Larry Hite, master of automated trading

I am going to talk about Larry Hite´s interview in the book The New Market Wizards.

This is another amazing interview that should be read by anyone interested in stocks and the financial markets.

Larry Hite interview

Hite was an outsider in the world of finance. Before he took it as his profession, he would work in very different jobs, like a rock band´s manager.

Hite was very fond of trading systems. He did not like to have human emotions involved with his trading decisions so he followed an automated trading approach. He would say that he did not trade the markets but money.

Larry Hite quotes

He said things like this:

I found that the origin of the term could be traced to the color of the most expensive chip in Monte Carlo.

That is when he talked about the concept of Blue Chips (the main stocks in the markets). It was because when he worked in a company a manager would tell him that he could only recommend Blue Chips.

How many Blue Chips from 1929 are still there?

Larry Hite trading system

He argued that if I could develop a winning system on a computer, so could others, and we would all cancel each other out.

That is one of the reasons I actually have for not using systems developed by people since I think that those systems may work well for a while till many people realize and “copy” them.

However, there could be valid systems for the long term, but those should be trend following ones, like that one of Hite. The majority of systems sold to the public in the retail markets are not good

Because people develop systems and people will make mistakes. Some will alter their system or jump from system as each one has a losing period. Others will be unable to resist second-guessing the trading signals.

Developing a winning trading system is not that difficult. What is difficult is to be psychologically stable enough to stand our ground when the hard moments come; or not being driven by emotions.

We do the same thing; we let the law of large numbers work for us. In a sense, we are trading actuaries.

It is one of the best quotes in the book.

His system is similar to a guy who is running an insurance business, but on the opposite side (the main side being that of market makers).

He knows that he will have many losing trades (accidents), but by following his trend following system, he will be able to win in the long run. Because as well as social masses, markets follow a trend.


When I get together with other traders and they start exchanging war stories about different trades, I have nothing to say. To me, all our trades are the same.

He did not trade arbitrarily. He would trade the trend in a similar manner every time and for every asset. There is no need to be guessing the market, but follow it.

The very first rule we live by Mint is: Never risk more than 1 percent of total equity on any trade.

When a man like this, with more than 30 years at top level of the trading industry says it, we do not need many words.

The third thing we do to reduce risk is diversify. We diversify in two ways. First, we probably trade more markets worldwide than any other money manager. Second, we do not just use a single best system. To provide balance, we use lots of different systems ranging from short term to long term.

Some people bet for one market or security and specialize in it. It depends on everyone´s personality and situation.

Larry Hite fund

For instance, being a big manager with lots of funds under supervision, Hite had to look for many different markets.

When you manage billions, you cannot just trade the ES future, you have to diversify your investments.

Some managers will like to keep as fewer markets as possible, and some like Hite will like to trade as many as possible.

When the volatility of a market becomes so great that it adversely skews the expected return/risk ratio, we will stop trading that market.

Larry Hite risk management

He thought the same was as Seykota. He did not like to trade the most dramatic moments of a bull market or a bear one, when volatility is so big that affect your trading and your nerves.

There will always be a chance to find another market to trade easily.

He remembered how he traded coffee in 1986. When the market was rising like hell; he sold his position and then the market kept rising before collapsing in a matter of weeks in the middle of exaggerated volatility.

He does not want to catch the final stage of a crazy bull (or bear) market.

Other traders consider that those moments are ideal to trade because they offer a good chance for a nice move in a short time.

We have to be careful here. When we see 5 and 10% daily moves, the market is very dangerous.

He is still one of my best friends, and his loss of that huge house had an enormous emotional impact on me.

Larry Hite trader

He talked about one of his friends who had made a fortune by arbitraging options (market maker). After that, his friend would not cut his losses when the price of gold was going against his contracts. He ended up bankrupt.

You even need to use stops when you are market making or selling options.

He even reminds us of a cousin of him who had built 100.000 $ from 5.000 selling options and who apparently traded without stop loss, hoping for any losing trade to reverse.

Hite told his cousin that that strategy would not work for the long run, and it effectively was so.

His cousin ended up losing all.

You have to picture that Jack was six foot-four. He said, “Larry, if you want to know where a market is going, all you have to do is this.” He threw his charts on the floor and jumped on his desk. He said, “Look at it, it will tell you!”

Jack was one of his mentors and explained him the importance of the long-term picture. That is where the main trend is. And you do not do that using 15 minutes charts.

I have two basic rules about winning in trading as well as in life: 1) If you do not bet, you cannot win. 2) If you lose all your chips, you cannot bet.

Novice traders should write this down and put it on their trading desk. When you start it is best that you bet moderately, because when you get a bad streak (and you will) you will lose not as much as if you bet hard.

Once you are experienced enough then you increase your trading bet size.