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Trade Talk Blog: Wizards of Today’s Markets: Jack Schwager, Part 2


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For Part 1 of this interview between our CEO, Rick Lane, and Jack Schwager, author of the “Market Wizards” series, see Wizards of Today’s Markets: Jack Schwager, Part 1.

In Part 2, Jack talks about his new venture, FundSeeder, and gives advice to those looking to make the leap from trading hobbyist to professional trader.

Rick: Do you have advice for those who look at trading as more of a hobby?

Jack: The first thing I would emphasize is that money management is really much more important than whatever methodology you tend to use. The methodology you use has to have some edge, but a marginal methodology with good money management is a million times better than a great methodology with inadequate money management.

Now, as far as how you achieve money management, I offer two bits of advice. For context, I should make it clear that I don’t trade all the time. Whether I am trading or not depends on a lot of things, such as how busy I am, whether I have the time to focus on the markets, whether I feel like trading, whether I think there are attractive trading opportunities, and so on. Throughout my career, I have gone from trading every day to other times when I haven’t traded at all, even for years. If I’m too busy to concentrate and focus, I won’t trade at all. The first piece of advice—and it may not be right for everybody, but it’s what I do myself—is that whenever I start trading, I always start out with a small amount of money that I’m willing to lose. Only when I get ahead, do I start to increase my risk. So I know that I can’t really lose much money trading because I’m just not risking much to start. By restricting your initial stake, you can’t do much damage, and whatever the outcome is, you know it’s not going to be very bad. So I think this approach to starting trading is good advice. One very important caveat to this approach, though, is that you have to be very careful not to get too complacent when you get ahead. That has been my personal Achilles’ heel. All my worst losses have always come after I’ve made a lot of money. I hope I am more cognizant of this vulnerability now and that I will guard against becoming sloppy or complacent after future winning periods.

The second element of money management I want to highlight is that you have to distinguish between trades that are truly investments and trades that are trades. When I say something is truly an investment, I’m thinking of a situation like the start of this year when metals were hated—everybody was just selling, selling, selling. I’m not up on the fundamentals of metals, and for some metals of course, like gold, it’s all psychological anyway. I didn’t know anything about the fundamental situation or where metals were going; all I knew was that the XME, the metals and mining ETF, had come down from a post-financial crisis peak in the high 70s to under 15. It was down about 80%. The world is not going to stop using metals. Metal companies are not going to go out of business. Hey, at those prices, which were then well below the lows of even 2008, I thought the long-term upside had to be far greater than the downside. And I was prepared to hold a long-term position like this even if it went to zero. And it wasn’t going to go to zero, because this was an ETF consisting of companies owning and producing physical commodities. My attitude was, “I’ll buy XME at 13 and 12 and so forth. If it goes to zero, it goes to zero.” That’s the type of trade I call an investment. I didn’t put stops in, and I wouldn’t consider placing stops unless it was to protect profits after the position went a lot higher. It’s an investment. It’s not a trade.

However, in contrast if let’s say there is negative employment report and bonds spike to new highs in response but then drift lower to close near the session lows, I might be inclined to take a short position on the assumption that the market had just witnessed a bull-trap failure. But that’s the type of position where I would place a GTC protective stop at the same time I entered the position because it’s just a trade. I don’t want to stick around short if the market goes back to new highs or even gets close to it. So the advice here is that if it’s a trade, always define your exit point right at the onset. Set things up so you don’t lose more than the amount you determined you can lose on that trade. That attitude, I think, is critical for positions that are trades as opposed to investments. The key point is that, at least for myself, I treat money management very differently for trades versus investments. And it’s absolutely critical that you distinguish between the two. I can say a lot more about money management but that’s probably enough for now.

Rick: They’ll have to read the book.

Jack: I have four “Market Wizards” books and I could talk for hours about lessons learned from the Market Wizards. I would add one more thing that’s absolutely critical, beyond what I just talked about: whatever approach you use, don’t just copy somebody else’s approach. Figure out what approach works for you. And if you haven’t done that, then you’re probably not ready to be trading real money.

Rick: That’s great. Well, speaking of traders who are just getting their start or looking to be discovered, there’s a platform that you’re involved with, Jack, called FundSeeder, that aims to help along those lines. Can you give us and our readers a little bit of background on what FundSeeder is all about and your role in the platform?

Jack: The key concept of FundSeeder is to create a central place on the web that would act as a discoverer and conduit of global trading talent. The main website is FundSeeder.com, which is the website for FundSeeder Technologies. That’s the traders’ side. And FundSeeder Investments is a separate sister company. So, on the one hand, FundSeeder Technologies is looking to discover global trading talent and, on the other hand, FundSeeder Investments, the company which has the appropriate registrations, uses the FundSeeder Technologies database to search for trading talent and connect those people to qualified investors.

The investment world has developed in such a way that it increasingly concentrates the amount of money being managed in alternative assets to a continually smaller number of large managers. It’s become increasingly more difficult for anybody that’s outside that sphere to get a chance to break into it, particularly if they haven’t got the Ivy League pedigree—and even more so if they come from countries that don’t have strong central markets. You can have people who have basic trading talent, either because they develop a great quant program, or just because they have intuitive skill, but if they’re located in, say, Eastern Europe and are just managing friends’ and family’s money, they will have almost zero chance of getting discovered. But these people are out there. In fact, there are millions or tens of millions of traders, and you only need a tiny fraction of one percent to be really skilled, and you could still end up with hundreds, if not thousands, of great traders that nobody knows about.

The mission of FundSeeder is to create a venue where these talented traders can be discovered. So people would literally link their account to FundSeeder.com, and we would get the results—their daily returns—not from them, but from the broker. So with FundSeeder, it becomes possible for somebody who is completely unknown to establish a track record in real-time, based on daily data. That’s an important thing. Our whole structure is daily data, which is tremendously more meaningful, reliable and statistically significant than the typical monthly returns that are contained in most manager databases. FundSeeder provides a place where these traders can generate real-time verified track records, have an opportunity to be discovered and, if they’re good, potentially end up managing money. So the way I put it is: FundSeeder is seeking to democratize and globalize the money management business.

Rick: When you say “get discovered,” do you mean that the second step to this is, once someone has proven that track record, and that track record is available on FundSeeder, then you’re matching them with investors, people with capital, who effectively will back them on the same platform or FundSeeder Investments, and who will then contribute capital for that trader to continue trading and growing his or her trading account?

Jack: FundSeeder Investments would be acting as a connector between the trading talent and the institutional investors who are looking for new trading talent. We query the investors who have signed up with FundSeeder Investments as to what type of traders they are seeking. What type of specific performance metrics do they require? How long is the minimum track record they will consider? Are they specifically looking for discretionary or systematic traders? Are they looking for traders who trade a specific market? And so on. Based on the specific mandate of the investor, FundSeeder Investments would then use the trader database to find traders who might be a good match and help them to become properly structured to take on such an investment.

Now ultimately our plan at some point in the future would be to use the FundSeeder database to directly select traders and pick 15 or 20, or maybe even more, good traders that we found who are uncorrelated with each other, and FundSeeder Investments would put them together into an emerging manager fund.

FundSeeder will be successful if and when we can get to the point where any serious trader would know if you’re actually interested in managing money as a career, and if you have skill, you’ve got to register with FundSeeder.com. We want to be the go-to place for traders who are skilled and are looking to break into the money management business.

I would also add that because many traders are not necessarily looking to manage money, FundSeeder provides a whole array of great analytics that’s useful to anybody. For example, you can generate your own equity curve, which you really can’t do otherwise, unless you want to keep a spreadsheet and create your own chart. Just having an equity curve generated and updated daily is really something quite valuable. If you are checking your equity curve daily, you can see if you are starting a drawdown or if your equity is deviating from normal behavior. Visual cues like that can be very helpful in controlling losses. You can generate underwater curves, rolling indicator charts (e.g., rolling returns) and volatility charts, etc. You can also do stuff like test what happens if you were to use a technical system, say a crossover moving average system, on your equity curve to generate signals to stop and restart trading—would that make your trading better or worse? There’s a whole bunch of free analytics and graphics that are on that site. And, of course, it’s in our interest to get as many traders as possible, even if 99% plus will never get to a point where they manage money, or even attempt to manage money, and are just getting the free graphics and analytics. It still helps us to have a greater mass of traders on the site.

Rick: That’s great. What brokerages are you integrated with?

Jack: Good question. Right now we’re integrated with Interactive Brokers, TradeStation and a host of futures brokers that use the Sungard/FIS GMI platform. On the OTC FX side, traders can link from a wide array of brokers if they’re using an MT4 platform. We are continually looking to expand the list of brokers that we connect with. Of course, we need the brokers to work with us as well on that score.

One last thing I would say is that, if your broker is not connected and you don’t want to switch brokers, we also have an unverified option that you can choose, which will download an Excel template. And if you have your daily return data or your daily equity data, either one, you can then use that template to upload your data to FundSeeder to create an unverified account. You’ll still be able to use all the same analytics. And in seeking superior traders, we will still search the unverified databases because we understand that perfectly legitimate traders may choose the unverified option simply because their broker is not yet linked to FundSeeder. We may have to do a bit more due diligence with these traders but nevertheless we are still paying attention.

Rick: Before we wrap up, is there anything else you’d like to mention on FundSeeder?

Jack: I just want to give credit where credit is due. I’m one of the founding partners, but the primary partner, the person whose idea it was, and the main driving force behind the company, is Emanuel Balarie. He’s the one who brought me in as a partner. It was totally his idea, and I thought it was a good one, so I joined in the effort. And there’s a third founding partner, James Bibbings, who has a Chicago-based company called Turnkey Trading Partners, which helps traders become established, compliant and to set up trading businesses or funds and so forth. Each of the three partners brings something different to the game. Emanuel was the one whose idea it was. He’s the primary marketing guy, the primary business guy. James is the compliance and nitty-gritty detail type of guy, and structures the business. And I’m the analytical guy and the one with the greatest trading experience. So something like designing the performance measurement and analytics offered by the site is something that falls primarily in my court. We have these non-overlapping areas of expertise, which is one of the things I think makes the partnership work.

Rick: That’s great. Well, Jack, I really appreciate it. And again, I appreciate the permission to use the name “Market Wizards” on this blog series. It’s been a great success, and I’m sure people will be really eager to read this interview as well.

If you’re interested in reading Jack Schwager’s work, you can find links to purchase his books at jackschwager.com. The most recent addition to his catalogue is an audio version of “The New Market Wizards,” released earlier this year. A revised version of “A Complete Guide to the Futures Market” will be released at the end of the year.