Market Wizard William Eckhardt

William Eckhardt

Jack Schwager’s interview with William Eckhardt in The New Market Wizards was packed full of knowledge. It took a good while for me to digest it all. Some of Eckhardt’s mathematical analysis was overwhelming at times. Eckhardt is probably most famous for being on the other side of the Turtles bet with Richard Dennis. This was one of the most difficult interviews for me to narrow down to a top five quotes. I gave serious consideration to making it a top ten quote post because of the wealth of knowledge presented.

Top Five Quotes From Market Wizard William Eckhardt:

“I take the point of view that missing an important trade is a much more serious error than making a bad trade.”

In this quote, Eckhardt is referencing his trading around the time of the first Gulf War. He explained that he didn’t understand why the markets were behaving in the manner that they were and gave serious consideration to sitting on the sidelines. He then went on to explain that if he traded, he could still limit his downside risk, but if he sat out, there was no way he could control his risk in terms of the opportunity cost of missing a big winner.

This falls perfectly in line with Trend Following and CANSLIM methodologies. By focusing on cutting losses short and letting profits run, we have a strong focus on limiting our downside risk. We forms the rules for our systems based on research, therefore it can be very risky to change those rules for discretionary reasons.

“You should try to express your enthusiasm and ingenuity by doing research at night, not by overriding your system during the day.”

Eckhardt is also referring to overriding your system in this quote. He is saying that instead of making discretionary decisions about your system during the day, you should invest that energy in researching and improving your system.

This has interesting applications to our approach as well. As a general rule, I don’t make trading decisions while the market is open. This allows me to relax and ignore the high stress pressure of a wild market. I make it a point to make all buy and sell decisions in the evening when the dust has settled. This gives me the ability to put a given move in perspective.

“Anyone with average intelligence can learn to trade. This is not rocket science. However, it’s much easier to learn what you should do in trading than to do it. Good systems tend to violate normal human tendencies. Of the people who can learn the basics, only a small percentage will be successful traders.”

The way Eckhardt phrases this, there are two components to being a successful trader. You must have a baseline level of intelligence, but beyond that, the ability and discipline to follow a system become more important. This combination of skills is the reason that some extremely intelligent people end up making terrible traders.

I find this to be very encouraging. I have always considered myself to have slightly above average intelligence, but certainly not anything special. This line of thinking means that once I have met the minimum requirement for intelligence, the only thing holding me back from becoming an exceptional trader is my discipline to stick to my system under pressure.

“One common adage on this subject that is completely wrongheaded is: You can’t go broke taking profits. That’s precisely how many traders do¬†go broke. While amateurs go broke by taking large losses, professionals go broke by taking small profits. The problem in a nutshell is that human nature does not operate to maximize gain but rather to maximize the chance of gain.”

Again, we revisit cutting losses short and letting profits run. In case anyone hasn’t noticed, this is the number one most discussed strategy in the entire Market Wizards series. Eckhardt apparently finds it so important that he brings it up multiple times. Anyone who has read The Complete Turtle Trader knows that this was also the basis of the system Eckhardt and Richard Dennis taught to their students.

What I thought was interesting about the way Eckhardt phrased this is that he broke it into two parts. The first part, cutting losses, is how amateurs lose money. Then, when amateurs graduate to professionals, they lose money by taking profits too quickly. In order to become truly great traders, professionals must graduate to yet another level.

“You’re much better off going into the market on a shoestring, feeling that you can’t afford to lose. I’d rather bet on somebody starting out with a few thousand dollars than on somebody who cam in with millions.”

This quote is just about pure motivation for me. I opened my first trading account with $10 and began saving. I built that account up to be a couple thousand dollars, mostly through saving over the course of a few years. Because of this, I feel the losses and I am extremely careful about the risks I take. I can see how someone with a lot of money could open a big account and not feel the losses.