Mark Weinstein interview with Schwager:
You mentioned earlier that one of the reasons you split with your former trading partner wasthat your own trading style was geared to extremely low risk. Since 1980, what was the worstpercentage drawdown you have experienced?
I lose so infrequently that I don’t really keep track of that type of number.
Well, let’s put it this way: What was your worst single trading month?
I haven’t had any losing months.
You have made money in every single month since 1980?!
Yes. Of course, I could have made a lot more money if I wasn’t so cautious, but that is the way I trade.
Do you remember your worst losing week?
I haven’t had any losing weeks during that time, but I have had some losing days.
That is an incredible statement. How can you be sure that you are not simply forgetting about
a few weeks when you lost money trading?
The reason I am sure is that I remember all my losses. For example, I have had three losing days in the last two years. Out of the thousands of trades I made during that time, I had 17 losers, but nine of them were because my quote machine was down, and when that happens I just get out of my position.
Most traders would be happy winning on 50 percent of their trades, and a win ratio of 75percent would be spectacular, yet you are implying that your win ratio is somewhere in the vicinity of 99 percent—that is really hard to believe.
You can check with Leigh. I told him about hundreds of my trades during the past few years.
[Leigh Stevens is a mutual friend who introduced me to Weinstein.]
OK reader, I know what you are saying: ‘”No losing weeks, but I’ve had some losing days.’ Give me a break.”
Frankly, I admit Weinstein’s statements sound preposterous. I could not verify his claims by examining account statements because his partners are vigorous in maintaining theconfidentiality of the partnership’s trading activity as it is a private trading firm, not open to thepublic. In fact, a number of his partners were adamantly opposed to this interview and were nearly successful in dissuading Weinstein from participating. The only account statement Weinstein was willing, or able, to show me was his independent entry in the option trading contest, which did indeed confirm that he multiplied a $ 100,000 account ninefold in three months with 100 percent winning trades.
Still unsatisfied, I spoke to Leigh, who has known Weinstein for years and has spent many dayswatching him trade. I have known Leigh for three years and can confidently describe him as honest, low-keyed, and levelheaded. Leigh confirmed that of about 100 of Weinstein’s trades he had personally witnessed and several hundred more Weinstein told him about on the phone (right after he put them on), he could remember only one that was a loser. Even if because of faulty memory (I mean this literally, not as a euphemism for dishonesty), Weinstein’s actual percentage winning rate is somewhat lower than he implies, I still believe his win/loss ratio is incredibly high.
How can he do it? Weinstein’s own response to this query follows, but to put it in perspective, Ithought some further elaboration would be helpful. Weinstein employs his own custom-designed state-of-the-art computer systems to monitor constantly technical indicators designed to measure changes in market momentum. Rather than use the standard values for these indicators, Weinstein uses his own values, which he frequently adjusts for changing market conditions. He combines this intensive real-time analysis with comprehensive chart analysis incorporating a variety of methodologies, including cycles, Fibonacci retracements, and Elliott Wave analysis.
Finally, add to this one last essential ingredient: an uncanny sense of market timing. Only when nearly everything lines up right and he feels the timing is virtually perfect does he put on a trade. He passes up many trades that he believes have a high probability of working, but for which he lacks the same degree of near absolute confidence.
Because of this combination of a lifetime devotion to studying the markets, intensive real time analysis, innate market sense, and incredibly rigorous trade selection, virtually all of Weinstein’s trades are at least marginally profitable at some point within 20 minutes of entry. That is all Weinstein needs to assure a breakeven or better result.
It helps to understand that Weinstein usually plays for quick profits and covers his trades within hours or even minutes. Even on position trades, Weinstein will usually take some profits quickly to assure a net profitable outcome. He also trades markets in rotation, quickly shifting his profits from market to market, always seeking the profit potential with the lowest perceived risk. Finally, Weinstein enjoys the support of a floor network that often puts him on the right side of the bid-ask spread.
Weinstein’s comments may sound like boasting on the written page, but that belies their tone. Naivete would be a much closer description. When Weinstein talks about trades his comments are peppered with phrases such as “it’s obvious the market is going lower”, “this market is so easy”. It is clear he has no conception of how of how difficult trading is for the rest of us.
How do you explain your ability to win such a high percentage of the time?
Because I have a real fear of the markets. I have found that the greatest traders are the ones who are most afraid of the markets. My fear of the markets has forced me to hone my timing with great precision. When I am trading properly, it is like a pool player running racks. If my gut feel of market conditions is not right, I don’t trade. My timing is a combination of experience and my nervous system. If my nervous system tells me to get out of the position, it is because the market action triggers something in my knowledge and experience that I have seen before.
I also don’t lose much on my trades, because I wait for the exact right moment. Most people will not wait for the environment to tip itself off. They will walk into the forest when it is still dark, while I wait until it gets light.
Although the cheetah is the fastest animal in the world and can catch any animal on the plains, it will wait until it is absolutely sure it can catch its prey. It may hide in the bush for a week, waiting for just the right moment. It will wait for a baby antelope, and not just any baby antelope, but preferably one that is also sick or lame. Only then, when there is no chance it can lose its prey, does it attack. That, to me, is the epitome of professional trading.
When I trade at home, I often watch the sparrows in my garden. When I feed them bread, they take just a little piece at a time and fly away. They keep on flying back and forth, taking small bits of bread. They may have to make a hundred stabs at a piece of bread to get what a pigeon gets at one time, but that is why a pigeon is a pigeon. You will never be able to shoot a sparrow, it is just too fast. That is the way I day trade. For example, there are times during the day when I am sure that the S&P is going up, but I don’t try to pick the bottom, and I am out before it tops. I just take the mid-range where the momentum is greatest. That, to me, is trading like a sparrow eats.
Am I paraphrasing you correctly? The cheetah is your analogy for position trading and thesparrow is your analogy for day trading. The common denominator is that both animals wait for can’t-lose circumstances.
How do you pick your trades?
I use many different types of technical input: charts, Elliott Wave and Gann analysis, Fibonacci numbers, cycles, sentiment, moving averages, and various oscillators. People think that technical analysis is unreliable because they tend to pick the one thing they are comfortable with. The problem is that no single technical approach works all the time. You have to know when to use each method.
How do you do that?
It is experience and gut feel. I use all forms of technical analysis, but interpret them through gut feel. I do not believe in mathematical systems that always approach markets in the same way. Using myself as the “system,” I constantly change the input to achieve the same output—profit! Is there anything you can single out as the most important element in deciding to put on a trade? I am always looking for a market that is losing momentum, and then go the other way.
Having traded both the stock and commodity markets, would you say they behave differently?
Absolutely. In contrast to the commodity markets, the stock market very rarely gives you the opportunity to enjoy a meaningful trend.
Why is that?
Because when institutions and specialists sell out, they don’t sell out at one price level, they scale out as the market goes up. Similarly, when they buy, they scale in as the market goes down. This leads to choppier price action and is the reason why many good commodity traders that I know lose every time they go into the stock market. But you win consistently in the stock market, as well. What are you doing differently? I don’t try to figure out where the market is going before the action; I let the market tell me where it is going. Also, there is such a variety of technical input in the stock market (divergence, advance/decline, sentiment, put/call ratios, and so on), that you will almost always get a signal before the market is about to do something.
Is your method of technical analysis therefore different in the stock market than in the
I look at the individual stocks; they all have their own personalities. For example, IBM and General Motors will usually rally before a major market bottom and fail to rally before a major market top. As another example, I have never seen a real good rally without the utilities leading the market. The utilities go up when interest rates are expected to come down, and when interest rates come down, portfolio managers jump into stocks. I have done extremely well trading the indexes, because before I ever traded index futures, I had become a very experienced trader of stocks and options.
What do you think is the public’s biggest misconception about the markets?
That people who trade the markets gamble. I know floor traders that have made money for twenty straight years. You can’t call that gambling.
Another major misconception is that people always expect the market to react to news.
For example, when John F. Kennedy was assassinated, the market initially broke very sharply, but then quickly rebounded to new highs. This price action baffled many people. Investors who sold on the news only to watch the market reverse blamed the institutions for pushing the market higher. What they failed to realize is that a market that is fundamentally and technically poised to move higher is not going to reverse direction because of a news item—even a dramatic one.
Another item I would place under the category of misconceptions is the way the media reports the reasons for the market being down. They are always saying that the market is down because of profit taking. I think it would be wonderful if everybody was always taking profits. But, the truth is, most people lose money, and the reason markets go down is because they take their losses. I know educated people who watch the news and wonder why the hell they lost money when everyone else is taking profits. The media owes it to the public to report that the market goes down not only on profit taking, but on a lot of loss taking as well.
What are the trading rules you live by?
1. Always do your homework.
2. Don’t be arrogant. When you get arrogant, you forsake risk control. The best traders are the most humble.
3. Understand your limitations. Everyone has limitations—even the best traders.
4. Be your own person. Think against the herd, as they must lose in time. Don’t trade until an opportunity presents itself. Knowing when to stay out of the markets is as important as knowing when to be in them.
5. Your strategy has to be flexible enough to change when the environment changes. The mistake most people make is they keep the same strategy all the time. They say, “Damn, the market didn’t behave the way I thought it would.” Why should it? Life and the markets just don’t work that way.
6. Don’t get too complacent once you have made profits. The toughest thing in the world is holding on to profits. That is because once you have attained a goal, you then set a second goal that is usually the same as the first one: to make more money. Consequently, for many people, attainment of that second goal is not as rewarding. They may begin to question what they really want from trading and trigger a self-destruct process in which they wind up losing.
Any final advice you have for the beginning trader?
You have to learn how to lose; it is more important than learning how to win. If you think you are always going to be a winner, when you lose, you will develop feelings of hostility and end up blaming the market instead of trying to learn why you lost. Limit losses quickly. To paraphrase from Reminiscences of a Stock Operator, most traders hold on to their losses too long because they hope the loss will not get larger. They take profits too soon,
because they fear the profit will diminish. Instead, traders should fear a larger loss and hope for a larger profit.
Weinstein’s most traumatic trading experience occurred when he let a material goal interfere with his trading. This is a common theme that has surfaced in other interviews. It invariably seems to be a mistake to translate the potential profit or loss of a trade into material terms.
The cornerstone of Weinstein’s trading approach is to wait for those trades in which everything appears to be lined up exactly right, and the odds of winning seem overwhelming. Even thoughmost of us can never expect to remotely approach Weinstein’s confidence in the trades he selects, the concept of waiting for only those trades one feels most confident about is sound advice that is echoed by a number of traders in this book.
Although viewing markets as nonrandom over the long run, I have long believed that very short-term market fluctuations (i.e., intraday price movements) were largely random.
Weinstein has shaken this belief.