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Learning Trading Skills from the 'Wizards'

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Jack Schwager, author of the best-selling Market Wizards books, reveals what he learned about trading success from his interviews with hundreds of master traders and how traders can put indicators and chart patterns together to determine buy/sell points. He explains how this background helped him develop three indicators, available only on TradeShark, to identify major trends and their strength.

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My guest today is Jack Schwager and he is best known for his Market Wizard books.  He’s talked to thousands of traders and money managers over the years.  Jack, what were some of the major lessons learned over the years from talking to all these very successful traders and money managers?

            That’s a hard question to answer in short because I’ve written four books filled with an answer to that question.  To boil it down to maybe just a few essentials, first I would say people need to find an approach that fits their personality there is no one magic way that works for everybody you have to find your own way.  Some people it’s fundamental, some technical, some long term, some short term it’s different for everyone.  Second thing and I guess one kind of rule I really believe in is know where your getting out before you get in because that’s the only time you have picture activity.  That doesn’t mean know when or how you’re getting out instead of the exact price necessarily because you might be using a indicator or system and then you just get out when the system does but you have to have a plan to get out before you get in that’s really the message.  The third thing I would say is a lack of loyalty.  Loyalty is great with pets, friends and family, not with trading.  Trading, you want to be the most disloyal person around.  If there is any reason why you no longer believe in something you’ve got to get out immediately and a really great trader will not only get out they will actually go the other way.

            A lot of traders you talk to use chart patterns, their main way of looking at the markets.  How would you recommend somebody kind of combine maybe chart patterns with indicators or is there one is better than the other?

That’s a good question.  One way you can do it, if you have an indicator that indicates a higher probability that the market is going to go up or down in certain regions and let’s say you also like to use chart analysis, and I do as a matter of fact, like to do that, then what you can do is use the indicator to say okay, now the indicator is in a buy mode, so I’m only going to use charts to decide where is a good buy spot, so here is a support resistance on the chart, because I am looking for the market to be up now because of this indicator, I’m only going to be looking for pull backs in the support, I’m not going to be looking to sell on rally’s into resistance.  So that’s a way you can combine the two.

You’ve developed some proprietary indicators for TradeShark, talk about those.

There are basically three indicators.  The kind of thinking behind it is to identify the major trends of markets.  The first indicator is a trend weight and that basically in very simplistic fashion, when it’s positive is indicating the market is in an up trend negative in a down trend but it’s much more than that.  It’s not just a matter if it’s plus or minus.  The indicator can range from minus 100 to plus 100 so it also indicates the strength of the trend and there is a difference whether it’s like a 10 or a 90.  Eventually the trend will get fully weighted while the over bought over sold gets stronger and stronger as the trend goes on and on and then that directional weight will start to drop and it’s not unusual especially for significant trends to see that directional weight go all the way back down to zero by the time the market is at a top.  So that’s in general how the three work.

The exciting thing about this is that you haven’t done an indicator for the public before and it is available in TradeShark, how will it help traders make decisions?

Traders can use it two ways.  The indicators are designed in a way that they can lend themselves to almost a systematic approach.  You can set them up so they literally   give you buy and sell signals and those are customizable there not like one spot where it’s a buy and sell, you can design it to fit the way you trade and what’s comfortable for you.  So that’s one way.  The other way is by simply defining buy and sell regions in where your bias to trade the market only in that direction.  You can use it in conjunction with whatever your approach is whether its chart analysis or some other indicators and you can combine that with these indicators using these indicators; let’s say the directional weight indicator as a filter to say which direction are you going to take other indicators, when it’s in positive mode then you will use the other indicator to only take buys or you will use the chart analysis to only give you buys, that’s how you can combine them.

Jack there are thousands of indicators out there, some may work better on certain markets than others but I sense yours are good across the board for all markets.

             Philosophically I come from the school that you don’t want to design things specifically for a market because you’ll get stuff that will look great in the past and then just break down in the future.  These indicators are, the thinking and philosophy behind them is very broad, it’s trying to capture things that are true of all types of markets across all times, the tendency of markets to have significant trends, the tendency of trends at some point to get over extended.  Those are the types of inputs, there was no looking back at any particular group of markets be it futures or stocks and fit something that works for that.  It’s basic starting with raw principals and coming up with indicators that really can be used with any type of market be it currency, be it stocks,  be it futures.

Jack, thanks for being here today.

 I enjoyed it, thanks!

We’ve been talking with Jack Schwager about his indicators exclusively available on TradeShark software.

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