December 22, 2017

By, Dale Brethauer

During my journey to financial freedom, I've gained a lot of insight on “how to” become successful in the markets. Today's lesson is entitled 8 Winning Concepts of the Super Traders.

These concepts come from Jack Schwager who authored two exceptionally valuable books. The first one was “Market Wizards”, and the second one was the “New Market Wizards”.  He interviewed the most successful traders of that time. In those books, you can glean a lot of information into what these successful traders did, and what they didn't do.

Well, Jack was asked to give a presentation to the Chicago Board of Trade about five years ago. And he titled this the Eight Concepts of the Super Traders. What I’ll do here in this lesson is review his presentation, because there's a lot of good information that I think will help you to become a success yourself.


Concept 1  |  Trading Method Must Match Personality


The first concept was to find a method that fits your personality. Are you going to be a day trader, a swing trader, a position trader or are you just going to buy and hold? It's totally up to you, those are four different methods and there's value in each one of them. Which one are you comfortable with?

Also choose a strategy that you are comfortable with.  As you're going through and testing your strategy, make sure that it has not only a positive expectation, but low drawdowns that occur when the trading system goes through a losing period. All trading systems will go through a losing period, you'll have losing trades and you'll have losing periods. You have to be comfortable with the drawdown.

This may be accomplished by back testing the strategy and paper trading it for a while. Because, during these drawdowns, if you don't have a rock-solid strategy that's been tested and you know what to expect, you're going to lose faith during those bad periods. So, the first concept is to find a comfortable method strategy that fits your personality.


Concept 2  |  Hard Work Pays, Gambling Does Not


The second concept is of hard work. This is very important. The general public is attracted to the stock market as an easy way to make money. You hear it at cocktail parties, you hear it in discussions.  The interesting part is you pick up the Wall Street Journal or the Investor Business Daily, and you look at the charts and you say, "Oh, I would have bought here, or I would have sold here”.  You don't have the luxury to be a Monday morning quarterback. You must make your decision without knowing the future.


It is very difficult to make money in the markets not knowing what's going to happen in the future. Not only that, a lot of people read books, and they say that sounds easy enough, I think I can do that. And they don't put the required work and time into it to become really proficient at it.



You wouldn't expect to read a book on brain surgery over the weekend and perform brain surgery on Monday morning, nor would you expect a first class violinist to perform for the first time after taking the first lesson over the weekend. There's a book called “Outliers” and in that book they talk about to really become proficient and become a professional you need to be willing to put in 10,000 hours. The concept of hard work; the stock market is not easy. Put the time and effort into it, and you will be a success. Once you get to the point where you've put the time and effort into it, good trading should be effortless.


The preparation and due diligence occur before the first trade is entered. Look at any professional athlete; take a professional golfer when they hit the ball 310 yards down the middle of the fairway, it looks effortless. And the reason it looks effortless is they have practiced thousands and thousands of hours hitting balls. Their body knows exactly what to do. That's the concept of hard work and it's true in the stock market too. You need to be willing to put in the hours of effort necessary to become proficient in trading the stock market.


Concept 3  |  Money Management


The third concept is money management. You need to not only have a profitable system. You need money management that allows you to go through losing trades.  Allows you to go through losing periods, and to stay with it, and stay on course with not a lot of big drawdown. Now, money management alone doesn't work, you're going to need a profitable strategy along with that, but as a professional, you should never put any more than 1% of your portfolio at risk on any trade.



You start with a $5000 dollar account.
Your hit a string of losers and you let the losses run out to the point that your account takes a 50% hit.
Now,  you need to make a 100% return on your remaining $2500 account just to break even, that is not a formula I want to follow.


Concept 4  |  Winning


The fourth concept is winning. The studies of hedge fund managers show that they only have about 65% winners. You don't need a very high percentage of winners, but you got to make sure that your winning trades are more profitable than your losing trades. In other words you have to cut your losses short and let your profits run. Also these successful traders talk about the more you try to optimize your system, the greater chance it won't work. If you've tested the winning strategy and you're trading the winning strategy, don't tinker with it and try to make it a little bit better, because when you try to optimize it, you have a greater chance it won't work.


Concept 5  |  Follow Your own Mind


The fifth concept is, you have to follow your own mind. You have to have your own strategy, you have to execute the trades.  Sometimes, you might listen to the talking heads, and I would suggest you don't.  I would suggest you do your own thinking, your own strategizing, with your own strategy, and xdon't worry about the talking heads what they're saying.  Don't listen to the talking heads, follow your own mind. And once again, they talked about that the combining methodologies is much worse than having a single, simple strategy.


Concept 6  |  Patience


The sixth concept is patience. The hardest concept but also the most important. You don't have to trade the market. The market does not trade you; you trade the market when you feel you have an edge. Amateurs go broke taking large losses; professionals go broke taking small profits. Professionals wait for a trade until they can see that they have an edge.



The cheetah is the fastest animal alive, however it will wait in the grass patiently, not only for a herd of antelope to go by, but a herd of antelope that has some baby antelopes, and not only that, they're looking for a lame baby ample antelope. Now, the cheetah is faster than any antelope but you look at a lame baby, and now all of a sudden the cheetah has caught a definite edge. Now, that's what we talk about patience. There is no reason to get into the market unless you feel you have the edge.


Concept 7  |  Confidence


Most money managers, and most successful traders that Jack Schwager interviewed, said that they keep most of their money in their own funds or their own trading strategies.  They feel that that's the safest place for their money to be. Now that's confidence, and that confidence only comes with many years of positive trading and positive expectation, and the work and due diligence that creates that positive expectation.


Many of these successful traders know they're going to win before they put on a trade, and that doesn't necessarily mean that every trade is going to be a winner. What that means is that the majority of the trades will be a winner and you're going to have more profit than loss. So, you know, going into the trade that in the long run, it's going to be a winning trade because you're going to wait for the edge.


Once you’ve discovered and tested your edge, you can then embrace losing. Losing is part of the game. Amateurs need to be right, and they say, "I'll get out when I break even," and then they put more and more money and down and down it goes, that's not the right thing to do. You have to - when you have a loser, you have to not be in love with that trade. You got to be willing to get out of it. You got to accept losing as part of the game.


Concept 8  |  Loyalty


Loyalty meaning that you cannot fall in love with any one trade. In other words, if - and I had trouble with this early on because I'm a trained engineer and I would look at my strategy, and put a trade in, and the market would go against me. And I would think, "How dare the market go against me," because I was in love with that trade. I had done the thinking behind it, it was my trade. It went against me; sometimes I even put more money into it.  So, you can't be in love with the trade, you got to be flexible, you got to be willing to say, the market is not playing by my rules and I’m out.

Final Thought  |  You have to love Trading

Jack summarized everything up by saying successful traders love what they're doing; they are passionate. It's more than just a hobby. You have to treat it like a business. You have to put the hours in it. You have to follow the rules. You have to execute the trades. You have to check your ego at the door. "Successful traders love what they're doing. They are passionate."