Like many of us, Bill Lipschutz got his start trading on a small account - just $12,000. Lipschutz had an innate ability and was successful trading from the start, taking four years to build that account to $250,000, compounded growth of 115% annually.
Then, Lipschutz lost it all. Lipschutz was short equities at the time and had been pyramiding into a substantial position according to New Market Wizards. Then came the Granville Reversal. Joe Granville was a perma-bear and newsletter writer, who put out a call for a stock market crash in 1982. Then in a single session, the Dow went from down 30 points to up 20 points. And just like that the bottom was in and the bear market ended.
In three days, Lipschutz was wiped out.
This week, in our series of insights from Jack Schwager's Market Wizards, we look at Bill Lipschutz, who lost a substantial sum early in his trading, but was able to rebound. (Read our last piece aboutMichael Platt, a hedge fund manager overseeing more than $29 billion in assets.)
We're looking to back talented futures traders with $30,000 to $150,000 in buying power.
But Lipschutz remembered being even-headed about the loss. He reported to Jack Schwager that he "just saw it as one major mistake. I've always had a lot of confidence as a trader."
But that doesn't mean that Lipschutz just wrote off the $250,000 loss and didn't make any changes to his trading. As all the great traders do, Lipschutz became more focused on risk management
Here's what he learned from his loss:
- Understand the risk / reward of the trade as it now stands. Lipschutz, who favors pyramiding and scaling into positions over taking the whole position outright, said that he learned that you have to understand the risk and reward as it stands now, "not as it existed when you put the position on."
- Unrealized P&L is a myth. Lipschutz also takes issue with the fact that some people will say that they are playing with the market's money when they have profits. "That's the most ridiculous thing I ever heard," he said in New Market Wizards. At all times, traders should be thinking about the markets as it relates to where prices are now.
- Cutting size can help build confidence. If you are in a losing streak, Lipschutz says that you should cut size and focus on building back your confidence. He says that a losing streak distorts the way that a trader assimillates and analyzes information - so cutting size is one way to give your trading account life while you sort everything else out.
- Don't count on perfect timing. One of Lipschutz's most useful pieces of advice comes from his view on market timing. He is a big proponent of scaling into a position. Though he is trading much larger size than we do at TopstepTrader, the advice is still worthwhile. Don't count on timing the market perefectly in order to make money trading.
"You have to trade at a size such that if you're not exactly right in your timing, you won't be blown out of your position. My approach is to build a larger size as the market is going my way. I don't put on a trade by saying, 'My God, this is the level; the market is taking off right from here.'"
What do you think of Lipschutz's learnings? Have any questions or recommendations? Put them in the comments below.