Four key truths to make it in the cut-throat world of trading: Schwager

Legendary financial author Jack Schwager says the same rules followed by professional investors are used by top DIY traders.

A trader on the floor of the NYSE last month. Jack D. Schwager says many of the strategies employed by top amateur traders mirror those of the best professionals. Picture: Michael Nagle/Bloomberg

The best professional investors follow the same rules as the top DIY traders.

Sounds like a hard concept to swallow? US trader and legendary financial author Jack D. Schwager believes those at the top of their game – whether it be managing billions or thousands – use the same guide for trading their way to success.

“Absolutely the same truths apply for professionals and amateurs,” says Schwager, speaking after Macquarie’s annual conference in Sydney on Wednesday.

“These truths are critical, which is why so many hedge funds recommend new starters read my books and they are accessible to lay people as well.”

Schwager is the author of Market Wizards, The New Market Wizards, Stock Market Wizards and Unknown Market Wizards: The best traders you’ve never heard of.

For a decade he was a partner of Fortune Group, a London-based hedge fund advisory firm, and more recently founded Fund Seeder, a platform for finding new trading talent.

According to Schwager, his experience in the markets and research for his books shows there are four key truths to making it in the cut-throat world of trading.

“Risk management is the most critical thing to being successful over the long term,” he says. “It’s often ignored by novice traders. People focus on trying to beat the market. But the successful ones are focused on managing risk. It’s the non-sexy thing – and yet risk management is the most important.”

Red flags include the possibility of ignoring the bigger picture of traders focus too much on their percentage of wins rather than their overall approach.

The second truth is that a trader must easily be able to change their mind and approach, according to Schwager.

“You need to be able to recognise when you are wrong. Even change your position. Good traders can divorce themselves from that, and change on a dime if required. The ability to admit you are wrong is critical.”

While the ability to change position is key, Schwager’s third truth is discipline. The second two truths can seem counterintuitive but actually need to be combined.

“Exceptional traders have an approach with some sort of edge,” he says.

“You’ve got to be disciplined to stick with your approach. Many people take trades that deviate from that approach but extraordinary traders are extremely disciplined.”

Where the discipline comes in is when they have to get out very quickly if things aren’t working exactly as expected. Schwager points to the fact that three former-US Marines have earned a place in his books as no coincidence.

“I don’t think that’s by accident. They are a very disciplined organisation and that approach and training also applies extremely well to trading.”

The fourth truth Schwager points to might be the hardest for novice traders to swallow. That is understanding the inevitability of losses.

“Exception traders understand that losing is part of the game,” he says.

“Most just don’t understand that. People need to understand that no approach will work all the time. It’s OK to be wrong. The ability to get out when you are wrong is essential to being a winner. If you try to avoid losses you end up staying in positions too long.”

The best case that highlights all these truths is Stanley Druckenmiller, Schwager says. Druckenmiller is considered by many to be one of the greatest investors of all time and was profiled in Schwager’s book The New Market Wizards.

“In 1987 the day before the big crash, Druckenmiller switched from short to long,” Schwager tells The Australian. “It was a bad call. The world was collapsing. What he did was get out of everything and reversed back to a short. That ability to change your position when you think it has to be done. That ability sets you apart.”