The New Market Wizards:
Conversations with America’s Top Traders
Jack D. Schwager
A practical summary by Andrew Barnett
Just as he did in his acclaimed national bestseller, Market Wizards, Jack D. Schwager interviews a host of
supertraders, spectacular winners whose success occurs across a spectrum of financial markets. Through
these interviews, Schwager reveals that winning in the markets is a matter of skill and discipline, not
luck.
Schwager’s Core Beliefs:
1. The markets are not random.
2. The markets are not random because they are based on human behavior, and human behavior,
especially mass behavior, is not random.
3. There is no holy grail or grand secret to the markets, but there are many patterns that can lead
to profits.
4. There are a million ways to make money in markets. However, they are all very difficult to find.
5. The markets are always changing, and they are always the same.
6. The secret to success in the markets lies not in discovering some incredible indicator or
elaborate theory; rather, it lies within each individual.
7. To excel in trading requires a combination of talent and extremely hard work.
8. Success in trading is a worthy goal, but it will be worthless unless accompanied by success in
other areas of your life.
The World’s Biggest Market:
Bill Lipschutz:
The Sultan of Currencies
Lipschutz’s first experience in actual trading was prompted by a $12,000 inheritance that he steadily
built up to $250,000 over a four year period. Clearly, as with most supertraders, he possesses an innate
ability to trade successfully. Additionally, his first year of trading in the currency markets was profitable,
and though he declines to quote any specific figures, his trading alone accounted for an excess of onehalf billion dollars in profits for Salomon Brothers over his eight-year stay with the firm.
Lessons from Lipschutz:
1. Hard work and an all-consuming commitment to the markets are essential for success.
2. Superior intelligence is another important ingredient for success.
3. Trading can be a wonderful game. In fact, Lipschutz claims that trading is such a wonderful
game, he would do it for free if he had to.
4. Use a scale-in and scale-out approach to ensure you will have at least a partial position if the
market keeps on going without excessive risk.
5. If you have a strong conviction about a trade and the market has a large move because of a
news event, the best decision may well be to bite the bullet and buy on extreme strength
(or sell on extreme weakness).
Futures-The Variety-Pack Market
Reasons why traders prefer futures markets over their counterparts:
1. Standardized contracts
2. Liquidity
3. Ease of going short
4. Leverage
5. Low transaction costs
6. Ease of offset
7. Guaranteed by exchange
Randy McKay:
Veteran Trader
Parlaying an initial $2,000 stake into $70,000 in his first seven months in the business, McKay
immediately demonstrated his talent as a trader right out of the gate. However, his ability to maintain
his winnings, holding a twenty-year record of highly consistent profitability, puts McKay in an elite class
where few have treaded before. From a trader on the floor, to a trader at home, to a money manager,
McKay has exceled in many different environments, accumulated tens of millions of dollars (by
conservative estimates) along the way.
Lessons from McKay:
1. Find the trading methodology that suits your personality.
2. Reduce risk during the losing periods and enhance profits during the winning periods by
using drastic variation in position size.
3. Use risk control, whether to reduce your position size during a losing streak or getting out of
a position that has gone sour.
4. Use fundamental analysis to focus on the market response to fundamental news rather than
to gauge whether the fundamentals are bullish or bearish.
William Eckhardt:
The Mathematician
Stopping just short of his Ph.D. in mathematics, Eckhardt began his career trading on the floor, but left
the reflexive trading arena for the more analytical approach of systems-based trading. With years of
experience as a trader both on and off the floor, a keen analytical mind, rigorous mathematical training,
and his great interest in scientific inquiry, Eckhardt is exceptionally skilled in the art of trading.
Lessons from Eckhardt:
1. Instinctive preferences often run counter to most fundamental principles of successful
trading: Cut your losses short and let your profits run.
2. Beware of “the call of the countertrend.”
3. Traders’ excessive concern with their current position can negatively impact long-term
performance.
4. Only believe the results of a system trading if you have done everything possible to disprove
them.
Monroe Trout:
The Best Return That Low Risk Can Buy
Known for his phenomenal return/risk performance (over a five year period, his average return was 67
percent and his largest drawdown just over 8 percent), Trout views himself as a businessman whose job
it is to make money for his customers. Along with his exceptional skill in timing the entry and exit of his
positions, Trout relies on systems based primarily on statistical analysis as opposed to more standard,
trend-following approaches.
Lessons from Trout:
1. Reach trading decisions like a system trader, but execute decisions like a discretionary
trader.
2. Develop a trading methodology that gives you an edge.
3. Exercise rigid risk control to protect against those infrequent events that cause enormous,
abrupt price moves that can quickly decimate overleveraged accounts.
Al Weiss:
The Human Chart Encyclopedia
In terms of return/risk ration, Al Weiss may well have the single best long-term track record for a
commodity trading advisor. Since he began trading in 1982 at AZF Commodity Management, Weiss has
averaged 52 percent annually. One thousand dollars invested with Weiss in 1982 would have been
worth almost $53,000 at the end of 1991. While the returns are impressive, they are only half the story.
During the time from 1988-1991, his worst annual drawdown averaged under 5 percent, while his
average annual return exceeded 29 percent. Using a purely technical approach, Weiss is an ardent
student of long-term chart analysis, focusing on multiple-pattern combinations to discover higher
probability trades.
Lessons from Weiss:
1. The markets are based on human psychology; by charting the markets you are merely
converting human psychology into graphic representations.
2. The human mind is more powerful than any computer in analyzing the implications of price
graphs.
3. Research and chart analysis can reveal complex patterns and higher probability trades.
Fund Managers and Timers
Stanley Druckenmiller:
The Art of Top-Down Investing
Druckenmiller belongs to the rarefied world of managers who control multibillion-dollar portfolios. In
the three years since he assumed active management control of the Quantum Fund from his mentor
and idol, George Sotos, Druckenmiller has realized an average annual return of over 38 percent on
assets ranging between $2.0 billion and $3.5 billion. According to Druckenmiller, superior performance
requires two key elements: preservation of capital and home runs.
Lessons from Druckenmiller:
1. Take full advantage of the situations when you are well ahead and running a hot hand.
2. Great track records are made by avoiding losing years and managing to score a few highdouble-digit or triple-digit-gain years, homeruns as Druckenmiller likes to call them.
3. If you make a mistake, respond immediately.
4. While valuation analysis is important in gauging the extent of a potential future price move
once the current market trend reverses, liquidity analysis and technical analysis are key
tools to timing the broad market.
5. Be flexible: go short and long while diversifying into other major global markets.
Richard Driehaus:
The Art of Bottom-Up Investing
After discovering the folly of following the recommendations of financial columnists in his early teens,
Driehaus began educating himself through stock newsletters and financial magazines, developing the
market philosophy that would serve as the core of his approach in his later years as a securities analyst
and portfolio manager. Though Driehaus’ flagship investment vehicle has been small cap stocks, he has
broadened his scope to include other types of funds as well. One of his hallmark approaches is to
remove the impact of general stock market trend by approximately balancing long and short positions
on an ongoing basis. In other words, the fund’s market directional exposure is near zero at all times with
performance entirely dependent on individual stock selection.
Lessons from Driehaus:
1. Price follows growth; the key to superb performance in the stock market is picking the
companies with the best potential earnings growth.
2. Find greater profit opportunities by buying stocks with average to below average P/E ratio
as greater inefficiencies will lead to greater profit opportunities.
3. Fortunes are made by jumping on board the strongest fundamental and technical
performers, not by picking bargains.
4. Do what is right, not what is comfortable.
5. You do not have to be right the majority of the time, but you do have to take advantage of
the situations when you are right. To accomplish this, you must take larger positions when
one has a high degree of confidence and hold such positions long enough to realize most of
the potential.
6. Carefully researching and rigorously verifying a trading philosophy is essential to developing
the confidence necessary to stay the course during the difficult times – and there will always
be such times, even for the most successful approaches.
Gil Blake:
The Master of Consistency
A Wall Street outsider, Blake spent time in the navy (as an officer on a nuclear submarine), as an
accountant (for Price Waterhouse), and as chief financial officer (for Fairfield Optical) before he began
his career as a trader. In his first twelve years of trading, he averaged a 45 percent return. Although this
is an impressive figure, the most striking element of Blake’s performance is his consistency; he has never
had a year with a return below 20 percent. As a mutual fund timer, yielding return on a stock or bond
fund by switching into a money market fund whenever conditions are deemed favorable, Blake uses
purely technical models to generate signals for the optimum daily investment strategy. His return
relative to risk puts Blake in a class of his own.
Lessons from Blake:
1. To be a successful trader, you must possess the ability to change your mind; dogmatic and
rigid personalities rarely, if ever, succeed in the markets.
2. Due to the dynamic process of the markets, a trader must be able to modify and even
change strategies as markets evolve.
3. Devise your trading rules and then follow your trading rules.
Victor Sperandeo:
Markets Grow Old Too
Sperandeo began his career on Wall Street straight out of high school. While climbing up the ladder,
Sperandeo bounced back and forth between different firms, only to realize that he needed to go out on
his own to get a fair deal. With a partner to finance, Sperandeo started Ragnar Options. Within six
months, Ragnar was the largest OTC option dealer in the world. After Ragnar merged with another
company, Sperandeo joined Interstate Securities to trade a company account and a few private
accounts, but eventually Sperandeo started his own money management firm – Rand Management
Corporation. Stringing together 18 consecutive winning years before registering his first loss, Sperandeo
has thrived by placing a greater emphasis on loss avoidance than on scoring large gains.
Lessons from Sperandeo:
1. By categorizing the stock market by risk, the odds will be in your favor.
2. Vary your bet size; place your largest bets when the odds are most favorable, but if the
market does not go immediately in your favor, pare down your bet.
3. Winning traders admit their mistakes and do not tie their self-esteem to being right in the
markets.
4. The buy-and-hold strategy is faulty.
Multiple-Market Players
Tom Basso:
Mr. Serenity
Managing to become a profitable trader while maintaining complete peace of mind and experiencing
great joy, Basso is an anomaly and a role model. Basso started out as an engineer, but began dabbling in
the investment field when his engineering gig became draining. Though he did not experience
immediate success in the financial markets, he persisted until he finally succeeded, managing equity
accounts at first and then expanding his management scope to include futures accounts as well.
Lessons from Basso:
1. Psychology is critical to success; in order to achieve success in life, you must have the right
mental attitude.
2. You have to enjoy trading, because if trading is a source of negative emotions, you have
probably already lost the game, even if you make money.
3. Maintain the perspective of viewing unfolding market events as you would view a movie;
don’t worry about the adverse market moves if you’ve got it right in a long-term sense.
4. Don’t take your problems too personally; the universe will still be there tomorrow.
Linda Bradford Raschke:
Reading the Music of the Markets
From an early age, Raschke knew that she wanted to be involved in the markets. Though she was unable
to land a job as a stockbroker after graduating from college, Raschke made it a habit to hang out of the
floor of the Pacific Coast Stock Exchange every morning before work, which eventually led to an
opportunity to become a trader. After six years as a floor trader, Raschke suffered an accident that
forced her to trade from an office, which led to her working from home. With an ability to see patterns
that others don’t, she has been able to trade short-term price swings with a consistency that would defy
the laws of probability.
Lessons from Raschke:
1. Understand that learning the markets can take years.
2. Start by finding a niche and specializing.
3. Never fear the markets or fear making a mistake.
4. Stay actively involved with the market.
5. Never be greedy; if you can’t get in at a favorable price, let the trade go and start looking for
the next trade.
6. Only by acting and thinking independently can a trader hope to know when a trade isn’t
working out.
7. The temptation to seek out other peoples’ opinions on a trade is a sure sign that the trade
should be liquidated.
The Money Machines
Mark Ritchie:
God in the Pits
Though Ritchie attended divinity school and barely scraped by with part time jobs in his early years,
after one trip to the Chicago Board of Trade with his brother Joe, he was hooked on trading. Most of his
trading career was spent on the floor of the Chicago Board of Trade, specializing in trading the soybean
crush. However, he eventually decided to try trading from an office. The change transformed Ritchie as a
trader because approaches which had brought him success on the floor did not bring him success off the
floor. In four years in off the floor trading, he registered an average annual return of 50 percent.
Lessons from Mark Ritchie:
1. Do your own research.
2. Keep each position size so small that it almost seems to be a waste of your time.
3. Have the patience to stay with a winning position as long as that position is working, even if
it means keeping a single position for years.
4. View risk of open profits differently from the risk as measured from starting equity in a
trade.
5. Recognize and control your greed.
Joe Ritchie:
The Intuitive Theoretician
Though he has never taken a math course, Joe Ritchie is considered by many to be a math genius.
Therefore, it is no surprise that his trading models for CRT (Chicago Research and Trading), the firm that
Ritchie is the founder of and driving force, are highly mathematical in nature. This approach has served
him well; Ritchie estimates that CRT, the primary dealer of government securities, has garnered close to
$1 billion in trading profits and done over $10 trillion in transactions. Ritchie is dynamic, energetic, and
brilliant. Work for him is truly fun because it is an endless challenge and an ever-changing puzzle.
Lessons from Joe Ritchie:
1. Successful traders tend to be instinctive rather than overly analytical; the most analytical
people tend to be the worst traders.
2. Successful traders are humble; they possess the ability to admit when they’re wrong.
Blair Hull:
Getting the Edge
Hull came to trading by way of the blackjack tables. When casinos were no longer a welcoming place,
Hull sought another avenue for applying probability theory to make money. Applying the same general
principles from blackjack, Hull profited from mispricings that occurred in the option markets, multiplying
his $25,000 stake twentyfold in three years. He continued to score consistent profits in the subsequent
years, averaging roughly 100 percent per year, before launching the Hull Trading Company (HTC) to
allow for a more widespread application of his trading strategies. HTC accounts for over 10 percent of
the total trading volume in a number of options in which they make markets by using a broad range of
interrelated option markets against each other in order to profit from temporary mispricings, while
simultaneously keep the firm’s net risk exposure to minimal levels.
Lessons from Hull:
1. Successful trading requires a well-defined method or specific approach that gives you an
edge; without a method, trading is every bit as much a gamble as betting in the casinos.
2. Even with a method, you still need money management to prevent an adverse streak from
taking you out of the game; even a good system can lose money with poor money
management.
3. Directional trades can be effective if you do the following:
a. Trade infrequently and only when you have a strong idea.
b. Trade the opposite side of the predominant news stories.
c. Time your trade to coincide with an event that has the potential to lead to a panic
climax.
Jeff Yass:
The Mathematics of Strategy
Yass started out as an option trader of the Philadelphia Stock Exchange, but, after enticing a number of
his college friends to try trading careers, created, along with his friends, the Susquehanna Investment
Group, which is one of the largest option trading firms in the world and one of the largest entities in
program trading. Yass seeks out nuances of market inefficiencies through complex refinements of
standard option pricing models. However, the essence of Yass’s approach is not necessarily having a
better model but rather placing greater emphasis on applying mathematical game theory principals to
maximize winnings. To Yass, the market is like a giant poker game, and you have to pay very close
attention to the skill level of your opponents.
Lessons from Yass:
1. It is critical to focus on maximizing gains rather than the number of wins.
2. A betting (or trading) strategy that increases the stakes on trades deemed to have a higher
probability of success could significantly enhance the final results.
3. Beware of acting on the obvious.
Disclaimer
The author may be contacted at success@LTGGoldRock.com
Copyright © LTG GoldRock 2010
All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means,
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system, without prior permission in writing from the publisher.
The material in this publication is of the nature of general comment only, and neither purports nor
intends to be advice. Readers should not act on the basis of any matter in this publication without
considering (and if appropriate, taking) professional advice with due regard to their own particular
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omitted to be done by any such person in reliance, whether whole or partial, upon the whole or any part
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552 683). Trading involves the risk of loss as well as the potential for profit. The author of this book takes
no responsibility for the individual investment decisions the reader of this book takes and recommends all
readers of this book consult a licensed financial planner prior to making a decision to invest in Foreign
Currency Trading.
Please refer to the LTG GoldRock Financial Services Guide (FSG) and/or
supplementary FSG if required, which can be found on the website www.ltggoldrock.com before
undertaking this form of investment. Any advice given is general advice only.
There are no guarantees or certainties in trading. Reliability of trading signals for mechanical systems is
in probabilities only. Trading real money involves hard work, risk, discipline and the ability to follow rules
and trade through any tough period. If you are looking for guarantees, trading is not for you. The
potential to lose money is real. Many people lack the discipline and are unable to be consistent. A system
can help you become consistent. The ability to be disciplined and take the trades is equally as important
as any technical indicators a trader uses. Ironically, worrying about the money aspect of trades can
contribute to and cause a trader to make trading errors. Therefore, it is important to only trade real
money with a risk capital plan. The reader of this book acknowledges that LTG GoldRock recommends
and advises all its members track and keep their own statistical results on trades and to develop a trading
plan in accordance with this analysis. They take complete responsibility for their trades and acknowledge
and accept the risks associated with Forex trading.