Market Wizard Scott Ramsey

market wizards

market wizardsJack Schwager’s interview with Scott Ramsey from Hedge Fund Market Wizards was very interesting and easy to read. Ramsey trades futures in an approach that reminded me a lot of William O’Neil’s CANSLIM method. He looks for fundamental reasons that a trade should happen, and then actually makes the trade when he finds confirmation in the technical data.

One of the most appealing aspects of the interview for me was the fact that Ramsey lives and works in St. Croix in the U.S. Virgin Islands. I have always dreamed of working from an island in the Caribbean. One of the reasons I have been so engrossed in studying trading is that successful trading would allow me the opportunity to work from anywhere in the world. St. Croix would certainly make my short list.

I was also interested when Ramsey discussed quitting college just 9 credits shy of graduating with an engineering degree. I was able to completely relate because I was also an engineering student who had his life changed by falling in love with an Economics class.

Top Five Quotes from Market Wizard Scott Ramsey

I made every rookie mistake in the books. Rather than taking the easy route and trading with the trend, I was trying to pick tops and bottoms, and I sat with losers and took small profits. – Scott Ramsey

Ramsey is an interesting type of trend follower, because he trades a discretionary approach as opposed to a systematic approach. Despite that difference, he is still very systematic in his research and analysis. He knows what types of setups he is looking for and has a routine for going about finding them.

He points out that he fell victim to common beginner mistakes like trying to pick tops and bottoms, holding losers, and taking small profits. It’s obvious at this point that all of the Market Wizards achieved their enormous success by doing exactly the opposite. I continue to find it encouraging to hear that even the most successful traders made the same mistakes I have earlier in their careers.

The other thing I did wrong was that every time I made money, I would pull it out. So instead of increasing my size over time, I stayed a one- and two- lot trader. I never really tried pushing myself. The evolution of a trader is when you start letting your money work for you and increasing your size. – Scott Ramsey

This is interesting, because there haven’t been many Market Wizards that have talked about taking profits out of an account vs. letting the account grow. I have always looked at my trading account as (hopefully) a savings account on steroids. Because I am not trading to make a living, I never gave much thought to taking profits out of the account.

While it didn’t address me specifically, I was still impressed by Ramsey’s comment about evolving as a trader by increasing your size. It makes sense that you would want to do as much as possible to compound your returns by keeping as much cash in the account as possible.

The reality is that I’m not being paid to be right; I am being paid to make money. You have to have a degree of flexibility. Whenever I talk to investors, I make it clear to them that whatever I say today about the market may or may not reflect the positions I have tomorrow or the next day. – Scott Ramsey

While I don’t have to deal with the pressure of talking to investors, I can still understand where Ramsey is coming from with this point. Even in talking to casual acquaintances at work, sometime I can feel them trying to pigeon-hole me into having an opinion on what the market is going to do. Most of the people I talk to are shocked to hear that I don’t usually have an opinion.

When we do express our opinions on the market, we reserve the right to change those opinions based on the action of the markets. That is another part that people don’t seem to understand. As traders, we need to be able to turn on a dime, and many times the general public will not grasp that.

To me, the most important thing is to control the downside. Rigorous risk control is not only important in keeping losses small, but it also impacts profit potential. You have to put yourself in the position to be able to take advantage of opportunities. The only way you can do that is to have a clear mind. If you have trades that are not working, and your mental energy is going toward damage control, you can’t think clearly about opportunities in the market. – Scott Ramsey

It seems like just about every single Market Wizard has mentioned risk control. Obviously, it’s pretty important.

I thought it was interesting that Ramsey pointed out that risking too much on trades will leave you with less capital to take advantage of the trades that will return the biggest gains. Over time, this will erode your trading capital. He also made a point to discuss the impact that focusing on damage control can have on your market psychology.

We need to trade at a level that allows us to focus on the next trade, not obsess about the loss we took on the last trade.

The market doesn’t care if you lost money on a trade. It doesn’t matter. Think about your next trade. You have to get past the idea that just because you lost money on a trade, it means you failed. Every trading decision you make is subject to some randomness. It doesn’t matter whether you win or lose on any individual trade, as long as you get the process correct. – Scott Ramsey

This goes right along with the previous quote. We need to disassociate our trades from our process. Poor trading approaches can still result in winning trades, and good trading approaches will still have losing trades. We need to focus on the next trade and understand that there is a degree of randomness that can show up at any time.

This can be exceptionally hard to remember during a losing streak. As one loss after another begins to pile up, you will begin to question every aspect of your trading.