The New Markets Wizards

Trading in the stock market requires hard work, talent and professionalism. Some professionals believe that trading and investing in the stock market is a random walk, while others believe that markets are not random. This paper seeks to discuss, compare and evaluate different opinions and methodologies in relation to trading in the stock market.

A Random Walk Down the Wall Street Vs New Market Wizards

The basis thesis of the book A Random Walk down the Wall Street states that the market prices for stocks are so efficient that a blindfolded chimpanzee throwing darts at the Wall Street Journal can select a portfolio that performs the same way as those managed by the experts. On the other hand, Jack Schwager asserts that markets are not random. In this regard, the efficient market hypothesis by Burton is applied to the stock market and insists that the future directions cannot be predicated on the basis of past actions. In this case, stock prices in relation to short run changes use a complicated chart pattern and, therefore, cannot be predicted. However, stock and its values can be managed to ensure that both technical analysis and fundamental analysis have been carried out and utilized. These techniques help to strengthen the forecasting. On the other hand, Jack Schwager asserts that markets are not random. In this way, he clearly states that stock markets should not depend on trends but should focus on classic trading principals, which follow such trends. In this case, Schwager helps to develop a subconscious market sense, which measures the price movement. According to the author, market futures, which do function as supplies, should be the last resort in the sense that it creates different markets. In this case, he encourages gauging of the price movement as a highly significant aspect in the stock market. This simply means that the trade market should be approached subconsciously and tactfully. Malkiel states “the market prices stocks are so efficient that a blindfolded chimpanzee throwing darts at the Wall Street Journal can select a portfolio that performs the same way as those managed by the experts” (Malkiel 2).

Differences

Malkiel insists that, as an investor, it is better to buy off and hold on to an index fund rather than selling and buying securities individually or active mutual fund management. According to the other thought, for more than 30 years, managers have out managed and outperformed the stock trade. On the other hand, Schwager insists that riding winners must always know how to cut losses. In this way, an investor should always stay short when the trend is down until the trend changes. This simply means that an investor should patiently follow the trend. He also speaks on developing a subconscious market trend but intensifies his argument on gauging the movement on the same. In this way, he takes a larger position on the chart points and insists that trading can be compared to being a surfer. This simply means that it takes some work, a little patience and skill.

Malkiel takes a careful approach towards the mutual fund management. In this way, he believes that investment must produce a rate of return equal to the inflation. In other words, an investor should not put all his/her trust on a mutual fund but should be well advised on the best way to handle stocks or money. Contrary to this, Schwager states that there are three key things that an investor should always watch out. These include: market tones, technicals and fundamentals. According to the author, fundamentals always suggest imbalance in demand and supply chain, which would determine a different or principal move. Fundamentals suggest the direction of the market or the market trend. Additionally, the correct or right psychological tone helps to reflect and direct an action to take. In this case, all the trade profits must meet the required standard and criteria. In case of an imbalance within the market, the author directs that exceptions should be made especially in deflationary and inflationary environments.

Schwager insists that the main reasons why central banks do not have trends are the currency move prevention. On the other hand, Malkiel argues that optimum investment strategies are age related and thus investments can only decrease where risks have been involved. Therefore, the risk bearing capacity depends on an investor’s ability to earn income and the investor’s age. Schwager gives an example of a bull responding vigorously to bullish news in relation to psychological tone reflection. The author Malkiel, on the other hand, gives an illustration of a random walk theory to explain fundamental analysis and firm foundations.

Market Wiz(ar)dom Profile

Market wizardom is an exceptional method employed diversely through methodologies and technical analysis. The traders consider this profile as a long term method in the trade market. The primary factors that contribute to the trader’s success are the first things, which entail being sure what a trader wants. The traders confirm this when Krausz and Faulkner assert or state that “"I can either go to business school to get my M.B.A., or I can trade on the floor of the stock exchange-hmm, which do I want to do?" It was not a hard decision” (174). Therefore, it is necessary for traders to be sure of what they want to do.

Examining Motives

This is a highly crucial factor that is related to the intentions and motives of traders. In this instance of profile, the traders suggest or state that “there is one need to examine your own motives extremely carefully for any such conflicts. The market is a stem master. There is one need to do almost everything right to win. If parts of you are pulling in the opposite directions, the game is lost before you start” (Schwager 269). In this case, the trader suggests that it is necessary to examine motives. This is because any difference between the activity carried out and the motive intended will cause a conflict.  Therefore, motives should be examined carefully. Additionally, it is equally beneficial to focus on mechanical design systems and direct energies to trading. The trader states that “the contrast between my motives and the activity resulted in extraordinarily obvious conflicts” (Schwager 269).

Matching Trading Methods to Personality

 This is one of the primary factors that contribute to the trader’s success.  In this case, it is extremely critical to choose a consistent method for the same. However, the consistency method must have a comfort and a personality level. This simply means that the approach used must be right and should feel comfortable. The trader asserts, “Virtually every successful trader I know ultimately ended up with a trading style suited to his personality” (Schwager 269). In this case, personality and trading style are one of the reasons why trading systems fail to make a profit. The trader also asserts “Incidentally, the mismatch of trading style and personality is one of the key reasons why the purchased trading systems rarely make profits for those who buy them, even if the system is a compelling one. While the odds of getting a winning system are small-certainly less than 50/50-the odds of getting a system that fits your personality are still smaller” (Schwager 269).

Having an edge is the other factor that contributes to the trader’s success. The trader explains that having an edge is not only necessary but hugely influential in the management of skills, and it guarantees success.

Developing a Method is Hard Work

This is a hugely decisive factor, which significantly contributes to the success. In this case, it is evident that there are no short cuts to success. This simply means that success can only be achieved through hard work.

Good Trading should be Effortless

 The traders insist that each proper training must be effortless. In this case, the trader asserts “In trading, just as in archery, whenever there is effort, force, straining, struggling, or trying, it is wrong. You are out of sync; you are out of harmony with the market. The perfect trade is one that requires no effort” (Schwager 271). This simply means that traders should not struggle or use strain, force or force things to happen.  On the contrary, they should simply visualize and gracefully go for the kill. This simply means that commitment and effort are more valuable recipes of success.

Money management and risk control are hugely influential factors. This is because it deals with an acutely sensitive and risky issue that involves money and risk control. Every successful system must have successful trading processes that control risks and understand theories on risk management. In order to control risks, a trader should only risk up to 2% of his capital, predetermine theory exit point before trading or agreeing to the same and take a brother after losing a predetermined amount in order to establish what went wrong in the trading.

Trading Plans

Trading plan is a hugely significant factor to consider. This is because it is related to trade entry rules and money management. Krausz explains “traders encounter the absence of a trading plan and the route of all the principal difficulties in the markets” (Schwager 271). On the other hand, Driehaus insists “that a trading plan should reflect a personal core philosophy. He is not going to be able to hold on to your positions or stick with your trading plan during extremely difficult times” (Schwager).

Need for independence is a highly significant factor. It entails thinking independently in the absence of hysteria. Ed Seykota states “by the time a story is making the cover of the national periodicals, the trend is probably near the end” (Schwager 176). Basically, independence means making one’s own trading decisions. This simply means that a trader may avoid people’s opinions if he feels that these opinions cost him money and confusion in relation to the market view. Michael Marcus states that “you need to follow your own light. If one combines two traders, you will get the worst of each” (Schwager 272). This simply means that the original move is always the best move.

The Importance of Varying Bet Size

Winnings can be maximized if betting is adjusted. However, this varies through mathematical demonstrations, which are significant in trade. Drucken Miller expresses it, and states “The way to build [superior] long-term returns is through preservation of capital and home runs.... When you have tremendous conviction on a trade, you have to go for the jugular. It takes courage to be a pig...... For a number of Market Wizards, keen judgment as to when to step on the accelerator and the courage to do so have been instrumental to their exceptional achievements (as opposed to merely amusing) returns” (Schwager 275).

The primary factors that contributed to success in this profile were the trader’s waiting for the right opportunities in order to increase the probability of his success. He did not trade all the time but waited patiently for the right trading opportunity, he used fundamental strategies in order to be quite sure about the market. He traded professionally, and he avoided trading with eagerness to win back losses.

Money Management

Edwin Lefevre takes money management into consideration. This is because he always used careful trends and professional trading to ensure that it was the proper time to trade. He manages his investments by considering the amount of risks in every decision. In this way, he uses a utility function to measure the risks. This simply means that he has greater control over the incomings and outgoings in the market. In this way, his money management plays a highly influential role in his trading system success. This gives him a business and personal perspective, which helps him to achieve greater money management. It is necessary to note that his money strategy management gives him a cost effective alternative, cuts his social needs and increases his standard of living value system.

Good Risk Management

Edwin Lefevre identifies, assesses and prioritizes the risks involved in every trend. In this way, he increases opportunity realization, controls, monitors probability, and coordinates the resource applications. The actuarial assessments, risk technology, standards, and management standards used are truly unique and effective. In this way, he is able to assess, characterize and identify risks, assess critical aspects and threats, determine the risks involved, identify ways and methods to reduce the risks, and prioritize the risk reduction. This is because he understands the probability of success. This simply means that he only traded when he was quite sure that there were lesser risks involved in order to create value, he was an integral part of the trading process, address assumptions and uncertainty, acted best on available information, was tolerable, took all factors into account, used a system that was inclusive and transparent, ensured continual enhancement and improvement and periodical re-assessments.

Behavioral Finance

This is evident from the fact that he approaches financing in the trade market in an exceedingly careful manner. He compares it to an animal patiently lying in waiting for its prey. He uses behavioral economics to integrate fields, methods and concepts, which are intended to promote self-interest. In this way, he highlights inefficiencies, over reactions, under reactions, noise trading and optimism. Behavioral finance in this profile impacts the marketing decisions made and stock image.

Mathematical Analysis

Mathematical analysis in the case includes analytical functions, infinite series, limits, measurements, integration and theories of differentiation. This simply means that, in every independent function in the trading market, a trader needs to analyze the magnitude or approximate techniques in the trading market. This simply means that a trader needs to apply the continuous probability and other analytic theories.

Trading System

Trading system is likened to building a house, where the builder takes into consideration the risks, draining experience, capital, future improvements, and the energy required. James Rogers suggests that

I just wait until there is money lying in the corner, and all I have to do is go there and pick it up. I do nothing in the meantime. In essence, by not wanting to trade, I had inadvertently transformed myself into a master of patience. By forcing me to wait until there was a trade that appeared so compelling that I could not stand the thought of not taking it, I had vastly improved the odds (Schwager 7).

In this way, he clearly explains what the trading system entails.

Discipline and Technical Analysis

Discipline and technical analysis is hugely influential in a trading market and business. In this case, in order to excel in trading, a trader needs to be disciplined and apply technical analysis. Schwager argues that “the secret to success in the markets lies, not in discovering some incredible indicator or elaborate theory; rather, it lies within” (Schwager 3). In this case, he describes the importance of discipline in the trading industry.

The primary premise as discussed in the premise profile indicates that A Random Walk Down the Wall Street does not hold because Malkiel explains trading and investing as a random walk. He also insists that investing should be a way of life. However, the premise also holds because Malkiel suggests that in order to gain profits, investments should be distinguished from speculation. This means that investing is a gamble and success and simply depends on the ability to predict the future.

Difference between Investor & a Trader

A trader buys stock but does not hold the stock for a frightfully long time. However, this depends on the performance of the stock. On the other hand, investors buy stocks with the intention of holding the stock for a long time. In this case, an average investor can make intelligent decisions on whether or not they want to hold the stock or let it go.

Monroe Trout & Gil Blake Views

Monroe Trout’s technique is related to testing market patterns for statistical significance. His money management approach is based on testing his losses per trade. On the other hand, Gil Blake prefers a technique that creates systems with the expected positive values. He creates a system that is related to diversification. In this way, the two professionals provide details on the stock market, stock growth and stock management. In this case, Malkiel states that “Market professionals arm themselves against the academic onslaught with one of the two techniques, called fundamental analysis and technical analysis” (Malkiel 2).

Conclusion

Trading is a hugely profitable business. However, it requires discipline, proper risk management, a solid trading plan, technological strategies and a careful approach. Sometimes an investor may incur losses, but a successful investor is one, who rises up quickly from a loss. The technique systems used must relate to diversification and must be carefully managed.