Jack Schwager Talks about Commodity Trading Systems

Futures Magazine

October 1995
Number 11, Page 110

Jack Schwager and Louis Lukac: Stand by your system

By Mark Etzkorn

May be 1994 was the year of discretionary trader, but dont tell Jack Schwager and Louis Lukac, co-principals of Wizard Trading Inc. The pair is unequivocally loyal to a 100% mechanical, technical trading approach.

In the five years since they began managing money together, Schwager and Lukas have never dropped a component system from their overall approach, changed any system parameters or overridden their system - "not to the tune of one contract," Schwager says. "The whole program was designed from the beginning so it would not require any decision or human intervention on any level."

Their confidence is the result of intensive research and evaluation that combined Schwagers 15 years of trading strategy development and Lukacs work in system design and testing he began while still an undergraduate at Purdue University. Schwager concentrates primarily on research and analysis, contributing many of the idea that drive the trading programs. Lukac handles programming and day-to-day trading operations.

Despite their segregated responsibilities, Schwager and Lukac share the same philosophy. They are staunchly anti-optimization and pro-diversification, emphasizing low volatility and a long-term perspective.

"The whole nine yards of Wizard Trading can be summed up in diversification, on three levels: We diversify heavily across markets, we diversify heavily across trading systems and we diversify heavily across inputs to those trading systems," Lukac says.

Active in 62 markets, Wizard utilizes around 40 primary trading "concepts" according to Schwager, with perhaps 10 times that number of individual systems.

About 90% of Wizards funds ($75 million) are traded in the Global Diversified program, which has returned 50.45% since 1993 and is up about 15% for 1995 through August. The Domestic Diversified, Financial and FOREX programs have total returns of 93.36%, 245.18% and 82.64%, respectively, since 1991.

Lukac and Schwager intended their methodology to capture the perennial characteristics of markets, above and beyond short-term or isolated behavioral shifts.

"Theres a universality in the markets that probably goes all the way back to just basic human emotions of fear and greed," Schwager says.

"We like our trading systems to fit inside a concept that we would like to express," says Lukac, who typically tests an idea across at least 25 markets and 10 to15 years of price data.

While the addition of new strategies to the mix may shift the balance of existing systems, the pair does not seek to replace poorly performing systems with "better" ones.

"We dont even look at that," says Schwager. "We start with the philosophical assumption that if something is good enough for us to have included it, that its going to stay there regardless if it goes through a bad period."

Lukac adds, "Well never say ‘Oh man, that one hasnt worked in two years, lets pull it out of there. Because just about the time you do that, it will take off."

A primary goal is to keep volatility, and by implication, risk, constant through time, regardless of market conditions, reflecting Wizards emphasis on controlling risk rather than generating astronomical returns. Every system trader has rough stretches, Lukac notes. "You try to control those bad times for when the good times come."

Their system dynamically adjusts position sizes and strategies based on volatility changes at the contract, sector and portfolio level. Lukac estimates 70% of trading is based on the actual trading model; 30% is triggered by the money management system.

"Every day, essentially, the [overall] system is determining the optimum position size given the input of all the various systems involved, and if that optimum position size is different from yesterdays position, then a trade is indicated," says Schwager.

Interestingly, Schwager vacillated for years with the idea of a completely computerized methodology. While writing the Market Wizards books, he recognized that each trader trades in a manner "consistent with his personality."

"For me that meant 100% computerized, concentrate on the analysis, forget about the trading 100%," he says. "Once I did that, teamed up with Louis and went to that type of approach, things really clicked, and for the first time in my entire career I was at a point where I had real, total confidence in the trading."

Schwager and Lukac designed their system for the long haul. "You can get two, maybe three good performance years in a row," says Lukac. "But to continue it 10 or 15 takes a good trading model. We want to be on of those that are still there."

Copyright (c) 1995, Futures Magazine

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