LessonObservationMarketsRiskInvesting
Traders who agree on nothing else all agree about risk control
Jack D. Schwager · Market Wizards
The idea
Schwager interviewed traders who made money in incompatible ways: trend followers and contrarians, fundamental and technical, fast and slow. Read across the volumes and almost nothing they say about markets is shared. What they share is how they handle being wrong: a defined loss before entry, a size that cannot end the account, and the willingness to take the loss when the thesis breaks. The implication is that the method is less important than the discipline around it, and that a strategy without an exit rule is a set of opinions rather than a strategy.
The common factor among people who last is not how they pick trades but how they limit what a wrong one costs.
When it works
Sales and trading, hedge fund and any markets interview that asks how you would manage a position.
When it may fail
Risk control alone does not make money; it keeps you in the game to find an edge. And the interviews are a survivor sample, which is the warning on the Darvas book one shelf along.
How to use it
For any trade idea, state the size, the level at which you are wrong, and what you lose there, before the upside. An interviewer hears the order you say those in.
Where it came from
Book Market Wizards · Jack D. Schwager
What the source says. Interviews with traders who made money in incompatible ways; read across the volumes and the only factor left in common is risk control.
Connected ideas
Says something similar
A risk limit is a decision about who has to be woken upA limit is an escalation rule: it decides when a problem must move up the firm, not just how big it may be.
Supports
A handful of outcomes carries a portfolio, and a careerResults come from a few outcomes, so the job is to survive long enough to be there when they arrive.
Takes it further
One person's record is a story about survivorship until proven otherwiseAsk how many people ran the same method and are not in the sample before treating a record as evidence of skill.
Concepts
Put it to work on L3VLUP
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