Market Wizard Bill Lipschutz

Bill Lipschutz

Bill Lipschutz is the first trader interviewed by Jack Schwager in The New Market Wizards. Most of the interview focuses on Lipschutz’s career trading currencies for Salomon Brothers and some of the crazy trades he experienced over his years there. Based on the fact that Lipschutz trades currencies, and the fact that his position sizes are in the tens of millions, you wouldn’t expect someone trading $5,000 to be able to gain anything from him. However, once again we see that some of the same core principles are implemented by all successful traders regardless of style or size.

Top Five Quotes From Bill Lipschutz

“There are a lot of elements to risk control: Always know exactly where you stand. Don’t concentrate too much of your money on one big trade or group of highly correlated trades. Always understand the risk/reward of the trade as it now┬ástands, not as it existed when you put the position on.”

Once again we see an intense focus on risk from a successful trader. Lipschutz stresses the importance of understanding what the risk is relative to where the position is at any given moment. This is important as different factors can change over the course of a trade. For example, risk can increase substantially as a stock approaches an earnings report.

I have fallen victim to this lack of focus on risk multiple times over my trading history, most notably how I held a small gain in NUAN through an earnings report in early 2012. The stock missed badly and I was stopped out the next morning.

“When you’re in a losing streak, your ability to properly assimilate and analyze information starts to become distorted because of the impairment of the confidence factor, which is a by-product of a losing streak. You have to work very hard to restore that confidence, and cutting back trading size helps achieve that goal.”

This is the reason losing streaks tend to produce a downward spiral. Loss of confidence in any profession can be devastating to productivity as well as morale. Lipschutz recommends countering that confidence issue by trading smaller until the confidence is restored. This allows the investor to get some low pressure wins under their belt before upping the pressure to normal levels.

Confidence is an issue I have had for as long as I can remember. I have actually been following Lipschutz’s advice for quite some time in that I generally deposit more in my trading account each week than I risk on any given trade. I do this because I am trying to build confidence by logging wins and gaining experience in a lower stress environment.

“I don’t think you can consistently be a winning trader if you’re banking on being right more than 50 percent of the time. You have to figure out how to make money being right only 20 to 30 percent of the time.”

Here is yet another example of an incredibly successful trader openly admitting that he is perfectly comfortable being wrong 70-80% of the time. Most of the discussions around this topic bring up the example that a baseball player who gets a hit 3 out of 10 times for his career is likely headed to the Hall of Fame. It’s not the number of times you are right, but how right you are when you are right.

This goes hand in hand with what O’Neil teaches where we aim for 20-25% profit on our winners and limit our losses to 7-8%. This allows us to be able to miss three times for every time we are right.

“You don’t want to hold a position when you don’t understand what’s going on. That doesn’t make any sense.”

This is one of those quotes that sounds so simple and rational in theory, but much harder to stick to in the real world. Of course it is also easy to make up reasons to explain away just about anything. If you’re not feeling creative, there are also a few cable networks that are more than happy to enlighten you to what’s going on.

The general idea here is that if a trade isn’t going the way you expected it to, GET OUT! Don’t overcomplicate it with analysis. If the price isn’t moving your direction, cut your loss as soon as possible.

“It’s not enough to simply have the insight to see something apart from the rest of the crowd, you also need to have the courage to act on it and to stay with it. It’s very difficult to be different from the rest of the crowd the majority of the time, which by definition is what you’re doing if you’re a successful trader.”

It’s one thing to identify a profitable situation. It’s another thing to act on it. It’s yet another thing to stick with it after you are proven right. This is what makes trading so difficult. That difficulty gets compounded by the fact that being right generally puts you against the crowd, who will constantly tell you how wrong you are.