Free The New Market Wizards: Conversations with America's Top Traders by Jack D. Schwager

German central bank create a lot of uncertainty. Finally, Kohl’s government currently appears to be on a much weaker footing. All of these factors should operate to provide disincentives for capital flowing into Germany.
    At the same time, a combination of low U.S. interest rates, an apparent desire by the Federal Reserve to continue to stimulate the economy, and preliminary signs of favorable economic data suggest that the United States may be coming out of its recession. Therefore, people are starting to think that the United States may not be a bad place in which to invest their money.
     
    Having established a long-term philosophy about which way the currency is going—in this case, the dollar going higher against the D-mark—how would you then recognize if that analysis were wrong?
     
    Events that would change my mind would include evidence that the German government was dealing effectively with some of the problems I listed before and economic statistics suggesting that my assumption of an end to the U.S. recession was premature—essentially, the converse of the situation I described for making me bullish on the dollar.
     
    For argument’s sake, let’s say that the fundamentals ostensibly don’t change but the dollar starts going down. How would you decide that you’re wrong? What would prevent you from taking an open-ended loss?
     
    I believe in this scenario very strongly—but if the price action fails to confirm my expectations, will I be hugely long? No, I’m going to be flat and buying a little bit on the dips. 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 to 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.” I am definitely a scale-in type of trader.
    I do the same thing getting out of positions. I don’t say, “Fine, I’ve made enough money. This is it. I’m out.” Instead, I start to lighten up as I see the fundamentals or price action changing.”
     
    Do you believe your scaling type of approach in entering and exiting positions is an essential element in your overall trading success?
     
    I think it has enabled me to stay with long-term winners much longer than I’ve seen most traders stay with their positions. I don’t have a problem letting my profits run, which many traders do. You have to be able to let your profits run. I don’t think you can consistently be a winning trader if you’re banking on being right more than 50 percent of the time. You have to figure out how to make money being right only 20 to 30 percent of the time.
     
    Let me ask you the converse of the question I asked you before: Let’s say that the dollar started to go up—that is, in favor of the direction of your trade—but the fundamentals that provided your original premise for the trade had changed. Do you still hold the position because the market is moving in your favor, or do you get out because your fundamental analysis has changed?
     
    I would definitely get out. If my perception that the fundamentals have changed is not the market’s perception, then there’s something going on that I don’t understand. You don’t want to hold a position when you don’t understand what’s going on. That doesn’t make any sense.
     
    I’ve always been puzzled by the multitude of banks in the United States and worldwide that have large rooms filled with traders. How can all these trading operations make money? Trading is just not that easy. I’ve been involved in the markets for nearly twenty years and know that the vast majority of traders lose money. How are the banks able to find all these young trainees who make money as traders?
     
    Actually, some of the large banks have as many as seventy trading rooms worldwide. First of all, not all banks are profitable in their trading every year.
     
    Still, I