Jack Schwager is the author of the bestselling books widely known in the West “Market Wizards" and "New Market Wizards», in which he summarized the experience of the best traders and the most successful investors.
Schwager's first book, published in Russian, became an 800-page tome «Technical analysis. Full course ", published last year by the publishing house "Alpina Publisher". In his book, Schwager also included the quintessence of market wisdom - tips for traders. With the kind permission of Alpina Publisher, we publish the tips in a slightly abbreviated magazine version.
Trade start
1. Differentiate between important long-term position trades and short-term trades. Average risk for short-term transactions (implied by the number of contracts in the position and the exit point) should be much less. Besides, the speculator should focus on trading long-term positions, as they are usually significantly more important to the success of the trade. Error, performed by many traders, is, that they are so immersed in trying to catch short-term market swings (creating tons of commissions and slippage), what major price movements are missing.
2. If you believe, that there is a long term trading opportunity, do not get greedy trying to reach a slightly better position opening price. The loss of probable profit from one missed price movement may overlap the profit from 50 slightly better execution prices.
3. The opening of any long-term position should be planned and carefully considered - it should never be an instant impulse.
4. Find the model on the graph, who says, that it is time to open a position right now. Don't initiate a trade without such a confirmation pattern. (Sometimes you can consider the possibility of a transaction without such a pattern., if there is a convergence of many measured moves and support / resistance levels in a given price area and a well-defined stopping point exists, does not imply high risk.)
5. Place orders, determining their levels using daily analysis. If the market does not approach the desired level of opening a trade, write down a trading idea and revise it daily until then, until the position is opened or the trading idea ceases to seem attractive. Failure to follow this rule can lead to missing good trades..
One common case is, what is the trade idea remembered, when the market has already moved away from the implied start price of the trade, and then it is already difficult to make the same deal at the worst price.
6. When looking for reversals of large-scale trends, you should wait for the appearance of any reversal formations, rather than open a position against the trend at target levels or on resistance / support lines. This rule is, in particular, important in the case of the market, where long-term highs / lows were reached (for example, high / low outside the price range of the previous hundred days). Remember, that in most cases of long-term trends the market will not form V-type reversals. Instead, prices will return multiple times., to test the highs and lows again. In this way, Waiting for reversal formations to form can prevent swapping during the top or bottom formation process, not to mention the losses, which may arise, if the trend resumes. Even if the market does form an important V-top or V-bottom, subsequent consolidations (for example, flags) can give a favorable profit / risk ratio for the moment of opening a position.
7. If you have, when you look at schedule (especially if you are not thinking, which market does it belong to), an instinctive impression immediately arises, follow this feeling.
8. That, that you missed a significant part of the new trend, shouldn't keep you from trading in line with this trend (until, as long as you can determine a reasonable stop loss loss stop point).
9. Don't play against bullish or bearish traps (last failed price formations), even if other reasons urge you to do so.
10. Never play against the first break in a price movement! For example, if you want to open a position in the direction of correction, and a correction is formed at the price gap, do not enter the market.
11. In most cases, instead of limit orders (executable at a specified price) use market orders (executed at the current market price). This is especially important when liquidating a losing position or opening a position., associated with favorable opportunities for long-term transactions, in situations, when it is important not to miss the current prices. Although limit orders will give a slightly better execution price in the vast majority of trades, this advantage will usually be more than offset by significantly worse prices or lost profit opportunities in those cases, when the original limit order is not executed.
12. Never increase a position near the original trade entry point after, how the market was already in a territory favorable for your position and returned to the original prices. Often the fact, that the market has made a full refund, is a negative sign for trading. Even if the position is still well founded, its increase in such a situation can lead to premature fixation of losses due to increased risk in case of unfavorable price movement.
Exiting the trade
13. Decide on the levels of protective stops at the time of opening a position.
14. Get out of any deal, if newly formed price patterns or market behavior are opposite to the direction of your position, even if the breakpoints have not yet been reached. Ask yourself: “If I need to have a position in this market, how should it be directed?». If the answer is not in that position, which you are holding, close it. Actually, if the opposite indicators are strong enough, unfold the position.
tion.
15. Either way, close the trade immediately, as soon as its original premises are violated.
16. If on the first day of your trade it turns out, that you are fundamentally wrong, exit the deal immediately, especially if the market is experiencing a gap, directed against you.
17. In the event of a large-scale breakout against the position, which you are holding, or liquidate the position immediately, either use a very close stop. In case of breakout with a gap, liquidate the position immediately.
18. If trading in this market begins to significantly go beyond the previous volatility in the direction, opposite of that position, which you are holding, liquidate your position immediately. For example, if the market, trading on which took place in the daily range, constituting approximately 50 points, opens on 100-150 points above, close your short positions immediately.
19. If you sold (bought) at the resistance level (support) and the market is consolidating instead, to turn around, - exit the deal.
20. For analysts and financial managers: if you feel, what are your previous recommendations, transactions or reports are incorrect, - change your mind!
21. If you cannot observe the markets for a period of time (suppose, traveling) - either liquidate all positions, or make sure, that all open positions have valid stop orders. (Besides, in such situations, limit orders should be used, guaranteeing market entry with planned purchases at low prices or with planned sales at high prices.)
22. Don't relax, having an open position. Always know, where will you exit the market, even if this point is far from the current price. Besides, figure emergence, unfavorable to your deal, may suggest the desirability of an earlier, than planned, exit from trade.
23. Resist the temptation to immediately return to the market after fixing losses on the execution of a protective stop protection. Such a return will usually lead to an increase in initial losses.. The only reason to return to a previously stopped trade may be a significant change in the market situation. (emergence of new models), ie. if all conditions are met, justifying any new deal.
Other rules
24. When the trade goes bad: (and) reduce the position size (remember that, that positions in highly correlated markets are akin to one big position); (b) use close protective stops; (in) take your time to start new deals.
25. When the trade goes bad, reduce the risk, liquidating unprofitable, not winning positions. This observation was also expressed by Edwin Lefebvre in his "Reminiscences of a Stock Gambler": “I've done totally wrong things. I maintained a losing position in cotton and closed a profitable position in wheat. There is nothing worse, than trying to average a losing position. Always close losing trades, keeping positions, showing profit ".
26. Watch carefully, so as not to change trading methods after making a profit: and. Don't start any deals, which would seem too risky at the very beginning of the trading program. b. Don't unexpectedly increase the number of contracts in a typical trade. (However, a gradual increase as assets grow is quite normal.)
27. Approach small positions with the same common sense, as for big. Never say: "It's just one or two contracts.".
28. Avoid holding very large positions at the time of publication of important economic data or government statistics.
29. When trading spreads, the same risk management principles should be applied, as in the case of unilateral positions. It's very easy to calm down on thoughts, that spreads move quite slowly and therefore there is no need to worry about protective stops.
30. Don't buy options without it, to plan, at what price of the underlying asset the transaction will be liquidated.
Holding profitable positions and exiting them
31. Do not take small quick profits on trades in the direction of major trends. In particular, if you are absolutely sure of the transaction, never take profit on the first day.
32. Do not rush to close a position after a gap in your direction. Use the break as a starting stop; then introduce tracking stops.
33. Try using tracking stops, placing them based on the development of the market situation, instead of, to fix profits at target levels. Using goals often gets in the way of realizing opportunities, provided by the main trends. Remember, you need big wins from time to time, to cover the failures.
34. Despite the previous rule, it is still useful to determine the initial target at the time of opening a trade, which will allow the following rule to be applied: if within a short period of time after opening a position, most of the target profit is reached (for example, 50-60% in one week or 75-80% for two or three weeks), then you should fix the profit in parts, referring to the restoration of liquidated contracts in a market correction. The idea is, that it would be correct to take a quick significant profit. Although this rule can often result in the loss of the remainder of the profit from a liquidated position, holding a position in such a case can often lead to a feverish liquidation at the first sharp return of prices.
35. If the goal is achieved, but you still like the position, leave her, using tracking stop. This rule is important from the point of view of the ability to trade in the direction of the main trend.. Remember, patience is necessary not only in those moments, when you expect good deals, but also for that, so as not to close the position, when it makes a profit. Failure to make an adequate profit on the right trade in the direction of the trend is a key factor, limiting the profitability of a trade.
36. One particular exception to the previous rule is, what if you have a very large position and the value of your assets is growing before our eyes, then you should consider the possibility of partial profit taking. When everything is going too well, to be true, be on the lookout! Maybe, it's time to start taking profit gradually and placing close tracking stops.
37. When fixing profit in a deal, That, in your opinion, still has long term potential (but, maybe, vulnerable to short-term correction), develop a plan to resume a position. Unless the market makes a significant return, allowing to resume the position, watch out for price patterns, which can be used to select the moment of a new entry into the market. Don't be afraid to reopen a position, even if the new entry point to the market turns out to be worse, than the exit point, if the idea of the long-term trend and the assessment of the current moment imply the renewal of the position. Failure to return to the market at a worse price can often lead to the loss of most of the big trends.
38. When trading multiple contracts, avoid the emotional trap, which consists in the desire to be right to 100%. In other words, fix the profit in parts. Always try to keep, at least, a partial position in the direction of the trend - until then, until the market forms a convincing reversal pattern or reaches an important protective stop.
Other principles and rules
39. Always pay more attention to market behavior and the formation of price patterns, than target levels and areas of support / resistance. Lent. The latter can often be the reason, that your correct opinion about the market will change prematurely.
40. When you feel, what needs to be done - either open a position, either get out of it, - act without delay.
41. Never act against your own opinion about a long-term market trend. In other words, don't try to sit on two chairs.
42. Winning positions, usually, have a positive revaluation from the very beginning.
43. The right timing to open a position and exit it (for example, choice of entry time based on convincing price formations, exit immediately at the first sign of failure) can often save you from big losses, even if the position fails.
44. Intraday decisions are almost always wrong. Do not trade intraday.
45. Be sure to check the markets before the close on Friday. The situation is often clearer towards the end of the week.. In cases like this, the best entry or exit price can usually be obtained before the close on Friday., than when the exchange opens next Monday. This rule is, in particular, important, if you hold a substantial position.
46. Dreams about the market may well serve as a basis for action. (when the memory of them is unambiguous). Dreams like this often come true., as they represent your subconscious knowledge of the market, which breaks through barriers, established by conscious thinking (for example, "How can I buy here, if I could open a long position at $2000 below last week?»).
47. You Can't Be Immune To Bad Trading Habits. The best, what can you do, Is to suppress them. Laziness and negligence will quickly lead to their return..
Price models
48. If the market sets new all-time highs and does not fall, there is a great chance that, that the price movement will continue. Selling at new highs is one of the biggest mistakes amateur traders make.
49. Narrow market consolidation near the top and top edge of a wide trading range - a bullish pattern. A similar narrow consolidation near the lower end of the trading range is a bearish pattern.
50. Play on breakouts of an extended narrow range with a stop near the other end of the range.
51. Breakouts of trading ranges, that last one to two weeks or longer, - one of the most credible technical indicators of impending trends.
52. A general and especially useful form of the above rule: flags or pennants, forming above the upper border (or below the lower bound) previous continuous and wide trading range, usually, turn out to be very reliable continuation figures.
53. Trade in the direction of wide gaps.
54. Breaks, arising after long periods of consolidation, in particular, after one or two months of trading in a limited range, are often great signals (this pattern works especially well in bear markets).
55. If the gap, level breakout, not filled during the first week, it should be considered a very reliable signal.
56. Breakout to new highs or lows, followed by a break with a return to the range within the next week or two, turns out to be a particularly reliable figure, talking about a bullish or bearish trap.
57. If the market breaks out to new highs or lows, and then returns to the previous trading range and forms a flag or pennant there, consider, that there was a trend reversal. You can open a position in the direction of the reversal, by placing a stop outside the flag or pennant.
58. Breakout of the trading range, followed by a deep return to range (for example, three quarters or more inside the range), Is another significant form of bullish or bearish trap.
59. If an obvious V-bottom is followed by a nearby consolidation formation, this can serve as additional confirmation of the trough. However, if this koi this consolidation then breaks down, and prices are approaching the low of the V-trough, then you should wait for the resumption of the downtrend and the achievement of new lows. In the latter case, one could take short positions using protective suspensions near the upper border of consolidation. Similar comments would fit the case of V-vertices, followed by consolidation formations.
60. V-tops and V-bottoms followed by multi-month consolidations, which begin to form immediately after the turning point, often turn out to be long-term highs or lows.
61. Narrow consolidations in the form of flags and pennants often turn out to be reliable continuation patterns and allow you to enter an existing trend when the breakpoint is located close enough.
62. If a narrow consolidation in the form of a flag or pennant leads to a breakout in the wrong direction (to turn instead of continuing), expect the continuation of the movement in the direction of the breakout.
63. "Curved" consolidations often lead to accelerated movement in the direction of the bend.
64. Breakout of short-term "curved" consolidation in the direction, opposite bend, often turns out to be a good signal of a trend reversal.
65. Wide range days (days, whose trading range is significantly wider than the average range of previous days) with closing in direction, opposite to the main trend, often give a reliable early signal of a trend reversal, in particular, if they also include a reversal signal (for example, filling the acceleration gap, breakout of prior consolidation).
66. Almost sheer significant price movement for the period in 2-4 of the day (with a breakdown of relative highs and lows) tends to continue in subsequent weeks.
67. Spikes are good short-term reversal signals. Thorn extremum can be used as a stopping point.
68. If there are thorns, analyze the graph twice: with and without a thorn. For example, if, when ignoring the sewing of the thorn, the flag is obvious, breakdown of this flag is a significant signal.
69. Filling the acceleration gap can be seen as evidence of a possible trend reversal.
70. Island reversal, soon followed by a return to a recent trading range or consolidation pattern, represents a signal of a possible long-term high (minimum).
71. Market ability to hold relatively steady, when others, related markets are under significant pressure, can be seen as a sign of inner strength. In a similar way, market weakness at that moment, when related markets are strong, can be seen as a bearish sign.
72. If prices are constantly increasing during most of the day trading session, assume close in the same direction.
73. Two consecutive flags with a small gap between them can be considered a continuation pattern.
74. Consider a rounded cavity, followed by a consolidation with a slight bend in the same direction near the top of this pattern, like a bullish formation (cup with handle). A similar observation can be applied to the tops of the market..
75. Cool sentiment of market players with a strong trend may be a more reliable indicator of the likely continuation of the price movement., than strong bullish or bearish sentiment as an indicator of a reversal. In other words, extreme sentiment can often occur in the absence of long-term peaks and troughs, but long-term highs and lows rarely appear in the absence of extreme sentiment (current or past).
76. That fact, that some trading signal did not work, is a more reliable signal, than the original signal. Open a position against the original signal and use the maximum (minimum), prior to false alarm, as a stop level. Some examples of such non-working figures are given in the rules 56-58, 62, 64 And 69.
77. Market failure to follow significant bullish or bearish news (for example, major USDA reports) is often a harbinger of an impending trend reversal. Pay special attention to these developments., if you have open positions.
Analysis and verification
78. View charts daily, especially if you are very busy.
79. Review long-term charts periodically (for example, every four weeks).
80. Follow the rules of keeping a trader's diary, attaching charts to it for each transaction taken and writing down the following things: reasons for the deal; intended stops and targets (if any); price, by which the position was closed; observations and lessons (mistakes, correct solutions or noteworthy models); net profit / loss. Important, so that the sheet, dedicated to the deal, was filled at the time of opening a position, then the reasons for the transaction will accurately reflect your way of thinking at that moment, not its reconstruction.
81. Maintain a collection of graphical formations, introducing into it all the observed market patterns, that seem interesting to you. This will help you to check your prediction regarding their outcome or to pay attention to whether, how the figure finally resolved (if you didn't know, what can you expect from this model). Be sure to follow each schedule until the very end., to see the final outcome. Over time, this process can improve your graph interpretation skills., by providing some statistical evidence for the predictive reliability of various graphical shapes (when they are recognized in real time).
82. Check and update trading rules, a trader's diary and a collection of graphical figures on a regular basis (for example, full renovation in three months). Certainly, checks can be done more often, if you think, what would it be useful.
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Jack Schwager manages a fund with more than 75 million dollars. He is Director and Research Director at Prudential Securities, Ink., Managing Director of Wizard Trading. Besides, in the field of futures trading, he is a reputable consultant with 22 years of experience in market analysis. People like him are usually called "financial gurus". It is published in the leading financial publications in the USA, Lectures, publishes Books. As one of his colleagues said: “Jack Schwager has had a greater influence on futures trading this century., than any other author ".
