Lessons From Legendary Traders: Michael Marcus

Michael Marcus is undoubtedly a legendary trader. Turning his life savings of 30,000$ into 80M$, he has earned his place in the Olympus of trader. He also traded for the legendary Commodities Corporation (later to be purchased by Goldman Sachs). In this article I present excerpts from his interviews in 'Market Wizards' book, by Jake Schwager.

Michael Marcus also serves as a person that many beginners can relate to: His began by losing most of his money and with very mediocre trading skills. With help and guidance from his mentor, Ed Seykota, he began winning and profiting in the commodity markets.

Lesson #1: Each Trader has A Distinct Style
"You also have to follow your own light. Because I have so many friends who are talented traders, I often have to remind myself that if I try to trade their way, or on their ideas, I am going to lose. Every trader has strengths and weaknesses. Some are good holders of winners, but may hold their losers a little too long. Others may cut their winners a little short, but are quick to take their losses. As long as you stick to your own style, you get the good and the bad in your own approach. When you try to incorporate someone else's style, you often wind up with the worst of both styles. I've done that a lot."

This is a very important point: You have to find out your strength and weaknesses and develop a trading style that suits your personality best. If you are good at holding winners - trade trend-following systems. If you are comfortable with several consecutive small losses and several big wins - trade chart patterns. If you are highly disciplined and not too aggressive - you could focus only on high-quality trades which come rarely. Let your personality choose your trading style.

Lesson #2: Always Use Stops
“Always use stops. I mean actually put them in, because that commits you to get out at a certain point"

This one's a no-brainer, but worth mentioning. Many beginners tend to discard stop losses after seeing several trades touching their stop loss and then continuing in their direction. Very wrong approach. Putting stop loss is crucial for your trading success and performance. If you stop loss is placed in logical place (A.K.A: Support or Resistance level), you should have no reason not to respect it - if price touched it, the basis for your position has voided and staying in the position is highly risky. Also, always have an emergency stop in case of sudden news or catastrophe.

Lesson #3: Trade Less
"I think the secret is cutting down the number of trades you make. The best trades are the ones in which you have all three things going for you: fundamentals, technicals, and market tone. First, the fundamentals should suggest that there is an imbalance of supply and demand, which could result in a major move. Second, the chart must show that the market is moving in the direction that the fundamentals suggest. Third, when news comes out, the market should act in a way that reflects the right psychological tone."

Do not overtrade. Take only highest-quality trades that has many confirmations from several timeframes and indicators. Of course, using fundamentals in FOREX and intra-day trading is a bit of an overshoot, but confirming with several dimensions is very useful in maximizing win rate and increasing Risk:Reward. Restricting yourself to high-quality trades requires strong discipline, but it very rewarding.

Lesson #4: Trade Markets You Know
"At that time, we had many wild markets. One of my rules was to get out when the volatility and the momentum became absolutely insane."

Michael Marcus restricted himself to trade in market environments he is comfortable with - markets with less volatility that are more predictable and technical-oriented. This enabled him to decrease his losing trades and maximize his hit rate. Try to trade at markets and market envionments you know best, and disregard 'uncharted territory'.

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Lesson #5: Strict Money Management
"The first thing I would say is always bet less than 5 percent of your money on any one idea. That way you can be wrong more than twenty times; it will take you a long time to lose your money. I would emphasize that the 5 percent applies to one idea. If you take a long position in two different related grain markets, that is still one idea."

This rule enabled Michael Marcus to withstand long periods of losses, but still be an active participant at the markets, eventually to recover and win back his losses. Risking more than 5% per trade opens up a possibility of losing your entire account - so you could not continue trading and recover. Remember, each trade is probabilistic and even excellent trading systems can perform badly in some occasions. The goal of Money Management is to avoid wiping your account in those ruff times.