I found Jack Schwager’s interview with Larry Benedict from Hedge Fund Market Wizards to be one of the more interesting interviews I have read. Benedict was extremely forthcoming and willing to discuss his long string of failures before he found trading success. He was also very open about his anger outbursts and other frustrations. Benedict trades a mean reversion style approach and attempts to grind out small, regular profits through a large number of trades while minimizing risk exposure.
Top Five Quotes from Market Wizard Larry Benedict
All the mistakes I was making along the way – and there were many – were providing experience, which was critical. The lessons I learned from those early failures helped me become successful. – Larry Benedict
It’s interesting how many traders discuss learning from their mistakes and blowing up accounts. In my very first podcast interview, Andreas Clenow spend a portion of our time discussing how he overcame his own mistakes. He also suggested that one of the best ways to gain experience quickly is to “fail faster.” This means that we should acknowledge that our mistakes are learning experiences and embrace them rather than hiding from them.
One of the best ways to get the most out of your mistakes is to keep a trading journal. This way, you can go back over those mistakes after the fact and gain a better understanding of why you made them.
I let the market dictate to me how i should be trading, not my macro views of what I think the market will do. – Larry Benedict
This is a fresh look at the classic Livermore advice warning against arguing with the tape. Benedict does a great job of illustrating the fact that he has macro economic views. He is even willing to discuss them openly with clients. However, he never lets those views influence his trading. For a beginning trader, this is much easier said than done!
The bottom line here is that just because a market should move in a certain direction does not mean that it actually will move in that direction. Our number one job as traders is to recognize when we are wrong and protect our trading capital.
Don’t average losing trades. Be smaller than you need to be. Take profits. – Larry Benedict
Averaging losing trades is another thing that Livermore warns against. If a trade is already showing a loss, then averaging down your cost is simple throwing good money after bad money. You should instead be investing more money into your trades that are actually working.
One of the topics that comes up most frequently in the Market Wizards book is attention to risk control. Many beginning traders lack any focus or understanding about the amount of risk they are taking. Because of that, most traders trade too big for their accounts, which leads to blowing up those accounts. Benedict’s simple solution is to trade smaller than you need to.
Another common mistake made by a number of new traders is that they will watch a position record an impressive profit, and then watch all of that profit disappear as they ride the position back down to their entry point. The best way to avoid this is to have an exit strategy in place before you enter a trade.
One big mistake is averaging losing trades. Trading is very hard, but it is also easy if you maintain discipline. People blow up because they lose their discipline. – Larry Benedict
Benedict once again points out the danger of averaging down positions, but his main focus this time is on maintaining discipline. While I have become very good at staying disciplined in my trading, i struggle constantly with it in other aspects of my life. Discipline can be a very tricky thing to master because you will always think you have it mastered until you realize you don’t.
Since I started in the business, I have seen a number of traders who ended up committing suicide or being homeless. The one trait they all shared was that they had a gambler’s mentality. When they were losing, they were always looking for that one trade that would make it all back. I learned early on that you can’t do that. This is a business where you have to work. That is what I do. Every day I make hundreds of transactions. I grind out the returns. If you look at my daily returns, you will see there are very few big up days. – Larry Benedict
Shit. I have this problem. When I lose my discipline, I develop a strong urge to bet the farm…..and I don’t even own a farm.
For Benedict, success is all about grinding out small returns every single day. Even if your system is much different from his, you still have to have the discipline to follow it 100% of the time with no exceptions. You also have to avoid the desperation of trying to make back all of a loss on one big swing. It is not a coincidence that baseball players than only swing for the fences have sudden and steep declines and pile up the strikeouts.