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How Do Market Wizards Trade? Jack Schwager Knows

NEW YORK (TheStreet) -- It's not often you get to interview a wizard. But Jack Schwager is an industry expert in futures and hedge funds and the author of a number of widely acclaimed financial books, including the Little Book of Market Wizards.

He is a currently a founding partner of Fundseeder.com, an online platform for connecting seed investors with undiscovered trading talent." Previously, he was a partner in the Fortune Group, a London-based hedge fund advisory firm that specialized in creating customized hedge fund portfolios for institutional clients.

I love "The Little Book of..." series because the books are fun and easy to read, packed with tons of trading wisdom thanks to his interviews with some of the most successful traders of all time.

Here's an edited version of my interview.

Rachel: Even though persistence and fearlessness after failure are key characteristics of traders, you say risk management and knowing when to say "uncle" are just as important. What are the best ways traders can practice risk management?

Jack: Let me give you two simple risk management rules recommended by multiple Market Wizards, each of which can be stated in a short sentence: "Decide where you will get out before you get in" and "Never risk more than some small percentage of your assets (e.g., 1%) on any single trade idea.

Rachel: You talk about one of the most important things a trader/investor can do is find a methodology that fits their personality. What methodology fits your personality and why?

Jack: Excluding trades that have an investment component (e.g., buying an exchange-traded fund or calls in an ETF in a sector or region that seems overdone on the downside), the typical trade I am likely to do can be described as follows: Select an entry point based on chart considerations (for example, entering a GTC buy order in a market at a point near anticipated support), along with a pre-determined stop point.

This approach gets around my natural tendency towards impatience -- a highly undesirable trait for a trader -- as I am making pre-planned trading decisions rather than actively watching the market and being tempted to make impulsive trades. By pre-selecting the exit as well, I take most of the emotionalism out of the trade. This is a good thing as I believe my emotions are a detrimental influence.

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