Michael Marcus Trading Strategy & Philosophy
Michael Marcus (1947-2023) was the first trader interviewed in Jack Schwager’s famous Market Wizards series.
He’s known for doing what most traders dream of doing – transforming modest capital into significant amounts of money, often yielding returns that would be remarkable by any standard (48% compounded returns over a 20-year period).
Let’s look into the elements of Marcus’s trading philosophy and strategy, looking at how his unique approach shaped his legendary career.
Key Takeaways – Michael Marcus Trading Strategy & Philosophy
- Focus on Long-Term Trends – Marcus emphasized holding profitable trades over time rather than chasing short-term gains. In his case, less day trading and more of a longer-term approach.
- Blending Technical and Fundamental Analysis – Combining chart patterns, technical indicators, and market fundamentals helped Marcus make informed trades – the best of which when they all aligned.
- Manage Risk with Tight Stop-Losses, Especially in Futures – Known for strict stop-losses due to leverage in futures, Marcus highlighted the importance of protecting capital.
- Emotional Resilience is Key – Understanding and controlling emotional responses to losses were important in Marcus’s success, allowing him to persevere and learn from setbacks.
- Rely on a Tested System – Given his tutelage under Ed Seykota (systematic trading pioneer), Marcus believed in developing and sticking to a tested system, which over time, would leverage a trader’s edge for long-term gains.
Early Life and Education
Born in Providence, Rhode Island, Marcus attended Johns Hopkins University and later pursued psychology at Clark University.
During his college years, he developed a keen interest in trading, which quickly overshadowed his academic pursuits.
At Clark University, Marcus was influenced by a friend who promised exponential returns in commodity trading.
This didn’t happen, but it left a lasting impression on Marcus and a fascination with the markets.
The Start
Marcus’ connection to a remarkable lineage of trading mentors is what initially attracted Schwager to featuring him first in his book.
This lineage reads like a “who’s who” of trading legends, starting with Amos Hostetter, the founder of Commodities Corp who started trading in the 1930s.
Hostetter mentored Ed Seykota, a pioneer of computerized trading systems and trend following, who was also famously profiled in Market Wizards.
Seykota, in turn, passed on his wisdom and expertise to Marcus.
Marcus then continued this legacy by mentoring Bruce Kovner, solidifying this chain as arguably the most influential mentor-trader lineage in trading history.
This connection can highlight the importance of mentorship and knowledge transfer in achieving trading success.
Marcus’s trading career officially began in 1972 when he invested his life savings of $7,000 (a large sum of money at the time – essentially a full year’s salary) in plywood futures.
That year, US President Richard Nixon imposed price controls on various commodities. This caused the futures market to market, and Marcus saw his investment swell to $12,000.
Within a year, he turned an initial $24,000 into $64,000.
Ed Seykota’s Influence: Mentorship and Money Management
While working as an analyst, Marcus met Ed Seykota, a visionary in computerized trading systems.
Seykota, fresh from MIT, developed one of the first computerized models for testing and trading technical systems.
Recognizing Marcus’s potential, Seykota suggested he join his firm, and although this move faced initial resistance, Marcus eventually became part of the team.
Seykota taught Marcus critical principles of money management and risk tolerance.
His mentorship helped Marcus refine his trading strategy by understanding the importance of trend-following and disciplined risk-taking.
Marcus credited Seykota as “a genius and a great trader who has been phenomenally successful” and expressed admiration for the depth of Seykota’s trading knowledge.
Developing a Trading Strategy
Marcus’s trading philosophy centers on several core principles that guided his strategies and built his reputation as a successful trader.
1. Holding a Long-Term Perspective
One of Marcus’s key beliefs is to maintain a long-term perspective in trading.
He views trading as a marathon, preferring to hold profitable positions over time rather than chasing short-term gains.
Marcus’s 1970s trades in corn, wheat, and soybean futures show this approach.
2. Using Technical and Fundamental Analysis
Marcus’s trading strategy integrates both technical and fundamental analysis, combining the strength of each to improve his market predictions.
Additionally, his fundamental analysis of the broader economic environment and company-specific details provides insights into potential long-term shifts in value.
His famous statement, “I look for confirmation from the chart, the fundamentals, and the market action,” shows this approach.
Marcus’s methodical reliance on data and patterns has allowed him to consistently make informed decisions and maximized his returns.
3. Managing Market Anxiety and Embracing Emotions
Trading is inherently emotional given the losses and gains of money that are common over short time horizons.
Marcus’s early career was punctuated by a series of impulsive decisions driven by market anxiety.
In his interview with Jack Schwager for Market Wizards, Marcus recounted how he often struggled with controlling his emotions.
“When I was winning, I tried to hide my elation, and when I was losing, I had to make sure not to let it show on my face,” he admitted.
These experiences taught Marcus an important lesson: acknowledging one’s emotions is essential in trading.
Marcus learned to treat anxiety as a feedback tool rather than a distraction, understanding that impulsive decisions usually led to losses.
Instead of fighting emotions, he simply tried to understand them on an intellectual level – i.e., keeping his emotions in check without letting them dictate his actions.
4. Risk Management with Stop Orders
Marcus emphasizes risk management as a cornerstone of his trading strategy.
Setting stop orders, he protects his capital and prevents losses from eroding his gains.
Placing these stops at strategic chart levels allows Marcus to anticipate potential losses and safeguard his capital.
He is diligent about adjusting his stops to lock in profits when market conditions align with his trade expectations.
This calculated approach to risk management enabled Marcus to retain control of his capital while riding market trends.
5. Balancing Independence with Mentorship
Throughout his career, Marcus maintained a balance between self-reliance and mentorship.
He believed in making independent decisions based on personal analysis but also valued insights from experienced mentors like Ed Seykota.
Marcus’s relationship with Seykota was instrumental in his growth, yet he also learned to trust his intuition and experience.
This blend of self-reliance and guidance allowed Marcus to develop a well-rounded trading approach.
Michael Marcus Trading Quotes
Quotes can be helpful when it comes to strategy and philosophy so you hear from the source directly.
Let’s take a look.
On Trading Psychology & 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.”
When you start losing, it can create a cycle of negativity that undermines your mindset and leads to further losses.
“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.”
Being open to uncomfortable truths is essential for adapting and making sound trading decisions.
Confirmation bias can be a real killer among other unhelpful thought patterns we have.
For example, if someone works for a certain company and ends up having a lot of their net worth tied up in their stock, this can create biases – e.g., only seeing good, ignoring anything bad – that aren’t helpful.
Perhaps the easiest way to cut down on emotional attachment is to lower your position sizing.
“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.”
Trading success requires both intuition and resilience to persist through both highs and lows.
Intuition, though, has to be refined.
There has to be a track record validating it.
Novice traders can’t generally trust their intuition or any hunches they have.
“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.”
Continuing to trade despite setbacks requires self-belief and a willingness to persevere through adversity.
“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.”
Both financial resources and mental resilience are important in trading. Losing either can jeopardize long-term success.
An athlete with lots of natural potential can lose their confidence and lead to their downfall if they aren’t brought along properly or have a major injury that makes them lose confidence in their own body.
With trading it can be the same thing. All experienced traders have scars.
On 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.”
Taking calculated, high-leverage trades at critical points with tight stops allows for gains while limiting losses.
The tight stops is also a common practice for those who started in futures trading.
With futures, you can often leverage a position 10x or 20x or more of your collateral given the leverage embedded in the product.
This means losses can be devastating, so traders are incentivized to keep tight stops but still maintain the high upside from such a highly leveraged product.
“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.”
Exiting a trade when uncertain is wise, as it provides clarity and prevents emotional decision-making.
“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.”
Approaching trades like a surfer catching waves means taking advantage of momentum while minimizing downside risk.
“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.”
Letting profitable trades run and quickly exiting losing trades is essential for balancing losses and maximizing gains.
His Trading Philosophy
“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.”
Each trader’s style has its pros and cons, and staying true to it allows for consistent results, even with imperfections.
“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.”
The most reliable trades combine favorable fundamentals, technical indicators, and a supportive market sentiment.
“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.”
While exceptional trading may require a natural talent, competent trading skills can be developed with practice.
“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.”
Taking a position requires courage and an understanding of whether market expectations already reflect your view.
“I look for confirmation from the chart, the fundamentals, and the market action. I think you can trade anything in the world that way.”
Analyzing charts, fundamentals, and price action can help determine profitable trades across various markets.
“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.”
Consistently following a tested system allows traders to find their edge and achieve long-term success.
Find something that works, then iterate over time.
Trading as a Discipline of Patience and Precision
Marcus views trading as an exercise in patience, likening it to the art of waiting for the perfect opportunity.
He examines each trade carefully, entering the market only when things align with his analysis.
This selective approach contrasts with higher-frequency trading, favoring higher-probability trades that offer substantial reward potential.
The timing of an exit is as important as the entry for Marcus.
He set stop-loss orders in advance, preparing himself for any downturns.
When the market aligns with his exit criteria, he acts quickly to protect his profits.
Stop-losses can also trigger automatically when away from the computer.
Taking Calculated Risks for Maximum Rewards
Marcus’s approach to risk-taking is deliberate and calculated.
Unlike many traders who diversify excessively, Marcus concentrates his capital on a limited number of high-probability trades.
He assesses potential trades against three critical factors:
- Fundamental Health – Analyzing the financial strength of a stock or commodity ensures he is investing in fundamentally sound assets.
- Technical Indicators – Using charts and market trends, Marcus predicts likely price movements.
- Market Sentiment – Gauging the overall market tone, he aligns his decisions with broader trends, improving his trade’s probability of success.
As such, Marcus is very old-school in his approach, focusing on more concentrated positions.
Modern trends in systematic trading involve taking lots of small positions (often customizing the exposure a certain way) to improve return-to-risk ratios.
The Legacy of Michael Marcus’s Trading Philosophy
Marcus’s insights into trend-following, risk management, and emotional regulation are important.
Jack Schwager, who interviewed Marcus for his Market Wizards series, considered Marcus’s career a prime example of trading mastery.
Through his mentorship, publications, and legacy, Marcus has inspired traders to approach the market with a balanced, disciplined mindset.
His story serves as a reminder that successful trading is not about luck or randomness (though that can be a factor in the short run), but rather about a thoughtful strategy, patience, and the courage to take calculated risks.