The Unknown Market Wizards gives the readers a glimpse into the mind of some of the world’s best traders – how they think about markets; what they have learned about trading; how they have improved; what mistakes they have learned to avoid; what advice they have for other traders. I am curious about all the market wizards and especially the strategies that they use.
You can refer here to know more about Jack D. Schwager.
Unknown Market Wizards has a preface, 10 chapters which are divided into 2 parts, a conclusion, an epilogue, and 2 appendices.
Part I is Future Traders. The 5 chapters here are Peter Brandt: Strong Opinions, Weakly Held, Jason Shapiro: The Contrarian, Richard Bargh: The Importance of Mindset, Amrit Sall: The Unicorn Sniper, and John Netto: Monday Is My Favorite Day.
Part II is Stock Traders. The chapters include Jeffrey Neumann: Penny Wise, Dollar Wise, Chris Camillo: Neither, Marsten Parker: Don’t Quit Your Day Job, Michael Kean: Complementary Strategies, and Pavel Krejčí: The Bellhop Who Beat the Pros.
The conclusion is called 46 Market Wizard Lessons. The 2 appendices are Understanding the Futures Markets and Performance Metrics.
There is an introduction and conclusion for every interview in Unknown Market Wizards. All the interviewees are traders, so most of their trades are speculation. I am more of a long-term investor but I did learn a few things from the book.
In order to succeed in trading, a trader has to know his/her edge, avoid suboptimal trades, and practice good risk management. There are 3 levels of risk management: individual position, portfolio levels and equity-based risk controls. The first 2 levels are about limiting the loss on individual trades and correlation of the individual positions, which are easily grasped. Equity-based risk controls mean cutting position sizes or ceasing trading when equity drawdowns reach specific threshold.
Some requirements to be a good trader include the flexibility to change your mind, strong work commitment, and learning from mistakes and incorporating the lessons into the process. Successful trading is a matter of skillful money management (expressed via entry and exit methodologies), not prediction. Find a methodology that fits your personality, otherwise there is a low chance of success as demonstrated by some traders in the book.
Human emotions and impulses often lead to disastrous results. Traders need to beware of letting a period of strong performance lead to complacency. Traders should wait for the perfect opportunity to act and do not waste the mental power on frivolous trades as this will erode the profit. Furthermore, do not beat yourself up due to a missed trade as there will always be another opportunity.
A new concept to me mentioned by one trader is that market’s discounting mechanism is based on speculator participation, not price. This is roughly equivalent to the fundamentals are discounted as everyone is on the same side. For example, markets bottom because speculators are already fully positioned short which naturally occurs in an environment of pervasive bearish news.
The author uses adjusted Sortino ratio and Gain to Pain ratio (GPR) to compute the performance of the traders, instead of Sharpe ratio. One major flaw of Sharpe ratio is that the risk measure (volatility) does not distinguish between upside and downside volatility. By using the adjusted Sortino ratio and Gain to Pain ratio, he manages to eliminate the upside volatility (which is good) from Sharpe ratio.
The formula of adjusted Sortino ratio is (Actual Return – Minimum Acceptable Return) / (Standard Deviation of Downside x √2) while monthly GPR is calculated by summing all monthly returns (positive and negative) and dividing by absolute value of the sum of all monthly losses.
To quote the author, successful traders take responsibility for their own mistakes and losses while losing traders will blame their outcome on someone or something else. I think this is equally applicable to investors as trading or investing are both activities where success or failure depends solely on the person. From this book, I realize that I have to try to achieve uncorrelated, and preferably, inversely correlated positions. Risk management is important in long-term investment too and I am lacking in this. Furthermore, I should only invest in stocks that I have high confidence of profitability. One last thing that I learned from this book is the need to adapt our investing style based on the market development as our methods may become obsolete as the world develops.
If you are short of time, you can just read the conclusion as the author has distilled the interviews into concise points here.
- The hard part about trading is that you can do the right thing and still lose money.
- Successful trading is the art of doing nothing. It’s what you don’t do in between the real trade opportunities that will determine your success over the long run.
- The markets are not about certainty; they are about probabilities.
- If you are hoping a trade will work, you are gambling and not trading.
Interested in Unknown Market Wizards?
I borrowed this book and I could not find a store in Malaysia that sells this book. If you know where to get this book, kindly leave a comment below.