Imagine that you could have an 18-year winning streak. What would that look like? How would you do it? If you are like Victor Sperandeo, you would focus on avoiding losses rather than making huge gains.
Sperandeo is one of those traders that got their starts playing poker (similar to Blair Hull). Sperandeo knew the odds of each hand and he would fold if he felt the odds were not in his favor and press if he felt they were.
Sperandeo found the way to wealth is “to preserve capital and wait patiently for the right opportunity to make extraordinary gains.” He does this by examining a trade to know what loss he could sustain, being consistent in balancing risk relative to profits, and seeking out superior returns after he has had periods of high profitability.
This week our series of insights from Jack Schwager's Market Wizards focuses on Victor Sperandeo.(Check out our last post “Why Do Successful Traders Have Early Failures?”)
Study the Market, Learn the Odds
Sperandeo understood that trading was a lot like poker. And neither are gambling. Gambling is when you take risks when the odds are against you, whereas trading involves speculating when the odds will be in your favor and taking the trade risk.
Sperandeo came to recognize the odds in the market by studying it. After studying markets for two years, he came to the conclusion that there are market cycles, which traders can use to expect when a bull market will be born … or die.
At the time, his study showed that in a bull market, the median extent for an intermediate swing in the Dow ($YM) is 20 percent. He recognized that if the market was up 20 percent, the odds for further gains start declining greatly. It doesn’t mean that it’s impossible, just that the odds start to change.
Know When to Use the Right Tools
Which stage the market is in also helps Sperandeo decide which technical analysis tools he will deploy to analyze the market.
He believes that if used indiscriminately, technical analysis is less useful. To know whether the the market will go higher, you have to know if it is in a young or old stage. Otherwise, you are applying the wrong tools to the current market.
Vary Your Bet Sizes with the Market Odds
Like many of the Market Wizards we’ve studied, Sperandeo’s money management approach was key to his success. He recommends that traders vary the size of their positions with their estimates on the odds of the trade.
Sperandeo always trades with a predetermined stop. By having an exit point, he can employ emotional discipline and avoid many psychological traps, like easy money, anxiety at a first loss, attempting to win it all back and panicking when even more money is lost.
As with many traders, this was a lesson Sperandeo learned the hard way. He once held a long position in equities when Congress announced a possible change to the tax code. His position started losing money, and he got out just before the bottom.
Find a Losing Streak Routine that Works
Despite making money for 18 consecutive years, Sperandeo had losings streaks. His response to them is unique. He reads.
The books take his mind off the loss and help him feel productive. He gains knowledge, which in turn boosts his self-esteem.
Then, when he’s ready to start trading, he starts small, focusing on making correct trading decisions which, again, serves as a boost to his confidence.
However strange that sounds, it’s worked out for him. 18 years of profits doesn’t lie.
What do you think of these takeaways? Put them in the comments below.