I’m currently reading “Market Wizards” by Jack Schwager, the first in a series of three (I think) books that Mr. Schwager wrote, containing excerpts of his interviews with very successful traders. The first two books (“Market Wizards” and “The New Market Wizards”) were comprised of interviews with futures traders, while the third book (“Stock Market Wizards”) has conversations with stock traders.
This exchange with a gentleman named Ed Seykota, who turned in a healthy 250,000 percent return for his clients over sixteen years, caught my eye:
What are the elements of good trading?
The elements of good trading are: (1) cutting losses, (2) cutting losses, and (3) cutting losses. If you can follow these three rules, you may have a chance.
How do you handle a losing streak?I handle losing streaks by trimming down my activity. I just wait it out. Trying to trade during a losing streak is emotionally devastating. Trying to play “catch up” is lethal.
A little later in the interview, there was this:
What are the trading rules you live by?
a. Cut losses.
b. Ride winners.
c. Keep bets small.
d. Follow the rules without question.
e. Know when to break the rules.
Your last two rules are cute because they are contradictory. Seriously now, which do you believe: Follow the rules, or know when to break the rules?I believe both. Mostly I follow the rules. As I keep studying the markets, I sometimes find a new rule which breaks and then replaces a previous rule. Sometimes I get to a personal breakpoint. When that happens, I just get out of the markets altogether and take a vacation until I feel that I am ready to follow the rules again. Perhaps some day, I will have a more explicit rule for breaking rules.
Never underestimate the importance of psychology and attitude as crucial elements of successful trading.
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