Jack Schwager: What makes a Great Trader?

If you peruse the Wikipedia entries that describe some of the world’s great investors, you’ll often find that they share a common footnote: a series of books entitled “The Market Wizards” which feature Jack Schwager’s profiles of a number of successful traders.

His most recent book, The Little Book of Market Wizards is a distillation of those interviews into a collection of lessons that can provide a useful entry point for those who might not be familiar with the habits, thought patterns, and disciplines that can differentiate great traders from good ones.

The key elements to become a Great trader?

Jack Schwager: “To me, trader means, first of all, someone who is as likely to go short, as well as long. It takes away this automatic long bias. That’s one critical element to the word, “trader.”

Another element of it is, I think, a willingness to change position with maybe more frequency than someone you might term as a “long term investor.” Those are the key elements.”

How great traders find the right aproach?

Novices tend to believe there’s some answer out there, that it’s a matter of finding the right formula, the single right technique. That’s why books like, “How I made a million dollars trading in the markets,” always sell well.

The truth is it doesn’t work that way. There is no single way that works continuously. If it did, it would stop working anyway because everyone would follow it.

It’s a really a matter of finding a method that is right for the person. It varies all over the place because there are people like, going back to Rogers, people like Rogers who have complete disdain for technical analysis. He’d say that the only people he’s met that make money in technical analysis is those that sell their technical analysis services, that’s his take on it.

On the other hand, you’ve got people like Martin Schwartz who’ve done phenomenally well. He’d say: “I spent a decade as a fundamental analyst, but I got rich as a technician.”

Believe me, Rogers could never make money using technical analysis and Schwartz could not make money using fundamental analysis. Yet, they both do terrifically well.

About managing risk?

That’s very important, but first I’ll note that these are not in order of importance, they’re in chronological order. You develop a method that’s right for your personality. It has to have an edge. Then, when you’re implementing it, part of the planning process has to be risk management.

You can have a method that has an edge, but if you don’t take risk management into account very seriously, and your approach leaves you open to having single trades, or a small number of trades, lose a lot of money.

A good approach could be sabotaged by a few mistakes. You never want that. You never want to be at the mercy of having a few mistakes knock you out of the game. Virtually every trader I ever interviewed said the risk management part is more important than the method.