Duffy Pratt's Reviews > The New Market Wizards: Conversations with America's Top Traders

The New Market Wizards by Jack D. Schwager
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Dec 29, 2010

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bookshelves: trading
Read from December 29, 2010 to January 11, 2011

I wish someone would do a series of interviews with a bunch of failures.

I found these interviews enjoyable, and there were several good tips and lessons that came through. But lets face it, these people for the most part are trading huge lot sizes, lots so big that they will move the market with their trades, and the types of things they take into account don't have all that much to do with the kinds of things that a small trader faces. Some things carry over, but very much does not. Also, the book is kind of dated, and many if not most of these traders started trading in the pits. My guess is that trading in the pits is a very, very different activity than sitting alone in a study and staring at a computer screen.

Here are two common threads that I find very interesting. First, almost every trader seems to agree that psychology is more important than the trading system a person uses. The important things are stuff like confidence in your system, discipline to trade it properly, not second guessing yourself, resisting greed and fear, etc... That's all well and good. And yet, every trader in the book has had Schwager agree not to reveal proprietary stuff about the systems that they trade, and often they refuse to answer specific questions because it will reveal secrets about the systems they trade. Anyone else see the tension in these two positions?

Back to my original thought. It's OK to interview a bunch of really successful people and then say what they all have in common. There's a whole aisle of business books that do exactly that, with dreadful names like "The Top 10 Secrets of Highly Successful People". Guess what -- they work hard; they take risks; they have self-confidence; and blah blah blah. But what about the failures? How many budding entrepreneurs shared all of the same "secrets", and yet did not make a go of it? Why isn't anyone interviewing the failures? It seems to me that their stories would be at least as interesting and probably more educational. And if you could find a common thread in why people fuck up (other than that bad shit just happens to lots of people), that would be information that was really worth having.
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Comments (showing 1-8 of 8) (8 new)

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notgettingenough Not only what you say about the 'failures', but most people are both. Hardly anybody in those markets are only successful and their failures are generally as dramatic as anything they do that works.

message 2: by AC (new) - rated it 5 stars

AC Of the three, Market Wizards (the original) is probably the best (though the third volume has good material in it as well). The psychological aspects, of course, are timeless. Failures are not often studied for the simple reason that they don't last long.

This is another great book of this sort (more up-to-date) - there is a newer volume out, but I haven't read it:

One interesting point that emerges from Drobny's book is the claim that because modern trading is so short-term oriented, the inefficiences grow (thus aiding the small trader) the longer out the time curve you go. This stands in contrast to the view of most high-powered traders that one can predict short-term moves but not long-term moves (as counter-intuitive as that might seem).

message 3: by Ryan (new)

Ryan It sounds like you've found your muse, Duffy. Now it's time to start interviewing.

Duffy Pratt I just picked up Inside the House of Money on your recommendation.

I've never believed in the efficient market, so it's hard for me to have any idea how people measure "inefficiencies." But I get the basic point -- that higher time frames have more readily identifiable patterns than short time frames. I don't know if its true.

I really would like to put a bunch of charts wihout scales on them in front of experts and see if anyone could identify the time frame, or even the relative time frames, of charts simply by looking at the relationships of the bars. My guess is that one can do this at the extremes -- say 1 minute charts and yearly charts. But I would be very surprised if anyone could distinguish a 30 minute chart from a four hour chart in Forex. It would at least by a very interesting experiment.

message 5: by AC (last edited Jan 12, 2011 07:16AM) (new) - rated it 5 stars

AC Duffy wrote: "I've never believed in the efficient market, so it's hard for me to have any idea how people measure "inefficiencies." But I ge..."

My understanding of Mandelbrot/fractals (very imperfect, to be sure - as I don't do math), is that you wouldn't be able to tell any time difference from charts --.

About EMH, Mandelbrot and Doug Henwood's great book (Wall Street) both have superb and detailed and sophisticated critiques of Efficient Market Hypothesis (its history and aims etc.). And Henwood's book can be downloaded for free. Though the book is a few years old, his skewering of Wall Street stands up (very!) well. A great read... Much better, imo, than his second book - though that one is good too.

I'm reading Econned - in fits and starts (like I read most things these days) -- and there's some interesting stuff in there, though I'm not far enough along to know quite what it is.

Henwood has passages in his second book about what is, in effect, a post-modernist view of money ('money' as mere 'electronic wish'... born from mind amidst the cosmic dust...) drawn from Gilder and Baudrillard and post-marxist leftists that are just stunning and weird -- all part of the new-economy mantra that one can 'conjure' wealth by sprinkling 'fairy-dust' (Plato's word) on the economy.

Of course, China and the current Bear have put something of a crimp in that theory....

Duffy Pratt Mandelbrot says that price moves are fractal, and thus charts in different time frames will be effectively indistinguishable. I think this is probably true in the middle range. As a practical matter, for me that means that a decent test of a 4 hour chart system is whether it also works on 15 minute charts.

However, as the time frame gets smaller, this idea breaks down. Even on a one minute chart, you start to see lots of gaps, and even periods that have no price move whatsoever. Drop it down to the tick chart, and it looks nothing like any other chart, and it cant -- by definition the open, close, high and low of a tick are all equal to each other. (Similarly, while you can theoretically make the length of the coast of England infinite by shrinking the size of your ruler, there may be a very practical limit on the size that one can measure. If that were, say the size of a proton, then the coast of England would still have a finite length.)

Duffy Pratt For me, the efficient market hypothesis never needed skewering. I first heard about it from friends who were studying econ. They were all hot for this new idea they had learned, because it seemed to make fools of investors. (Keep in mind, many of these kids were trust fund brats, so they liked the idea of biting the hand that fed them.)

At around the same time, corporate raiders were regularly taking over companies and then selling off the parts. They could do this because the actual book value of the companies was less than their market value. How's that for efficiency?

message 8: by AC (new) - rated it 5 stars

AC A note of caution on this - the fact is, that markets ARE relatively efficient most of the time. That is *precisely* why firms like LTCM could make some huge mean-reversion bets and keep winning... until (suddenly) they didn't. In other words, it's not the belly of the theory that is false -- it's the tails.

This, I think, is why it was so hard for people to see the bubbles that forming RIGHT ALONGSIDE these efficiencies....

At any rate, I think it will be a long time before such ideas are resurrected -- and that shows that the bear has begun to TRULY bite. This is important. Because while MSM pretends and extends the American dream, bear markets are more like assassinations than 60-minute infomercials -- and they need to REALLY change behavior and attitudes before they can end. We are nowhere near there yet, in my opinion -- but the last 10 years have, at least, made a serious dent in it....

JMO, obviously...

Anyway,... it's an interesting world, and (pace some earlier comments in this thread) the markets *clearly* are offering a very important window on what is happening to us today... and a much clearer window than I think can be got from many more traditional vantage points...

Here, in illustration, is Klee's 'Angel of History' - w/ eyes fixed firmly on the past, but blown by the storm winds backwards (as in ancient Greek) into the future....


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