Trading on the exchange market is associated with big money, sometimes with fame and other pleasures of the modern world. However, in addition to such generalities, we rarely have the opportunity to learn how to earn really big money in financial markets. A Belgian immigrant who lives in the United States has managed to get to big investors and persuade them to talk.
The mentioned person is Jack Schwager, the author of several books about trading in financial markets and trading his own money in the stock market. Schwager wrote down his conversations with famous traders and published a book entitled “The Market Wizards”. The book turned out to be a bestseller and is really a must read for anyone who thinks about trading in financial markets. We will not find advice on investing directly in the book. However, the book contains many valuable tips on more psychological issues.
The described traders come in a very different way to tradining. One uses fundamental analysis in his decisions, while another one prefers automatic trading. All, however, have one common element, namely sticking to certain rules. In addition, most of them have the ability to self-reflection, which I think is crucial in trading. There are no infallible people, the sooner we acknowledge the error, the less money we will lose.
The book was written over 25 years ago, so it might seem that it has lost some of its relevance. Not at all. The amazing thing is that the same mechanisms still work in the markets. Maybe it is now dominated by automatic trading, which at the end of the 1980s was a novelty, but the behavior of exchanges and, above all, investors is the same. Exchanges is dominated by fear and greed, and as long as you can earn big money on them, nothing will change.
The book describes various markets, from stock markets to futures markets. Economic threads are also discussed. Already in the 80s Jim Rogers predicted the domination of China and the growing problem of indebtedness of states, referring mainly to the United States, which currently public debt exceeds 100% of GDP.
Jim Rogers is a living legend among traders. He started to invest in the 1960s with just $ 600. In the 1970s he joined forces with another legendary investor, George Soros, about which many conspiracy theories circulate. They founded the hedge fund named Quantum Fund. In the 1980s, Jim Rogers left the fund and began investing in his account. He is a frequent speaker at universities and guest on television programs on investing and business affairs.
Jim Rogers is a typical representative of long-term trading. He usually keeps his positions for several years. He is looking for shares that are likely to turn out better than the market. In the 1980s, he estimated well that stock markets would be on the rise in that decade. Rogers invested in German shares. The German market seemed to him the most prospective, because the German economy was booming, and the local stock market still did not move up, after the collapse which it experienced in 1962.
Rogers thinks patience is the most important thing in trading. He says that unless you have a good opportunity to open a position, you should not make any decision. People often set themselves the pressure to act, which usually ends badly. Jim Rogers usually analyzes the market for important fundamental factors. Although he admits that sometimes he looks at charts, which often show panic of the crowd. He happens to do exactly the opposite when he sees a panicky downward movement or euphoric upward movement.
Jim Rogers’ strategy is not easy to describe in a few words. It’s just trading on common sense, as he says. It should also be added that many years of experience backed up, in which he certainly had worse periods. Nevertheless, we can write down a few rules that Jim Rogers follows:
- search for undervalued stocks. Quoting Warren Buffett ” Price is what you pay. Value is what you get”. So if you want to get the value, you have to look for such companies for which you do not pay too much, and at the same time these companies will have a big prospect of development ahead of them.
- do the opposite when you see panic or euphoria. In general, it is about behavior against the market, when it clearly does not behave rationally. The movement has no ground in fundamental factors, and is the result of herding behavior. However, special care should be taken with this principle, as many beginners say that now the market will definitely break down and take a short position in the middle of a bull market, for example. Very experienced traders can take action against the market. Jim Rogers has worked for years in his position and is considered one of the most bright investors.
- be patient, which means that you should wait for the right opportunity. No decision, sometimes the best we can do. The opportunities will finally come.
- do not suggest any advices. Most people in the financial markets are losing. This applies to all markets, equities, futures and OTC. Therefore, it is best to stick to your own judgment and analysis.
Paul Tudor Jones
Paul Tudor Jones is a legend on Wall Street. You can call him a typical speculator. His assets are estimated at over 4.5 billion dollars. In the 80s, he became famous for the documentary film “Trader”, in which he discovered the secrets of his methods used on the stock market. Jones banned the film’s release, in which often he was nervous. However, the film got into a wider group and you can find it without much problem on the Internet.
Paul can boast of incredible effectiveness. he achieved a three-digit rate of return for five years in a row. In October 1987, when the indices suffered a severe breakdown, Paul achieved a rate of return of 62%. He started as a broker on the New York Cotton Exchange. He can boast of earning a large commission in the first year of operation, which amounted to 1 million dollars. He later worked as an independent trader on NYCE. hen in 1984 he founded hedge fund, the Tudor Futures Fund. The fund started with assets worth $ 1.5 million. At the end of 1988, it was already over USD 300 million.
Paul Tudor Jones is a typical speculator who bases his decisions mainly on technical analysis. He operates on the futures market. He believes that to succeed you have to go a bit against the flow. He tries to buy in bottoms and sell at the tops, which is slightly opposite to the rest of the market participants.
Certainly the method gives you the opportunity to purchase a given item at an attractive price, but it can also be very dangerous when you do not capture the right moment and the market will continue to go the same way, that is in opposite to our position. Jones found out about it in 1979, when he worked as a trader on NYCE. On the cotton market, prices fell to new minima and slightly rebounded. Paul decided that this was the effect of activating stop-loss orders and open a large long position. The market after a short stop, continued to go down. However Jones increased his position, although he felt that he could make a mistake. He managed to close the position after a few days, and the loss incurred only on this transaction amounted to 60-70% of the total capital. Jones was so depressed about the situation that he almost gave up his membership in the NYCE. However, he did not give up, and above all he drew appropriate conclusions from this situation and we can read about it in the aforementioned book.
Jones’s approach seems right to buy in holes and sell at the tops, not vice versa. Of course, other factors are important, such as volume or open interest on the futures market, the main trend, etc. However, the most important issue in speculation is proper capital and risk management. Paul was painfully convinced how important these elements were. This event could end his career, but he showed a strong character and was a huge success.
The summary will be short. There is no one, the best way to play in financial markets. Everyone has to find their own, which can be the most difficult in the entire career of a trader. However, regardless of which strategy we choose, we must have strict rules of conduct, which we stick to, which is the best in this profession.
CFDs have opened many markets for retail investors. Additionally, thanks to leverage, we can start trading with really small capital. it is very important to choose a stable broker who will act as an intermediary in CFD transactions. There are two types of brokers, Market Maker and STP/ECN. The first one is always the other party to the transaction, and the other one should theoretically transfer the transactions to liquidity providers, but it is different. Therefore, a very important element is a stable trading partner, in this case a broker.