8 Trading Lessons From Market Wizards

Last Updated on January 24, 2017 by Mark Ursell

In this article I discuss the book, Market Wizards, by Jack D. Schwager. The book is one of the best books on trading ever written and a source of inspiration for many traders over the years.

Market Wizards contains a depth of information that must be absorbed slowly through multiple reads. Over the years, I have read it through cover to cover and also dipped into it, re-reading favourite stories.

After reading it recently I decided to write this article discussing eight of the most important messages in the book.

About the Book

Market Wizards is based around a series of interviews with 17 traders and investors. The people interviewed were some of the very best people in their field, many of them are still highly regarded over 25 years later.

Most of the interviewees were top Wall Street fund managers, some were famous pit traders and others renowned educators. They include Paul Tudor Jones, Jim Rogers and William O’Neil.

The majority of the book is conversations between the author and the traders. One of the great strengths of the book is the author Jack Schwager. Schwager is a trader and market insider. He also has strong journalistic instincts to bring out the personal story along with the professional story. As an author he has the writing ability to put everything down in a clear and often compelling way.

1. You Don’t Need to Achieve Perfection

“It is incredible how rich you can get by not being perfect.” – Larry Hite

“Do you have a high percentage of winners in your stock picks?  No, only about 50/50” – David Ryan

This is a great message and very reassuring for anyone just starting out or trying to improve their trading.  Even the very best traders do not achieve perfection. In fact they are not even striving for perfection in terms of winning trades.

The financial markets reflect the opinion of the participants at any point in time.  As new information flows-in, people react to that information in different ways. Exactly the same report will cause one person to sell and another person to buy.

It is impossible to predict the future and all successful traders know this. The best that anyone can do is to make an informed guess based on historical precedent. However, this informed guess combined with good money management, is all that is needed to allow some traders to be profitable over a long period of time.

2. It is OK to Make Mistakes… but Don’t Sit on them ‘Rabbit in the Headlights’ style

“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” – Michael Marcus

“When in doubt get out and get a good night’s sleep” – Michael Marcus

Everyone has put a trade on and then instantly felt that it could be a mistake. This is quite normal, the market always looks a bit different when you have a live position compared to when you are neutral. Usually the best thing is to wait for a bit and see what happens.

However, there are times when it is clear that, for whatever reason, the position is unlikely to be successful. The advice from commodity trader Michael Marcus is to get out of the position as soon as possible. Most people find it hard to take a loss straight away. However, the cost of trading is small compared to the potentially ruinous cost of holding onto a bad position.

By far the worst thing is to ignore your stop-loss or move it to allow the position a bit more ‘wiggle room’.

3. Be Adaptable

“I constantly change the input to achieve the same output – profit”  – Mark Weinstein

“Yes, you have to adapt. You need to change your method of buying and selling, because the market is continually changing in subtle ways.” – Tom Baldwin

In the above quotes, futures trader Mark Weinstein, and pit trader Tom Baldwin, show their commitment to being adaptable. This is important for new and old traders alike. The markets change both cyclically and secularly and we need to pay attention to these changes.

A trading strategy that works perfectly during the a bull market could be completely useless in a trend-less market. Equally, a range trading strategy will struggle to be profitable when the market is in a strong downtrend.

Keep thinking about how you will react if the market changes. Trade what is happening but be prepared for what could happen.

4. Develop Your Own Style

“More money is lost listening to brokers than any other way. Trading requires an intense personal involvement. You have to do your own homework” – Michael Marcus

One thing that is fascinating about Market Wizards is how these highly successful traders achieved trading success in different ways. Each of them has made significant profits for themselves and their clients using different methods.

The Market Wizards show how trading is a personal experience. Everyone is different in terms of their attitude to risk, expectation, patience and analytical skills. The people being interviewed all demonstrated a strong understanding of how their personality fitted with the financial markets.

Below, I have given a few examples of the different opinions contained within the book:

“Pick one area and become expert in it.” – Gary Bielfeldt

“I use all forms of technical analysis but interpret them through gut feel. I do not believe in mathematical systems that always approach markets in the same way.” – Mark Weinstein

“If a system doesn’t work for both bonds and beans we don’t care about it” – Richard Dennis

It can seem confusing that these traders seem to be offering different advice. However, what they are all saying is that they trade in a way that is consistent with their beliefs.

5. Go Big When You See an Opportunity

“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”  – Michael Marcus

“When you feel the percentages are skewed in your favour – you raise and play that hand to the hilt.” – Gary Bielfeldt

“Shoot the fish in the barrel” – Jim Rogers

A number of the people interviewed recognised the importance of taking advantage of the big opportunities. To do this successfully requires the skill to recognise the opportunity and the bravery to back it strongly.

It is difficult to identify which trades have the potential to be great. Inevitably the really good trades do not occur very often. I think there are two ways to try to put this into action.

Firstly, stay on the lookout. This may seem obvious but the big opportunities have a way of hiding in plain sight. Simply by looking for the big trades and expecting that they will happen makes it much more likely that you will find one.

Secondly, plan your tactics for how to take advantage of a great trade. if you think a trade might be a big one, scale into it. There is no need to enter a large position straight away. Take a normal sized position and then let the trade move in your favour. The scaling in system will not work on any old trade. Look for the ones that have the best potential.

6. Wait Out the Bad Times

“After a devastating loss, I always play very small and try to get black ink.” – Marty Schwarz

“The speculator can choose to only bet when the odds are in his favour. That is an important positional advantage.” – Larry Hite

Dealing with losing trades is something that every trader must learn how to do. The instant reaction to a loss can be anger, sorrow or frustration. A string of losses can cause even greater problems.

How we deal with this losing period is key to how successful we will eventually be as traders. The traders in the book all had to come through periods of substantial loss with many of them blowing accounts and almost going broke. One of the simplest and best ways to deal with a bad period is to wait for a good opportunity and trade small. Build up some confidence before trading normally.

7. Have Faith in Yourself

“Be your own person. Think against the herd, as they must lose in time.” – Mark Weinstein

“Making your best judgement, being wrong, making your next best judgement, being wrong, making your third best judgement, and then doubling your money.” – Bruce Kovner

Faith in their own judgement is a key part of the success of all of the Market Wizards. No trader can remain profitable relying on the trading advice of others.

A lack of faith causes a trader to close profitable positions early when they read a news story contradicting their trading beliefs. It also leads to hesitation and missing out on good opportunities.

Faith is something that needs to be built up over time. Many of the traders emphasise the importance of making your own mistakes. Paul Tudor Jones recommends that every trader keeps a trading diary. The act of recording our thoughts along with our profitable and losing trades speeds up the learning process.

8. Be Professional

“[Following a loss] I was not going to quit. I was determined to come back and fight. I decided that I was going to become very disciplined and businesslike about my trading.” – Paul Tudor Jones

Two simple words but they are possibly the most important for trading success. Adopt a professional attitude in every aspect of your trading. Think about yourself as a professional and think about your trading as a business.

Almost every aspect of being a successful trader can be summed up by the idea of being professional. Do your research; study the markets; enter trades based on sound reasons; do not get too emotionally involved; keep good records; review your results; and strive for improvement.

Every single trader knows that it is not possible to make money trading by being casual and careless. Work hard to be the opposite.

Afterword

This article has summarised some of the most important messages of the book but there is still much more to learn. I recommend that every trader read the book and I am certain that everyone will learn something useful.

If you are based in the US you can check the book out on Amazon.com and read some of the reviews:

For UK based readers, the link on Amazon.co.uk is: