Ãû¼Ò̸ϵͳ¿ª·¢Ö®Ò»_____Jack Schwager

"Jack Schwager on What Really Matters with Strategy Trading”
Interview with Jack Schwager
by Janette Perez

Jack Schwager, Co-Manager of Fortune Asset Management's Market Wizards Funds (a fund of hedge funds) and author of Market Wizards, The New Market Wizards, and Stock Market Wizards requires little introduction to the TradeStationWorld community. Based on his prior experience, which includes 22 years as the director of futures research for some of Wall Street's leading firms and ten years as the co-principal of a commodity trading advisory firm, and countless interviews with traders, we'd like to share with you some of his thoughts on the world of strategy trading.

Janette: Jack, have you always been a believer in strategy trading?

Jack: No, I certainly haven’t always felt that way because when I first started out in my first five or six years in the business, I was purely a fundamental analyst and actually was very skeptical, if not cynical, about technical analysis. That attitude was based on biases rather than any actual evaluation. It wasn’t that I tried technical analysis and found it didn’t work; it just seemed to me intuitively that it wasn’t scientific.

Janette: How did your opinion change?

Jack: My perceptions about technical analysis changed through someone who worked for me by the name of Steve Chronowitz. At the time, I was a Research Director for a futures firm and Steve was my technical analyst. I noticed that Steve did pretty well with his calls, and I knew he was purely a technical analyst. So I asked him to show me what he was doing, and I showed him what I was doing fundamentally. We basically educated each other on our respective methodologies. Once I became exposed to technical analysis, I saw that maybe it might work because the market is just reflecting the input of all the participants. It’s not a matter of magic—it’s just basically a reflection of market psychology, which is human nature, and one could argue that human nature really doesn’t change, so there might very well be repeatable patterns.

Janette: Did you start using technical analysis in your own trading?

Jack: The transformation began when I started experimenting using technical analysis. I found it very appealing because I was also trading my own account and one problem I always had with fundamental analysis was that it never gave you entries or exits.

Janette: Can you give us an example?

Jack: Certainly. Fundamental analysis tells you if the market is over-priced or under-priced, given the known information, but you don’t always have all the inputs. For example, if your analysis tells you the wheat market is underpriced at $3.50, and it goes down to $3.00, it would be more underpriced as long as the fundamentals didn’t change. There is nothing that will get you out of the position, and there are a number of weaknesses in that. To begin, you have to be drastically wrong only one time to wipe out your account. Beyond that, the price weakness could develop because of fundamental changes that are clearly not predictable such as a drought or a huge export order from an unexpected source. Alternatively, you could have structural changes in the market that might not become evident until after the fact. In other words, once all the smoke cleared a year later you could say, “Ah, this is why prices went that way,” but there’s no way you could have seen it at that time. All of these problems relate to the fact that in fundamental analysis, the very approach is inherently in contradiction to money management control. I’m talking about fundamental analysis on futures or index markets here, not fundamental analysis on individual equities.¡¾½»Ò×֪ʶmacd.org.cnÊÕ¼¯ÕûÀí¡¿

The nice thing about technical analysis is that by definition you’re using an approach in which the money management is built-in. If a market is going down, you’re not going to be buying more because it’s at a better price. On the contrary, you’re going to be getting out of the trade because you’re long and you lost money. In other words, if you’re losing money, the trends have changed and your stops are going to get activated. In short, I found it much easier to trade with technical analysis than with fundamental analysis.

Janette: Is there one specific trade you can point to?

Jack: Yes, one trade I will always remember as one of the best trades I ever made, was ironically a losing trade. It was a trade that occurred the first year I started using technical analysis in trading. The D-Mark was in a narrow basing pattern for many months, and I thought it was bottoming out. So, I went long, but I put a stop in right below the base. When the D-mark started to go down, I got stopped out and took a modest loss on the trade. The D-Mark then proceeded to go down and down, and I just knew that if I hadn’t been using technical analysis that the small loss could have been a huge loss. That’s just one example of a trade that helped to solidify my biases in favor of using technical analysis. I still used fundamental analysis sometimes to define my direction in the market, but I strictly used technical analysis for timing. That was the transition I underwent. Thus my attitudes about technical analysis going in, with no knowledge of the markets, were radically different than they were six years later and thereafter.

Janette: That’s really interesting that you’re saying that this was one of the best trades although it was a losing trade because of all the experienced you gained. Can you give us more background on how you started in the markets?

Jack: I got into the markets out of graduate school with an Economics degree. I expected to have jobs offered to me on a silver platter (coming out of an Ivy League School). After two weeks of going to employment agencies and not getting any calls back, I got pretty frustrated. So, I came up with the idea of putting an ad in the New York Times “Position Wanted” section, saying nothing more than, “M.A., major in Economics, minor in Math, Brown University. Looking for an analytical job.

Janette: What was the outcome?

Jack: Well, I got fifteen calls back on that one small ad. Unfortunately, fourteen were bogus responses. I followed up on one and then learned the game, which spared me from the rest. All the responses except for one were really the type of thing where they lead you on to believe that there’s a job, and when you show up, you’re solicited for one of these chain marketing deals—really taking advantage of people who are looking for jobs. The one legitimate inquiry I had was from Reynolds Securities (which subsequently was merged into Dean Witter for a commodity analyst job that had opened up.

Now, I don’t know if it’s any different these days, but when I went through college and graduate school, in economics, they taught you nothing…zero…not anything…not one word about commodity markets. When I was asked if I knew anything about commodities, my “insightful” response was—and I still wince at the memory-- “something like gold?” That really was all I knew about it. The Research Director was writing a commodity column for Barron’s and would have other people do the leg work and write a draft that he would then rewrite and use it for his column. When he was interviewing candidates for this position, he got it down to four people, and had each of us write an article on a commodity. I was assigned copper. Well, I knew nothing about it, so I went down to Grand Army Plaza, which is this huge library in Brooklyn, New York, and I literally spent the week there reading everything I could on copper. I got the American Metal Market Bulletins going back for as many years as they had and sat there going through them a day at a time, absorbing any information I could get. I also went through years of the McGraw Hill weekly letters on metals and other assorted articles on copper. I essentially educated myself as an “expert” in copper. After about a week, I knew enough to write an article. I wrote the article and got the job. I was told later on by someone who worked in the same department and who became a good friend that they had passed around the articles of the various candidates and everybody said “hire this guy!” I actually kept the article and ten years later, I came across it cleaning up my files and read it. At that point, I had lots of knowledge about commodities, especially fundamentals, and was actually surprised at how good it was—you wouldn’t have known that the person writing it only had one week’s worth of experience with the markets. So, I really wrote myself into the job.

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