue using that system when the much better and good times comes back subsequently.
12) Patience is gold.
Patience is another key attribute that Jack Schwager had observed of the top traders.
He provided a quote by Jim Rogers to explain this point:
“I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up. I do nothing in the meantime.”
It is true that you need to have patience to be a successful trader or investor.
Whether you trade short term or long term, there will be times when the market is not conducive for making trades.
If you can have the patience to do nothing when the market is giving nothing, then you are already way ahead of most amateur traders.
Jack also used a quote by Jesse Livermore to explain further:
“”There is the plain fool who does the wrong thing at all times anywhere, but there is the Wall Street fool who thinks he must trade all the time.”
13) The important of sitting still.
This point is a bit similar to the earlier point, except that this point is more applicable to those open trades that you are already in.
There is a tendency by traders to want to take quick profits once there are any to be taken.
And Jack used this quote by Jesse Livermore to illustrate this point:
“It never was my thinking that made big money for me. It was always my sitting. Got that? My sitting tight!”
According to Jesse Livermore, the best chance to reap big profits is to learn how to let the stock price run its full course.
When the stock is still going in the direction of your trade, then you need to have the discipline to hold on to your chair and sit tight with your position.
Get out only after the stock has shown signs of starting to turn against you.
14) Loyalty is a disaster.
Jack Schwager said that a good trader should not have any loyalty to any stocks that he is in.
A stock is merely a tool to make money from and if any trader starts to become too loyal to his position or to the stock that he owns, he will not do the right thing (which is to cut the position), when bad things happen.
To illustrate this point, Jack shared a quote by Jesse Livermore again:
“As I said before, a man does not have to marry one side of the market until death do them part.”
A stock or a trade position is not your wife, neither is your friend. If it is not working out for you and making you money, never hesitate to dump that position.
15) The comfort thing.
This was a very enlightening point that Jack brought out.
According to him, we as human are designed so poorly to trade, such that when an average human make a trading decision, his chances of winning is less than a random chance.
What is the reason for this?
Jack carried on to explain that for most average people, it is a natural human instinct to seek comfort in the way they go about doing their daily work.
As such, it is also naturally for you to make trading decisions that gives you comfort but not profits.
Some examples that I can personally think of is:
1) Dollar Averaging down on a stock as it becomes cheaper and cheaper is a form of comfort.
2) Not willing to take a loss is a form of seeking comfort as well.
3) Choosing to quickly take small profits is a form of comfort seeking as well.
As a conclusion, Jack said that they market do not pay you to do comfortable things.
And top traders always have to make trading decisions that are contrarian and uncomfortable to the average trader.
Maybe, that is why they are successful in the first place.