What Makes a Great Trader? An Interview with Jack Schwager by Will Ortel

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.

Jack and I spoke recently about his most recent book, the characteristics of great traders, and the path that those who should aspire to be great should follow. A lightly edited transcript follows, beneath the full conversation.

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.

In fact, it’s odd, when I remember for “Market Wizards,” the first of the Market Wizard books, when I interviewed Jim Rogers, immediately as soon as I stepped into his Brownstone he said, “I don’t know why you want to interview me, I’m not a trader.”

That was his opening line. I said, “Well, yeah. I know you invest long term but, in my mind, you are a trader because you will go short as well as long, and change positions, and so forth.”

In my mind you are making decisions. To me, decision on when to go in, out, reverse positions, that’s a trader. As opposed to a long term investor who says, “I want to have 50 percent of my money in equities. I’m going to buy an index. I’m going to stay for 40 years.”

Not that there’s anything wrong with that but that’s not a trader.

How do great traders go about finding their approach to the markets? What would you say sets them apart?

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.

The very first thing to get across to people is you’ve got to figure out what is the right method. It’s not just fundamental versus technical. Either are you short-term, or you’re long-term. Do you want to trade stocks? Do you want to trade futures? Do you want to trade currencies? On and on with the variations.

It’s a discovery process, an evolutionary process. Nobody can tell you that.

I get emails from people sometimes. They’ll say, “What trading method would you recommend?” To me, the question is a lot like “I’m going to buy an expensive suit. What size should I get?”

How would I know? I don’t know if you’re six-six or five-five, so you can’t answer that question. There is no answer to that question. There is no right sized suit for everybody, and people need to think of trading the same way. There is no right size trading method for everybody.

Is it enough to “find the right suit size” so to speak?

The approach has to have an edge. It’s not enough to just have an approach that you’re comfortable with. It can make all the sense in the world. On paper, it might sound reasonable, but the markets don’t pay off for approaches that sound reasonable. They pay off for what works, and what works may often be very counter-intuitive.

You have to get some sense of feeling and confidence that that approach that you’ve evolved works. By work, I don’t mean it’s a money machine. I just mean that over time it’s making more than it’s losing. That’s the edge.

What 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.

You’ve got the key ingredients, but it all doesn’t mean anything unless you implement it, and implement it consistently. Another way of saying that is “discipline.” You need the discipline to take your method, with the edge and the risk management, and stay true to it. There are trades that are going to look scary and that you’re going to really not want to take, but if it’s part of your methodology, you take them.

There are times your methodology, or your risk management, tells you, “Here’s where you’re out.” You may hate to get out, but that’s your methodology, that’s your risk management, you get out. You have to be strict on the discipline part.

So self-knowledge, having an edge, risk management, and discipline are the qualities that set these traders apart?

Flexibility is another trait that separates great traders from just about everybody else. They’re able to change on a dime. They could be wildly bullish one minute, and if something happens to change their mind, they’re able to be wildly bearish the next. That flexibility to be able to change your mind and not hope that your position is right is an essential ingredient.

That’s true of a number of traders. Paul Tudor Jones was bullish on the stock market when I saw him one week. Two weeks later, he was bearish.

Apart from the characteristics we’ve discussed, is there some other quality that all of these great traders have…Is there a

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