Born in Farmingdale, New York, Lipschutz began his business career while attending Cornell University. He holds a Bachelor of Fine Arts and earned his MBA in Finance in 1982. Lipschutz’s education undoubtedly contributed to his success in the forex market.
He became interested in stocks after inheriting $12,000 worth of stock when his grandmother died. Eventually, Lipschutz managed to turn his inheritance into $250,000, after hours of stock market research. He’s had his share of ups and downs in his investing career; he has already lost his entire portfolio balance on a single bad trading decision because he did not use a proper risk management strategy. He could have walked away from trading after this major setback. But it fueled his interest in trading and he decided to learn from his mistakes. In 1995, he created his own company, Hathersage Capital Management.
Lipschutz has featured in books such as The New Market Wizards: Conversations with America’s Top Traders, by Jack D. Schwager, 1992 and The Mind of a Trader: Lessons in Trading Strategy From The World’s Leading Traders, by Alpesh B. Patel, 1998 He was inducted into the Trader Monthly Hall of Fame in October 2006.
Lipschutz says that the main point of attention for investors when trading should be the risk-reward ratio. It still focuses on $3 return for $1 risk. Additionally, according to Lipschutz, it is important to understand the difference between a winning trade and a losing trade, including trade timing, stop loss-take profit set, and trade size.
“If you make a mistake in calculating the trade size and in the gain or loss of a trade, you may have to pay the price with your trading capital. However, it is also essential to understand the overview of the market, which is a crucial part of price action trading,” he said in an interview with Jack D Schwager.
Investors should focus on having a good understanding of the market whether they are trading on the basis of technical analysis or fundamental analysis. Many traders don’t want to focus on fundamentals, he says, but it’s essential to understand at least the essential function of fundamental analysis as it provides the logic and reason for market movements. “There is a need to understand what the market is thinking and how to manage risk with sentiment,” he said.
Many traders enter the market and see it as a money-making machine, which is not a wise thing to do, he says.
Lipschutz revealed many important tips for successful forex trading in his interview with Jack D. Schwager in “The New Market Wizards: Conversations with America’s Top Traders”. Let’s look at some of these tips.
Pay attention to the risk-reward ratio
Investors should pay attention to the risk-reward ratio, he says. They should look for positions where the potential profit is at least three times the amount they are risking on the trade. For short-term trades, Lipschutz looks for a 3-to-1 multiple between upside and downside. For more complicated trades where investors are risking significant capital, he says the ratio should be closer to 5-to-1 at a minimum. “A good rule of thumb for a short-term trade – 48 hours or less – is a ratio of three to one. For longer-term trades, especially when multi-legged options structures are involved and a some capital may need to be used, I’m looking for a profit/loss ratio of at least five to one,” says the co-founder of Hathersage Capital.
Pay attention to details
Lipschutz insists on the importance of structuring each trade to maximize the chances of success. Even if investors have a winning outlook, it’s easy to lose money if they don’t understand the details. “If your timing is slightly off, you could lose. You should structure your trade in a way that increases your probability, your advantage and decreases your disadvantage. Slightly off timing can cause you to lose huge amounts of money. It is so important for perfect trade execution. Do everything you can to increase your chances of winning, while limiting the risk of each trade,” he says.
Understand the market
Lipschutz values feeling. Whether they are pure technical traders or have a different approach, he says, it’s a mistake to ignore market perception. “It doesn’t matter if that perception is based on the Aztec calendar. If traders think something is going to happen based on their charts, then something is going to happen simply because of market momentum. Unless you do not understand this, you will end up compromising your trading positions,” he adds.
The co-founder of Hathersage Capital says the best traders are very smart and willing to do whatever it takes to succeed. Being a genius is not enough to succeed in forex trading. “Truly successful traders see money as just a way to keep score and derive deep satisfaction from trading itself,” he says.
Be fully focused
Lipschutz explains that a truly successful trader must be totally focused and involved in trading. Money shouldn’t be the only reason an investor enters the trading profession. “Most of the best traders have a childhood fascination with the game. Whether it’s the psychological elements of the game, the technical elements of the game, the nameless and faceless aspect of a market, or them as single individuals against the market, or battling your brains against other people’s brains. There’s an almost insane sort of focus you have to have to achieve business excellence,” he says.
The price of phenomenal success is something few investors are willing to pay. For those with insane focus, he adds, there’s virtually no price to pay because they love what they do.
Options are not appropriate as an insurance policy
Lipschutz says using options as an insurance policy is probably not appropriate for the professional trader. It may be appropriate in market areas where there is not much liquidity or where price movements are often discontinuous. “A professional trader who is ‘close to the market’ at any time they hold an open position will be able to cut the position and exit if it goes against them. Only in the rare case of a professional who holds extremely large positions that alter these market price characteristics favor the use of options as insurance,” he says.
Feel the pain of loss
The best traders feel the pain of a loss and they’re never numb because if they are, it’s over for them, says the forex veteran. Lipschutz explains that the moment investors become numb to a loss, they start gambling and the money in their account is thrown into the market in a desperate attempt to recoup what they lost. “When you go through a losing streak, all the doubts come up and you’re very reluctant to pull the trigger. There’s nothing you can do right. Everything you do is wrong. It’s something You just have to learn to control. You really have to learn to control that fear. You have to feel the pain of a bad trade, or a bad trade. If you don’t and you’re numb, then it’s over,” he adds.
Lipschutz is a good example of how determination can pay off when it comes to trading. Even if investors are off to a bad start, that doesn’t mean they can’t be one of the best traders one day.
(Disclaimer: This article is based on Bill Lipschutz’s interview with Jack Schwager in the Market Wizards book series)