MARTIN SCHWARTZ | PIT BULL | Lessons from Wall Streets Champion Trader.
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In this review we look at the book Pit Bull from champion trader Martin Schwartz.
Schwartz, a former marine corps captain, is a Wall street stock trader who made a fortune during his career. He also gained popularity when he won the US investing Championship in 1984, more than ten years prior to the likes of Mark Minervini.
We uncover the key lessons provided from a professional trader who is famously known for turning a $40,000 account into over $20 Million, without realising a drawdown of more than 3% in any given month, super performance to say the least…
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Schwartz refers to Newtons law in which an object in motion will stay in motion.
He says a stock that is going up in direction is likely to continue going up, and each new high is therefore often the best place to enter a long position. Amateurs on the other hand try to call tops and bottoms counter to the ongoing trend, often leading to disappointment.
A clear advocate of trend following, but Schwartz warns of over confidence when benefiting from a seemingly never-ending trend, and says;
“My biggest losses have always followed my largest profits.”
But Schwartz’s views leave us with the question of how do we know when to enter and exit a trend? And how do we know if we are being overconfident whilst increasing the likelihood of a large loss occurring.
The first rule I found is what Schwartz referred to as the Red Light Green Light indicator. He says it is his favourite indicator to determine a trend.
The theory is based on a 10 period EMA, which stands for Exponential Moving Average. The EMA tracks price over a set period and gives more weighting to the most recent price movements, unlike the SMA, or Simple Moving Average which gives an equal weighting to all price points.
Schwartz looks for bullish opportunities to buy or go long a position when price is above the 10 period EMA, or sell, even going short a position when price is below the 10 period EMA, indicating a bearish environment or red light.
Schwartz says; “My moving averages are the key to being on the right side of the trade”.
Schwartz by his own admission is a short-term trader and a trade lasting as much as a week would be considered long term. In fact, he says he is often in and out of a trade in five minutes and never usually in a trade for more than a couple of hours.
The methodology used by Schwartz requires markets with plenty of liquidity accompanied by considerable volatility. The footprints left by this price volatility can leave clues for high probability entries. For example, Schwartz would draw support and resistance lines like the ones shown here, these often also confirm the overall trend of the timeframe in question.
His philosophy is to buy strong stocks showing temporary weakness, much like a rubber band having to snap back, sometimes the price is slack and sometimes it is over stretched.
Buying at a time when price is slack, at a support level, above the 10-day EMA, and in a general upward trend, puts the odds of success in Schwartz’s favour. When all his criteria were met, he would load up with huge amounts of capital, sometimes only looking for a one or two point move.
Schwartz refers to his method as a high probability low risk concept. The low risk aspect comes from using tight stop losses, which if triggered would indicate a break in support and a lower probability of success. In such a situation he would want to be out of the trade at the earliest opportunity, with any loss of capital limited to the stop loss.