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Trade Like A Market Wizard - An Interview With Mark Andrew Ritchie

Submitted by Erico Matias Tavares via Sinclair & Co., 

Mark Andrew Ritchie grew up in the Deep South, in an Oregon coast logging town and in Afghanistan, where he traded in the bazaar for kites, glass string and homing pigeons. He eventually became a pit trader at the Chicago Board of Trade, a founding partner of CRT (once the largest options trading firm in the world), a participant in Jack Schwager’s bestselling book “The New Market Wizards” (1994) and creator of the Ritchie Rule trading app.


After raising five kids with his dream woman, she engaged him to follow her dream working with orphans in Asia where he became a barefoot banker. He is Chairman of RTM2, a trading group, and lives near Chicago. He has authored many widely acclaimed books, including "God in the Pits" (1989) and "Spirit of the Rainforest" (2000). His latest book on trading, "My Trading Bible", scheduled for release in September, is now available on Amazon.

Erico Tavares: Mark, it is a great pleasure to be speaking with you today. Your life has been an inspiration to many, as a market trader, family man and someone very involved in spirituality and philanthropy. What has inspired you to have such a keen interest in these often conflicting fields?

Mark Andrew Ritchie: I spent part of my childhood, aged 9 to 13, in Afghanistan. It was a unique experience, trading in the bazaar for strings, kites and pigeons with some very poor people. After returning to the US and trying to have a normal youth, tragedy struck and I lost my younger brother in an accident.

It has occurred to me, only recently in fact, that these two factors have been the most important in shaping my personal development. Throughout all these years I have never discussed them with any of my peers and friends. This is understandable as losing someone so close is a very sensitive topic, and the experiences in Asia were just too distant for any of my peers to have any discussion with me about it. But that’s why I am who I am.

ET: Given those circumstances, is that why you decided to become a market trader, or did fate play a role?

MAR: Becoming a trader was a combination of many coincidences, but on the other hand you bounce around a lot many different communities and you end up migrating towards the one that suits your personality type the best. And obviously trading and risk taking, actually not risk taking just for the fun of it but more the managing risk, is what attracted me.

I was actually on a track to resolve my struggle with my own personal Christian faith with which I was raised and while doing that found that buying low and selling high certainly had some rewards that were important and critical to me. As a result, after rubbing shoulders with the poorest of the poor in the streets of Afghanistan buying low and selling high was not just something of interest but had real value.

ET: So you became a pit trader. Was that your first trading job?

MAR: Yes, you can call it that although we were actually arbitrageurs. But generally speaking, a pit trader is someone who makes as small a profit as often as possible. Normally when you think of traders or you read anything by Richard Dennis and any of the speculators, they want to buy soybeans at $7 and sell them at $12. And we pit traders want to buy soybeans at $7 and sell them at $7.0025, and do that as many times as possible.

If you look at a price chart over the last 30 years, you will see that the opportunities to buy soybeans at $7 and sell them at $12 are not that many. In fact you would not have that many chances to buy them at $7 and sell them at $8 either. But you could buy them at $7 and sell them at $7.0025 a thousand times!

And that was our goal. That was our place in the investment world and I am going to guess quite a contrast to anyone else’s. I will give you an example. There was a seminar at the Board of Trade many years ago where they invited a bunch of bankers who were interested to find out more about what we did. And we tried to educate them as to how things worked in the pit. One of the guys said “I don’t care about the market I am trading, whether it’s soybeans, corn, options on a stock… I have no interest in that. All I care about is buying at the bid and selling at the offer. I want to buy it at 12.5 and sell it at 12.75 all day long.” And the bankers were mystified by this.

My brother Joe once described our business as picking up dimes in front of a bulldozer. And that is quite different from what the bankers were doing or from what anyone outside the pit was doing.

ET: So in a sense it’s like a brokerage commission business where you buy at the bid and sell at the ask, but you could also take risk, or speculate, by holding on the position for longer or shorter. Is this correct?

MAR: Actually, to be precise, a commission is the fee that you get when you execute a trade on behalf of somebody else. There are no commissions involved in what we do. We are buying for our own account and it is a speculation. If you buy at 12.5 and sell it at 12.75, you are still a speculator. You are speculating that it is worth more than 12.5 when you buy it. And when you are selling at 12.75, you are speculating that it is worth less when you sell it. But if you are wrong, you may buy it at 12.5 and sell it at 12.25 or even 12. 

So you are still a speculator, just not the size of a major speculator, although anyone outside of the floor is not going to try to buy it at 12.5 and sell it at 12.75.

ET: When you co-founded CRT with your brother later on, did you then become one of those major speculators?

MAR: No, we still traded the small edge. At one time in the bond options market our firm executed between 25% to 50%, if I remember correctly, of all the trades in the pit. And that’s not because we were taking huge positions. In fact we were taking positions that were as small as possible, because the smaller the position, the more times you can trade in and out. And the more times that you can trade in and out, obviously, the less risk that you are going to have.

When you make a trade, the sooner you can get out of it the sooner you can get into another one. So volume was the key. And obviously the higher the volume you traded the lower the profit margin per trade.

And that is a luxury that a person off the floor never had in those early days because the transaction costs of getting in and getting out were so high. You probably are too young to remember this but back when I started I think Merrill Lynch was charging $100 a round turn. If you are paying that amount you can never make money. The quarter tick profit on the grain contract that I’ve been discussing was $12.50, so you would lose $87.5 on every trade – and those were the winning trades!

A professional trader once called me looking for a little help. He was making $5-10 per round turn but he was still losing money. I told him that it was because of his transaction costs. A trader with a poorer winning record would have gone bust many years before him, but this guy could still not make money even though his trading was profitable. His commissions were killing him.

ET: Presumably these days with transaction costs being so low the markets have become fairer and more democratized…

MAR: Transaction costs in the markets have gone down and they should continue to go down in a liquid market, which is the key to a good market.

In fact, if you want to look at the macro effects around the world, I have said from the time I started in this business that open outcry is the greatest thing that ever happened. I am not going into a depression because the pits are going away, but that’s because they are being replaced by more efficient computers.

In fact by now, Erico, you should have been enough times around the world to realize that the first thing you are going to find in third world countries is a lack of free markets. The minute you come off the airplane there’s a poor man on the street who will give you a much better price for your dollars than any local organized bank.

The lack of a free market is a sophisticated form of oppression and theft that keeps the poor poor. I can’t think of a better definition of oppression than that. And in the Western world in general and the US in particular we don’t tolerate that kind of stuff.

ET: Jack Schwager is known for having interviewed some of the best traders in the business. How did he find you?

MAR: Well, it wasn’t because my trading was so outstanding. Actually I told Schwager at that time that he could interview as many people he wanted for his book, but that it would never be as successful as his other book “Complete Guide to the Futures Market”, which I still think is a masterpiece. And he said I was wrong, that the interviews with top traders would be very successful. And he was absolutely correct.

I’m not sure why he approached me. I said at the time that my track record may not match his typical trader profile, but after having a look at it he said I was in good shape. He turned out to be more interested in my philosophical, empirical outlook and other things I was doing outside of the pit, and that is how the whole thing started. He came to CRT’s office and interviewed me and my brother Joe, who I hasten to say is far more responsible for the success of the firm than I was.

ET: You mentioned that CRT was exploiting a market edge and trading a large volume in a particular market. If you are swinging for the fences, like hoping to buy at $7 and sell at $12, presumably you have to pay a lot of attention to fundamentals and stay in the trade for a long time. On the other hand, as you said, your goal is to exploit short-term opportunities for a smaller spread over and over again. Does this mean that your edges are purely technical as opposed to fundamental? In fact, how do you come up with your edge?

MAR: Great question! I have a chapter in my latest book titled “The Crowd is Always Wrong”, a hackneyed line from the floor. We had many sayings but I think this was one of the best. Let’s suppose you just decide that every time the price jumps up by 2% or 3% it’s because there’s a crowd that is creating that distortion and so you sell into that. That’s just a trading idea. An edge is actually the discovery of a market that in some way is out of balance. So you execute a trade based on that.

At CRT we realized that all the trading in options created some sort of out-of-balance situation. So if someone was buying the call you would sell it to them and buy the underlying against it to lay your risk off.

ET: Interesting. And do edges change as markets evolve? Do markets become more efficient over time as more people trade them?

MAR: I am not sure that markets are becoming more efficient. I suppose it is true that the more traders there are, the more it will tend to be efficient. But prices have to move. The academics who talk about the market being efficient and the price being where it ought to be… don’t make any sense to me. Why does the price have to be where it “just happens” to be? It doesn’t have to be there. It has to move, and when it moves it creates opportunities. The job of the trader is to find the edge, and I am not talking about the fundaments. I’m talking about the price movement that must result from daily trading.

For instance, if the grain market is going up generally speaking, all the grains are going to go up. If corn is going up too high and wheat is not following it you can sell corn with some degree of confidence and try to cover yourself by buying some wheat. That’s a little bit “out there” for an example, but our goal was always to be market neutral--take advantage of a buying opportunity in one place by selling it somewhere else.

You are always looking for an edge one way or another. I don’t care how you get it, the key is to get it. You just don’t sell something for no good reason, or buy something for no good reason. You need to have a reason. That reason is your edge.

And if you do it without a stop you are taking far more risk than your reward would ever justify. In other words, you have to assume that you will be wrong some reasonable percentage of the time and having a stop in the market will take care of that.

ET: Can you talk a little bit about risk management? This seems to be so important to you that you have even created an app to help traders manage their trades appropriately… Is that the other important component to your trading in addition to having an edge?

MAR: I will not say that risk management is another component. I know I will be criticized for saying this, but your statement is basically why everyone goes broke. It is not another component… it is THE component of trading! Everyone goes broke because their trading size is wrong.

Sometimes traders are hesitant to pull the trigger on a trade. That’s because their trading size was not right. If it had been right they would have done the trade; if it had been too large and they did the trade, most likely they would be stressing about the position.

If you trade for a while and make 50%, then trade some more and lose 50%, guess what? You have lost money. Even if you had lost 40% you would still have a losing year. This is another way of saying that the size that you are trading is more important than your entry and exit points. That flies in the face of conventional trading wisdom, which states that if your entry and exit points are generally winners, then you are a guaranteed winner. And that is not true!

I do this in seminars. Attendees take a winning system which I give them and they turn it into a losing system just by not trading at the right size!

ET: That’s a fascinating insight Mark. Most trading books focus on when to buy and when to sell. You focus on something else that is critically important, which is having the right size in your trades...

MAR: Yes, again this is just not another factor; it is THE factor that produces the results in our business. This is a winning system and I demonstrate it in my app. I have traded it from a hundred thousand dollars to a couple of billion dollars.

But almost everyone else who trades this winning system loses money! How do they do that? I give them a proven winning system that can make billions, and yet they lose money simply by mishandling the size with which they trade. That’s the factor that will eventually blow everyone out of the water.

ET: And that factor is determined how, your adrenaline levels? If you are getting too much adrenaline from that size probably you should be looking for a casino, not the markets…

MAR: That’s true, but there’s no way you can operate without adrenaline. The goal is to have it reduced and to eventually have none at all, but this takes a lot of experience.

Now that I am in my retirement years I have finally given away the exact formula that I use and that I believe is exactly right for trading. I demonstrate this, if you set the numbers exactly right but they are still too big for what you can stomach, at least you can see how that impacts your success.

In my seminars I give everyone $100 and tell them to trade this winning system with this money, and whomever makes the most money will keep it. The most common investment people make in the first shot is $20. Now, I am guaranteeing from the outset that this is a winning system, there is no trick involved here. And $20 initially is a guaranteed loser! Breakeven is at around $15. So trading size is absolutely critical.

What is even more dangerous is if you invest the right amount, then after making a lot of money you enter into a choppy period with some losses that causes you to abandon this system – remember, it’s a guaranteed winning system. How many traders do you know who stopped trading a system, only to commiserate some time later that if they had continued they would have made a fortune? Every trader out there has a similar story.

Why do traders quit then? Most likely because they were trading too big during those drawdowns and they did not have a way to adjust their trading size to help them survive the drawdown. If you are reducing your size as your losses accumulate, you can continue to pull the trigger. If you are not adjusting your size, you will reach a point of pain that will force you to abandon the system; then almost invariably a year down the road you realize that had you continued trading it you would have made a fortune.

That phenomenon explains why people tend to be in the market when the system is losing and out of the market when the system is winning. That’s why only a fraction of people make money trading.

I was making this point at a recent seminar and Jack Schwager was there and interrupted to point out that even the correct mathematical size is way too large. His point is so important that it was well worth the interruption. I belabor this point because ignoring it will guarantee failure.

ET: You describe all of this in detail in your new book, My Trading Bible. What prompted you to write this book? Your long standing experience as a trader and seeing what works and what doesn’t?

MAR: Yes, but let me back up for a second, to even more basic concepts. When you say “what works and what doesn’t” you refer to buy and sell points. My book is far more basic than that. A winning trader never gives away the entry and exit points. If I tell you what prompted me to enter the market, for example, that a certain market always rallies on Tuesdays, what will you do? You and everybody else will go long every Tuesday at the open and sell your position by the close. There, I just guaranteed that my winning system will cease to exist because now everybody knows about it. My edge will immediately disappear. It has to!

This is why all throughout my career I could have never written a meaningful book that anyone could use to make money, because if I had done that it would have destroyed my edge. I cannot tell you how I am buying and how I am selling. No serious trader would ever do that. Anyone who is doing that is selling a system that he knows he can’t use. That’s what happens in many of these trading seminars.

But now in my retirement years I am giving away this particular formula which is not going to affect my bottom line because it is not sensitive to entry and exit points; it’s trade-size sensitive which is far more important. What I am saying is that you can have winning entry and exit points and you can still lose money if you don’t trade the right size. Almost every novice loses precisely this way.

Let me try to illustrate: A guy called me once saying he had a mechanical system that was a guaranteed winner over the past 20 years, year in year out, and with no discretionary elements – all the entry and exit points were given. He wanted me to fund his system. I said, ok, tell me the following: When are you going to start trading your system? No answer. How much capital do you want to use in the opening trade? He wasn’t sure; he wanted my input on it. How much money are you going to lose before you stop trading this system? No answer again.

So you see, he had this system but no idea on the three most important questions of the industry: When will you start trading? How much are you going to invest? And how much do you need to lose to convince you it’s a losing system? He did not have an answer to any of them.

My book focuses on those most important questions. It shows how to take X number of dollars and execute it into your particular system. Suppose your system has 1000 winners and 2000 losers over the last ten years, with $300 profit on each win and $100 lost on each loss. We are all talking about the law of averages. Then suppose you commit $10,000 to your idea, what size must you trade in order to execute your idea properly. If you do not grasp this concept, I promise that you cannot win over the long term.

That is what separates the winners from the losers.

ET: That’s a phenomenal insight. Who should read this book: novice traders, advanced traders, professional traders…?

MAR: The novice for sure. Anyone who imagines that traders take profit away from the market without adding any benefit. And the professional as well.

It will help a professional trader to fine tune his or her systematic approach. I ran into one successful professional trader recently. I asked him how much he risked on a particular trade and he said 1% or 2%. First you must notice that there is a huge difference between 1% and 2%. Nevertheless, I asked, “1% of what?” That question threw him off a little bit. He said 1% of his portfolio. Then the logical follow up question is, “Will you reduce that percentage after a loss? Or increase it after a win?” Most pros will not. And that is a mistake. This book will show how to avoid that mistake.

To clarify: the mistake we pros make is to continue trading the same size until we win our money back, or if the losses continue, we throw the system away when we can take no more, almost always an arbitrary decision, and surely highly discretionary. In that situation, the system was not allowed to recover the losses by trading smaller.

That’s the key Erico. If you do not allow your system to recover your losses by trading smaller, eventually you will have a problem. You will be required to fund a possible losing system with new capital, or throw it away.

ET: In your book you also talk about handling the losses, even advise on how to lose your shirt without thinking about suicide... Can you talk about that?

MAR: Any fool can take a profit. It takes a lot of character, discipline and commitment to take losses and continue going – and that is the only way one can succeed.

You can even use your favorite sports philosophy to grasp this. We’re Chicago guys here in the Midwest so we all know Michael Jordan was cut from his high school basketball team. If he had seen the handwriting on the wall, which was “you did not make the team buddy, study harder in History class and maybe you can do something else” he would not have become whom he did. Instead he went out on the basketball court and shot baskets until he became one of the greatest basketball players ever.

Now, that’s the difference. If you are going to trade you need to have the discipline to be trading small enough so that suicide does not come on the radar screen during a drawdown. The lasting trader will always reduce trading size in order to continue trading and come back.

I recently spoke to a group of successful investors from Asia. For them it seemed obvious that you should increase trading size to recover your losses. Of course that’s a strategy – even Edward Thorpe wrote about it; every time you lose, double down, and just keep doing it until you get it all back. I was mystified that these sophisticated investors could think like that. And they were mystified too. They said, “You need to recover your money by trading smaller?” And I said, “Yes, if your systems cannot recover from a loss by trading smaller they're not worthy of your trading.”

Of course you can recover your losses quicker by trading larger. And it will work great for a while. But when it stops working - and it will - I can guarantee you there will be trouble. That proverbial “stuff” will hit the fan. I wrote about it in my other books too, and I have seen what this situation can do to a person.

ET: Yes, losses can accumulate much quicker than anyone can imagine…

MAR: Yes. Now, what you want to aim for is that your trading should be boring. Most people can’t understand this; for them, trading is all about excitement. But for me I want to be doing profitable boring trades all day. Good trading should be boring.

ET: Excellent piece of advice! When you brought up the Michael Jordan example and how you need to persist in the face of adversity, we’re sure that resonates with your upbringing and your quest to reconcile your religion with many facets of your life, in particular trading. You write about it in your book. Can you expand on this?

MAR: What are we doing here, I mean, on this planet? Who are you, where did you come from, what is the Truth and all of that. This is a question the whole world is facing right now, with terrorism and so forth. I think we have been put here for a reason and you can be a contributor to the problems in this world or to the solutions.

I struggled with those questions for many years. There’s a great deal of self-sacrifice in Christian life but when all is said and done one needs to be able to look in the mirror and have a peace that his or her existence on this planet is helpful. This is not rocket science and not that difficult either.

This will not appear to be a topic for the trader. But when you get into the middle of the worst drawdown of your life, like what I detail in chapter 5, I promise that these questions will come immediately to the surface.

One reviewer, borrowing a line from Mark Twain, wrote that I had the confidence of a Christian with four aces. When you get in a drawdown, you lose faith and imagine that you have a pair of nothing.

Being raised in a Christian home won’t immunize you from facing these struggles. You can choose whatever guru you like to follow, Mohammed, Buddha, Confucius, Krishna... take your pick.  When your worst drawdown comes, it will help to have a guru to follow. But the questions remains: Will your guru get you through? They all exemplify humility. One of these gurus was so humble he confessed that he wasn’t sure of his own place in heaven. That’s humility. My guru said that he came from heaven and would take me there. The point? When that worst drawdown comes, and it will, are you going to be able to trade with “the confidence of a Christian with four aces.”

ET: Final question: is that the reason why you engage in so many philanthropic efforts around the world?

MAR: I don’t use that word--philanthropic. The great comic Phyllis Diller had a large amount of her jewelry stolen, and she said, “I’m sorry it has taken me all my life to learn that I could have done something more productive with my money.” And she laughed at herself. One person’s “philanthropy” is another person’s “more-productive-with-my-money.”

We all know the parable of the talents; it’s where we got the word “talent.” It’s about this rich guy who gives a fraction of his wealth – his talents – to ten of his servants and then asks what they have done with it.

Anyone who supposes that they will not be asked what they have done with their God-given talent is making a huge mistake. This applies to everyone. Even Atheists have an almost subconscious feeling of responsibility for the talents they have.

I challenged a fellow trader with this concept and he opened a computer center for inner-city kids to use after school and in the summer. He insisted that I travel to his city to see it. I never saw him so happy. Now here’s the punch-line to that story: he was thanking me for making his life meaningful!

I know I’ve been accused of over-spiritualizing the trading experience. But these intensely private, spiritual themes will loom large in the middle of a traumatic drawdown. And this damages the pro trader’s bottom line and completely removes the novice from the business.

 ET: We’ll end it there Mark. Thank you for sharing so many of your trading insights and personal beliefs. All the best to you and yours, keep up the excellent work!

MAR: Thanks, all the best to you too.