Monroe Trout – One Of The First Market Wizards – Trading Strategies

Monroe Trout is an American investor and hedge fund manager. He was interviewed in the New Market Wizards by Jack Schwager. This article looks briefly at Monroe Trout’s early life and his life as a trader. We end the article by listing a few trading quotes from his interview in New Market Wizards.

The 50 best trading quotes

Table of contents:

Monroe Trout’s trading career:

Mr. Trout is the son of Monroe E. Trout, a former Emeritus of American Healthcare Systems. He was born on January 22, 1962, and in 1978, at the age of 17, he got a summer job as a futures trader.

He graduated with a B.A. in Economics from Harvard College in 1984. His senior honours thesis was on stock index futures. Monroe was the Harvard basketball team captain that led the team to a third-place finish in the Ivy League of ’84.

He started his career when he went to NYC to work for Victor Niederhoffer’s NCZ Commodities at the New York commodity trading pit. He became famous on the trading floor after he recorded 69 profitable months out of 79 months. He also worked as a floor trader on two more exchanges before starting his own firm — Trout Trading in 1986. Monroe had traded stocks, commodities futures, stock index futures, and options for himself.

He doesn’t use many actual stops for his trade. However, he uses mental stops. He set beepers so that a warning will go off whenever a trade is going against his position, alerting him to begin liquidating the position. This is what he had to say concerning stops:

Naturally, Monroe has a good eye for spotting where other traders or the general public will put their stops. He usually got into the market a little early before the price reached that point.

He believes the market almost always gets to the round number. So, the ideal place to enter is before those numbers are reached and play what he called the “magnet effect.”

To illustrate this better, he might buy the stock index markets when the Dow is trading around 2,950, waiting for it to go to 3,000. Then when the market gets close to 3,000, things get more complicated. When that happens, he’d tell everyone on the trading floor to get their phone and call different brokers and listen to the noise level on the floor. If it doesn’t sound loud enough, it means the order sizes are small, and then he’d start exiting his positions because the market is probably going to fall. On the other hand, if it sounds crazy and many transactions are being made, he holds on to the position.

For over five years of trading, his average return was 67% per annum. And the most significant drawdown was just over 8%. To demonstrate his consistency, Monroe had been profitable in 87% of all months.

He retired from active trading at the age of 40 with an estimated net worth of over $900 million.

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Monroe Trout trading strategy quotes:

We took the following notes from the interview of Monroue Trout in New Market Wizards:

I sincerely believe that the person who has the best daily Sharpe Ratio at the end of the year is the best trader.

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We do good research, so we have an edge.

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I can retire today and live very comfortably off the interest for the rest of my life. The fact is that I like to trade.

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Traders should avoid putting stops in the obvious places. For example, rather than placing a stop 1 tick Above yesterday’s high, put it either 10 ticks below the high so you’re out before all that action happens, or 10 ticks above the high because maybe the stops won’t bring the market up that far. If you’re going to use Stops, it’s probably best not to put them at the typical spots. Nothing is going to be 100 percent foolproof, but that’s a generally wise concept.

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The markets also appear to have become more efficient. Some of the patterns I used to trade off are starting to get eliminated as other people start picking upon them.

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We like to see that something has worked in the past before we use real money on it.

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We try to diversify everything we possibly can. We like to diversify over both trading strategies and time.

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I believe that to be a good trader it’s very important to be rational and have your emotions under control.

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I don’t sleep well at any time. Unfortunately, that’s one of the prices you have to pay for being a trader. I wish I didn’t have to, but that’s the way it is…I probably sleep worse when Iæm doing well, because I get too excited.

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In general, it’s probably best to be somewhere between a pure discretionary trader and a pure system trader.

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We have never used any of these systems as is, we use them to give us ideas in constructing our own systems (on buying systems).

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The markets are clearly not a random walk.

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A successful trader is rational, analytical, able to control emotions, practical, and profit-oriented.

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Learn a lot of statistics. Learn how to use a computer. Find some systems that work. Develop some simple risk management rules.

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They believe they can make tons of money with little work (on traders dreaming of getting rich).

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Above all, make sure you have an edge.

Monroe Trout – One Of The First Market Wizards

Monroe Trout’s trading career:

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