The Art of the Trade: What I Learned and Lost Trading the Chicago Futures Markets

The Art of the Trade What I Learned (and Lost) Trading the Chicago Futures Markets

Jason Alan Jankovsky

John Wiley & Sons, Inc.

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The Art of the Trade

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The Art of the Trade What I Learned (and Lost) Trading the Chicago Futures Markets

Jason Alan Jankovsky

John Wiley & Sons, Inc.

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Copyright © 2008 by Jason Alan Jankovsky. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate percopy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750–8400, fax (978) 750–4470, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748–6011, fax (201) 748–6008, or online at http://www.wiley. com/go/permissions. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation.You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762–2974, outside the United States at (317) 572–3993, or fax (317) 572–4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com. Library of Congress Cataloging-in-Publication Data: Jankovsky, Jason Alan, 1961The art of the trade: what I learned (and lost) trading the Chicago futures markets / Jason Alan Jankovsky. p. cm. Rev. ed. of: Dancing with lions / by Trader X. c1999. Includes bibliographical references and index. ISBN 978–0–470–13899–1 (cloth) 1. Jankovsky, Jason Alan, 1961- 2. Commodity exchanges—Illinois—Chicago— Biography. 3. Capitalists and financiers—Illinois—Chicago—Biography. 4. Businesspeople— Conduct of life. I. Trader X, 1961- Dancing with lions. II. Title. HG172.J36A3 2008 332.64'4092—dc22 2008014643 Printed in the United States of America 10

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We do not see things as they are; we see things as we are. —Anaïs Nin

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Contents

Read Me First Foreword Introduction Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7 Chapter 8 Appendix A Appendix B

ix xiii xix The Early Years The Day I Bought the Low Technical Analysis Adversity The Meaning of Life The Trading Police The Last Word In Conclusion For Traders Only Insight into the Person of “Trader X”

More from the Author Postscript Notes Index

1 13 29 51 65 79 103 109 115 133 155 159 167 175

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Read Me First

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his is my second book for John Wiley & Sons. It was originally published under the title Dancing with Lions by Trader X. Although it was received well by readers, it was not considered a mainstream book by the trading community. It was only after my first book for Wiley, Trading Rules That Work: The 28 Essential Lessons Every Trader Must Master, had established itself as a good seller that my editor Kevin Commins approached me with the idea of writing another book. I told him I already had written another book years ago, which had been published with a different publisher. The book had initially sold well, but it was now out of print. I told him that I thought this book could reach a new and wider audience with a new publisher. Kevin read it and felt it had good insights. However, it was, in his words, “a little rough.” He suggested that I update it and let him see what Wiley thought. The result is The Art of the Trade. As my career has grown and changed, I have had to let go of many of the original points of view that I held as a young trader. Dancing with Lions was published at a time in my trading career when both the industry and I were going through changes that eventually would alter things significantly. In the case of the markets, technology has given

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birth to fully online market access, global market opportunity, and a host of innovative new trading products; something that had never happened before. During this time we also saw the tragedy of 9/11 and the inevitable financial repercussions that a seminal world event like that can create. The markets went on to recover more quickly than I could. In my case, I was knocked-flat for years. My trading suffered dramatically during the months after 9/11. It would be unfair to the reader to suggest that all markets can be traded by all traders at all points in time. My emotional and mental state was devastated by 9/11; I was not capable of a strong market presence. The demons I thought I had exorcised to achieve the level of success that I once had had come back in greater force and numbers. I lost everything and eventually quit the business for a period of time. My thinking was so convoluted that I honestly felt that I would never achieve my goals as a trader or even as a person. I went through the hell I describe in the first chapter for a second time. I laugh about it now, but when someone asks me now about the experience I usually reply, “I went from being Trader X to being Waiter X. . . .” Yes, I actually waited tables for a few months. I was serving drinks to people I could have bought and sold a few months earlier. It was humiliating. I think it is important for readers to know that now more than ever, I sincerely believe that trading is more an art form than a science. As an artist, there will be times when we are at our best, times when maybe we are just getting by, and times we are under extreme adversity. As I mention throughout this book, a lot of what we perceive to be our unique adversity is sometimes self-created. If we are self-aware enough, we can see this relationship. If we are committed to our success enough, we can learn to stop creating adversity for ourselves as well as resolve the adversities that we have created. Indeed, some of the best art ever created has come from an artist who has struggled through extreme personal tragedy and pain, only to find his or her divine spark of excellence that now expresses itself on the canvas, in stone, or on the manuscript page. In my opinion, trading is no different and could be considered an equal expression for this spark of excellence. Some people are familiar with Vincent Van Gogh’s issues; try learning about the life of Galileo or Jackson Pollack if you want to see how far adversity can take you. Those men amaze me with their tenacity and skill. They would have made great traders.

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In my case, I experienced a deeper and more purifying kind of adversity, and part of what made those years good for me (in the end) was the final acceptance that no matter the circumstances that I find myself in, it is always my response to them that either moves me forward or moves me back. Sometimes people get beat down so hard that they just lie there and quit. I came very close to that point for the second time in my life. I remember the day and the hour. I remember the climb back in the darkness. Before you pass judgment, you might be there too one day. . . . I couldn’t control the events that happened to me any more than you could. Some group of fanatics (without using a harsher word) chose to do something horrifying and affect millions of people negatively; and we all suffered to some degree. The fact that in my case it meant the potential to lose large sums of money, lose opportunity, and almost lose my sanity (again) had nothing to do with the actual events that transpired. That remained my choice in the end; even if I didn’t see that at first or was unwilling to accept it at first. Making the conscious choice to pick up and start over was entirely mine and even though I discuss this in the book, I know that truth at a deeper and much more complete level than ever before. The trader I am today is a different trader than I was then. To the outside observer that relationship may not be fully apparent, but inside me I know the difference. I think that in my years since the catastrophe I am better equipped. I have not recovered to the level I was prior to 9/11 and I don’t even need to. No matter what happens for me going forward, 100 percent of it will be mine and all of it is exactly what it should be. Regardless, what you read from here forward was written at a different time in my life. Some of the material has been edited and amended to reflect the changes. Wherever I think it is important, I note that for you. While you are reading, I hope that you take time to reflect back on your own previous trading past and ask yourself some hard questions. Perhaps, in addition to the insights I share or the unique point of view I hold, you will personally be able to use the past years of your trading career in a new way. Much of what I found in the markets has not changed in spite of my personal experience during the last several years; mostly what has changed is my level of self-awareness and self-acceptance. No matter what happens in the markets, my trading account balance is my responsibility and no one else’s. Sometimes

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that means I am positioned on the wrong side of a world event; sometimes that means I did something stupid to myself. But in all cases, the responsibility lies with me and it can never be lip service. I must own that level of responsibility. Lastly, before we get started, in fairness to the reader, most of what you see here is as close to the original text as my new publisher would allow. Much of my more colorful language has been edited to a “PG” level, but most of the content is as I wrote it for the first edition. My intention was to preserve the original purpose of the book without a lot of change. I say that because, if you are one of the traders who sincerely want to get as far as you can go, some things won’t change while others things get better/worse. The trading environment evolves just like you do. For example, in today’s electronic marketplace, the risk of your account balance being affected due to a brokerage house internal issue (as described in Chapter 4) is a lot smaller. On the other hand, the regulators are another issue (as described in Chapter 6). In my opinion, I think that they have gotten worse during the last few years. I think the U.S. markets will lose market share and skilled people as the regulators overregulate, increase costs, and waste time and resources. Anyway, rather than take up space with a whole new book, let me let you get to reading The Art of the Trade. I hope you find value in my experience and wish you the best in your trading. Jason Alan Jankovsky Formerly “Trader X” Chicago, Illinois Spring 2008

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Foreword to the First Edition

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t is the author’s intention to write this book only as a journal of his personal experience through being in the business of futures and options trading and how he discovered the true nature of reality as he sees it. Therefore, he could exploit the apparent function of the markets by discovering their real function, as well as how to exploit everything else. He did not intend to write a how-to book. He has made this narrative as brief as possible and that holds at least two real benefits for readers. First, because the author believes he has nothing new to add to the business of trading per se, the reader will not have his (or her) valuable time wasted looking for something that really does not exist. Second, the author will force the reader to wonder what he is really getting at by a consistent reference to the fact that the author knows what some overriding principle or reality related to the markets is and the reader does not. The reader will then form only one of two conclusions: Either (1) the author is nuts and this book was a waste of time, or (2) the author is on to something. The reader will then really start the process of getting what the markets actually represent for him.

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Trader X1 receives two benefits from this hypothesis as well. First, if the reader believes this book was a total waste of time, Trader X knows that particular reader will probably remain enough of a losing trader to provide a constant flow of money that becomes available to him and those that fall into the second group, although he knows that will continue anyway. Second, Trader X can draw new distinctions about the nature of reality from those traders who read this, and believe he is on to something, should he meet them personally without them knowing it was he who wrote this book. He believes their thinking would be influenced somehow by meeting a “famous trader” and, therefore, they would never really share the true nature of what they see, but something else of little value. Because a very large group of traders who could be potential readers live and work side-by-side with him, Trader X believes he would lose these benefits. He would become a direct target of criticism or congratulation that would influence his trading because they could “find” him and, therefore, influence his clients to whom he feels a high degree of personal responsibility. The author believes this could only lead to losses. Trader X believes this would be the case if only one copy was sold and he only met one individual. Since he cannot predict what would happen “positively” or “negatively” in either case, he decided not to take that risk, or reduce it as much as possible, especially if the book sold well within the industry. This is why the book is anonymous.2 The author assumes the reader will already have a basic knowledge about the trading business. For those who know little about the markets, or are not in this industry, outlined next are some of the basics he refers to.

The Arena The futures and options exchanges are a central meeting place for the purpose of trading in some necessary element that affects everyone. This includes consumable commodities such as corn, crude oil, orange juice, and the like. It also includes financial instruments such as Treasury bonds, currencies, stock indexes, and so on. Exchanges do not set prices; they provide a place for price competition from all participants who choose

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to trade. Those who do not trade receive a benefit intangibly by keeping prices as fair to them in their daily life as possible. Membership to the exchange is not a requirement to trade through the exchange. This provides a way for anyone to exploit price competition for their personal benefit or to earn profit from some perceived opportunity. There are two kinds of market participants who are in direct competition with each other. It is this competition that will create prices or cause them to move. One participant is the speculator and the other is the hedger. The speculator is attempting to take advantage of price movement solely for personal profit. He (or she) is taking the risk of price action, either for or against him. The hedger is attempting to take advantage of price movement for the purpose of reducing his production costs or to improve his profit margin when he markets his final product. He is transferring his risk to the speculator and assumes little or no risk of price action against him. Should prices move in a direction that further reduces his beginning cost of business (or further improves his profit margin), he cannot take advantage of that from the point he transferred his risk to the speculator. The hedgers benefit from the markets is a “known” permanent cost of business. The speculators benefit from the markets is an attempt to profit. A futures contract is a standardized agreement between two parties to either make or take delivery of a specified amount of a particular something at a specified future point in time. This agreement can be created or liquidated at any time prior to that date. As long as any market is “open” for trading this agreement can be created or liquidated for any length of time either side wishes to participate. This time frame can be months or years and also as short as just a minute or two. Any individual, whether a speculator or a hedger, is obligated for the total value of that futures contract for the time he holds it. On a specified date he must either pay for it completely if he is a buyer in the market, or actually produce the product traded to the buyer if he has been a seller in the market. That is called taking or making delivery. Until that point the exchange requires a financial commitment bond to secure this relationship and to protect both parties against default from this contractual agreement. This is called margin. The exchange typically requires that each party wishing to enter into this agreement from either side deposit 2 percent to 5 percent of the face value of the contract. In some cases, the hedger does not have to make this commitment. He only needs to

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prove to the exchange that he actually owns or controls the product to be traded in sufficient quantity. In either case, this can be in cash or something that is considered liquid enough to be converted into cash within a reasonable time frame. Once this has been done, you may trade. When you choose to participate as either party to the transaction, you are opening or taking a position. Because of the relationship between entering the agreement, and not having to fully accept financial obligation until a future date, a futures contract is considered a leveraged instrument for the period of time leading up to the delivery date. Typically, about 98 percent of all futures contracts are liquidated before that time. This is called closing a position. The time between opening a position and closing the position is called holding a position. If you open a position in a futures contract by buying the price currently being traded, you are going long. If you open a position in a futures contract by selling the price currently being traded you are going short. When you do either, it is called an execution. To close any futures position, you must make another execution. If you are holding a long, and you wish to close your position, you must execute by selling into the market at the price currently being traded at that time. If you are holding a short, you must execute by buying the price currently being traded at that time. You will be assigned the difference between the two prices executed against the margin in your account as it relates to the full value of the position. In other words, if you buy one futures contract of corn for $2.75 per bushel and sell it for $2.77 per bushel you would have a profit of 2 cents per bushel. The corn contract size at the Chicago Board of Trade (CBOT) is 5,000 bushels. Therefore, you would have a profit equal to $100 (2 cents ⫻ 5,000 ⫽ $100). If the opposite has occurred you would have lost $100. The amount of cash in your margin account would have gone up (or down) by $100 if you would have bought and sold corn for a gain (or loss) of 2 cents a bushel, aside from any fees. If you complete a transaction as described, you will have either a profit or a loss against your margin at that point until you decide to execute another transaction or close your relationship with the exchange and ask for payment to be made to you. If you went long by beginning this process on the buy side, and you closed your position with a sell execution higher than your buy execution, you would have a profit. If the opposite occurred, you would have a loss. If you

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went short by beginning this process on the sell side, and you closed your position with a buy execution lower than your sell execution, you would have a profit. If the opposite occurred, you would have a loss. Because you may begin this process in either fashion, you can attempt to profit as prices are rising or falling. The hedger is not obligated to both sides of this process unless he chooses to. He may close his position by making or taking delivery, depending on which side of the market he is hedging from. Hedgers use both sides of the market depending on their business needs. For example, if you make candy bars you might want to buy sugar ahead of time if sugar is at an important low price relative to your cost of production. If you grow cocoa and sell it to candy bar makers, you might want to sell cocoa in the market ahead of time if cocoa is at a higher price than you normally could get from a candy bar maker. In either case, the buying or selling hedger is not obligated to liquidate his transaction. He may make or take delivery. The entire process must occur under the authority of the exchange. This is the clearing corporation, which must ensure that both parties to the transactions have been assigned their positions and that sufficient margins for every transaction are available and on deposit with the exchange. This is done to make absolutely certain that those who have traded for profits receive them and that those who have traded for losses will pay them. An option on futures is slightly different. It is the right but not the obligation to enter the futures contract until a specified date. If you choose to exercise this right you are now in the futures contract itself and subject to the obligations as described above. There are two parties to an options transaction as well; the grantor, or writer, and the owner, or buyer. The grantor is obligating himself to take the other side of a futures contract, which he will provide to the owner at a specified price called the strike price. He is under this obligation until the specified date called the expiration date. The owner of the option may exercise his option, or sell it to someone else, at any time prior to the expiration date. The grantor may also close his position at any time prior to the expiration date by buying it back from anyone who owns the option, or another grantor, prior to the expiration date. This is called offsetting. The grantor does not have to own any futures contracts at any price when he writes an option, but will be assigned his obligation if

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the option is ever exercised against him. This is called uncovered option writing. If the grantor enters a futures contract at the time he writes an option, or at any time prior to it being exercised, this is called covered option writing. The price paid for any option is called a premium. The grantor keeps the premium paid by the owner if the option is exercised, or a portion of the premium if he offsets it prior to expiration. There are two kinds of options. A call is the right to buy futures at the strike price specified. A put is the right to sell futures at the strike price specified. If you write a call, you are giving someone else the right to go long. If you write a put, you are giving someone else the right to go short. Approximately 98 percent of all options written are offset or expire with no value that can be exploited from further price action in futures. If they do have some value, this is called an in-the-money option. An option can go “in” or “out” of the money any time prior to expiration. If the owner of an option does not liquidate or exercise an in-themoney option at the time of expiration the exchange will do it for him. Conversely, an option that has not gone in the money is called out of the money. At the time of expiration, all out-of-the-money options, whether calls or puts, are worthless. The grantor will keep 100 percent of the premium, or the portion that he had before that date. The owner of the option receives nothing. Whether you are participating in futures, options, or both, the relationship both parties function under is a zero-sum transaction. This means that all the participants who hope to profit will be paid those profits from the other participants who have losses. The money paid to a winning transaction is paid from the money in the losing transaction.This also means that anyone who executes any position will be at risk that price action could move for him or against him at anytime. It is not possible to participate in futures, options, or both without accepting this risk. All the infinite possible combinations of futures and options and the price action between the two are an attempt by every participant to take as little of this risk as possible while attempting to maximize the potential for profits. In any case, the losers will always have to pay the winners. The clearing corporation will deduct the money from the losing positions and deposit the exact same money to the holders of the winning positions. Ghostwriter X3 Fall 1998

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Introduction

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very trader has a story. This is my story. When I sat down to put my story on paper, I asked myself some hard questions. After giving some deep thought to those questions, I came to some conclusions. First, as far as the markets themselves are concerned, I really have nothing new to say. It is my belief that everything that could be written (or said) about the markets has already been done. All of it. I think the people who write books about the markets basically do a tremendous disservice to the true student of trading by simply reiterating what has been said already. Or worse yet, publish a lot of worthless psychobabble. They make it harder to uncover the real truth. I didn’t want to write a book that would slow down anyone’s quest to become the best trader he or she could become. Nor is it my intention to “teach” anything. I tried that. Most people who teach trading, with few exceptions, never walked the road I did. Not even close. In fact, there is at least one person who I think should be in jail for what he sells the public under the guise of a “trading course.” After what I’ve been through, I would never, as God is my witness, attempt to cheapen the price of admission to this business and sell it to Joe Public for $195 knowing full well that his equity is cannon-fodder for men like me. It’s

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a disgrace. I don’t know what’s worse, someone who palms himself off as an “expert,” or the fact that the public is so willing to believe him and others like him. I guess they deserve what they get. As you will learn, I deserved what I got, but for different reasons. Second, trading is an intensely personal and subjective endeavor. There is nothing else like it on Earth. I thank God I was born at a time in history when this kind of trading exploded onto the world financial stage and I got to be a part of it. It truly is an art form. And like all art forms the result is clearly observable, but the hidden part of the artist is never fully revealed. What I wish to communicate in some way is my personal “behind the scenes” view of my experience. I wish there were some way to really do that. I’ve had the best and worst part of all of it; I wish someone could have been there to share it with me. But I know that because no one was there, that too is part of the story. For the individual who is looking for some “secret knowledge” regarding the nature of price movements, I think you will be disappointed. I used to think that way and probably read every book ever written on price action. If there were a Ph.D. in markets and trading I would have it. But I think we all know how much most Ph.D.s are worth. As I said, I think it has already been done. What I think about price action can be said in the phrase “Buy low, sell high.” When anyone asks me today, “How do you know when it’s high or low?” My answer is, “Read what I have to say very carefully.” That’s it. There is no easy way. Don’t waste your time looking for it. As you might discover, trading is really not about price action anyway. Don’t rip yourself off by trying to reinvent the wheel. Lastly, I hope you experience everything that I have—all the pain, the glory, the money, the broken dreams, the unexpected joy, all of it. I don’t think you will ever become a lasting success at anything, certainly not trading, until you do. The markets are the absolute best place to find what you are looking for. If you truly and completely desire to become what you could be, very few places will give you such a perfect and lasting opportunity to do so. It took me a long time to accept the lessons you could learn in these pages. But, I suspect most people won’t learn anything and will continue to do it the hard way. That is the razor’s edge. It takes a lot of effort to swing a dull axe. Be wise and sharpen the blade.

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Like a canvas or a piece of music, the whole is based on the sum of its parts. Each part contributes, some more than others, and they must be understood in the context of the whole. This book is not in any chronological order; it all relates to the whole picture. While reading it, feel free to skip around and take the material in any order you like. When I was younger I would sometimes skip to the last chapter of a story to see how it ends and then go back to discover how it got that way. That is certainly one way to look at life.You might learn more that way. The raw material of your trading art is the unique part of you found within the context of the whole. No one can fully see things the same way you do.You will never see things exactly as I do. No one can take from you or me what we have paid the price to know. It’s my opinion that the reason so many people never become a lasting success at trading is because they have never paid the price to really know. The only reason I have achieved what I have from the markets is because I discovered the right questions to ask and eventually had the courage to answer them. What are those questions for you? Let me say this before getting started. Some who are close to me asked me why I wrote this book under a pseudonym. Most who know me won’t even know I wrote this. I think the answer to that will also shed some light on my experience. I didn’t want to make enemies in this business. Some of those who are on pleasant terms might recognize themselves in these pages. I didn’t want to make it easy for lawsuits to find me or lose friends by sharing my experience. Some clients might even recognize themselves. The worst part is that everything here is completely factual; I tell it like it is and how it really happened to me. Parts are dirty. Many people won’t believe it’s like this. Some will be angry. Some will think I stretched the truth. Some will say its outright fabrication. Some of the people I’ve known in this business are so completely lost to any form of common sense that they would do God knows what to profit or cause pain to me for no other reason than their supersensitive egos are offended somehow just because they think they recognize themselves in here. I hate to say it, but trading is a brutal world. You don’t win unless someone else loses. That’s their journey and their story. If it’s such a big deal, write your own book and “slander” me. I’ll put it on the shelf with the rest of the stuff that doesn’t matter. . . .

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Finally, if you the reader doubt the authentic nature of the contents here, I will give you the acid test. Open a trading account. Become a broker. Jason Alan Jankovsky Formerly “Trader X” Chicago, Illinois Fall 1998

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Chapter 1

The Early Years Illusion in the midst of Reality No minute lost comes ever back again. Take heed and see ye do nothing in vain. —London Clock Tower Motto

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hen I decided to become a commodity broker, I had no idea what I was eventually getting into. It began in the spring of 1987. I answered an ad in the Chicago Tribune and interviewed with the sales manager1 of a commodity-trading firm. I was very impressed. They had a beautiful office in Oak Brook, Illinois, a very affluent Chicago suburb. Everyone there wore expensive suits, the parking lot was full of German and Italian cars, the whole scene reeked of high finance.

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After some discussion of my background and what I thought I could do in the brokerage business, I was hired. The interview was brief. They didn’t ask me for a résumé. They just wanted bodies. I was given a big book to study so I could pass my Series III commodities broker’s test. I was given a start date with the rest of the new hires. I really believed I had scored the job of my life. I was 26 and thought that in no time I would be earning $100K a year, driving a Ferrari, and flying the Concord to spend the weekends in Paris. It was largely from my initial experience with this brokerage house that I chose to keep trading as a career no matter how it turned out. That first commitment had a lot to due with how my success was measured over the years. If I hadn’t made up my mind that come hell or high water I was going to be a commodity broker, who knows where I would have ended up? Over time, the pressures of the trading world gave me every opportunity to quit and do something else. In fact, my family tried everything to convince me that I was out of my mind for sticking with it during the rough years. No one saw what I saw except for my mother. Moms are like this, aren’t they? One immutable thing was her absolute support of what I wanted to do. Suffice it to say, at that time when I first started, the lure of money was so strong that you could have promised me a ride on the Space Shuttle to quit and I would have turned you down. I wanted it that bad. To put this in perspective, as an Air Force ROTC student with a good academic history, I earned an Air Force Academy appointment with a good shot at the space program (according to my recruiter). As a side note, there is a commercial space tourism company selling rides right now aboard a privately built spacecraft just for people who want that thrill.2 I was surprised to learn after missing what seemed to me a once-in-a-lifetime shot at the time (I turned the Air Force down), I was able to do it anyway. The concept of “regrets” and “missed opportunity” figures high in this story. Sometimes life gives you a second chance at something. The markets will always give you another chance. I was totally unprepared for what would become the “normal” process of working in this industry. My first day on the job at a Midwest brokerage office went something like this: I walk in. The “sales manager” brings me to an empty desk, points to the phone and says, “Here is a phone.” He drops a stack of papers

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on my desk and says, “Here are some sales leads. Your job is to convince people to send money for trading. Once you have opened a few accounts, we’ll show you what to do with the money.” He then said, “Good luck,” and walked away without saying another word. Okay, no problem. I was so excited about what I was doing I really thought everyone I called would talk to me. I didn’t see it as telemarketing. I believed that everyone wanted to make big money. I thought everyone would see the wisdom and “common sense” of the particular market opportunity that we were selling. I just watched the “seasoned professionals” sell and did what they did. What made this whole experience intoxicating was that what we were selling actually happened. We were suggesting that the public buy silver. At the time I started on the phone in 1987, silver was selling for about $5.10 an ounce. The company I worked for was marketing call options. I had scored 100 percent on the part of the Series III that covered option hedging and speculating. I had basically succeeded at everything I had done before; why should this be any different? There was no way you could convince me that I had anything to learn. Besides, the company was making the recommendations; they were telling me what to do. I figured between me and them, “we” knew exactly what “we” were doing. Needless to say, as long as silver kept moving higher, the money rolled in. I ate the phone. I was the top “rookie” in the office. Silver soared to almost $12 an ounce in less than 120 days. I thought it was always that way in this business. I was making more money in a month than some people I knew made in a whole year. I felt like I had arrived in a big way. Then I got fired. The company stole my clients (of course). In this business there is a curious concept that companies “own” clients. How can you “own” a client? Aren’t you supposed to be working for him or her? Doesn’t a client have the right to do business with anyone he or she chooses? I was told that if I contacted any of my clients I would be sued. They refused to pay me my remaining commissions—something about being covered in case of potential lawsuits. They never told me when to expect payment if there weren’t any lawsuits. Maybe they just expected them. As you will see, this happens every day. They basically didn’t like me, I guess. As I found out later, the egos of people in this business are beyond belief. Never will you meet people, as a group, with absolutely

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no justification for what they think they are. Still, I never found out what happened or why I was let go. I certainly wasn’t sleeping with the boss’s wife. (Or his girlfriend for that matter. That’s another thing that happens every day around there.) All I knew was that I no longer had a job and I really wanted to be in this business. Believe it or not, it never occurred to me that maybe every other commodity company could be this poorly run as well. As any Series III broker can tell you, every retail commodity house is run like an accident waiting to happen. You would be absolutely amazed at the sheer chaos and complete lack of even the most basic business sense. The people working in the markets every day, as a group, I don’t think could run a newsstand without help. Here’s just one story: At the time of this writing a personal friend of mine just left one brokerage house to go to another. The reason? The owner’s cousin, fresh out of rehab, wanted to get in the business. My friend simply told the owner, “It might not be a good idea to have a recovering heroin addict trading someone’s money and exposing the company to risk.” The owner called him a “Jew bastard” and fired him on the spot. My friend had been there for years and was a top producer. In a split second, my friend’s whole life was turned upside down and his income dropped to zero because some psycho-egomaniac thought a convicted felon with a drug problem would be a good addition to the staff and completely capable of servicing clients. If the boss was that stupid, how well could he manage clients in the first place? How long would a guy like that last as a manager at Microsoft? How long would that guy last in any business? The Equal Opportunity people would have a field day with a racial slur like that. In the case of my friend it really was easier and more cost effective to just find another brokerage house, forget the whole thing, and move on. Not to mention that the “sales manager” at the offending brokerage house told all of my friend’s clients that he was drinking on the job anyway and “we’ll take care of you.” It was an outright lie. But, of course, they “own the client.” This happens every day in this business. Retail brokerage houses are run without any common sense at all. They come and go faster than GI’s at a nickel whorehouse. The sad thing is that people don’t care since there is so much money in it they can afford to be that reckless. It’s like this: If a thief kills another thief and you are a witness and

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a thief yourself, what do you do? Tell the cops? Forget it. You’re in a whole other world. The constant lack of integrity really got to me over the years, as you will see. I really believed that people in “high finance” were supposed to be a personally responsible lot. Boy was I wrong. So I went to work for a new firm, which at the time was a real trading house, but of course it wasn’t what I thought a trading house should be like. My idea of a “professional house” was nothing like this place. They had a tiny office, with steel desks, quote systems everywhere, and they let you do whatever you wanted to do. There was no organized market research, selling effort, nothing. You came and left when you wanted. No sales hype or $2,000 suits. Just a bunch of whackos taking $500 a day out of the markets trading one-lots.3 No one talked about the markets. They didn’t need to. Some of the guys, who were real traders, only had one or two clients and had had them for years. What was wrong with these people? Didn’t they know what kind of money was out there? Looking back, I would give my right arm to be working at a place like that today, but at the time I was so disgusted with that environment, which I perceived as apathetic to real opportunity, that I started looking for a new house. I should mention that that owner was one of the most respected men in the business at that time and had a reputation for fair and equitable treatment of his staff, customers, and support people. But back then, I didn’t know how rare honest and equitable business practices were. I really thought I could find the best of both worlds. I found a new brokerage house about April. My timing to reinforce this misconception was perfect. Right about then the drought of 1988 hit. My new firm was selling call options on corn and soybeans. Corn went to almost $6/bushel. Everyone was talking “Beans in the teens!” My book of customer equity went to almost a million dollars. A book of equity is the slang term used for the customer list a broker has that includes the current cash balance of each customer. A book can be any size number of customers or account deposits. This is also called money under management or an equity run. So after my book of equity went to almost a million dollars, I took a few days off. I was in bed flipping through the TV channels when I saw a financial broadcast telling the world that Chicago soybeans had traded to a near-record high of $10.97 that day before closing lower.

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I think it was around $9.50/bushel. Of course, that was the top. As I had no idea what I was really doing, I was only mildly concerned that the market was below the previous day’s close. I didn’t know what “volume” and “open interest” were, or “reversals.” Nothing. I absolutely believed that commodity trading was huge moves, high profits, lots of sales hype, all that Gordon Gecko stuff.4 I kept selling clients and buying calls until September of that year. Not an easy thing to do when the market is lower every week. As the market kept moving lower, I started asking the boss what was happening. When would the market turn up again? He told me to keep selling. “But it looks like it’s over. What about the clients who are going to lose?” I asked. “They don’t know that. You don’t know that. You want to get paid don’t you?” was his answer. At that time, I just agreed because these guys knew what they were doing, right? One of the bozos working there drove a red Porsche 928. He also brought in a 500-gallon saltwater aquarium into the office. He wore big rings. He didn’t talk much, but he was definitely into the “look at me” type of thinking. He really thought he was the thing. I remember him being called into “the boss’s” office to discuss his lawsuits. No Porsche, no rings, the fish tank sold at auction along with the rest of the company’s stuff.You guessed it; the company went out of business. There was a huge National Futures Association (NFA) investigation. The NFA is the self-regulatory body authorized to sanction people to work in the industry, mediate arbitrations, and generally harass or intimidate those responsible for providing access to the markets. By the way, the first firm I had worked for was also shut down by the NFA. I had no idea how any of this would later come back to haunt me. Simply put, because I had worked at these two companies, I was on the “watch list” at the NFA (yes—they have a watch list; ask them about the “tainted broker” program if you want to see the constitution completely ignored). It never occurred to me that guilt by association was a real thing that would make it harder to work in the business. My thought was that since I hadn’t done anything wrong, even if there was a problem, I would be cleared. I had this problem more than once. So did many others, honest and crooked alike. The funny thing was, most of the guys who worked at these companies moved on to other firms like rats from a sinking ship. And all the other houses wanted the “big broker” type

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to work there. They offered these brokers huge deals to play the same show in a different town. Did it ever occur to any of them that if this technique generated lots of lawsuits, it might not be a good idea to hire these brokers? Maybe they all just wanted the money so bad they didn’t care. I found out later why that didn’t matter, but I made the same mistake. I was on the sinking ship too. So now I was broke, having spent my huge income like a drunken sailor. After all, just get on the phone and wait for the next big haul, right? I went through a succession of companies and repeated this entire scenario over and over again for the next several years. I even “started” a company with a partner. That’s a story in itself; I’ll cover that later. During this time I met some “professional” traders. Because I was beginning to consider that this boom-and-bust cycle might be avoidable, I actually listened to a wheat pit trader explain the concept of overbought to me. I picked up a book or two on market analysis. “Maybe there is something to this,” I said to myself. Over the years I kept buying books, attending seminars, listening to tapes, and subscribing to newsletters. I spent thousands and thousands of dollars doing this. I routinely listened to what pit traders thought and what they read. It never occurred to me that pit traders might be some of the least educated people in the business. This whole process of “analyzing and studying” the markets was another roadblock. I think you will be surprised at how little that whole process can help a trader. This period became a huge emotional struggle for me. I couldn’t accept that I wanted to do things “right” and yet no one else wanted to. Believe it or not, I never lied to any client about anything. I never misled them or promised they would make money. I sold clean and really wanted them to win. I genuinely liked my clients. I returned phone calls promptly and never asked for more than a reasonable amount of money for my services. I always did what I believed a true professional should do when he has a fiduciary responsibility—and still do to this day. However, the fact was, I was grossly misinformed about the true nature of the markets and the industry. I honestly thought the solution to this problem was more market study and finding the right brokerage house. Although that wheat pit trader and the others all meant well, I actually lost years “studying the markets.” I found that there is no “right” brokerage house and that no book can ever tell you about

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how to become a trader. You have to live it to understand. Let me finish setting the stage for where and how I finally became the winner. Someone once told me that all progress in the world depends on the unreasonable man. The reasonable man persists in adapting himself to the world; the unreasonable man persists in adapting the world to himself. Therefore, all progress depends on the unreasonable man. At this point, my career in the commodities markets had been less than spectacular. I had worked at many companies and all of them had gone out of business. All the money (literally millions of dollars) I had raised was also gone. I had spent all my income and was once again without a place to work or a client base of any kind. What was wrong with this picture? Was it me? Was it the industry? I wanted to be reasonable about it, but what was the true answer? I was spending a lot of time dealing with this same problem. I was working for people who couldn’t get a job cleaning toilets in the “real” world, but were operating companies that made tons of money (on commissions—never in market profits). I was attempting to learn the markets to reduce the loss factor but still losing all the time. I got really angry with myself, the markets, and the companies—everyone and everything. What was wrong? Why wasn’t this working? Why wasn’t I a success at this like everything else? The year was now 1993. I won’t talk about the catastrophe that I created for myself during the first Persian Gulf War except to say this: When it was all over it took from 1991 until 1996 to pay all the debits, unpaid taxes, unpaid debts, and recover from the emotional trauma that an unregenerate mind is capable of inflicting on its owner. But during these previous years, all the raw material for ultimate success were given to me. At the time I saw it as complete and unmitigated adversity. Even filing bankruptcy, and all the embarrassment that goes with it, was a huge stepping-stone to prosperity. When the Department of Justice subpoenaed me while I was working for a company that was doing a Ponzi scam through the legitimate markets; even that was important. By the way, I was never charged due to my phone records showing I wasn’t involved in any way. But at the time, my point of view was: “What is going on? What is wrong? I’m trying to do this right . . .” and so on. The years of frustration, bitterness, and disappointment were beginning to boil over. Let me draw all this together for you. I’m in my early 30s. I’ve made and lost a million dollars twice. I’m broke, almost homeless,

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without any income, behind in my bills, and no longer have any credit. I’m too confused to work at my best, angry at life. Feeling like I’ve hurt people. Feeling like I’ve let people down. Embarrassed in front of my family and friends; earning an undeserved bad reputation. To make matters worse, watching everyone I know get on with their lives; getting rich, being in love. The women in my life lost interest in me. And let’s not forget drinking too much; even a brief fling with cocaine. I could go on with all the rage, hatred, and blame. For the sake of making the point, here is the bottom line to all this: At no time during the whole experience did it once occur to me that everything I’ve been through was completely and utterly of my own doing. It was not the fault of anybody but me. If you read between the lines of this short description of my early years, you can see how easy it might be to say things like: “It is the market’s fault.” “It is the company’s fault.” “It is my stupid clients who won’t listen.” “This research sucks.” “If only I had done _________ (fill in the blank).” “If only so and so hadn’t done _________ (fill in the blank).” “What a rotten fill” or “The market’s gonna come back.” “Markets don’t do this.” “My girlfriend left me, that bitch! It’s her fault I can’t think.” And on and on, ad nauseum. If you are in the business, and honest, you know you have said or thought the same things. Or at least heard it from someone you work with. In my state of mind, I was doing everything I thought was right, expecting the whole world to see things as I saw them, holding others to a standard of behavior they weren’t capable of or didn’t see the need for; and all the while not considering the possibility that the world I was in was nothing like the world I was certain it was. I was completely amazed during my period of recovery to learn that somewhere around 80 to 90 percent of people who trade lose. The average length of a commodity broker’s career was less than seven years, and they are broke when they quit. The average company goes out of business in less than five years. All this despite the fact that the industry as a whole was growing faster than ever. How can these seemingly contradictory positions be true? Whose “fault” was it? Where was all that money going? And to whom? Now before you assume that I never experienced these deep conflicts, or I had some kind of detached concept of what was happening

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inside of me, let me set you straight. I felt completely trapped. I could not find an answer to what seemed like a huge injustice being perpetrated and worse yet, against me personally. I couldn’t see the true nature of what was really happening. I actually thought that God himself was out to get me. I was “insane” to a certain point. This entire conflict was more than a war inside of me. It was literally a personal struggle between life and death. There is no doubt that if I had lost control of the last part of myself that I still controlled, I would have committed suicide. I know how those poor souls who actually kill themselves feel. That’s how deep of a conflict I was in over why nothing was working like I thought it should. It is almost impossible, even in a thousand books, to adequately communicate the emotions I was feeling. Feelings that were so real I could taste them. Despair really tastes like burning copper and gin. No one reading this will be able to appreciate the intensity of that experience unless he has been through at least some of it. To those people who say, “I would never get that far gone over money. That could never happen to me.” Let me say at that time I believed the same thing. I never thought I could get so upside down in every part of my life. I literally found myself at the end of a rope that I didn’t even know could exist; certainly not for me personally. I actually believed it was all about money and how money works. Remember, I have a higher I.Q. than most and had succeeded at everything I had done up to that point. Women loved me. My family loved me. I had friends. I made money. I was young and ambitious, respected by strangers. Then I got into the markets. Why should it be any different? I began to experience a world without the same “base” of reality. This thought never went through my mind. In fact, at one point early on my little brother bumped into me on LaSalle Street and asked me how it was going. I started to shake and told him, “I’m losing over $100,000 so far today alone and I can’t handle it.” My brother took me by the hand like a five-year-old and walked me over to St. Peter’s Cathedral on Madison Street and sat with me. He prayed while I cried. My world was unraveling and I couldn’t stop it. My entire concept of success and what it meant to be a success was turned upside down and blew out with the wind. I felt like I was detached from the rest of the human race. I felt as if everything I

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had ever been taught or learned on my own was either a lie or wasn’t meant for me personally. I resented the success others had and felt powerless to create it for myself. I can’t really tell you how abandoned I felt. I didn’t understand that what I was going through was actually creating within me the potential for a truly glorious thing. Something priceless. I wouldn’t wish it on anyone, yet now I would never trade those years for anything. I was literally only hours from the “low of the move.” Up until this point I was using every tool in my toolbox I could find or invent to make sense of what was happening in my life. Still, nothing was working. I knew there was an answer. I knew I could find it. I didn’t know where or what it was but I was committed to finding it. I didn’t care what I had to do. I wanted to win. I believe it was this resolve that finally made the difference. Then I had the turning point. The rest of the book is about all the pieces that were there and how they came to fit together. As I stated in the introduction, this book isn’t written in any chronological order. All of the chapters and sections fit as part of the whole. The end result is that I’ve learned what the markets are really about. I’ve also learned that anyone can be a net profitable trader and do it anyway he wants. It is my “baptism by lava.” It’s all here and the “secrets” too. Now don’t misunderstand me, I still made a lot of stupid mistakes and repeat some of my previous errors, but something had changed. When that change became clear, the emotional difference is what people call an “epiphany.” And the markets, of course, had no idea this had happened to me.

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Chapter 2

The Day I Bought the Low Clarity of Observation Unless there be correct thought, there cannot be correct action, and when there is correct thought, right action will follow. —Henry George

S

ometime in the fall of 1993, I began referring to myself as a “trader” instead of a “broker.” To most people, the surface difference is that basically one guy is upstairs on the phone (the broker), and the other guy is in the pit doing trades (the trader). The truth is the line isn’t really that clear. Some “brokers” trade and some “traders” simply broker their transactions. If you are in the business you know what I mean. For those who don’t, let me take a minute to clarify these 13

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relationships. The side of the business I was first exposed to was retail brokerage. I worked from an office and solicited accounts from the public—typically with a market concept easy for the novice to grasp— trades such as soybeans during a drought, cattle during the barbeque season, that kind of thing. The interesting part is that even though the markets can be traded from the long or short side any time, and often represent more profit potential from shorts, it is very difficult to communicate this to a public client who has never traded before. Consequently, most brokers prefer to open accounts by marketing a trading opportunity from the long side. The most popular one I ever did was the “heating oil during the winter” play. It didn’t seem to matter that no one uses heating oil in enough quantity anymore to make a real energy difference. I believe the New York Mercantile Exchange (NYMEX) still trades heating oil only because it has so much public interest from all the brokerage houses selling it each fall. Maybe they view it as “free money” for their members. I’m ashamed to admit that I too did the “heating oil play” for many years like everyone else. So, when I say “broker,” I mean “somebody who provides access to the markets.” A lot of brokers help the client trade. They suggest when to enter or exit the trade, when to add to the trade, how to protect equity, and the like. During the time I was a broker, I did all of this. By doing so, I acted in the capacity of a trader. I had little knowledge of how that really worked, though, which is one reason why I created so much pain for myself. A trader, on the other hand, is entering and exiting the market (under any time frame you choose) with the intention of making a consistent profit. His perspective on price action has more to do with where he feels the market is at, where it might be going, how long it will take to get there, what to do if he is wrong, how much to put on, when to add to the position, whether to add at all, when to lighten up, and what to do if something changes; basically, how to profit without his head being handed to him. This all seems very understandable until you consider that to broker an investment (a trade) is a completely different skill, and is no way even in the same universe as trying to profit from that trade. Let me show you what I mean: In the typical retail broker’s office there is a group of brokers on the phone selling, sometimes 12 to 14 hours a day. Stop to consider that selling a financial intangible over

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the telephone is one of the hardest things to do, period. Some rookies work for months and quit before ever opening an account. This often happens after a financial trauma hits them, such as getting their car repossessed. At one company, every rookie who started got the same desk. After a while an ex-fighter pilot in the office started calling it the “ejector-desk.” Statistically, financial sales over the telephone are one of the hardest things to consistently do because both the state of mind and the skills needed to remain successful are very hard to develop and maintain. In addition, remember that commodity trading represents less than about 5 percent of the public investor’s interest in the first place. Add to this the fact that all brokers are paid only a percentage of commissions generated and you have a very volatile income situation at its best. The bottom line is that even with a superior, never-ending-saleslead flow, the average broker has to bust his rump to bring in accounts and hope that the commissions generated becomes a decent income before he goes broke. This is why there is such a high temptation to do trades just to create a commission, which is also known as churning. “Churning” is a term to describe a certain behavior brokers do to generate their income. It is considered unethical and is, in fact, illegal. If a trade is done without the client’s knowledge, that is a “churn.” The idea being that if your relationship is strong enough with the client, he won’t mind. Since those trades are always losers, some clients do mind. Now the broker has to do a “dog and pony” show around it. Some clients buy this—but the ones who don’t, the broker knows that client will complain if he does it again. Therefore, if any trades are performed that include this client, the broker will make the phone call to get the client’s approval. The broker does run the risk that the client will say “no.” This client will probably be closed out at some point because the broker can’t earn an income from him. Or the income is “too small.” If a client doesn’t mind, that broker knows he can now trade that client with impunity and will make a good income from that client until all his money is gone. This whole show will happen until the regulators “catch” this broker and then either a fine will happen or he is expelled. If a client who allows this to happen changes his mind (usually at the point of total loss), then the broker might get sued. So he settles. This whole problem would not exist at all if brokers would call their clients on every trade; but since most trades are “thought of ” at

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the moment the broker turns his screen on, there isn’t enough time to call all his clients before the “market gets away from him.” If brokers would plan their trades out, then there would be lots of time to call everybody and get approval. This problem also wouldn’t happen if owners would pay their brokers a base salary and train them on how to trade. Or find someone who knows how to trade. But that is too much work. Additionally, if a broker would take power of attorney on his accounts, then he could trade anyway he wants; but then the regulators assume if you do that you intend to churn them anyway. So the NFA immediately asks this broker to “prove” he wasn’t churning. How do you do that? If you tell the regulators, “I have power of attorney,” they say, “Why do you need it?” Sooner or later any broker who has power of attorney will give it up because he says, “How can I prove I wasn’t churning? If I like a market, but I have a loss, the NFA thinks I did that trade just to get paid. I can’t win.” The end result is that if you want to trade for your clients, and stay out of trouble, you can’t have more than a handful of them because you can’t call them all—all day long—while the markets are moving. If you plan out a trade and call everybody, what happens when something changes? Do you put the client in anyway, knowing he would lose or do you make all the calls all over again? Suppose you couldn’t reach someone and he sues you because you “missed” the trade for him and he just assumed you would take care of him because you “know what you are doing.” This happens. The bottom line is that if you try to run your business efficiently by using all the tools that you have a right to use, the regulators assume that is “churning,” no matter what your intention is. Therefore, most guys just do it anyway and hope for the best. You can make $100,000 a year for years before someone says: “Hey, you can’t do that.” Now you can afford the right attorneys. So who cares? Also, many owners simply ask the broker “Did you call your clients?” Unless the owner has brains enough to hire a “sales manager” smart enough to require the brokers to hand in the tapes of every conversation regularly, the broker just says “yes” and that’s the end of it. Often, the broker has only one tape, and he just keeps recording over the old conversations. If the client doesn’t say something today about what was done yesterday then it is “old business.” Personally, I think

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the issue of “churning” is total B.S. The purpose of the markets is to provide unlimited opportunity. Sometimes that means five executions in one day, sometimes it means nothing for a week. If all those trades are done during the last day of the month, the regulators say: “You were trying to pad your commissions before the end of the month.” What do you do? If I saw an opportunity, and the markets gave it to me on that particular day, now I’m “churning” instead of providing an opportunity to the client and myself. If I’m a day trader, that means I’m looking for something every day. If those commissions add up to some number the regulators arbitrarily conclude is “churning,” then someone else decides how much opportunity my clients can have from the unlimited opportunity the markets provide. Why don’t they just pass some law that says, “No one can be as successful at this as possible because we have to protect people from churning”? Regardless of what anyone tells you, many brokerage houses actually encourage churning, although they pay lip service to regulators and customers by saying, “We have every control in place to prevent that.” The fact is, when a broker churns, they just hope he makes enough to pay for whatever lawsuit might come in. Now consider that most clients are losing anyway. So the broker is doing two things with most of his time: trying to replace the losing clients with fresh equity AND trying to convince the loser that he should stick around a bit longer. The average commodity broker is not able to handle both on a consistent basis to keep his book of tradable equity growing every month. This is exactly what I went through. I would raise a group of clients, put them in a trade, hold their hand as they lost, and do it all over again next month. If I was good enough, I could make $10,000, $20,000, $30,000 (my end) each month. Then my head would explode from the pressure. I would take a break for a week or two. More often than not this would coincide with the next “sell an up market” recommendation from the company. Sometimes I would come back to find the company shut down without anyone thinking to call me or mail me my paycheck. This was often around the same time my personal income was gone. Add to this the pressure of looking for work once or twice a year. Is it any wonder that friends or family think you are crazy? Or that brokers drop like flies? To this day I question the sanity of some of the wives of the brokers I worked with. Why put your family through that?

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True, there is a certain romance with “being on the edge,” the thrill of doing something that would turn most people into lawn furniture; but the fact is that kind of life will kill you. I saw it happen. In August 1990 the first Persian Gulf War began, which eventually created the amazing move in the crude oil markets. At that time the markets literally went wild with euphoria. It was something truly amazing to witness. We were on the phone 18 hours a day raising equity. No one had time to spend the money we were making. There was no end to the people willing to invest to get rich. The guy at the desk next to me opened a $1 million account in less than two minutes on the phone, the first time he ever talked to the client. The “sales manager” was actually charging the brokers more money for leads so that he could pocket more for himself. The brokers, myself included, were paying it gladly. It was insane. It was without a doubt one of the most unique experiences of my whole life. One day a buddy and I went to lunch for about an hour and when we returned there were paramedics taking one of the brokers out on a gurney. Apparently, this broker actually had a fatal heart attack right there in the office and died while on the phone talking to a prospective client. The buddy I went to lunch with didn’t miss a beat and said, “Who gets his leads?” Such was the greed factor in play at that time. Where could I find time to become “expert” enough at market price action to make winners of my clients? Now let’s talk about traders. I know some people won’t like this, but as a group, traders are some of the least knowledgeable and least skilled people involved in something that is considered a “professional” occupation. There is no formal process to get ready for trading. It is basically on-the-job-training. Most pit traders net out less than $75,000 a year. In other professions, such as doctor or attorney, that kind of money is a given. To become a “professional” trader, you have to put up a reasonable amount of money as your starting capital, pass a test to trade on the floor, and buy a seat or find a clearing house to lease you a seat.1 That’s it. Most of these traders blow all their equity in a short time and go back to being doctors and attorneys. Some traders start by being a floor runner, work up to clerk, and then find someone to stake their entry into the pit. This is done through the “buddy system” on the floor and is a highly political, good ol’boy network.

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You would be amazed at how many people end up trading in the pits for no other reason than they were drinking pals with a local who wanted to retire.2 No real training just cojones—and believe me, the cojones factor is responsible for more losing traders, financial catastrophes, and general market mayhem than you would like to believe. Consider that about half of floor traders are undercapitalized in the first place, and you can begin to see why trading is not an easy thing to do well. Suppose this guy is supporting a family? What do you tell your spouse when you blow out and you have to sell the house? For the typical, off-the-floor trader (an upstairs trader), getting started is even easier. All he has to do is fill out an application with a clearing firm and give them a check. Then he simply calls the floor and gives his order to a trader in the pit who executes it for him. Upstairs traders, or people who trade their own account, are no different than pit traders. They are all attempting to profit from price action. Most of the time they have done nothing more than the most basic research or understanding of what is going on. The fact is, of these two groups of traders plus the public client, about 80 to 90 percent close out their account (or have it closed for them) at a loss. The average account lasts about four to six months. Where does all that money go? I’ll talk more about that later. Now in fairness to the good traders out there, and the ones who have net winning years most of the time, I’m not trying to disparage the whole group. Some trading groups take a very professional approach to their market presence. Many large firms require university degrees, certain market knowledge, and require their traders to work under very close scrutiny. But this approach is not as common as you might think. My point is only to illustrate that the world of trading and the world of brokerage are not easily integrated. To their credit, some people realize this problem is real. Some brokers never advise their clients of anything; they simply charge a fee for doing what the client wants. Many traders do the same thing and never trade for themselves, they just stand in the pit and wait for someone to hand them a piece of paper and simply execute the order. I have a close friend who is always the number one or two producer in commission income to his brokerage house. He makes about

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$250K every year, year in and year out. He never went to school, never did anything else. He doesn’t care at all about his client’s gains or losses. He expects them all to lose and he really considers himself a “white collar bookie.” Over a few beers he has told me more than once he can’t believe this business is legal. If a client happens to call a winner for himself, he just expects that money to be converted to more commissions over time. He is never wrong. He is truly a “broker.” As a side note, I actually worked with him side-by-side for a while because I figured, since his customers were such consistent losers, I would clean up if I listened to what they did and did the exact opposite in the markets. “Fade them,” so to speak, which actually happened for a short time until I couldn’t stand working there from all the other stuff that went on. To continue, I have another friend in the pits at the Chicago Mercantile Exchange (CME). He trades a very complicated stock index spread. He has made over $1 million in some years. He is a true student of himself and the markets. He would never consider looking for a client or trading for clients. To show you how wide these two thinking patterns are, let me illustrate: Guy #2 thinks Guy #1 is sort of a commodity clown—a source of entertainment. He will roar with laughter when Guy #1 tells him about his latest blowout and some of the things his clients will say. I remember Guy #2 asking Guy #1 what he thought of the current price of S&P 500 Futures. Guy #1 actually replied, “That’s the stock index one, right?” Guy #2 calls Guy #1, “The common man’s millionaire ‘cause it’s all his money!” Remember that bridging this gap is an entire business in itself. That’s why the world of Commodity Trading Advisors (CTA) exists.3 That’s where the whole support industry of books, tapes, seminars, trading systems, and the like comes into play. These people understand that to attempt doing both is VERY DIFFICULT at best and the failure rate is high. Even if you had unlimited capital and unlimited access to knowledge as a trading advisor, a self-directed trader working for the public, or the public itself; based on the statistics you probably will still be a net loser. Having learned what I have, what still amazes me is that every year the business of commodity trading gets bigger and bigger. There is always someone who fancies himself a trader, a broker, or both, and is willing to dance into a lion’s den to prove it. There is

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always someone willing to invest their money with these people. The common thread behind all of this is that everyone thinks they can make money, it is easy to do, and they already know what they need to know; however they decided that.Very few people realize doing one or the other is hard enough. This is what happened to me. I was told what I was told, and through my own ignorance accepted it. I figured I knew what I needed to know even if the company didn’t. I thought doing it all was easy enough. Where my problem developed is now very simple. It never occurred to me that I might be in a game whose real rules I didn’t know. Throughout my life everything I ever attempted was met with enough success to somehow convince me that success only worked a certain way. So naturally, this business must not be any different. I was not equipped to see when it didn’t work that way. In fact, I was so entrenched in this thinking that I never knew to even consider looking at it any differently. I was a “commodities broker.” The markets “should work like this.” And the people in the business “should be like this.” As time went on and the real rules were in play, my natural assumption was that something was wrong. Since I could always control my environment before, I was sure that I could find a way to control this one too. As the markets more and more tried to communicate to me that this game was somehow different than others, I continued to interpret that information as only a set of circumstances that didn’t fit with my established picture of reality. I was convinced that the problem was an external thing and therefore subject to forces I could exert upon it. In every other financial arena, I would work long hours if I needed to, study what I needed to, do what I needed to, and I would make money in droves. My clients would benefit from our effort together. It was only a matter of time. When I would do these things as a broker/trader and get my clock cleaned the problem couldn’t be me because I knew what worked. I have to repeat this: It never crossed my mind that I didn’t really know this game. By now you may begin to see how confused anyone can become. If there is nothing wrong with me, it must be bad luck, or a programmed attempt to make me suffer, or any number of things. I just wasn’t capable of seeing it any other way. Stop and add the financial pressure, or the government breathing down your back, or people you

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trusted screwing you, and you can begin to see how your mind would convince you of the worst. Then drive the last nail in the coffin with the use of alcohol and drugs. Reality takes on a completely different and horrifying perspective. Back to 1993. On the verge of losing my sanity, I came to my senses. Up to this point my concept of reality was based on a set of personal experiences. Since everyone’s experiences are different, then it follows that everyone’s concept of reality also must differ. This hit me like a ton of bricks. Until that point I really believed that “reality” was basically the same for everyone. What would lead anyone to accept this? For starters, have you ever stopped to think that you surround yourself with people who basically agree with you and your train of thinking? If you are a sports fan, how much time do you spend hanging out at the local chess club? If you are a Democrat, how many Republicans do you play chess with? At the most basic part of our thinking, we tend to define reality as we personally choose to define it. If someone else’s reality is in conflict with our own, we tend to think someone is “wrong” and the other is “right.” I had spent my whole life up to this point dealing with people who thought like I thought. They saw business and success in a similar fashion. We all had similar results. The fact is the markets are made up of people who all think differently for their own reasons. The only thing we have in common is that we all participate together. In this respect, it’s like riding the subway or standing on a street corner. The guy next to you could just as easily be an axe murderer or the president of General Motors. Each has a different perspective of reality and what is happening around him. In trading the only thing we have in common is that we are buying and selling in the same place—each of us choosing to look at the markets in our own unique way. This was new to me. This was not the world I was used to being in. At that point my thinking practically went faster than I could handle. I had been defining myself as a successful person who was now a commodity broker; when in fact, I was a commodity broker who wasn’t a success. My profession began to expose me to a new reality, which in turn began to open up a completely different set of variables. It might be possible that all my life experience up to this point meant nothing in this new world, this new paradigm. Until that moment, I saw

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the markets and the business of trading as nothing separate or unique from everything else I had ever done, only different. As I accepted the possibility that the markets and trading might have a completely distinctive reality all its own, a flood of questions ran through my mind. What would this reality consist of? How is it created? Who creates it? How does it differ from what I already know? How can I understand it if I have no basis to compare it to? I could go on but here’s the point: What became astonishingly clear was how absolutely narrow my personal method of defining reality really was. There was no room in my head at that time for anything that didn’t immediately and neatly fit with the established set of perspectives I currently held to (the implications of this are truly staggering if you let yourself run through the whole gamut of possible life experiences). If the markets have a reality all their own, then the reason so many people fail is because they refuse to find out what that substance truly is and adapt to it. Market reality must be something so completely unpalatable or unacceptable to most people that they would rather fail at trading than embrace it. Of course, that is exactly the case. The true reality of trading and the markets as a whole is something that most people would rather die than accept. Market reality only functions one way, but we bring a personal definition to the table when we trade. We are trying to make sense of what we perceive, and the only basis we have to do that with is our previous world and life view, perspectives, and belief structures. The end result is that we as traders “see” the market differently than everyone else, but the market itself is only functioning one way and will never be any other way. So the true state of trading reality is in conflict with what we personally think it is. We can choose to define it any way we want. It’s the definition that creates our gains or losses. If you ask me what that reality is, my answer is “absolutely nothing.” The market you trade is nothing more than a mirror. What do you see in any mirror? That which is put in front of it. Only what you want to see by what you put in front of it. The mirror itself is nothing. The market is only what you bring to it. It really is “no thing.” Before you throw this book down as being overly simplistic, esoteric, or philosophical with no trading value, I want to remind you that this is my personal story of my journey through the markets and what

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I came to learn. It is not a how-to book on trading. Before you throw this out, I would encourage you to consider this basic and very deep concept and let it roll around in your head: What is everyone else looking at in the mirror? When I came to understand that the market’s reality is only a reflection of my own, I began to consider myself a true trader. At its most basic level the desire for profit in any financial endeavor is based on the ability to observe some kind of inequality somewhere and feed that inequality with some kind of effort designed to push that inequality in your favor. We call this a profit. But what really is the market? A constant inequality that we, all of us who participate, wish to see push in our favor. What is our effort? Executing a trade. What is our profit? Buying low and selling high. What is the true nature of the market’s inequality? Discovering that, my friend, is the dance, the art of trading. The price I paid for that knowledge is my unique experience and the nature of my reality. There was no other way for me to discover that except the way I did. No other way was possible given the state of mind that I had brought to the table. How could it be? Until I was able to understand it was impossible to understand. Until all the mitigating factors in my life positioned me to ask myself the right questions, it was completely impossible for me to observe my thinking and perspectives for what they were: Closed to the true nature of the reality I was immersed in. Please think this through: Can you see that your personal concept of reality may not be the actual reality the markets really function under? Looking back, all the pain I endured was completely self-created, as was my ability to get through it. Your trading and your results are created only by you and you alone. There is nothing else involved in any trading of any kind. My understanding came once I was willing to accept that the entire market and all price action are a perfect reflection of my own thoughts. The true study of the markets is the study of your own thoughts. That’s not to say technical or fundamental analysis of the markets doesn’t have its place. It’s just that people who trade greatly overestimate their true usefulness. So, in the fall of 1993, after “ruining” my life by accepted standards, I affirmed the possibility that my view of reality was nowhere close to

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the truth that I needed to discover in order to profit from all that the markets were capable and more than willing to pay someone. By someone, I mean anyone. No one is better equipped than anyone else is. I chose to accept that my personal choices were responsible for every one of the agonizing disappointments, all the pain, all the losses, all the bad business partners, the bankruptcy, and all the mistakes. It was all the result of my personal choices—made through the lens of my personal perspective of reality—and nothing else. I put myself here through ignorance. Thank God I wasn’t dead, on drugs, or worse. There are worse things. That’s why people kill themselves, because from their point of view, death is better than the reality they have created for themselves. I decided to discover the truth about the markets at any cost. What happened was an ongoing process of self-disclosure that remains to this day the most difficult thing I’ve ever done, but has yielded the highest rewards I could ever ask for. Without any doubt I can stake all I am or could ever hope to be on this one fact: The only way to consistent trading profits is through self-study. By that I mean real self-study. The kind that brings you face-to-face with what you don’t want to see. The kind that confronts the deepest part of who you are or think you are. The kind that causes you to change your behavior, how you spend your time, the ones you associate with; even those you love and why. That kind of self-study I wasn’t prepared for any more than anyone else would be. That takes guts. Courage. Blood, sweat, and tears (if you have any pride in yourself). I chose to go to the wall with this. This process continues every day, through every minute of every trade. Even when I am not currently in a position, this process continues. Every part of my life contributes to this process. Every thought, action, motive, or activity contributes and, at the same time, has the potential to detract from my results. This takes a level of commitment, not lip service. This is the hard edge. Dividing between the individual parts of yourself and constantly re-integrating what you find. It’s saying goodbye to some things and owning other things in a way that cannot be compromised. It’s lifting outside of yourself and considering what you really see. It means a constant change knowing that the change is the only permanent part of you. It is the journey and not the destination. The destination is always someplace new, yet always the same: To take out money.

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When I chose to uncover what the real market realities were and the true nature of my own personal reality, I realized it was impossible for me to act in the capacity of a “broker.” I could no longer continue to sell an investment to someone who knew nothing about the markets, and do it in such a way that he or she would be exposed to a needless loss just so I could get paid. I couldn’t sell someone on heating oil going higher if I really thought the market was more likely to move lower. If a client opened an account hoping to make a gain, I needed to be in a position to give him a fair shot. Only a true trader could do this. I was absolutely convinced that you could profit from price action. I became a student of how, in the deepest sense, the markets actually worked and what created them. Only by doing so could I ever hope to give a client the best possible opportunity for a gain. Even though I would continue to raise equity for the purpose of trading I could no longer see the business of commodities as only that. As time went on, the amount of time I spent raising funds became less and less and the time invested in understanding the real nature of price action (and myself) became more and more. This new attitude created all kinds of conflict with brokerage houses. They want brokers on the phone selling, not trading. Trading is simply the messy little necessary evil that generates commissions. They view every minute you aren’t on the phone selling as “lost time.” They only tolerate the 30 seconds of each day allotted to executing trades because that is the only way to get the commissions. They want brokers to spend those 30 seconds writing a ticket for a 50 lot (meaning 50 commissions) instead of a five lot. The conversation goes something like, “Oh, you’re in? Great, how many round-turns4? That’s all? Well, get back on the phone.” This creates tremendous pressure if you are really trying to trade well. There’s more to this next story, but let me describe how one relationship ended. Here was this owner’s reason for firing me: My commissions were so small compared to himself and others at the company. I had the smallest book of equity as well. He also had this suspicion that I was “stealing” leads that he provided, which wasn’t true. (What was I going to do with them, line my bird cage?) I had taken a small office downtown to concentrate my efforts. He assumed all this was leading up to me leaving to start my own company, and it was his blood that was going to get me there. He figured he would beat me

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to the punch. When I asked him to look at my trading equity, my sales, and commission history from the time we began working together, he refused. I implored him to use his common sense and realize I had no intention of hurting him in any way. He absolutely refused to listen or change his mind, but I was on to something. Here’s what he missed: I had raised only about $25,000 in new cash in 90 days (compared to what I had previously done this was peanuts). Every client of mine on the books had nice gains, after fees and commissions during that time. Every other client on the books at the same company was losing. The ratio of fees generated as a percent of total equity was only average, but the average size of my positions never committed more than 30 percent of total equity on deposit. In other words, I was trading smaller but more often and realizing consistent commissions while making gains for the client. In addition, every trade was discussed with the client and the client gave permission to do each trade. I followed every NFA rule. Many at the company didn’t. No client was ever in a position to wake up one morning with all his equity gone. If this stupid @#%$ would have thought this through, he would have realized that within six months the commission income would have been exponentially bigger than it was. Furthermore, trade size would have also geometrically increased, and the clients would all be profitable, or at least still in the game. All this would be accomplished while taking on less risk to do it. Not to mention that those clients might all send referrals and continue to invest more free cash. If this idiot really had thought it through, he could have had every client under management at the company in the same position. Instead he killed the golden goose. In this business this happens every day. Shortsighted owners screwing themselves and everyone who trusted them because they think this business is only about commissions. This is one of the realities that I had to accept. Brokerage houses just want commissions. They don’t want you messing up the process of converting client equity into commissions as fast as possible with the ridiculous idea of trying to make money for your clients. To continue being a broker would only continue the problem. That’s why I chose to go completely on my own. I would become a trader. This was really the beginning of my career. Everything had lead up to this point. In the process I became bulletproof.

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Chapter 3

Technical Analysis Clairvoyance for Profit When a true genius appears in the world you may know him by this sign: that all the dunces are in confederation against him. —Jonathan Swift

T

he year was 1992. During my odyssey to discover my success as a commodities trader, I had opened an account with a very well-known discount brokerage firm in Chicago. If I told you who it was, you would instantly recognize the name. At the time, they had a small room on the ground floor of their offices that was available for local customers. The room was full of quote screens, tables, and telephones wired directly to the trading desks of this company.The idea was that if you were a customer, you could come into the office and trade your own account right there, every day if you wanted to. It was similar 29

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to the old-fashioned bucket shops that used to be so popular at the turn of the 20th century, except this one was completely legitimate. The whole idea was a really good one for business. After all, if you lived in town and you didn’t want the expense of setting up your own trading facility in your home, or you couldn’t afford to trade in the pits, this was the next best thing. You had good access to the markets at a reasonable discount rate. The rest was up to you. Bear in mind, I was still the kind of person who relied heavily on charts, graphs, statistics, and the like to determine “where the market would go.” I still hadn’t had my catharsis in thinking, so I was really just following the herd to trading oblivion.The room was always full of people who were trading. There were the usual fights over who had the screen first, people who always felt they owned the phone that you wanted to use, the name calling over who was “nuts for going long (or short)” on whatever market was being discussed. There were constant practical jokes, things like unplugging a screen when someone was trying to execute a trade, someone urinating in the coffeepot; that kind of thing. What I found interesting was that the conversations and the general interactions between everyone were nearly identical to what goes on all the time in a “real” brokerage office. It was sort of like an adult Romper Room.1 I was constantly amazed at how ridiculously childish people would be both in their thinking and their actions. It still blows my mind that these people have money or are entrusted with it. What I didn’t know was that every one of these psychos knew less than I did. I actually thought that the guys who traded knew what they were doing, both in the “playpen” (as I called it), or in a brokerage office wearing a shirt and tie. Once I became accustomed to the whole scene and began trading there every day, I began to feel more comfortable about what I was doing. I would let people see my charts with all the lines drawn on them. I would explain what I thought and listen to what they said. After some time I began to realize these people had no idea what they were really doing. In fact, the real shock came when I began working at a brokerage company shortly after losing my stake in the playpen. One of the brokers in that office was someone I had originally met in the playpen. After blowing out all his own money, this nut-bag went into the business as a broker. He was doing the exact same thing he had done before, but

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this time with client money. He had absolutely no clue. Believe it or not, this kind of thing happens regularly. Not only do most people have no idea what they are doing, they don’t even believe they need to know. The guys in the “playpen” and the guys in the broker’s office are virtually identical; their constant point of view is that they all believe you can find some reason for doing a trade by looking at a chart of the market with little lines drawn on it or reading an incomprehensible table of numbers some computer spits out. So does the public. Neither group of traders would ever think to ask, “Who programmed the computer?” or “What is this attempt to analyze really based on?” I have yet to find any broker or trader who could tell me that the Fibonacci retracement study is named after a 13th-century Italian mathematician who was looking for two things: 1) order in the universe and 2) the philosopher’s stone.2 Fibonacci actually believed you could turn lead into gold. (I’ll show you the irony in a minute.) Would you want that guy trading your money? Both groups of people look at the same stuff and decide to buy or sell simply by interpreting what they think they see on it. It reminded me of having your palm read. Another amazing thing I noticed in both places was how many people would stand around watching a screen of some market and constantly talk. After the market would move to a certain point all the discussion would go quiet and then someone would break the silence by announcing to everyone that he intends to buy or sell if the market moves to (such and such) price. A spirited discussion would follow, and then like lemmings, everyone, or at least those with enough courage, would also execute a similar trade at or around the same point. Another lively discussion would follow about “what point to take our profits” or “where to run our stops,” all of this with no prior thought or planning until that moment. Then the market would reverse and go the other way, resulting in yet another lively discussion about “how it will come back” or “if it trades to (whatever price), I’m out,” and any number of things. Some guys would take a small loss; some guys bigger losses. Some guys just held on. Some guys would wait to execute at that price. Some would add to the losing position and hope for the best. Then the market would reverse and trade back to where it started. Some guys would get out there to “cut their losses.” Some guys would say: “I’m reversing.” All sorts of things. Eventually, the market would close.

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Then both rooms of “children” would have the same results: some winners, some losers, but always more losers than winners. The losers would go back to the pictures with lines on them (or the numbers in rows), to “find out what went wrong.” The winners would all point to the same pictures with lines on them (or the same numbers in rows), and show them “where they went wrong.” This would set off yet another spirited discussion, followed by pontificating by the winners, philosophizing by the losers. Then it was time to hit the bar. This same pattern happened day after day, over and over again. In the end, the group in either place kept changing as one by one the losers eventually were replaced by new potential losers. Subsequently, the winners turned into losers and were replaced by new potential losers. Then all joined the party of losers in transition and winners in training to become losers. Looking back I wish somebody would have slapped me. I was that guy for years. What a complete waste of time. I’ll never get those years back. While I was in the phase of lunacy—called studying the markets—an amazing thing happened that started me down the road to true understanding. I share it with you in as much detail as I can remember. I swear to God this actually happened. To the best of my knowledge, the shabby guy in this story still trades in the playpen. For all I know he was an alien making a pit stop on earth and had a little extra time to kill. It was a Monday morning around 10:00 a.m. I remember it was Monday because the discussions after the weekend in both the playpen and the brokerage office were always the same: Who got laid? Who got trashed? Who got arrested? Who saw some great movie? and so on. In the middle of enduring a conversation about someone who hadn’t gone home the whole weekend, a man walked in whom I had never seen before. The playpen got real quiet. I thought that maybe he was the owner or something. A regular, whom I called the Fly because he was always hovering around behind me and looking over my shoulder at what I was doing, leaned over, whispered real low, and said, “Stay away from that guy, he’s nuts.” He said it in such a way that made you think everyone else in the room must be an Einstein. “Why?” I whispered back. “Just watch,” said the Fly. So I did. Now remember; in order to be in that room you had to have a trading account open at the firm. This guy was dressed in a baggy old winter coat, worn tennis shoes, and hadn’t shaved for a few days. He almost

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looked like a street person, but there he was. He calmly sat down in front of a screen and everyone gave him a wide berth. He just sat there for a moment with his eyes closed, collecting his thoughts. He let out a long sigh and went to work on the keyboard. He would stop, think a little, and tap away some more. He must have done this for a while because eventually everyone else went back to what they were doing. I kept watching. He picked up the phone and asked for the back office. He very calmly asked what the balance was in his trading account. He pulled a pencil and notepad from his pocket and wrote that down, then put the pencil and notepad back in his pocket. Then he did what at the time didn’t seem all that strange. He pulled an empty, green glass Coke bottle from his other pocket and put it on the desk next to him. I thought he was just getting rid of his trash. I had no idea that act was so significant. Meanwhile, the Fly buzzed over and said, “Now watch this,” and so I did. The shabby guy sat for awhile, and then his eyes got real wide. He grabbed the Coke bottle and put it to his ear exactly the way you would put a telephone to your ear. He said, “Hello.” Then he jumped out of his chair, and yelled around the room, “You gotta buy! You gotta! They’re saying it’s time to buy! Hurry before it’s too late!” He then dropped the Coke bottle, grabbed the real phone, and yelled, “Buy a hundred May at the market. Be quick about it. This is account number XXXXX!” He proceeded to wait a few moments and then started writing furiously on his old notepad. “Okay, 30 at even, 30 at a quarter, 40 at one-half. Right, got it; new order. Sell my 100 at (whatever the price was) stop. Thanks.” Then he hung up and sat back down looking once again calm as can be. I wasn’t sure what to think. This shabby guy walked in, traded a hundred-lot of something, did it while yelling at everybody in the room, and did it all, by my assessment, because someone called him on the Coke bottle. “See what I mean,” said the Fly. I didn’t know what to think. Twenty minutes or so later the shabby guy did the same thing. His eyes darted to the Coke bottle. Then he grabbed the Coke bottle and said, “Hello.” Again he jumped up and yelled “It’s time to sell!” this time, called the desk to liquidate his position, canceled his stop, and then sat back down. He then proceeded to calculate something on the notepad for a moment. Then the shabby guy very calmly got

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up, walked around the room, and said, “It’s been nice trading with you boys today,” and walked out. Everyone basically ignored him and once he left the conversation started about what a whacko this guy was. While they are all talking, I walked over to the screen that he was using to look at the market he was trading. There on the screen is the five-minute May pork belly chart. Ask anyone what trading pork bellies is all about, on a five-minute time frame no less. I saw his entry point and his exit point. I then converted to the daily chart and saw this guy had captured about 75 percent of the day’s range. I then figured what that meant if you had a hundred-lot on. The Fly told me this guy comes in every now and then with no set pattern. He does the same thing every time; talks to the Coke bottle, trades, and then leaves. When I told the Fly that trade was worth about $32,000, you know what he said? “Look, he’s just some nut. Maybe the guys at the desk feel sorry for him. He probably doesn’t even have an account. They probably held his orders. They never placed them. No one trades like that.” I asked the Fly, “How did he get in here?” “Who knows?” was his answer. I asked the Fly if anyone looked at his other trades. “Of course not, he’s crazy,” he said. And that was the end of the discussion. The Fly was not the first person I met in this business who would ignore reality when it stared him in the face. What made such an impression on me was this: If it was a real trade (and I believe it was), this guy, crazy or not, had executed both sides of his trade at precisely the right time, however he chose to do it, and he took the most amount of money in the least amount of time that particular market had to offer on that particular trading day. It was simply amazing to me. All of the people in that room were attempting to do the very same thing every day. All the people in that room had every tool the industry could provide you to do it with except the magic Coke bottle. As time went on and my losses eventually put me back on the phone at a brokerage office, my thoughts were constantly on how to improve my trading for my clients and myself. But that whole experience kept coming to the front of my mind. Was that guy just lucky? Did he have some secret? Then the big question: How do I learn to do that? If you stop to look at the real implications of what had happened and start thinking it through, the conclusions are simply beyond the acceptance of nearly everyone in the business.

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This is important, follow me on this: There exists unlimited market information that can be compiled in an infinite number of ways, which, in turn, can be interpreted in an infinite number of ways. This takes its form as the huge business of technical analysis. Add to it the additional information such as books, tapes, seminars, and so on, that also is a huge business designed to help you make sense of the voluminous amount of market information. The business of commodity trading grows larger every year, and the fact still remains that about 80 to 90 percent of the people who execute both sides of at least one trade during their lifetime will remain net losers. Every one of these losers has access to the same information as everybody else. It is true that many of these losers don’t know they need to learn the business of trading. But the people who do know, and buy this stuff, are still in this losing group. So if the market information is all the same for everybody, then the problem must be in how it is used—or it’s something else. What is still striking is that the shabby guy in this story apparently never uses any of the technical analysis information. Also consider that many of the people who write the books, hold the seminars, sell the courses, sell the trading programs, and the like, don’t even trade. One so-called expert, the guy I mentioned in the introduction, fills his marketing material with scores of testimonials. People just lauding over how incredibly reliable his technique is, like he’s the only one with the Holy Grail of trading. You can have this amazing secret for only $69! (We’re having a sale this week.) I personally have met one individual who writes a new book every two years or so, is highly regarded by the public, has sold lots of seminars, is highly sought after to lecture at industry functions, and it’s rumored that he hasn’t traded for almost 15 years. He is the consummate professional opinion gabber. I’ve met this guy more than once. You would be amazed at the crowds that draw around him. He owns a discount brokerage house. He even does television commercials. People really believe this guy has some secret. When I was going through my period of delusion, I bought his books too. When I started coming out of the fog, the last time I met this guy, I asked him a question, “Can you show me your personal trading results by using this information?” It was an honest question. I assumed that he traded. I didn’t mean to put him on the spot. I just assumed if he was selling it, there must be

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some truth to it. Or at least something that would make the price fair, even if it only helped me make one additional winning trade. You know what he said? “Well, I’m retired now. I want to help others learn how to profit.” Read: “I won’t take the risk you are willing to. I’d rather sell you what you want to hear.” You can make a lot of money in commissions helping losers execute their trades. You can make a lot of money selling “loser training manuals.” You can make a lot of money selling dreams. I finally understood what was happening through all this when my girlfriend at the time asked me: “How much money have you spent over the years on all these books and charts and stuff?” I added it up one day and told her. “There are thousands of guys like you out there, right?” was the next question. “Have you made more money?” was the final question. When I answered, “No” (which was the truth at that point), you know what she said? “You should be in the racket around the racket. They don’t know any more than you do.” It was a revelation. I finally decided to test this hypothesis by selling my own “technical analysis.” During the summer of 1994 or 1995 (I would have to look), I started a 900 number line giving out price action opinions in five different markets. In the process, I discovered that the 900 number line business is even sleazier than this one, but that is another story. Since the provider is gone, the records are gone, and it was a long time ago (by this industry’s standards), I’ll tell you the name of the business. It was the Pro-Traders Hotline. I charged $1.99 a minute and the average message was three minutes long. I even offered a free newsletter if you left your name and number. I hoped to make new clients out of the ones who left their phone number. I updated the line’s recorded message at about 6:00 a.m. every trading day and again around 4:00 p.m. I placed a small ad in a trading newspaper and took my chances. I had no idea that anyone was calling until I got my results every week. Within four weeks I was being paid a net profit on this. Within 90 days it was a few thousand dollars a month. It really was a neat little business. Then the provider of the service disappeared and I never got any money. All in all it was an interesting experience. Here’s the kicker: I made the whole thing up. All the daily recommendations I took from the previous day’s high or low. I invented some hyperbole and hype about support or resistance and said, “Make sure to run your stops.” A few times I just flipped a

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coin and said, “Go long (or short) on the open.” Sometimes I would say, “Stay out until the market defines itself.” What the hell was that supposed to mean? The bottom line is people ate this stuff up. If I really wanted to be in this just for the money, I could have figured out a way to pump that phone line for all it was worth. I really believe that is what most of the support industry to commodity trading is really doing. I bet most of them are doing it ignorantly and really believe in the B.S. they sell. I’m sure a few know exactly what they are doing is selling B.S. This whole thing can be summed up in the following wire service opening comments. This was actually on the CQG network, seen by thousands of traders every day, all of them using it to help them trade: N.Y. World Sugar Futures Called to Open Unchanged 08:36:41 CST 04/03/95 KEYWORDS: FOOD, COMMENT New York-April 3-FWN—N.Y. World Sugar futures are called to open unchanged, based on overseas trading. At the London Commodity Exchange, May sugar is currently down 10 cents at $374.20 after trading between $375.00 and $373.40. The physical market remains quiet with no news of any sales, several sources said. As a result, traders expect May sugar to continue trading back and forth between 14.00 and 14.50 cents. The only known tender at this time is on April 19, when Egypt will be in the market for 50,000 tons of raw sugar for delivery in July. “Technically, the market looks flat and is in a triangle consolidation due to an ABC correction,” one technical analyst said. “At this point the 40-day moving average has flattened out,” this source said. “And open interest over the last month has done little. As a result, this source said, “THE MARKET COULD GO EITHER WAY.” The caps are mine.You need some analyst to tell you that? Therein ends our object lesson on the validity of technical analysis. It is important to remember a few things. The real business of technical analysis is an important part of trading. It does have its place to the successful trader. It can be an indispensable part of lasting trade success. The entire key is how it is used and understanding what it is really saying. That’s what I want to talk about for a minute.

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Let’s review what we have learned so far: • The entire world has access to the same information in the form of price action. All the markets have all the traded prices in the same format. • There is an entire industry that takes those trade tics and compiles them into many different formats. They then interpret what those little price changes mean based on some reason. • Some stop there and some add additional interpretation as to what you should do in that market. • Some want you to “do it on your own” and provide all sorts of personal opinions on how you should learn to read this stuff. • Some will even do all this for you and sell you a complete set of trade rules to follow to make your fortune; including “high-tech” software. With all this information the fact is, in an ever-growing business, almost everyone is a net loser. So how can technical analysis or market education be of any value? The value is in the fact that 100 percent of the losers are using it. Suppose you could find out where they are trading and take your position against them? In a small way that is what the pit trader does every day. That’s why the membership to the “club” is so expensive. If you, as a student of the market, were to stop right now, put this book down and every other book down, and ask yourself, “Where is the loser?” You would begin the process of learning what technical analysis is all about and why it has its place. The real value of technical analysis is that everyone using some form of it or buying some interpretation of that analysis really believes he will profit by using it. By knowing where that person is and trading against him, when he liquidates his loser, he must pay the winner. That person should be you. But he thinks it will be him. Because his belief is so strong in “what the chart is saying,” he is willing to execute a trade, putting his capital at risk for the eventual winner to take. It can never be any other way. If using the information results in a winning trade, he will be so convinced that it is accurate that he will never trade any other way. He won’t ever consider evaluating the market any other

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way because “this way works.” Therefore, he will eventually make more losers. The reason is because all interpretation of all price action is nothing more than someone’s point of view. Every technical “system” has its share of winning trades. Once it works one time for someone, his point of view becomes all the time. At the very least he is willing to do a few more trades to find out. This is called “testing.” Some true idiots do something called “paper trading.” The idea behind this form of mental masturbation is this: “If I pretend to trade long enough I will learn how.” By that reasoning, if you play enough video games, you would become qualified to fly an F-16 into combat against someone who is trained to kill you, and do it equally as well as Chuck Yeager.3 It’s madness. It really should be, “If I pretend to be a loser, eventually I can become one.” Some very sophisticated paper traders will come up with some small something that they believe is a pattern (from their point of view) and “back test it” through 10 years or more of price action, thereby “confirming” its viability. They then begin using it with the same results as everyone else— or selling it to you. Remember, none of those hypothetical trades were ever done by anyone. How easy is it to say, “Well, I would have done such and such here because looking back the market would have done such and such anyway”? That’s all these people are really doing. They are saying, “Since the market was eventually moving lower, I would have found a way to be short” or vice versa. If you doubt my hypothesis, here is some homework. Peruse the “for sale” section of any industry magazine or paper. Count the number of “trading systems” available as the next “for sure” approach. Do this for a few months. Watch how fast these systems come and go. Call up the authors and listen to them justify what they are doing. Ask them how much money they personally have taken from the markets. If you want a real eye-opener, ask these fruitcakes to fax you the latest monthly statement from their brokers showing gains. Listen to all the reasons why they can’t. Then go read the classified ads section for people selling these same systems after having tried them. Call those people and ask them why they are selling them. Without fail the answers will be along these lines: “Well, it’s just not what I had wanted. Oh sure, it works (which is a lie), but I’m looking for something more aggressive or that takes less risk (that is, I want to get my money back). I’m not satisfied with my results (I’m looking for a new system to recoup my losses).”

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Let me make this really clear: If there were a system you could buy that worked, that’s what people would use. There would only be one of them. The rest of the people are trying to find a system or create one by doing their own research and charting, or God only knows what. The only way to see if it really works is to trade with it. When they do, they lose, and find out it doesn’t work. Then they try something else until they run out of money. This happens every day. Can you see why I wrote this anonymously for the first edition? Someone could become furious. All the people in the business of selling all these different colored crystal balls could be out of a job if the majority of people putting their confidence in all this insanity were to wake up and say, “Hey, this is a rip-off.” For some reason everyone believes in this hocus-pocus. That will never change; at least for right now. But none of these “purveyors of profits” like their “profession” or “science” to be called on the carpet. There’s too much “evidence” that this sort of thing works. They will be happy to show it to you. Do you want the acid test of the evidence? Ask whoever is trying to sell you whatever it is they are trying to sell you to let you pay for that system, research, tools, opinion, or analysis out of the profits that it generates. It boils down to getting past illusions. The kind you tell yourself, others tell you, or the kind you let yourself believe. I think I’ve learned how to do that. I’ve been able to discover what the real secret to using analysis is really all about and what analysis is really trying to do. It’s like this: How many people take the “science” of alchemy seriously today? The hypothesis that you can turn lead into gold doesn’t fit anymore with the facts of particle physics and chemistry. We have come to know the true nature of gold and lead—they are separate elements. Did you know that, at the height of the belief in alchemy, there was a school in Amsterdam that offered a degree in alchemy? That is an historical fact. You could receive a degree from a center of learning respected by the known world at the time without anyone ever in history before or since ever being able to transmute any elements into something else. It’s never been done. It is physically impossible. For some reason people thought you could do this. Somebody must have said, “Wouldn’t it be neat to turn lead into gold? We would all be rich.” It doesn’t matter why they thought that or how much the basis of that idea was rooted in the known reality of the time, it couldn’t be done then and no one will

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ever succeed at it because the actual unknown reality (the higher reality if you will) won’t allow for it. That didn’t change the fact that people believed it could be done. This belief existed for almost a thousand years. You could study it until you were an “expert” in it. All of what there was to know about turning lead into gold—great halls full of hundreds of people all discussing exactly how to do it. If you could convince someone you had done it, people would listen to you and value what you said very highly. If you claimed you had done it only once, and simply wanted to share with others your knowledge (for a small honorarium) you could do so. Let me repeat: This is a historical fact. Others would be so convinced that you knew what you were doing that they would follow in your footsteps. They would buy your books. They would attend your traveling seminars. People would hire you personally to perform this miracle and teach them how to do it. If it didn’t work, there was always some reason. With enough time, “We could fix that.” Others would take what you knew and add to it to “improve” it. Others would try to refute your ideas with ideas of their own. Still others would keep some parts of the whole concept but ignore other parts not to their liking. Some would combine parts of the entire theory with other parts into incomprehensible combinations that only they understood but claimed worked. “I’ve found it, but I’m not going to tell you, not just yet. I’m going to test it some more.” The whole world of alchemy might shower all kinds of awards on them and laud how far they have “advanced” the “science.” Sometimes they would “teach” those secrets to only 23 people or so. These were all fakes, frauds, charlatans, cheats, liars, and very deluded honest people all seeking something that couldn’t possibly be done. Either they were trying to exploit this belief to steal money or honestly believed they could make money. Some people spent their whole lives in this pursuit and died penniless still believing it could be done. Does any of this sound familiar? Remember when I said in Chapter 2 that everyone’s reality is different? All of the charting, systems, and analysis are simply someone’s point of view on what is happening. They then use all this stuff to somehow convince themselves that a winning trade is right in front of them (which it is, but for different reasons). This gives them enough courage (meaning hope) to place their capital at risk. This whole process

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is formulated on the assumption that analyzing prices will somehow provide the answer to where prices are going next. If that really were the case then everyone would be a winner. There would be no losers to pay them. Because the business of trading is a zero-sum game, the entire environment cannot function that way. It is against the laws of thermodynamics. Since we are playing in a world where only the loser can pay the winner, it must follow that the winner needs to do something different than the loser. Since the loser is absolutely convinced he can make a loser out of someone else by reading a chart, and every other loser is thinking the same thing, it follows that the winner must be thinking something entirely different in order to take their money with any consistency. The sum total of the loser’s trading is the inequality of the markets. Nothing else. The winner exploits this with as much certainty as the loser becomes the loser. There are 100 percent winning traders. I know one or two of them. They don’t talk much. Why? They don’t have to. They don’t need to convince you or anyone else they know what they know. I personally only win about 70 percent of the time, but it doesn’t take a rocket scientist to see that is more than enough, even when I get “spanked” by the markets. Let me give you the basics on doing real “technical analysis.” I’ll start with a few premises that you must accept at face value. Don’t read between the lines. Leave that for the next loser. 1. A price chart (in any time frame) is simply a pictorial representation of the sum total of all the market participant’s belief structures. In order to execute for an entry (hoping to profit), your belief must have been strong enough to do something, otherwise you wouldn’t be in. Since in order for a price to print, both a buyer and a seller must execute, then both believe they will profit. Therefore, they must believe completely opposite of each other. Since both traders have access to the same market information (the price), they must have concluded two completely different things from that information. (What that prices means.) 2. Because every potential trader in every market is seeing it differently, every printed price will mean something different to everyone. The price, which you must be concerned about, is the

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price the guy who is already in the market (long or short) is in at, and where he needs to execute to get out at. He must do this sooner or later. He cannot “lose” forever and cannot “win” forever. He must execute for either to happen. His prices are the ones you are looking for. These two prices are the only two that matter. It doesn’t matter what the end result to him is with those two prices; it only matters to you. 3. When every potential trader has executed for an entry, in any time frame, the market is vulnerable. When no one is doing anything, and what’s been done is done, prices must stop. They will start moving when the loser decides to get out. The winner can afford to wait. The loser must execute on the same side that the winner is already on. It cannot be any other way. If the winner chooses to liquidate against the loser, both are now out. Therefore, there are less people in the market with unrealized gains or losses. 4. Every “technical indicator” designed is based solely on combining or dividing prices in some way. They are all “moving averages” in varying degrees of complexity EXCEPT ONE. That is volume and open interest (V/OI).4 V/OI is the only “technical indicator” that chronicles the true state of what is happening inside the minds of the market participants. Nothing else can tell you what is happening behind prices. Only V/OI can tell you when people are coming into or leaving the market. That’s why it was the original one used by traders in the first place and it is the only one that really matters. Let this soak in a bit. What I am really saying is that the true trader, the consistent winner, is not concerned with any price or where prices “started” from. He or she is concerned with what it takes for people to believe strong enough, and with enough commitment, that they will place their capital at risk. The true trader is looking for the place where they must change their minds enough to give up their position and leave the market. Since he knows that the loser is always basing this decision on price, he is only looking at which price they are changing their minds. He is only concerned with when they are in the market and when they are leaving the market. The true trader doesn’t care at what price that happens, how far apart those prices are, or how much

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time it takes for it to happen. He is just watching for it. The true trader is thinking something like this: • • • • • •

What did people believe in order for prices to get here? What will make them change their minds? What price action will cause the loser to quit? What price action will cause people to more firmly believe? How long has the loser been losing and when will he quit? How long has the winner been winning and where will he think enough is enough?

The bottom line is that a price chart cannot “tell” you what is likely to happen next until you begin to interpret it from the losers’ point of view. Any chart, or any analysis, can only be useful when you start asking it to help you find the loser and uncover how he is thinking.You should look at any chart and ask questions of this sort: • • • • •

Who is winning, who is losing, and why? At what point are they likely to switch sides on each other? Who is confused? What will cause them to change their minds? When will they quit?

If you choose to continue using indicators to assist you in determining these places, always remember they were based on prices first and solely. What will make this whole thing more difficult—it’s not easy in the first place—is that the traders in question are always coming and going. Sometimes they use different time frames. Sometimes they rely on different information from one week to the next, trading in different sizes than last time. When the market opens and closes, they initiate on the buy side at one point, and then they might initiate on the sell side, and so on. There are any number of things. The dance is developing an understanding of what the sum total of everyone is doing from a net perspective and positioning yourself accordingly. The one thing that is always a constant is that the loser really thinks that he will be the winner and really expects his analysis, however it was done, to make all the difference. But the real reason a market has “support” or “resistance” is because it was at that exact moment everybody who was capable of doing something had done so. Who cares why they did it?

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Now they are all waiting for the other side to quit first. Of course, that’s always the loser because the winner has a lead before he has to do anything, unless he wants to. That’s where all the money goes. Except for the small part that becomes commissions. Before I forget, the same applies to the concept of fundamental analysis. People take what they read and assimilate from the fundamental sources and act on it by executing. The fundamentals have to convince someone to do something. In this respect its net result is the same as the technical and, therefore, of no more value. The fundamentals see their final result as part of V/OI; and you can study that fundamental crap until you head caves in and it won’t help one bit. You still have to do something to profit and you will still be in the same market with the same losers—or become that loser. That’s all I have to say about fundamentals. When I sat down to write this book, I intended it to be my trading story. It wouldn’t be complete if I didn’t tell that part of the story that drove this thinking home. There were many trading lessons to be learned from my experience of trading crude oil during the first Persian Gulf War. Lots of life lessons, too. I talk about some of them throughout the book, but this is the main one. In the fall of 1990, Saddam Hussein’s tanks rolled into Kuwait (it was in all the papers). To any student of Middle East politics, that had all the ramifications of leading up to World War III. Crude oil was trading about $16.50/BBL. Something was going to happen and in a big way. Even in my ignorant trading state at the time, I had the presence of mind to buy crude. The market continued a steady climb with only modest retracements until the bombing of Baghdad on January 15, 1991. It then sank like a rock back to roughly $16.50/BBL shortly thereafter. In other words, by trading it wisely you could have been long up to roughly $37 and short back down. In less than a year, you could have gotten disgustingly rich. As my pit trader friend says, that was “screw you” money. I was buying all the way up and pyramiding with open trade profits. The issue of money management was a lesson in itself. No one who is a successful trader pyramids like that. I was net long almost 200 cars (car is market slang for one futures contract) from about $27/BBL on the average somewhere around Christmas. As before, I thought that was

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always how it was in futures. What I didn’t know was that open interest had been dropping among the large speculators. In other words, the pros were getting out before the bombing, which most believed was certain, and in fact did occur. Open interest from the small speculator (read: the public and those who work for them) had risen to a record high. I had at least learned the lesson to run stops, so I knew I could keep some of it. But I really believed that the market would go to $40/ BBL or more. With what I know now, it was ridiculous to assume that any market would go to any price. It just goes where it goes. You can’t “predict” prices—only watch them and use them to your advantage; which was what the pros were doing. Because I knew that the bombing would do something to the market, and having assumed it would mean higher prices, I was going to liquidate into the highs that I thought were coming. Sometimes that’s how tops happen and sometimes that is the right thing to do. I would have made about $2.5 million at $40/BBL. I even went shopping for Ferraris after New Year’s Day. I picked out a black one. I figured I had finally made it—in a big way. So here’s how it played out. The U.N. coalition forces begin the attack on Baghdad before dawn local Iraqi time. That was late at night New York time and the markets were closed. The overnight electronic system wasn’t trading yet so I had to wait for the New York Mercantile Exchange to open in about 12 hours. What could possibly happen in those hours? Well, everything. The market ran to about $41/BBL in the Far East, which was open at the time, then started to slide off. In London it actually opened lower from the previous day. By the time New York opened it was $10 lower. The panic that hit the open caused the market to slide another $3 in less than a minute or two. Of course with the huge volume and knowing the rules of the game, all my stops were elected near the low, far below my intended prices. It was enough of a low below my average to make me debit about $200,000. I was shellshocked. It couldn’t have been worse if I was in Baghdad! If I had bought puts against my futures ANY TIME after Christmas I would have been nicely ahead, even with the huge premiums that I would have had to pay. To make matters worse, the trade played out exactly as I had planned, but because the brokerage house had no clearing relationship with the Singapore Mercantile Exchange (SIMEX) or the overseas

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markets, I lost. The owners of this company knew my position and everyone else’s there, but like I’ve said before, very few brokerage owners have even the slightest idea of how to really do this business. They care even less for the guys who work for them. They don’t care at all about clients, except as potential commissions. With the magnitude of the world event, the leverage we had, the size of our total position, along with the potential for violent price action, you would think someone would have thought to protect our exposure. I had done what I knew how to do, but there was more that could have been done. At the time, I didn’t even know exchanges could have reciprocal arrangements with each other. At the very least we could have had the office open all night at that critical time and had some kind of hedge account somewhere overseas. Knowing what I know today, the whole thing was completely avoidable. I lost everything I had and spent years paying off the debt. That almost killed me. If ever I had a reason to quit, there it was. But here’s the lesson: Who was long? Who had to become a seller to get out? Me; the guy reading the charts and forming opinions about prices. Since everybody had already gotten in on the long side, the only way out was to sell. But there was no one else left to buy against that sell order! No wonder the pros were out. They all knew that after studying what was going on behind the prices, the message was obvious for anyone who could see it: Time to liquidate. The best thing to do was go short against that last group of buyers. I’m sure a few did. I would have. Knowing what I know today I would have done that in a New York minute and never lost a second of sleep. There is no doubt in my mind there is some crude oil trader, sitting on his yacht, somewhere in the Caribbean, that I and all my clients paid for. If I ever find that guy, he owes me a “thank you.” Come to think of it, he doesn’t. Nobody twisted my arm to do that trade. Now, here’s the thing I want to make absolutely clear. I was devastated at the time; but the entire experience was crucial to my development as a trader and as a person. If it had not happened exactly as it had, I may have never learned the importance of being concerned about who the loser is and to avoid being that guy no matter what. A very sharp card player once told me, “If you are in a card game and can’t tell who the patsy is, you are the patsy.” If I had made that money,

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I would have eventually lost it all anyway. The experience of the win would have firmly convinced me that I knew what I was doing. The charts told me how to do it, they were “right.” I could trust them and not have to think for myself. That is what the whole business of technical analysis is all about. It would have only been a matter of time before this sort of illusionary thinking would lead to loser after loser in any market I was trading. If I had made that money I might have never learned that. It forced me to reevaluate how I saw the structure of the markets. It taught me that trading isn’t about prices or buying and selling something; it’s about outthinking someone who does very little thinking in the first place. The Art of the Trade is about knowing how people think and how they act from their thinking. First, you need to know them as individuals, then what their thinking must be like when it’s formed into a crowd, and how crowds behave. Then you need to know what will influence that thinking or behavior and realizing when that thinking or behavior isn’t justified, when it’s likely to change, and at what point that will probably happen. Also, at what point will every individual within the group have no choice in the matter, their fate being determined in advance, without them even knowing it, at the exact moment they put themselves into play, however long ago that was. In addition to all the concerns about individuals and groups, it is essential that you know enough about your own method of thinking and know yourself well enough to ascertain when you are thinking no different than the crowd in question, or in some other unique manner. This type of knowledge will never be a number on a screen, some line between two numbers on a screen, or some combination of those numbers. It can only be a factor of how well you understand the exact nature of the reality those numbers really represent and how well you know your own ability to determine that. Where can you buy that for $195? How out of touch with reality would someone have to be to think they could find it for you? Not to mention sell the exact same thing to someone else just as easily. How self-deluded does someone have to become to think he can reduce that process of critical thinking, intuition, and deduction down to curlycues, dots, ratios, lines, and numbers on a piece of paper for himself? How far beyond reason would someone have to be to now expose his

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money or his client’s money to a winner-take-all battlefield thinking that this was all there was to it? This happens every day. In fact, you do it now, don’t you? So, to close out this chapter, let me return to the “playpen.” I really believe that shabby guy knew exactly what he was doing. Maybe the magic Coke bottle was some kind of personal amusement. Maybe he really understood the nature of the markets and those who participate very well. I bet the clothes, the beard, everything was just his way of saying “F’ you” to all those losers. Maybe he just didn’t want the Fly wasting his time. I bet he already knew what I came to discover on my own: Find the loser and take his money. Take all his money. Don’t even leave him cab fare. Take his house, his car, his boat, his airplane, whatever. Don’t take his self-respect or his belief he can win because then he will stop trading before you can take all his money. Don’t let him know he is the loser. Keep telling him he can win. Once he realizes he is the loser, the game is over for you. That is all you can get from him. Now you will have to share all the money with him because he found out how to be the winner like you are. But don’t worry, all his friends think they are smarter than he is and smarter than you are. Just be patient and reel them in, one by one, until you own the whole block. There is a batch after them, too. How much money do you want? I wanted to become the type of man the shabby guy was, and indeed I did become that man.

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Chapter 4

Adversity The Trial of Principal A smooth sea never made a skilled mariner. —English proverb

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ebster’s dictionary defines adversity as a “state of hardship or affliction; misfortune.” It implies that what is happening is unexpected or from outside your own doing. As most people know, part of what we endure through life is self-created. This falls under the concept of the unexpected because what right thinking individual would do something to hurt himself if he really knew better? Most adversity we suddenly find ourselves in; whether we have created it for ourselves or not. When I chose to become a commodities broker, and later a true commodities trader, I wasn’t prepared for adversity. Certainly not the 51

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kind I had to go through. In fact, I considered adversity as a minor and temporary thing that you could get through by exerting enough effort and then would not have to deal with it again. I really thought that adversity was a state that “losers” frequently found themselves in, but not me for very long. What I came to discover is that adversity is a constant state of existence for anyone who is connected to the markets. The very nature of executing a trade puts you in a state of conflict. The people in the business itself are the type who naturally gravitates toward conflict. They create adversity for themselves and those around them as a normal course of action in both their thinking and interaction with one another. Adversity is constant in the business of trading because the most common mode of thinking is “every man for himself.” Even though it doesn’t have to be this way, those involved seem to prefer it. The bottom line is that people really are functioning like “I’m gonna screw you before you can screw me. I’m going to do that even if I don’t have to. Everyone could be a threat to me or stop me from getting what I want.” The worst kind of adversity, of course, is the self-created kind; sometimes that means our own trading. All the rest is just kind of a “bonus.” I honestly wasn’t prepared for this type of harsh reality. Until I got into the markets, I had defined adversity a whole other way. This business of something constantly working against you was totally new to me. I suppose I was naive. Regardless, as the whole experience unfolded I wasn’t prepared for some of the blows that would come my way, or the daily tension that would exist in addition to what the markets are capable of inflicting on you. But, as you will see, I found a way to transform it to become a source of power. Ultimately, it helped contribute to my trading success. While you are reading all this, I want you to try and remember that through all of this the public was, and still is, entrusting brokers with their hard-earned cash. They really believe they are working with the brightest and most professional people in the world of finance. We can make it look that way. After all, we know how to double or triple money every month, right? I really wanted to be that kind of professional and work with people who thought the same, but that didn’t happen. No matter what I wanted to believe about myself, I was still in the environment that was far from my perceived ideal. What did happen was a period of years full of constant adversity. Here are a

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few examples of things that went on around me on almost a daily basis. This is the short list, by the way. Things would disappear off my desk. By “things” I mean: a brand new lap-top computer (with all my records in it); my Mont Blanc pens; countless numbers of staplers, notepads, rolls of tape, or any kind of basic office supplies; plane tickets; calculators; books, newspapers, and magazines—all with information I wanted to keep or use; equity runs1; sales leads, sales material; charts, research, business cards of market contacts; sometimes my lunch (or parts of it); even brand new clients whose paperwork and check were waiting to be processed. It got so bad I eventually began carrying around every possible item I needed to run my business in a bulging briefcase I never let out of my sight. I did this because I never knew when something that I needed wouldn’t be there. I’m sure a lot of it was done for no other reason than to watch me blow my stack, which would elicit shrieks of laughter from the children that worked there. This buffoonery wasn’t limited to just the office. One brokerage house I was at decided to throw a huge party to celebrate a big month. They rented a charter boat to cruise around Lake Michigan for a few hours in a Bacchanalian fit of revelry. One of the guys in the office was a little different. The other children enjoyed picking on him like kids do in a schoolyard, you know the type. When his back was turned the “brokerage-yard bully” threw his suit jacket overboard. He lost his keys, wallet, and lots of cash. He was pissed. “The boss” said, “Gee, that’s too bad, you should be more careful,” and roared with laughter along with the other six-year-olds. The poor guy spent a week or two sorting out the mess of getting keys, credit cards, driver’s license, and so on. This type of moronic behavior is a given in this business. Apparently, everything you own or use to run your business is raw material for private or public amusement. I frequently saw people doing cocaine at 7:00 a.m. at the company trading desk while processing orders—this after being out all night long drinking and more. Imagine trying to place orders, check on orders, or move orders when the guy you are talking to can barely see straight or won’t stop talking. Worse yet, he does a line while you are talking to him. This wasn’t one or two isolated incidents, this happened everywhere. Sometimes they would even get the coke from the owners.

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Paychecks would bounce. I’m not talking a few hundred bucks— I mean checks for $10,000 or $15,000. Imagine the headache that could cause. On payday some guys would leave the office as soon as they got their check, go down to the bank it was drawn on and cash it, even drive out to the suburbs in some cases. They knew that if they waited too long it would be no good. On any given day, between the 10th and 15th of the month, there are scores of brokers walking around downtown Chicago with literally tens of thousands of dollars in cash in their pockets. I shudder to think of the crime wave that could cause if an enterprising mugger read this. I guess the owners figured that if you didn’t take your money the moment they gave it to you, you must not really want it, or something equally stupid. I would go to lunch, come back, and find the office door locked, the lights shut off, and everybody gone. I would find out later that the owner wanted to take everyone out to the ballgame or something. “Sorry, we couldn’t find you, so we just left.” Imagine the needless anxiety if I had positions on and I had to spend the rest of the day hanging out by a pay phone. Thank God I had quarters. Imagine the problems clients have when they expect to reach you when the markets are open and they can’t. I remember one time this happened and I went down to the pay phone in the building lobby. There was only one phone. Standing next to it was a rather well-dressed man. When I went to pick up the receiver, this guy actually said, “You can’t do that, I’m expecting a call from my broker.” If I wouldn’t have seen the humor in that I would have cried. You have to remember that in the late 1980s cellular telephones were not cheap or common. Because I was tied to the office 12 hours a day at this point in my career, I never needed a cell phone even if I could afford it. If the office was locked—I was out of business. Guys would start a brokerage house knowing full well that it would be gone in a few months. They would hire a bunch of hungry brokers and turn them loose on the phones. The money would roll in. Absolutely none of the bills would be paid. Once the quotes went down, or the phones were turned off, or the landlord started the eviction process, the owners would pack up and go somewhere else. Maybe one or two of the brokers were in on it. Everyone who worked so hard to build a business for themselves would literally have

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the rug pulled out from under them. Who knows what happened to the clients? I’ll tell you how fast this can happen. At one place it was just another normal day, a few of us worked until about 8:00 p.m. As we were all leaving, the owner, who was working late, stopped us to mention what a great job we were all doing and how he would see us all tomorrow. I came in at 7:00 a.m. the next day, only 11 hours later, and the entire office was empty. No desks, no phones, no computers, nothing; it was all gone—moved out. It was probably all sold to a liquidator days before. The owner was simply waiting for us to leave before calling the movers in and didn’t want us knowing the jig was up. I never saw him again. Within a few minutes one or two of the other guys started showing up. One broker, who didn’t want to believe what had happened had actually happened, volunteered this comment for the rest of us: “Maybe we just moved and they’ll be here any minute to take us over to the new office. . . .” For all I know he showed up every day for a week waiting for that to happen. “Thank you, and good night. You’ve been a great crowd.” The constant practical jokes in the office were simply beyond belief. Guys would find dead animals in their desk drawers, phone handsets crazy-glued to the cradle, Tabasco sauce or worse in the coffeepot, fake client inquiries for million dollar accounts made to a rookie from a phone in another part of the office. People were told that their parents were just in a car crash and they needed to call the hospital. The owner would pay commissions to someone who he thought wasn’t working hard enough in rolls of pennies. Someone would come back from lunch and find his entire desk and his telephone locked in the storage closet; listening to the phone ring until he could find the building engineer with the key. Sometimes whoever did it gave the engineer $20 to say, “I don’t have the key, try tomorrow.” Until caller ID came out, one of the favorite things to do if a client pissed someone off was to call the local pizza place in the client’s hometown. The broker would order a dozen pizzas for delivery to the client. Everyone in the office would whoop it up in the background while someone else yelled into the phone, “Hurry up, can’t you tell we’re having a party?!” A lot of this nonsense was really cruel. I remember one incident in particular. In one office, there was a black guy who was a rookie. It was his first time ever in the business. He was from the South Side

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and came from a poor family. He really had ambition. He wanted out of the ghetto. I really admired him. He was constantly being teased with the “I have a dream” thing. People asked him if he wanted to trade “fried chicken or watermelon futures today.” One time somebody came in the office wearing a KKK hood and bouncing a basketball. It was criminal what those men put him through. He finally quit and filed a discrimination suit. Of course, the company was gone by then. Let’s not forget the general back-office mayhem. You’d ask a secretary to mail an investment package to a prospective client and she’d forget or refuse to do it. If you brought it to the attention of the owner, he’d brush it off. It would turn out he was sleeping with her and that was the only reason she had a “job.” Phone calls were routinely ignored or not put through. Your Series III registration would never make it to the NFA, or the check for the fee would bounce. My mail was never delivered. We would run out of account forms or sales material and it would take days or weeks for someone to get more. That week’s “manager” of the place would lose the keys to the front door or not show up at all. The fax or copier would run out of paper or toner and it would take days or weeks to fix. We’d run out of numbered order tickets and have to resort to blank paper to track trading (a serious NFA violation). Someone would institute a “new policy” but forget to tell anyone. Then when you wanted something done it was always, “Didn’t you know about the new policy?” Then, you’d have to do it all over again a different way. Equity runs missing or incorrect—the list is endless. Then there were the fist fights, guys having sex in the office during trading hours, or it would be somebody’s birthday and the owner would have two or three strippers show up. Alcohol abuse was a constant. One time I’ll never forget. Someone who was losing badly in a trade simply couldn’t take it anymore and threw his quote screen right through the window of the office onto the sidewalk of LaSalle Street several floors below. He started trashing the entire office until the biggest guy in the place hit him in the face with a telephone and knocked him cold. It’s a wonder no one was killed. Can you imagine being on the phone trying to solicit clients or trade intelligently when stuff like this is happening? We would have to cut down all the redwoods to make enough paper to talk about what happens when these children disguised as

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brokers would trade. There were the constant debits, trades being down without margin of any kind, trades with the wrong account number on the ticket, no one fixing the problem, or even knowing about it for days or until the client with that account calls up saying “I didn’t do this trade.” Then, of course, the broker was not in the office, on vacation, or not even employed there anymore. Or they can’t find the order tickets. Or there are no order tickets to find. The constant “I said buy, not sell” errors, “size of the trade” errors, someone completely forgets he has positions on and blows up without even knowing about it until the clearing firm calls; if the call was ever put through. Brokers needing a commission so bad they would trade new client accounts before the check from the client even cleared the bank; of course it’s a loser. When the broker tells the client it was a loser, the more enterprising clients would stop payment on the check; you should see the fur-fly when that happens. Inept brokers doing spreads but putting both sides on in the same direction; or getting out of spreads the same way.2 Brokers forgetting they had “good till canceled” stops active in the market until they get filled, then deciding to keep the trade in order to “See what happens, maybe it will be a winner.” Brokers doing trades without customer approval, getting approval for one trade but doing another; getting approval to go long but changing their mind and going short without telling the client. It just goes on and on and on. Reliving all this is making my head spin. The point I’m making with all of this is that it would never end. This happened constantly everywhere I worked. It still happens every day all over Chicago in all those little brokerage houses that solicit cash from the public. I would put up with this insanity in one form or another until I couldn’t stand it anymore and go someplace else. But it was always that way. I simply couldn’t accept that this kind of daily adversity would be something I would have to endure if I expected to be a “professional commodities broker.” The industry is just that way. It really doesn’t matter if the adversity is self-created, imposed on you by others, or simply how you chose to interpret market price action against you. If you are in this business, without a doubt, you will suffer. I’m sure one reason so many people wash out of the trading environment is because they can’t handle or can’t accept the constant adversity. It doesn’t matter if it is the kind I went through or the kind others go

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through. It’s almost like a trial by fire. You can’t get “it” (whatever “it” you are looking for) until you pay some kind of price to the markets. If you find a way to get through it you will prosper. If not, well— they’ll just stack your body up with all the others. As you can see, when I was in the process of discovering this for myself, I had some very frustrating experiences. There are other kinds of adversity in other parts of the business. All of what I endured taught me life lessons that, in the long run, made me better equipped for anything that might come my way. My eyes were opened for that. Today, I can tell instantly when a situation is about to go south. That comes out in my trading; it helps me cut losses faster. That’s why I feel that everything contributes to your trading from every part of your life—past, present, and future. Everything you go through will teach you something about the nature of reality, as it really is, instead of how you expect it to be. Trading the markets cannot be done well unless you understand the nature of the reality they function under. If your eyes are open to an infinite number of possibilities then nothing can surprise you or catch you unawares. By looking at trading the same way, you can “see” the whole picture. What to do next becomes self-evident. But to get to that point, you must first have enough experiences of what life is not. The more pain you go through, the more you should ask yourself, “What is life trying to teach me?” Once you have learned that, and trained your mind to accept every new lesson, trading becomes easier. At some point, once you know why you do what you do the way you do it, trading is effortless. I had to learn to do that instead of expect some chart to tell me what to do. Pain is the only megaphone loud enough to get past your preconceptions. In my particular case, I had to accept that my idea of what a professional is and does is not in the same reality of the other market participants I was exposed to. I had to conclude that since that was the way it was, pulling money out of the markets was still possible, even if what the markets really are is nowhere close to what I first thought they were or the people who are involved in them. I’d like to share the final adverse situation I went through. This one is slightly different because I had some control over the results. After this experience I still had problems with brokerage houses and my

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trading but the knowledge that I could win became absolutely unshakable. Up to this point, I felt that I was at the mercy of those who might be further ahead than I was. By that I mean they had more money to work with, they had better leads, they knew the business better, they could trade better, or any number of reasons. By going through this next situation, I came to understand that inside of me was a winner. I was no longer at the mercy of circumstances. I didn’t have to see the business the same way. I didn’t have to believe somebody else’s point of view or put up with anyone’s insanity. I matured as a businessman and with it I learned how to create success in a world that didn’t function as I thought it would. It set the stage for ultimate trading success because inner reality that is firmly rooted can adapt to any situation or circumstances. Success is a state of mind. You then adapt that state of mind to the needs of the particular situation that you chose to explore. A successful pilot is no different than a successful rock climber. Both possess the same inner world that is expressed in two unique ways. Each environment has particular parts that need more of one thing and less of another. Either person could learn to do the job of the other if he so wanted to and have similar results. On the inside they possess the same raw material. This last adversity taught me that by doing what I knew would work, I could achieve what I wanted. I learned there was nothing wrong with me deep inside, only in my choices up to that point and the way I chose to look at things. I learned that the business could give me what I wanted. In fact, it would have given me what I wanted sooner if I had been able to grasp its true nature sooner. After I had made the choice to focus exclusively on learning to be a true trader, I had a problem. I was flat broke. I had nothing. The latest brokerage house debacle left me in the same position that I had been in several times before. This time it was different because I had chosen not to go back into the same cycle, if I could avoid it. But I didn’t know exactly what that meant except that I didn’t want to be involved with anymore psychos. I carefully thought this through. If I had no money and lots of financial pressures, nothing would solve that problem except cash. To get cash I needed to work. I carefully considered if I should take a break from the markets and find something else to do for a short time. Should I quit completely?

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After much thought here was my decision: I would go to work for a brokerage house and raise cash to develop my trading presence. I would alter my selling approach to be fairer to the client, and I would only sell a market I believed in. I concluded that I must find the most stable brokerage presence possible until I had enough cash to be on my own. Sooner or later it was clear to me that I would stop working for anyone else, for any reason. I decided to no longer subject myself to those sorts of external adversities if I could avoid it. From then on any employment was just temporary. I decided to do it my way. Since I was seeing this situation from a new perspective I had new choices and new possibilities. Before then being on my own didn’t occur to me very seriously because I thought, why reinvent the wheel? I thought that the glut of brokerage houses dominated the market and that business only worked one way. I figured I could eventually find a “good” brokerage house. I thought the owners knew something special or were connected. I thought it was very expensive to do. Why go through the hassle? Why compete with them? What I didn’t know was that they, the brokerage houses, were very easy to start. It cost next to nothing to do. Most of the owners were just six-year-olds with a checkbook. I was certainly smarter than they were. Since they come and go so fast, that should have told me something. I thought it was just bad luck. All kinds of things became very clear. Starting my own company that I could run my own way became the goal. This sounds simple, but for me, I hadn’t really considered it as being the solution to at least part of the problem. By now it was January 10 of that year. I had no idea how to start a commodity company or what it would cost, but I knew it cost more than I had because I was penniless. I made a few phone calls to clearing firms and asked how to get started. Within two days I understood how to start a company and the costs. I found a lot of options; everyone had a slightly different program. All anyone needed, besides filling out the right paperwork, was a phone and a few sales leads. No wonder brokerage houses come and go so fast and are typically run by morons. Any moron could do it. I figured if they could do it, I could too. I actually ended up one step better because I found a company based in Oregon that had a branch office program. They did a lot of advertising on CNBC, had direct floor access, great lead flow; all the expenses

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I had no idea how to pay for. I would only be a branch office instead of my own show, but for where I was it was close enough. Looking back, I was setting myself up for another career reversal because all my paychecks had to come through this company, but at the time I took the risk. The owner promised me no funny business over the money (a lie). We filed the necessary paperwork and I was in business. But there was a problem. I had no office, no phone lines, no tollfree inbound number, no marketing or sales material, no trading equipment, no quote service, no order tickets, no fax, no money, no nothing. My bills were way behind. My rent was behind. I couldn’t even afford business cards. It was a dilemma. Here I was about to do something totally new to me in this business with absolutely no resources at all. I borrowed $200 from a friend (he wasn’t sure about more given my condition), and convinced the owner to advance me another $1,000 against my expected commissions. He also sent me a stack of account forms and faxed me 500 sales leads to the public fax around the corner. I went over to the CME and begged the publications department to give me 25 copies of the “Foreign Currency Futures & Options” brochure. They gave me 15 and made me pay for them. In just a few days, I had sales material, a stack of leads, and a chance to make this work like I thought it could be done. Better yet, I thought I could do it reasonably free from interference. With the money I had borrowed, I probably bought myself 12 days of time before all hell broke loose with creditors, my landlord, the phone company, and so on. Talk about being on the edge; I was scared. I had no idea how to sell without hype of some kind. I didn’t know if there would be some rule I wasn’t following as a branch office that would bring the “trading police.” I didn’t know if people could understand trading in foreign currencies. What if I couldn’t sell this? What if I couldn’t learn fast enough? I was doing something completely different than I had done during my entire career. At that moment I had no assurances any of this would work. I had less than two weeks to recreate my entire concept of the markets and generate commissions. Since I had gone through the heat of the fire so many times, at least I knew what not to do. I can’t emphasize enough in this short description that I was really scared; completely full of anxiety about the results. If it all blew up I would end up on the street in the middle of winter. Have you ever

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been through a Chicago winter? On top of that, I wasn’t sure whether I could handle another failure or the humiliation. Try looking for work in that state of mind in any business. I was afraid that if I failed I wouldn’t be able to get any job anywhere. If I failed, it looked like the end for a very long time unless I made it work. Don’t forget I was still recovering from losses in crude oil during the first Gulf War. I still had a hundred grand or so left to pay on the debit. I was under pressure. I carefully set up my office right there on the only table in my apartment. To put this in perspective, let me tell you about the apartment I was in at the time. I was living in an SRO, a single-room occupancy hotel. It was officially a hotel and they had daily, weekly, and monthly rates. Some people call it a transient house. It had its share of lowlifes, hookers, and lunatics. One day there were shots fired down the hall (while I was working). Somebody actually died in the lobby one night. In that respect it was like being in a brokerage house—anyway, at least I felt at home. It wasn’t hell but you could see it from there. Only months before I had been living in a penthouse apartment, but now I was so broke it was all I could afford. It was either the SRO or move in with a girlfriend, but I had enough pressure on me. Looking back, it was the fact that I had nothing to lose and everything to gain by trying that really fired me up. After everything was in as much order as I could make it, I took inventory of where I was. Every minute that went by was a minute closer to being on the street. I had to make it happen. I hit the sack to get a good night’s sleep. I set the alarm for 7:00 a.m. The next morning I got up and the power in the building went out. Luckily, my phone still worked. I had no idea if my phone would be shut off, or if the power would come back on. All I knew was that I had to work fast. I didn’t really know how much time I had. After a quick shower in the dark, I called my buddy (Guy #1 from Chapter 2) and asked him to fax me a chart of the daily Japanese Yen futures and the currency preopening comments. I went over to the 24-hour public fax to pick up my “research,” got some candles at the Walgreen’s, grabbed a Starbucks coffee with the last dollar to my name, and headed back to the “office” to get to work. On the way back I really thought I must be crazy. Was this business really worth it? By the time it was about 9:00 a.m., I was ready to start selling—by candlelight no less. I picked up the phone and called the first lead. I sold my heart out. I dialed like a madman.

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Anybody walking by my room must have thought I had gone completely over the edge to hear me working in there. At the end of the first day, I had three bona-fide potential clients for currency trading. I did this for 12 straight days, 12 hours a day. My buddy faithfully faxed me my “research” daily. Because I didn’t have a quote system when I traded, I felt like I was trading in the dark (actually really in the dark—the power would go out all the time). My buddy gave me quotes every 10 minutes no matter how busy he was. He wanted me to win. He knew the whole story. By the end of those 12 days, I had opened three accounts for a total of about $18,000 in equity. At the end of those 12 days, I had done about $1,800 in commissions (my end). At the end of those 12 days, my three clients had about a 7 percent gain on their accounts after fees. It was February 1. Payday was the tenth. Everybody had to wait until the tenth. My first check was for $800 because I had to reimburse the owner for the loan he gave me. That $800 check meant more to me than any other check that I have ever gotten. I just prayed to God it didn’t bounce. I had done it. Scared out of my wits and up against more adversity than maybe I could handle, I had what it takes. I wasn’t out of the woods yet, but I could see the edge of the forest. I just hoped a forest fire wasn’t coming next. As the days rolled by, I kept at it nonstop. Within 90 days I was way ahead. I had come back from the edge. The reason this is so significant to me is very simple. Because I had nothing to lose, I had everything to gain. During this time I fought daily with the fear of failure. I fought with the anxiety of trading without the tools I had come to rely on. Because believing I could win was so firmly in place in my mind, I did win. When your back is up against the wall you can only do one of two things—quit or fight like hell. When you fight like hell, hell takes a walk. I had demonstrated to myself I could win in tough circumstances. I had learned that to make money trading doesn’t require a whole lot of stuff. In fact, it was easier. I learned that the business doesn’t have to be like a special education kindergarten class. A committed soul can achieve anything. The experience became the turning point in my confidence level. I never question or second guess my trade conclusions today. I trust myself to do the right thing all the time. My mettle was tested. I know now that as long as there are markets I can profit from them. It’s through the process of doing it right and winning that the inner reality can express itself. The result is the same—profits.

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Being a trader means taking money out of the markets all the time. I needed firepower to do it. Since I had none, I needed the public’s money to get there. I am eternally grateful to those clients who sent the cash during that critical time. They provided me a chance to see what I could really do. Their confidence is part of the story. I’m sure if they really knew what I was up against on a personal level, they never would have done it. Would you? The story doesn’t end there. The owner of this company was no different than any other. Because I had no real control over getting paid or maintaining my registration, this whole thing went under too. But it wasn’t because of my choices, my effort, or me—and not before I had proven to myself that I could remain a consistent winner both in the markets and in the business. I became bulletproof and would eventually remain a net winner.

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Chapter 5

The Meaning of Life Existence Without Limits Ability has nothing to do with opportunity —Napoleon Bonaparte

H

ow’s that for the title of this chapter? Notice how short this chapter is. It is so simple to me, and I hope I can communicate it to you. In a very basic sense that was what I found within the markets and the people who are involved in trading and supporting those markets. Have you read God in the Pits by Mark Ritchie? I didn’t find God. I already knew who He was. I think I found what God is trying to tell everyone of us through this whole experience. I think those who only view the markets as simply a financial pursuit are missing what it is really all about. Let me provide you some details.

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When I was young I knew something was different about me. I came to know that “different” means “unique in a personal way.” What I didn’t know is that each of us is that way. We are all unique in some way. Therefore, we are all equal in some respects. We all have strengths and weaknesses that express themselves (sometimes without our knowledge). When I was younger I paid lip service to this idea. Because of the hell I put myself through, I came to learn what that really meant. When I said “different,” what I discovered during my formative years when comparing myself to others (which I don’t do as much anymore except to find a similarity) was “You are all the same. I am superior to you.” I believed this for good reason. Don’t mistake what I tell you next as an attempt to inflate my own ego in any way. I have come to see my strengths as really a weakness if I am not careful. If you put together six months or more of 100 percent winning trades you could easily get cocky and miss something that leads to a loss. My self-image and self-concept doesn’t rely on my gifts anymore. I didn’t create these advantages. I was only entrusted with them. How could I take credit for them? If someone else doesn’t have these gifts, they will have something that I wish I had. I don’t view that person as lesser because he or she lacks something that I have, or better because he or she has something I don’t. I see it as completely different now. Anyway, let me show you my starting point: I was a gifted child. Anything I touched would work out the way I wanted it to. I was always in the “smart” class at school. I was given special work to do to keep me from being a problem with the other “smart” kids. I would understand things very fast. I was reading at the college level in fourth grade. Sometimes the teacher would give me a task that even he thought was very complicated, certainly way beyond me. I would do whatever it was so fast they (the teachers) all thought I had cheated or somehow already knew the answers. I was always taking I.Q. tests or perception tests. Inkblots were my favorite. (Boy, I made their heads spin.) I was always frustrating people, which I secretly found very funny. (“You’re just jealous.” ) Once my high school geometry instructor really tried to put one over on me by giving me a problem to do. He said, “Here’s a problem for you. I want you to write a proof for the trisection of an angle. Use any angle you want. Have it for me by Friday.” I said, “No problem.” I went

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to work and by Friday I turned in my proof. He didn’t tell me that trisecting any angle was one of the “impossible” problems in classical geometry. We weren’t that far along in class. In classical geometry you were not allowed to use any other tools except a compass and a straight edge, and you were not allowed to mark the straight edge in any way. Every theorem or postulate used in your proof had to be a proven theorem or postulate based solely on the intrinsic fact of some mathematical reality (2 + 2 = 4 always) or some geometric reality (an endpoint of a line can never be anything else but an endpoint because that is what an endpoint is). After my teacher read my proof—and had his friend, the head of the mathematics department at a university review it—he told me that was the closest anyone had come in the past 2,000 years. I had done this in three days. It wasn’t completely provable for some reason that I had missed, but the fact was my basic train of thought was there. I even built a successful liquid-fueled rocket engine for a science project completely from scratch. At 12 years old, by reading books, I had done something on my own that the best engineers at Rockwell International, Martin Marietta, or NASA had millions of dollars to do. I did it basically as well as they could. No wonder the Air Force wanted me. I was also a MENSA member for a period of time, although I quit when I discovered the so-called smartest people indulged themselves in the most deluded fantasies you could imagine. I could go on, but you get the point. I went to a Midwestern college and studied music. When I got fed up with university life, I entered the business world. I was always the only guy they ever hired who didn’t have an “education.” That didn’t matter. I would produce some degree of success, get bored, and move on. I interviewed really well. I got so good at it the person doing the interview would always have me meet “the boss,” who just naturally liked my “enthusiasm” or whatever, and I would usually get the job. No matter where I went things would happen. What I didn’t discover until later is that when anyone begins to do something well, but has only been there a month or two, people gravitate to see “what they are doing.” They want that success for themselves. The small-minded ones see you as a threat (that’s a different issue). When “the boss” notices what you are doing he puts you in line for a promotion or something. Or even offers you a job with him. “Always looking for good people,

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you know?” You can find yourself getting somewhere with very little “real” performance behind you. Especially if you have a reputation or your résumé says “Air Force Academy Appointee.” This happens in the markets all the time. Just look at all the registered CTAs who do okay with $30,000 for six months, publish their “track record,” have some brokerage house raise a million or two for them, and proceed to blow up in the next six months. Looking back, much of my initial success had very little real effort to it. At the time I thought it did; but in reality I was constantly being noticed or working closely with others who thought exactly like I did. They were all “whiz kids” in some form or another, and wanted other “whiz kids” around them. We were all working in the same environment that valued that particular train of expression. We were all working on everything together and eventually, between all our skills and talents, we would produce a profit in some fashion for ourselves or someone else. We were all entrepreneurs working with other entrepreneurs. As time went on and I would move around from one idea to another, or some project to another, my list of successes would grow. People who had “jobs” would constantly say things like: “Wow, you did that?” or “You mean you can actually make money selling soap?” (I was in AmWay for awhile.) The natural thing for me was “success.” It had never been any other way for me, in anything I have ever tried to do. I just thought I would always be in that frame of reference. Can you see how it would be easy to expect that to be the case? As I said in the beginning chapters, the trading environment is nothing like that world. The people in the markets are nothing like that. The fact I had to learn was that my giftedness made no difference here. It was actually a hindrance. I won’t spend time rehashing how I came to discover this. Here is the end result: I came to understand that the ability to unlearn everything you know, or have learned, or you think is important, is the only skill you need to start the process of trading success. The horror of giving up everything you know is what most people don’t really want to face. I didn’t want to believe it either. I ran from that. I had to finally accept, after I couldn’t run from it anymore, that what I thought was so important about my very nature, that which was the only skill I knew led to other skills was the real reason behind my

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past failure in the markets. How could this be true? What does it mean to “unlearn”? I had to find a pathway to that knowledge. I started the process of finding it with a simple question. It went something like this: How does a point of view come to exist in conflict with another and both are equally valid? What is it about each point of view that makes each valid in its own right? What is the nature of either that puts it in conflict with the other? This was the key question for me: How is this conflict resolved? Now I want you to bear in mind that these questions for me are not philosophical. I was being entirely practical. I started to look at every conflict I ever saw as an opportunity to ask these questions. What blew my mind was that this is really the state of everyone’s existence at every moment of every day and most of them never realize this. Some people will think I’m completely off my rocker when I say this, but it really is the truth. It can be this simple: If you are driving somewhere and someone is driving slower than you are, and it’s a one-lane road, this conflicting relationship exists. You want to get where you are going faster than someone else wants to get where they are going. He wants the same thing but differently than you do. How is this conflict resolved? Either he speeds up to validate your point of view, or you slow down to validate his point of view. Or something else completely. To draw in a little of “the markets” at this point, both of you want the same thing—a profit—but are approaching that from two points of view. One of you is “long” and the other is “short.” Neither one of you will get where you are going without this conflict finding a resolution. Maybe this “idiot” will get off the road. Maybe this “moron” will stop tailgating me. Do you see what I mean? Both points of view are equally valid for either person. Both points of view are seeking a resolution as long as both points of view are held by either person. It doesn’t matter who resolves the conflict first. If the guy in front speeds up, he must share the other’s point of view. If the guy in back slows down, his point of view must become like the guy in front. Both have a right to use the road for his own purpose, but at that exact moment one or the other must change his point of view or the end result will be an accident that neither wants. Who’s first?

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The point I want you to see is that from that moment on my entire life and everything in it became a study in how conflict develops and how it is resolved. Suppose I go to a restaurant and the waiter is “too slow”—from whose point of view? Suppose the waiter is “too fast”— again, from whose point of view? If I look at it from the waiter’s point of view, what is that? Some lazy actor wannabe or someone who is overworked? Someone who is late for a date or someone who desires to give good service? How would I know unless I asked? The amazing thing, and if you aren’t careful you will miss the key to success with all this, is there would be no conflict at all if I hadn’t formed an expectation of how fast a waiter should be in the first place. The overriding element here is that when any conflict would happen anywhere, I would ask about the other person’s point of view. In so doing I would discover more about the nature of people and how they come to see reality. It didn’t matter if I thought their view on reality was completely insane; it was actually the point of view I had to contend with. My gifted ability was never the question. It never helped a bit. It made no difference to the nature of the conflict either way. I’ll tell you one story that had its end result the same way no matter what I would have believed, or could have hoped for, and it never could have been any other way under any circumstances. I was on a business trip in New York. I had just finished a great dinner at Smith & Wollensky’s in Manhattan with some associates. It was a good walk back to the hotel. Everyone else took a cab back, but I had never been in New York before and wanted to see a little of it. I convinced my partner to walk with me. No sooner had the cab driven away, and we had walked half a block or so, when that most clichéd New York tourist tragicomedy happened: We were mugged. This particular mugger was very good at “making” us as out-oftowners. He stepped out of the shadows and said something like, “Put ‘em up, tourists.” There we were at gunpoint, a. 38 caliber. Ironically, it was a Saturday night. I said to my partner (who had a camera with him), “Wow, it’s one of those famous New York muggers. Get a picture of me with this guy, will you?” I swear that’s what I said. It just came out; I was in a good mood. “I’m not kidding, funny man,” the mugger said. He pointed the gun right at me and he was shaking it so bad I thought it would go off right there. “First time for both of us?” I asked the mugger

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while I reached for my wallet. My partner gave him his wallet. He didn’t have to ask at that point. “You’re a regular riot,” he says. “Can’t wait till you’re on Broadway.” And that was it. Back at the hotel it was the topic of conversation for days. The bellboy actually said, “Welcome to New York.” The point is that no matter what I thought the guy was getting my money. End of story. The conflict created was going to be resolved his way. The rest was just how I chose to look at it. I’m not trying to oversimplify or draw any esoteric conclusions about the markets from all of this. What I’m trying to say is that at every moment of every day we are constantly bombarded with conflict in many forms and levels of complexity. It’s all around us. We can choose to consider its nature and effect on us or ignore it completely. We can choose to attach any meaning we want to anything that is going on around us—or in us. From that meaning we form conclusions about the nature of reality as we see it. In the case of the mugger, everyone who comes to New York to visit is a source of income. To someone else he is a nuisance or dangerous. To the police department he is what creates their jobs. To other muggers he is competition. To a priest he is “the reason Christ died.” To the activist he is a confirmation of what activism is hoping to change. It goes on and on. But the reality of any of this for me is simply an act of conflict that taught me more about the nature of reality and to adapt to it. By “adapt” I mean not walking anywhere in New York if I don’t have to. All of our actions have their basis in our perception of reality and how we have chosen to adapt to it. If you don’t want your water turned off, pay the bill. So why do people get their water turned off ? When they have the $20, they spend it some other way that for them has become some kind of priority for some reason of their own. The conflict is resolved one way or the other. If you don’t want that conflict, go without water in the first place. That will create a whole different set of potential conflicts. That doesn’t matter to the reality the water department feels compelled to operate under for reasons of its own. When I considered that any number of realities could coexist, and that all had value, I was in a position to see things that I never could before. It broke down the barriers between my own reality and everyone else’s. It opened up a whole different set of possibilities that were not there before. In doing so I came to understand my fellow man and

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what matters to him. He could show me something that I had never considered. I could offer possibilities to him he couldn’t see for himself. Can you see where this would create friendships that were not possible before? How about opportunities for individual experiences that were not possible before? The list is endless. Here’s an example: I was on the beach here in Chicago one weekend. There was a very attractive woman there with two male friends. One woman, two men. Either they are all friends, or she is dating one of them, or something else. I watched for a while; I couldn’t hear what they were saying. Every now and then their field of view would cross mine. I just watched. Eventually, I had to know what was happening, if anything was happening. Stop for a minute and ask yourself what you are thinking so far and why. Speculate on what I was thinking. Speculate on what they were thinking. Take a minute and do that before I tell you what was actually happening. Done that? You ready? They were part of a film crew shooting a movie in town. They were all married (no chance with the woman). They were on their day off. They had a call for extras and needed someone about my height and complexion. The only reason they mentioned this to me was because I walked over and said hello. They weren’t going to “bother” me. Would I like to be in the movies? She thought it was “sweet.” I thought she was attractive. They didn’t know where to go for dinner, could I suggest a place? How about I take all four of us out? The next day, I meet a famous actor. I meet a famous Hollywood director. I ask about what kind of reality they are trying to create. They tell me. Try this. It works. I contribute to a big movie. Just for fun. Never got paid a dime. Didn’t want one. This would never have happened if my thinking had been something like, “That person is too involved with her boyfriend(s) to be interested.” “I’ll just sit here” and create no conflict. Interested in what? My inflated ego? I’m trying to get laid? Would anyone care at all what I think? How would I know unless I asked? I simply placed no boundaries on any or every possibility and said, “Hello, you are a very attractive woman. Are you three together in some way? Am I intruding?” I didn’t know if she or any of them would say “buzz off ” or what they would do. I simply observed that something was

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happening that I knew meant if I went over to meet them I would cause conflict with whatever it was. How that conflict would be resolved, and what that would show me about my perception of what I desired, was what concerned me. That I hoped to meet an attractive single woman was only my perception. What I discovered was a completely different set of realities that never entered my mind. How many people would say something like this, “Boy, you are so lucky.” “I would love to do something like that.” “That kind of thing never happens to me.” Of course it does, but your perception of what could happen doesn’t allow for it. You probably sat next to that director on the bus one day, but because he stepped on your toes trying to sit down next to you, he was an “idiot.” Therefore, your reality was what it was of your own choosing instead of some wonderful possibility of what it could be of your own choosing. The possibilities are endless. By changing my point of view to include everyone and everything, I became simply a mirror to others and their reality. Everything became possible because nothing was impossible. The quality of life that can create is simply incredible. Borrow someone’s Lear jet for the weekend, have Wolfgang Puck cook you dinner in your home, drive Mario Andretti’s Lotus, and the like. By seeing others as distinct and unique expressions of some heretofore unknown reality, I was able to find all those people, experiences, and unobtainable knowledge that we are all looking for because it is within them in the first place. To see the true unalterable reality that surrounds us, you have to see that reality in little bits and pieces through the eyes of all of us who create it. So what am I saying? I have found God? No. I wasn’t looking for him. I did find that His whole grand experiment is a playground that I can participate on at any level I choose. Because I can create reality anyway I choose, I decided to let everyone else show me what they think it is and then be a part of that as a participant, without forming any reality on my own to compare it with. Therefore all realities are mine, all possibilities are mine, and that can be anything. I walk the whole of life and anything it can offer you is already mine. I am the razor’s edge.

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I know what you are thinking. What does this have to do with trading? It has everything to do with trading. Let me postulate for you:

1. Everybody Wants the Same Thing from the Markets They want profits. They bring their cash to the table and play. They watch prices move. That movement means something to them. To one person it means one thing, to someone else it means something else— herein lies the potential for conflict.

2. Potential for Conflict They look at the market in question and have to do something in order for that market to pay them. They have one of two choices (actually three, but I won’t go into “staying out” as a profit—you wouldn’t understand that yet). They can buy or sell. They make that choice. It makes no difference how they came to that conclusion or what they told themselves to justify their action. They did something and that something was done—this is creating conflict.

3. Creating Conflict The markets move for or against the position chosen by the executed trade. This is the same for either position. Only one of those positions can be profitable in any case.

4. Your Reality of the Situation is in Conflict with Someone Else’s This reality is either a profit or loss to you personally. Only one thing can happen at this point as prices continue to move. Either someone else must accept that your reality is being validated, or you must validate someone else’s reality. How long this takes is not an issue.

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5. The Conflict Must be Resolved Either you give up your position to someone else or he gives up his position to you. Because both of you chose to enter the conflict based on how you personally chose to view the reality of your entry price, the fact is only one of you has the profit.

6. The Conflict is Resolved Now start at the top again—until you are rich or broke, or somewhere in between and you take your ball and go home. Whoever has the loss must pay the winner. It is too late to discover why or how that happened. No amount of anything you could do can help. Your fate was sealed when you made the trade. The profit or loss was created at that moment. It was only a matter of time until one or the other would ever walk away from the conflict with the profit and the other with the loss. You both accepted this when you got in, whether you knew it or not. The bill is due to one of you and the bill is paid by the other. Nothing can change that. The markets will never be any other way. That is all there is to the markets. Period. End of story. Whether you choose to accept this or not. Whether you choose to believe it or not. If you have been paying attention to what I am getting at, this next bit will begin to make perfect sense. Because the reality of the market finds its expression, moment to moment, as a price that means something different to everyone, then it follows as soon as someone chooses to do something—at any price—the reality of the person involved and the market having “agreed” in some fashion. Someone else thought it “agreed” with their point of view as well, but for different and completely opposite reasons. Because it is intrinsically impossible for both to be right from that moment on forever (please ignore the market “coming back” for right now, please), it also follows that one of you must not understand enough about what the market can only do from that point. It doesn’t matter which one it is because only one thing can happen: The market is going to disagree with one of you.

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Only one of you can be right in either case. Since you apparently think the winner will be you, what has led you to believe this? That “what leads me to believe it” thing, whatever it is, that little something is why you lose. Ask yourself exactly what that little something is. Critically examine your thoughts and be brutally honest about what it is. Anything else will cause you to remain the loser, forever. Here is the point you eventually need to get to. This is where I choose to remain every day. I don’t care what has to happen to remain in this place. The place you need to be is: “Who is the loser? I want to be the winner!” That is the only place to execute. You execute knowing it will be you because you know it can’t be him. Otherwise, why would you let him have your money? The Art of the Trade is about understanding how the loser thinks so thoroughly that when he says, “Here is my money, would you like it?” Your answer is, “Yes.” Anything else results in him eating you. Why give him the chance? It doesn’t matter why or how he concluded he wants to give you his money. He decided he wanted to. Unless you are a bigger idiot than he is, you should take it. The Art of the Trade is the process of discovering this and doing it so well you are the traded high for the day and the traded low for the day. When you execute, the market’s next trade is your way, and it never trades there again until maybe after you liquidated at some point. It means discovering what the totality of a crowd’s thinking “looks like” if it were a picture (which it is if you choose to look at a chart). In my personal odyssey through this amazing activity, one thing became abundantly clear to me. By understanding how the vast majority of people really think when they create reality, or the tools they use to do it with, I found that most people do basically the same thing the same way most of the time. I’m not talking about interpreting price action, I mean how they arrive at conclusions. Once you reach that conclusion, you act on it. The thinking goes something like this: “I want something. How do I get it? I should do such and such (it doesn’t matter what it is, the should part is the important thing). Where is my thing I want now?—that is, expectation of results. Here it is or isn’t.” This whole process goes on within the current belief structure of the person in question. If they get what they want, they conclude it can only be because of the “should be doing” part, not from anything else that is possible. It is only when they don’t get what they want that they are

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willing to accept the possibility that their belief structure must change. Here’s the really important thing: For most people, when they change their belief structure, they retain the same expectation of results. This comes out as “more of the same,” but for different reasons. What I learned from watching others’ behavior, as it relates to what they believe, while holding to the same point of view on their expectation of results, is really enlightening. Some things totally defy reason. I could write a whole book on the things I have seen. I’ll give you just one basic example: Why do some women get married and then divorce, then get married again and divorce again, sometimes five or six times in a lifetime? I studied these females. They believe that a successful marriage is a question of finding the right person. They have an expectation of who that person is already. It never enters their mind that it might be a question of being the right person for someone else. Or that what makes a satisfying marriage is something completely different than what they think it is. This expectation comes out as: “This is not the right person for me,” when the reality is something completely different. They can believe anything, and often do change what they believe—their “should be doing to get what I want” part. They call this “growing.” But they are still seeing all of it through the lens of their expectations. Since they can’t see that their expectation is causing the problem (How could they? They aren’t considering the possibility that the expectation is the problem!), they keep marrying the “wrong” person (from their point of view), when the fact is any person would create the same conflict. Sooner or later everyone is someone you didn’t expect, especially if the expectation keeps changing slightly (which is another thing they do). When the conflict isn’t resolved, from the point of view of their expectation, they conclude they made a “mistake.” Rather than ask, “What is the true nature of this conflict?” They ask, “What am I doing wrong?” Do you see what I’m getting at? This applies everywhere: the drunk who can’t stay sober, the person who can’t get ahead in his bills, the guy who can’t make money in the markets, the guy who is always in a fight, all kinds of things. It specifically comes out in the markets this way: Since I’m constantly losing, I should do something to improve my approach. I don’t know enough about _______ (fill in the blank).”

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I’ll give you a few; moving averages, retracements, point and figures, W. D. Gann, parabolics, pattern recognition, RSI, stochastics, Elliot Wave, how the pit works, the news, the fundamentals, the bonds, the beans, and so on. When the loser says, “I don’t know enough about _______,” what he is really saying is, “I expect that to make a difference.” It doesn’t cross the loser’s mind that this expectation is still inside a structure of beliefs that the market doesn’t function under in the first place. Hence, he will always lose. More of the same. If he makes a winning trade he will conclude it was because of the “should be doing” part. Therefore, he will be more convinced of its validity. In any case, the markets don’t work that way. He has concluded they “must.” You want to learn so much about that loser’s thinking that you can spot him a mile away. The best place is in your own backyard. Study your own thinking because right now it is identical to his. By studying your own thinking, you will see how the other person thinks, but from a new point of view. Once you know how that thinking (the loser thinking) leads to losses, you can begin to see how to exploit that for potential profits. The unexpected bonus I discovered is that when you do that, the entire world opens up to you in ways you can’t possibly imagine until you do. It makes trading look like a case of the clap. That is the meaning of life. Discovering the nature of reality, not yours—the real one. Then “getting in play” when you do. That’s it. For me it’s that simple. It can be anything. Which means it is everything. It would be the same for you. Man, what a wild ride.

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Chapter 6

The Trading Police Killing Opportunity through Poor Execution Beware lest you lose the substance by grasping at the shadow. —Aesop

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e live in a dangerous world. It is dangerous for us who live here because that is the nature of reality as it was created. It is also dangerous because we, meaning enough of us, have chosen to make certain distinctions about this nature of reality. We have chosen to protect ourselves as much as possible and have taken certain actions to do so. Once those actions have been taken, we will find ourselves in conflict with the nature of reality and because, by virtue of its nature, it was the not the initiator of this conflict, we will always be subject to its will anytime we attempt to impose our will on it.

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What does this mean? It means the more we legislate, the more we suffer. It means the more we attempt to protect ourselves, the more we will find ourselves unable to protect ourselves. By creating conflict, that conflict is seeking a resolution by the very nature of the two wills in opposition. It will never be any other way until God himself chooses to create something else as the nature of reality. Until that happens we are continually going to be in a contest of wills of our own choosing unless we as a group decide to do otherwise. Because this group is made up of individual wills this is intrinsically impossible unless every one of us chooses to stop the conflict. As long as one person chooses to keep the conflict in play, it is not possible. This is why “history repeats itself,” why there is “good” and “evil,” why there is “right” and “wrong,” and why there will always be “long” and “short.” Some enlightened people have come to understand this. The only person who could understand this completely is the individual who created the “rules” of play in the first place. Since He made it, He must have formed distinctions for Himself as to why it was made this way and why there would be a reason to do so. He, whoever He was, gave us this same ability. That is why we are called “sons of God” by enlightened individuals, and why the currently unenlightened individuals in the initiating conflict group feel there is something “out there” or “there is something I think is spiritual” or “something isn’t right” or “it shouldn’t be this way” or any number of little ways of saying the same thing. No matter how you want to slice it, the very nature of this thinking betrays why this is so and will never be any other way. If you make any distinction such as “right” or “wrong,” there must have been something behind, and above, that distinction which you made a comparison to. That something is beyond the issue in question because you cannot make any distinction without a standard of comparison that must, by definition, be neither. What is that something? It doesn’t matter how you choose to define what it is. You came to the conclusion that some conflict (that you had a part in) is seeking to be resolved and the standard of comparison is known but unrealized to you. Or you are confused about its true nature. Everyone has this ability but always chooses to place its final outcome within the perspective of an intended result. This is why two individuals can be so sure they are “right” about someone or something and the other

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is “wrong.” Nobody in that particular conflict is asking if it just “is.” Since all governments are made up of more than one person, the inherent nature of all government is to perpetuate this conflict, and it has no choice in doing so until everyone in that government (or under its control) decides to change. That is why the history of mankind is largely a history of perpetual conflict from two opposing points of view—every war, every economic collapse, every conflict between church and state; all of it. This is also why the absolute best form of government is the “enlightened monarch,” one individual who understands this concept and can “legislate” from this point of view only, never his own. All “legislation” he would then enact would always be in the best position to both enlighten his subjects and reduce or eliminate this conflict within his kingdom. This is also why all spiritual texts in any form all refer to some distant point in time where there will be “peace on earth under God.” That is because His “messenger” will be the “instigator” of this and He will be “king on earth.” God has tried to do this more than once. It is we who have the problem. This is also why all “good” monarchs are overthrown. (Hey, he is doing such and such I don’t like!) All spiritual leaders are assassinated. (He’s “wrong” about God!) All “good” politicians are voted out. (He’s taking away my “rights.”) A “new” point of view takes over and the whole cycle repeats itself until we kill each other. What does this have to do with trading? I’ll get to that. This chapter is about how regulators contribute to the process of making all of this harder for us. Once this is clear to you, you might be able to see it from the “higher” point of view. This will put you in a better position to profit from their actions, once you know what their intentions are, and how it can’t possibly coexist with what “real traders” think because you can’t trade consistently for profits unless you see it differently from everybody else. Regulators are in the “everybody else” group. Let me show you how the whole process starts. The regulators are part of government. In our particular government, we have come to interpret the rules to mean “everybody is equal,” and we all have “equal rights.” In reality, all governments attempt to minimize “inequality.” It’s just how they view this weeks “flavor” of inequality that concerns us. The framers of the U.S. Constitution were, for the most part, enlightened people. They meant to make their intentions so clear it would

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be impossible to reinterpret them from any other point of view. They knew that certain points of view would help the process of rediscovering what the basic idea was on to. They hoped to make all points of view congruent with the basic idea in some form that the two opposing points of view would then see the others and an effective compromise for all would be reached. They knew that the government itself would be part of the problem, so they attempted to put the government in a position where it could never influence this process of finding congruency. The whole thing is not new. Just read Plato’s Republic for the starting point, and the rest of history (if you have time), to see the endpoint the way Jefferson, Franklin, Hamilton, and the others tried to find it. The result was the best attempt in history, but the inevitable is the inevitable. What Jefferson and the rest meant when they said “all men are equal” was that all men have the same basic nature subject to their creator. They assumed that everybody would basically know what that meant. Today, we have come to see those words as “I have the same rights as you. You can’t tell me what to do.” Today, we interpret “Life, Liberty, and the pursuit of Happiness” to mean “I can have anything I want. If I don’t, it is somebody else’s fault.” Our government now finds itself in the business of protecting everybody’s “rights” and, therefore, it spends most of its time creating new and fascinating conflicts between the most ridiculous points of view as to “rights” that you could think of. For example, employment “rights” have escalated to the point where employers are impeded from dismissing a poor performer if that performer can claim some type of “discrimination.” In trying to protect the “rights” of certain aggrieved groups to a job, the government has diminished the rights of employers to fairly and effectively manage their workforce. Another example is the “right” of a child to an education. Sure, it’s great that we have a public school system open to all. The problem is too many public schools are ineffective and downright dangerous. If a well-meaning, loving, and intelligent parent elects to home school their child, the parent vey well may run afoul of local authorities. The rights of the child—as understood by government—trump the rights of the parent. In regard to guns, we have come to interpret, “The right of the people to keep and bear arms shall not be infringed” to mean “Only certain kinds of weapons can be owned by the public. Guns are dangerous in the first place.” Did you know

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that many parts of the Brady Bill were actually taken from a 1936 Nazi legislation that removed guns from the public? Hitler and the Nazis were elected. If no one shoots back at you, how easy is it for any government to take complete control of everything? Let’s talk about taxes. In all of recorded history, there has never been a country as wealthy as the United States. Every year the total amount of taxes raised in this country, in all their many forms, is larger than the gross domestic product of some nations. I read somewhere that the total taxes paid on a pack of cigarettes every year is bigger than the net worth of Costa Rica. The U.S. borrows more money than any country in recorded history. With all this cash flowing into the U.S. Treasury, every single fiscal year this country still cannot operate at a surplus on behalf of its citizens. Where is this conflict developing? Well, for starters, in this country if you are “disadvantaged” (whatever that means), you have the “right” to a home at the taxpayers’ expense, income at the taxpayers’ expense, and medical/ health benefits at the taxpayers’ expense. If you have children, the taxpayers pay for them too. Some enlightened people have seen this conflict for centuries. The code of Hammurabi, the Torah, the Koran, the Tao Te Ching, the words of Buddha, Zoroaster, Confucius, Jesus, Moses, Solomon, Alexander the Great, Plato, Aristotle, Cleopatra, and others all, in some form or another, basically say, “If you don’t work, you don’t eat.” End of story. How come we still have this conflict? The citizens of this nation have so fully convinced the government that certain “rights” exist that we are being bled dry so that everyone can be “equal” when in reality we are not “equal;” we are confused about reality in the first place. I’m not saying it is “bad” to spread the wealth around, I’m saying “where do you draw the line?” As soon as someone says, “NO, the line is drawn here,” someone else says, “You don’t have the right to do that.” People in this country don’t want to take responsibility for themselves; they want someone else to “recognize” their “rights.” The end result is that hundreds of billions of dollars are simply wasted and the problems get worse. No place in the world is richer and at the same time no place in the world is falling apart at the social seams faster than the United States. I could go on but I don’t want my right of free speech taken away. The point I’m making is that the intention of any law is eventually turned into a state of conflict that must be subject to some other law.

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The interpretation between the two creates more conflict subject to a new interpretation, subject to new laws, subject to new interpretations, subject to new laws again, until all our heads are spinning, and someone decides to start over. That’s called a revolution. That will happen here again sooner or later, in some form or another. I hope I never live to see it. Let me show you how this plays out in the markets by using a gaming illustration. Never assume I equate trading with gaming. Anyone who believes that is completely lost. Just take this book back for a refund if you think that is the case. Anyway, suppose a man went to a casino to play cards. Suppose he has read a book on card play. He sits down and loses all his money over a period of time. He can’t understand why because the book said “such and such and eventually you can win.” He must now form a conclusion. Either the book was lying, or the book was right, and he didn’t have enough money to finally win, or something else. His expectation was a perception that he could beat the house. If the expectation was strong enough, he might conclude that the house had cheated. It doesn’t cross his mind that the very nature of card play means that, to beat the house, you must play only at certain times with any systematic approach because any systematized approach cannot play forever. The approach of systematic card play is based on probability theory, and that theory finds its expression from an assumption of timelessness. If you could flip a coin forever, you would get 50 percent heads and 50 percent tails. But you can’t flip a coin forever so that inequality shows up as either about 52 percent heads or tails, or some ratio subject to random bell curve distribution depending on how long you flip the coin. This might have actually been explained in the book (“the markets are a zerosum game”), but because the book formed whatever it concluded in the way it did, this person believed it would be that way when he personally sat down and began to play at that particular moment. When it wasn’t, he concluded from his point of view, based on his lens of expected results, that something was “wrong.” That couldn’t be him or the book, therefore, someone cheated. Since he wasn’t, that must be the house. He will now demand his money back if he is certain of this relationship enough to make that effort. In the markets it works out as arbitration or a lawsuit.

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I won’t go into the whole idea about “fair play.” Suffice it to say that if the casino was cheating, and if this was a certain fact, no one would play in that particular casino. They would go to a fair casino. Casinos know this, but they also know that since they are open 24-hours, and card play is actually going on forever, and they know that any one individual can’t play forever, it is absolutely certain that they will take more money from people than they pay. You would be surprised how thin a casino’s margin is. That is why, when you are winning, they will do everything to reinforce the belief that you can win anytime you like. Why do you think they have limousines and Lear jets for the big players? Why do you think they comp them rooms at the hotel or give you free booze if you are at any table, even the smallest? If you take a lot of money from them, they really consider it a loan. That is why certain players get a limit on their play or can’t play at all. That is why it is always in the casino’s best interest to keep the games fair. If they cheat at all in any way, or you think they do, they are out of business or you go to another casino. That is why they work so hard at showing you they are fair. Things like the dealers always showing their hands to you after they touch your chips. They won’t encourage you to take a card or influence your play. If they spot someone taking your chips when you are distracted, that guy goes to jail. If they didn’t do those things, they would be out of business. I’ve played in casinos all over the world. For the most part they are the fairest business people you can find. They really don’t have to “tip” the odds anymore than they already are in their favor. They just have to be there longer than you are. In the markets it works like this: Because every trade is done in a pit, sooner or later, if someone in that pit is doing anything to tip his odds or not take responsibility, he can’t be a member of the club. If a pit trader has more than his fair share of out-trades, someone notices. If he refuses to own up to the responsibility of his side of those trades, no one trades with him. If he is “front running,” he is called on it. If he holds an order, he is called on it. If you can’t play nice, you can’t play at all. The markets police themselves. Even the huge FBI investigation, done under cover a few years back without the exchange’s knowledge (boy, did that make people mad), found only a handful of traders who could be considered “over the edge.” The FBI even admitted that the

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integrity of most pit traders was beyond dispute. Most of the infractions were minor in nature and could have been simply from the fact that we all make mistakes or get overworked. Somebody somewhere cried “foul” loud enough to the right people and the government decided, since so many people had lost money (from their point of view), the markets were a “scam” and, “we’re gonna get to the bottom of this.” What they discovered is what all the rest of us already know. The markets are one of the fairest places on earth for executing an order. You can’t cheat and be in this game. That’s why we have been here so long and the whole issue of financial futures is a reality. The problem comes in when the public gets involved because they don’t know the rules in the first place, they only think they do. The public doesn’t know what zero-sum really means: Nothing except trading creates losses. If you trade, and you can’t trade for whatever reasons of your own, the losses are yours. It doesn’t matter if somebody or something helped you. Who opened the account? Who wrote the check? Who agreed to place himself at risk? No, you can’t have your money back. But some of them think they can have it back and it’s the government’s responsibility to do something for them to protect them from their own state of mind. As a group, they (the public) think that they have the “right” to make money. If they don’t, it was somebody’s “fault.” They go running to the government, who believes this anyway (but is supposed to protect me, too), and say something to the effect, “If I would have known it was this way, I wouldn’t have played.” In other words, when they sat down to play and didn’t win, somebody must have cheated somewhere. The government then “investigates” why these people couldn’t have what they wanted and makes someone, who does nothing but say “we are open,” pay these people something. To prove you haven’t done anything questionable requires the whole trial process done by people who don’t know this business or arbitration by people who do, and that costs money. But neither will result in a victory for the accused, even if he is so far in the white that you would think he was standing in the doorway to heaven because that becomes part of the public record. Now it’s harder to find work at “good” brokerage houses (you could be a problem) or to open new accounts from “good” clients (just because you were found innocent doesn’t mean you are).

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This is why anyone accused of wrongdoing simply settles for some amount. Why go through the hassle and the expense? If the accused is in the public eye, he says something like “without admitting or denying guilt.” Since nothing causes losses except trading, and the trades were all done properly, they must find something besides trading to “fit the bill.” As things go, the largest part of the business is outside the pits (which are fair), so the regulators focus on “how the account was solicited, opened, or traded,” but that could be anything. Therefore, all the people who are in this part of the business spend huge amounts of time trying to prevent lawsuits from happening. The net result is that the total environment is less effective to do anything. Or they make one mistake and they’re out. So, all those silly little things that could happen by people drawn to this business become fair game. Nevertheless, the government, by its actions, created the environment that this happens in. I’ll show you how this is the case. The actual result is that when the regulators put so many rules in place to protect the public, they create an environment where those rules can be ignored if you choose to ignore them. All you have to do is settle, which is always less than you made. The worst part is that even if you do business squeaky clean, from the point of view of the higher reality (seeing this from the other person’s point of view), no matter how well you follow all the rules, someone will cry “foul” and you will find the regulators saying, “Okay, you are guilty. Prove you are not because this poor person lost his money and he didn’t have to.” A broker has no rights. Since the smart brokers give the client absolutely no advice (he doesn’t want a lawsuit), the client never gets to see that this is a zero-sum game. It is never explained to him. He never gets any help. If you do help the client, sooner or later someone will conclude that the “help” caused his losses, not the actual trading. “Therefore you stole my money” or something to that effect. That’s the part that really bothers me. Where are those people who stand up and say, “Hey, you lost. That’s life. Keep playing until you figure it out if you can. Otherwise, too bad, find another sandbox.” If the regulators were to say to some of these people: “Sorry, it’s a zero-sum game. You played and you lost. Take responsibility for yourself. There’s no evidence to support your claim you were cheated. Thank

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you for playing, we have some lovely parting gifts for you and the home version of our game. Next.” Things would get more equitable in a hurry. I will admit a lot of lawsuits are headed off at the pass when some brokers or owners say exactly that to a client and remind him that he signed the disclosures, and the recordings of the trades will be available for discussion. However, that doesn’t solve the problem entirely because you can’t teach some people common sense. Furthermore, the regulators assume that your compliance doesn’t matter anyway because you must not have told the client what that really meant when he signed and agreed to trade with you, otherwise he never would have complained. The broker is “wrong” in any event. I’ll tell you how I found this to be the case. I’ve had a total of four arbitrations. I was found “not guilty” on two of them and the other two were settled. In all cases, every complaint imaginable was in every one of them. (I didn’t disclose the risk, I lied, I churned, and so on.) The first one should have been the eye-opener. This guy, who I spent at least an hour describing exactly how options work and their risk, not to mention all the other time invested with all the other stuff, claimed I lied to him. “He didn’t tell me how it worked.” This guy did one trade. We had discussed this trade and I taped his approval to do the transaction. I played the tape for the regulators. Their conclusion was that, although I did have approval for the trade, the client didn’t know what that really meant. Therefore, the process of arbitration proceeds “to get all the facts.” How could you misunderstand “Your total potential loss could be $3,000 if the market moves against you”? The client accused me of churning. The very definition of churning means “excessive trading for the purpose of generating commissions.” How could that be the case if you only did one trade? And you agreed to it anyway? I finally just settled with this moron. You know what he said? Let me quote him for you: “I knew you guys were cheats. I already have an account at another company. They’re making me money. I’m sticking with them.” In other words, “As long as I’m winning, I won’t sue anybody.” If you are thinking, “That’s not everybody,” you are completely correct. But if you are a broker, you never know who that somebody is until the paperwork comes in the mail. It could be any

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one of your clients at any time, for any reason that is not to the clients liking. Why? He has the “right” to be “protected.” Who is that guy? So what do you do? Make as much money as you can, anyway you can, and settle. I personally don’t think that way, but most of the people in the business of serving clients do to some degree. The worst part is that since the regulators have to assume the client might have been correct—and everybody just settles—it never gets any better. Clients will always run the risk they really are being lied to or being dealt with unfairly by any broker whom they do business with. So they “gotta find out.” Brokers will always run the risk that no matter how clean they sell or handle the client’s money somebody who didn’t understand what they were getting into, no matter what you did to explain it, will sue you. “Fine, here’s some money; get the f— out.” If you are clean, prove it; if you are dirty, so what? It gets better. Some of the really bad clients know this relationship exists and will simply threaten some kind of legal action unless you give them at least some money back. The conversation goes like this, “If you don’t pay me back, I’ll file an arbitration and you won’t work in this business ever again. I know you are afraid of that and I also know they (the NFA or CFTC)1 think you are already guilty. All I have to do is make them think you did it again. I don’t care if we followed the rules or what I signed. You don’t want the headache. I already know that, so pay up.” It’s like a kind of stop-loss order for those people. I had a client threaten me with that before I learned how the game was played. At the arbitration I beat him, but it cost me more than he had paid in commissions. Up until that point he was the sweetest guy you could ever meet. I discovered that was only so he could trade with the hopes of winning. If not, my blood would allow him to trade another day. Or at least that is what he expected. I’ll tell you how far the regulators go to “find out if everybody’s doing this clean.” Regulators have to justify their jobs in some fashion. The things they do to justify their jobs are behind some of the problems that they think they are solving. I worked very closely with a young man, maybe 22 or 23 at the time. He was one of the good ones. He and I had a strong relationship in the office. One day the

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NFA came in to do an “audit.” This is the process where they check to see if you are following all the rules they have in place. The owners know they will find something out of place somewhere. That “something” is immediately disclosed as “what we are trying to improve.” They know it’s what the NFA would get pissed-off about if they had found it on their own. The next thing is to say, “We want you to help with this.” So they work together to do so and the net effect is no disciplinary action until the “next time.” But there is no next time because by then, everybody’s gone somewhere else. And the company’s gone. In the mean time, just to make sure the wool wasn’t pulled over their eyes, they start a client-contact process. This is where they take a handful of accounts and call these clients to discover how “satisfied” they are with their investment in the markets. Because the clients all have losses, there will always be someone who isn’t happy about that. To their credit the NFA does not make this an issue most times; sometimes they do. But if you were a client, and you got a call from the regulators “checking up on your broker,” wouldn’t you wonder why that was? It’s like a game of Russian roulette. If the NFA calls 10 percent of your clients, is one of those guys going to be the one that cries “foul” only because the regulators were calling and he thought he “smelled a rat”? The NFA in this man’s case did that. My friend had been in the white the whole time, but now he has this new problem, a client suing him. The client said, “The NFA wouldn’t have called unless you were doing something wrong.” This broker quit because he believed that at some point, the regulators must be on his side too. In reality, they created his problem and had to assume he was the guilty party until proven otherwise, which costs time and money. This broker said, “I can’t believe this,” and went into another field of employment. The NFA, by its actions, drove a qualified honest broker out of the business. I will tell you another story you absolutely will refuse to believe, but it is fact. One individual I worked with had a client tell the NFA, more than once, “I’m completely happy.” The NFA representative told him specifically, “If you have losses, those losses may have been caused by your broker. Do you know the forum of arbitration is available to you to resolve a dispute?” This client asked, “Are you suggesting

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I sue my broker?” The NFA representative replied, “Well, um, no. It is our intention to keep trading fair and equitable. But losses may have occurred through negligence on the part of your broker.” The client said, “I’m happy with him,” and finally hung up. This client called his broker and asked him if he knew the NFA would encourage the point of view that all brokers are crooks. This broker was furious. He went over to the NFA (their offices are in Chicago) and demanded an explanation. They called security and threw him out. Here’s the whole point: There was no audit being done at that firm. Apparently, someone from the NFA went over to this broker’s clearing firm and just asked for a few copies of public account forms. They never told anybody what they were going to do with them or why they demanded personal and confidential information about people. This client was simply working in the garage when, out of nowhere, on a Saturday, someone is suggesting he is a victim. Do you see how certain clients might conclude: “Wow, I can get my money back”? This kind of regulation has actually made problems possible, without providing benefits to the client. Meanwhile, the whole intention was to help the client “get in” fair. Once he’s here he’s fine; if he knows what he’s doing or can find someone who does. If he doesn’t know what he’s doing or can’t find someone who does, it doesn’t matter in either case. The bottom line is that anyone who wants to get into this business wouldn’t know that until he came to discover it for himself. Good people, with all kinds of good intentions, skills, and desire to do this ethically will find it doesn’t matter if they do. They will suffer; perhaps more if their sense of justice is more acute. Bad people, who are looking for a way to “work a deal” somehow, or figure they have found easy money, find this business can be an open door for them. Both of these people come and go, but for the most part the good ones throw in the towel sooner. The net effect is by attempting to do the right thing, which is full disclosure of risk and how the game is played, they set the stage for that to be ignored in the long run. All the “little things,” such as missed time stamps, missing paperwork, and so on, are violations in some form, subject to fine or expulsion from the industry. Some guys

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get so fed up with chasing paper tigers and unnecessary B.S. that they throw in the towel too. These guys say things like: “I’m just gonna make enough money to pay all the fines if I miss something.” “Screw the NFA, it will take years to yank my license, by then I’ll have enough money to do what I want anyway.” “Who cares what the client thinks? He can’t afford to sue me. If he does I’ll just settle.” It goes on and on. This happens every day. I’m going to tell you the story of how I came to fully realize this whole process. I was working at a medium-sized retail brokerage house that was only in the business of options. They did this because somehow, in the mind of the public, everyone is completely convinced that futures trading will ultimately cause a “margin call” or cause you to lose more money than you originally opened the account with. This is a legitimate concern and does occasionally happen. It is avoidable 99.99 percent of the time if you use some common sense with regards to position size, protective stops, staying out of markets at certain times, and money management. But that doesn’t matter. If you try to explain this to a first-time customer, they get the impression this is all very risky and complicated. Therefore, it’s not for them. To avoid this problem, our main selling point was that because your risk is only exposed to the premium that the option costs, you could never have a margin call or lose more than you initially invested. Your risk is defined so “you can sleep at night.” Which is true. The other side of the coin is that any market you trade with an outright long option position must move a long way to make it profitable. If you buy calls, expecting higher prices, you need that market to make a big move, especially if you buy out-of-the-money calls in the first place. Corn could make a dollar a bushel move your way and you could still lose money if you held a certain option. Then you get this phone call: “The market went my way—how could I lose? You cheated me.” Again, this was all explained but that doesn’t matter. Anyway, I was there because my initial project to go on my own had blown up, but not before I had some success with it. Plus I knew the owner of this office and I knew he was a square shooter. If I wanted

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to do something differently than the company wanted, he was fine with that as long as it was okay with the clients. It was an opportunity to get enough cash to do what I wanted. He was fine with that too and hated to see me go when I did. It was ironic that the last place I worked at was the best experience of the bunch. I got on the phone to raise capital. Since I had come to better understand the markets, I used that knowledge every now and then. This company, in order to demonstrate to the regulators that they fully controlled the sales process, had hired an independent company to “eavesdrop” on conversations between brokers and clients. The fact that they could do this from Connecticut, when we were in Chicago, is a frightening “Big Brother” concept in itself, but that’s another issue. They were trying to do the “right” thing. They told you this was going to happen but they never told you when. The whole idea was to get the “real story” on your selling, and review it with you to both improve your approach and to remain in compliance. I thought it was a good idea. At some point it was my turn and my personal tapes came in. We discussed it and that was that. What the company didn’t tell us was that they were also sending copies of the same tapes to the NFA for review. This was a “show of good faith” so that the NFA would leave them alone for the most part. However, they were the only people in the business doing that voluntarily. Naturally, the NFA thought that was a good move and decided they would review the tapes. Remember, the NFA, although a self-regulatory body, must follow the guidelines of the CFTC charter and mandates. Therefore, whatever it does is basically redundant. Also, a few cents out of every trade commission is their only source of funding, which means my trading pays them. They work for my benefit too (allegedly), but as we have seen that is not the case. To keep the rest of the government off their backs, the NFA follows the entire Fair Reporting thing, the Equal Opportunity thing, and so on. The bottom line is that the NFA is a bureaucratic nightmare. Ask someone who has tried to get anything done with them. Anyone working there is some automaton who is told to do something and to do it one way—no questions and no exceptions. The net result is some guy making $25,000 a year, who has no idea how trading or raising equity is really done, who was only hired because the law said he has the “right” to a job, and who could have

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just as easily been flipping burgers last week, is able to bring the whole process of earning an income and servicing clients in one of the most difficult financial environments in the world to a grinding halt because he is “just following the rules and doing his job.” Now remember, I had been in the business for eight years at this point. I had serviced hundreds of accounts. I had won two arbitrations and probably would have won the other two. I had proved to someone who knew this business that I had never broken a rule. So here’s what happened: One day I was in my office and one of these NFA androids walks in. He asked the boss to take a package and point me out. So my boss did. This worker drone says, “You have two weeks to comply with this investigation. Until then you cannot solicit or service any accounts. Goodbye.” Then he walked out. My boss looked at me and said, “There must have been some kind of mistake. Whatever you’re doing is fine. Don’t do anything, I’ll handle it.” Mistake or not, I wasn’t working until I “complied.” So I asked my boss to let me get started on my end while he tried to sort the whole mess out. We review the package and here’s what we found. I am in “violation” of NFA guidelines (not laws, guidelines) with regards to the solicitation of client accounts. They very courteously cited for me about 10 or more different ones, all with a very stern warning that any one of them is grounds for having my Series III license revoked. They then listed all the things that I had said for each point. Without fail, all but two comments had been taken completely out of context from the entire conversation. This had all came from one tape of one conversation. (What about all the other tapes that were in “compliance”?) In other words, make one mistake (from our point of view) and your career is over. It didn’t matter that to prove any individual was a problem required systematically looking for a clear pattern of abuse that must be very clear as abuse. That would take time, attorneys, and a lot of evidence. But that is not how they are thinking over there. Make one mistake, you’re out. That pile of papers made it very clear that unless I could answer their questions and substantiate what I said, and do it in the next day or two, I was out. They assumed that if it happened once, it was happening every day, all the time, with everyone I spoke with.

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The package also included the review process to get my license back if I so chose. In other words, they assumed I was guilty of whatever it was I was guilty of and it was up to me to decide if I wanted to continue my career. I panicked. Wouldn’t you? If I hadn’t kept my own records on my own accord (and they hadn’t disappeared off my desk), I never could have provided them with the written documentation for the kinds of information they requested. If I had trusted someone else to hold those records and I couldn’t find them, that wasn’t good enough. (“Maybe someone was counting on that?”) For each “violation” I had to show them exactly what day what position was done that showed a profit to my client, provide a copy each of the time-stamped order tickets, a transcript of the tape documenting that I had approval to do the trade, and independent documentation of when that conversation was held. If I couldn’t do that, I was out. I had to show them exactly how I determined that Japanese Yen futures were moving higher, and why they were moving higher. Furthermore, how the trade did, in fact, occur exactly as I said it did, meaning analysis of some kind for that particular day, which proved I knew “what the market would do.” If I couldn’t do that, I was out. If I said, “You could profit by 30 percent on that trade.” They said that was a “guarantee.” They wanted me to produce a written documentation of how I could “guarantee” any profit to the client, even when the markets went our way. They said that the phrase “there is a risk of loss in trading” did not accurately describe to the client how that could happen by using options and therefore was an attempt to “minimize the risk so the client would open an account.” It didn’t matter that the previous 30 minutes on the tape was that very discussion. At that point I hadn’t said it again, which assumes the client was too stupid to pay attention or think for himself. I could go on and on and on. The long and short of it was I had to drop everything, which means not service the clients on the books. I couldn’t touch their positions to protect them or keep profits. Someone else had to do that, which means time away from his business. Not to mention that he had no idea why or how those trades were done and didn’t even know those markets. Is that fair to my clients, or his? I spent the next few days getting everything they wanted together. It was either

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that or I was out. Even if I got it together, I didn’t know if it would make any difference because almost everything they accused me of needed to be held in context of the entire presentation, which they weren’t doing in the first place. The fact is I never told the potential client anything that wasn’t true. I could substantiate everything I said to him. I put this all together and gave it to the NFA. I was told I couldn’t solicit accounts or talk to any clients until the “results of the investigation were in.” In other words, the merest suspicion of wrongdoing in any form will put your income at zero. Suppose I was supporting a family? The bills don’t stop coming. After enough finagling from the company, my boss, and me, I was able to “temporarily” work until this was done. I never heard from them. Not a peep. Six months later I got a letter in the mail saying in effect “Okay, all clear but we will continue to keep your file active.” In other words, we are watching you. “You got away this time, but you won’t forever.” For six months I never knew when they might walk in and tell me my career was over. They never gave me an opportunity to discuss the “charges” against me in any case. If I wanted to keep trading, “Well, that’s your problem.” To the best of my ability as best I could, I had followed every rule they have on the books. All of this from a group of people, who otherwise would have no authority of any kind anywhere, are really not necessary in the first place, and they are paid by my trading. It’s simply unreal. Once I knew that no matter what I had done to show good faith, their bureaucratic process will always leave me at risk, I had no choice but to assume sooner or later that I would have to go through it all again. If one dot was missing or one “t” not crossed, I could be out of business. At the very least, I would have to jump through hoops to stay servicing the clients I had at the time. This would happen if I was working somewhere or owned my own company. If I had my own brokerage house, I would have to go through an audit. Which is fine, except I won’t play the “we are working on it” game. I would say, “Hey, I followed everything in this book you gave me to follow. There it is in black and white.” Without a doubt I’m certain they would come back with, “But you aren’t doing it exactly the way we want. We have to clean up this industry. What are you hiding?”—or something equally stupid that says, “It’s not good enough.” No matter what you do, it’s

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going to cost lots of time and money in attorneys, arbitrations, reviews, and the like with a bunch of people who are from the public, have never traded, and are following the letter of the law but not its spirit. In other words, I never knew if my fiduciary responsibility to protect my clients or my skill at trading would be interpreted as “an attempt to minimize the risk” from their point of view, which is what fiduciary responsibility and skill are supposed to do. If I executed a complicated combination of futures and options to reduce or eliminate the risk completely (which is possible), that might be “churning.” If something in the market changes and I reverse or liquidate to protect my client, and couldn’t reach him immediately (he is out of town or something), that could be “unauthorized trading.” If I was executing a hundred-lot trade for 30 different clients and missed a time stamp somewhere, that might be “failure to comply with required record keeping.” Who knows? What if they “eavesdrop” on my phone lines and hear me say “this is a lot of fun” and determine that is a “guarantee” the client would make money? All the NFA has to do is form any of those conclusions and I am out. Or spend all kinds of time and money to “educate” the idiots who work over there. The fact is most clients will never trade with someone like me in the first place. What chance do they have with a broker who could care less in the first place? And it’s the NFA that puts the broker in a position to think like that to “protect” himself? Who needs it? I could go into all the other stuff the regulators impose on the client–broker relationship. I could show you how this creates order imbalances, how it affects the pits, and so on. I won’t do that right now. My head hurts. I suppose that will have to wait for another book. If no one has shot me first. The thing that really broke my heart about all this is that it doesn’t have to be this way. There are ways to have controls on people’s behavior that can’t control themselves. There are ways to do that without creating an environment that fosters the uncontrolled. There are ways to help the uncontrolled see that it is in their best interest to change their behavior. There are ways to keep bad clients out.You don’t have to use threats, punishments, or restrict freedoms to do it. It’s tragic that

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part of the problems we all face every day come from authorities who probably mean well. Nobody wants to get ripped off. Sometimes the “little guy” suffers an injustice that he or she didn’t have to. Well, that happens to everybody. It happened to me too. That is life. It’s a dangerous world. Once you cross the line in your thinking that says “everybody’s guilty until they prove different,” you create a whole other set of problems. By the assumption of guilt, the innocent are now vulnerable. The guilty just hope they aren’t caught. Statistically, certain things are unrealistic to expect. “Everybody should have a job.” “No one should be hit by a car.” “No one should lose money.” “Everyone should be happy all the time.” The list is endless. Once you cross the line and start expecting the unrealistic to be certain by legislation, you run the risk that someone who is just doing their best in a difficult situation will get run over in this zeal to make the world a painless place. I have to say this. I hated writing this part of the story. I love the business of trading. I will never do anything else, and I fully expect to have positions open the day I finally check out. It’s too much fun and there is too much money to get for all those other things that life can give you. I couldn’t leave out this part of the story. Understanding how regulators work in general and in the trading world in particular was part of what I learned. For what it’s worth, the following paragraphs are my insights into working with the regulators. If you are a client wishing to trade for himself always remember one thing: If your already overburdened broker thinks that you will be a compliance problem, you will open yourself up to all kinds of headaches. No one is going to want to work for you.You are too much “risk.” Leave the guy alone. Don’t ask him for help, that exposes him to “risk.” Do it yourself and don’t complain at him about fills, stops, and price action. The guy has to do three, sometimes four steps to get you in or out, and if he misses one of them, someone who will never help him make a dime is going to be all over his ass. When he makes a mistake, for the most part they are honest ones. If your phone was ringing off the hook constantly, and everybody you were talking to was in a hurry, you might miss something too. If you get a fill back that is 10 tics off your expected price, it is not his fault. Don’t scream and yell and expect him to drop everything to find time and sales, or phone his back office about the rotten service. Now the regulators, or someone

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who is afraid of the regulators, will want to know why he is “shortchanging” someone. If the guy is a pro, he knows already if you are due something, or if something should be checked. That is the nature of this business. Grow up and deal with it the way the rest of us who aren’t happy once in awhile have to do. If you think the service is great, tell him. Now he will work harder for you. All day long people are complaining. When you place or move orders, get the ticket number and used it. Don’t make the guy guess it’s you. Errors that are avoidable happen like that. Clients sound alike. Don’t say, “It’s me, cancel my stop.” Use your account number so that he doesn’t have to look it up all the time. Be as professional about this as you expect him to be. Help him do this easier so that he can operate with the freedom of mind that no one is going to “hassle” him. If you are a client who has never traded before, remember that there are no promises made. You are responsible for the losses if you have them. Nothing causes losses except trading. If you’re not happy, go home. Don’t threaten or complain or ask all kinds of stupid questions about how it happened. It happened, that’s it. Nobody is stealing from you. It’s next to impossible to do. Either you or your broker were wrong, or both. You did know the risk, don’t say you didn’t. If you agree to trades you are not being “churned.” End of story. Don’t be the guy who makes it hard for a broker to tell it like it is. The more you think it is him personally, the more he will attempt to justify the trade to protect himself. Now you will get even less help from him, or he will close you out because you are a risk. Either way, the fact is, you agreed to trade. It doesn’t matter if he said something that didn’t pan out, that was only his point of view anyway. If you were willing to accept his point of view in the first place, then be prepared to accept that it may not be shared by the market. You weren’t going to share any of your profits with him, were you? Why should you expect him to carry the burden of your losses? If you think you will make money, go for it. If you end up with losses, don’t be a crybaby and expect “mommy and daddy” to bail you out. You are an adult like your broker is. He is in a tough business; tougher than you’ll ever know. Give him credit for where he’s at and what he’s trying to do with his life. He doesn’t get a pension like you do. Don’t make it harder for him to service his other clients who understand this.

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If you are a broker, give your clients a little respect. The good ones trust your judgment. They expect you to give them a fair shot. Don’t sugarcoat the risk. Do your homework and accept it when a client says no. Don’t coerce them into doing something if you can tell that they really don’t want to get started or do this particular trade. There are other potential clients. Commissions will be there sooner or later; the business is huge. Don’t rush. If the client says yes, then do your absolute best to find the right point to do the trade. Don’t force the issue. If you missed it, tell the client you missed it. If it might take another week, tell your girlfriend she has to wait for the fur coat.Your job is to protect his equity. In the long run the client will respect you. If the trade is a winner, don’t take credit for it. It was never your money at risk.You did the job the client paid you for and that is that. Don’t expect your clients to blindly follow your lead the next time. You have to earn your client on every trade. Follow the rules. Do it in the white. If the regulators get all over you, try to understand their point of view. All the power of the government boils down to is whether or not the government’s representative wants to use it or thinks he needs to. Don’t give him a reason to do so. Cooperate, and if it means a little extra work then it means a little extra work. Do it all the way. If they don’t think you are the man they are looking for then they will leave you alone. Just pray you never have to go through what I did. Sometimes the regulators are singling you out for reasons of their own. If they do, take it a step at a time. If you are in the white, eventually you will win but they will never go away. Don’t work for someone who expects you to bend the rules in any way. Leave so fast you leave your coat behind if he says, “I’ll handle that for you.” You will end up out of the business through no fault of your own. That’s what almost happened to me. Lastly, if you are one of the regulators, the spirit of the law determines the letter of the law; not the other way around. If you are on the audit teams, think about that. If you process paperwork or are involved in keeping registration current, please remember that most of the people in this business aren’t out to screw anyone. They just want to work. Do what you can to keep them earning an income. Don’t put them in a position where they spend four weeks or more waiting for something. Or they missed some little thing “this time” that is in their file already. That causes pressure to trade too fast when they finally get on

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the phone. You call it “churning.” They call it “eating.” If you help to write the rules, stop and ask if any more of this B.S. is really needed. If you enforce those rules, try to see how many of them don’t help in the first place. Asking somebody to spend his time on something that you and I both know is just going to sit in some file somewhere is pointless and it makes it harder to service the client. Try to see that you only have a job because the 12 cents from every trade goes to you. Don’t make a broker pay you twice. Don’t make a broker’s life harder than it has to be, because if you do he will get angry at your lack of concern for his position. Then they snap. Who knows what will happen then? If your job is to protect the client, how can you do that if the client’s only contact to this industry is under all sorts of pressure from you? That’s it. I hated this part. I hope someone remembers that.

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Chapter 7

The Last Word You sure you want to do this? Life is a gamble at terrible odds; if it was a bet you wouldn’t take it. —Tom Stoppard

S

ome people think the concept of trading as I’ve described here is really barbaric. Personally, I do feel that way. It is a very base idea to “kill and eat something today.” Let’s face it; that is how a zerosum game is played. Whose idea was it to make it this way? It wasn’t mine.That’s the way it is, baby—brutal. I learned to understand it, accept it, and exploit it. One other thing happened that I learned from. It is what I want to talk about for the last few pages. No matter what you personally choose to believe about the trading environment, you can’t make money at this unless someone else loses theirs. To make a million can only mean someone else (or a group of 103

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them) had to lose exactly that same million. Who was that? What did he experience from that loss? How did that affect his hopes, his dreams, his family, his friends, and even his destiny? I’ve known people who’ve committed suicide, become drug addicts, lost their homes, become alcoholics, started beating their wives, gone insane—the list goes on and on.You never hear about that part when CNBC has a tag line that reads something to the effect: “Soybeans unexpectedly went limit down today in heavy trading.” Sometimes it takes months for someone to go ballistic; sometimes just one trading session. All the pain, problems, and hell never stop. Every year this business gets bigger. The markets go merrily along as “portfolios get readjusted” or “yields flatten out.” It’s all saying the same thing, “You lost on your side—sorry.” Every year the stories that could be told get created. My story is not unique by any means, just that I’m still here through all of it and prospering. Throughout this book I’ve been really hard on the “loser.” I make it sound like I have a biased point of view on that person, like he is a concept more than an actual person. To some extent he is a concept because most people will never see the actual individual whose money they took. That didn’t happen to me. I knew of one guy, and it was a very sobering experience. Let me share it with you. One day I was walking through the Chicago Board of Trade and saw this man holding his sobbing wife. I had never met the man, but had seen him around the markets. What I never knew about him until that time was that he had been trading for about 15 years only for himself. He had blown out completely and his wife had come to his office to help him clean out his desk. As it turned out, through mutual acquaintances, which I didn’t know we had, I learned the whole story. We were having a few drinks when one of the guys asked, “Did you hear about (so and so)?” “No,” I said. When he told me the whole story I was totally shocked. This trader’s wife was dying of cancer. The emotional stress of this turmoil had caused him to go belly up. He lost everything. Since he had only been a trader, he had no way to support his family or cover the costs of medical bills. He had no other skills. He went into a tailspin. Later, he killed himself and left his family and his dying wife alone. This was the same man I saw in the CBOT that day. Up until then, it was just tragic. The next part made it real.

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Someone asked, “What was he trading?” The answer was wheat. By coincidence I had been trading wheat for the time in question. “From what side?” I asked. “Long,” was the answer. I was trading shorts. “From where (meaning prices)?” The numbers were almost the same as mine. I was the actual person on the other side of his trades, or at least one of them. I had his money (or at least some of it). Instead of seeing the markets as “prices,” it hit me that there were real people on the other side actually experiencing the results of those losses in a very real and permanent way. I had been the conduit to some of this man’s devastation. From that point on I had a huge emotional struggle develop that was completely unexpected. Every time I took money out of the markets, I would remember this guy’s face. I began to think that I was involved daily in putting people into their graves (at least financially). I began to feel tremendous guilt over my profits. This lasted long enough for me to lose tens of thousands dollars. If I was to keep trading, I had to find a way to reconcile this conflict or I would end up just like him. Nothing could prepare you for this. I can’t give you a two-cent answer for a million-dollar question, but I resolved that conflict. I found the meaning in this conflict and what it can teach us. Here’s what I think I learned: Life is a battle. There will be winners and losers. Losing is really part of winning. By putting people in a position of losses I am helping the better souls learn how to become winners. Those winners will have losers to pay them and those losers (the better ones) will become winners. The cycle goes on forever. If it sounds pompous, I can’t help that. I’m not being pompous; I’m trying to find value in the fact that I kill and eat people every day. Some don’t see it coming. Does anybody really want to inflict that kind of pain on someone else? And know they are doing it? Did you know that in Africa there are tribes that actually apologize to the animal they kill? They ask its spirit to remember that they have a responsibility to care for their families and they need the meat to do that. What is going on there? If I were a gazelle, as soon as I saw those guys coming, I would head the other way. When you’re dead, who cares if they apologize? In the markets you are the gazelle or the hunter. You can’t be both. Most people will say that this point of view is not realistic.

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They say this because people who trade are supposed to know the risk of what they are doing. If we are all adults about this, then we can all accept our results. I agree with that most times. Sometimes I can’t. It hurts me to know that sooner or later I will be a part of someone’s untimely financial demise. Maybe that person didn’t know what he was doing and would not have been eaten if he had known. If you are going to kick a sleeping lion in the face, you had better know what you are doing. Most people don’t know this risk when they trade. I admire those that know this risk and embrace it. I take a lot of pleasure in trying to outsmart him knowing he is trying to outsmart me. Most times I win; sometimes I lose. Standing right next to him is somebody who has no idea that he is going to maybe shipwreck his life. That guy is the real loser. I’m talking to that guy right now. Don’t be that loser if you can help it. If you are going to start a war, know how to win it. The winners always write history. Stop and think what is possible to you personally if you have losses. Think about the emotional cost, all the financial pressures, or the stress on your loved ones. I believe this is deeper than, “only trade with money you can afford to lose.” Why? Well think about this possibility: If you are not emotionally prepared to lose, your losses might depress you.Your behavior changes slightly. People ask, “What’s wrong?” Some admit they have losses, others won’t. You answer “Nothing.” Maybe you don’t want to hear your friends say, “I told you so.” Your spouse senses something is wrong. Maybe the feeling of losing ten grand and admitting it to your spouse is simply too painful. Maybe she concludes you are unhappy in the marriage.Your boss sees you lack something on the job. Maybe your behavior causes you to be passed over for a promotion. These things are real. Most people never see the potential for connection in there somewhere. This list is endless. It’s not a game at that point. Think about the real risk of trading because it’s not about money. It could mean some or all of your life. I’ve seen it happen. It happened to me. It still happens every day around here. It very well could happen to you. If you accept that risk and you lose, you are to be admired for trying to better yourself. Welcome to the war. If you are ignorant of this risk, wise up. It’s no challenge to kill a child. In fact, it is embarrassing and wasteful. It hurts to admit you’ve done it. If you pretend this risk isn’t there, you are a fool.You deserve to lose. I’m sorry I had to be the

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guy who devoured you. Next time don’t kick me in the face. If you do, you better have a big gun pointed at my heart, in which case I will say, “My turn to die.” Then I’ll ask you where you got that big gun and can I have one too. In the final analysis, it’s not about money; it’s about evolving. Those who don’t are food for those who do. Sooner or later everyone gets a chance to be both. Just do yourself a favor and never stop evolving. I would like to meet you. Otherwise, I will eat you.

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Chapter 8

In Conclusion I think most of the people involved in any art always secretly wonder whether they are there because they’re good or there because they’re lucky. —Katharine Hepburn

I

t was a beautiful fall day. The air was crisp. The sun was shining—a perfect day for a drive to look at the changing colors.Winter would be here soon and it would be a while before I could enjoy the days like I want. I decided to go for a drive. No place in particular. I headed north on Lake Shore Drive from about Burnham Harbor. I thought I would go north on Sheridan Road up to Winnetka or so and then back. The last few sailboats were motoring over to the locks, going into storage for the season. A few brave souls were out jogging along the lakefront.You could see the waves breaking a little higher on Oak Street Beach because the winter winds off the lake were starting. It was a

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postcard-like setting for me. I really enjoyed all this. It was the middle of the week, early afternoon. I had the Drive almost to myself, unconcerned about anything except the hum of the engine. I felt great. I decided to give the car a little push. You guessed it. Flashing lights, the siren. If you have ever driven Lake Shore Drive, north from downtown, you know how easily this can happen. It’s five lanes in some spots, posted 45 mph, but you can easily do 80-plus when no one’s around. Apparently, I wasn’t even in the same time zone by the time I stopped according to Officer Friendly. Sheeze, I was only in third gear for crying out loud. I had two left I could have used, why don’t you just be thankful? Well, I knew I had a problem: ticket for sure, maybe even a ride back to the clubhouse too. I had created some conflict, how was this one going to work out? I really had no idea what I would do, but I knew where the starting point was. I wasn’t thinking about “talking my way out of it” or anything. All I knew is that he had the advantage, but I had the first move. As he approached the car, I watched him in the rearview mirror. He moved quickly, so I knew he was angry. His hand was on his service revolver, but in Chicago that is to be expected. I did nothing and kept both my hands on the wheel where he could see them in case he was the twitchy, Barney Fife type. When he got to the driver’s door he banged on it with his flashlight. He knew that would piss-off most people. He wanted an excuse to unload on me. My response to that, if he didn’t like it, would certainly justify at least a ticket. Maybe he had the capacity for violence, which for a Chicago cop is practically a given. I continued to just observe and wait for enough clues. “Yes, Sir,” I said. “I’ll roll down the window.” “You think you’re hot s— in this ride, don’t you?” was the first thing he said. I had my answer on how to win. The trade was executed right then. As they say in tennis, advantage-in. “Oh, no, officer, I only just bought this car about a month or so ago. I work so hard I never have time to enjoy it. Take a look at the odometer; I think it’s still less than 1,000 miles. I must confess the temptation just got the best of me. I can’t believe the first time I let it out a bit I got stopped. I’m really sorry I put you through the trouble, Sir.”

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“You were going 83 miles per hour; the limit’s 45. I should take you in.” This man was not happy. “Yes, Sir, you could do that. I would hate to put you through all that trouble but you are the boss.” He went on for a moment or two about how unsafe that speed was and that’s when I had him cold. Dead to rights. If it had been a trade, I had his money and there was no way he was getting it back. I almost started laughing when I realized how easy he gave me the opportunity to take the profit. Up to that point I still had no idea how to finally win, only clues that I had to consider in an attempt to win. If I didn’t find it, I was going to jail, probably. But he gave it to me without having to look for it anymore. I then chose to add to the position that had the potential and executed again. “Yes sir, you are right. But that is why I bought this car.” (Lie.) “How much do you know about ____________?” (I won’t tell you the make and model, but there were only a handful in the whole country at the time.) “What’s that got to do with anything?” he asked me. “Well, I’ll show you” I said, “While you are writing this up let me give you the nickel tour. Is it okay if I get out?” “Sure,” he said. I knew I had his interest then. He knew something was going to be different about this stop. So I showed him the air dams and explained why they contribute to the car’s stability at higher speeds. I threw in some stuff of my own about, “When the air is colder it’s denser so they work better.” I showed him the suspension (we had to get down on our knees to look under the car) and explained how that works in conjunction with the air dams. Then I explained the reason the car is mid-engined is because that helps it remain more balanced and contributes to its overall stability. I went on about how that helps the brakes work better and the car resist spins. I told him the car was engineered for panic braking and avoiding potholes on the bad Italian roads, so naturally it works even better on good asphalt like Lake Shore Drive. I told him the whole reason I got a little ahead of myself is because I really believed I was safer here than on the Dan Ryan Expressway with all those nuts. Basically, what I told him

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was all technically true, but I put it in the frame of reference he gave me, the issue of safety. Personally, I bought the car to run wild with it. I do that every chance I get. I could outrun a helicopter if the road was long enough and I was willing to deal with that conflict. He didn’t have that perspective. In fact, he basically told me that he believed anyone who owned something like this was intending to break the law when he accused me of being “hot s—.” Once he made the distinction that “ownership equals unsafe,” I knew his point of view. Now the trade was confirmed as a winner and he had no chance. It was over for him. It was a simple matter to put my actions into his frame of reference, thereby resolving the conflict in a way that validated his point of view. I let him “win.” But in doing so he saw my point of view as being the same as his. Therefore, he actually lost and gave up his position to mine. Then I did what was only the right thing to do. Class and style, baby. “Have you ever driven one of these, officer?” “No.” “Why don’t I ride with you?” So off we went. We drove up and down Lake Shore Drive finally arriving back to his squad in about 15 minutes or so. The whole time I kept asking him, “Can you feel how stable the car feels?” “Can you feel how those brakes make you feel safe?” “Can you see that eighty feels like forty?” The end result is, of course, no ticket. He has to drive some Detroit derelict all day long. But today, he got to drive something that was out of his reach, maybe forever. Do you think he woke up that morning thinking he would be behind the wheel of a state-of-the-art engineering marvel that he’d never even heard of before? Something that costs more money than he gets paid in two or three years? (Maybe he was just jealous.) Who knows where it could have gone? We never discussed his family, how long he’d been a cop, what he likes to do for fun or to relax, all those other places to connect. The possibilities were completely endless. He even apologized for stopping me and thanked me when we parted. Imagine what the conversation must have been like back at the precinct. Do you think I will ever get a ticket from any of those officers if I’m pulled over? I’ll probably have to let them all drive sooner or later. Damn, I should at least ask for gas money.

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Would any of this have happened if I had done something different? Like “make a case” for myself? Or focus on how frustrating it was to get pulled over? Or if I would have been concerned with my own point of view in any way? For me, it was his point of view that mattered. Everything is like this—especially the markets. The Art of the Trade is the process of getting to the point where you can begin to see the true nature of reality, doing it in a way that is completely divorced from your perception of what that reality should be, always attempting to adapt yourself to that reality as it unfolds around you. Once you begin to discover that, you can begin to exploit price action in any market in any time frame. You will never arrive because that reality is constantly being created differently by those who participate. Therefore, you must be constantly creating differently as well. Otherwise, when you dance to the wrong tune, you get eaten. It’s like this: “This is what the market says, this is what I do.” But that “What is it really saying right now?” question is the art. What I choose to learn—and believe every trader needs to at least consider—is that everything in your life and everything in your personal thinking can contribute to that process. Every circumstance, every event, every person, every situation I might find myself in has the potential, if I let it, to teach a lesson on the nature of how people think, how they function as a group and what causes them to do certain things. Most importantly, it is how I personally interpret this constantly unfolding reality that is created by these people. The markets themselves taught me this. I learned that there are only two points of view: the other person’s and the best one. What I think is of no consequence. Mine must become the best one. Nowhere is this truer than in a zero-sum game. The end result is the ability to do or become anything you could ever want to be. All that takes is money. And money in a never-ending supply is what the markets can give you. In any amount you need or want. That’s why we trade in the first place. But, you won’t get a penny of it unless you are willing to hear its voice. It only speaks one way. By God, I was willing to stop talking and finally listen.

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Appendix A

For Traders Only Looking in the Mirror Speculation: From the Latin root verb “speculari,” meaning “to observe.” It implies unbiased assessment of conditions and leaves the final result of any conflict, action, or effort to be free of any committed outcome. —Anonymous

A

t the beginning of this book, I told you this is not another “how-to” book on trading. This is my personal story of how I finally came to be a permanent success at trading. When the manuscript was finished, and after I paid “Ghostwriter X” what he thought was a huge check, I was at the point of deciding if I should actually publish this. It was at this point that I gave the issue of trading itself more thought. The people who are naturally drawn to this type of book are going to be, for the most part, in the business of trading 115

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somehow. I don’t think this will ever be read by anyone who is in crop dusting. So I thought in fairness to you spending some of the money that you will probably lose anyway, I offer you a better shot at getting mine. I will be on the other side of some of those trades. Fair enough? Here are some things relating to the actual part of execution, both initiation of a position and liquidation of that position. Also, I want to share some thoughts on maintaining a strong market presence. These are only words. They have all been said before in some form or another. This isn’t “new” in that respect. I want you to look at these insights from a new perspective; hopefully the one I have come to understand and presented throughout this book. Even if you came to understand the point of view I hold, you will see it in a unique way. Find a way to “look” at what is happening like I do. That is when this information is really useful. Then let your own expression of that perspective control the execution of your trading. Let that be the art form you create. Do it better than I can, so I can learn from the new reality that you are creating, that I have never seen before. I’m looking for that every day. Please be there. I’m getting bored with what I find now. One last qualifier: I tried to “teach” trading for a period of time. I have no intention of ever doing it again. If you think I am trying to “teach” you anything, I will hunt you down and have your head for a paperweight. Better stop now if you think that is what you will find here. Here you go. Try to take my money. If you are losing a tug of war with a tiger, give him the rope before he gets to your arm.You can always buy a new rope. —Sufi Wisdom Cut your losses, @#%$ for brains. Live to trade another day. You are wrong today. Try tomorrow. The markets will never end. Go do something else for a while. Write a book for Christ’s sake. Someone will buy it. The fault, dear Brutus, is not in our stars, but in ourselves, that we are underlings. —William Shakespeare, Julius Caesar (I, ii, 140–141) Who twisted your arm to do this trade? Who called the floor and said, “Get me in?” Who clicked the “Enter Order” button? Take 100 percent

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responsibility for your results, no matter what they are. The more you blame, the more you lose. Write down everything you do and look at your ratios. Know what you average gain/loss is. Know your percentage of winners to losers. When you trade write down why you did the trade. On a regular basis review these notes and ask yourself what the quality of your thoughts really was at the time. The more you kid yourself, the more you lose. Attempt to improve your gains by 10 percent and reduce your losses by 5 percent on some time frame of your choosing. If you are half right you will improve your net gains by 7.5 percent or more on a regular basis. The market is always right. If you lost, you missed something. That something is inside your head. What is it? Never trade without a stop. Ask yourself why it is okay, just this time, not to place a stop. What is that something? Let profits run. If you think it is time to get out, ask yourself why you think it is time. Let the market decide that, not that something that says it is time to get out. Who knows how far it might go? Never add to a loser. Ask yourself why you feel the “need” to do so. The market does not know you have any position on.Your first loss is your best loss.Take a new look at it.Take a break. Do anything but add to it. Always remember that 90 percent of people who trade lose. Only 10 percent win, but they have all the money. One hundred percent of contracts traded fall between the two. Therefore, 90 percent of the size is controlled by 10 percent of the people. Who are those people? What are they thinking? If a hundred “one-lot” traders are working against one “hundred-lot” trader, how did he get to be that big? Was it from his losses? Always consider what the large traders are doing, but that they can be wrong too. The small guy does have his day. Remember that. If you want steak, but can only afford chicken, a cow will be your undoing. —Proverb Don’t trade more than a reasonable size. Don’t “load up.” Only very experienced traders know how to do this. They got that way from a proven method that works for them. Until you get there, and know you are there, you will meet your Waterloo when you do so. I will be

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there, or someone just like me. I will also rent you a car so you don’t have to walk back to Paris to get more money. Please come back. I would like the continuing pleasure of removing that new money from you as well. Go with your “gut.”Your subconscious mind has the ability to form associations and reach conclusions for you. It oftentimes will know something your waking mind doesn’t. It is trying to tell you something. Please listen.You must learn how to differentiate a gut intuition from a testosterone-fueled ambition. Otherwise, you will have no testosterone at all. Never listen to what anyone else is talking about regarding their trading. They “talk” their position because they want you to validate their point of view. They don’t know why they did the trade in the first place. Or they want to “help” you in some manner with your own trading. Never tell anyone what you are doing in any market. Let them wonder. The more you listen to what others say, think, or do, the less clear your own thinking will be. Since I am crystal clear in my thinking and I want to take your money, the more I like it when your thinking is fuzzy. Find someone in the office that is always losing. Carefully observe what he does and how he justifies his positions. Observe his train of thought. This is different than listening to what he says as I describe above. Find this critical difference and exploit it. Be polite when doing this so that you always have this advantage. When he quits and goes somewhere else, either maintain the relationship or start a new one with his replacement if you can. This will become a never ending source of information about the loser’s thinking. You only need to find one because they all think the same way. It is a “shortcut” to the top if you can find it. How do I know this? I’ll tell you. One of the honest men I met in this business showed me. It was Christmas and he stopped at my desk before leaving the office for the holidays. He dropped $5,000 in cash on my desk and said, “Thank you.” I thought he was joking. He sat two desks away from me. He would listen to how I worked my trades and would occasionally ask for my “help” on his trades. He was taking the other side of my trades almost like clockwork. I was losing so consistently it was a sure bet. I made him a fortune. Talk about an eye-opener.

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My sense of pride was so shattered for a while that I wouldn’t talk to him. He understood that and never teased or derided me for what I was trying to do. He was a man of honor. When he passed away I didn’t know about it. I heard through the grapevine. The fact I couldn’t honor him on his last trade really hurt me. He taught me a hard lesson, but I learned it. Stay away from women when you are losing. If you are a woman trader, stay away from men. At certain times the relationship between men and women is similar to being long or short against the other market participant. The critical component that isn’t working will sometimes have come from your opposite in some fashion. Until you are back on, the “whatever it is” that isn’t working will be reinforced by the opposite sex. “I’m losing in the markets, honey.” “But what about our vacation plans?” Get the picture? God help you if you are married at this time.Your money is MINE. Don’t look for tops or bottoms, anticipate them. Tops have a distinctive “look” to them. There are two ways the top happens. The best kind is an all-time or near all-time high. Look for huge volume. This is turnover; lots of people getting in and out. Look for a big range when this happens. If you have unlimited courage, pick a price and hang on. If you have a lot, but not an unlimited amount of courage, sell on the close and hang on. If you have a good dose of courage, but with a streak of caution, wait for the next day’s attempt to match or exceed the previous day’s high, and sell when the price slides back through the day’s opening range, and hang on. If you have, say, an average amount of courage, sell the second days close and hang on. If you have no courage at all, why are you trading? In any case, look for open interest to drop on the big day, or the big week, the market is finished. Once you have your position, take a vacation for a month.You will make huge money if your skill in timing this event has been tested. The market will break and it might take some time for this to occur. Maybe it will go south for years. Stay with it. The second kind of high is a consolidation high. Prices stay within a basic area for some time before going south. Afterwards, they rally huge to re-test. Wait for the re-test, then sell. Do this on rising open interest. This is the loser hoping to buy cheap one last time so that he doesn’t miss the new highs he is certain will occur. When prices get back to the

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highs, consider offering him the opportunity to unburden himself for the responsibility of his bank account. Selling highs is dangerous in any case because you won’t know it was the absolute high until prices finally drop. That might take time. But the clues that this is inevitable are there. Sooner or later any market must top. Is this a top or the top? What are those clues? It is exactly the same for bottoms. Just turn the chart upside down and you will see what I mean. Markets that are at an important low price take time to distribute. This means they crash and just sit there. Or they trend to a bottom and just sit there. Anybody who could have entered on the buy side has run out of money trying to pick the actual bottom and is now so discouraged he will need time, maybe lots of it, to get his courage up to try again. The potential seller is afraid of a rally. The selling hedger will deliver his higher-priced goods anyway so that he doesn’t have to buy to get out. Therefore, the market just sits while the bulk of the market participants do nothing and watch. The whole show starts when one large buyer or lots of little ones start buying. There are only the late shorts to take on the approaching horsemen of their impending apocalypse. Some of the early longs sell, cutting their profits short. Don’t worry, they will be back. Hence a rally that falls back, but never a new low because the buyers are so convinced that the spike means the beginning of a move they don’t liquidate. They created the potential for a self-fulfilling prophecy. As long as they believe that as a group, they won’t sell. Start listening when all the “fundamentalists” begin raving that those prices aren’t “justified” just yet. Watch for the hedgers on the buy side getting in at that point. Now it’s time to join the fun, maybe. If you have read this critical distinction correctly, here’s another clue: The commission houses start offering it to the public. Watch what their advertising says. They prefer to market a trade to the public from the long side. But one word of caution: If this market has been in a steady climb before the commission houses are in, it will correct. They are late. Maybe not forever, but there might be enough of a correction to wash you out, or at least them. Some of the clients that are early enough might even make money on this one. That’s okay, they’re just holding it for me until I find them. Maybe I should charge interest on the loan.

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Range trading is sure money. Enter in the top or bottom 5 to 10 percent of the range. Place your stop outside the range and wait. Liquidate and reverse at the same point the other way. Do this forever until one protective stop or the other is hit. Then take a break. Wait for more clues before doing anything. What does a range look like? How do you know a range has been established? How do you know the range is over and the market is moving to a new equilibrium? How do you know when a market is due to break out of a range? Never trade shortly before or shortly after some major life event, expected or not. If you get a phone call your parents have just died in a plane crash, or something that for you is equally major, liquidate everything you are holding and deal with it. Don’t get back in until you are over it. You will not be in any frame of reference to understand price action when you can’t think straight. You will miss something and lose. The only exception is a planned trade that is winning and your stops to lock in a permanent profit are outside the range of a limit move for the day in question. If you are getting married, or your kids are starting college, or you are buying a house, or some major planned event, you have the same problem. In any case, I’m looking for you to believe that you are capable of handling it all by continuing to place yourself at risk. I need a bigger yacht anyway. Everyone reads the news. Try observing how often a market fades a major piece of news. This is a clue to its real nature, not the expected nature. Try observing how the market behaves the day after the news. Never anticipate any news. News, reports, or numbers are always factored in to the price before they are out in some way. Of that you can be certain. How is the news factored in? If a piece of news comes out that was unexpected and the market does nothing, what does that tell you? What does it mean for a market to “do nothing”? What does a “nothing day” have to look like for it to qualify as a “nothing day”? As a side note, I know of one trader who made his fortune exploiting this one skill. Whatever the Wall Street Journal commodity news section had for the headline that day, he would wait all day and fade that news on the close. He would run a $500 per contract protective stop and wait. He had somewhere around 80 percent winners for an average gain of somewhere around $500 each. I don’t think he ever traded bigger than a 20-lot his entire career. Do the math.

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If you just scored a huge win, you might want to reduce your position size for a period of time. Large amounts of success can sometimes cloud your thinking or cause you to get slightly complacent with your “research” into the nature of price action.You are a bit more susceptible to losses perhaps. Always reduce your trade size during a period of losses.That way you can always afford another beer to cry into. Train your body as well as your mind. You are in a winner-take-all battlefield. You must have every advantage you can find. Find the best balance for you between enjoying life and slowly ending it.This will provide a more consistent starting point every day. When your mind is sharp you function better.Your mind lives inside your body. If you aren’t eating right or exercising regularly, your mind will suffer at some point. By the way, I’m counting on your lack of discipline. Put aside a portion of your winnings when you have them. There is a freedom of mind that comes when you know that no matter what kind of damage you do to yourself for a short time you can always pay the mortgage and the bills. You will create all kinds of problems for yourself if you spend it all, all the time. There is a tendency to expect market profits to support your lifestyle when in reality it is your lifestyle that leads to profits. Be sensitive to this. Find a happy medium between saving and spending. At some point you won’t know how to spend it all anyway and it will just sit there until your wife gets half. Never lose your sense of balance. It doesn’t matter how you do that. Once your sense of balance goes, so does your money. You will think it had wings. How do you create balance in your life? What is balance? When a market keeps moving only one way, day after day it seems, and the ranges are modest, be ready to move. All those winners will get nervous at some point. Where is that point? What does it look like? If you are one of those winners, how do you think about those profits? At what point are you nervous? A retracement is inevitable. If you have done your homework, this is where you add to that winner and take all. All markets retrace before the big move. Pay attention. If you are wrong, always place your “GFO” (get the f— out) stop at the break-even price on the entire position and watch it like a hawk. If you have correctly interpreted what must happen next, you will do very well. If the market doesn’t rebound, be very nimble and consider totally reversing. Markets set up big moves like this. If it is not one way,

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it will be the other. Run with it. If you think you have earned the skill, plunge for all you are worth. If you don’t have the skill, well, there is always Vegas. Too bad you don’t have any money left to join me. If you trade futures, always remember all markets are “bearish.” Their function is to provide the producer of that commodity with a way to exploit higher prices, which he will sell into. If he is not doing that, it is because he expects higher prices first before he sells. This in itself is an advantage that you should learn to exploit. But he is always a seller eventually. Once he does this, he is the ONLY market participant who is under no obligation to get out by becoming a buyer. He may deliver against the position. Therefore, the speculator who buys and sells is the net force on the market. At some point there will be an inequality when the initiating buyer must become the seller to get out. If the hedger sells, the initiating speculative seller sells, and the liquidating speculative buyer becomes a seller to get out; that market is under three times the selling pressure it would normally be under; especially if the old shorts decide to press their advantage and add to their positions. This is why markets will always break faster than they rally.You will not have a lot of time to join the party. To exploit this, you must be vigilant and ready to move. And I mean now. There are not many buyers out there. Most of them are small shorts covering too soon. That means one-lots. If you can’t see this eventual inequality developing and time it fairly well, it’s better to let it go.You will end up selling it into the hole. Market orders or resting stops will get filled way below what you see on the screen. Wait for the next one. Otherwise, I’d like to thank you in advance for my new airplane. Options are hedging instruments. People trade them like speculative vehicles, but they were originally developed as a low-cost way to protect something. Ninety-eight percent of all held options expire worthless if they have traded anytime for any strike price. The reason this is the case is very simple. The market will only be at one price at expiration any way and the people who sell them, or write them, have enough presence of mind to write most of them on the side of the market that prices are moving away from as well as buy them back after the premium has dried up. If you are speculating with options, you have two things working against you, time and price. The market might “get there” eventually, but you will find it is there after the strike you are

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holding has, more often than not, expired. You need big moves to fight the time decay, even if you are holding an “in the money” option. It is better use of your money to use options to protect open trade futures profits. The reason is simple. If you are long, and the market is moving your way, puts get cheaper. It is the same for calls against shorts. There are times you can buy a put or call against your futures for next to nothing if it has only a week or two before it expires. Sometimes that is cheap insurance if you expect some big report; you think the market might be vulnerable to large price swings and you don’t want to risk getting stopped out; or just want to take some time off while holding something that is working. Writing options is a complicated thing. Why make this harder than it has to be? There are at least 30 different ways to combine the writing of options on either side of a market, or both at the same time. To profit, the market must still move in an intended manner. I’m the only guy I have ever met, besides a full-time option pit trader, who can explain what an “inverse-ratio back spread” is. Some of the pit traders don’t even know what that is. Almost all of these complicated ways to profit are used by hedge funds or professional money managers. If you intend to exploit option-writing strategies to achieve profits with your trading, you need to become at least as expert on it as they are. In any case, without a sound understanding of the market that you are doing this against, trying to capture time decay might mean equity decay. Be very careful when adding options to your mix—not everyone can be a bookie. Jesse Livermore said it all. Find and absorb everything you can about him. If you find something new, please share it with the rest of us. Prices are continually in motion, even when the markets are closed. They are this way because all the losers are studying them from the point of view of “Okay that’s over. What does this mean?” Then they form their conclusions while the market is closed to “do such and such at this point” or “I’ll wait for the open, see what happens, then do such and such,” and so on. The end result is when the market does something, anything “unexpected,” they have to reinterpret what that means in real time. They then place orders or execute against their “original plan.” The end result is that the force of the buying and selling had its first belief structure while the market was closed. When it is closed and the loser says, “I better just get out,” he can’t do that, so

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his tension builds and he chooses to execute at the first opportunity he can, which is the open. This rush of orders placed in the last 10 to 15 minutes before the open is what causes gaps. Gaps are a good indication that the loser is getting out. Conversely, if he decides “I have to get in,” it can also mean he is setting himself up for a loss in a day or two. Gaps often show you “key” points for you to consider. It is for this reason that you should consider any opening price as slightly more indicative of the nature of the market than the close. But the close has equal significance from the point of view that when the loser is waiting to get in, he will tend to view any closing price as “strong” or “weak.” He will then make his trade decision at night waiting for the market to open. So in effect the pressure on prices was preordained the previous night. If you combine this relationship between the open, close, and gaps, watch to see how news is factored in. You can then begin to see how the thinking of the loser shows itself a day or two ahead of the news and then be able to correctly anticipate how to place your position the day of the news—waiting for the inevitable move to where the loser’s stops must be. This ability is a real art. But then again, you never studied art, right? The average market participant operates in a time frame of 72 hours or less. That is because they all expected to make money “right now.” Where is this rhythm showing up in the ebb and flow of price action? Most losers exit their position in that time frame. First, if their trade is “not working,” they get tired of waiting for the gain that didn’t come. The pressure of being in a loser is building to the “I better just get out” point for him. Also, the average loser will wait to exit a position until the loss is somewhere between 60 percent to equal of the initiating margin requirement amount against him. Why do you think the exchange sets them to be those amounts anyway? Partly because that amount always is enough price movement on a chart for almost any chart reader to see he is wrong and decide to quit. If you want a good idea where stops are building for the liquidation point, simply calculate what initial margin would mean in price action from the point you believed the loser got in at. For example, if you think the loser came in on the buy side of corn at $2.75, and initial margin is $600, then his sell stops are about the $2.63 level, or fairly close. Ergo, your best buy point.

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Also plot ahead about 72 hours for that to happen. As the $2.63 area is reached (assuming you are seeing it right), observe how much time this actually took. If it happened in less than two trading sessions, be careful. If a loser gets spanked too fast, he has a tendency to “stay out until things settle down.” That means he will take more time to get his courage up for an attempt to get his money back. If your price is reached in three or four sessions, he is simply frustrated. Now he wants to just get it back, so he immediately executes according to his trade plan. For some reason the loser doesn’t seem to mind if a loss takes the right amount of time to play itself out, but if it happens too fast, then he is cautious. The same is true for a winning position. If it happens too fast, the loser mentality tends to “just take it” and wait “for things to settle down a bit.” It seems that there is a time frame for either losses or occasional gains that must be just right for them as a group to be able to function well under. I don’t understand it, it just is. Can you find that rhythm? If not, I’ll find you. You will be sorry you ever thought you knew what you were doing. That’s okay, go borrow some money from your rich uncle. I’ll just wait right here until you get back. No rush. Take your time. Make sure to build a strong case for yourself; bring all those charts for him to look at. Until you really have a handle on finding the loser and feasting on his ever-dwindling trading stake, try not to hold a position over a weekend. Anything can happen in the minds of the losing group when something truly unexpected happens, especially if it is on a Friday night or Saturday morning. This group will stew about what it means to them personally for 48 hours. This will create a huge order imbalance on Monday morning. Unless you have a good lead on this market, or are fortunate enough to have positioned yourself properly for the inevitable panic, you will be in the losing group without knowing. Three weeks of profits can go up in smoke in 10 minutes. If you are on the right side and you have a windfall, don’t add to the position or take your profits. Wait until Tuesday’s trade. If this event has truly converted the perception of the market, a reversal is in the works because all the winners will bail too. Hence, the market is seeking to attract everyone back into the game.You are probably out anyway if you are using good money management. But if it is a knee-jerk reaction kind of thing you

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will be able to add to the position with almost certain probability of higher profits. In other words, nail the coffin shut and bury him. Also regarding weekends, Friday’s closing price trades at some point on Monday approximately 92 percent of the time. Just reenter the position when your liquidating price trades on Monday. Your net equity position will remain the same and, if nothing has changed with the structure of the market, then you can continue to let the profit run. If something truly unexpected did happen to the mind of the market, you will be flat during that time. Plus you will not have to reevaluate the position in real time when it is temporarily working against you, creating confusion on your already fragile ability to do this anyway. You do keep a box of Kleenex in the office, don’t you? I hate it when they cry. Page 60 and 61 (the first two pages of Chapter 5), Reminiscences of a Stock Operator, paperback edition, by Edwin Lefevre, referring to “Larry Livingston”—read this very carefully. Remember this part was written about an observation made before World War I. “All the world’s a stage, and all the men and women merely players.” What do you think Bill meant by that? Speaking of paperweights, the apparent function of a paperweight is clear. Its real function is to validate a critical distinction in the mind of its owner. How is this so? People used paperweights to hold down papers in case they blew off the surface they were on. Which surface? Most likely a desk or table. Why is this? Those papers were crucial in the mind of someone who wanted those papers available for some reason while he was seated in front of them. Or he didn’t want to get up and walk around the surface in question; otherwise there would be no conflict. Therefore, some task was being done at the time that needed to be free of interruption. Perhaps work. What causes papers to blow away? Some kind of atmospheric force. Since a surface where work is done is usually indoors, then it stands to reason that either a window was open or a fan was blowing. Consider then that a paperweight would be a necessary component of every desk so placed in proximity to a window if the window needed to be open for long periods of time. Why would a window in the workplace need to be open for an extended period of time? There can be only a few distinctions in this case. The person seated at the

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desk was either too hot at the time and wanted a breeze; the person needed access through the window for a reason of his own; or something was in the air that this person wanted out such as smoke. In any case, whether intentionally or unintentionally, this person was expecting air to possibly upset his papers and chose to find a solution to his problem. In the case of the fan, he would be expecting this problem, but that can only mean he wanted to create a breeze. Since the purpose of a breeze is to cool the individual then the most likely reason that anyone would be sitting at a desk, doing work, who didn’t want papers to blow away, who was creating or expecting a breeze, is because it was too hot at the desk on which work was probably being done and the most likely setting was an office of some kind. Today, because most office buildings where work is being performed are climate controlled and air conditioned for the most part, the windows remain closed and a fan is not required, a paperweight would not be a crucial component to completing a task free of interruption. So why are paperweights still common on many desks when they are no longer needed? Most paperweights are of design, construction, or assembly that offers a unique something to consider it for besides its apparent function. They have clocks, sayings, descriptions, metaphors, and so on, all within their construction that must make an impression of some kind before they are purchased because they serve no purpose by their apparent function and in fact, are completely unneeded in most office environments. No one would buy them unless they contributed in some way to the purchaser. Therefore, that relationship must exist in the mind of the owner and nowhere else. A paperweight therefore serves to validate some component of its owner’s thinking that is important to him or her alone. Paperweights serve no other purpose in most cases. Do you see how conclusions that appear random, in fact, are based on observations and critical deductions? How much more so is price action to be considered? Here are a few thoughts on using technical analysis from my point of view. Let’s say you are looking at stochastics. Most people who use them work in certain time frames to compile them. What are those time frames? Does this differ depending on the market being traded? They will then form a conclusion about what those numbers mean at

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some critical point. Then they will do something, putting themselves in play. Where is that point? It works sort of like this: Everybody using stochastics is probably thinking this market is overbought. Therefore, if they are long, they must start to consider liquidating; otherwise they wouldn’t be trusting stochastics in the first place. The people who want to short this market are thinking the same thing, but from the sell side to initiate. The late buyer “doesn’t want to miss it.” If this is actually happening, then they are executing against each other. Therefore, O.I. (open interest) won’t move very much because the same contract is simply being transferred to another body to hold if the old shorts aren’t getting out yet. (One gets out, but one comes in.) That means the market must move higher because some of the longs will wait, but the old shorts are nervous and must cover. (What they expected didn’t happen.) Therefore making the new shorts nervous, then they will cover, and the market is running out of potential shorts because they are already getting in. This process will happen until everyone quits all together and the O.I. drops at that point. So, when the shorts bail (those that thought the market was overbought and got in) and the longs bail (to take their profits), the market is ready to go the other way. Now it is time to short this market. If you can see that this “overbought” point is also at some “resistance” number, you now have two good reasons why the market might be vulnerable to moving south. This is a different process than “trusting the chart” or “doing what the stochastics say to do.” Do you see the critical distinction? Just because something says “overbought” does not mean it is time to sell. It might mean it is time to sell but only if the market is running out of people who want to play and only if they are deciding that because enough of them believe what the indicator tells them. This is why a market that is overbought can continue to climb, sometimes for weeks, before breaking. Maybe no one is watching that particular indicator except you. Sometimes the people who want to short that market get spanked two or three times before they finally quit. Who is that? How long have they been spanked? How many times will the average person trading that market, who is trying to sell it and using stochastics to tell him where, going to execute? What is his emotional state at that time? Once it breaks, does he rush right back

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because he “knew that would happen” and he wants his money back? If he does, why would someone buy to let him in? How would you know that is what he is doing? What are the clues this is happening? Do you see what I’m getting at? No? Good. Thank you for the new tires on my car. Wanna play again? I need new rims, too. Bernard Baruch, one of the great business minds of this century, was an excellent trader in his own right. He never spent more than 30 minutes or so each day “analyzing” the markets he would trade. Sometimes he did it in bed while having breakfast. If you find you are spending a lot of time “analyzing” your market, be careful. It is completely possible you are expecting that analysis to tell you something or do something for you it can’t do. Carefully review your thoughts. Listen to what they are. You are vulnerable at that point. I look forward to enjoying your money with great relish. Please, take all the time you need. For those who are not trading now, but wish to get started, I have a final summation for you. You and your trading are the same thing. What I’ve hoped to communicate here is that who you are determines your results. When you execute, you place your thoughts into an action that you believe creates a profit. It is the same for everything in your life. In everything you do, you have an expectation of a benefit—otherwise why do it? When you critically examine who you are, you will always uncover how you are thinking. By knowing as much as you can about your thinking you will discover how you make actions. If you take the step of examining everything in your life, past, present, and future, you will see that your thinking has played out in your actions, thereby creating the results you have (the “life” you have created for yourself). If you hope to trade for profits, there must be something behind that action that is prompting you to pull the trigger at that precise spot. Find out what it is. You must become a student of yourself. Forget the markets. Study you. When you understand yourself and how you personally create your actions, you will be able to control your executions. This means you will trade only when you know you can profit, not because of something. At that point you will make 100 percent winning trades. Anyone could learn to do it.You cannot succeed at trading by “studying the markets” because no market moves based on what people know. Markets only move based on what people do. They make those actions from the quality of their thoughts. Since no one is thinking anywhere near their true potential, it

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follows that their actions will never be of any quality either. This is 80 to 90 percent of the people who participate—probably you right now. You will never trade for consistent profits until you know why you do what you do and why everyone else does what they do, because both of you cannot be right in this game. Until you are thinking (and therefore acting) correctly against price action, you will never know why price action is what it is.You cannot know that until you know yourself better than the other market participant knows himself. To win at trading you must know why everyone else is losing. You must know why you lose to understand how everyone else loses. When you know how losing happens, then, and only then, can you execute against the loser to win. Trading is not about markets; it’s about thinking. Since most of the participants aren’t thinking, that is your edge. Never trade until you are there. Otherwise, I will take your money. Believe me, I am out there looking for you and I know how you think. Lastly, I quote the good book: There is no end to the expressing of ideas. Excessive devotion to books and the studying of opinion is tiresome and wearying to the mind. —King Solomon, the wisest man that ever lived, Ecclesiastes 12:12 That’s it. See you at the dance.

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Appendix B

Insight into the Person of Trader X 1

by Ghostwriter X

I’m a joker who has understood his epoch and extracted all he possibly could from the stupidity, greed, and vanity of his contemporaries. —Pablo Picasso

I

am a ghostwriter. I have been published under my own name, but I earn part of my income by ghostwriting. At this writing I am 42, married, no kids, and business takes me between Chicago and New York regularly. I have already written eight books, some for major publishers, and others for smaller companies. My books are everywhere, at every bookstore, on the Internet, in mail order catalogs, in the backs of

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magazines, and, occasionally, on TV. I write for magazines you’ve seen on every newsstand. With ghostwriting, I assist authors with the completion of their manuscripts for a fee, but the credit always goes to the “author.” In some cases, very little is actually contributed by the author. 2 In the case of assisting Trader X with his manuscript, the relationship was unique. He made it very clear he expected me to ask questions to help him clarify his thinking, but to never add to or embellish what we discussed or write anything on my own. Why is this unique? To put this in perspective, every author thinks he has an idea for, or has written, the next sequel to Gone with the Wind. Every day, wannabe authors call me or send me their manuscripts fully convinced that the world will stop turning if people don’t drop everything they are doing to absorb their essential wisdom. At the very least it will be at the top of the New York Times bestseller list for weeks. It is enough to make me laugh sometimes. That is why I only work with authors I like and believe in. Authors that have guts, originality, and something to say. Trader X is one of the good ones. He wanted help in communicating every part of his experience. He felt that by asking the right questions, the “hard questions” as he put it, he would remember more details. He also felt that someone could help him choose the kinds of words and phrasing that would make this interesting reading for everyone. He showed me two books in his library to illustrate what he meant: A Brief History of Time by Stephen Hawking and How to Date Young Women for Men Over 35 by R. Don Steele. Trader X felt that both books took a difficult subject and communicated the essential elements concisely and with style. I agreed completely. Anytime I felt I could help Trader X clarify a thought, passage, or concept, he would listen with great interest and then decide yes or no. It surprised me that he was usually easy to work with. He was confident, but never arrogant. When I mentioned to him that he didn’t need to have his ego validated, when I assumed he would be full of himself (most traders are), he said, “That’s for women to do.” Throughout the process of writing, he was concerned that the manuscript would be “too long.” When I reminded him that one must expect a certain length in communicating anything effectively, Trader X mentioned that he didn’t want to be rebuked like Mozart was by the Holy Roman Emperor: “There are too many notes, Herr Mozart.”

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In the spirit of the verbal parry I shot back, “Which notes are those?” Instantly he replied, “In this case, it’s your job to find out.” It was the first of many times I would lose the round, but together I think we have won the war. The result is that through the process of writing and rewriting this book it has very little of “me” in it. The one exception is this appendix. He agreed to let me write it the way I wanted. Trader X frequently asked me, “Is this what you really think? Am I really like that?” When I reminded him that it was my point of view; not necessarily what everyone might think, he said, “Of course, stupid question. Just do what you think best.” In getting to know him, I found the concept of writing anonymously on his part intriguing, and I decided to do the same. I spent many hours with him, simply observing what he did throughout his day-to-day routine. My hope was to see the end result of where he was by virtue of where he came from. I wanted him to reveal as much as possible. He stressed that I “make sure people realize how easy this is.” Later, I understood he was joking. I think he wanted me to remember that the facts are the facts and that to pontificate on their nature from a constant point of view might lead the reader to believe that eventually everyone could understand. Time after time he would explain in great detail his pet peeve. To him, most people who write books about trading try to make it all seem ridiculously simple to the common reader. They run around claiming that their method is easy to use and understand, and in the end really do a disservice to the entire industry. Trader X believes that these authors offer these overly simple solutions in hopes of encouraging the most ignorant lay person to open an account and use their approach, buy their system, subscribe to their newsletter, and so on, and in the end waste more money and time. But Trader X did the same thing; he wasted years believing there really was a magical solution. “Boy, if I had a rocket launcher,” he would say, quoting Bruce Cockburn. Trader X told me about the brief period in his life when he attempted to “teach” trading. He said it was a truly frustrating experience. Unlike other guys out there, he was brutally honest with his students, telling them the specific steps and actions they would have to take in order to succeed in this business. He was also blunt about the

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potential risks. He mentioned that of all his students, only two stood out in his mind. One man decided that trading wasn’t for him. Trader X explained to me that he believed that man really understood himself. Trader X went on to explain that to discipline one’s desire for profit in such a way as to completely stay out of the markets until one is ready is a true mark of success that can be applied to any field. Trader X also mentioned that this student would likely know how to time his trades by waiting for the best point to execute. He said there was another side of the coin too—this man tended to hesitate at the best point to execute. Furthermore, as a “rookie” trader, this man would often miss the bulk of a market move and have a tendency for lower profits and a high degree of regret in his thinking. This would have a tendency to come out as “rushing to the next trade,” which would then create losses. Therefore, his results would probably have been net losses, at least for a period of time. For this man to realize the potential and stay out completely demonstrated a keen awareness of his own state of mind. “It’s probably good that he chose to stay out,” Trader X told me. “If he would have committed to trading, he probably would have done it so well he would have gotten it all. There would have been none left for the rest of us to get.” Quite a frightening thought. Trader X believes that student will succeed at anything he finally decides to do, but he doesn’t believe that the man was “scared off.” The other individual he could remember from his teaching days was a guy he still knows well. In fact, this is someone Trader X considers one of his best friends. This man always tells the truth. “Tells it like it is,” as Trader X likes to explain. While writing this book, Trader X never hid his losses or mistakes from me. During those times, he would call up his friend and they would spend time talking on the phone. Frequently, his friend would help him clarify his thinking. It was fascinating to watch and be part of. After a string of losses, his friend commented, “You are an uninfected carrier of brilliant thinking.” Trader X confessed, “At the time he was right.” Trader X also respected the fact that his friend had an unwavering commitment to learning the true nature of price action. Here is a classic Trader X explanation about his friend: “This guy started with a clean sheet of paper. He threw everything he had learned up to that point out the window. He started with one-lots. He asked himself

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the hard questions. If he had losses he always asked himself where his personal point of view caused him to hurt himself. I never heard him say once that it was the market’s fault. He never blamed anyone or anything. He kept asking where the loser was and he was determined to never be that person.” From Trader X this type of compliment is extremely rare. He summed up his “teaching” experience this way: You can’t teach trading. You can only provide a means of helping someone discover what trading really is. People I would attempt to teach the markets to never could grasp the concept of being the loser. They didn’t want to accept that all these price tics were really people’s beliefs. They all wanted to figure out what “the market was going to do next.” They didn’t believe that the charts or the numbers were just clues to what people were thinking about. They thought that if X happened, then Y must be next. They thought that there was some constant that they could find. They simply didn’t believe it was the study of how they personally interpreted what they saw. They refused to accept that if they were thinking like every other loser; they were going to be the next loser. They never could understand that what they thought about didn’t matter. They never would look inward and admit to themselves first, “I am the loser.” It would not fit in their head, no matter how I tried to reach into them, that every loser is thinking about the price, not what that price really represents.Trading is not about the price. Trader X continued: Every one of them saw the markets as prices going up, then prices going down. They never could grasp that people believe one thing, now they believe something else. They couldn’t accept that if what they believed was different than what was actually the belief structure of the market, they would always be in the wrong spot. They thought trading was about buying and selling something. They would never understand that trading is really about anticipating where you take a stand by saying to everyone who is in the market, “I don’t think you can continue

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to believe what you believe anymore, you will have to get out about here.” When I would explain to them or show them how that fact was disclosed by these things (I would show them a chart and the volume and open interest), they would always say something like: “But such and such number was bullish/ bearish.” “Such and such report is coming out Friday.” “The indicator such and such was bullish/bearish.” “The trend is such and such.” “This is how Ed Sekoyta trades.” “This is what Peter Stodielmayer says.” It was always some argument that was attempting to validate their current thinking. Worse yet, they wanted to simply add what I showed them to their current arsenal of tools. It simply wasn’t possible to them that all that really didn’t matter; only what the market participant believed about all that. Or what he had already believed about that and now he must make a new choice. All of which means believe something else. After I was full of information for the millionth time, Trader X backed off and completed his thoughts on the matter: They all thought you could figure out where “the market would go next” by somehow combining and dividing all of the previous prices. When that didn’t work, but my trades in the same market from the same side did, they thought I had some secret I was holding out on. They would always ask, “How did you know that would happen?” When I would tell them, “I didn’t know. I only guessed based on what I had come to know,” they thought what I did was simply guess and therefore I really had nothing of technical value to offer them. When I would do it over and over they concluded I was some mystic or something. It was really frustrating. That frustration spilled over into my trading as losses. When I realized this was one of those constant things in the business that would never change, I quit trying to “teach.” I was content to just take their money by outtrading them. Day after day, even while we worked on this book, Trader X would consistently take money from the markets. Watching him work fascinated me. We would sit for hours in front of the trading screen and

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discuss everything from philosophy to Shakespeare, from the space program and the design of aircraft to alchemical history, and the trends in social thought from medieval times to the present, and he would still pull money out of the markets. He would be watching his computer screen and explain to me precisely what was happening. Here is an example of one of his typical explanations: “Now watch this, that is the last bunch of losers getting out. There they are, that’s their stops liquidating with the loss. Right now they are all sitting in their offices saying ‘I knew I should have waited.’ They can’t stand that so they will try to get it back. That means the angry ones will do the same trade from the same side in about an hour or so, especially if prices move back to their original entry.” He would continue, “Okay, the winners are probably thinking I have to do something right here, they probably will move their stops up. The pit wants those stops. When they force the market into those stops, the losers will jump on those prices. Their thinking is probably, ‘I’m gonna miss this trade if I don’t,’ but the pit needs their blood to get out. Once that happens the market will come right back. This is free money, I’m getting in.” Since I’m not a trader, most of what he said wouldn’t make any sense to me. He told me, “Those that trade will understand.” Then he added, “Most of them will think I’m guessing.” His daily trading routine has absolutely no set pattern. Sometimes he won’t go into the office for days. If the currency he was trading would make some huge move and he missed it, Trader X would look me in the eyes and say in the most deadpan manner, “You’re right. The market has completely run out of opportunities.” Sometimes he would come in, sit for a few minutes, execute a trade, liquidate, and then leave. Sometimes that whole process would be less than 20 minutes. Still other times he would work straight for 24 hours trading up a storm. I once made the mistake of asking him “How did you know that would happen?” He looked at me truly bewildered and finally said, “Et tu, Brute?” Trader X then offered this explanation: “Look, I have trained myself to observe what is happening. When I turned the screen on and saw that it was all in play I simply took the money that was there to get. If the whole process would have took 48 hours that’s how long I would have been here.”

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I first met the author at a downtown trader hangout called the Cactus Cantina. It’s on Wells at Van Buren, in Chicago. It was a Friday and the place was packed. I assumed that everyone in the business of trading was there. Not having been intimately exposed to the markets before, I found the conversations going on around us fascinating. It was all about what the bond markets were doing, why soybeans were climbing, who just got his “dick slammed in the drawer” trading the S&P 500 Index, and so on. A mutual friend who is not in involved in trading introduced Trader X to me. When I asked our mutual friend how he had become acquainted with Trader X, he replied, “We met at a night club. He was on a date with a female body builder.” I soon discovered that aside from the markets, Trader X is almost exclusively focused on women. Specifically, Trader X is focused on women and “walking the edge” as he calls it. Simply put, he runs on two tracks, women and trading. On our first meeting we talked for a moment or two, exchanging the basic pleasantries. Initially he was very guarded. Later he told me that he had to assume I would be one of those individuals who had no clue. Once he understood I was completely open to him and his ideas, Trader X let his guard down, but never completely. As the conversation slowed I began to ask him about the trading business. “What do you want to know?” he asked. “Well, my first question is what do all these people do?” His immediate answer was, “They are attempting to profit from price action.” Then he added, “But most of them don’t know how to do that very well, if at all.” I replied, “They seem to be discussing things with some authority.” Trader X quickly said, “Of course they are,” and said nothing more. I asked if it was okay to start taking notes. “I hope you don’t get writer’s cramp,” he said. “But let’s not do that now.You may not want the job anyway.” His reply intrigued me more. I knew right then, I would be ghostwriting this book. That was the beginning of our relationship. As we talked that night, Trader X struck me as someone who knew exactly what he was capable of doing. I didn’t know it at the time, but I was to discover that statistically he is among the top in his field. He could be considered one of the best traders in the world. After getting to see both his life and his business, I found out that his results are impressive to say the

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least. Almost everyone I know would have quit and done something else long before succeeding at his level in the trading business. Using the documentation he was willing to show me, and after doing independent research on my own to verify what he told me, I learned that he is able to outperform approximately 93 percent of those who compete in the markets. After seeing his point of view and understanding what he has personally experienced, I can understand why he would choose to do it another way; that is, to never put himself in a position of working with people who would attempt to control his activity, process, or the way he trades. Due to his willingness to take adversity head on, and the high demands he places on those he chooses to work with, Trader X appears enigmatic. When we went to work on his manuscript, I suggested that he include more detailed information on his trade results. He had some very insightful comments on my recommendation. “First,” he said, “The world is full of skeptics. Most people won’t believe the numbers. The results will always be ‘too high’ or ‘too low’ to someone. People in this business never believe you are doing as well as you claim anyway. Second, I’m not doing this to sell books, trading systems, or expect people to believe what I know is the gospel. Third, every time I start talking my gains I start losing.” Enough said. I had the opportunity to observe him trade and I can tell you he knows exactly what he is doing. Trader X is a full-time trader, working from a small office in the financial district of downtown Chicago. At the time of this writing, he is trading in the cash currency markets. He consistently told me, however, that it didn’t matter which market you traded in. They were all fundamentally the same. The basic skills can be applied to any market. The chapter on regulation (Chapter 6, The Trading Police) will shed some light on why he trades almost exclusively in FOREX today. He trades completely alone without a staff of any kind. At the time of this republication, Trader X does not trade for a client base anymore, preferring instead to provide market analysis to those individuals who subscribe to his commentary. Currently, he is not registered as a Series III commodities broker at any firm; although those who know him are constantly asking him to work with them through their firms. He believes people want him to work with them because they think he has

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some kind of “secret” about the markets. He also believes that they too somehow wish to have access to the “secret.” Trader X’s eloquent reply to all this was, “In the land of the blind, the one-eyed man is king.” As I began assisting him in completing this book, Trader X insisted that I spend time observing his personal life and his relationships. He believes everything in his world either helps or hinders his trading. Trader X is single and living alone. He is 47 years old at the time of this republication. He has never married and has no interest in marriage. When I asked him why, he said, “I’ve never met a woman worthy of my affection. Bill Gates will be selling apples on a street corner before that happens.” Quite a pithy answer. He dates several different women and is always in the company of females. I’ve personally had the pleasure to meet many of the women he dates, and they all were exceptionally unique combinations of intellect and beauty. Most women are attracted to his mind and the way he views life. He is not particularly attractive to look at, but that doesn’t matter to the women who find him interesting. In fact, I’ve seen him talk to a woman in a bar for a few moments and then proceed to have her on his arm the rest of the night. He has no children (to the best of his knowledge), but as he says, “It’s not from lack of effort.” In one respect he is completely unique with regards to women. Every woman he is dating knows about all the others. He never hides anything. All of the women he dates know they will always be competing for his attention. For some reason, they all accept this situation. I guess they see it as a personal challenge. Trader X says that he has never been in love. To him this isn’t a problem, but he is sure it will happen when the timing is right. Trader X is not looking for love, but he believes it is looking for him. The “love relationships” all his friends indulge in are great entertainment for Trader X. He literally howls with laughter when one of his friends starts or ends a relationship with someone else he knows. He finds all the fights, disagreements, and power struggles to be one predictable mess. Trader X always asks his friends to explain their reasons for bonding in the first place. “Watch the fireworks with those two,” he’ll say, while getting a personal chuckle from the frustrations of others. “Neither one of them knows what they are doing.” Women who date men for their money are a constant source of humor to him. Trader X loves to watch the dysfunctional behavior both

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parties exhibit. It still amazes him that men are that stupid and that women think they can hide their true motive. Sometimes he makes bets on who will leave first or cheat first. Sometimes the bet is how long it will take to reach the guy’s credit limit. He really does view relationships and women as a kind of tinker toy set. His point of view can best be summed up by his view on monogamy, or as he calls it, “monotony.” “Fifty-two percent of all marriages end in divorce. Of the other 48 percent, statistics show half of these are unhappy, but they stay together for some reason. In addition, statistics also show that 66 percent of all women who are married, seriously dating, or engaged to be married are only with that guy until someone “better” comes along. Seventyfive percent of all men and women cheat. This means that your odds of a successful marriage, not necessarily a happy one (an important distinction), is easily three or four to one. “Those are rotten odds. Every one of those people believed it couldn’t happen to them. There are better odds at a craps table. I’d rather be the guy everyone’s leaving the husband for . . . I guess that makes me every man’s nightmare.” His parents are still alive, but no longer married. His father has remarried, but his mother has not. I think the majority of his distaste for marriage comes from the fact that he is from a broken home. “Those two should probably never have been together, but here I am,” he told me. He believes a lot of the credit for how far he has gone in the markets goes to his mother. “She absolutely supported me. She was behind me 100 percent. There were times when I would have quit except mom said give it one more try. I think moms never get enough credit for the support they give their families,” he related. He has two younger brothers and a younger sister. He is very proud of his sister, who is a world class athlete. “She has had some great opportunities to really use her talents,” he says. Of his two brothers, one is an expertrated chess player. He has beaten a world-rated grandmaster once, and could easily play chess full-time on the worldwide tournament circuit. His other brother owns a computer consulting company. He was also one of only a handful of men ever hired at a prestigious Big Eight accounting firm who didn’t have a four-year degree. This brother finished his college education while working in their consulting department. It seems that Trader X comes from a talented family.

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The early years of Trader X’s family life included regular church attendance. By attending church so regularly with his family, there is no doubt he has developed deep spiritual beliefs, and has strong feelings on key moral issues. I asked him point-blank about his religious orientation. His answer was, “Confused.” Today he shuns church involvement, but respects those who attend. He says that the sick belong in a hospital. I personally find this a narrow point of view and not generally in keeping with his other world and life views. We spent time discussing his views on religion, and here is what he had to say, “There is religion and there is faith. Jesus Christ hated religious people. He called them ‘whitewashed tombs.’ They look great but are full of dead men’s bones. Most churches are full of so many religious people and religious teaching that you can’t get to the real issues of faith. Basically, they make a religion out of Christ when He was something much more significant and full of much more common sense. If you take Him at face value He doesn’t fit with what people expected. So they ‘religiousfied’ Him. I don’t think if He were around today He would spend a whole lot of time at the churches that are named after Him. If He wouldn’t, what’s the point in me going?” I think it was his religious training that taught him the importance of integrity in every area of life. Throughout this book you can see that many of his choices, commitments, and frustrations were over what he perceived to be a failure in human character. Trader X has made a very clear and conscious decision not to follow suit. He seems very concerned with what is “right.” Although he is absolutely certain that he knows what “right” is, Trader X allows others to disagree with his point of view. This is true in all matters of philosophy, business, arts, sciences, and the like, with the exception of trading. When someone will disagree with his hypothesis or assessment of the particular market in question his answer is always, “Take the other side of my trade then, pinhead.” I’ve discovered that people rarely argue with him twice. I believe this is because they view him as overly opinionated. Trader X has absolutely no interest of any kind in professional athletics. He won’t go to sporting events. Somebody asked him to take a free ticket to a Chicago Bulls play-off game, which is quite a prize in Chicago. His answer? “I’d rather die from paper cuts.” No matter where he is, if the conversation should turn to sports, he will go completely

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silent for long periods of time. Some people interpret this to mean he is uninterested. But what is really happening is that he is listening intently for clues as to what motivates people to form the opinions they do and spend their time the way they do. He does this in any conversation, but even more so with people who follow sports. Trader X truly believes that sports are a complete waste of time. At the same time, it is then surprising that he values his sister’s choice of profession. While he supports his sister fully, it is a riot to hear him talk about how stupid it is to “bounce a ball on a hardwood floor.” Sometimes for fun he will join conversations about sports. It can be very interesting to observe the conversations between himself and others knowing what his real motivation is. For example, recently a local professional baseball player scored a new record for home runs in one season. The discussion between him and a few friends was very animated about how many total home runs the ballplayer would eventually end up with, if the team might make the World Series, things like that. Right in the middle of the conversation, Trader X jumped in and said, “Do you think this makes it any easier for any of you guys to get laid?” The conversation came to a grinding halt. “What does that have to do with anything?” one of the guys asked, slightly miffed. “Do you want to get laid more?” he asked again. “Sure,” the guy said. “How about making more money?” Trader X asked. “Well yeah, but what does that have to do with Sammy’s record?” the guy asked, a bit upset by the logic being thrown his way. Trader X then posed this question, “Well I was just wondering, since no matter how many times this guy hits a ball with a stick of wood, you aren’t going to get more of what you want, why would you waste your time counting?” At times he can become very exasperated with the whole sports thing. I once saw him grab his head and yell, “Will this drivel never end!” He then left the room. Although he exercises every week and takes care of his health, he smokes and drinks more than some. When I confronted him on this contradiction of maintaining your health while doing unhealthy things, especially since he has no use for sports, he had an interesting answer; “Hey, what’s the point of looking good and feeling good if you aren’t going to enjoy your body? Just because I work out doesn’t mean I’m going to deny myself some pleasure or my whole life is going to revolve around watching a bunch of guys bounce some ball, or hit

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some ball, or chase some ball like a stupid Cocker Spaniel. I don’t think those guys realize how dumb they look. It makes me sick these people get paid the money they do.” After saying all of this, he then looked at me rather sheepishly and added, “The fact is, I would love to have some accounts from those guys. They have all kinds of cash they don’t know what to do with. Plus, they would think I’m some kind of guru, which isn’t true, but they would show me off to all their friends, invite me to all their parties. I would have unlimited access to all their women, not the wives, the hangers-around women, I mean. Imagine the hot tub scene in that crowd.” I have to admit Trader X would frustrate me to no end sometimes with his nearly constant focus on females. Trader X is a private pilot and has a close friend from college who is also a pilot. They regularly fly up to Wisconsin for three to four hours and play blackjack at the Indian casinos. Trader X tends to walk out a winner more often than not. His friend usually loses. I am told that they have complex conversations about their results on the flight back. From what I’ve seen at private blackjack parties and the stories he’s told me, Trader X seems to have a thorough grasp of probabilities and card play. Personally, I believe playing cards is a kind of laboratory experiment for him. When we have discussed cards, he makes it very clear to me that gambling is gambling, but trading is art. He gets very angry with people who think trading is gambling. Once at a black-tie event, Trader X was introduced to a prominent local bank president. When asked about what he did for a living, his answer was a short, “I am a trader.” “Oh, you are a professional gambler, eh?” the bank president replied with a smile, obviously trying to “bait” him. Trader X looked him square in the eyes and said, “To the uneducated and brainless layman it might look that way. How long have you been shuffling papers at what you do?” The banker got the point. Although Trader X considers himself an artist, he spends very little time in the arts. He doesn’t regularly attend concerts. Unless a girlfriend wants to specifically go, he rarely makes the effort. He rarely goes to art museums, art galleries, or the theater. I just assumed he would be interested in those events given his views on trading. His response was, “Most of the artists out there aren’t really saying anything of substance.” In my view, Trader X is more cultured than most writers I’ve interviewed.

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He loves to read Shakespeare and has memorized large blocks of the sonnets and the plays, but he has only seen one performance in his entire life—Henry V. His favorite art form is the movies, old and new. Even if he doesn’t like a film, he will always find something good about it. “Even a chick flick like Terms of Endearment,” he told me once, “Nicholson was perfect.” His taste in music is very broad. He listens to everything from Bach to Megadeath, everything imaginable except Marilyn Manson. “What happened to that guy?” he asks. He seems to find value in most kinds of expression. At the same time he doesn’t find much real value in most of it for himself. Trader X studied music at school, but quit altogether when he realized he could learn just as much by listening and reading on his own. “Most people with degrees end up working for those without degrees,” he remarked. I then asked him directly how he knew that. Here was his reply, “The guys at the top always hire people who have a degree in something besides what they do themselves, if they even have one. Since I always was in business for myself, if I needed a particular skill I didn’t have to reach my goal, I would hire someone who did. I always made more money than that guy. Trading is nothing like the real world. Even if I had a degree, it would be of little use here. Of what I have learned about statistics, that degree would probably be of most use in this business.” He then added, “Look at what universities do anyway. They heap scores of books on you to read. All they do is then test you to see if you read any of it. They really can’t teach you to think in the first place. Just look at all the brain-dead people out there with a degree. In the markets the test is not A, B, or C about how well you are assimilating information. Either you get it or you don’t. If you don’t get it, you don’t eat. What degree can prepare you for that? I constantly meet people with degrees in finance or accounting who want to become traders. I always ask them, ‘Since you know what to do with money or how to count it once it’s made, how much do you know about making it?’ You wouldn’t believe how many blank looks I get.” I believe what he is getting at is there is a difference between a formal education and a real one. Believe it or not, Trader X is funny, and I don’t mean silly adolescent humor either. I mean the guy is able to joke about the circumstances in life that bring most other people down. He found a way to

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interpret life from a humorous standpoint that would be insightful at the same time, sometimes to the point of hilarity. One story illustrates this well. I remember we were in a cab somewhere and the driver was pulled over by a Chicago police officer. Most people would get frustrated over the delay. It’s a “hassle” to them. As the cop approached the cab he leaned out the window and said, “Officer, if I’m late to this party some poor soul will never have his life changed by meeting me. Can we just go? How much to just let us go?” The cop smiled and laughed. The cop replied, “A hundred dollars.” Trader X actually said to the cop, “Will you take a check?” This kind of thing goes on around him constantly. I think we could write a whole other book on his sense of humor. I found working with him to be a lot of fun. Another memorable occasion happened in his office. I was sitting across the desk from him taking notes as he would speak. He had positions on at the time, so his attention would flit back and forth between the screen and me. There were long periods of silence as he would think. At one point when I wasn’t looking in his direction, I was writing some notes to myself, he started laughing. I looked up and he was sitting there with his hands behind his head looking at the ceiling and just laughing to himself. I looked at the ceiling and saw nothing. I asked him, “What was so funny?” He looked at me, waved his hand in the air dismissing the question and said, “I’m sorry, some are just for me.” He really believes that life is one big joke waiting to happen. I think a lot of his personal success is due to the fact that he can keep a sense of humor no matter what is happening. Although he enjoys parties, he frequently drinks alone. He is not an alcoholic by any means, but he seems to be the kind of person that enjoys a drink for its own sake. He can do that anywhere. I was always surprised to find out no matter where we went or what we were doing he always would order a Heineken. He didn’t always drink it, but he always had it in front of him. Drinking seems to go hand in hand with his social interaction, but I’ve seen him enjoy a roaring party and not drink at all. Recently, to continue improving his trading performance, he has stopped drinking on Sundays and working nights. Trader X thinks it doesn’t help that much, but he still maintains that choice most of the time. He talks a lot about personal discipline and how hard that is for him and everyone else. To him, the key to success is personal

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discipline. Though he hates himself when he falls short, he never spends any time in self-judgment. When he fails, he just gets on with life, plain and simple. Trader X never touches drugs, but he never condemns those that do. “That’s where they are at” is his answer. He vehemently asked me not to include in this book the fact that he keeps beer in his office (Heineken), but I felt it would show part of his character. “What part?” he asked me. “The part you don’t want people to see,” I told him. Since this is in keeping with the theme of the book as it regards self-disclosure, he reluctantly agreed to keep it in. “I hope no one gets the wrong impression,” he later told me. Then grinning, he chuckled as he said, “After all, my analyst says I’m making great progress.” His favorite shirt is a Cactus Cantina T-shirt. On the back it says “Don’t Drink and Trade.” When I asked him about his hobbies he asked the qualifier, “You mean besides women?” Again the women thing. I said, yes, of course, and needled him to give me a straight answer. But in his mind, he really doesn’t have any hobbies. His whole life is a hobby to him. He really believes the sum total of life experience is to enjoy life while you are here. That can be anything to him. One story is particularly revealing as to what he means. He loves going to the zoo and was recently caught sliding a slab of round steak into the snow leopard cage at the Lincoln Park Zoo. When questioned, “Why did you do that?” He answered, “I was trying to win the leopard’s trust.” When the zookeeper reminded him you can’t win a wild animal’s trust in one attempt, he replied, “I know that.” The zookeeper was slightly puzzled and then asked him, “How long have you been doing that?” His answer was short. “I’m not going to tell you.” Only after the zookeeper threatened to have him put in jail did he come clean. The leopard and he had been “friends” for over a year. How’s that for a hobby? He said he wanted to be a zoo volunteer, but they wouldn’t commit to him being in the big cat house. He decided to feed the cats anyway. “I didn’t have to clean up the s—, either,” he said. Trader X has other “hobbies,” but he really is afraid that someone reading his book might put two and two together and confront him as the author.Very few people in the business do the kinds of things he does. Most think he is over the edge. No one knows about the leopard incident, so he feels safe discussing that one.

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Trader X is an avid reader. He reads several books per month. He has countless comics clipped from the paper all over his house. He reads a lot of cartoon strips. He very much enjoys “Calvin and Hobbes.” He reads from any genre you could think off, but he particularly enjoys science fiction. I remember once while observing him trade, as he was executing the trade, he said (talking to the screen); “Resistance is futile. You will be assimilated. We will add your distinctiveness to our own.” He was quoting the Borg, an alien antagonist from the Star Trek series. He recently confessed he wanted to read the science fiction book written by Leo Melamed,3 but didn’t know where to find it as it’s out of print. He thought it would be interesting to see what goes on in Leo’s mind. “I think the rest of the world would like to know, too,” he quipped. Trader X indulges in writing poetry and, in addition to this book, he has been working on a love story. “But,” as he confided in me, “I’m not qualified to trade that market.” His library is quite large and he knows where everything that matters to him is in those books. On more than one occasion we would be discussing a topic for which I wanted to have more detail, he would think for a moment, pull a book from his shelves, and turn to the exact page almost instantly. Trader X has a huge amount of books on the markets. He has read every one of them at least once. There are only a few trading books that he feels have anything significant to say and are worth keeping. He says he must get rid of several of his books to make room for the soon to be released Milli-Vanilli4 biographies and critical discussion of their music. I think his point was that an endless discussion of Milli-Vanilli would be of more value than most of the existing books on the markets. After observing Trader X and helping him to finalize his manuscript I was surprised to see the depth of his thinking. He uses an amazing amount of common sense when thinking about the most complex issues. He seems to have at his elbow almost anything you could think of that might shed light on whatever it is he is dealing with. For example, when we were discussing the problem of how the regulators actually help contribute to the quality of the business, he reminded me that this issue has always been a part of everyday life under any form of government. He paraphrased Winston Churchill as saying, “Democracy is the worst form of government; but so is every other,” also, Thomas Jefferson, Elizabeth I, Plato, and, of all people, Keith Richards of the Rolling Stones. He told

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me later that he believed all life and all life experiences were variations on the same theme. Once you know the theme, you can work back to any solution to any set of issues no matter how complex. Trader X did make one qualifying remark by quoting the French cynic Voltaire, “Common sense is not common.” I think he believes that one reason the markets work the way they do is because no one uses their common sense when trading. He seems to have an uncanny Sherlock Holmes type of ability as well. Trader X is deeply observant of everything going on around him, often seeing things that most people would miss. He then can form conclusions that are incredibly accurate. One story illustrates this point very well. We were out taking a walk in his neighborhood one day. Approaching us from down the sidewalk was a man walking his dog. He said, “That man is in business for himself.” I assumed he knew the man. As were got closer together he said, “Hello,” from a distance. “That’s a well-trained dog,” he said. He and the man stopped and talked for a moment. He casually inquired as to the man’s line of work. “I’m retired,” the man said. “I used to own a chemical company.” After a few more minutes, they parted. It was clear they had never met before. I said, “That was pretty good.” “It was easy,” he said. “What tipped you off?” I asked. “Well, he is out walking his dog at 10:00 a.m. on a Wednesday. If you work for someone, you don’t have that kind of freedom,” he said. I then reminded him the man could have had the day off. He said, “That’s true. But did you notice his shoes? They were Ferragamo. Would you dress that way on your day off? Plus the dog was less than a year old and very well trained. To train a dog that well you have to invest a lot of time. He must have had the time to do that. What employer would let you take time off to train a new puppy? Also, the way he walked said, ‘I do what I want.’ That kind of ambition won’t be happy until it has found its true expression. He also had a very thoughtful look that suggested he was deep in thought about something. Everyone knows that employees aren’t in the habit of thinking when they are working, why would they do that on their day off? I took an educated guess.” “Amazing.” I said. “Actually, I could have ignored all that,” he said and smiled. “In this neighborhood most people are self-employed anyway, that’s the only way to afford it here.” Either way he was right. Maybe he just wanted to impress me.

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Trader X feels misunderstood and believes he hasn’t accomplished anything particularly significant. He really doesn’t understand the public fascination with successful traders. The business of the markets is to profit. If you are earning profits, that’s your job. That’s nothing special. He could never understand, for instance, why they gave medals of heroism to lifeguards. “That is the job they signed on for” he says. In his assessment, he has simply done what it takes to understand the markets, and simply does his job of taking profits. There is no mystery to him. Why others feel the need to view the markets the way they do doesn’t make sense to him anymore. Why they go looking for “secrets” is ludicrous to him. Trader X thinks anyone could perform as well as he does if they would only change their point of view. In this way he feels a sense of detachment from everyone else. He can’t connect with someone who isn’t on the same frequency, but he believes you can choose your own frequency anytime. He is tuned to the frequency of the markets. He can’t understand why everyone finds that so significant when it is within them to do the same thing if they really want to. Part of his reason for remaining anonymous is that he wants to keep his thinking to himself. He doesn’t want to be expected to continually share his insights or endlessly discuss what he has discovered about trading. He’s just telling the story of how he got where he is and what he has learned. “How many times do you think Neil Armstrong could talk about walking on the moon before he freaked?” was his question to me. “What’s he done lately?” Trader X really believes he has nothing new to add to the subject of trading. He thinks the average trader is fascinated with people who are successful in the markets simply because they aren’t, but desperately want to be. It’s the same fascination some people have with messiah figures. He feels the average person is “on the outside looking in.” What he hopes to communicate is that you are really on the inside looking out in some way. Besides, he stressed to me that he didn’t want to end up like Richard Dennis or someone like him. “Ever since he attained the status of ‘Trading God,’ people won’t leave him alone. They totally deified him. Even his ‘turtles.’ They all have this incredibly pompous air about them. People threw money at them in droves. The fact is he (Dennis) took a hit for a huge amount of money in the last few years, something like $50 million or more. So did a few of his turtles. All that

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money was given to them because of the reputation at the time. How do those clients feel about the ‘god-ness’? I never want to be in that position. If I ever get to trade with that kind of firepower it will only be because I earned it from the markets or from people I have a sense of responsibility to. They must have lost that somewhere. I’m not trying to be arrogant or anything about what success I have earned; its just any number of things can take it away from you. The last and first battle is always your desire to be held in high esteem—by yourself or others. Now you have a reputation to protect, or think you do. You are more concerned with that. That can lead to losses fast.” Then he added, “Plus, I’m too ugly-looking for that crowd.” When we were discussing his motives for writing this book, his line of thinking was very committed. He is doing this for himself. He wanted to document the process he went through. When I discussed marketing the book, Trader X wasn’t concerned with whether or not the book sold a single copy. And he mentioned that he could care less what people thought of his point of view on the business. He explained to me that he wasn’t out to teach anything, but wanted the true student of the markets to observe the lessons. He went so far as to carefully explain that the business of futures, options, and FOREX trading could be done a hundred times better. He thinks that if the right people see the right information from the right point of view, this business could become everything it has the potential to become. Trader X believes there are a lot of people out there who feel as he feels. Here are his comments on his own effort regarding this book. “I really don’t care what people think of my work. Those that create the problems we could all do without. Who cares what they think anyway? I went through hell to get where I am. A lot was avoidable. A lot that happened was because of total a—holes that are in this business. Getting rid of them won’t make trading any easier, just more enjoyable. I just wish more people could see what I see the way I see it. If not that’s okay too. In the meantime I wanted to share my story with others. I hope they like it and find value in my experience.” In closing, it has been my privilege to work with and get to know Trader X. Working with him has been inspiring and one of the most interesting writing projects that I’ve worked on. Trader X has helped me understand trading, the people who make the markets, the nature

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of failure and success, and most importantly I’ve learned things about myself. The story of Trader X can be shared by all of us; the struggle for success, knowing you could win or lose, the rise of purpose over adversity, the quest for inner knowledge, and the passion to pay the price no matter what. In the end, Trader X came out a winner. And when I say winner, I don’t mean someone who thinks they are a winner. I mean someone who doesn’t have anything to prove to anyone and knows it. He came to understand himself, against the odds and in the kill-or-bekilled world of trading which some consider being the most difficult circumstances in which to succeed. Trader X survived and specifically came to understand how to profit at any time and in any amount he chooses. Trader X was able to learn what he has without surrendering any part of himself to do so. As a study in success it was truly a unique look into the financial world. It was an equally unique look into the mind of one of its hidden best. Even with his high success rate, Trader X lives by the axiom: “You are only as good as your last trade.” So how good are you? Ghostwriter X

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More from the Author

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or the serious student of trading, the author makes his trading material available in audio format. It is important that the user of this material understand that Mr. Jankovsky believes you cannot “teach” trading, only provide a method to help the student uncover what trading really is from the students own point of view.The author believes it is not possible for one artist to teach another artist what art is, only provide additional tools for creativity. Great art comes from inside the artist and even though two different artists might use the same paints or use the same musical scale when creating their art, each will have a unique expression of what art means to him or her. Great trading art can be made by anyone and the common medium is the trading prices. Mr. Jankovsky believes it is pointless to teach someone else how to create art exactly like he does. The author takes the point of view that the basics of potentially great trading art are the same for any individual; it is what that individual does with those basics that matter.This is for the student to decide. His material is not a “trading course.” It is a roadmap to help uncover the students’ own creativity.

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The material includes written documentation as well as audio. The written information is a supplement to the series and should be used while listening. The author makes it very clear that there is only one reality the markets function under and the only pathway to permanent profits is to adapt to this reality. The author also feels that about 80 to 90 percent of the people who attempt to absorb this material will never become a lasting success at the markets. He doesn’t believe most traders will easily accept what he shares. He makes this material available in hopes that those who will eventually get what they are looking for might be able to someday discuss their art.

The Psychology of Trading The Art of Evolving as a Trader: 12 Hours of Audio Divided into 6 Two-Hour Sessions of Instruction: • Introduction and Interview Setting the stage What you will learn What the program is not Outline of material • Basics of the Marketplace—Understanding the Mirror Arena of conflict Psychology of price movement • Basics of creating Art—Identifying Your Starting Point Clarity of observation and the desire for profit Cultural myth and self-sabotage • Basics of Trader Evolution Gains and losses Accumulating profits • Requirements of a Net Winning Art Form The circle of the trade Record keeping Identification of opportunity to profit • Becoming a Trader Proper execution Money management Physical health

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• Use of technical analysis and the theory of time compression • Conclusion • Printed material The audio package includes a trade syllabus, illustrations, note cards, and a booklet of thoughts by Mr. Jankovsky as an additional supplement. Full details including availability and current pricing can be found on Mr. Jankovsky’s web site at www.myforexbriefings.com. Additionally on the web site are complete details of his twice-daily live internet FOREX broadcasts, special education and training programs, archives of his past content, schedules of his personal appearances and speaking engagements. Some content is free for the asking and some requires membership to the web site. Trial memberships are available and depending on your trading background you may qualify for a discounted full membership. Complete contact information for Mr. Jankovsky is also listed on the site.You can also contact him through the following methods. E-mail: [email protected] Skype: TheLionOnline Yahoo IM: TheLion_Chicago

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Postscript He who can see three days ahead will be rich for three thousand years. —Japanese proverb

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originally wrote this postscript for the second printing of Dancing with Lions, that is, the first edition. I have updated my thoughts here and removed the outdated. Now that John Wiley & Sons is the publisher, some of what was first written here is no longer applicable. There are some things I left in because I feel they help keep continuity with the original point of view that I offered as Trader X. I no longer deal with the same people whom I did when I first wrote this. For that reason, the risks that being anonymous helped me to avoid are no longer there. I do my own thing my way and I don’t fear repercussions now. This postscript is intended to offer a timelier look into the changes in the industry and with me. I think biographical information needs to be updated until the person dies. We all should be growing and evolving and for better or worse; it is what it is. I sincerely hope that you see that the markets and trading are part of that evolutionary process for yourself as well. If you ever come across a copy of the original DWL, you would notice a few errors and omissions. Because the first publisher chose to

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produce a second printing, I asked if it would be okay if the errors and omissions were corrected before we went to press the second time. In the interest of producing a quality product as well as an accurate one, the publisher agreed. I wanted to add this postscript on my own because, in the years since I wrote this, some things have changed for me that I thought a new reader might benefit from—also a confession. First, there were two deliberate misstatements of material fact that I included in the first printing. I did this for my own edification, as an experiment. I hope the reader doesn’t take offense at this, but I think it sheds light on the true state of mind for most traders. In Chapter 3 I made reference to a certain renaissance mathematician. In Appendix A I offered a quote from Shakespeare. In all the copies of DWL that were sold or given away for review, nobody (not one!) brought it to the attention of the publisher (or me) that both the spelling of the name “Fibonacci” and the century of his influence were inaccurate; or the quote from Julius Caesar referred to a character from Hamlet. As I mentioned before, I have never found anyone connected to the markets that has done any of their own research into the person of Fibonacci; let alone understand what he was all about or what he was looking for. Fibonacci had little interest in markets or commerce except for the “science” of alchemy, which he hoped to exploit, literally, to make gold from lead. I thought it would prove my point quite nicely that most traders are not investigating anything about the true nature of technical analysis if I put right in front of them so obvious an error. Fibonacci retracement is accepted as a legitimate method of predicting price movement. Fibonacci had no intention of his observations ever being applied to markets or pricing. He was about uncovering the grand design and harmony between nature and mathematics. In fact, fractals are part of his legacy. But in his time, money was still an unsophisticated concept. The world was only beginning to experience the first real banking revolution, whose most notable purveyor was the Medici family of Florence, Italy; which to this day has an influence. Fibonacci would say: “You missed the point.” The correct quote from Julius Caesar is “The fault, dear Brutus, is not in our stars, but in ourselves, that we are underlings.” I had replaced Brutus with dear Horatio, the friend of Hamlet. The fact that the average person who considers himself educated has never read Shakespeare with any

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critical consideration is an indication of the true state of ignorance most people operate under. I don’t mean to imply that all traders are ignoramuses or that all people with formal educations are morons. Certainly, I did not mean to suggest that someone who has read Shakespeare casually is stupid—if anything I would hope a casual reader would spend more time with him. I think my point is simply to note that in the course of publishing something for public consumption, nobody had the presence of mind to “get the facts straight” before printing. How much of what you and I consume as conjecture or opinion is accepted as fact, simply because somebody somewhere “says so”? How much of that kind of thinking goes on in the markets day-to-day? How much do you do yourself? It also goes to show you the nature of how “experts” are often self-created because most traders accept the point of view: “If so and so said it, then it must be true.” People buy the “experts” books and apply their techniques without question. Until they lose. If you are going to trade, then check your facts. Most certainly, check out how much opinion you are willing to swallow. Also, my apologies to Mr. Leo Melamed, his name was spelled incorrectly. That one wasn’t intentional. All these errors have been corrected before we went to press with this printing. Additionally, I haven’t put any more in (to the best of my research beforehand). As a side note, my sincere thanks to the trader who sent me a copy of Mr. Melamed’s sci-fi book The Tenth Planet. I’ve been trying to find a copy for years. Whoever sent it must have thought very carefully because it was autographed by Mr. Melamed himself. Look me up, I owe you a Heineken. Before we run out of paper, I wanted to spend a minute or two sharing some additional insights with you. At this point in history, the worldwide economic situation provides some astounding opportunities to build wealth. I want you to remember that what is happening now is fundamentally no different than any other time in history; just unique to the forces that brought us here. If you look at the number of automobile companies in existence prior to World War I and the number that control the market today, it is very similar to the number of .coms that were publicly traded only a few years ago and the number that will be here tomorrow. Every industry has a period of development, growth, fallout, and consolidation. The “new” industries or economic changes are not new, only different. Remember too that knowledge is

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increasing at a phenomenal rate. It has been conservatively estimated that it has taken almost 300,000 years of human history to compile one exobyte of information. It will take only until 2003 to compile another two. Now at 2008, with quantum computers just around the corner, the information we routinely take for granted as “normal” will now become “useless” because it is so common. We are living in a time of information overload. But it is important to remember something. That information is still used by people who have not changed one cipher. Because human beings still operate on a fixed system of information processing, evaluation, and action, the world today offers more opportunity than ever when you understand how people form their conclusions. The basic structure that creates the markets has never changed, only the information that is valued by traders to create their urge to action resulting in an execution. Focus your energy on discovering not only how traders think but also on what they value. Today, there is a prevailing undercurrent of thought that says: “Information is the key to uncovering market price action.” I postulate that this information overload will create a sense of powerlessness and confusion in the mind of most traders. They will be driven to a state of inaction and overload due to the fact that they cannot process everything there is now to consider before making a trade. They will then subjugate themselves to something that can compile this huge amount of information they believe they cannot assimilate for themselves. That would be a computer. I believe the end result will manifest itself as more and more trust in computer-generated trading systems. The use of neural-net software, artificial intelligence, matrix nodes, and so on will be given the “carte blanche” to execute transactions. The final authority to expose a bank, brokerage house, hedge fund, or even a government to market risk will be abdicated to a “black box” sitting somewhere on an executive’s desk. Why is this important? Because the box is only as good as the programming that runs on it. The box will never be better than the programmer who programmed it. Who is that? What market assumptions has he made? What is the presumption the system operates from? What hypothesis does the system make and where is that incompatible with human factors? The reason I feel this is the best thing ever for traders is simple. Once the box “goes down,” or interprets the market in a way that

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“doesn’t make sense,” or says “stand aside” when the market is trending like a ski slope, someone with little or no market experience will be forced to panic or “change the plan.” When that happens, you will have people executing trades (at considerable size) for reasons that have nothing to do with the needs of the market. Sometime, somewhere, there is going to be a Bill Gates wannabe who is more afraid of losing his job than knowing how to liquidate a loser. Someone will “hope it comes back” by the time their bank opens in Asia. Someone will add to a loser “just until the system is back on-line and tells me what to do.” The seeds of this are already in place. Witness the predictors from New Mexico—computerized buy/sell programs on Wall Street, online trading with “full analysis” at no additional charge. We, as a group, are willing to trust our financial health to systems that never can take into account any specific market event and the choices made to liquidate. They are all models that work on averages, that compile information over years. Any one event is the anomaly. As any trader knows, it’s the anomaly (read: the unexpected) that throws all bets into a cocked hat. When people panic, they do not act rationally and all trading systems (no matter how complex) can never account for irrational behavior. They cannot predict it, nor can they time it, nor can they explain it. The staggering thing is the amount of market force that can be realized by a computer when it manages several billion dollars. Are you willing to let someone bet your retirement fund on a machine that wasn’t even invented 40 years ago? The basics of economic thought and monetary systems have evolved over thousands of years. The lessons of manias, panics, and busts are ignored by all these computerized systems because none of these systems are sophisticated enough to consider how crowds actually behave. A market is a crowd driven by greed, fear, and hope. No machine can account for the human element and when you let a machine swing a billion-dollar trading line, you leave the human in a position of fear like the world has never known. “What if the computer is wrong?” What irrational behavior will develop when a billion-dollar hedge fund computer says “liquidate” into a market break when the trader’s “gut” says: “Hold on until the close”? What if the trader overrides the system and has to answer to the regulators, shareholders, board members, and the like if he or sheis wrong? What if

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the computer is wrong? Who is responsible to make the excuses to the investors? Who decides to liquidate or initiate? I’ll tell you who: Someone who was watching television six hours a day when he was still in high school, someone who was in grade school on October 19, 1987, someone who still plays Zelda or Diablo II when he is home from running simulations at Merrill-Lynch, someone whose father is a big client at Prudential, who graduated cum laude from Harvard Business School without ever trading a single share of stock and then was hired to run a hedge fund. Every one of these people are people I have met and watched work. Every one of them is using a computer simulation created for the markets at considerable cost. None of them have ever stood in a pit. None of them have ever seen a bear market. None of them have even gone without a meal even once. None of them will ever be able to survive even one day of “unexpected” price action. None of them can answer the question “What if . . .?” What am I saying? We are all headed for a financial apocalypse? No, not that at all. I’m saying that the issue of trusting technical analysis and computers has reached a level that makes understanding the human element more important than ever, due to the size of the money and the computing power. All this money ultimately controlled by an individual who trusts a massive software program. What is the quality of the software? How well does this guy trust it? At what point will the individual say: “No, the software is wrong at this point. I’m going to do. . . .” In the final analysis, the software is only as good as the person who trusts it and believes it will generate consistent profit. The need for critical deduction, intuition, and discipline has been engineered out. The pundits feel that is a benefit. The fact is any seasoned and net-profitable trader will tell you the human element is by far the most critical. The difference is similar to the general who has fought for his life in combat a dozen times, and a 2nd lieutenant newly graduated from West Point. Who do you want running the show? Who would you rather trust with your life if it were you or them? The trader’s trust and belief in the system still casts the final die. When he bails on the system, he bails on the market. I think the issue of understanding the proper place to buy or sell in any market will evolve into understanding how people come to trust computer

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software. Perhaps the length of time it has been used will play a roll. If you discover that a certain market participant has just invested in a new piece of software, perhaps he will pitch it in 90 days if it has been losing. Maybe this will help uncover where he is executing. Watch who buys it next. Perhaps a bank has just spent several hundred million on an ownership position with a “state-of-the-art” software company to develop a proprietary chaos-theory trading system. Perhaps they publish their financial position. Perhaps you see they are holding large long positions in the Euro year to year just prior to this investment. Perhaps they are looking for a new system to recoup their losses in Euro last year. Perhaps the system is supposed to give them a cost-effective way to creatively finance their losses. Notice if this particular software company has had several banks use their service, all with similar results over time. Fade the stock of the next bank that buys their “improved” product. Great short potential there, I think. I suppose I could go on for hours. I simply want the reader to consider that the amount of trust placed in artificial trading approaches merely increases the potential for failure geometrically. Sooner or later we will all get the wake up call. It doesn’t matter who or when. It is my sincere hope that you as a trader will come to understand that there never has been, nor will there ever be, a magic bullet. By placing the final and complete trust in yourself first, you can uncover how to exploit those who cannot. The world is your oyster. I hope you have enjoyed reading. Thanks again. Jason Alan Jankovsky Formerly “Trader X” Chicago, Illinois Spring 2008 P.P.S. One last thing, I was surprised to learn that another author has used the pseudonym “Trader X” and also publishes in the trading arena. There is no connection of any kind between myself and this other Trader X. As far as I can tell, we both came up with the same pseudonym while working independently. I hope to avoid any confusion due to content. Additionally, you cannot copyright a nom de plume.

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Notes

Foreword 1. Trader X was my pseudonym. Obviously I am no longer anonymous. The forward was originally written by Ghostwriter X and most of what he contributed to the book is left as it was originally written. Please see the Read Me First for more details on the differences between the two published books. 2. I no longer trade for customers, although, at the time this was written, it was a serious concern for me. I no longer have any conflicting relationships that might expose me to this risk (to the best of my knowledge), but I wanted to keep this in. 3. Ghostwriter X is a real person who assisted me in completing the original manuscript. He wishes to remain anonymous. Chapter 1: The Early Years 1. The sales manager of most retail commodity brokerage houses is usually someone personally related to, personal friends with, or some other version of being “buddy-buddy” with the owner of the place. This includes people who owe the company money and are working it off (including debits, lawsuits, advances against commissions that were never earned, or drug problems), someone sleeping with the owner (male or female), someone the owner owes a favor to, or any number of people that have a job but are not qualified to do it or have no idea how to do it. At one company, the owner’s ex-wife (who was sleeping with the top broker there) demanded a job or she would disclose the owner’s affair with the wife of another owner. He made her “sales manager” with something like $60,000 base salary. After three months of total insanity trying to get stuff done, he finally fired her; partly because the relationship between he and the wife of the other owner was over and he

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actually had moved to another city to start a “branch office” for the company. You wouldn’t believe what I’ve seen. . . . 2. Private space flight remains in its infancy. Virgin Galactic (Richard Branson and Scaled Composites) most likely will be the first to offer “pay to fly” services that might be considered within reach of the average individual. There are many other companies involved and it is only a matter of time before spaceflight is as common as intercontinental flight. I’m looking forward to finally flying. 3. One-lots is market slang for the position size of one contract. If you are a onelot trader, you are as small as you can get and still be in the game. Some people who trade stay at this size for the entire life of their account, partly because they can’t afford to do any more size and because of money management and risk control. A one-lot trader is never taken seriously by anyone because he (or she) is only going to be around long enough for someone else to take his money anyway. Most traders will start as one-lot traders and work up to larger size; the theory is “if you can do it with one contract, you can do it with a hundred contracts.” This is partly true, but the fact is since most people don’t know what they are doing, a one-lot trader will probably never get any bigger, so he becomes like the flea on the lion’s back. He’s irritating, but he moves around a lot and sooner or later he’ll go somewhere else—or he’s crushed anyway. 4. Gordon Gecko was the name of the antagonist character in the movie Wall Street, played by Michael Douglas, Gecko was the perfect capitalist seeking only his own best interest. He is most remembered for saying, “Greed is good.” The movie was released in 1987 and remains a favorite of market participants. I like to think of myself as a Gordon Gecko with a soul. Chapter 2: The Day I Bought the Low 1. A seat is the term for an exchange membership. There are many different kinds of seats available at all the various exchanges. A seat gives you the ability to trade directly in the pits, or now with the electronic systems, the ability to clear transactions as a market maker directly with the clearing corporation. 2. Local is market slang for an independent pit trader who trades only for himself, has no other clients, and lives in the area. Locals are an important part of the liquidity in the markets. Most locals are people whose father was a trader and the family owns the seat at the exchange, was personal friends with someone who owns a seat, or is someone who has enough cash to buy or lease a seat. Locals are often the stuff of legends. Tom Baldwin, Charlie D., and Richard Dennis were all locals. Read Connie Brucks The Predator’s Ball: The Inside Story of Drexel Burnham and the Rise of the Junk Bond Raiders (1989) if you want to see how these guys think. Talk about the razor’s edge.

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3. A commodity trading advisor is usually someone (or a team of two or three traders) who has little or no experience in the futures or options markets, but has developed some kind of “system” that they believe is a unique and profitable method to execute trades with. In many cases, these people have produced a hypothetical track record of trades this system would have done in the markets, but in reality those trades were never done because the CTA has no investment capital under management yet. The trade approach is presented to you (the potential investor) with the intention of demonstrating that “what we do works and you can make money” or “our computer software or proprietary methodology has uncovered a special relationship that we use on your behalf ” or some equally assumptive position that is predicated on a what-if about the past market price action that every one of these CTAs believe will be easily duplicated from here forward. If the system works for a short time with what little money the CTA has managed to find, the marketing people pull out the stops. Within a short time the CTA has all kinds of money available; but now the quality of the market has changed to something the system doesn’t work well with. By that I mean the system is a trend follower or something, but the market has gone into an extended phase of consolidation between two price areas (in other words it’s not trending anymore). The system gets chopped to pieces looking for the resumption of trend. The CTA now proceeds to lose most or all of his equity in a short time. Look up a few copies of Managed Account Reports to see how fast these guys come and go. Many of them have closed shop on one group of investors, massaged their software/system a bit, reformulate what they have learned, rename what they do, and start all over again next year with a new group of customers. All these people take fees regardless if the system is working, and if it does work, they take a percentage of gains too. You as an investor have less than a 15 percent chance of a 10 percent gain in one year. Additionally, look at the percentage of these CTAs who are losing in less than a year. Explain to me how 80 to 90 percent of these people can have drawdowns at almost any time, a new group of hundreds of them show up to the markets each year, and there are still thousands of investors with millions of dollars willing to get their butts kicked so hard it changes their last name? God I love this business! 4. Round-turn is market slang for a buy and a sell that completes the process of getting into and then getting out of any market being traded. A round-turn is assumed to mean one contract traded. So if you have done a hundred roundturns, that means a total of 100 contracts today; which might mean you did 10 separate 10-lot trades—or 100-lot trade. Or some kind of combination between number of executions, how large they were individually, and what they all added up to. If you have done a round-turn that also means you were in and out of the market and you don’t have any other positions currently open—unless you say something like “I did 50 round-turns and I’m holding 10 bonds long overnight.” The point is, that anyone who hears how many

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notes round-turns you have done today can simply multiply that number by your share of the commissions and know how much money you made today. You should hear what this sounds like at the bar. If all the round-turns I hear discussed actually happened, then apparently I drink dollar drafts with guys bigger than Neiman-Marcus.

Chapter 3: Technical Analysis 1. Romper Room was a popular children’s television show from the early 1950s to the mid-1990s with various hostesses and syndications, including the broadcast from Chicago during the 1960s. The show featured “Mr. Do Bee” and “Mr. Don’t Bee” character, a bumblebee who attempted to teach children the difference between good and bad behaviors in the classroom. Most people that I know from the markets lean more toward being “Mr. Don’t Bees.” 2. Philosopher’s stone was a term used by people who practiced alchemy. During the time in history when alchemy was accepted as a legitimate science, those who practiced it had a problem: No one had ever actually transmuted some element into something else. No matter what they did no one was ever able to turn lead into gold no matter what they tried. The assumption then developed that there was some necessary ingredient that was required to complete the process. I guess no one thought to suggest “maybe this isn’t possible.” Anyway, at the time of this belief, religious fervor was at it’s height in medieval Europe. The point of view of people practicing the science of alchemy sort of combined the inner spiritual workings of man with the science itself producing a hybrid belief structure somewhere along the lines of “Only a man pure in heart could ever learn the secrets of God Himself.” Apparently everyone involved in this science came to conclude that what was missing was something God himself had “hidden” in the earth somehow and it was the “philosopher” or the man concerned with God’s own character, who would be the man to find it. So the “Philosopher’s stone” became the object of almost every noble person’s search. With it he could finally complete the alchemical process and learn how to make gold just like God could. Nobody stopped to think that this whole concept was founded on the greed instinct in the first place. What I found amazing when I studied alchemy is how many people did things like imprisoned chemists who were working on it “until they solved the problem” (many died there), fought wars over land that was supposed to have the philosopher’s stone in it (guess which conflict that one was), promised they could do it by prayer alone (and were imprisoned in churches), or were even beheaded for suggesting it was not possible to do (those people were “heretics”). Some people made fortunes by simply saying “If you give me some gold, I’ll tell you where to find it.” People will believe almost anything if money is involved. If I ever figure out how to exploit that belief I will own every one of you.

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3. U.S. Air Force Brigadier General Charles Yeager (retired) is considered by many to be the single most qualified air-to-air combat pilot alive (that’s why he still is alive). A World War II ace and postwar test pilot and consultant, his life was featured in the movie The Right Stuff, which documented his (and the first astronauts’) contribution to the early U.S. manned space program. In 1947, at the controls of the rocket-powered Bell X-1 research aircraft, he successfully broke the sound barrier for the first time without losing control of the aircraft. At the time, that was considered the riskiest thing a pilot could do because everyone else who had tried it before went home in a body bag (or at least what they could find of the unfortunate pilot). There are some things you can’t “pretend” to do. 4. Volume is the number of contracts traded during the trading session, usually counted as the daily volume. Open interest is the number of futures contracts that have not been liquidated at the close of trading for that day and will be held in the market overnight. Chapter 4: Adversity 1. Equity runs is a market term for the computer-generated accounting, created by the clearing firm, which shows you all your clients and their account numbers, the previous day’s trade activity, open trades your clients are holding, how much in fees they have paid to date for the month, what your required margin for the positions open is, and how much equity your clients have on the books to trade with today. Some equity runs will provide you certain information about your option positions such as “long in the money,” time to expiration if you have written any options, implied volatility, net long/short an equivalent amount of futures, and various other data. Most brokers can’t read them except to say: “I have XXX positions on that if I liquidate I will have XXX more completed round-turns to add to my monthly fees.” A broker is supposed to check his run for errors, which can include trades he didn’t do, trades that were not cleared properly, trades from the wrong side, trades missing, trades in the wrong account, and other kinds of accounting nightmares. Most of the errors are caught at the clearing firm but sometimes the broker himself made the mistake. Often, the broker doesn’t notice an error; or doesn’t notice it in time. Now he “eats” the error or forces his client to “eat” it. In any case, how would you know if you don’t even get one? No equity run can tell you if you have active orders in the market. Add to that the problem that some brokers forget their orders, forget to place them, forget their positions, or don’t come in at all that day. Some brokers don’t even read their equity run, they just check it every now and then to count the commissions for the month. 2. Spreads is a trading strategy where the trader attempts to capture the change in the underlying basis between different trading months of the same or

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notes similar commodities. For example, if there is a small amount of corn “in the bins,” but the potential for the new crop is to come in larger, a trader might spread between new crop and old crop corn looking for the old crop to gain in price faster than the new crop. There won’t be enough corn to meet demand until later so the old crop should become more expensive relative to the potential new crop. The trader would buy the old crop contract and sell the new crop contract at the same time giving him two contracts in the account. In corn this trade might be done between the July (old crop) and December (new crop) contracts of the same year. You can also spread between different commodities if they have an economic relationship; such as the “crack spread.” This spread is done between products in the energy complex as the relative price of crude oil changes against the finished products made from crude oil such as gasoline and heating oil. Spreads are usually less risky than outright long or short positions because you are actually on both sides of the market and markets tend to go in the same direction over time, no matter which delivery contract you are using. Spreads usually attempt to take advantage of short-term inequalities between delivery months—not within the whole market. The idea is to make more money on one side of the spread than you lose on the other side of the spread. In the corn spread described above, you would want the near month to rise faster than the back month; you pocket the difference in that case. Of course, a spread doesn’t work very well if the market is orderly with no unforeseen delivery problems and there are times when both sides of a spread can go against you. Most retail brokers who do spread strategies are sometimes looking to charge twice the number of commissions because you have to do four “sides” of a spread to get in and to get out (two round turns per spread). Hedgers and commercial traders who know how to use spread strategies often work on a large discount basis to the customer and wouldn’t be considered brokers in the same sense that I refer to in this chapter. I’m being fair to the serious guys who do this part of the business.

Chapter 6: The Trading Police 1. The CFTC, or Commodity Futures Trading Commission, is the federal regulatory body chartered by Congress to oversee futures and options trading, monitor exchanges, and resolve disputes. Appendix B: Insight into the Person of Trader X 1. Ghostwriter X chose to remain anonymous when John Wiley & Sons purchased the rights to publish this book. 2. To keep the continuity of the original book and the contribution of Ghostwriter X, the name Trader X has been retained.

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3. Leo Melamed is the Chairman Emeritus of the Chicago Mercantile Exchange (CME) and is considered to be the “Father of Financial Futures.” It was largely through his efforts that the CME became the trading powerhouse it has become. He helped institute trading in Foreign Currencies and Stock Indexes which revolutionized the CME’s growth from a small agricultural exchange to one of the most influential financial institutions in the world. 4. Milli-Vanilli was a Grammy Award winning musical duo from the 1980s— until it was discovered they were complete frauds. They lip-synced their music when performing “live” and all of the recordings were done by studio musicians who were never told what they were actually recording. They were disgraced, had their awards revoked, and eventually faded from popular memory.

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Index

A Actions, reality (basis), 71 Adversity, 51 creation, 52 defining, 52–53 lesson, 58–59 self-creation, 57–58 Alchemy, belief, 40–41 Alcohol abuse, 56 Arbitration, 86–87 occurrence, 88 process, 88–89 Associations, formation, 118 Audit, execution. See National Futures Association B Back office, problems, 56 Baghdad, bombing, 45–46 Balance, sense (control), 122 Baruch, Bernard, 130 Behavior, observation, 76 Black box, usage, 170–171

Blame, losses (relationship), 116 Body, training, 122 Book of equity. See Equity book Boom-and-bust cycle, avoidance, 7 Brief History of Time, A (Hawking), 134 Brokerage house appearance/disappearance, 60–61 change, 4 clearing relationship, absence, 46–47 commission income, 19–20 creation, 54–55 market dominance, 60 nonsense/problems, 55 Brokers capacity, 26 characteristics, 19–20 churning problem, 15 proof, NFA requirement, 16 client advice, avoidance, 19 contact, 15–16

175

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176 Brokers (Continued ) replacement, 17 respect, 100 compliance problem, 98 dog and pony show, 15 money, availability, 54 phone selling/trading, contrast, 26 problem, regulator creation, 90 protection, 97 role, 14 term, usage, 13–14 thinking/actions, childishness, 30 trades, client nonapproval, 57 Brucks, Connie, 156 Business world, entry, 67–68 Buy/sell programs, usage, 171 C Capital, raising, 93 Capital risk, 38–39 placement, 41–42 Cash currency markets, trading, 141 Charts belief, 137 usage, 30–31 Chicago Board of Trade (CBOT), problems, 104–105 Chicago Mercantile Exchange (CME), 160 Foreign Currency Futures & Options brochures, usage, 61 trader interaction, 20 Churchill, Winston, 150 Churning absence, 99 assumptions, 16–17 encouragement, 17 illegality, 15 perspective, 16–17 possibility, 97 Clients accounts, solicitation, 94 close out, 15

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index contact process, 90 gains, opportunity, 26–27 gains/losses, concern (absence), 20 loss, concern, 6 paperwork, processing, 53 point of view, understanding, 100 promises, absence, 99–100 protection, 97 raising/trading, 17–18 referrals, 27 replacement, 17 respect, 100 satisfaction, 90 servicing, 95–96 capability, 4–5 serving, 89 theft, 3–4 Closing price trades, impact, 127 Commission creation, 15 generation, 26, 36 income, production, 19–20 Commitment, level, 25 Commodity brokers career span, 9 initiation, 51–52 perspective, 21 Commodity company initiation, 60–61 setup, 62 work, 62–63 Commodity Futures Trading Commission (CFTC) charter guidelines, 93 regulatory body, 89 Commodity prices, exploitation, 123 Commodity trader initiation, 51–52 success, discovery, 29–30 Commodity trading, size (increase), 20–21 Commodity trading advisor, definition, 157

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Index Commodity Trading Advisors (CTA) existence, reason, 20–21 money, availability, 157 track record, 68 Common sense, teaching (absence), 88 Conflict cessation, decision, 80 creation, 74, 80 development, 83 history, 81 occurrence, 70 potential, 74 recognition, 83 resolution, 71, 74, 105 Consolidation high, 119–120 Corn in the bins, term (usage), 160 call options, 5 CQG network, 37 Crack spread, 160 Critical thinking process, 48–49 Crude oil markets (movement), Persian Gulf War (impact), 18 retracements, 45 trade, 45 D Dancing with Lions, 167–168 Democracy, government form, 150 Desire, perception, 73 Discrimination, 82–83 Distinctions, issue, 80–81 Dysfunctional behavior, 142–143 E Enlightened monarch, government form, 81 Entrepreneurs, interaction, 68 Equity, raising, 18 Equity book, 5 size, problem, 26–27 Equity runs, 5

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177

definition, 159 information, 53 problems, 56 Exchange membership. See Seat Execution, quality, 79 Expectations impact, 76–77 perception, 84 Experts, impact, 35–36 External adversities, 60 F Facts, importance, 169 Fair play, 84–85 Feelings/emotions, communication, 10–11 Fees generation, ratio, 27 Fibonacci retracement, 168 Fiduciary responsibility, 7–8 impact, 97 Fills, complaints, 98–99 Financial apocalypse, question, 172 Financial intangible, telephone sale (difficulty), 14–15 Financial trauma, occurrence, 15 Foreign currencies, trading, 61 FOREX, 141–142 trading, 153 Free cash, investment, 27 Free money, perspective, 14 Free speech, right (cessation), 83–84 Front running. See Traders Full analysis, 171 Fundamental analysis, concept, 45 Futures, trading, 123 G Gain/loss, knowledge, 117 Gains improvement, 117 time frame, 126 Gaps, cause, 125 Giftedness, impact (absence), 68–69

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178 God in the Pits (Ritchie), 65 Good faith, showing, 96–97 Good till canceled stops, activity, 57 Greed factor, 18

index

J Julius Caesar, 168–169

Liquidation absence, 120 timing, 47 Livermore, Jesse, 124 Local, definition, 156 Losers, 137 attack, 104 avoidance, 106 discovery, 126–127 exit, 139 decision, 43 identification, 75 concern, 47–48 payment, 74 philosophizing, 32 thinking, 42 learning, 77 training manuals, selling, 36 viewpoint, 44 Losses brokers, impact, 90–91 consistency, 118 creation, trading (impact), 86–87 reduction, 116, 117 relationship. See Blame taking, 31 time frame, 126 women, interaction, 119 Love relationships, 142

L Learning commitment, 136–137 selection, 133 Lefevre, Edwin, 127 Legislation, problem, 80 Letter of the law, determination, 101 Life battle, 105–106 event, impact. See Trades integrity, importance, 144 monotony, 143 Life lessons, 58

M Managed Account Reports, usage, 157 Margin call, occurrence, 92 Margin requirement, 125–126 Markets adversity, 52 avoidance, 135–136 belief structure, 137–138 closing, 125 continuation, 116 direction, determination, 30 education, value, 38–39 force, 171

H Hammurabi, code, 83 Hawking, Stephen, 134 Health maintenance, 145–146 Hedge account, usage, 47 Hedge funds, impact, 124 Hedgers, examination, 120 How to Date Young Women for Men Over 35 (Steele), 134 Human character, failure (perception), 144 I Individual wills, 80 Inequality, minimization, 81–82 Information access, 35 assimilation, 147 In the bins, term (usage). See Corn In the money option, holding, 124 Inverse-ratio back spread, 124

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Index gaming, illustration, 84 inequality, 24 information, existence, 35 knowledge, requirement, 19 money making, 77 withdrawal, 64 movement, 122–123 orders, filling, 123 participants, time frame operation, 125–126 price level, 120 price movement, buy/sell intention, 31 prices, trading, 38 reality, 23 discovery, 26 expression, 75 screens, observation, 31 studying, 7–8 problem, 32 support/resistance, reason, 44–45 trading ability, 14 mirror, 23–24 qualification, 150 requirements, 58 truth, discovery, 25–26 Marriages, problems, 143 Melamed, Leo, 160–161, 169 Men, equality (meaning), 82 Middle East politics, examination, 45 Mind, training, 122 Monarchy, overthrow (reason), 81 Money making, right, 86 taking, timing, 34 theft, 41 trading, requirements, 63–64 U.S. borrowing, 83 Money under management, 5 Motivation, impact, 145 Moving averages, complexity (variation), 43

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179

N National Futures Association (NFA) audit, execution, 90 CFTC charter guidelines, 93 good faith, show, 93 guidelines, violation, 94 guilt, knowledge, 89 investigation, 6–7 problems, 90–91 regulation, problems, 91–92 rule, adherence, 27 Series III registration, absence, 56 violation, 56 Negotiation, example, 110–113 News, reading, 121–122 Newsletters, offering, 36 New York Mercantile Exchange (NYMEX) heating oil trades, 14 opening, 46 Nothing day, 121–122 O Off-the-floor trader, initiation, 19 One-lots, 123 definition, 156 trader, 156 trading, 5 Online trading, 171 Open interest (O.I.), 129 definition, 159 observation, 138 Open trade profits, 45–46 Opportunity, destruction, 79 Options hedging instruments, 123–124 speculation, 124 writing, 124 Order tickets, absence, 57 Out-of-the-money calls, purchase, 92 Out-trades, proportion, 85

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180 P Paper Trading, 39 Persian Gulf War crude oil, trading, 45 impact, 8, 18 Personal choices, impact. See Trading Personal discipline, 148–149 Personal reality, truth, 26 Philosopher’s stone, term (usage), 158 Phone lines, eavesdropping, 97 Pit traders, integrity, 85–86 Plato, 82, 83 Point of view change, 73 congruency, 82 existence/contrast, 69 understanding, 141. See also Clients validation, 118 Ponzi scam, importance, 8 Pork bellies, trading, 34 Portfolios, readjustment, 104 Positions average size, 27 justification, 118 reduction, 122 securing, 119 Predator’s Ball,The (Brucks), 156 Premium, risk exposure, 92 Price actions complaints, 98–99 opinions, sale, 36 profit, 19, 140 research, 122 Prices chart, representation, 42 justification, 120 meaning, 42–43 motion, 124–125 prediction, 46 reduction, 119 trades, liquidation, 127 Private space flight, infancy, 156 Probability theory, 84

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index Problems, solving, 66–67 Profit approach, 69–70 cutting, 120 defining, 24 guilt, 105 point, determination, 31 purveyors, problems, 40 run, allowance, 117 trading, 131 Protective stop, 121 Pro-Traders Hotline, 36 Public, protection, 87 Pyramiding, 45–46 R Ratios, examination, 117 Reality coexistence, 71–72 conflict, 74 creation, 73–74, 76 defining/perception, 22 narrowness, 23 ignoring, 34 perception, 71 point of view, 87 preparation, 52–53 truth, relationship, 24–25 Reason, defiance, 76–77 Reasonable man, impact, 8 Recommendations, creation, 36–37 Regulators contribution, 81 jobs, justification, 89–90 letter of the law, determination, 101 role, understanding, 98 rules, 87 Religious people, perspective, 144 Reminiscences of a Stock Operator (Lefevre), 127 Republic (Plato), 82 Resistance number, 129–130 Resting stops, filling, 123

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Index Retail brokerage houses, problems, 4–5 Retail commodity brokerage houses, sales manager, 155–156 Retail commodity house, problems, 4 Revolution, 84 Risk minimization, 95 Ritchie, Mark, 65 Rookie traders, impact, 136 Round-turn, definition, 157–158 Rules of play, creation, 80 S Sales leads, 3 Sales manager. See Retail commodity brokerage houses Seat, exchange membership, 156 Self, re-integration, 25 Self-created adversity, 52–53 Self-directed trader, action, 20–21 Self-judgment, avoidance, 149 Sell order, impact, 47 Series III commodities broker, nonregistration, 141–142 Series III license renewal, 95 revocation, 94 Series III registration, absence. See National Futures Association Silver, purchase (suggestion), 3 Singapore Mercantile Exchange (SIMEX), brokerage house clearing relationship (absence), 46–47 Software, usage, 173 Sons of God, naming, 80 Soybeans, call options, 5 Speculation, 115 Speculators, open interest, 46 Spiritual beliefs, development, 144 Spreads, definition, 159–160 Steele, R. Don, 134 Stochastics, usage, 129 Stop-loss order, impact, 89

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181

Stops complaints, 98–99 placement, 123 Subconscious, impact, 118 Success, production, 67–68 T Tao Te Ching, 83 Taxes, raising, 83 Teaching. See Trading experience, 137 Technical analysis, 29 business, 48 information, nonusage, 35 interpretation, purchase, 38–39 knowledge, 48–49 sale, test, 36 usage, 129, 165 validity, lesson, 37–38 value, 38–39 Technical indicator, design, 43 Technical value, offer, 138 Telemarketing, perspective, 3 Tenth Planet,The (Melamed), 169 Time compression, theory, 165 Time-stamped order tickets, usage, 95 Traders accomplishment, 152 anonymity, reason, 152 characteristics, 18–19 clarification, 134 commitment, 153 energy, focus, 170 entry execution, 43 front running, 85–86 hobbies, 149 humor, 147–148 initiation. See Off-the-floor trader; Upstairs trader learning, focus, 59–60 losses, percentage, 9, 117 observation, 138–140 ability, 151

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182 Traders (Continued ) on-the-job training, 18 personal life, observation, 142 position, 148 price viewpoint, 42–43 problem, development, 21 readership, 150 relationship, observation, 142 role, 14 routine, observation, 135 system trust/belief, 172–173 term, usage, 13–14 walking the edge, 140 Trades correctness, 41–42 execution, 52 hypothetical transactions, 39 life event, impact, 121 margin, absence, 57 pit execution, 85–86 plotting, 126 problems, 125–126 results, 141 tics, compilation, 38 Trade size errors, 57 increase, 27 restriction, 117 Trading account balance, 33 usage, 32–33 art, 163–164 business, 140 career, commitment, 2 commonality, 22–23 creation, 24 environment, belief, 103–104 gaming, contrast, 84 groups, professional approach, 19 impact. See Losses improvement process, 34–35 initiation, 130–131

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index knowledge, addition, 152–153 luck, impact, 21–22 oblivion, 30 personal choices, impact, 25 presence, development, 60 pressures, 2 price, relationship, 137 profits, self-study (impact), 25 psychology, 164 reality, concept, 22, 23 relationships, 73–74 results, creation, 24 risk, 106–107 routine, pattern (absence), 139 stop, usage, 117 study, 163–164 systems discovery, 40 sale, 39 teaching, 116, 135 inability, 137 thinking, 52 validation, 138 tracking, 56 understanding, absence, 137–138 Truth discovery. See Markets telling, 136 Turnover, impact, 119 U Uniqueness, 66 Unlearning, ability, 68–69 Unreasonable man, impact, 8 Upstairs trader, initiation, 19 V Volume definition, 159 examination, 119 Volume and open interest (V/OI), 43, 45

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Index W Wealth, building (opportunities), 169–170 Wheat, trading, 105 Winners desire, 75 existence, 59 payment, 74 pontification, 32 Winnings, allotment, 122 World War III, ramifications, 45 Worldwide economic situation, opportunities, 169–170

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183

Writing/rewriting, process, 133–135 Written documentation, providing, 95 Wrongdoing, suspicion, 96 Y Yeager, Charles, 159 Yields, flattening, 104 Z Zero-sum, meaning, 86 Zero-sum game, 87–88 performance, 103–104

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