Michael Marcus’ Trading Strategy Explained

Michael Marcus turned $30,000 into $80 million over a 20 year period — not too shabby.He was profiled in Schwager’s original classic Market Wizards, giving one of the more impressive interviews in a book filled with many.

What many don’t know is that Michael Marcus was also part of what has to be the most famous mentor/trader lineage in trading history. The names read like a trader hall of fame inductee list.

The lineage began with Amos Hostetter, Founder of Commodities Corp and mentor to Ed Seykota (whom was also profiled in Market Wizards). Seykota then trained Michael Marcus whom in turn mentored Bruce Kovner.

That’s like if Jerry West had trained Kareem abdul-Jabbar and he taught Michael Jordan whom then mentored Stephen Curry.

Needless to say, whatever knowledge they were teaching one another is worth knowing.

The Trading Strategies and Tactics of Michael Marcus

On Having the Proper Mindset

I think that, in the end, losing begets losing. When you start losing, it touches off negative elements in your psychology; it leads to pessimism.

I am very open-minded. I am willing to take in information that is difficult to accept emotionally, but which I still recognize to be true.

Gut feel is very important. I don't know of any great professional trader that doesn't have it being a successful trader also takes courage: the courage to try, the courage to fail, the courage to succeed, and the courage to keep on going when the going gets tough.

I would sometimes think that maybe I ought to stop trading because it was very painful to keep losing. In 'Fiddler on the Roof,' there is a scene where the lead looks up and talks to God. I would look up and say, 'Am I really that stupid?' And I seemed to hear a clear answer saying, 'No, you are not stupid. You just have to keep at it.' So I did.

Trading has two types of capital that must be managed – financial capital and mental capital. In this case, losing a lot or being unsure of your system drains you of your mental capital. You don’t want to do that. Losing either your financial or mental capital will knock you out of business. So protect both equally well.

The Importance of Risk Management

At key intraday chart points, I could take much larger positions than I could afford to hold, and if it didn't work immediately, I would get out quickly. For example, at a critical intraday point, I would take a twenty-contract position, instead of the three to five contracts I could afford to hold, using an extremely close stop. The market either took off and ran, or I was out.

If you become unsure about a position, and you don't know what to do, just get out. You can always come back in. When in doubt, get out and get a good night's sleep. I've done that lots of times and the next day everything was clear.

My trading in those days was a little bit like being a surfer. I was trying to hit the crest of the wave just at the right moment. But if it didn't work, I just got out. I was getting a shot at making several hundred points and hardly risking anything. I later used that surfing technique as a desk trader.

Perhaps the most important rule is to hold on to your winners and cut your losers. Both are equally important. If you don't stay with your winners, you are not going to be able to pay for the losers.

The Philosophy Behind His Trading

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 bad in your own approach.

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.

I think to be in the upper echelon of successful traders requires an innate skill, a gift. It's just like being a great violinist. But to be a competent trader and make money is a skill you can learn. 

In the final analysis, you need to have the courage to hold the position and take the risk. You need to be aware that the world is very sophisticated and always ask yourself: 'How many people are left to act on this particular idea?' You have to consider whether the market has already discounted your idea.

I look for confirmation from the chart, the fundamentals, and the market action. I think you can trade anything in the world that way. 

Comm. Corp. taught me to see the signal, like the signal, follow the signal. If you follow your system /methodology then over time your edge will kick-in and you’ll end up ahead.