Raschke, Linda - Trading Sardines.pdf

‘ id dng Sardines celebrates grit and resilience In nancial markets. It is a hilarious, h o n e s t a n d P^Hant account of the evolution of a professional *r over nearly four decades. From th e raucous >"9 floors of the early eighties to t h e days o f

9* t serverracksthirtyyearslater,thereadertakes * zoological trip through th e m arkets, trading ante9te. and unimaginable events, watching how 008 woman responds with unblinking honesty. ^ a Raschke shares a lifetime of m arket lessons while highlighting the tension betw e en luck, risk, and passion—and th e dangers a n d joys th a t It

LESSONS IN THE MARKETS FROM A LIFELONG TRADER

w ngi Along the way, she shows that perseverance o o overcome any challenges, b o th in life an d In trading. Her stories, docum ented w ith ch a rts an d Photos, will keep you laughing a n d p ro v e th a t humor mayjust be the key ingredient for survival. You won't hear these ty p es o f ta le s a n y w h e re Else—this is the REALworld o f trading. Thisbook will motivate every trader, no m atte r th e

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levd of proficiency and experience. Linda's success is testimonythat you don't have to b e perfect, you just have to stay in th e game.

•Readers of this book have a fantastic c h a n c e to gain Invaluable Insights a n d lessons from U nda's own trading journey—n o t Just In te rm s o f h e r

MMM•111

trading methodology, b u t m ore Interestingly th e specific behaviors and habits th a t sh e h a s b u ilt around her trading and, perhaps m o s t v alu a b le of all, her mindset and how sh e d e v e lo p e d h e r mental approach to trading th e m arkets. This Is a fascinating, enjoyable, hum orous, a n d esse n tia l read for anyone who Is Interested In know ing b o th how to achieve trading success, a n d even m o re

Daughters Press

LINDA BRADFORD RASCHKE

importantly how to sustain I t '

—Steve Ward, Performance Coach

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ADVANCE REVIEWS “The more you actually know, the less confident you become. I advise you not to read any books. Including this one.” —Charles Dow “I did not learn how to trade the markets from reading this book. It is a rip-off.” —Jesse Livermore “The author should not have gotten back up on her horse when she fell off.” —Richard Wyckoff “I did not understand the angle this book was taking. Clearly, the author is making this up.” —William Gann “The sequence of stories in this book is confusing, it just doesn’t add up. Retrace your steps directly out of the bookshop.” —Leonardo Fibonacci “How dare this author write about a woman trader! Her credentials make her unqualified to write on this subject. Besides, I made more money than she ever did.” —Hetty Green “This chick is ballsy—she’s cornering the market in books about women traders. It won’t end well.” —The Hunt Brothers “The only market women belong in is the supermarket, and this book belongs firmly in the discount bin.” —Bernard Baruch “I experienced only waves of nausea reading this book. It has no forecasting value.” —Ralph Elliott “This author needs to learn how to write. She sure can’t trade. Cut your losses immediately.” —George Douglass Taylor

Trading Sardines LESSONS IN THE MARKETS FROM A LIFELONG TRADER

Linda Bradford Raschke

g Daughters Press

“The Edge... there is no honest way to explain it because the only people who really know where it is are the ones who have gone over.” —Hunter S. Thompson

CONTENTS Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1. A Less Than Auspicious Start . . . . . . . . . . . . . . . . . . . . . . . . 5 2. It Did Not Seem Prudent . . . . . . . . . . . . . . . . . . . . . . . . . . 15 3. Sneaky Tricks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 4. Tater Tots . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 5. Land of Cheesesteaks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 6. Lessons from Philly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 7. Pipeline to God . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 8. Upstairs Trader . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 9. Oops . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 10. Insight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 11. Danishes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 12. Trying to Keep the Ball in Play . . . . . . . . . . . . . . . . . . . . . . 77 13. Market Technicians . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 14. Working the System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 15. My Trading Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 16. Jigsaw Puzzles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 17. Queen of Spades . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 18. My Name is in the Phone Book . . . . . . . . . . . . . . . . . . . . 119 19. It’s a Profit Deal! . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125 20. Synchronicity and the Morgue File . . . . . . . . . . . . . . . . . . 133 21. MRCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141 22. Moving up to the Big Leagues . . . . . . . . . . . . . . . . . . . . . . 147

23. Orange Juice and Leo . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24. TAG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25. Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26. Making Waffles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27. The Y2K Bug . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28. Mr. Bill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29. Animal Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30. Generic and Big Daddy . . . . . . . . . . . . . . . . . . . . . . . . . . . 31. Enter Enter Enter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32. Mike Epstein . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33. Burning Dog . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34. Nigel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35. War Horse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36. Hurricane Francis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37. Travels with Erika . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38. Girls’ Night Out . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39. Damon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40. Judd and the Start of Really Big Things . . . . . . . . . . . . . . . 41. Bulls and Bears Make Money, Pigs Get Slaughtered . . . . . 42. Jinx . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43. A Walk in the Park . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44. The Biggest Loss is Yet to Come . . . . . . . . . . . . . . . . . . . . 45. What Do You Do For Fun? . . . . . . . . . . . . . . . . . . . . . . . . 46. Full Circle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Epilogue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Parting Shot . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Glossary of Trading Lingo . . . . . . . . . . . . . . . . . . . . . . . . . . . .

161 167 173 179 185 193 201 209 217 221 229 235 241 245 249 253 257 261 273 281 287 291 297 303 305 307 309 313

INTRODUCTION

w rote this b o o k because nobo d y could believe all th e crazy things

I

w h ich have h a p p e n e d to m e in th e financial tra d in g industry. W h e n I was a m arket m aker o n th e Philadelphia S tock Exchange,

th e specialist in th e p it w here I stood said, “T ru th is stranger th an fiction.” It is im possible to m ake these events up. I started o u t trading in San Francisco o n th e Pacific C o ast Exchange w here there w as o n e o f th e best business libraries in th e country. T h e first b o o k I checked o u t was a b o u t catastrophe theory. T h is is a c o n cep t used to show h o w gradual changes to a system can produce su d d e n drastic results.

A sto ck m ark et crash is an obvious exam ple. I t never cau g h t o n as a legitim ate m odel o f price behavior because it h ad n o predictive value. B u t it op en ed m y eyes to th e fact th a t there is so m u c h th a t w e can't m odel. W e live in an abstract nonlinear w orld th a t is in conflict w ith o u r h u m a n biases. D espite th e increased awareness over the past tw o decades o f black sw ans, fat tails, a n d chaotic events, otherw ise kno w n as “outliers,” p e o p le te n d to b e m o re c o m fo rta b le en g a g in g in s tra ig h t lin e d th in k ing. Fuzzy variables are messy. T h e u n know n is uncom fortable. 1

TRADING SARDINES

2

Yet trading is about decision m aking u n d e r u n c e rta in ty . T h is is my journey as a trader where m y k nack fo r b e in g o n t h e w ro n g side o f oudiers and unforeseen events is well b e y o n d ra n d o m . Som e o f the challenges and obstacles along th e w ay w ere self-created. Some were plain old bad luck. But p art o f this s to ry is a b o u t h o w to pull yourself up by the bootstraps yet one m o re tim e a n d k eep a positive attitude. How to persevere, the w ork an d single-m indedness required to succeed, and above all, how to m ain tain a h e a lth y sense o f hum or to keep ones sanity. It was not my intent to write an au to b io g rap h y b u t to share some o f the more interesting and useful lessons I le a rn e d o n m y journey. Hopefully, an astute trader will get som e ideas to fu rth e r th eir own research or see different ways o f looking a t th in g s. F o r th o se w ho are newer to the financial trading industry, it m ig h t b e a n eye-opener as to how many potholes can pepper th e ro a d to success. ***

Nothing is ever as it seems. T h is was o n e o f th e first stories I heard on the trading floor: "T ra d in g S a rd in e s” An older gendeman was walking along th e w h a r f w atching the fishing boats re tu rn fro m a h a r d d a y s w o r k . H a n d s clasped behind his back, h e in h a le d th e s a lty a ir i n t o his lungs and listened to the seagulls’ caw as th e y ch ased after the fishermen. W hen he opened his eyes, h e saw a g ro u p o f m en crowded at the end o f th e w h a rf a b o u t 5 0 y a rd s away. T h ey were raising their hands in a h u rrie d c o m m o tio n . C u rio u s as to what the fuss was all a b o u t, th e m a n m o v e d closer and closer until the caws from th e crow d o v e rto o k th e caw s from the seagulls. H e slid betw een th e m e n u n til h e w as in th e middle o f the action. A n A sian m a n p e rc h e d o n to p o f a box in the middle o f the crowd. H e w as a sm a ll m a n , w ith dark leathery skin, and deep w rinkles a r o u n d h is eyes. H is sleeves

INTRODUCTION

w ere rolled u p , a n d h e w as p o in tin g a t d iffe re n t m em b ers in th e crow d. T h e o ld er g e n tle m a n lo o k ed a ro u n d a n d saw th ey w ere b id d in g o n a rare can o f sardines. " H u n d re d dollar b id , h u n d re d d o llar b id , n o w o n e ten , n o w o n e tw enty, w ill y o u give m e o n e th irty ?” T h e en erg y fro m th e c ro w d w as in fectious. O v erco m e w ith e m o tio n , th e g e n tle m a n sta rte d raising his h a n d to o , driv in g th e b id even higher. " O n e sixty b id , n o w o n e sixty-five, w ill y o u give m e o n e seventy? O n e seventy b id . G o in g o n ce, g o in g tw ice." H e a rt ra c in g a n d d e te r m in e d n o t to b e o u tb id , th e g e n tle m a n raised his h a n d a shouted, " O n e seventy-five!” T h e auctioneer tw irled aro u n d a n d said, "Sold!” T h e g e n d em an co u ld h ardly believe it. H e w as th e w inner. H e trie d to catch h is b re a th as th e o th e r m e n p a tte d h im o n th e b ack a n d dispersed b a c k to th e ir h o m es fo r supper. T h e g e n d e m a n co u ld n ’t w a it to g et b ack h o m e to sh o w th e prize to his wife. B eam ing w ith pride, h e presented th e rare can o f sardines to his wife. S he sm iled a t h im a n d b ro u g h t th e tin over to th e d in n e r table. T h e y b o th sat d o w n , p re p a rin g to feast o n th e delicacy th e g en d em an w o n . H e hooked his finger a ro u n d th e ta b a n d p u lle d th e lid o p e n . A n aw ful ste n c h h it h im in th e face. T h e can o f sardines was rotten! T h e w ife cried o u t as th e g en d em an ju m p e d to his feet a n d raced o u t o f th e house b ack d o w n to th e w harf. H e fo u n d th e auctioneer cleaning u p from th e d ay a n d explained to h im w h a t h a p p e n e d , d e m a n d in g a refu n d . T h e o ld m a n le t o u t a laugh a n d said, "You silly fool, th o se w ere tra d in g sardines, n o t e a tin g sardines.”

Don’t place valuations on the things you are trading.

3

____________________ 1_____________________

A LESS THAN AUSPICIOUS START

lost everything.

I

Tears screamed down m y face. I w ondered, “H ow the fuck do

I get m yself o u t o f this one?" T he year was 1982, and I was as wide-eyed as D orothy first gazing

upon the m arvelous Emerald City. However, in this story, D orothy ends up accosted by m unchkins trying to outbid her every move and in debt up to her eyeballs to the W izard o f O z after she had her ass handed to her by the W icked W itch o f the West. U nfortunately, no sparkly red shoes were going to save m e from this one. H av in g recently g rad u ated college arm ed w ith a degree in econom ics a n d m usic com position in one han d an d a c h u n k o f stu dent d eb t in the other, I m oved to San Francisco to m ake m y fortune as a stockbroker. I rented a tiny apartm ent w ith three girls who all thought it was a fantastic idea to paint our living room Pepto Bismol pink. W e lived one block from the corner o f H aight and Ashbury, so anything went. 5

6

TR A D IN G SA RD IN ES

S in c e I d i d n ’t h a v e a la s t n a m e lik e R ockefeller o r Vanderbilt a n d t h u s z e r o access t o a t o n o f rid ic u lo u s ly w ealthy relatives who c o u l d b e c o m e c lie n ts , I w a s re je c te d b y ev ery brokerage firm in San F ra n c is c o . D e t e r m i n e d n o t t o g iv e u p o n m y goal, b u t desperate to p a y t h e r e n t, I e n d e d u p g e ttin g a jo b as a financial analyst at Crown Z e lle rb a c h . I t h a p p e n e d t o b e acro ss th e stre e t from the Pacific Stock E x c h a n g e . I d i d n ’t k n o w w h a t th e P acific S to c k Exchange or “PCX” w a s a t t h e t i m e . I s o o n le a r n e d t h a t i t w a s o n e o f four exchanges in t h e c o u n t r y t h a t t r a d e d e q u i t y o p tio n s . L is te d e q u i t y o p t i o n s h a d b e e n a r o u n d f o r less than a decade, so t h e t r a d i n g f l o o r f u n c t i o n e d lik e t h e W ild W est. Arbitrage oppor­ t u n i t i e s w e r e a b u n d a n t . T o o v e rsim p lify , arb itrag e means exploiting a m i s m a t c h i n p r ic e o n d if f e r e n t m a rk e ts. Im agine you’re grocery s h o p p i n g a n d y o u se e t h e c o s t o f b u t t e r is $ 1 .0 0 at Walmartand $ 2 . 0 0 a t T a r g e t. Y o u c o u l d b u y t h e b u t t e r a t W alm art for $1.00, w a lk a c ro s s t h e s tr e e t a n d se ll i t a t T a rg e t a n d pocket $1.00. It was t h a t easy. O f c o u r s e , te c h n o lo g y e v e n tu a lly le d to efficient markets. T h e b u i l d i n g w h i c h h o u s e d t h e P acific S tock Exchange was a p r o d u c t o f t h e 1 9 3 0 s a n d f u s e d to g e th e r th e previously standing classical a r c h ite c tu re w ith t h e a r t d e c o sty le o f th e time. Ten imposing c o lu m n s lin e d t h e e n tr a n c e to th e ex ch an g e giving it a stately appear­ a n c e . A p a s s e rb y w o u l d h a v e n o c lu e o f th e chaos th at ensued inside. E v e ry m o r n in g , tr a d e rs w e a r in g ja c k e ts o f green, orange, purple, s o m e s t r i p e d a n d a ll d e c o r a t e d w i t h b a d g e s , stream ed down the g r a n i t e s t e p s o f t h e e x c h a n g e i n s e a rc h o f coffee, breakfast, and c ig a r e tte s . T h e y r e s e m b le d jo c k e y s lin i n g u p before the next big ra c e . T ra d e r s i n N e w Y o rk s t o p p e d f o r lu n c h . W ith San Francisco t h r e e h o u r s b e h i n d , t h i s m e a n t a p a u s e f o r bagels and a game of b a c k g a m m o n . A f r i e n d i n t r o d u c e d m e to o n e o f these colorful c h a r a c te r s , a t r a d e r n a m e d G e rry . G e r r y w a s a le a n , w ir y m a n . H e h a d a th in m ustache that hid e v e n t h i n n e r lip s w h ic h w e re p e r p e tu a lly c u rle d u p like the Cheshire

A LESS THAN AUSPICIOUS START

7

C at. Before becom ing a trader o n the floor, G erry h ad been a m ath­ em atician. H e drove a n a n tiq u e black M ercedes convertible w ith a license p late w hich read “T H X TD Y .” T D Y was th e sym bol for T cledyne, a high-flying tech stock in th e early eighties. G erry m ade handsom e profits thanks to th e volatility o f Teledyne. Eager to know m ore ab o u t precisely w hat G erry d id for a living, I invited h im to play tennis. G erry was a great tennis player. H e had an intense focus an d never to o k unnecessary risks to w in a p o in t. It was Gerry's tu rn to serve. Pivoting his w eight to his back foot, he threw th e ball in to th e sky an d w hacked it across th e n e t in m y direction. R ight h an d ready, I sm ashed th e fuzzy yellow ball back over th e net. As w e h it th e ball aro u n d , I knew I h a d th e o p p o rtu n ity to pick G erry’s b ra in a b o u t tra d in g o n th e floor. M in d racing, w h ere to begin... W h at d o you do dow n there? Too general H ow d o you buy an option? Too sim plistic. H o w d o I unlock the mysteries o f th e universe to seize financial independence? Too desperate. I inhaled deeply a n d paused. “W h a t is a m arket maker?" G e r ry lo o k e d a t m e c u rio u sly . “A m a rk e t m a k e r p ro v id es liquidity," h e said. “H e quotes b o th a b u y a n d sell price in whatever in stru m en t is bein g traded." I furrow ed m y b ro w try in g to visualize w h a t G erry h ad said. “H o w d o y o u m ake m oney d o in g that?” G erry chuckled. “You m ake m oney o n th e difference betw een th e b id a n d th e ask w hich is called th e spread." Back a n d fo rth w e w ent. I asked G erry question after question, an d he h appily supplied m e w ith answers. O u r verbal volley m irrored o u r ten nis m atch. “L ook, you seem p retty interested in this stuff," he said. “I f you w an t, th ere is a series o f tapes back a t th e clearing firm th a t coven th e basics." “O h yeah?" T h is so u n d e d prom ising.

TRADING SARDINES

8

MYeah. Spend some tim e learning th e ropes an d then I’ll bring you onto the floor.** 1

could hardly believe it. T his was m y chance to join the ranks of

the colorful jacket gang o f th e Pacific S tock Exchange. I did not (it the image o f a stereotypical floor trader. 1 gave o ff m ore o f a Barbie vibe with my blonde hair, blue eyes, an d slight Valley Girl accent. But was I going to let that get in m y way? As if! Gerry looked m e straight in th e eye as he was talking. He had stopped blinking, which was distracting. I refocused. T his was busi­ ness, not a game, and he was assessing m y com m itm ent. “I’ll supply you with the initial capital and we’ll split th e profits 50/50.” “Deal.” We shook hands and co n tin u ed to play. I created my first com pany an d in tru e clueless form , I named it “Pyramid Trading Company.” I was inspired by th e pyramid-shaped Rubik’s cube which dangled from m y keychain. In hindsight, I realize how utterly insane a nam e th a t was fo r a com pany in the financial industry. I had dedicated every w aking m o m en t o f the past two months to the tapes Gerry had m entioned. T h e instructional videos covered topics ranging from how to price options to th e intricacies of arbitrage strategies. They explained how a m arket m aker buys and sells inventory and how to use hedging strategies in stocks an d options to minimize risk. It was entirely mathematical and filled w ith dry terminologies like delta, gamma, theta, and im plied volatility. I didn’t fully understand all of it, but I took copious am ounts o f notes. Everything went out the window the first day I stepped foot o n the floor. O n that day, all I saw was a sea of faceless bodies. It was a tw isted blend o f JosephsAmazing Technicolor Dreamcoat with Pink Floyd’s The W all. M y throat tightened as I fought to steady m y breath. “H ere w e go.” T he original options flo o r c o m p rise d o f 6 0 0 bodies pressed up against each other in a sm all, w indow less room . There were 22 trading pits, each listing options o n four to eight stocks on 15 screens

A LESS THAN AUSPICIOUS START

9

dangling overhead. Each trading pit housed 15-20 regulars or “locals” and a handful o f “boat people.” These traders were called boat people because they w ould m igrate to wherever the trading action was hot. They were at a slight disadvantage because the locals were reluctant to trade w ith them . I f you form ed solid w orking partnerships with the locals, you were m ore likely to participate in the order flow. It also behooved you to w ork a few individual stocks instead o f trying to trade m ultiple stocks. I f you had sizable positions on, it could be difficult to exit those trades unscathed. I made m y way through the bodies, wicking sweat o ff every trader I passed. I arrived at the furthest side o f the exchange where a stock called U nion O il (UCL) traded. I strategically picked this pit because the volumes were excellent an d th e crowd was hospitable. Trading pit territories were fiercely protected so it could be difficult to break in as a new trader. A t the tim e, there was only one other female trader on the floor, a petite older gal n am ed Kathy. I was th e second fem ale trader, recognized by m y D u tc h Boy haircut. B oth o f us were seen as a novelty, yet I always felt welcom ed as part o f the gang. I stepped into the p it an d the traders parted like the red sea. I gulped and walked to the center o f the crowd. A ring o f arm pit sweat down to m y waist left a dark stain on m y em erald green jacket. As 1 stood there, I rem em bered going skinny dipping as a teenager. I snuck o u t o f the house in th e m iddle o f the night and joined my friends at the com m unity sw im m ing pool by the Rose Bowl. There were three diving boards to choose from: small, m edium , and tall. Unlike Goldilocks, I wasn't given the option o f picking the one in the middle. Instead, m y friends shoved m e towards the ladder o f the high dive. M ore afraid o f letting the guys see m e sweat than careening into the water below, I ascended to th e top. I walked to the edge o f the diving platform a n d peered o u t into the darkness. I couldn’t see the pool below me. “T his is it. T his is how I die. Tomorrow the headlines

TRADING SARDINES

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will read: LOCAL GIRL PLU N G ES T O H E R D E A TH , NAKED. W hat will mother think?” 1 took one last breath and jumped, not knowing what it would feel like to h it the w ater below. * * *

A broker walked over with a sell order. Everyone in the pit turned to me and yelled, “Raise your hand! Bid for one!” M y hand shot straight into the sky. Another broker rushed over w ith a buy order. Again, the crowd shouted, “Raise your hand! Offer it back out!” Like that, I completed my first transaction, flipping one option for a 1/8* profit. The pit applauded. For that one day, I was everyone’s little sister. Every day after that, I was just another trading jacket and badge number. San Francisco traders were true pioneers. In the early years of the PCX, trading volumes were light an d volatility was low. An increase in trading volumes and volatility m eant m ore opportunities to profit. In April o f 1982, the Chicago Mercantile Exchange introduced what was to become the m ost popular co n tract o n the C M E — futures based on the SP 500. T his new contract allowed u$ to speculate on the future value o f the stock m arket. T h is piqued m y interest. Following Getty's lead, I picked up the pho n e an d called an order to our floor clerk. “Rick, place a bid to buy one SP contract at 118.45* The SP futures had opened below 120. Today, they trade over 2,700. I closed my trade a whopping three ticks higher w hich yielded a gain o f $75. It was a modest win, b ut I’m p ro u d I can say I traded the SPs on the first day they were listed. I traded them every m onth after that for the next 36 years. The secret to dealing w ith the unknow n, w hether it was walking onto the floor for the first time or trading a new m arket, is to dear the mind and make your body go through the motions. The sensadon is like a tennis player relying on muscle memory. T h e moment the player starts to overthink the shot is the m om ent a mistake is made. As a newbie on the floor o f the Pacific Stock Exchange with a couple of winning months under m y belt, I was feeling confident and ready to

A LESS THAN AUSPICIOUS START

11

take on the world. O r so I pretended. I had PTSD flashbacks to when I was a kid about to walk onstage for a piano recital. Heart racing, tunnel vision, and for some reason m y right arm inexplicitly losing all feeling. “W ho can play the piano w ith a n um b right arm ?” I th o u g h t as I stepped closer to the w orn baby grand in the m iddle o f the stage. 1 knew m y m om would be filling up the front row w ith a slew o f m y siblings, b u t I couldn’t see them because everything was black in m y peripherals. “Is this worse than death?” A bit m elodram atic, b u t at I I years old, it seemed true. N ow keep in m ind, the D O W was trading below 1000 for m ost o f 1982. Stocks had a daily range o f h alf a p o in t an d volatility was nothing com pared to w hat it’s like now. G erry eyed the tape o f stock prices scrolling overhead. “R um or has it there m ight be a takeover o f C ity Service.” “O h yeah? T here is definitely an increase in trading activity.” I felt like I knew m ore than I actually did. “It’s a risky move, b ut it m ight pay offb ig to sell some straddles.” W ith o u t losing you in technical jargon a b o u t th e intricacies o f options and straddles, all you need to know is this: there is an unlim ited am ount o f risk when you sell a straddle. A nd I was about to learn this lesson the hard way. C ity Service stock was trading around $34. T h e options in C ity Service were marked up in price and the 40-ievel straddle was trading around $10. I f the stock closed at $40 on options expiration, the trader would make $10. I f the stock closed anywhere between $30 and $30, the trader could still make money. However, if the stock either closed below $30 o r above $50, you could potentially lose unlim ited am ounts. Remember w hat I’ve told you so far: th e stock was trading at $34. In 1982 there wasn’t significant price m ovem ent o n takeover deals. T h e expiration for the option was at the end o f the week and it seemed as though I couldn’t lose. In a few days, I could collect m y

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$10 and chalk it up as a brilliant move from the surprisingly gifted new trader on the floor. You ever get a li ttle voice inside your head suggesting you ought not to do something but you go ahead and do it anyway because fuck that little voice, I’m going to m ake m o n ey ... I came face to face w ith m y arch-nemesis: greed. I sold some straddles m inutes before the closing bell. ‘ How can I lo se r I thought naively. T he next morning, I raced to the exchange, eager to check my position. Trading on City Service had com e to a halt. G u lf O il bid for City Service at $63 and the stock opened 2 0 dollars higher than where it had closed. “$63 bid? $63?!? H ow could this happen??" This was completely unheard of. Such an outrageous takeover offer had never happened before. M o u th hanging agape, I was in shock. I’m sure everyone could see the panic streaked across my face. “W hat have I done?” I didn't have the capital in m y account required to hold my posi­ tions. My clearing firm told m e to go dow n to the floor and dbse Out all my open trades. H u m S ta& l, I started i vSafifcof shame from trading pit to trading pit dosing m y positions, begging for fair prices. The sharks sensed blood an d began d r d in g . I could hear murmurs and snickers from the crowd, “W e knew she w ouldn’t last.” This was one o f the m ost embarrassing m om ents o f my life, and it felt as though it would never end. I d the m idst o f all the chaos, time ground to a halt, It was as i f the universe was m aking sure I would always remember this m om ent. Gerry had been selling straddles as well, b u t his trading account was 20 times bigger than m ine. I was a m ere peon. M y total loss was $86,000, which doesn’t sound like m uch now, b u t since I didn’t have

A LESS THAN AUSPICIOUS START

13

a nickel to my name, it felt like I had lost $86,000,000. T his 23-year old had lost the cost o f an MBA from Stanford in less than 24 hours. As fate would have it, G u lf O il, the com pany w hich set o u t to acquire C ity Service, backed o u t o f the deal the next day. T h ey real­ ized their $63 a share deal was way too high an d the stock opened down 20 points. Since I was forced to close m y p osition th e day before, the damage was done. I became an indentured servant to m y clearing firm for the next sue years as I worked to pay back m y losses. Years later, I became friends w ith Larry M cM illan, a renow ned expert on options. H e started his career on an equity arbitrage desk. His firm had lost money speculating on G u lf O il’s bid as well except they got spanked when the price dropped. I got spanked w hen the price went up. As the saying goes, misery loves com pany. Larry and I became fast friends as we bonded over o u r experience with G ulf O il. I could appreciate th at he was an excellent pianist as well. I found out over tim e th at m ost every trader h ad experienced early fiascos in their careers. It sim ply was a m atter o f surviving.

_____________________ 2 _____________________

IT DID NOT SEEM PRUDENT

I

t did n o t seem prudent to declare bankruptcy at 23 years old. After m y blowout, I was in a predicam ent since I owed a substantial sum o f m oney to m y clearing firm . W ith m y tail between m y

legs, I turned to m y grandfather for a financial reprieve. H e was the only one in m y family w ho had the kind o f m oney th at could bail m e o u t o f m y debt. “Here you are, running around Wall Street, getting into trouble!” he said. M y grandfather severely disapproved o f m y profession. H e was a conservative m an and didn t believe in m aking a fortune in the stock m arket. W h o could blam e him? H e was b o m into a fam ily o f ten children. Each kid had one pair o f shoes apiece. H e survived the G reat Depression and became a prom inent attorney. M y grandfather started a law firm in Seattle, W ashington an d form ed a partnership w ith W illiam Gates, Bill Gates' father. T h is is one o f those degrees o f separation the family likes to throw around at cocktail parties because it’s fun to drop a nam e like B ill Gates. H ow bourgeois. 15

TRADING SARDINES

16

W ith m artinis in h an d , th e conversation goes som ething like this: “You know , m y m o m grew u p d o w n th e street from B ill Gates,* “You d o n 't say!” “W h y yes! H is fath er was p a rtn e rs w ith m y grandfather." “G et o u tta tow n!” M y g ra n d fa th e r w as so risk-averse that when his partner, W illiam G ates, asked i f m y g randfather wanted to Invest in h is so n Bill's co m pany, m y g ra n d fa th e r scoffed a t the idea. "A com puter! W h o has a use fo r a c o m p u te rr h e exclaimed. I f he o n ly k n ew w h a t h e h a d passed up! M y g ra n d fa th e r m a d e h is d e c is io n clear b y saying, “You got yourself into this mess an d y ou are going to have to figure out a way to get o u t o f it.” I'm sure th a t was accom panied by a line about building character. H e m ay have th ro w n in a “y o u n g lady” for good measure. F o rtu n ately fo r m e, m y clearin g firm was in a predicament as well: th ey w an ted th e ir m o n e y back. T h e y needed for me to stay in business so I c o u ld p ay o f f m y d e b t. A n o th e r firm in New York needed boots o n th e g ro u n d o n th e Pacific S tock Exchange, so my clearing firm fo u n d an o p p o r tu n ity to sta rt collecting on my debt th ro u g h in d e n tu r e d s e rv itu d e . M y n e w taskm aster was a trader n am ed M orris. H e was a w ell-educated, native N ew Yorker living at the H otel Des Artistes o n th e U p p e r W est Side. H is great-grandfather m ad e a fo rtu n e b y in v e n tin g C h ris tm a s tree light bulbs. I was a d eep ly -in -d eb t C alifo rn ia su rfer ch ick . W e m ad e an unlikely pair. M orris w as a t th e fo re fro n t o f tra d in g technology. He was one o f th e first to d evelop softw are th a t sc an n ed for mispriced options across th e c o u n try 's f o u r m a jo r ex ch a n g e s. Personal computers weren’t even a th in g yet, so th is w as c u ttin g edge technology. It took a co m puter the size o f a Volvo sto red in B attery Park Plaza to run the p ro p rietary softw are. T h is w as a b it m o re advanced than Christmas tree lig h t bulbs, b u t clearly, in n o v a tio n ra n in th e family. M orris h ad traders p o sitio n e d o n all th e m ajor exchanges ready to p o u n ce o n a n y arb itrag e o p p o r tu n ity th e com puter spit out I

IT DID NOT SEEM PRUDENT

17

became his sole trader on the floor o f the Pacific Stock Exchange. M y trading badge was K91, so M orris nick-nam ed m e “T op D og,” w hich I took as a com plim ent. We never m et in person, but we spoke on the phone several times a day. M onday m orning, 7:00 A M PST. “H ey T op D og, it looks like the W ang April 30 call options are priced too high. G e t in and sell some straddles!” 7:25 A M PST. MH ey T o p D og, th e Z apata calls are priced too high. See if you can buy som e calendar spreads to sell the expensive prem ium ." I rushed over to the Zapata pit, b u t the locals hissed at m e. T hey knew m y gam e and corrected the quotes before I could place the trade. T here were no autom ated option pricing routines, so all the prices were updated by hand. Since the exchange was n o t specialistrun, it was up to the market makers to update the options in the pits. M y days consisted o f m e running around th e floor all day having quotes changed the m inute 1 arrived. According to M orris's m odels, every o p tio n o n th e floor was priced "too high." T his was because the big bull m arket was o ff to the races, b u t the historical volatility m odels were still reflecting the doldrum s o f the preceding bear m arket. W e d idn't realize w e were working o ff "outdated models.” W e had short straddle positions in m ost stocks. T hanks to m y hum bling experience w ith C ity Service, I knew that shorting straddles is an excellent strategy if prices stay in a contained range and I learned th at doesn't always happen. Every day I came into w ork praying nothing w ould move. As I was toiling away on the W est C oast, there was a journalist nam ed R obert Foster W inans o n th e East C oast m aking his last edits to m y death w arrant. W inans was notorious for his "H eard on the Street" colum n in the Wall Street journal. Winans* w ords had power. W h a t he w rote in his colum n could influence th e m arket and know ing this, he took advantage o f his position. W inans will go dow n in history as a sneaky little shit for ru nning an insider trading

scam w ith his lo n g -term lover, D av id . T h e full sto ry should be turned in to a n o p e ra becau se i t s filled w ith s e d u c tio n , greed, and even a co n sp ira c y to c o m m it d o u b le s u ic id e b e fo re th e S E C SWAT Team co m es fly in g th ro u g h th e f r o n t d o o r. W in a n s leaked his stories in advance o f p u b lic a tio n to a retail b ro k e r w ith K id d er Peabody named P eter B ra n t. T h is allo w ed B ra n t to tr a d e o n th e in form ation a day b efo re it w as k n o w n to th e p u b lic . A n d th is le ft th e rest o f us selling o p tio n s to so m e o n e w ith in s id e r in fo rm a tio n . M o rris a n d I w atch ed tw o co m p a n ie s tra d in g o n th e Pacific Stock Exchange: T ie C o m m u n icatio n s a n d K ey P harm aceutical. Over a short p e rio d o f tim e, th e o p tio n s fo r b o th stocks w ere heavily in demand. I n fact, d e m a n d w as so stro n g , th e im p lie d volatility o n the options ju m p e d like oil h ittin g a h o t fry in g p a n . T raders flocked to the action. M orris a n d I h a d sizable sh o rt straddles o n these tw o stocks. That little sh it W in a n s p u b lish e d o n e o f h is sto ries a n d th e n boom ! O ne of the stocks g ap p ed u p big. I covered so m e s h o rt call o ptions. M o rris called, “You wuss! W h y d id y o u a d ju s t th e position??’* B oom ! T h e o th e r sto c k g a p p e d d o w n big. I p o n d ered what to do as th e cro w d w as g o in g crazy. M o rris called ag ain . “H ey! W h a t th e h ell are y o u doing? Get in th e re a n d a d ju s t th e p o sitio n !” I w as d a m n e d i f I d id a n d d a m n e d i f I d id n ’t. A m idst all the ch ao s, I ra n in to th e w o m e n ’s b a th r o o m . O f co u rse, n o one was in th e re since th e m a jo rity o f tra d e rs u s e d th e m e n ’s b ath ro o m . I closed th e stall d o o r a n d fo cused o n th e h ex a g o n al p a tte rn s in the tiles until m y visio n c lo u d e d a n d tw o w a rm streak s g razed m y cheeks. “What th e h ell a m I doing?” I g ra b b e d a w a d o f to ile t p a p e r an d dried my eyes. I lo o k e d in th e m ir r o r to m a k e s u re m y face w asn’t red and puffy. I s tra ig h te n e d m y ja c k e t, sig h e d , a n d th re w m yself back to th e w olves. A gain. I a m n o t su re h o w w e su rv iv e d th e m a n y lan d m in e s during the m id -eig h ties. T h e re w ere h o stile tak eo v ers in th e fo rm o f greenmail.

IT DID NOT SEEM PRUDENT

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salacious gossip, blackmail, an d insider trading. N o t only were we all screwed over by people like R obert Foster W inans an d Peter Brant, but we had to deal w ith th e actions o f M ichael M ilken an d Ivan Boesky. Michael M ilken was know n as the "Junk Bond King.” A ju n k bond is exactly w hat it sounds lik e-a b o n d w ith a crap credit rating. It’s the equivalent o f lending your neighbor $20, except th a t your neighbor has a gam bling problem a n d has already borrow ed $200 from you. You’re n o t so sure he’s going to pay it back, b u t i f he bets on the right pony a t the tracks, you m ight w in big. Ju n k bonds were conveniendy renamed high-yield bonds to m ake it easier for investors to digest. It is nicer to th in k o f a b o n d as giving you a high-yield rather than rem inding you th at w hat you are buying is actually junk. The finance industry has a h in n y way o f renam ing things to m ake them sound better to th e public. T ake th e term "correction,” for example. W h at a cute w ord for w hat actually represents a 10% drop in the market. “O h , the m arket’s ju st correcting itself.” Like it m ade a boo-boo. Puh-lease. Anyway, M ichael M ilken engaged in securities frau d a n d was partially responsible for th e dem ise o f D rexel B u rn h am , a m ajor brokerage firm. Ivan Boesky, know n for the start o f leveraged buyouts and mergers, scammed the system as well. H e was convicted o f insider trading and ultim ately ratted o u t M ilken. T h e rest o f us? W e were doing o u r best to survive and, i f lucky, thrive.

3

SN EAKY TRICKS

M

o st o f th e trad ers in S an F ra n cisco w ere d o in g v e ry w ell. T h e y o w n ed racehorses, dro v e n ic e cars, a n d lived in b eau tifu l houses w hich glistened like c ro w n jew els a to p th e hills o f th e B ay A rea.

G o ld w as in— bracelets a n d n ecklaces a n d b ags o f g o ld co in s stash ed in closets. E v en th e c le a rin g firm s w ere s w im m in g in th e d o u g h . T h ey re n te d ski chalets in L ak e T a h o e fo r tra d e rs to use. Free d o n u ts an d coffee g reeted us in th e m o r n in g . O n F rid ay s, th e re w as m o re pizza th a n a n y o n e c o u ld eat. T ic k e ts to th e baseball g am es, ra cetrack o u tin g s, even free h e a lth in s u ra n c e . A ll th is t o e n c o u ra g e th e tra d e rs to stay a t a p a rtic u la r c le a rin g firm . O n e d a y I a n aly zed m y c o m m is­ sions. E ven w ith a n e x c h a n g e se at, I w as p a y in g 4 0 % o f m y g ross to the clearing firm in fees. T h is w as tr u e w ith m o s t everyone. E ach tim e a tra d e r flip p e d a n o p tio n , i t w as k a -c h in g f o r t h e c le a rin g firm . B u t as trad ers p r in te d m o n e y a n d s p e n t th e w e e k e n d s a t L ak e T a h o e , it seem ed like a fa ir c o s t to p la y th e g am e. T h o u g h m o s t all th e tra d e rs w e re g o o d frie n d s o f f th e flo o r, a d ifferen t se t o f ru le s a p p lie d in th e p its . I w a tc h e d o n e tr a d e r place

21

SNEAKYTRICKS

23

b eh o o v e m e to fig u re o u t h o w to b e a n e x p e rt o n h is th r e e m a in in d ic a to rs as w ell. T h e tr a c k r e c o rd f o r th e E lves tim in g sig n a ls w as close to 9 2 % o v e r o n e te n -y e a r stre tc h . J im in y C r im in y — 9 2 % ! T h a t is sig n ifican t! W h y p a y a tte n tio n to fu n d a m e n ta ls o r n ew s w h e n i t s a liq u id ity g a m e. P e rh a p s m a k in g m o n e y c o u ld b e easy as lo n g as o n e d id n o t g e t c a u g h t o n th e w ro n g side o f tak e o v e r d eals.

4

TATERTOTS

was 13-years o ld a n d I never w a n te d to e at a n o th e r ta te r to t as

I

lo n g as I lived. M y tw o y o u n g e r b ro th e rs a n d sister w ere sta rin g d o w n a t th e ir plates. D a y fo u rte e n o f e a tin g ta te r to ts fo r d in n e r

a n d d iem was n o en d in sight. I pu sh ed th e little pieces o f fried po tato a ro u n d w ith m y fork. M y b ro th er, Steve, w as th e first o n e to p u t his fo rk u p to h is m o u th . C ru n c h . H e w in c e d a n d p u t his fo rk back d o w n . M y sister, A n n e, eyed th e ta te r to ts suspiciously a n d refused to to u c h th e m . M y y o u n g est b ro th e r, R oger, seem ed c o n te n t an d was m u n c h in g away. H ow ever, h e w as o n ly 3 years o ld a n d h a d n ’t refined his palate yet. M y m o m w alked in to th e d in in g ro o m w ith scorecards in h an d . “Okay, no w everyone take a card an d a pencil.” T h e re was a collective groan a ro u n d th e table. M y m o m sat a t th e h e a d o f th e table an d recited th e questionnaire as if we were judging a fine dining experience. “H o w d id y o u f in d Urn consistency?” Steve h a d his fingers in h is m o u th . “I th in k I c u t m y lip.”

25

TRADING SARDINES S h e i g n o r e d m y b r o t h e r a n d c o n t i n u e d . “A n d h o w was the flavor? L in d a , w h a t d i d y o u th in k ? ” I r o l l e d m y e y e s l i k e o n l y a 1 3 - y e a r - o l d g irl c a n do, huffed and s a i d , “ I t t a s te s li k e s a w d u s t .” M y m o m s h o t m e a s i d e l o o k w h i c h h i n t e d I sh o u ld tone down t h e a t t i t u d e o r e ls e . I w a s t h e o l d e s t a n d w a s ex p ected to lead by e x a m p l e . I s w i r l e d m y t a t e r t o t i n a p a t h o f grease. T here wasn’t e n o u g h k e t c h u p i n t h e w o r l d t o g e t m e t o c h o k e dow n another b ite -s iz e d p ie c e o f c a r d b o a r d . M o m h a d t h e b r i l l i a n t i d e a o f s i g n i n g u p o u r fam ily to rate food p r o d u c t s . A c o m p a n y s e n t u s f r e e s a m p le s i n exch an g e for feedbad o n t h e i r p r o d u c t s . D e s p e r a t e t o f e e d a fa m ily o f six, m y m om thought t h i s w a s a s a v v y w a y t o s a v e m o n e y . E a c h fa m ily w as assigned a d i f f e r e n t f o o d i t e m , a n d t h e o p t i o n s r a n g e d f ro m frozen chicken n u g g e t s t o f r o z e n p iz z a . U n f o r t u n a t e l y , w e g o t s tu c k w ith frozen tater t o t s . A n e n t i r e m o n t h o f t a t e r t o t s w i t h d in n e r . I t w as enough to put m e o f f t h e s t u f f f o r life . M y m o m w a s t h e c o n s u m m a t e p e n n y p in c h e r. I f coupon clipping w e r e a j o b , s h e ’d w i n e m p l o y e e o f t h e m o n t h e v e ry tim e. She would b u y a w h o l e c o w a t t h e b u t c h e r , s p l i t i t w i t h t h e neighbor, and then p a c k t h e b o d y p a r t s i n t o t h e f r e e z e r l i k e a m o r b id gam e o f Tetris. T h a t c o w w o u l d l a s t u s a g o o d s ix m o n t h s b e fo re w e could switch u p o u r d in n e r m e n u o p tio n s . I ’m s u r e m y m o m w a s c o n c e r n e d a b o u t m o n e y because my dad n e v e r h a d a s t e a d y j o b . G r o w i n g u p , i t w a s e ith e r feast or famine. I n g o o d y e a r s , w e h a d s k i p a s s e s , a n d i n b a d years, w e lived off of h a m b u r g e r h e l p e r . I f I h a d t o l a b e l m y d a d ’s p ro fe ssio n , I would say “s c h e m e r .” H e f o u n d 2 1 w a y s o f m a k i n g m o n e y in 21 yean. His d e s k w a s a lw a y s c o v e r e d w i t h c o n s t r u c t i o n e s tim a te s o r figures on h i s l a t e s t p r o j e c t . T h e m a j o r i t y o f h i s id e a s fell th ro u g h , b u t it never R im f r o m t r y i n g . H e e v e n t r i e d h is h a n d a t trading. In the

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any money at it, b u t he accumulated several books on the markets in his library. O ne day after dinner, I slipped into the library hoping not to be summoned for dishwashing duty. I brushed my hand over the books, leaving a dear trail in the dust collected on the jackets until a tide caught my eye: Treasure ofW all Street Wisdom. Curious. I pulled the book down and opened it up. It contained an expose o f the writings o f technicians and traders including Dow, Rhea, Livermore, Gann, Schabacker, and Gardey to name a few. Everything you ever wanted to know about each master’s m ethod was summarized in ten pages or less. It was as if the heavens had opened up and the great traders o f yesteryear were shoudng out, ‘You can do id G o forth and make money!” I found the Holy Grail. I snapped back to reality when I heard Steve yelling for me to come to the family room. This could only mean one thing: game night. My eyes narrowed, and I p u t my game face on. Every night after dinner, my family circled around the living room to compete in an ultra-compeduve game o f Hearts, Scrabble, Parcheesi, Sorry, or Mastermind. We were ruthless and we were out for blood. Tonight’s game was Scrabble. Scrabble is not merely a game in the Bradford clan. It is an intense sport o f wit and skill that could rival the likes o f the Hunger Games. It is our family’s form o f Darwinism; we use it to weed out the weak links. My mom, Steve, and I positioned ourselves around the sides of the board, with Anne and Roger watching from the sidelines. Roger would eventually turn ou t to be a fantastic Scrabble player, which is painful to admit. However, at this point in his life, he was more likely to eat the letter tiles than form any high scoring words. We each drew our seven tiles from the bag. M y m om assessed the tiles she pulled. She picked up a few tiles and placed them in the center o f the board. “Prowl, 13 points. Steven, are you keeping score?”

28

TRADING SARDINES

“ Y es. M o m . " “ O k a y , L in d a s tu r n ." E y e i n g t h e P t i le , I p l a c e d m y w o r d h o r i z o n t a l ly u n d e r my mom'i, “ P a + A q u a , 1 8 p o in ts .” M y m o m g r i n n e d . “ O l d V e r y g o o d , L i n d a . W h a t a clever word. A n d y o u u s e d a Q ." I g r a c io u s ly a c c e p te d t h e c o m p l i m e n t . I w a s p leased w ith my word, S t e v e s c o f f e d a n d p u f f e d o u t h i s c h e s t . “ O h yeah? Well, how a b o u t th is : Z a ! T rip le w o r d , 3 3 p a i n t s .” I s c o w l e d . “ T h a t ’s n o t a w o r d , S te v c l” “ Y es, i t is , Z V /i-d u h l” I ju m p e d u p in I n d ig n a tio n . “M o o o o o m l” “ C a l m d o w n ! P le a s e . A s s n e a k y o f a w o r d Z a is, it is, in fact, a w o r d . N o w s i t d o w n . I t 's m y t u r n . ” S te v e s t u c k h i s t o n g u e o u t a t m e w h i l e m y m o m pond ered where to p la y h e r n e x t w o rd . “ O h h o h o ! W o o d c u t , 1 5 p o i n t s . T h a n k y o u .” M y m om placed h e r l e t t e r s v e r t i c a l l y u n d e r t h e W t i l e o f h e r firs t w o rd a n d then waved a c k n o w le d g m e n t a t t h e I m a g in a ry a p p la u s e . I s t a r e d a t m y t ile s . I w a s w o r k i n g w i t h t h e fo llo w in g letteri: I, E , S , S , N , T , a n d V . M y m o m h a d sec m e u p p e rfe c tly for a triple w o r d s c o r e , a n d I k n e w I h a d t o t a k e a d v a n t a g e o f it before Steve c o u l d . V w a s m y h i g h e s t s c o r i n g l e t t e r t o t a l i n g 4 p o in ts , so I had to u s e t h a c l e t t e r f o r s u r e . I r e a r r a n g e d t h e m a c o u p l e tim e s coming up w i t h d i f f e r e n t w o r d s . V e ts . V e n t s . V e s ts . A n d t h e n I saw It. I couldn't b e lie v e m y lu c k . “ I n v e s t s . N i n e p o i n t s , t i m e s t h r e e b e c a u s e o f t h e triple word s c o r e , p l u s f o u r t e e n p o i n t s f o r W o o d c u t s , p l u s F I F T Y b o n u s points f o r u s i n g a l l s e v e n t i l e s , t o t a l i n g n i n e t y - o n e p o i n t s . H A ! TAKE T H A T , S T E V E !" T h i s is t y p i c a l l y h o w o u r g a m e n i g h t s w e n t . W e evolved Into more ctnmA nhvrrc. hur ws> crlll

InKc a t Mrh nrhfr.

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I f 1 w asn’t p lay in g b o a rd g a m e i w ith m y fam ily, th e n I w ai practicing th e piano, T h e p ian o alw ayi served a> m y escape from m ost things In life. I started at an early age an d had becom e quite accomplished. I enjoyed playing the piano because people paid atten ­ tion to me. It was difficult to get noticed in a fam ily o f four kids. M y mom's tim e was sucked u p taking care o f m y sister w h o h ad m ental disabilities an d m y youngest bro th er w ho was a caboose. I was pretty m uch on m y ow n d u rin g m y teenage years. B ut I g o t noticed w hen I played the piano. I Im pressed people an d beam ed w hen som eone paid m e a com plim ent. M y p ia n o teacher was a Juilllard graduate, and I was eager to please her. She was the ep ito m e o f perfection. She was skinny, elegant, graceful, a n d a m aster a t playing th e piano. I held her in the highest regard. M y m om created endless sources o f e n te rta in m e n t w hich d id n ’t cost very m uch money. W e hiked m any o f th e m o untain ridges along the West C oast an d spent weeks In th e w oods w ith o n ly a pack on o u r backs. She always fo u n d th e least p o p u lated trails a n d w ould push us hard. "Just tw o m ore miles,’’ follow ed by, “ju st three m ore switchbacks,” followed by, “ju st over th e next ridge,” an d then Anally we could stop an d take a break. She w anted to m ake sure w e grew up to be resilient an d self-sufficient. I graduated high school a t sixteen years o ld . T h is m e a n t I was sm art en o u g h to skip a grade b u t socially in e p t. I h ad becom e a moderately deviant teenager and didn’t p u t m uch effort Into applying for college, so I w en t to th e o n ly school I applied to, O ccid en tal College. I focused m y efforts o n learning film scoring, d eterm in ed to be the next Jo h n W illiam s, a prolific A m erican Aim com poser. I loved w riting m usic an d was q u ite good at im provisation. T h e Arst m o n th in to college, m y p arents en tered in to a b itter divorce. M y dad drained the bank account and hid all the money. W e stopped talking. Since I d id n 't have a scholarship, I needed to And a way to pay for school. I found scrappy jobs to All any available tim e

s l o t in m y d a y . I w o r k e d a t t h e L o s A n g e le s T i m e s a s a n acco u n t clerk d u r i n g t h e s u m m e r a n d o n w e e k e n d s , a n d I l a n d e d a j o b processing g r a n ts f o r a t u m o r v ir o lo g y la b a t U S C f o r a c o u p l e o f years. I worked o n t h e b r e a k f a s t l i n e i n t h e c a f e t e r i a a t 6 : 0 0 A M e v e ry weekday, t a u g h t g u ita r le sso n s t o p a y f o r m y p i a n o le s s o n s , t a u g h t m usic classes a t t h e lo c a l c h u r c h , a n d w o r k e d i n t h e s c h o o l a d m in is tra tiv e office d u r i n g l u n c h . W h e n I w a s n ’t a t w o r k , I w a s e i t h e r fa llin g asleep in e c o n o m i c s f r o m n o t g e t t i n g e n o u g h s le e p o r p r a c tic in g th e piano in s i d e a d r a b s c h o o l p r a c tic e r o o m . I p l a y e d f o r s ix h o u r s a t a time, a n d i t s e rv e d a s a r e t r e a t f r o m t h e re a l w o r l d , a p la c e 1 d id n 't have to in te ra c t w ith a n y o n e . I n t o t a l c o n t r a s t , m y f r e s h m a n r o o m m a t e h a i l e d fro m Chicago w h e r e h e r p a r e n t s d r o v e m a t c h i n g R o l l s R o y c e s a n d o w n e d four b a n k s . H e r n a m e w a s B itsy , a n d s h e d r o v e a D a t s u n 2 6 0 Z . A nd she h a d a p o n y , o b v io u s ly . M y s o p h o m o r e y e a r r o o m m a te w as from B e v e r ly H i l l s a n d d r o v e a M e r c e d e s B e n z w i t h t h e license plate E X P N S V . S h e w o r e G u c c i b y d a y a n d p r e t e n d e d t o b e in to punk r o c k a t n i g h t . I t n e v e r b o t h e r e d m e t h a t I h u s t l e d h a r d to get by. 1 e v e n fe lt s m u g w h e n I b o u g h t m y o w n c a r w i t h t h e m o n e y I made. I t w a s a n o l d , b e a t u p T o y o ta C o r o n a w i t h a t r u n k th a t wouldn’t o p e n . T h e A C d i d n 't w o r k e i t h e r , w h i c h w a s b r u t a l d u r in g summer. F o r m e , m o n e y is a m e a n s . M o n e y m a k e s a n y t h i n g possible. My j u n i o r y e a r, I h a d s a v e d u p e n o u g h t o m o v e o f f c a m p u s . I rented the t o p f l o o r o f a h o u s e t h a t h a d i t s o w n e n t r a n c e a n d p a tio . I relished m y in d e p e n d e n c e i n m y u l t i m a t e n e w p a d . D u r i n g m y s e n i o r y e a r, I g o t m y f i r s t ta s te o f m a k in g investment d e c is io n s . A n a n o n y m o u s d o n o r s e t u p a f u n d a t m y college to allow s t u d e n t s t o m a k e i n v e s t m e n t d e c i s i o n s . T w e lv e s tu d e n ts served on t h e b o a r d , a n d w e m e t o n c e a w e e k t o d is c u s s t h e m a rk e ts . I figured I w a s e m i n e n d y q u a lif ie d f r o m m y y e a r s o f w o r k i n g d ifferen t jobs, b u t t h e t r u t h w a s I k n e w l i t d e a b o u t t h e m a r k e t s . T h e fath er o f one o f t h e s t u d e n ts w a s t h e la r g e s t s p e c ia lis t o n t h e f lo o r o f th e American

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Stock Exchange. T h a t stu d e n t knew m ore th a n all o f us com bined. He took the helm in a quiet, unassum ing m anner. T he markets were w eak d u rin g this period. T h e great recession o f 1979 intensified w hen oil em bargoes to o k h o ld an d interest rates went through th e roof. G as lines a n d w h e th e r y o u h a d a n even number o r odd num ber license plate were the topics d u jo u r. It wasn’t any fun investing in stocks th a t year, b u t w e m anaged to keep o u r heads above water. M y experience w ith th e C harles R. B lyth F u n d was my m ain credential from college, a n d I h o p ed to parlay it in to som ething m ore significant in S an Francisco. M y d a d m a y have deserted m e during m y first year o f college, b u t I was d eterm in ed to show him that I did n o t need h im . I was going to figure o u t how to be successful and m ake lots o f m oney, an d it was p artly o u t o f spite. I m a y n o t h a v e f o u n d i n i t i a l su c c e ss o n t h e P a c if ic Exchange, b u t th a t w as o n ly th e firs t c h a p te r i n m y b o o k , lite ra lly .

______________ 5_______________

LAND OF CHEESESTEAKS

(lew o u t to N ew York to finally m eet M o rris face to face. I h a d

I

no idea w h at to expect because, fo r th e last 18 m o n th s, h e h a d resem bled a beige p h o n e w ith a lo n g c u rlic u e c o rd a tta c h e d .

M orris tu rn ed o u t to be h andsom ely rugged w ith a shaggy beard, deep b ro w n eyes, a n d th ic k w avy h a ir th a t h a d n o t b e e n c u t fo r awhile. K haki B erm uda shorts a n d S perry T opsiders w ere set o ff by a wide grin. H is walls w ere lined w ith pictures o f h im self sailing solo on his sixty-fbot sailboat, w in d su rfin g boards, a n d a n ergonom ic toilet seat he had designed. C redentials included n o t only architecture and engineering degrees, b u t also a n M B A from H arvard. T h e cherry on to p was th e fact h e drove a ro u n d in a red P orsche. I was hap p y I hadn’t previously m et M orris before we started w orking together. W e usually spent th e day yelling a t each o th er over th e p h o n e an d this picture w ould have ruined those calls. M orris an d I ended u p having a long friendship. H e was on e o f m y first investors w hen I becam e a C om m odity T rading Advisor.

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LAND OF CHEESESTEAKS

35

and I was ready for a change o f scenery. I went back home to pack up my life and move to Philadelphia. O n my last night, my mom and I went to a bar to listen to some music. In the corner o f the room, there was a sign which read "Palm Readings $5.” Whenever we re in a transition period in our lives, we turn anywhere to find answers. W hat does it all mean? Am I making the right choice? I don’t want to know exactly what my future holds, but I*d feel an enormous sense o f relief if someone could give me a sign it was all going to be okay.

Usually, psychics are portrayed as haggard women with long, curly gray hair staring intensely into a crystal ball. My psychic came to me in another form. His name was Lance, and he was fabulous. Lance looked like he was ready to hit an underground rave in a warehouse outside the city. He spoke with a slight lisp and took my palm into his. “Ohhh, ye th , honey! You are about to th xa it a new chapter in your life and by the look of it, you are going to be wildly th -u c-th -e-th -fu l.” I stared at him incredulously. “I’m going to be wildly what?* “7ft-uc-fA-e-fA-ful, honey! You’re going to be /£-uc-f/r-e-/£-ful!*

long inventory. I f y o u w ere lo n g call o p tio n s, yo u had no choice but to sh o rt stock against th e m to h e d g e y o u r p o sitio n . It forced you to becom e a d e p t a t tra d in g sto c k a g a in st y o u r p o sitio n to make up for th e tim e decay. O th e rw ise , y o u m ig h t as w ell h a n g up a noose. Jerry a n d N a te w e n t th ro u g h every sin g le o rd er which traded in m y p it o n Friday. T h e y w a n te d to k n o w w h y I h a d n o t participated in certain tran sa ctio n s to re d u c e m y p o s itio n size. I w a s in th e bath­ ro o m ? N o , th a t is n ’t g o in g to f l y I h a d n o t m a d e enough o f an effort to take p a rt in th e sm aller tra n sa c tio n s. Je rry looked disappointed. Even th o u g h h e w as a m a n o f few w o rd s, I always knew when he disapproved o f so m e th in g . H e w o u ld p u rse his lips and furrow his eyebrows. Jerry sighed a n d said, “I t is n ev er a problem getting into a m ark et. It is always a p ro b le m g e ttin g o u t w h e n you n e e d to.” T h is w as o n e o f th e m o s t i m p o r t a n t lessons o f m y career I en c o u n te red th is issue in m a n y m a rk e ts over th e next three decades.

Never get so big th a t you can’t g et o u t w hen you need to. L iq u id ity is o n e o f th e fu n d a m e n ta ls o f trading. Traders think the gam e is a b o u t th e c o n d itio n s to g e t in to a m ark et, b u t you can get in to m o st m arkets a t an y tim e . A lw ays m ak e sure there is an exit You d o n ’t w a n t to get s tu c k try in g to g e t th e last h ig h price, so leave the last 5 % fo r so m e o n e else. O n c e a m a rk e t tu rn s, liquidity vanishes. You need to have a m a rk e t to sell in to . A n d y o u do n ’t want to be that perso n selling B eanie B abies in 2 0 1 8 . D isap p e arin g liq u id ity h as b e e n m a n y sm a rt traders’ undoing. O n e o f th e m o st fa m o u s ex a m p le s is L o n g -T erm Capital Manage­ m en t. It was a hedge fu n d w ith tw o w ell-k n o w n N obel Prize-winning eco n o m ists o n th e b o a rd o f d ire c to rs. 1 T C M used extreme leverage to engage in a rb itra g e stra te g ie s. W h e n th e R ussian government d efau lted o n b o n d s in 1 9 9 8 , L T C M g o t squeezed. There was no m ark et to red u ce th e size o f th e ir a rb itra g e p o sitio n and ultimately, th e F E D o rganized a b a ilo u t. B u t i t w as to o late to save the investon

LESSONS FROM PKILLY

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who saw their equity drop from $ 4.7 billion at the start o f the year to $400 million. *** I made markets in a stock called Amerada Hess and the company’s CEO , Leon Hess, was always supposedly o n the verge o f dying. Rumors o f President Reagan getting shot were ram pant. Scuttlebutt created short-lived fervor and caused speculators to overpay. T h e public was overly optim istic about a stock’s prospects for the day. They wanted options at any price im m ediately at the Opening bell. T he enthusiasm was strongest a t th e o p en in g as th e p u b lic bid the price way above fair m arket value. W e called this period “T he Opening Bulge.” T he specialist in m y p it used to smile and say, “Take the cookies w hen they pass the plate around.” T h e cookies were the profits from retail customers overpaying. T he cookie plate isn’t passed aro u n d every day, so w hen the trading is good, keep going. You don’t w ant to stop because you have made a specified a m o u n t o f money: A trader also has to know w hen to ‘tee ft up, trade extra heavy, an d use a full line.” M ost o f the tim e trading opportunities are m arginal, b u t it’s im portant to m aintain some level o f activity on m odest size, keeping risk low. By engaging in a nom inal am o u n t o f trades, a trader gets inform ation from the market. H ow weak is the decline? W here does support com e in? Are the reactions shallow or deep? W h at is the volume and overall interest in the market? T h en w hen a rare w indow o f opp o rtu n ity presents itself, you are in a position to trade aggressively. W h en traders th in k a b o u t m o n ey m an ag em en t, th ey th in k about stops an d trade m anagem ent. B ut a big p art o f the equation is knowing w hen to go all in, increase the leverage an d press your trading to th e h ilt. L oad th e boat. T h ese o p p o rtu n ities have an increase in volum e and volatility. T here is no p oint in actively trading in a dull m arket. Let the m arket tip its hand and com e to life first. And then if you are fortunate to be in the groove an d know you’ve

got a tiger by flic tail, milk It for all it U w orth. Till* Is where the real money if made. A trader only nccda a few great days a month, to “Take those cookies when they com e your way,” W hen the m arket gives you an o p e n in g , capitalize on It. Everyone got along well on the floor in Philadelphia. During lunch, someone would bring a copy o f the New York 'lim es crossword puzzle and we would all give it a try. I sucked at It and was utterly mystified how the usually crass traders had such eloquent vocabularies, I mostly only heard four-letter words com e out o f their mouths. The one thing which separated the W est Coast from the East Coast was the pranks. Mischief makers taped paper tails made from order tickets onto the back o f trading jackets. Baby powder was sprinkled on an unsuspecting trader’s shoes. A clerk’s phone handle was covered with Vaseline. W hen trade volumes were low and traders were bored, anything went. T h e w o r s t t h i n g 1 e v e r w i t n e s s e d o n t h e f l o o r in v o lv e d a giant, f ly in g c o c k r o a c h . T h e E x c h a n g e w a s n ’t t h e c l e a n e s t p l a c e to work. O c c a s io n a lly y o u s a w o n e o f t h e s e c r c c p y - c r a w l e r s s c u t t l e across the g r o u n d . O n e s lo w - m o v in g m o r n i n g , a t r a d e r n a m e d M i k e c a u g h t a c o c k r o a c h in a j a r a n d d a r e d a c l e r k n a m e d H a r r y t o c a t it. H a r r y took o n e lo o k a t t h e c r i t te r a n d s a id , “ F o r e n o u g h m o n e y , I ’ll e a t it.” Lifeless tr a d e r s j u m p e d t o t h e i r f e e t. F in a lly , s o m e t h i n g i n t e r e s t i n g to throw m o n e y a t. W e p a s se d a h a t a r o u n d c o l l e c t i n g lo o s e b ills t o e n tic e H arry t o c h o k e t h e s u c k e r d o w n . T h e e x c i t e m e n t w a s b u i l t h a l f o n intrigue a n d h a l f o n d is g u s t. M i k e t o o k t h e h a t a n d b e g a n c o u n t i n g th e cash. “$ 9 0 0 ! H a r ry , w ill y o u e a t t h e c o c k r o a c h f o r $ 9 0 0 ? ” H a r r y lo o k e d at t h e m o n e y , g r a b b e d t h e ja r , a n d c h o m p e d d o w n . T h e c r o w d roared. A c o u p le tr a d e r s b e n t o v e r li k e t h e y w e r e g o i n g h e a v e . M i k e c a lle d out, “T h a t w a s t h e b e s t t h i n g I b i d o n a ll d a y ! I ’m g o i n g h o m e .”

O n the other end o f the sp ectru m , tensions ran high when markets were swinging. Fines for bad behavior did little to curb

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fighting. Quarrels broke out when there were disagreements on who should get the trade “buck you,” Mid the (lighted trader. ‘No, fuck you, mother fucker,'' (aid the offending trader. "No. Fuck you!" Then one trader graba the other guy by hi( tie and lift* him up aa If to hang him. The crowd makca the noiac a gathering of people doca when drama unfolds. A few rows back, a wizened older trader aighs. ‘Floor official, please!" Trading halts for two minutes as the official trots over to the pit. It was like a hockey game where referees tried to keep high sticking and tripping to a minimum. It seems like all traders use the F word in a million different contexts, just as someone would pepper their speech with *umm* or ‘like* Other words were considered uncouth, but fuck was part of the linguafranca. Floor traders were a funny breed. The ones who whined about their bad trades were usually the ones who made the most money. The way they spoke made It sound as if they were losing tons of money every day. It was a contest; who got screwed the most on their stock fills? Who lost the most amount of money on options decay while they were away on vacation? It was unspoken bad juju to mention winning trades. If a trader was making great money, they kept a perfect poker face. If someone did happen to mention a winning trade, It was usually because they had so few wins. Their ego wanted the world to know they managed to make at least one. To this day I remain skeptical of anyone who brags about their trades or proflu. One of the best broken on the floor was a massively tall fellow by the dubious nickname o f “Bogsy." Everyone liked Bogsy, despite his picking the traden off. One day he walked back Into the pit with his Jaw hanging down to his knees and a long face that was chalk white.

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"Guys—um um um....* Awkward pause. “I made an error. Can you let me out?" Oops. 300 options contracts had changed hands with 1$ traders in the pit." This was a large trade and an expensive mistake. When a broker makes an error, he is responsible for making up the loss to his client. The broker has all the downside risk and none of the upside profit opportunity. He only makes commissions. The traders in the pit had already hedged the trade with stock, making it complicated to unwind the error. A trader known for adding a bit of levity to the situation turned and stared him down. "BARK LIKE A DOG." The crowd turned and nodded in agreement. This was the last thing Bogsy would ever do— he was an in your face type of broker. He was squirming. The sweat was dripping down his brow. His eyes darted left and then right. There was no escape. He sucked in his breath and let out a long, slow deep “WOOOOOOOOOOF." The crowd let him out of his error even though I am sure it cost each of them to do so. It was worth hearing Bogsy give a big Woof. Humor keeps your spirits up even w hen y our account is going down. The PHLX floor proved to be yet an o th er chapter in my continuing education about outliers. An outlier is something which comes as a surprise or is outside o f our normal expectations. Statisti­ cally, it is a data point which is outside the expected range for value. Outliers are "rare events,” which Nassim Taleb has christened black swam.

Thereis a quote from the movie Guys a n d Dolls, "One of these days in your travels, a guy is going to show you a brand-new deck of cards on which the seal is not yet broken. T hen this guy is going to

offerto bet you that he can make the Jack o f Spadesjumpoutofthis brand-new deck ofcardsand squirt cider in yourear. But, son, do notaccept thisbet, becauseassure as you stand there, you’re going to end upwithanearfullofcider."

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In die eighties, there was an arbitrage strategy that proved too good to be true. ‘‘Boxes” are an arbitrage strategy that involves buying a call spread along with the corresponding bear spread, or in the case of shorting the box, selling both spreads. This was a popular strategy when interest rates were high. The trader who sold the box collected the interest on the amount that was credited to his account. At the time, boxes were considered to be as low risk on the totem pole of strategies as one could get. There were a few traders on the floor who made their entire living putting on boxes and locking in an eighth o f an edge. One day in Conoco, the 5 point boxes were sellable at 5.25. It was like free money. The next day they started trading at 5.75. Excited traders seeing a slam dunk sale hollered, “Sold!” (Thinking they would be worth 5 at expiration). They put on their maximum positions. But the buyers came back the following day and were willing to pay 7.5 for more-all day long. This was totally contrary to a mathematical understanding o f option arbitrage. I know of one trader who ended up covering all his boxes when they started trading at 9. A few days later Conoco was taken over in a two-part deal, mainly with cash, but with a backend “stub" stock that still used the puts. The boxes that would have been worth 5 points at expiration went to 12. Many traders got blown out on that because they then had to buy their positions back at the obscenely higher price. The math was dear but did not indude all the information in the system. Quant traders who rely on math continually get killed if they overleverage their expertise in math. This two-tier tender deal was a new phenomenon. An offer is made to buy a controlling interest in the stock at a higher price, and the balance of shares is purchased later at a lower price. Nobody was thinking outside the box—literally.

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outside its histo rical ra n g e , th e re is a g o o d reason w hy. T h e m arket is im p a rtin g p o w erfu l in fo rm a tio n . M o st p e o p le d o n e k n o w h o w to in te rp re t th e in fo rm a tio n th e m arket shares w ith th e m . M a rk ets are all a b o u t su p p ly a n d d em and. Stay p o sitio n ed in th e d ire c tio n o f th e su p p ly o r d e m a n d im balance, especially i f it is p u sh in g o u tsid e its historical range. T h is is th e sam e th in g as buyers p a y in g ab o v e fa ir valu e fo r th e boxes. T h e re w as a reason w h y b u t th e tra d e rs d id n o t k n o w w h a t it w as a t th e tim e. I t is m o re c o m fo rta b le to h o ld o n to w h a t m akes sense in stead o f accepting th e seem in g ly irra tio n a l p ric e a ctio n . A berratio n s a re see n as s o m e th in g th a t falls o u tsid e o f th e n o rm o r w h a t is expected. Since i t is usually a n aty p ical event, m o st people th in k th a t it s h o u ld b e ig n o re d o r d isco u n ted . T h is m ig h t b e tru e w ith certain types o f m o d elin g . F o r exam ple, th e C hernobyl explosion in 1986 led to e x tre m e gaps in th e ag ric u ltu re m arkets th a t w o uld have d is to rte d th e resu lts in m a n y sy stem atic strategies. I t w as a n outlier e v en t th a t g e n erated a o n e -tim e p rice shock. H ow ever, th e ty p es o f a b e rra tio n s th a t gen erate pro fits fo r savvy traders a re th e o n e s th a t reflect a c h an g e in a relationship. I n 1999, PE ratios w ere th o u g h t t o b e to o h ig h fo r m a n y o f th e new ly form ed tech com panies. T h e levels w ere w ell above th e historical n o rm . B ut, in th is case, it w as n o t a sig n o f o v erv alu atio n. T h e risin g tre n d o f the PE ratios w as th e m a rk e t p lacin g a value o n th e ir fu tu re business. T h e early h ig h read in g s le d t o a 1 Vi year p arabolic rise in th e ir stock prices. W h e n th e 1 0 -y e a r tre a su ry y ie ld s d ro p p e d b e lo w 3 % fo r th e first rim e in o v e r 6 0 years, m o s t tra d e rs h a d never seen th is before. I t was w idely reg ard ed as a n a b e rra tio n . R ates w ere w ell below th eir historical n o rm . G o v e rn m e n t d e b t levels w ere rising, a n d th is was seen as a sh o rtin g o p p o rtu n ity in b o n d s a n d notes. B ut instead, yields w ent low er a n d stayed lo w fo r th e n ex t 9 years, frustrating b o n d bears. T h e reasons as to w h y th is h a p p e n e d cam e o u t la te r a fte r th e fact.

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short side. I watched him trade from th e sh o rt side for the next 10 years, m aking good m oney even w hen stocks were in an extended bull run. His secret was he was very selective ab o u t his entry spots, and he did not fight the tape w hen there was m o m en tu m . W ith the OEX options, a trader still needed to tim e the entry and the exit well. Ron put on his position before the m arket turned and took them off before the swing ended. If you d id n o t do this, then once the market turned, the option market makers “leaned” in the new direction. T his m eant you had to pay an extra l/8 th , hit the bid to sell, or buy the offer to cover or go long. A trader ended up paying too m uch “vig.” “Vigorish” is the nam e for the spread plus commissions. Ron liked to short the m o rn in g rallies. H e followed the price action up until it stopped rising. T h e n he p u t his shorts out, often holding until the end o f the day. T h ere was always a protective stop resting in the m arket. “H ow do you know where to p u t in a stop?” I asked. “H ow m uch m oney d o you w ant to lose?” he answered. Never risk m ore than you w ant to lose. T h is sounds obvious, but traders have an infinite capacity to surprise. T h ere is no one magic level. Ron’s generic b u t practical response rem ains the best answer for discretionary traders. For a short period, 1 m ade m arkets in the o ptions o n the Value Line index. T h e O E X is an index o f 100 stocks, b u t the Value Line index had 1700 stocks. It is w eighted differently as well. T h e OEXs had become such a popular product o n the C hicago Board o f Options Exchange (C B O E). We were excited w hen the P H LX (Philadelphia Stock Exchange) got approval to list the Value Line O ptions. I had been trading the O E X options and th e SP futures for quite a while. I liked to tape read and m ake directional day trades in the market. I was looking forward to trading index o p tio n s o n o u r exchange. But I learned the hard way the Value Line o ptions d id n o t trade anything like the OEXs.

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O n one expiration, the call option* were trading a ro u n d 50 cent* a m inute before the d o tin g bell. It looked like they were going to go out worthies*. T h e index wa* (till a full p o in t low er th an th e strike price. A big order cam e in o n the close to buy tw o th o u san d . O u r job, o f course, wa* to fill this ord er an d I sold th em alo n g w ith the rest o f the trader*. A fter all, th e m arket wa* now d o se d . B ut o p tions continue to trade for an o th er 15 m in u tes after th e u nderlying index or stock has d o se d . I w atched in h o rro r as th e closing bell rang. The expiration setdem ent price o n th e Value L ine Index crep t up... and up... and up... F IV E F U L L P O IN T S ! T h e o p tio n s I sold a t 50 cent* were now w orth $ 4 .5 0 o n expiration! O U C H . A sale o f 100 options led to a $ 4 0,000 loss in ju st a few m in u tes, an d th ere was nothing one could d o ab o u t it. T h e y w ere exercised in to cash, so it was a double ouch. T he reason the Value L ine index behaved like this was d u e to the fact there were 1700 sm all stocks equally w eighted. All som eone had to d o to m an ip u late th e in d ex w as place a large n u m b e r o f market orders for 100 shares each in several h u n d re d o f th e stocks. If enough o f them ju m p ed an eighth o f a p o in t, it goosed th e index by a significant am ount. As a stock index settles, th e final m arking of the prices is called the expiration ‘‘runoff.’’ I t was n o t long before the regulatory agencies staggered th e tim e o f day for expiration on different products. T h a t type o f m an ip u latio n co u ld n o longer take place, bu t n o t before it had extracted a b it o f m y blood. My initial reaction in these instances ten d ed to be total disbelief. I’d stand in th e p it after it closed, m o u th o p en , jaw do w n to m y knees. W hat can one do? T h e dam age was done. I f I had looked a t m y bottom line, I m ight have been too depressed to trade the next day. So Instead I p u t m y nose to the grindstone a n d concentrated extra hard. A few days later w hen I th o u g h t I had recouped th e losses, I decided it was safe to peek to see w hat the actual dam age h ad been. O p en in g my account statem ents in a sheltered corner where nobody could see,

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I breathed a sigh o f relief know ing that the account balance was back up. T h e detour had cost m e an extra three days o f trading efforts. A ll l e s s o n s w e r e l e a r n e d t h e h a r d w a y .

O n e w eekend w hen I was 14, m y parents left for the weekend, leaving m e in charge o f m y three younger siblings. To keep us from g e ttin g in to trouble, they assigned a lo n g list o f yard work. We lived o n a corner lo t surrounded o n three sides by streets. O n the other side o f the m ain road was the Arroyo Seco canyon. It was a kid’s paradise for building tree forts and rope swings and catching pollyw ogs in the wash below. M y m om had an affinity for roses and a knack for grow ing them ; she w o u ld pick gorgeous roses for the h ou se, b u t I can’t th in k o f a plant I hated more. M y brother and I had to w eed between the bushes and thorns. W hen she and my dad turned in to m aniacs w ith the electric hedge clippers, we picked up th e branches. M ore chores included pu lling crabgrass out o f the ivy w h ic h surrounded three sides o f the house— a two-day job. Picking u p p o iso n o u s oleander branches and raking up the clippings from th e m iles o f hedges were o n the list as well. T h is weekend, I got to be the hedge clipper queen. My job was to prune the trellis and vines running up the side o f the house. It was a typical Los Angeles sunny day and I was working barefoot in my bikini. You can’t ever pass up a chance to work on your tan when you’re a teenager! I could n ot quite reach the top o f this trellis and was too lazy to go into the garage and retrieve the ladder. I blithely pulled over th e patio chair and stepped ou t on to the patio table against the side o f the house, right into the m iddle so I could reach those top vines w ith m y lethal weapon in hand. T he patio table was made o f tempered glass, all the rage in Southern California in the seventies. BAM! The gu n sh ot sou nd o f glass shattering echoed around the neighborhood. “Stceeeeeceeeeeve!” I was sitting nearly naked o n the concrete p atio, surrounded b y glass, and think ing it best n o t to move. My

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future m arket is dow n th e m ax im u m a m o u n t allow ed o n the day. T rading is halted at the lim it do w n price. T h is w as m y first trade in the Palladium market. C ould I n o t have w aited o n e m ore day to jump? D o w n lim it is a b a d sc e n a rio f o r a n y tr a d e rs w h o are long T h ere is nobody to sell to , a n d th e m ark et is usually going lower the follow ing day. Losing trades seem ed to h a p p e n to m e 9 9 % o f the tim e I m ade a trade in a new m arket o r a n ew system . All th e research in th e w orld c a n t m ake u p for real-life le a rn in g experiences. In this particular case, I scram bled to hedge in th e cash m arket, for an extra price o f course. It’s n ev er a p ro b le m g e ttin g i n t o a m a r k e t; it’s alw ays a p ro b le m g e ttin g o u t w h e n y o u n e e d to . R in s e , rep eat. W ith all th e funny goings-on in th e 1 9 8 0 ’s— rum ors and take­ overs, Pac M a n a n d G am e Boys, 1 n ev er g o t lu ck y a n d caught a w indfall from a sto c k . I t w as n o t u n til 1 2 y ears o f trad in g that th e m arket finally delivered a g ift. I w as still u p d a tin g m y SMR charts by h an d (except P alladium , w h ic h I p erm an en tly took off my trading list). It was Ju n e o f 1993 a n d soybeans h a d m y favorite 3/10 oscillator bu y divergence. N o b o d y to ld m e y o u are n o t supposed to bu y Soybeans a t th e e n d o f Ju n e . T h e seasonal tre n d is dow n due to harvest pressures. N o r d id I k n o w a n y th in g a b o u t how bad the fundam entals were. 1 d id n o t k n o w a n y b etter. I b o u g h t call option spreads, th en o u trig h t calls, a n d e v e n tu a lly th e fu tu res as welL It w as m y version o f th e Texas hedge: lo n g in th e field a n d long in the futures m arket. T h e next few days, rains b egan in e a rn e s t a n d th e Mississippi River flooded. I t was im possible to m o v e th e c ro p d o w n the river w here buyers w aited a t th e o th e r en d . T h e p r o d u c t is se n t o n barges to b e ex p o rted . W ith n o s u p p ly a v a ila b le a t th e b o tto m o f the M ississippi, beans proceeded to tra d e lim it u p fo r several days. It was pu re luck. F or th e first tim e in m y life, I w as o n th e right side of

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an oudiet. A benefactor o f ran d o m n ess in a cruel a n d u n p re d ic ta b le world. Profiting from a h o rrib le flood o n th e M ississippi River! A fter holding positions in h u n d red s o f stocks, I h a d never b een o n th e rig h t side o f a takeover o r gift. M y w indfall in th e soybeans felt like p u lling the handle o n a casino slo t m a c h in e a n d w a tc h in g coins sp ra y o u t faster than I co u ld g rab th e m . K a -th in g ! A fter th a t, 1 a d o p te d th e p h ilo s o p h y th a t tra d in g has litd e to do w ith brains because o v e rth in k in g m u c k s th in g s u p . In s te a d , it was a b o u t p o sitio n in g y o u rse lf so th a t, o n c e in a w h ile , y o u m ig h t get lucky.

At the end o f the day, It all comes down to staying in the game.

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m a d e th e last p a y m e n t to m y c le a rin g firm to cle a r m y C ity Service d e b t. I m a d e e n o u g h m o n e y to g o o u t o n m y o w n a n d trade for m yself. A te n - to n w e ig h t h a d b e e n lilte d o f f m y sh o u ld e rs and, to c e le b ra te , I d e c id e d to b u y a h o rse. I t w as m y d re a m as a little girl to o w n a p o n y . G ro w in g u p in L o s A n g eles, h o rse s o n ly existed in the g r a y area b e tw e e n fan tasy u n ic o rn s a n d s u m m e r c a m p hacks. Guys m ig h t ta k e d e lig h t in rid in g d i r t b ik es, b u t girls ca n fly o n a horse w ith w in g s. F a te w o u ld h av e i t th a t I h a d a n a c c id e n t o n th e first horse I tried w h e n th e b it b ro k e in its m o u th . T h is is lik e h a v in g th e brakes go o u t o n th e F errari y o u are te s t d r iv in g o n a tra c k . Idyllic visions of m e c a n te rin g th r o u g h w ild life p reserves w e re rep laced b y sterile blue c u r ta in s d r a w n a r o u n d a b e d in t h e e m e rg e n c y ro o m . T h e sound of ra c in g h o o f beats w as d ro w n e d o u t b y th e u n e a rth ly scream s o f a little b o y w ith severe b o d y b u r n s f ro m p la y in g w ith m atch es. M y muffled m o a n s f ro m fra c tu re d rib s a n d a p u n c tu r e d lu n g d id n o t capture the sa m e a tte n tio n , so I la id th e re w aitin g . T h i s w a s a c ra s h c o u r s e i n t r o d u c ti o n to m y lifesty le fo r my g o o d - n a tu re d n e w h u s b a n d . H e w as also a flo o r tra d e r o n th e PHLX, w h o m I h a d b u m p e d i n to w h ile still i n S a n F rancisco. “ H i.” “H e llo .” “ H o w are y o u ? ” “G o o d , a n d you?” “G o o d , g o o d .” “W e ll, g o o d to see y o u ! G o o d -b y e .” T h a t w as th e e x te n t o f o u r first co n v ersa tio n . H e m oved to Phila­ d e lp h ia f ro m th e s u n s h in e s ta te , a n o th e r u n e x p la in a b le m igration f r o m C a lifo rn ia . T h e first d a y I tr a d e d o n th e P H L X , th e guys in his p i t h e ld u p sc o re ca rd s r a tin g m e . O f c o u rse , I d id n o t fin d this out u n t i l y e a rs later. O n t h e floor, I k e p t m y n a m e B rad fo rd , a n d he was R a sc h k e . I t c o u ld h a v e b e e n c o n fu s in g o th e rw ise .

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H e d id n ’t m i n d t h a t I w e n t i n t o t h e c o u n t r y t o r i d e e v e r y f e w w eeks, b u t th is a c c i d e n t m a d e m y n o n t r a d i t i o n a l p u r s u i t s a l o t m o re real. H u sb and: “W h a t? D id y o u say m y w ife is in th e e m e rg e n c y ro o m ? I th o u g h t sh e w as o u t r id in g a h o rs e .” H u sb an d : ‘ W h ic h h o s p ita l d i d y o u sa y t h i s w as?” H u sb an d : “R eally? T h is is n o t a jo k e ? ” H u s b a n d : “A lr ig h t, w e ll I c a n ’t c o m e o u t th e r e u n t i l a f t e r t h e m arkets close.” N o a m o u n t o f m o r p h in e w as g o in g t o h e lp t h e p o o r li t t le boy. H is scream s p e rsiste d , a n d I c lo s e d m y ey es, k n o w in g I c o u l d n o t rew ind th is ta p e . I s o m e tim e s w o n d e r — i f w e c o u l d h a v e o n e d a y t o start over again, w h ic h d a y w o u ld i t b e? W o u l d w e sa v e t h a t g e t o u t o f jail free card f o r w h e n w e m a k e a te r rib le tra d e ? O r w o u ld w e k e e p it fo r w h e n th e re w as a case o f p h y sic a l h a r m ? O r , w o u l d w e u s e it for so m eo ne else? I d e c id e d I w o u ld n o t w a s te i t o n th is a c c id e n t. As m y h u s b a n d le ft t h e t r a d in g f lo o r t h a t a f te r n o o n , t h e r u m o r mill o n th e flo o r sta rte d w h irrin g . “D i d y o u h e a r, s h e fell o f f a h o rse !” I sep arated m y r ig h t s h o u ld e r t o o , s o th e r e w e n t t r a d i n g o n t h e floor fo r a w h ile . I t s e e m e d rid ic u lo u s : a n e w ly -s u c c e s s fu l f e m a le trader co u ld n o lo n g e r tr a d e o n t h e f lo o r b e c a u s e , in s te a d o f b u y in g a Porsche, sh e tr ie d t o b u y a h o rse . A n d p r o m p tl y fell o ff. I started tra d in g fro m u p sta irs, b u t n o th in g w as g o in g t o k e e p m e from g e ttin g a h o rse now . I w a s m o r e d e t e r m i n e d t h a n ever. T w o m o n th s la te r w ith a f o o t o f s n o w o n t h e g r o u n d , a th r e e year-old th o ro u g h b re d p a c k e d m e a r o u n d w i t h m y s h o u ld e r s till in a sling. “Y up, sh e se em s safe e n o u g h , I ’ll ta k e h er.” W h o h o p s u p o n an u n k n o w n y o u n g ra c e h o rse i n F e b r u a ry w i t h t h e i r a r m s till in a sling? M y d e c is io n -m a k in g p ro c e ss w a s alw ay s “le a p a n d t h e n lo o k .” T h is b it m e in t h e b u t t m o r e t h a n a fe w tim e s la te r i n life. L eaving th e tr a d in g flo o r tu r n e d o u t to b e a b le s s in g i n d isg u is e . I had to a d a p t to tr a d in g “u p sta irs’ i n m y c le a rin g firm ’s o ffices. Y ears

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la te r w h e n e le c tr o n ic t r a d i n g r e p la c e d t h e p i t s w i t h screens, floor tra d e rs w e re u n a b le to m a k e th e tr a n s i t i o n o f f t h e flo o r. T ra d in g from u p sta irs m e a n t k e e p in g m y eyes g lu e d t o t h e c o r n e r o f th e w all in the o ffic e . T h e r e h u n g a Q u o t r o n m o n i t o r p e p p e r e d w i t h 3 0 0 quotes. W e d id n o t h a v e c h a rts . I k e p t e v e r y th in g b y h a n d , u su a lly a chicken s c ra tc h lin e c h a r t o f t h e in tr a - d a y S P s a l o n g w i t h p e r io d ic readings of t h e m a r k e t in te rn a ls . T h i s p r o v e d t o b e t im e - c o n s u m in g . B u t it was a fa b u lo u s exercise in ta p e r e a d in g a n d k e e p i n g m e n t a l ro ad m ap s in o n e ’s h e a d . E v ery five m in u te s I j o t t e d d o w n t h e S P a n d b o n d prices, th e T ic k s a n d T rin (A rm s in d e x ) , t h e a d v a n c in g a n d d e c lin in g issues (b re a d th ), a n d th e Q C H A (th e u n w e ig h te d av erag e p ercen tag e gain of N Y S E sto c k s). T h is , a lo n g w i t h m y li n e c h a r t , h e lp e d m e to capture 2 - 3 in tra d a y sw in g s e a c h d ay . I b e lie v e a t r a d e r d e v e lo p s a b e tte r feel a f te r d o in g th e s e ty p e s o f ex ercise s b y h a n d . I a ls o t r a d e d t h e b o n d s a r o u n d t h e e a r l y m o r n i n g econom ic n u m b e r s . I n t h e e ig h tie s , th e y s e t u p a “f a d e t h e n e w s tra d e ” more o f t e n t h a n n o t . A s t h e m a r k e t s h a v e e v o lv e d a n d b e c o m e m ore efficien t, a tr a d e r m u s t b e c a re fu l a b o u t w h e n t o fa d e n ew s spikes and w h e n n o t to . I le a rn e d a l o t f r o m b e i n g u p s ta ir s b e c a u s e I c o u ld hear th e o r d e r fill re p o rts o v e r t h e lo u d s p e a k e r in m y c le a rin g firm ’s offlce. “ T ra d erX , y o u so ld te n b o n d s a t x y z p r ic e . " O f c o u rs e , I d id n o t know i f th e y w e re in itia tin g o r e x itin g a p o s itio n . B u t i t w a s en lig h ten in g to o b se rv e t h e tim in g o f o r d e rs e x e c u te d a t t h e e x tr e m e o f a sw ing, that m o m e n t o f p a u s e b e f o re t h e p r ic e s r e a c t i n t h e o p p o s ite direction. T h e m a r k e ts e n t e r e d “c r e e p e r m o d e ” i n t h e s u m m e r o f 1987. T h e D O W fin a lly t o o k o u t 2 4 0 0 a n d w a s g r i n d in g h ig h e r. A low v o la tility tr e n d is th e w o r s t ty p e o f e n v i r o n m e n t f o r a tra d e r. T here is alw ay s th e t e m p ta tio n t o p i c k a t o p . T h e s e ty p e s o f m oves don’t le t a n y o n e in . A t t h e sa m e tim e , t h e m a r k e t n e v e r g e ts s o overbought t h a t a re a c tio n d o w n u n f o ld s . A r is in g m a r k e t w i t h lo w v o latility is u s u a lly a sig n o f a s u p e r s tr o n g t r e n d , s o I t r y t o a v o id th e s e m arkets. N e w e r tra d e rs g e t f ru s tra te d b y t h e la c k o f o p p o r t u n i t y a n d d ip s and

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short into these types o f rallies to o soon. B u t th e last 10% o f th e move can go parabolic as people begin to chase for fear o f being left out. Eventually, th e m ark et ends in a bu y in g clim ax w h ich squeezes out any prem ature shorts. I d id n o t w a n t to be a ro u n d in th is type o f environm ent, so, I to o k tw o m o n th s o f f t o train w ith m y horse. I was having a great tim e— it was th e best year o f m y life. I got married, I bo u g h t a house a n d a horse, I was debt-free, a n d trad in g was good. I began an intern sh ip w ith a h orse trainer, T h e horse I purchased after m y accident was a race track reject, a three-year-old thoroughbred, N eith er o f us h a d an y idea w h a t w e w ere doing, In Los Angeles, I had never know n anyone w h o ow n ed a horse. I was galloping aro u n d th e cornfields, m y fingers tig h tly w o u n d around the silky black m ane. T h e evening w in d was w h ip p in g a t m y neck and all m em ories o f th e trad in g d ay w ere gone. R acing hooves and pounding hearts a n d m y horse’s heavy b reath in g w ere all th a t filled the air. D u sk was ap p ro ach in g , a n d I u rg e d m y h o rse o n , try in g to squeeze in an extra tw o laps a ro u n d th e hills. I h a te d to see th e su n slip down o n die horizon.

P roudly p o sin g w ith m y scraw ny 3 -yea r o ld racetrack reject.

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62

M y m in d was b lan k o th er th a n h o p in g m y horse d id n o t stumble a t o u r breakneck pace. G ro w in g u p in L os A ngeles, I never would have guessed th a t I w o u ld o n e day b e racing aro u n d N ew Jersey fields o n m y ow n horse.

Naivete can open you up to a whole world of opportunities because you are too ignorant to know that something is not supposed to be possible.

9

OOPS!

kept i n eye o n th e m ark et en o u g h to catch som e o f the short

I

side in S eptem ber b u t h ad n o idea o f w h at was yet to com e. T h e m arket h ad en tered nebulous territory. Each m orning from the

bam , I called in to th e exchange to stay in to u ch w ith the markets. O n e m orning, m y h u sb a n d called m e from the exchange, “You better get hom e. T h e m arket is gapping dow n b ig tim e* “H ow big?" “I don’t know w hat is going o n, b u t you m ight w ant to get hom e ASAP." It was a b o u t a 1 5 -m in u te drive back to m y house, assum ing no traffic a n d m e breaking th e speed lim it. U p to this p o in t, th e m arket h ad rallied 44 % since th e begin­ ning o f th e year. T h e re w as n o t m u ch cash left o n th e sidelines and the previous m o n th displayed th e classic deterioration typical o f an overbought m arket. A new p h en o m en o n was introduced the prior year— p o rtfo lio in su ran ce. T h is w as a d y n am ic hedging strategy 63

TRADING SARDINES

64

designed to sell futures as prices d ro p p ed . I t h e d g e d a n investors portfolio against losses (in theory, o f course). W h a t it d id instead was to create a 'positive feedback lo o p ,’’ fo rcin g prices low er and then selling more futures. It did n o t sta rt th e fire, b u t it sure poured gasoline on the flames. Tradets flock to volatility like m o th s to artificial l i g h t I rushed hom e to where I now h a d m y h o m e tra d in g se tu p : o n e Q uotron screen and a phone line. Friday h a d closed w eak. Typically, i f the margin calls that were sent had n o t been m et, an extra b it o f liquida­ tion occurred m id-m orning. T h e n o nce th is w as o u t o f th e way, a reaction back up would unfold. T h e SPs h it a p o in t w here they were at a 20-handle discount. T h ey h a d u n d o n e o n e year o f gains in a few hours. 'B u y W holesale, Sell Retail," right? B ut, th is was n o t a normal day. For weeks I was patient, w aiting for a m a rk e t selloff to provide a buying opportunity. After a few ho u rs, I started buying. Soon, my trading profits for the year were com ing un d o n e as well. I m anaged to lose five m onths o f earnings in five hours. M y eyes co u ld n o t believe the prices in the stocks. M y prim ary stock, S alom on B rothers, used to trade in the 34 - 38 range and it was now selling a t 21. Yikes! Even in a dram a-ridden world, this was u n h e a rd of. It fd t like a bom b had gone o ff flatte n in g th e landscape around it. Haunting stories about the crash o f 1929 w ith stocks throw n away at fire-sale prices flashed through m y m in d . W h e n th e SPs ended the day at a significant discount, I b o u g h t m o re o n th e do se . T he basis for the trade was still there— th e considerable d isc o u n t to the underlying index. Accounts th a t tu rn e d d e b it d u rin g th e day were forced to liquidate providing additional selling pressure o n th e dose. T his drove the futures dow n even m ore. N obody had any idea o f the m ag n itu d e o f th e situ atio n . T here was no internet, no Tweets, only a television— n o t th e m o st d m d y in its reporting. T h e floor was sw irling w ith ru m o rs.

65

OOPSI

I d id n o t w ant to look a t how m uch m oney I h ad lost o n the day. I knew i f I d id , it w ould affect m y ability to fu n ctio n th e n ex t day. Averaging a loser is the w orst strategy a trader can ad o p t, especially if one gets away w ith it. T h is tim e I got away w ith it because the futures gapped up an d traded u p 25 p oints o n Tuesday. It en d ed u p being a $500,000 sw ing dow n a n d u p in less th a n 18 ho urs. T he next day was a classic. Every conversation started the same way. - SP 2 J7 • SA P 500 (P fl, Doc «7. Darty

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“D o you w ant th e good news o r th e bad news?" A large trader, know n for selling prem ium (a b ad th in g w hen the m arket moves big), crawled in to the office w earing a hockey m ask. A hush fell over the office as they cautiously peeked a ro u n d th e corner. “O o o h h .” “A hhh." “D id you see M anny?" H e h a d lost $ 4 0 m illion. I h ear h e never traded again. First O p tio n ’s to tal loss was $ 1 1 2 m illion. T h is m e a n t th a t th e traders’ capital, m ine included, should have been long gone. Exchange m em bers' accounts are n o t protected by S IP C (unlike a n investor’s

68

TRADING SARDINES O n e day a fellow nam ed B arry cam e in to th e office w ith a

marvelous software program called “Insight.” Barry’s: p artn er had written software called W indow on Wall Street w hich provided quotes and a ticker, but Insight was on e o f the first c h artin g program s for a home PC. It also was the first filtering software. It was written in DOS using Pascal and was super clean a n d fast. T h is new frontier of home computing was exciting. I was one o f th e first buyers o f Insight and ran it on a 386 PC with data from a Signal box, w hich came over FM radio. T he average sm artphone in 2 0 1 8 is a t least 1500 times faster Right before midnight, I had to sh u t o ff th e com puter and then reboot it after m idnight. I f I d id n o t d o this, th e d ata w ould merge into the next day. T his m eant th at any tim e I traveled, a neighbor had to come to the house, shut dow n the co m p u ter an d tu rn it back on the next morning. It was one n o tch easier th a n tak in g care of a dog, but a lot more awkward. C o m p u ter m ain ten an ce continues to be a big part o f this business and m y least favorite one. Before I purchased Insight, I paid an extra $200 a m onth to get bar charts on my Quotron. They were 15-m inute orange bar charts with no indicators. W ith Insights software, I now h ad color (!) and lots of built-in indicators. I was a kid in a candy store an d proceeded to lose money for the next three m onths trying to figure o u t the squiggly lines. It was a good thing m y husband liked to do all the grocery shopping and cooking because we w ould have starved otherwise. I was friends w ith another trader fro m th e P hiladelphia floor. I told him how lousy I felt because m y strategy h a d n o t w orked out. It was a horrible quarter o f trading. A n d th e n h e said h e had lost ten times that am ount— perspective. I felt a lo t better. Som eone else had made some o f the same m istakes, b u t h ere th e y w ere, carrying away on the phone w ith m e as if n o th in g h a d h ap p en ed . So even if you are m ildly depressed an d dow n in th e d u m p s, strike up a conversation with someone. I f n o t a fellow trad er, th e n th e nextdoor neighbor or the check-out clerk a t th e su p e rm ark et. Talking

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leads to a notable physical change in y o u r biochem istry th a t shows a lowering o f stress horm ones. Insight had a quirky indicator called “Cyclic.” It was a fast, sensi­ tive version o f a stochastic A stochastic is a m om entum indicator that measures overbought and oversold as well as m om entum divergences. It is a good technical analysis tool for pattern recognition. Cyclic had been a program m ing m istake w hen the developer was trying to write a stochastic. I was trying to figure o u t how to use som ething w hich was like that oscillator on the S M R charts. I d id n o t w an t to keep updating these by hand. George Lane popularized th e first stochastic oscillator know n as % K and % D in the m id-eighties through a series o f articles an d pamphlets. T he indicator was developed between 1954 an d 1957 by a group o f seven traders at the C hicago B oard o f Trade. G eorge was one o f those traders. T hey traded during the day an d p u t in grueling hours o f research at night, calculating over 6 0 different versions by hand before settling on one. It has been one o f the m ost w idely used tools in technical analysis, belonging to a class o f indicators know n as m om entum oscillators. T h e g u id in g p rin cip le is: m o m e n tu m precedes price. In a trending environm ent, it will reach its extrem e in the direction o f the trend well before price does. I had figured o u t how to p u t the value o f the cyclic next to the price quote an d net change for each m arket, so I d id n o t have to watch charts. I was used to w atching the quote board on the trading floor. It was the easiest way to follow m any m arkets at once. For tape reading purposes I w atch th e “n et change” quotes instead o f charts. It took me two more years to figure o u t how to program the SM R C harts oscillator th at I updated by h and for a decade. I figured o u t that it was the difference between a 3 and 10-period sim ple m oving average w hich was rescaled. A 16-period m oving average o f the 3 /1 0 was overlaid o n to p o f this. T h e 3 /1 0 oscillator is quite sim ilar to a slow stochastic w ith a % K = 7 an d % D = 12. Indicators help to

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o f (he reasons Ease G e rm a n y ’s e c o n o m y suffered for th e next tw o decades. Also, th e c o u n try had becom e a p o llu ted cesspool. I do n ’t m ind saying th is because m y g reat-g ran d m o th er was from D resden. My great-great-grandfather laid th e D resden sew er lines. W h en it becam e d e a r th a t E ast a n d W est G e rm a n y w ere going to be unified again, th e n u m b e r o n e trad e in m y m in d was sh o rtin g the D eutsch M a rk . G erm a n y was g o in g to have to abso rb all this pollu ted w asteland. I w a tc h e d th e m a rk e t for a few days u n til it seemed like it had stopped going up. T h e n I initiated a short position in the currency. A fter sittin g

with th e trad e for less th an three days,

m y PfitL lectured m e. “T h e D eutsch M a rk has n o t sto p p e d g oing up!" “I th o u g h t...” M r. P & L sh o o k his head. H e knew w h at I th o u g h t, b u t it d id n 't m atter. I th o u g h t w rong. T im e to G T F O - G e t T h e Puck O u t. Exit a t th e m arket. It was like sticking m y fingers o n a h o t stove. A ny longer a n d 1 w ould have lost m y sh irt, n o t to m e n tio n a few fingers. I sh o o k m y h ead in wonder. T h e trade had seem ed so obvious to m e, w h at had I missed? T h e reb u ild in g process for G e rm a n y w as g o in g to be in D eutsch Marks. It created a noticeable Increase in d e m a n d for th e currency. A fellow trader o nce to ld m e the age-old adage: “ I f you throw a frog In a boiling p o t o f water, It w ill quickly ju m p o u t. B ut if you put it in lukew arm w ater an d slowly tu rn u p th e heat, it Will cook to death.” In this case, I was a frog ju m p in g in to a p o t o f boiling water. “Punnym entals” is a jocular expression for the fact th a t there are always two sides to a coin. 1 learned to throw the “funnym entals” o ut the window . S cenario b u ild in g docs n o t w ork for m e. I will m anage to get it w rong an d the real reasons for the m ove will em erge after the fact. I d o best w hen I stick to technicals based o n the price. M orris used to say, “A b lo n d th in k in g is like p o u rin g honey in to th e gears o f a fine Swiss w atch.”

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Scenario b u ild in g falls in to th e cam p o f preconceived notions a n d cognitive biases. T h ere are a lo t o f sm o k e a n d m irro rs th a t can m ake a sm art person th in k they are really sm a rt a n d can “figure the m ark et o ut." B ut as th e o ld saying goes, th e m a rk e t is g o in g to do w hatever it takes to drive th e m ost a m o u n t o f p eo p le crazy. Smart people (all into th a t cam p too. In th e early nineties, th e SP futures w h ic h h a d been m y bread an d b u tter w ent through a low volatility period. For three m onths the average daily range was 3 points. T h is was w h en th ey w ere trading aro u n d th e 4 5 0 handle as well. I always joke th is w as w h en I started trad in g corn. B ut, it was n o t a joke. T h e average daily d o llar range in co rn has exceeded th a t o f th e SPs m an y tim es in th e past. T his is w h y it is good for a trader to have a stable o f m arkets to trad e and to never rely to o m u ch o n o n e m ark et o r style. T h ese years ta u g h t m e a lesson in patience. T h e re was n o room fo r error since th e ranges w ere so narrow. Also, th e lack o f volatility led to fewer o p p ortunities. F or general m arket tim ing, I was still logging th e indicators my first backer, G erry had show n m e. W h en they becam e overbought or oversold, I p u t positions o n in th e O E X an d SP futures, looking for a reaction in th e opposite direction. Som etim es I was a b it too early. M ore th a n once I w oke u p in th e m iddle o f th e nig h t unable to sleep. It was another instance o f being unhappy w ith m y lack o f patience. My husband was no help. H e m ade sarcastic com m ents like, “T h e pioneers are the ones w ith th e arrows in their back,” an d “You k n o w w here you can find sym pathy— betw een sh it an d syphilis in th e dictionary.”

If you don’t have a thick skin, you are not going to last very long in this business.

11

DANES

aking a break fro m tra d in g is d ifficult. I t co n su m es y o u a n d

T

swallows y ou up like a tsu n a m i. T h e m ark ets d an c e th e ir tw o step in m y head tw enty-four-seven. T h e c o n tin u a l process a n d

routine keep you in th e gam e, w aitin g a n d w aitin g u n til th e re is on e big opening. I spoiled m an y fam ily vacations because I n eed ed to

be attached to a p h o n e lin e like a n um bilical co rd w h ile w e w ere o n an island o r a t a ski resort. I cringe w h en I th in k b a c k to tim es o f m e hiding in m y room , lap to p h o o k ed u p , w h ile everyone else was playing cards. T h ere were only tw o previous tim es in m y career w h e n I h a d n o positions on. T h is was because m anaging m an y o p tio n s, hedges, a n d spreads was com plicated. T h e re was n o t always th e b est liq u id ity in far-out contracts o r o p tio n s series. T h e first tim e I w as “flat” w ith no positions was w h en I m oved fro m C alifo rn ia to P h ilad elp h ia to trade o n th e P H L X . T h e second tim e was w h en I to o k a w eek o f f to get m arried a n d go o n a h o n ey m o o n . 73

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know, we have so m eth in g In th e U nited States called a D anish. W e like to eat them for breakfast.” I rolled m y eyes an d let th at one slide. Prom th e n o n , w h en traders cam e to o u r h o u se to h an g o u t, which was every w eekend, th ere w ould be T in a in th e pool, T in a sunbathing o n th e law n, T in a in the h o t tu b b a ttin g h er innocent blue eyes. Even th ough m y h u sb an d was a fantastic cook, he actually thou g h t the traders flocked to o u r house to cat his food. M y office was in an upstairs room . I looked o u t over th e lush green lawn an d pool an d could see T in a reading w hile Erika napped on a quilt. S om ething was ro tten in th e state o f D enm ark. I w orked so hard to get to where I was, b u t at th at m om ent I realized that it was all backward. I literally b ro u g h t som eone from th e o th e r side o f the world and was paying them to play the part th a t I w anted. W h y was it not me on the grass reading w hile m y toddler played in the grass? W hy was I upstairs b e h in d the co m p u ter screen instead o f experiencing that m om ent? I had taken over as the breadw inner for the family, and my husband took the p o sition o f c h e f w hile th e 20-ycar old D anish version o f m e to o k th e position th a t I w anted: th e m om . In a flash o f irrita tio n , I g rab b ed m y p a p e rw e ig h t clo ck a n d chucked It across th e room in m y office. Bam! It flew th ro u g h th e closet door, w h ich I d id n o t realize w as hollow u n til it proved an unsuccessful barrier for M y clock. “F U C K A D U C K I" I scream ed into th e void. As quickly as I lost m y com posure, l regained it. I inhaled for four counts a n d collapsed In to m y chair. I stared a t the rem nants o f the closet door. A b ig hole stared back a t m e, w hich becam e a daily rem inder o f m y loss o f self-control u n til we m oved o u t o f the house. In all h o n esty , I a b s o lu te ly lo v e d w o rk in g .

______________ 12______________

TRYING TO KEEP THE BALL IN PLAY Trading is like tennis: Keep the b a ll in play, don’t m ake unforced errors, be p a tie n t a n d w a itfo r y o u r opening.

A

year an d a h a lf after I gave b irth to m y daughter, I co m p eted w ith m y horse in a cross-country event. C ro ss-co u n try is th e upper-class’s equivalent o f a T ough M udder, b u t fo r horses. I

didn’t fit in to th e upper-class d escription o f th is sp o rt. I b o u g h t m y first horse as a racetrack reject before she was sent to th e glue factory. Despite our lack o f blue blood, w e m ade a great team . M y m are, Pegasus, was the bravest, m ost athletic horse o n th e field. W e soared over fences an d raced th ro u g h m u d d y puddles w ith ease. W e usually com peted early o n w eekend m ornings. Som e people w e n t to church, I w ent to the barn. I t was there I felt peace from th e chaos w h ich surrounded m e o n a regular basis. However, th is p articular S unday m orning was different. Pegasus an d I started o u r ro u n d in the com pe­ tition. W e galloped across a big field an d approached a zig-zag fence halfway a ro u n d th e course. R ig h t befo re w e le ft E a rth , Pegasus 77

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d o c to r b u d d ie s in to th e ro o m to h y p o th e siz e w h a t's w ro n g w ith y o u . T h e y ru le d o u t e v e ry th in g fro m allergies to a b ra in tu m o r u n til th e y se ttle d o n a n ew ly d ia g n o se d c o n d itio n called C h r o n ic Fatigue Im m u n e D y sfu n c tio n S y n d ro m e . “O h goody, a n e w disease ju st fo r m e!” I sarcastically th o u g h t. O n e sa rca stic th o u g h t a d ay was all th e en erg y I c o u ld m u ster. T h e rest o f th e tim e I laid in b e d like a z o m b ie vegetable. C h ro n ic F atigue Im m u n e D y sfu n ctio n S y n d ro m e, o r C F ID S for short, is a central nervous system d y sfunction. It affects th e n eurolog­ ical, endocrine, a n d im m u n e system s. N o d o u b t m y adrenaline-filled lifestyle h a d p u sh e d m e over th e edge. T h a t tim e in m y life w as a blur. I t was as if tim e ceased to exist, b u t fo r o n ly m e. E veryone else co u ld go forw ard a n d live th e ir lives. I re m e m b e r lo o k in g o u t m y bedroom w indow on e m o rn in g an d w atch in g o u r D an ish au p a ir play w ith m y daughter. T h e su n w as sh in in g , a n d th e y w ere lau g h in g a n d ru n n in g in circles. H e re I w as, tra p p e d in a b o d y to o w eak to m ove. “W h a t h a d i t b e e n like to r u n in th e grass? W o u ld I ever be ab le to experience th a t again? H o w can I g e t m y en erg y back?” I desperately w o n d ered . I w as so tire d o f b e in g tired. T h e re w as o n e th in g th a t k e p t m e h o p e fu l th ro u g h o u t th is tim e. A g irlfriend’s sister w as d iag n o sed w ith C F I D S , a n d sh e m an ag ed to recover after th ree years. S o, I believed recovery w as possible, an d I w o u ld n o t live (Ike th is forever. I h a d to figure o u t w h a t to d o . I jo in e d a su p p o rt g ro u p . N o th in g like g o in g to a g ro u p m e e tin g o f teachers, lawyers, a n d o th e r w h ite-co llar folks afflicted w ith a sim ilar illness a n d h a lf o f th e m are dressed in pajam as. I h e a r d a b o u t a w e lln e ss c e n te r w h ic h h a d f lo a t ta n k s a n d d ecid ed to give it a try. A flo a t ta n k lo o k s lik e a g ia n t egg w h ic h y ou c lim b in to a n d th e n flo a t as i f y o u w ere in th e D e a d Sea. T h e ta n k has 1 ,6 0 0 p o u n d s o f h ig h -g ra d e m a g n e s iu m su lfate (E p so m salts). T h is m in eral is ab so rb ed th ro u g h th e skin. W h e n floating, the sy m p a th e tic n e rv o u s sy stem learn s t o re c a lib ra te itself. T h is is th e

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so

part o f ou r brain which activates th e fig h t o r flig h t resp o n se. After ten weeks o f floating in a Z e n m e d ita tiv e m in d s e t, I w as h ooked. I bought a float tank an d p u t it in a n upstairs b e d ro o m . I sp e n t many hours floating in nothingness. W hen my daughter Erika tu rn e d five, th e flo at ta n k becam e a centerpiece on hom e tours she c o n d u c te d fo r n e w school friends. ‘This is our spaceship,” said Erika, pro u d ly p o in tin g to th e float tank. A collective ‘ Woooaaah!” echoed a m o n g st h e r frien d s. S he carried on the tour to the trading room , w here stacks o f c o m p u te r m onitors lined the walls. ‘A nd this is m ission c o n tro l, ju s t lik e N ASA,” she continued. The children could hardly believe th e ir eyes. T in y mouths hung agape until their atten tio n spans gave u p a n d th e y returned to their adventures on the playground in th e b ack y ard . O u r house was anything but normal. It took a few years to recover fully. I flo a te d several tim es a week and started walking again. A t m y w eakest p o in t, I c o u ld h ardly walk around the block. Eventually, I jo in e d m y d a u g h te r’s T ae Kwon Do class. A nd w hen 1 say I jo in ed th e g ro u p , I m e a n I w as d o in g karate with a bunch o f five-year-olds. Yes, th ere I w as, b arely able to do five jum ping jacks in the back o f th e stu d io . B u t I h a d n o p rid e, and 1 slowly gained my strength back. M y h u sb a n d ’s role w as crucial during this time, and he kept the household ru n n in g . Late one night, I was un ab le to sleep, so I tu r n e d o n th e TV. A larger than life figure appeared o n a n Infom ercial, talk in g about the power o f positive thinking. It w as m y first in tro d u c tio n to Tony Robbins, the motivational speaker. I picked u p th e p h o n e an d ordered his set o f cassette tapes. Somehow, I k n ew these tapes w ere going to help me beat this disease. I had a n assistant a t th e tim e, although I'm not sure why since I was hardly trading. I to ld h im w e w ere going to listen to one 30-minute tape alter the m arkets closed every day. I was so drawn into the power o f these tapes th at I to o k notes. I started a journal and wrote down the things I w an ted to d o . A t th e to p o f m y journal

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I wrote, “M ake $3,000,000 in the next four yean.” I was confident I could accomplish this goal. I knew it in the very core o f m y body. I was going to m ake b o th a full recovery and m illions o f dollan. I en d ed u p reaching b o th goals w ithin tw o yean. I know I m ay so u n d like a T ony R o bbins infom ercial myself. “You to o can m ake m illio n s o f d o lla n a n d b e a t w eird im m u n e diseases by listening to som e tapes!” B u t n o m a tte r w h o inspires you, I am a big believer in the pow er o f th e pictures w e p u t in o u r heads. I believe in positive th in k in g an d th e pow er o f visualization. My favorite images are from luxury h om e magazines, the type found at airport newsstands. I love flipping th ro u g h th e pages a n d seeing m ulti-m illion-dollar hom es in A spen, F lorida, W yom ing, an d the C aribbean. A ny gorgeous a n d tra n q u il place to live. A beautiful environm ent has always been a big m otivator for m e. I placed pow er in tokens, magic talism ans, colored light bulbs, an d am bient m usic. I had rose quartz crystals an d light therapy boxes. I surrounded m yself with anything I thought w ould help m e get better. F unny hippie stuff aside, it turned o u t the m ain ingredient was tim e. T here is n o th in g m ore m addening th an to lose one's sh o rt-term m em ory and cognitive functions. T his is w hat happened to m e during this tim e. I learned to be grateful for every healthy day. G ratitude is a key ingredient o f success. It m eans th a t even w hen bad things are happening, you always have som ething to focus on. Just like pilots have a gauge to m ake sure they can still tell w hich way is up, gratitude keeps m e from ever feeling upside dow n. W h en you are trading the m arkets, you have to have a separate source o f happiness— to know th at there are still w onderful things all around, most o f which do n ot require money. It is easier to take risks when you remove your personal happiness an d w ell-being from the equation.

Gratitude leads to optimism, and a positive attitude is 90% of the game.

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t was 1990, an d I felt isolated trading o u t o f m y hom e digs. M y

I

trading office was now In m y dow nstairs basem ent w hich lacked any natural light. Being subterranean for a m ajority o f the day did

not bother me because it was peaceful and quiet except the hum m ing from the com puters and the occasional m ouse clicks. B ut I missed having other traders around to break up the day and was in desperate need o f th e cam araderie from a com m unity. I am n o t sure how I found o u t about the M arket Technicians

Association (M TA), b ut it was a welcomed reprieve from m y solitary confinem ent. T h e M T A was a nifty o ld boys d u b located in th e World Trade Center. Institutional traders came together to share their research. It was established by three technicians from the institutional side: Ralph Acam pora, Jo h n Brooks, and Jo h n Greely. T here were about fifty o f us w ho m et o n a m onthly basis to discuss m arkets and share ideas. Each m onth, a speaker w ould present to the group. Speakers in d u d e d technicians such as D ick Arm s, Arch Craw ford, Bob Prechter, an d Sherm an M cClellan. 83

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Attending these meetings allowed m e to em erg e fro m m y cocoon and socialize w ith other m arket professionals. I to o k th e G reyhound bus which ran up the N ew Jersey T u rn p ik e to N e w York. I ’d spend a few hours discussing w hat people had been w o rk in g o n a n d th en hop on the bus back hom e. A fter o u r m eetings, a h a n d fu l o f us headed down to the same old bar an d grill lo cated in a b a s e m e n t o n a dirty New York street. Veterans sw apped en g ro ssin g m a rk e t stories over hamburgers and beer. Arch Crawford had a particularly co lo rfu l w ay o f lo o k in g a t the markets. H e had done a p resen tatio n th a t e v e n in g w h ic h seemed m ote like a tarot card reading th a n a n acad e m ic view o n technical analysis. His com m entary left you w o n d e rin g w h e re h e w as hiding his crystal ball and turban. I cornered h im a t d in n e r a n d questioned his rationale. Arch looked at m e w ith ru b y red cheeks (his normal coloring) and a twinkle in his eye. ‘ D o you know w hat hap p en ed before th e crash o f 1987?” M y w edding, I th o u g h t. Surely, th a t c o u ld n ’t h av e caused the market to crash. Arch continued. ‘ Solar flares! T h e se u n u su a l ev en ts associated w ith the sun exert an o d d effect o n h u m a n behavior. I t causes people to feel agitated and uneasy.” T h e idea o f th e su n b e in g a b le to c o n tr o l m y feelin g s left m e agitated and uneasy. It’s m ore c o m fo rta b le to t h in k o f this as pseudo-science. ‘ M any studies show an Increase in m u rd e rs a n d suicides around solar flares and m agnetic storm s." A rch sp o k e q u ite m atter-of-facdy. T his could have been w ritten o f f as th e ram b lin g s o f a n eccentric, but his track record was spot-on. W e c o n tin u e d to talk , a n d he told me he used a 5-day moving average o f th e T rln for sh o rt-te rm timing. I used a 10-day m oving average as sh o w n to m e b y G erry . It turned out that Arch was a secretive technical trad er h id in g b e h in d astrology. I look a t the 5-day m oving average to th is day, ev e n th o u g h the

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Trin is n o t as useful as it once was. Still, it seems a lo t sim pler than p o n dering th e choreographed chaos o f th e cosm os. F u n piece o f tra d e r trivia: it sh o u ld n ’t h e called th e “T rin .” Richard “D ick” A rm s created it, an d it sh o u ld be called the “A rm s” Index. B ut n o n e o f th e d ata feed services w o u ld change the nam e. G o d forbid it costs a few extra bucks for th em to acknow ledge the legitim ate in v en to r o f a p o p u lar indicator. D ick w rote a book I had checked o u t from th e San Francisco library in 1982 on equivolum e. It is w here the w id th o f the bar varies w ith th e volum e. A sh o rt fat b ar represents a n increase in v o lu m e w ith n o range. T h is loss in m o m en tu m often m arks a sw ing reversal. Back th en , I charted 2 0 stocks p lo ttin g these equivolum e bars. C h a rtin g this w ay was a lot o f work. I finally dro p p ed th e project, b u t it was educational to see how volum e interplayed w ith th e price. 1 always learn the m ost when doing things by h and. D ick sent m e th e last book he w rote called The Tackle Box: Stories about People W ho Fish before he passed in 2 0 1 8 . H e m ay have been a classic m arket technician, b u t he was also an avid fisherm an an d a consum m ate Renaissance M an. * * *

I served o n th e M T A board for a few years in th e capacity o f “librarian” w hich was right up m y alley. I could bury m yself in books 24/7. Plus, librarians d o n ’t have to look chic. T h e M TA’s library had every book on technical analysis as well as m any papers from the 20th century. T h is was a hundred tim es better than th e W all Street W isdom book I read w hen I was young. T h e re were also rare an d unusual old books w hich w ere tragically lost in 9/11 because th e W orld Trade C en ter housed th e library. A fter th e m eetin g s, I sat in th e lib ra ry fo r a few h o u rs a n d skim m ed through as m any books as I could. I had the key to the rare classics w hich w ere locked away In a special cabinet. I cam e across a well-worn, xeroxed m anuscript. T h e title was, “T h e T aylor T rading

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Technique.* This book deals w ith th e d a y to d a y p ric e m ovem ents as opposed to long-term trend analysis. George Douglass Taylor w as a g ra in tr a d e r in th e fo rties and fifties at the CBOT. H e was a trad er first a n d fo re m o st, tra d in g the daily movements both on an d o ff th e flo o r u n lik e m o s t o f th e other authors I read. H e applied his tech n iq u e n o t o n ly to th e agricultural futures but stocks as well. O ver the next two decades, I b o u g h t m a n y co p ies o f th is book and marked them up w ith a yellow highlighter. T aylor’s pearly words o f wisdom became m y doctrine, a n d h e in flu e n ced m y tra d in g style. It is a great tape reading book w ith practical g u id elin es o n all aspects o f trading. Some o f m y favorite quotes: * T he trader w ho know s ho w to a c t w h e n th e ex p ected happens is in a better position to act w h e n th e u n e x p e c te d happens. • A trader is ready to trade o r n o t to tra d e — a t th e o p en in g or shortly thereafter— u n en cu m b ered b y c o m m e n ts o r opinions. • A trader does n o t w orry because h e d id n o t g e t th e extrem e of cither play. H e needs to feel h e is rig h t w h e n h e m ak es his play and when it turns o u t ju s t as h e an tic ip a te s i t w ill, h e has an intangible that is far greater th a n th e m a terial gain. * Never make a trade unless i t favors y o u r play. • Forget about a trade after y o u h a v e m a d e i t . T a k e w h a t the market offers you a t th e tim e a n d d o n ’t h o ld o n fo r w h a t you think the m arket should d o . T rad e o n w h a t th e m a rk e t does, n o t w hat it m ight do. * Never try an d anticipate th e m a rk e t f a rth e r a h e a d th a n your signals. C inch your profits as th e m a r k e t gives th e m to you. Your play is to take whatever th e m a rk e t o ffers y o u a n d a t the exact tim e o f this offering. You can believe in th e ta p e a t all tim e s. L e a rn t o re a d it and believe in nothing else for sh o rt-te rm tra d in g . T ay lo r’s w o rd s gave

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m e great peace o f m in d th a t all I h a d to d o was to d o th e best jo b I could a t th e tim e a n d n o t be perfect. • *• In 1991, th e M T A h eld th eir an n u al conference in S anta Barbara a t a beautiful reso rt n e a r th e o cean . In th e g o o d o ld days, in s titu ­ tions paid for th eir technical analysts’ trips. T h e locations w ere q u ite p lu sh . A t th e S a n ta B arbara co n feren ce, I h e a rd a le ctu re w h ic h m ad e an im pression o n m e fo r life. H a n k P ru d e n w as th e speaker. T h e title w as, ‘D o in g y o u r o w n analysis in a closed ro o m w ith n o w indow s a n d n o do o rs.’ In o th e r w o rd s, y o u wall alw ays d o y o u r best w o rk w h en y o u are free fro m d istractio n s a n d th e in flu e n ce o f others. H a n k was a sh o rt, enthusiastic w h irlw in d o f energy. M y favorite saying o f his was, “You are y o u r ow n b est client.’’ I n o th e r w ords, d o y o u r w ork fo r yourself. I m ade i t a p o in t to keep T V s o u t o f m y trading office after I heard his lecture a n d never subscribed to others’ new sletters o r analysis. H a n k a n d I b ecam e g re a t frie n d s fo r th e next 2 6 years u n til his passing in 2 0 1 7 . H e w as th e w orld’s leading au th o rity o n W yckoff a n d ta u g h t technical analysis a t G o ld e n G ate University. I flew o u t to San Francisco periodically to speak a t th e conferences h e hosted. M y m o th e r lived in th e Bay area, a n d it was an excellent w ay fo r m e to visit her, too. M y M o m d id n o t approve o f m y profession in th e beg in n in g . N o b o d y likes to see th eir k id in m isery. In th e early eighties, I griped a b o u t a p articularly depressing tra d in g p erio d . S he to ld m e I co u ld always go in to H u m a n Resources. W h ere d id th is com e from ? T h is is a b o u t as far aw ay fro m m y skill set as o n e c o u ld g e e S he w as a h ig h school co unselor a n d w as g o o d a t w o rk in g w ith people. I w as n o t. M y d a d w as n o lo n g er in m y life after I sta rted college w h ich w as a real sham e because w e h a d sim ilar w ays o f chinking. A t an o th e r M T A an n u a l conference, I m e t A lan Shaw after h e gave his keynote speech. H e w as o n e o f th e original fo u n d in g fathers

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b ack in th ose days! In th e n e w era o f q u a o itia tly e analyShs, th ere is so m e th in g to th e o ld school technicals o f th e past. B oth a m ark et technician a n d a trader m u st have a set o f rules and assum ptions in w hich th ey believe. E verything com es d o w n to supply an d d e m a n d a n d th is is w h a t creates th e c h a rt p a tte rn s. A ccording to A lan Shaw, technical analysis is based o n th re e m a in assum ptions: 1) T h e m a rk e t is a d isc o u n tin g m ech an ism . 2) T h e m a rk e t to p s o u t w h e n th in g s c o u ld n o t

look a n y b e tte r

a n d m akes a b o tto m w h e n th in g s c o u ld n o t lo o k a n y w orse. 3) “In p rice th e re is know ledge.” H e sa id th is last p h rase over a n d over. A n d th en he gave o n e last story a b o u t a sen ato r w h o was speaking o n tclevision a b o u t th e E n ro n situ atio n . In th e se n a to rs h a n d , h e w as ho ld in g o n e o f th e analysts’ reports o n E n ro n . A t th e to p o f th e page, it said: S T R O N G BUY. B u t there was also a c h a rt o n th e fro n t o f th e rep o rt w h ich show ed th e sto c k h a d b e e n in a d o w n tre n d fo r over a year. T h is was before all th e ugly new s sta rte d co m in g o u t. P rice was scream ing th a t th ere w as so m e th in g w ro n g w ith th is stock. N o t to o sh o rd y after th a t, a ru lin g passed th a t all analysts m u s t n o w in clu d e a c h a rt o n th e fro n t o f th e ir rep o rts sh o w in g th e d a te a n d p rice o f th eir reco m m en d atio n s. C h a lk o n e u p fo r th e technicians. A lan’s p a rtin g w o rd s w ere, “W e are alw ays stu d e n ts first, a n d analysts o r trad ers second.” I crossed p a th s several tim es w ith N e d D avis since w e b o th o ften spoke a t th e sam e events. T h e last tim e w as a t a tech n ical conference h eld in M ia m i a n d h e w as th e k ey n o te speaker. N e d h a d over 1,100 in stitu tio n a l clien ts a n d o n e o f th e m o st respected research sh o p s in th e in d ustry. T h e very first th in g h e said w as, “D O N O T A S K M E F O R M Y F O R E C A S T . I D O N O T B E L IE V E Y O U C A N F O R E C A S T T H E M A R K E T .” H e th e n d isp lay e d tw o ch a rts. O n e w as a su rv ey fo r th e p ast 2 0 years o n th e d ire c tio n o f in te re st rates. I t w as ta k e n fro m th e

TRADING SARDINES country*! top 50 o p e n s in the field. Each year, ab o u t 1/3 o f them get the direction ti^ it. H e showed several examples w here respected technicians and analysts wete unable to get better th a n 50% correct on their calls. Nobody knows w hat the m arket can o r will d o each year Nobody has been able to predict the direction o f interest rates either consistently. Ned likes objective indicators. Charts are not, strictly speaking, objective since they can be subject to interpretation. According to Ned: 1) Successful traders have an objective indicator they use. 2) Successful traders follow a disciplined methodology. T hey do not allow large losses. T his is the n u m ber o n e rule. 3) They are disciplined in following th eir m ethod, yet they are flexible. “For example, a trader can be bearish a n d hammer the downside.” N ed pounded the table for extra emphasis. ‘ But be must also be able to tu rn o n a dim e an d switch to being bullish i f the m arket changes.” Ned likes looking at Sentiment indicators and feels they have the most value ar extremes. b is always im portant to ask, ‘ W here am I going to go wrong? H ow am I going to cover if I am wrong?” h i dosing, Ned p u t u p a long-term c h a rt w h ich show ed the sentiment extremes. I f one had bought a t th e extrem e in o p tim ism a n d sold die extreme in pessimism, every trade w ould have been w rong. A nd if you had done the opposite, you w ould have m ade 6 0 0 0 SP points. This was in 2006 when the SPs were trading a ro u n d 1500. Unfortunately, this can’t l« il to a trading system because you do not know the extremes until at LEAST one day after the feet. You can only see them in hindsight. But, you do have to be flexible w hen there is too much optimism o r pessimism. N ed trades fo r h im self using hourly d u n s . This is interesting because th e nature o f his business is to provide long-term charts to institutional clients.

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“I am in th e business o f m a k in g m istakes. I t is m y jo b , th o u g h , to m ak e sm all m istakes, n o t b ig m istakes.” I w o u ld lik e to p ractice n o t m a k in g m istakes a t all, m yself. A t a n M T A m e e tin g u p in N e w Y ork, I m e t a n o th e r m e m b e r n am ed R o b e rt w h o e n d e d u p b e c o m in g a lifelo n g b e s t frie n d . H e h a d so ld h is m a c h in e s h o p a n d retired . H is c o u sin w as th e largest trad er in th e g old p it a t th e tim e. R o b e rt w as well-versed in th e natu re o f trad in g . H e w as o n th e u ltim a te q u e s t to explore every m e th o d o u t th e re u n til h e fo u n d o n e th a t su ite d h is style. W e b ecam e great b u d d ies even th o u g h h e lived tw o h o u rs n o r th o f m e . I co n sid ered h im to b e m y su rro g ate fa th e r w h e n I n e e d e d to ask fo r advice o n d o w n th e road. R o b e rt sp e n t tw o years ev alu atin g diffe re n t tra d in g styles, fro m Steve M o o re’s S easonal p ro g ra m to tra d in g sp read s to m ech an ical systems. H e trad ed o n e te ch n iq u e o r strategy for th ree m o n th s. T h e n , h e assessed h o w w ell i t w o rk e d w ith h is te m p e ra m e n t a n d c o m fo rt level. H e u ltim ately se ttled o n d a y tra d in g th e SPs, lo o k in g fo r th ree pushes u p o r d o w n to fade o n 5 -m in u te ch arts. H e w as th o u g h tfu l in h is ap p roach to evaluating m ethodologies. I enjo y ed h is friendship im m ensely. H e w as o n e o f th e few p eo p le I m e t w ith a n e n g in eers m in d w h o d id n o t tr y to fit d ie m a rk e t in to a n algebraic eq u a tio n o r black box. O n R o b e rt s tra d in g journey, h e sh a red w ith m e every resource h e investigated o r pu rch ased . H e in tro d u c e d m e to m a n y system s. O n e w as a volatility break o u t system p u b lish ed by B ob B uran. I t was a n ep ip h a n y m o m e n t. T h e goal o f a v o latility b re a k o u t system is to cap tu re range ex p an sio n a n d stay w ith th e tra d e w h e n i t w orks. I t gave m e th e to o ls to develop a fram ew o rk to b e o n th e rig h t side o f tre n d days. T h is h a d b een m y nem esis in th e tra d in g p its. I t m ig h t s o u n d like a n obvious sta te m e n t, b u t w h e n y o u are o n th e trad in g floor in th e e q u ity o p tio n s, it is y o u r jo b to accom m odate th e o rd e r flow. B uy o rd ers co m e in w h e n th e m ark et is go in g u p ,

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TRADING SARDINES I was never a systems trader th o u g h I tr y to stay system atic.

It is hard for me to give up th e control I g et w ith ta p e reading. I don’t w ant to give up control, period. I w o u ld like to believe my experience gives me an edge. B ut som e people w ill o n ly be able to make money following a system. T h e problem is, i t s h a rd to muster the necessary confidence in a system unless you develop it yourself. Systems, even ones that m ake 100 trades a m o n th , can go through brutal draw-down periods. A nd i f th e system isn’t y o u r baby, you’ll abandon it with a loss instead o f adhering to it long enough to recover a drawdown. I f it even docs. It’s n o t only a b o u t th e draw dow ns, but about how long it takes to m ake the draw dow n back. T h is is a crucial piece o f information system developers often fail to m e n tio n . I f it were so easy to develop and trade a profitable system , everyone would be driving EXPNSV Mercedes convertibles a n d m a k in g millions. Still, it's fun to try ... Buran told me a great story ab o u t a g ro u p o f G erm an traders he had sold his system to in the m id-nineties. T h re e o f th em w o e trading 10 million dollars. D espite th e fact it w as a system , it took a tremendous am ount o f record keeping a n d o rd e r p lacing back in those days. Nothing was autom ated. I f you know a b it ab o u t systems, the distribution o f big wins is quite skewed. T h is m eans a significant percentage o f the profits are m ade o n ju st a few days. T h is holds true even when the trade frequency is high a n d th e average h o ld in g time is less than 24 hours. O n this particular day, these G erm an traders took the day o ff to watch the W orld C u p finals. A s M u rp h y ’s Law would have it, it happened to be o n e o f th e fo u r days w h ich made 85% o f the profits for that year. O ’Shaughnessy’s law says M urphy was an optim ist. I f you miss a trade, th a t o n e w ill b e th e b ig one.

You can’t predict in advance where the big wins are going to come from-)list keep taking every system signal.

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hile reading books a t the M T A s library, I stum bled across a w ork by G eorge Angell. H e h ad attem pted to m ake a m ore detailed system o u t o f T aylors w ork. T h is system d id n o t

test out, b u t his m ention o f a 2-period rate o f change intrigued m e. I plotted this on m y Insight Software and started logging data by hand. M y best w ork cam e from testing by h an d . I could see w here a signal worked an d why. I could also look a t th e conditions where signals failed. W h en testing w ith a com puter, to o m u ch data gets lum ped together. T h is often cancels things o u t an d it is easy to m iss the subde nuances that lead to learning. I’ve learned m ote by notating signals o n charts, studying w h en signals d o n ’t w o rk , lo oking for secondary o r confirm ing signs, an d recording seas o f d ata by hand. T here is no w ay I could have created m y num erous nuanced tactics by backtesting and doing com puter runs. O n e w eekend after a m arathon session o f 30 straight hours, I developed the G o lf System, m y first 100% m echanical system. I d id

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not play golf Inn called It tills because o n e co u ld leave renting orden with a broker and go play golf for tb c day (m eaning! not having to watch the screens.) T he trade was to en ter long or short on the dote depending on where the m arket closed. T h ere were also 2 filters that dictated when not to take a trade. H i e exit was a small fixed target for the next day. T h e stop was three tim es ns great as the target but the win rate was 89% . T his was the best ever mechanical trade—1 was so excited! I usually entered 2 0 0 -3 0 0 big SI’ contracts on the dose. This was before the Introduction o f the sm aller e-mlnl futures and before there was a liquid G lobex m urket. I am sure the broker Initiating my orders thought this fem ale trader In New Jersey wai crazy. Rut we ended up getting m arried 19 years later so, obviously, I made an Impression. I was set for life w ith m y G o lf System . 1 shared the signals with my friend Robert from the M TA. Later, w hen Steve Moore and I published a dolly research fox, 1 Included the signals at die bottom of the fax. Soon enough there was a rash o f initiating orders on the dote, One subscriber from Hawaii was doing 90 lots and other broken were doing It for their dlcnts. After a few years, die Aslan currency crisis hit in the summer o f 1997. An adverse overnight gap In the SPi left the trade deeply In the red. O u ch l T h ere was n o t enough liquidity In the Globex market for me to use overnight stops on the size I wai doing. So, I abandoned the G o lf system b u t n o t until It gave met good parting spanking. Any tim e you find th e key, th ey eventually change the lock. At the time, I was obsessed w ith 1-9 day patterns and the 2-period R O C even though there was only a m arginal statistical edge. I tried using NAVA patterns, a now -defunct program for analyzing patterns, and com paring them to past occu rren ces. I p rin te d o ff endless amounts o f charts. I showed m y work to others, b u t it was like talking in a foreign language. T his was O K , because this is w hat makes this

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bualncaa grcat-cvcrytme Itaa their own way o f acting thliiga. Dm, It a nice (o get feedback. One of (lie people I allowed niy work to win I .ai ry Wllllumi. an Induairy icon. I had not heard o f him when I waa a door trader alnce he caicrcd to a dllfercnt aegment o f the trading Induairy. I Initially met him at an MTA meeting In New York, toiler, when 1 went to California to vlali family in LA, lorry Invited me to come to vialt hia office. At the lime he woa living In Uanclio Santa Fc, and hia office woa a few bloclu from the beach. I did not know what to expect, but when I walked in, all I aaw were hooka. I gu ru I waa expecting an array o f m onitor! but they did not cxlit. Itutcad, hooka were piled high on tablca, in cluttered itacki on the floor, puilicd aldcwayi on ahetvea, all In total dlaarray. He had Juit publiiltcd a book on the diicnvery o f M ount Sinai and handed me another book titled, ‘ How to Outfox the Foxea.” I low to beat attorneyi at their own game. A man o f many Intercati. In the corner woa a Juicer that Larry uacd for hia M onday Juice fuiti. He alio ran marathoni. When do we trade! In the entire office, I only law one im all primitive CRT. T h li woa In the daya w hen TradcStatlon charting aoftware wai In Iti Infancy, I woa one o f the flrat 100 uicra to have a iccurity block that plugged Into the back o f the CPU. My block number waa ‘ 100.” Larry had me beat became he waa an original Syitem W riter uier— a generation before me. I tried In vain to allow him the work 1 had been doing with the 2-period ROC, but it waa too awkward trying to program my pattern! in Jm t a few minutea. Thia waa fruatratlng bccauac I waa not great at writing code. I had failed to communicate. We decided to pack It In and go get lunch at an ocean caff. “My car or youra?" ‘ O h, youra, definitely,” I laid, thinking o f my bland rental car. Larry brought around an aged dirty white minivan, the type with an awkward illdlng door half the length o f the van. My rental might have been cooler. Obvlouily, Larry had no need to Impreia client!. 1

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n case y o u flip p e d to th is c h a p te r first, h e re are th e th in g s y o u m issed so far: I rep eated ly g o t m y ass k ic k e d b y th e m a rk e ts, I h a d a baby, a n d I p u t m o re m o n e y th a n I care to a d m it in to m y ho rse

fetish. So th e re , y o u are c a u g h t u p . H e re are m y secrets: P r o g r a m 1: T h is is m y S P d a y tra d in g , m y b re a d a n d b u tte r. I

d o 9 5 % o f m y tra d in g in th e SPs as o p p o se d to th e o th e r sto c k in d ex fu tu res. I t w as m y o rig in a l g a m e a n d c o n tin u e s to b e th e c o n tr a c t I a m m o s t c o n s iste n t w ith . “ I f i t ain’t b ro k e , d o n ’t fix it.” O n e w o u ld b e h a rd -p ressed n o t to fin d a t least 2 -3 d e c e n t tra d in g o p p o rtu n itie s each d ay fo r sm all b u t su re pieces. I u se th e R ussell o r th e N A S D A Q fu tu res w h e n I w a n t to c a rry a p o sitio n . I u sed to use th e m a rk e t in tern als su c h as T icks, T rin , th e tre n d o f th e b re a d th , a n d V D C T ic k s a n d T rin are less critical th a n th e y

were

In th e eig h ties a n d n in e tie s. A t o n e tim e , I fa d e d t h e tic k extrem es. N o w tic k s w o r k b e tte r as a m o m e n t u m in d ic a to r. T h is c h a n g e d w h e n sto ck s w e n t t o d e c im a liz a tio n in 2 0 0 1 . A lso, m a rk e t Internals, 99

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P ro g ram 2i T lili profit center li reterved for the top 24 doincttlc future* m arket* an d (lie llunil*. T h e trade* have a d u ratio n o f 1-3 day*. T h a t I* i f it I* a w in n in g trade. It’* n o t a great idea to hold a liner overnight. M y rh y th m It, “in one day, o u t th e next." I learned tlili from the T aylor trade* a* well a* the volatility breakout play*. O v e r th e year* I h av e c o m e u p w ith k ittc h y nam e* fo r th e pattern*. P or exam ple, pinball*, five finger*, Anti*, an d th e black trade. 1 gave th e I -3-day pattern* fu n n y name* fo r m y ow n benefit. An unu*ual n a m e la like a *ym hol in th a t it convey* a th o u ia n d word*. I know prcciaely w hat th a t p attern look* like and how the m arket ilio u ld behave i f th e trade kick* in. It I* m y ow n gam e board that I created In th e ab icn ce o f o u td d e Influence*. It i«, In a way, a "religion." N o t everyone u n d erttan d * in m e o n e d ie * gam e board. T h a t I* w hy It I* im p o rta n t to co m e u p w ith y o u r ow n.

'livo-fierloii R O C (ntte-af-changr) buy a n d u ll A nth, P o r o v e r 3 3 year* I've w r itte n d o w n th e d o t i n g p ric e an d m o m e n tu m read in g * fo r 2 4 * m ark et* . T ill* I* th e w ay I tta y

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organized. Otherwise, the a m o u n t o f d a ta is o v erw h elm in g and it is too easy to miss som ething review ing th e p a tte rn s I have flagged on autom ated worksheets. I need to go th r o u g h th e process o f seeing it in the data and the chart. T h e n th e a n tic ip a tio n b u ild s around the potential the next day m ight bring. Program 3: These are trades m ad e o f f th e daily an d weekly chan structure. T hough they fall in to th e cam p o f classic technical analysis and pattern recognition, I try to q u a n tify th e m . T h is is important because I will be the first to a d m it th a t I c a n see w h a t I w an t to see. It’s like looking at puffy cum ulous clouds. “D o you see that elephant in th e sky?” “N o, I only see a b u n n y rabbit.” I use the 3 /1 0 oscillator b e n e a th all m y c h a rts because I am brainwashed from p lo ttin g th e S M R c h a rts b y h a n d for decades. Even with a directional oscillator, a tra d e r c a n still see w hat they w ant to sec. So, I don’t use oscillators to q u a n tify anything—it is all done w ith ATRs an d th e pivots a n d p a tte rn s fo rm ed by swing highs and lows. ‘Just basic technical analysis, sir.” Trail a stop o n these p attern s a n d “see w h a t th e m arket gives.” An exit is also called for if there is a loss o f m o m e n tu m . Lastly, the market will let you know i f y o u are w ro n g because th e trade will show red. A good trade w orks rig h t aw ay a n d n ev er looks back. M ore often than n o t m y best trades c o m e fro m th e daily swings turning up or dow n rather th a n b reak o u ts fro m c h a rt formations. It’s a m atter o f style. A market m ight have 14-20 reasonable sw ing trades a year. With the benefit o f hindsight, it is easy to im a g in e h o w sim ple it would be to accumulate vast fortunes sw in g tra d in g . T h e reality is, I feel lucky i f I capture one great sw ing trad e a m o n th in a m arket. The real trick is know ing w hen to stay O U T o f a m a rk e t— like when there are no swings and it is c o n so lid a tin g in a n endless noisy line.

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M Y T R A D IN G P RO G R A M

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Program 4: My fourth profit center is dubbed “everything else.” These are the types o f trades w hich m ight n o t happen very often. I purchase call o r p u t spreads i f th e m arket reaches an extreme in sentiment, and sometimes I build an outright position in the futures. I establish a position i f there is an interesting an d unique stock opportunity. I p u t o n positions if a seasonal trade looks interesting. Program 4 involves opportunities th a t n o t easily m odeled or quantified. These situations tend to be based off factors besides pure price data, unlike m y other three programs. I m onitor how each profit center does on a quarterly basis. O ne quarter, the SP scalping m ig h t be th e m ost profitable. T h e next quarter, Program 2 m ight produce th e m ost profits. As the trade duration increases, the trade frequency drops and so does the winloss ratio. For example, I can get a consistent 85% w in rate scalping SPs, but this drops to 60-65% for profit center two. T h e third profit center has the lowest win/loss ratio. Sometimes it is less than 50% winners, m uch as a trend following system would show. However, it also produces the best gains each year. O n e year, the bonds were the best performing market and the next year the grains were rock stars. Another year, the yen p u t a 3-inch layer o f frosting on the cake and in-between every layer, too. Unfortunately, this is where the outliers have happened as well. The random unforeseen events which I was on the w rong side of. T he longer th e h o ld in g tim e, th e greater th e risk. I can tell w hen I am o ff track because the trade frequency goes way up or down for one o f the profit centers. The problems are easily identifiable. Trying too hard to make something happen which is not going to happen, not getting rid o f losers quickly enough, or trading when sleep deprived. We all know what we are doing wrong when our performance is suffering. A t least, I do. I K N O W I fucked up. There

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is n o th in g lik e c o ld , h a r d sta tistics sta rin g m e in th e face, th o u g h , to give m e a sh a rp w a k e u p call. M y p r o g ra m re q u ire s lo ts o f tim e a n d o rg a n iz a tio n , b u t w h o needs a life? I w o u ld n ’t d o i t i f I d id n ’t love it. It’s all a b o u t elim in atin g o u tsid e d istra c tio n s a n d in flu e n c e s. I h a v e tr a d e d m y sa m e m e th o d ­ o logy fo r fo u r d ecad e s. N o th in g h a s c h a n g e d e x c e p t f o r m e a n d m y m ailin g ad dress. I a m o ld er, s m a rte r a n d slow er.

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v ery C h ristin a s , m y m o m w o u ld give m e a jig saw p u zzle as a p resent. T h is tra d itio n s ta rte d w h e n I w as a k id . A n d every year, m y m o th e r b ecam e m o re sadistic as sh e f o u n d w h a t sh e th o u g h t

were im p o ssib le-to -co m p lete puzzles. T h e re is o n e puzzle w h ic h w ill go d o w n in infam y. I t w as h a n d s d o w n th e m o st ch allen g in g p uzzle ever created. T h is puzzle fro m h ell w as in tim id a tin g in th a t it w as m assive. T h e re m u s t have b e e n 1 0 ,0 0 0 pieces. T h e b o x th e puzzle cam e in displayed a m a p o f th e w o rld . U p o n fu rth e r in sp e ctio n , y o u could see th e m a p w as m a d e fro m m illions o f itty b itty p h o to g rap h s. T h e state o f F lo rid a alo n e co n sisted o f fifty p h o to g ra p h s. B u t never say never. T h e puzzle w as fin ish ed so o n e r th a n later. It’s a n ad d ic tio n fo r m e w h ic h I o n ly allow m y self to in d u lg e in o nce a year. Puzzling is a n a rt. I t w orks best i f y o u do n ’t tr y to o h ard. L et your eyes glaze over th e c lu m p s o f pieces. D iffe re n t colors w ill seem to have d ifferen t textures. W ith o u t lo o k in g to o h a rd a t th e edges, th e 109

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he tid e was c o m in g in , b u t w e w ere sittin g ju st o u t o f reach o n th e pebbly beach in o u r w oo d en A dirondack chairs. It was alm ost lap p in g th e n o w sm oldering (ire w here w e had roasted

m arshm allows an d h o t dogs earlier. Roger was stu c k w ith a m itt full o f H earts. W e couldn’t w ait to lay a few m ore o n h im . M y baby brother, w ho will still be the baby brother w hen we are all o ld a n d gray, tu rn ed o u t to be th e best card player o f all o f us. H e played th e te n o f hearts. Steve played a five and M om played a six. “Ha! I’m getting rid o f m y n in e o f hearts!’’ W e were all happy to d u m p m ore hearts o n Roger. Roger took the trick again, another 4 points against him . H e next played the Ace o f Clubs, taking th at trick as well. N one o f us thought anything was amiss until he played the Jack o f H earts. I looked at Roger’s face— he was giving away nothing. H iru n n u n . You don’t play the high card in 111

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hearts unless you W A N T to ta k e th e tric k . W e all h a d t o p u t down another heart. “D on’t tell m e you have th e Q u e e n , K in g , a n d A ce o f H earts too?” Yup, he sure d id an d h e to o k th e r e m a in in g h e a r ts in th e two rounds. R oger was m ak in g a n o t so d e s p e ra te a t t e m p t to sh o o t the M o on, b u t there was still o n e ca rd h e n e e d e d — th e Q u e e n o f Spades. A real nail-biter was b u ild in g a n d m y fa m ily m e m b e r s w e re wearing th eir best poker (aces. H o w was R oger g o in g to g e t th a t Q u e e n ? W a s h e h o ld in g the Ace an d K ing o f Spades as well? T h e y w e re t h e o n ly ca rd s th a t could sm oke o u t th e Q u e e n . W e d a r te d fu rtiv e g la n c e s a r o u n d th e table. Roger was in control fo r now , b u t h e h a d to sta y in c o n tro l. H e played th e Ace o f D iam onds an d to o k th a t h a n d . H e th e n p la y e d th e Queen o f D iam onds, b u t w h e n i t ca m e to M o m , s h e la id d o w n th e King. A chance For som eone else to w re stle c o n tr o l. I t w a s m y t u r n next. It is m o m en ts like these w h e n I tr y m y h a r d e s t n o t t o fla sh a g rin . I did n o t have any diam o n d s left, m e a n in g I c o u ld p la y a n y c a rd I wanted. I p retended to study m y cards w ith a n a d d e d in te n sity . T h e n I slowly selected o n e a n d g e n d y flo ated it o n to p o f t h e p ile s o all could see th e evil face o f th e Q u e e n o f S pades.

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“G ee, M o m , I h ate to d o th is to you!” It m e a n t 13 p o in ts against her. Roger’s face fell. H e w as stu c k w ith 13 p o in ts in H earts against him , b u t if he h a d been able to snag th at Q u e e n , we each w ould have had 2 6 p o in ts against us. “I ’ll be th e sacrificial lam b. A gain.” M o m said. T h e tid e h a d n o w dow sed o u r fire p it, so ro astin g m o re m arsh ­ mallows was o u t. T h e beer su p p ly was ru n n in g low, too. B ut w e were all in th e best o f spirits hav in g foiled baby bro ther. W e all grew u p losing. T h e gam es we played co u ld o n ly have on e winner, so th e m ajo rity o f us w ere losers each ro u n d . T h e o n ly th in g th at m ade losing tolerable w as m ak in g sn id e c o m m e n ts a n d tak in g jabs at each other. W e d id n o t gloat i f w e w o n because th e o d d s were th at we w ere still g oing to lose m o re tim es th a n w e w o n . M y b ro th e r Steve a n d I have m a n y discussions o n th e analogies betw een p o k er a n d trad in g . I d o n o t p la y p o k e r a n d h e does n o t trade. Yet every sta te m e n t I m ak e a b o u t tra d in g can be ap p lied to poker an d vice versa. T h e re is n o rig h t o r w ro n g w ay to “trade." W h a t is rig h t for o n e perso n m ay b e co m p letely w ro n g fo r an o th er. T h e biggest challenge is m a k in g decisions w ith in co m p lete in fo rm atio n . W e are going to b e w ro n g a percentage o f th e tim e . W h a t d o y o u have to do to stay stro n g psychologically? H o w d o yo u keep y o u r ego o u t o f th e equation? E go can b e th e u n d o in g o f trad ers a n d m an y different p o k er players. I have h eard m a n y stories a b o u t traders w ho blew o u t d u e to o n e b ig loss caused b y a n o u t o f conctol ego. I heard a sto ry a b o u t Raul T. Jo n e s w h e n h e d id a s tin t trad in g in Tokyo b ack in th e m id-eighties. T h e m a rk e t w as roaring. H e was standing at a desk su rro u n d ed by Japanese traders, a n d h e gets o u t o f a losing trade. A few o f th e o th e r trad ers w ere aghast an d rem arked, “A hh h , yo u tak e losses?” Every trad in g en v iro n m e n t is u n iq u e, a n d th e sam e goes for each poker gam e. T h e tra d in g shifts fro m m o m e n t to m o m e n t ju s t as poker shifts fro m h a n d to h a n d . M y b ro th e r tells m e th a t i f yo u are

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tim e d o es th e strateg y deterio rate? M a n y strategies d o as inefficiencies in th e m a rk e t a re a rb itra g e d o u t. T h e m a r k e t c a n g o o n “tilt” to o . A m a r k e t isn’t a n in d iv id u a l d e c isio n m a k e r, so th e c lu es w h e n th is is h a p p e n in g to th e m a rk e t are tric k y to tim e . T h e m o s t p ro fita b le tim e s f o r a tr a d e r c a n b e d u r i n g h u g e e m o t i o n a l m a r k e t e x tre m e s — t h e ty p e o f m a r k e ts a p ro fe s sio n a l is m o r e lik e ly t o feel. A g o o d e x a m p le o f th is w as w h e n R e a g a n w as s h o t, a n d th e m a r k e t h a d a v e ry v io le n t se ll-o ff fo llo w ed im m e d ia te ly b y a c o m e b a c k rally. T h a t se ll-o ff w as p o o r d ecisio n m a k in g as a re su lt o f a n e m o tio n a l sh o c k . A n o th e r exam ple is a tr a p o r false b r e a k o u t fo llo w e d b y th e a n x ie ty o f g e ttin g o u t o f it. I n 2 0 1 6 t h e m a r k e t m a d e e n o r m o u s g y ra tio n s a f te r th e e le c tio n resu lts, a n o th e r case o f t h e m a r k e t g o in g o n tilt. M y b r o th e r S tev e o v e rsa w a te a m o f P h D s w h o u se d A rtificial In te llig e n c e to m a p c r e d it f ra u d . T h e d r iv in g p re m ise is t h a t a b e r­ r a tio n s g a v e in f o r m a t i o n . B u t d o a ll f a t ta ils g iv e in f o rm a tio n ? A b e rra tio n s i n l o n g - te r m r e la tio n s h ip s c a n g iv e in f o rm a tio n , b u t o th e rs a re s im p ly e v e n t d r iv e n . Y ou m i g h t t h i n k a tr a d e r ’s skill is in f in d in g th e a n o m a ly , b u t t h e real tr ic k is f in d in g a w a y to ta k e a d v a n ta g e o f i t b e fo re th e e d g e is g o n e . P e rh a p s th is is b e c o m in g easier w ith m a c h in e le a r n in g b e c a u se in f in ite ly m o r e d o lla rs h av e b e e n g o in g i n t o th is a re a t h a n i n t o tr e n d fo llo w in g . M a th m o d e ls c a n ’t w o r k all o f th e tim e in sy stem s o f im p e rfe c t in f o rm a tio n . N o m a t t e r h o w o n t o p o f e v e r y th in g a tr a d e r m ig h t b e, th e r e a re p a r ts o f th e e q u a tio n t h a t w ill b e h id d e n . A n o rm a l d is tr ib u tio n w o rk s u p t o a p o i n t , b u t th e g o ld is in fin d in g w h e re th e d is tr i b u t i o n fails o r is sk e w e d . T h e m a th g eek s h a v e tr o u b le se e in g th a t . T h e p r o b le m is in ta k in g m a th as a g iv e n a n d ov er­ w e ig h tin g i n f o r m a tio n . S tev e ta lk s a b o u t th e d iffe re n t p o k e r styles: loose-passive, looseag g ressiv e, tig h t-p a s s iv e , a n d t i g h t ag g ressiv e. I f y o u a re a g o o d p la y e r u s in g a t i g h t ag g ressiv e sty le y o u w ill p o ssib ly b e a w in n e r

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(providing the rake isn't too high). Your v arian ce w ill b e lower in the long run because you are en terin g a lesser n u m b e r o f hands but ones o f higher quality. T h e m o st p ro fitab le players use a looseaggressive style. T heir variance is h igher b u t th e ir p ro fit per year is also somewhat higher. You have to be w illin g to h a n d le th e style you choose. A loose aggressive player needs to b e co m fo rtab le with large swings and the em otional co m p o n e n ts th a t c o m e w ith that. Let’s talk about variance for a b it a n d h o w it factors in to trading styles. W ithout getting bogged d o w n in statistics, th in k o f variance as the swings in the P and L. In poker, a n aggressive style o f play will play hands more frequently th an o th e r m e th o d s a n d will more often bet or raise than call. T h is leads to p laying fo r bigger pots but bigger losses as well. Simply pu t, an aggressive style takes m ore risks. An aggressive trader trades w ith w id er sto p s, takes m o re trades, or often enters where there is less co n firm atio n , all lead in g to larger swings in the P and L These traders n eed to b e able to handle mote significant losses and draw dow ns em otionally. I knew a poker player w ho was exceptionally g o o d a t handling the swings, not just the em otional c o m p o n en ts. H e h a d great skill at ending his poker sessions w hen h e h a d to o m u c h g o o d variance o r a big w inning streak. I can rem em b er m o re th a n a few times where I wished I walked away after a g o o d r u n . I t’s o n ly after I started to give some back th a t I to o k a break. O v e r tim e , w e get to know ourselves and o u r patterns. S om etim es I w ish th a t it didn’t take so m any years. A player who can't handle a large loss a p p ro p ria te ly is better suited to playing a tight aggressive style. F o r a trad er, th is means scalping or hitting singles w ith reasonable m o n ey m anagem ent stops in place. Take fewer trades a n d p ick y o u r spots! The Weakest L in k is a television gam e sh o w th a t d e b u te d in the US in 2001. T h e eight co n testan ts are ask ed q u e s tio n s o n e at a tim e, and i f they answer correcdy, th ey have th e o p tio n o f banking

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th e m o n ey o r o p tin g to b u ild i t u p . I f th e n ex t p lay er g ets th e answer correct, th e m o n ey in th e p o t rises exponentially. H ow ever, th e m o n ey is o n ly safe a n d locked in o n c e it has been b an k ed . I f a question is m issed, th e en tire p o t goes back to zero. T h e re are 2 optim al b ettin g strategies. M o st co n testan ts te n d to b a n k a lte r 2 -3 correct answers o r lose th e p o t th a t has been b u ilt u p , precisely th e w rong tactic to pursue. T h e strategy th a t m axim izes th e p o ten tial earnings is to never b an k th e sm all p rofits, b u t keep try in g to score th e entire p o t b y gettin g 8 correct answ ers in a row. T h e rew ard for one correct answer is $1000 b u t th e pay o ff for 8 correct answ ers in a row is $123,000. T h e next best strategy is to b an k after every correct answer. Each rig h t answ er earns m o n ey th o u g h n o t very m u c h . T h is last strategy parallels th e tra d in g style o f th e tra d e r w h o scalps fo r a few ticks, locks i t in , a n d has a h ig h w in -lo ss ratio . T his is an exam ple o f low variance. T h e m a rk e t m ig h t ru n m u c h higher after he has b o oked his sm all p ro fit, b u t o n th e o th e r h a n d , his profits are locked in , an d th e m ark et can’t take th e m away. A trader w h o initiates o n a b reak o u t fro m a m a jo r c h a rt fo rm a tio n will invariably have m ore losses d u e to false b reak o u ts. A n d each breakout m ay n o t get to o far, b u t th e tra d e r has to b e w illin g to trail a sto p an d n o t b an k p ro fits to o so o n . A ll h e needs is 1-2 h u g e moves a year, b u t it takes lots o f patience, discipline, a n d fo rtitu d e. T h ere is n o th in g like an o p en p ro fit th a t starts to b u rn a h o le in a novice trader’s pocket. Generally speaking, gam e players a n d traders fin d it easy to q u it w hen th ey are w in n in g b u t h ard to q u it w h e n th ey are losing. A good reason as to w h y you should set loss lim its. You never w an t to lose m ore in a single session th an y o u can reasonably expect to w in in a session o f good poker, o r for th a t m atter, a p erio d o f trad in g . Don’t get “stuck." H o w will y ou feel w hen you start th e next trading day if you d id n o t clean u p yo u r mess from th e day before? You will be a t a psychological disadvantage o n th e o p e n in g bell.

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Stay in the process no m atter w hat, a n d i f y o u can’t d o this, then step away. T he m arkets trade 2 4 /7 . T h e re w ill alw ays be trading opportunities. W hat do you do when things aren’t going well? D o n ’t dig a deeper hole. I have to regroup first before m a k in g b a c k a loss. T h e best trades I ever m ade were m aking back b ig losses. T h e w orst trades I made were carrying over a bad p o sitio n in to th e n ex t m orning and thinking 1 could get o u t at a b etter price. B u t after keeping track of the statistics, more often th an n o t I was g e ttin g o u t a t a worse price. T he market is going to get w orse because o f th e w ay it closed. It’s hard to take advantage o f the opportunities th a t th e opening provides when you are still figuring o u t w h at to d o w ith a losing position. Its been said that to be a long-term w in n er in p o k er you need fire in your belly, a passion for the gam e a n d a passion fo r learning and growing. But you also need balance in y o u r life. A t th e beginning o f your poker career, you are th irsty fo r know ledge a n d experience because this is how you grow. B u t i f yo u d o n ’t have o th e r things in your life, you will get obsessed w ith th e stim u latio n . T h e n it is not a career or a passion, it’s an addiction. T h is is so tru e fo r new er traders.

To gain experience you need to play the game and learn the sophisticated depth of subtlety. Combining analytics and context takes experience. The math is the easy part. Isn’t this true of most all games?

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MYNAMEIS H THEPHONEBOOK

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n th e early nineties, I h ad set u p m y tra d in g office in o u r d o w n ­ stairs basem ent. I h a d these clu n k y m o n ito rs th a t w o u ld lo o k utterly prim itive next to th e flat screens w e use today. M y screens

displayed m y charts a n d quotes, p retty m u c h w h a t I use to d ay b u t

w ith a few m ore pixels. Every m o rn in g I w o u ld d isap p ear in to m y cave an d start m y day. O n c e th e m arkets w ere o p e n , I was d e a f to m y surroundings. A b o m b co u ld have g o n e off, a n d I w o u ld n o t have noticed. W e lived in th e m id d le o f n o w h ere. W e w ere s u rro u n d e d by evergreen trees, a n d o u r house backed u p to th e clubhouse o f th e local golf course. It was a tran q u il place to live. O n e s p rin g m o rn in g , as I w as d o w n s ta irs w o rk in g a n d m y h u sband w as upstairs p re p a rin g lu n c h , o u r d o o rb ell ran g . B eing com pletely oblivious to th e w o rld a ro u n d m e, I d id n o t n o tic e . However, it was h ard for m y h u sb a n d to ignore. H e p au sed fo r a m om ent, w ondering w h o co u ld be a t o u r d o o r in th e m id d le o f th e trading day. 119

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M y husband opened che d o o r o n ly to fin d th ree enthusiastic Japanese businessmen on our doorstep. After picking his jaw up off the floor, he asked, “C an I help you?" T h ey to o k o u t a book, The N ew M arket Wizards, and pointed at m y nam e. "Is this the home o f Linda? W ere here to see th e wizard!" My husband stared at them wondering w hat alternate dimension we were now inhabiting. “U h, she’s busy at th e m om ent." They continued looking at my husband optimistically. "M aybe try later..." he said as he slowly dosed the door. M y husband raced down to the basement. "You will never guess w hat just happened." The N ew M arket W izards is o n e o f a scries o f b o o k s written by Jack Schwager. I am n o t sure how Jack cam e across m y name in the early nineties, b u t he contacted m e an d w an ted to have dinner I did not know w ho he was an d to ld h im h e w o u ld have to wait until I took another trip up to N ew York. M y health was not 100%

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yet and so I rode m y favorite G reyhound bus w hich ran up the Jersey Turnpike. Jack was skeptical that a trader could make such good profits trading on a short time horizon. But I told him it was impossible for me to predict m uch further than 2-3 day* out. After some lengthy discussions, I showed him m y work and methodology, as well as my profitability. We had dinner with a tape recorder running, and I had no idea 1 was to become a chapter in his N ew M arket W izard book. Weeks later, he called m e up to ask for m y address. In a few days, I found a package stuffed in m y mailbox by the postal service. I was a chapter in the book. T h at package invoked Steve M artin in The Jerk. “First, I get m y name in the phone book, and now I’m on your ass. You know, I’ll bet more people see that than the phone book." T h e Wizards books turned o u t to be quite popular. I lived on the edge o f the New Jersey Pinelands. It was woodsy and remote, at least 45 m inutes from Philadelphia. T he book turned o u t to be an open invitation for people from all walks o f the industry to take it upon themselves to visit my office. I eventually begged the exchange to remove my address out o f their listings since I was still a member. A nother individual showed up bearing an interesting gift. He was one o f the original turtle traders. T his was the nam e given to a group of traders whom Richard Dennis trained. He was not managing money at the time, but he wanted to meet me. He brought me a paper bag which had a copy o f his notes in an 8 x 11 book format o f Richard Dennis's program . I did n o t know m uch ab o u t trend following systems because it just wasn’t my game. But when I read through it, I was surprised only 10% o f the content had anything to do with a “system." T he rest was a com bination o f psychology, game theory, and classic pattern recognition, allowing for discretion on add-ons. Twenty-five years have passed since this visit, so it is O K to m ention this now. Most o f the pattern recognition was very simple

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bar chart formations. For exam ple, let’s say th ere w as a b ig spike high, som ething th at nowadays is called a h a m m e r o n a can d lestick chart. I f the m arket then took o u t this sw ing sp ik e price, i t w as a point to add a u n it and increase th e leverage. W h e n R ic k ca m e to w ork for me, he had been w ith a “Turtles" firm , S jo, In c ., a n d h e confirmed th e use o f these idiosyncrasies. H e called th e m "s tru c tu ra l points* T h e original Turtles System was m o re th a n a m ech an ical “system.” B ut the nuances o f discretion w ere s o m e th in g th a t stayed in the classroom between D ennis an d his stu d e n ts. T h e biggest lesson was, you have to take the entries. You can’t a ffo rd to m iss th e on e trade w hich m ight m ake your year a n d y o u never k n o w w h ere it is going to com e from . "G et th e trade o n ,” as R ick q u ip p e d . * * *

Toby Crabel came to visit an d stayed a t m y h o u se w ith his family. I had m et him earlier through a m u tu a l b ro k e r a n d w e h a d socialized in N ew York and C hicago together. H e h a d sig n e d a non-com pete for 5 years alter w orking for V icto r N ied erh o ffer, w h ic h m eant he had a head full o f ideas a n d n o o u tle t fo r th e m . T o b y loves statistics the same way I do. A n d he loves te n n is t h e w ay I love horses - he was actually a sem i-pro for a w hile, a n d chat se em ed to be where he released all o f his energy. T h a t evening, I sh o w ed h im m u c h o f my original m odeling using sh o rt-te rm rates o f c h a n g e in conjunction w ith pattern recognition. Toby got pensive w hile m y h u sb a n d c o o k e d d in n e r. "I miss the industry. Five years is too lo n g to sit a r o u n d d e v e lo p in g n e w models and n o t using them .” ‘ Tell m e about it! Five years is a lo n g tim e to w a it fo r anything. Especially th e m arkets. W h a t have y o u b e e n w o rk in g o n ? ” ‘ I’ve been building a platform for a u to m a tin g m u ltip le strategies. I still w ork with holding tim es o f less th a n tw o to th re e days,” he said. “A h h h ...m o st o f m y w ork is w ith m o d e ls o n ly : 2 variables and o n e filter. T h ere are subde tw eaks su c h as th e n u m b e r o f look-back

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days to d e te rm in e th e A T R o r tim e o f day fu n ctio n s. I use large sam ple sizes, to o , b u t I fin d th a t even 3 0 0 is n o t big en o u g h .” I was still looking for affirm ation th a t I was o n th e rig h t track. Toby's w ife was feeding her son a vegan gruel w hile w e sto o d a t the co u n ter a n d co n tem p lated th e next g reat system . “So, d o you plan o n m anaging m oney?” I w an ted to know. “T h e day I h it th e five-year m ark," T oby sm irked. We had a great tim e that w eekend, hanging o u t a t C a m p Raschke, staring at com puter screens an d talking strategies, even i f w e couldn’t p u t them in to effect. Five years later, th o u g h , T oby d id p u t th em in to effect a n d th e n some. H e h it o n a n iche w here there w as a real n eed for a p rogram delivering low drawdowns. H is returns were q u ite sm all b u t extrem ely consistent. H e exploited a n d scaled a tim e fram e th a t n o b o d y else had, w hich allow ed firm s to leverage his p rogram s a n d allow ed h im to collect m ultiples o f m an ag em en t fees. H e m oved to Beverly H ill# and continues to ru n his firm as m ethodically as he plays tennis.

Professionals often develop concentration and consistency from other disciplines.

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irS APROFITDEAL!

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ver th e y e a n , d ie m ost unim aginable events have occurred. It w ould b e im possible to m ake these things u p . O n e m orning, I got a call from th e group o f b ro k e n w h o d id m y business up

in Chicago. “Hey Linda, w ere sorry, b u t you can’t d o business w ith us today* “W hat d o you m ean I can’t place any orders? I have positions on!* I could n o t believe m y c a n . “Sorry, C hicago is sh u t down.* T h e b ro k e n were c u n , u n d er the gun to m ake p h o n e calls to dozens o f clients. “B ut, b u t, but? W h a t ab o u t m y positions? H o w am I supposed to trade?* “C losed. Sorry. W e will co n tact you tom orrow w ith an update.* “dick* It was A p ril 1 9 9 2 , a n d a tu n n e l b e n e a th th e C h icag o R iver w as b re a c h e d . A c o n tr a c to r w o rk in g o n b rid g e p ilin g s so u g h t an easem ent fro m th e c ity to preserve a historical c o m p o n e n t o f 125

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th e b rid g e , a n d th e c ity a p p r o v e d t h e m o d i f i c a ti o n s t o th e plan. T h e c o n tr a c to r a n d its c rew s h a d n o id e a t h a t s o m e w h e re deep b e n e a th th e riv e r a n d s e d im e n t, a n o l d d e c o m m is s io n e d tunnel la id d o r m a n t— b u t still v e r y m u c h c o n n e c t e d t o o t h e r tunnels b e n e a th th e city. T h e c o n s tr u c tio n le d t o a s l i g h t s h i f t i n th e river b o t t o m , w h ic h g r a d u a lly g r e w t o a s l o w - s e e p i n g le a k o f m ud, w h ic h fin ally t u r n e d in to a fu ll- o n b r e a c h , w h ic h w a s m easu red to b e a 2 0 -fo o t-w id e h o le . T h is a llo w e d 2 5 0 m i l l io n g a llo n s o f water t o flo o d th e b a s e m e n ts a n d u n d e r g r o u n d fa c ilitie s in t h e Chicago fin an cial area. S ecu rity crew s a t th e M e rc h a n d is e M a r t re p o rte d fish s w im m in g h ap lessly in th e b a s e m e n t. T h e L o o p a n d th e Financial D is tr ic t w e re e v a c u a te d , a n d t h e C B O T a n d C M E c lo s e d for a few d ay s. M y b ro k e rs s e t u p s h o p in s o m e o n e ’s h o u s e o u t in the su b u rb s , b u t th e m essage w as l o u d a n d c le a r: H a v e b a cku p accounts a n d b a cku p brokers. O n e d ay in th e m id d le o f t h e a f te rn o o n , I re c e iv e d a cold call fro m a lad y b ro k e r u p in N e w Y ork. S h e d id n o t k n o w w h o 1 was, so I d ecid ed to have so m e f u n w ith h er. MO h y e a h , I d o h av e a f u tu r e s a c c o u n t , h o w d i d y o u get my n am e?” 1 asked. “ I ’m w ith V is io n u p i n N e w Y o rk . I w a n t y o u t o o p e n an a c c o u n t w ith m e." S h e sp o k e w ith a n u r g e n c y o n l y N e w Yorkers h av e m astered . " N o w w h y w o u ld I w a n t to d o th a t? I d o n ’t tr a d e m u c h . I live on a firm in so u th e rn N e w Jersey, a n d th e m o s t I d o is b u y a n occasional c o m c o n tra c t to h e d g e m y c h ic k e n feed ." “L ike, y o u r c h ick en feed? Y ou raise c h ic k e n s ? " I c o u ld h ear paper sh u fflin g in th e b a c k g ro u n d as sh e f ra n tic a lly s c o u re d h e r cold call list to fig u re o u t w h y I w as o n th e re . “Yes, m a’a m . I ’m lo o k in ’ a t th e c h ic k e n s i n m y b a ck y ard right now ." I w as actu ally lo o k in g a t T in a ’s ass o n t h e la w n b e lo w as she s u n b a th e d w ith m y d a u g h te r.

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"W ell, I th in k w c co u ld d o so m e b usiness together. 1 w o n t take n o for a n answ er." She was persistent a n d called m an y tim es. I already h a d great rates w ith m y clearing firm b u t was try in g to keep a n o p e n m in d . I figured it w o u ld n 't h u r t to have a c co u n ts in several places* as I learn ed w h e n th e C hicago R iver flooded th e F inancial D istrict. I to ld h e r w e co u ld m eet fo r lu n c h w h e n I w as b ack in N e w York. T h e n ext tim e I drove u p to N e w York, I scoured th e street corner w here w e w ere to m eet. I d id n o t see a n y broker* o n ly a tin y sp eck o f a person. A n d th a t sp eck w as Liz— all 9 0 p o u n d s o f her, re d h a ir piled u p o n h e r h ead a n d a co lo rfu l sc a rf flap p in g i n th e breeze. S he h ad a d eep th ro a ty voice w h ic h m a d e h e r s o u n d like sh e w eig h ed 2 0 0 p o u n d s o n th e p h o n e . I o p e n e d an a c c o u n t w ith h e r o u t o f sheer respect a t h e r g u m p tio n . W h e n w e g o t to k n o w each o th e r better, she to ld m e sh e w as raising m o n e y fo r a fem ale C T A a n d th a t I sh o u ld b eco m e one* too. T h e in stitu tio n a l sid e o f th e bu sin e ss a n d m a n a g e d m o n e y w as an area I k n e w litd e a b o u t. W h y w o u ld I w a n t to tra d e m o n e y fo r som eone else, give th e m 8 0 % o f th e p rofits a n d keep o n ly 20% ? O v er th e previous years, I h a d b a c k e d q u ite a few trad ers. T h e d eal w as always 5 0 -5 0 . T h e tra d e r k e p t a t least 5 0 % o f th e p ro fits. 1 fu n d ed 16 different traders over th ree decades, a n d o n ly o n e ever m ade m oney— B ob B uran. So, I don’t b ack traders anym ore. O n e o u t o f 16 m akes fo r a b a d w in-loss ra tio reg ard in g tra d in g traders; a tru e testa m e n t to h o w ch allen g in g th e tra d in g pro fessio n is. A t a n y rate, I co u ld n o t u n d e rsta n d w h y 1 w o u ld g o to so m e o n e else fo r m o n e y w h en I h a d m y o w n . Liz gave m e th e n a m e o f th e tra d e r sh e w as raisin g m o n e y for so I co u ld talk to h e r o n th e p h o n e a n d learn m o re. T h e C T A w as Liz C h ev all, a n d sh e w as as gracious a n d as h elp fu l as c o u ld be. Liz was o n e o f th e o rig in a l T u rtle T rad ers ta u g h t b y R ic h a rd D e n n is a n d Bill E c k h a rd t. T h e T u rtles w ere lo n g -te rm tre n d follow ers a n d ,

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in their heyday, managed a substantial a m o u n t o f funds. H er firm, E M C Capital Advisors, was (bunded in 1988. It h ad respectable performance, modestly outperform ing th e S i’s for 2 5 years. Liz had a remarkably dem ocratic view o f trad in g . She once said, *Go for it. Today the physical advantage o f m en in th e trading pin is inconsequential because trading is virtually 100% electronic. I give the same advice to both m en and w om en seeking entry-level jobs in managed futures. Technical skills are m andatory. G reat thinkers and idea creators need technical applications to test a n d execute trading strategics. Having those skills is a great way to gain en try or to build your own business.* She believed th at n u m b ers w ere a meaningful way to combat discrimination— a profit sheet c a n n o t tell the differ­ ence between a male or female trader. A nd she believed th at m anaging m o n e y w o u ld b e worth my while— so much so th at we often had p h o n e conversations about it “You know, when you manage m oney, y o u d o n ’t have to get the same type o f tetum s you do on your personal account. Yet indirectly you are using much greater leverage— just o n o th e r people’s money. *Oh, G od, you have m y atten tio n * “You already have a sound strategy an d great experience. Just keep doing what you are doing except scale u p th e size.* She spoke w ith conviction, an d i t really p la n te d a seed in my head. She stressed that the ability to a d a p t to ch an g e is the key to long-term success in trading. ‘ I ts relatively easy to develop a profit­ able trading strategy over a short tim e fram e. It’s far m ore challenging to develop a reliable m ethod to co n tin u ally a d a p t th e strategy to future market conditions.* G o forth and prosper! Liz passed in 2013 at age 56 o f an aneurysm . I h o p e her name is remembered. She was che only original fem ale ‘Turtle* trader and one o f the few to stay in business for so long. S h e w as a force o f nature, and I am so glad I knew hen

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I educated m yself as best 1 could a b o u t this new side o f th e business. I m et w ith brokers in Chicago. I m et w ith Richard Kovner, brother to the infamous Bruce Kovner. H e had an unglam orous office in the garment district o f New York. I w ent to Delaware and, courtesy o f a friend m et w ith folks w ho ran D elaware Pension m oney. 1 m et contacts in everything from th e seediest offices to th e classiest digs. Everyone was willing to give m e their tw o cents on th e business an d how to get started. I saw the low returns other m anagers were m aking and thought I could do better. I ts doable to m ake a 100% return o n a million dollars. It’s nearly im possible to do th a t o n a billion. Still, I appreciated Liz’s advice. I w anted to b u ild a business an d n o t ju st trade for myself. There is a great line in The Jerk when a light bulb goes o ff in Steve Martin’s head: “Ah-ha! It’s a profit deal!* T h at is how I felt. T here is a significant difference betw een gener­ ating returns o n big m oney, m eaning $ 1 0 0 to 300+ m illion, versus my personal account w hich was sizable by now. I was com petitive, though, and th o u g h t it w ould be easy to produce th e 2 0 0 -3 0 0 % returns I was used to doing. W rong! I called u p M orris, w h o had backed me o n the Pacific C oast Exchange w hen I blew o u t. W e had stayed in touch because I had convinced h im to b u y th e In sig h t software I used. H e loved it an d used it every day to trade, so m aybe he felt he owed me. B ut perhaps he liked talking to m e now th at he no longer had to chew m e o u t for being too quick o r slow in adjusting ou r positions. Somehow, we had rem ained good friends. 'M orris, I need to show a track record o n a third-party account* T hird party accounts were also know n as O P M s— for ‘ O th e r People’s Money." ‘ W h a t d o you need?*

§

*1 don’t know, is $30,000 OK?* ‘ Sure!* H e sounded unfazed.

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T his does n ot sound very Im pressive, b u t I fig u re d i f I traded 1 contract in a third-party account, it w o u ld b e p r o o f o f th e program I had been doing for myself. It could serve as a u n it size— o n e contract per $50,000. Just like that, I had m y first O P M deal; th a n k s to M orris' undying optim ism , I officially started m anaging m o n e y in 1 9 9 2 . Some people can trade their ow n m o n ey b u t flop w h e n under the pressure o f trading O P M . O th e rs can sh o w im pressive performance on O P M b u t are too lackadaisical w hen tra d in g th e ir o w n accounts. T h u s, it is essential for investors to see a le n g th y re a l-tim e record on O P M before com m itting funds to a trader. I am n o t sure how w ord g o t o u t I w as m a n a g in g m o n e y because I never d id any advertising. N o r d id 1 h ave a n y o n e raising money for m e. T h e M arket W izard book h a d b e e n p u b lish e d , a n d m y name in p rin t undoubtedly helped. I d id w ell tra d in g th e P ritzkers' money w h ich was placed w ith m e th ro u g h o n e o f m y C h ic a g o contacts, an d th a t was all the Street needed to know . T h e P ritzk e rs are one o f th e w ealthiest families in A m erica, h a v in g m a d e a fo rtu n e from their stake in the H y att hotel ch ain . T h e y w ere so m e o f th e first to be aggressive in allocating fu n d s to altern ativ e in v e stm e n ts such as CTAs and hedge funds. I f th e Pritzkers h a d m o n ey w ith m e. everyone h ad to have m oney w ith m e. S o o n I h a d to b e c o m e a C T A because you are only allowed u p to 15 acco u n ts b efo re th e C F T C requires you to register. I delivered a 7 6 % re tu rn a fte r foes m y first year, and 1 was up an d running. **♦ Shortly after th at, 1 started ru n n in g a c o p p e r h e d g in g program courtesy o f M orris. H e sat o n th e b o a rd fo r a firm w h ic h produced c o p p e r w id g ets o n razo r t h i n m a rg in s . P e r io d ic a lly I b o u g h t a couple hundred copper futures 16 - 18 m o n th s o u t to hedge their com m ercial contracts. T h e n each m o n th I liq u id a te d a se t num ber o f contracts as th e copper w as used in p ro d u c tio n .

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As traders, w e look a t futures as a speculative vehicle. B u t w hen futures w ere created in th e m id -1 8 0 0 s, it w as fo r th e farm ers to reduce th e u n certain ty in their business w ith th eir crops in th e field. T h e actual users an d producers are referred to as 'co m m ercials.” M y copper client could n o t afford to guarantee a fixed contract price an d risk the raw m aterial cost rising above his m argins. I relied o n th e brokers in the p it to shop a ro u n d m y orders. W h o is going to sell m e cop p er futures w hich d o n 't expire u n til

a year an d

a h alf later? M ost o f th e trad in g is d o n e in th e 'f r o n t m onth* w hich is the co ntract closest to the actual delivery date.

Copper-1994: Scram bling to g et long com m ercial hedges executed. T h e different years are assigned colors. I f I w ant to buy copper for the follow ing year, it is th e 't e d m o n th ,” m eaning red for the second year o u t. I becam e good friends w ith th e N ew York co p p er brokers o u t o f necessity. I m ay n o t have k n o w n m u c h a b o u t th eir lives, b u t I relied o n th em to h elp m e fin d custom ers to take th e o th e r side o f th e orders for m y com m ercial client. W e h a d slang nam es for th e

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in d iv idual m arkets. C o p p e r w as “th e w ire.” “ B u y m e 5 0 cars o f the w ire, m ark et.” C a rs ■ c o n tra c ts. A n o th e r f u n n y n a m e w as “sweet stu ff” fo r sugar. “O ffer 50 sw eet s tu f f a t 8 .8 5 .” C o p p e r has stro n g seasonal te n d e n c ie s— t h e la rg e s t orders are p laced in th e fall. T o th is day, I lo o k f o r a r ip e b u y in g opportunity in O c to b e r w h en I have a h ig h deg ree o f c o n f id e n c e t h a t co p p er has reach ed its seasonal low. P rices are re a d y to rise , a n d a lo n g position ca n p a y well.

My horizons were expanding beyond trading as a sole proprietor.

20

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F

ran k w as a u n iq u e , b rillia n t in d iv id u a l w h o e n te re d m y life m o st random ly. H e lo o k e d th e p a r t o f a stereo ty p ical e n g in e e r— sh o rt sleeve sh irt (plaid flan n el in th e w in te r), p e n in th e p o c k e t, w ire-

rim glasses a n d a crew c u t. F ra n k h a d w ritte n so ftw are fo r H e w le tt Packard w h ic h e x te n d e d th e sh e lf life o f o n e o f th e ir p ro d u c ts b y tw o m o re years. H e w as o n e o f th e few, i f n o t th e o n ly p e rso n , to neg o tiate a percen tag e o f th e p ro fits in to h is c o n tra c t. H P th o u g h t it im possible to co m p le te a p a rtic u la r jo b u n d e r th re e m o n th s , le t alone a t all. B u t F ra n k s m o tto w as, “I t’s n o t i f it ca n b e d o n e , b u t h o w fast i t ca n b e done.* I t goes w ith o u t sa y in g h e p ro v e d th e m w ro n g a n d e n d e d u p financially set fo r life. W ith h is n e w w in d fall, it b ecam e h is m issio n to c o n q u e r th e m ark ets w ith h is g en iu s b ra in . B u t h e w as h a v in g a to u g h tim e . U n lik e softw are, th e m a rk e ts c a n n o t b e reliab ly w o n w ith raw intelligence. 133

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13S

Frank was Io n o f fun to h an g w ith because h e h ad all th e toys: helicopters, m ilitary H u m m e rs, th e latest a n d greatest je t skis, an d a m lllion-dollar m o to rh o m e . W h e n you have n o kids, y o u can en d up w ith way too m u ch tim e on y o u r hands. F rank lived in a m odcsr, n o n -d cscrlpt ra n c h e r in th e w oods, b u t h is b a se m e n t lo o k ed like a top-secret m ission c o n tro l center, H e h ad th e fastest c o m p u te rs and data feeds, su rro u n d e d by in d u strial size ionizers. Every cable and wire was perfectly tied back a n d h id d e n o u t o f sight. T h e re was an extensive collection o f rifles in a separate ro o m , co m p le te w ith a sophisticated piece o f e q u ip m e n t used to recalibrate laser sights. T h e first tim e h e show ed it to m e, all I co u ld say was, “ P retty dangerous to keep th at type o f arsenal n ex t to a tra d in g office.” “D on 't w orry, I have all m y flies b acked u p .” H e was alw ays an engineer. • •

0

F ra n k to o k us o u t to a n a b a n d o n e d a ir p o r t in h is m ilita ry H um m er, and we all to o k tu rn s d o in g d o n u ts in th e sa n d . E rika was hanging o n for d ear life try in g n o t to get th ro w n o u t th e w indow . Frank also gave E rika rides o n th e b ack o f his H o n d a G o ld W in g m otorcycle, an early n in e tie s m o d e l all tric k e d o u t. S h e w o re a helm et, and they on ly w en t a ro u n d th e block. S om ehow , she d id n o t grow u p to be a thrill seeker. A nd Frank's jet skis! H e h ad a Y am aha, th e biggest a n d b ad d est you could b u y at th e tim e. E rika an d I rode o n th e back. W e p u t in at th e Rancocas C reek In N ew Jersey a n d w o u ld go all th e w ay o u t to th e D elaw are River. F rank was always try in g to to e th e lin e at 6 0 m p h . I co u ld n o t w alk th e next d ay since m y q u a d s w o u ld be screaming. E rika got squished betw een us. W e’d all go o u t for a C o k e afterw ard— sta n d ard fare for Frank, Frank an d I h ad a silent pact: 1 ta u g h t h im ev ery th in g I knew ab o u t th e m ark ets, a n d h e ta u g h t m e e v e ry th in g h e k n e w th a t I could u n d erstan d , w h ich w as n o t m u ch . I drove to his h o u se every

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Wednesday after the markets closed. We spent several hours on his computcis and then we went roller skating. Nobody would believe this surreal image unless they saw it fbr themselves: an airplane hangar in the m iddle o f N ew Jersey filled with dozens o f roller skaters between the ages o f fifty and seventy. Women with skinny flamingo legs twirled around in teeny skirts as a live organist played. Men stood erect like ballroom dancers, but on roller skates. The arena swirled to the rhythm o f waltzes and foxtrots in what appeared to be a forgotten world. Each week the paramedics showed up and wheeled out a senior who slipped and fell, spraining an ankle or breaking a bone. They might have been the only outsideis who knew about the hanger and the weekly soiree o n wheels. Frank bought m e an expensive pair o f ritzy toller skates. H e needed someone to go with him to this weekly event and be his skate partner. I was the youngest there by at least 20 years, as well as the w orst skater. A fter a vigorous hour o f roller skating, Frank and I would get a Coke, continue to talk shop, and then talk m ore shop all the way hom e. Topics included: w riting scripting languages, com p arin g d a ta feeds, Improving computer efficiency. Statistics, m ore statistics, and technical subjects for which I had a rudimentary knowledge of. ‘ D urable and Robust* were the two words Frank brainwashed into m y head. I started using Aspen Graphics in addition to m y Insight and TradeStation software. Aspen was w ritten by two rogue partners who had left CQ G , another charting software firm. Since Frank wrote the scripting language for Aspen, he taught m e how to write anything imaginable. I am not a programmer, b u t w ith his guidance, I soon felt like a master com puter hacker. N ow I had a language to describe

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any pattern or concept under the sun. I could make things pop out on my charts in pretty colors. Jackson Pollocked graphs exploded with hues that actually m eant something to me. A few yean earlier, I developed a model on m y Insight. It was a volatility model I used for buying o r selling straddles on the OEX (similar to buying or selling prem ium). I t consisted o f overlaying multiple rates o f change on top o f each other and using the max/ min o f all these squiggly lines as an indicator. So, for example, when the readings were all clustered together, and the m ax/m in was low, I bought straddles on the OEXs. W hen the bands were spread far apart, as would happen after a large standard deviation move, I shorted straddles.

B-huy straddles, go long volatility S-sell straddles, go short volatility I had the idea the first and second derivatives o f these rates o f changes could have value i f program m ed into a neural network. Frank had a fellow Hewlett Packard friend, Ernie, whose son worked

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for NASA. N o th in g like g e ttin g h e lp in t r a in in g a n e u r a l n e t from a rocket scientist! W e re-ran th e d a ta ev ery th r e e m o n th s to update its training. N eural netw orks m ig h t h av e s o u n d e d sexy a t th e time, but in th e g rand schem e, th ey are q u ite p rim itiv e . T h e y c a n n o t be used as a substitute for a system a n d are o n ly as g o o d as th e questions you ask o f th em . As F rank ex p lain ed , n e u r a l n e tw o rk s are best used as ‘p a tte rn classifiers.*’ T h e y m ak e a fu n c tio n a l c o m p o n e n t in a more extensive, m ore com plex system . After ru n n in g the d ata a t th e e n d o f ea c h day, I asked th e network th e question: w h at is th e d ire c tio n a l b ias f o r th e n e x t d a y and how reliable is this bias? It s p it o u t a re a d in g f r o m -5 t o 5 w ith 0 repre­ se n tin g n o edge. I h a d lo ts o f f u n w ith th is . I t s u p p o r te d th e work I w as d o in g w ith m y T aylor m o d e lin g a n d p r o v id e d a n ad d ed confi­ d en ce factor. A h ha! T h is neural n e t w as th e k e y to e v e ry th in g . I t was so good I w as going to have to k eep i t in a vault! I t w as g o in g to be better th a n m y G o lf system ever h a d b een . T h e m ark et m akers o n th e t r a d in g f lo o r o f t h e P H L X called each m o rn in g w a n tin g to k n o w w h a t t h e n e t sa id fo r th e day. I was p o p u la r a n d tru sted because m y c o m p le x a n d s e c re t system was on a w in n in g streak. A reading o f +3 m e a n t easy tr a d in g w ith a long side bias. B u t th ere w as o n e exception. W h e n i t in d ic a te d a 3 o r -5, there co u ld b e a huge m ove, b u t th e d ire c tio n m ig h t b e co m p letely wrong. “H ey, w h at’s th e “N e t” re a d in g to d ay ?” “H m m m , -5. G e e .. .T h ere’s p o te n tia l f o r a g o o d tre n d day down.’ W h e n it tu rn e d o u t to b e a m assive tr e n d d a y u p instead, the trad ers w ere n o t so happy. H ere’s w h a t w as h a p p en in g : w h e n th e m a r k e t w o u n d dow n to a n eu tral eq u ilib riu m level, th e n e t c o u ld n o t p r e d ic t th e directional o u tc o m e . I t n eed ed m o m e n tu m to give a g o o d re a d in g . Instead, it in d ic a te d 3 o r -3 , im p ly in g t h e p o te n tia l f o r a sig n ific a n t range day S o m e tim e s th e m a rk e t w o u ld je r k v io le n tly i n o n e d irectio n and

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th en w hipsaw in th e opposite direction. M y m arket m aker b uddies on the floor d id n o t w an t to h ear there was going to be a huge move, direction unknow n. O n e does n o t need a neural n e t to m odel this. I learned to m odel an y th in g linearly. T h e n it becam e too m u ch w ork to keep it alive for am usem ent purposes. T h ere is n o m ore glorious feeling in th e w o rld th a n cap tu rin g a huge trend day. M y first seven-digit day cam e from a short position in the SPS. T h e m arket was overbought, th e sentim ent readings showed too m uch bullishness, the 2 -period rate o f change was poised to flip down an d m y m odels lined u p like a rare planetary alignm ent. I had come in to th e day w ith a s h o rt side bias. W h e n th e m ark et started selling o ff the opening, I added in a big w ay an d held u n til the close. T his is the ideal tren d day— o p en o n th e high a n d close o n th e low w ith range expansion an d v olum e. T h e m ark et gives a b o u t 1-2 tru e trend days a m o n th i f it is feeling generous.

M illio n dollar trend day

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After the markets dosed, I w ent to taekw ondo class with Erika or rode my horse. O n this particular day, I will never forget driving down our two-lane country road to the karate studio. T h e sky could not have been any bluer, the trees were a deep lovely green, and the sun was a shining ball o f yellow fire. M y eyesight was razor sharp, and my senses heightened from my body drow ning in endorphins. They say the first high is the best. 1 have never felt th a t intensity again, but I won't forget the feeling cither. M y gam e becam e h u n tin g the big trend days. Lions and tigers and bears, o h my.

Technology offers the trader more resources than ever, but it is experience that has a greater edge.

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MRCI

iving in the m iddle o f nowhere, (the N ew Jersey Pinelands), had Its benefits. For example, the barn was close. Besides that, it was a sandy wasteland w ith bracldsh cedar w ater in the streams. T h e running joke was that the state bird was the m osquito, though it was a close race between it and the greenhead horsefly.

L

To escape the Pinelands, I occasionally took a trip up to C hicago to have dinner w ith the broken handling m y business. M y brokerage firm, Gerald which later becam e R and Financial, arranged a d inner for ten clients at one o f Chicago’s am azing steakhouses. C hicago was the center o f the m eat-packing industry and it has som e o f the country's top steakhouses. Steve M oore sat at the opposite side o f the table from me. T hough we d id not get a chance to talk m uch at dinner, we started sharing research over the phone shordy after. Steve had been trading since th e early seventies an d set u p a com puter research facility in the m id-eighties. H e founded M oore

141

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Research C enter, M R C I, in th e e a rly n in e tie s . I t w a s o n e o f the finest com puter research offices a t th e tim e . H e lives o n his ranch w ith his wife, assorted dogs, w ild tu rk ey s, a n d a g o a t o n th e side of a m ountain outside o f E ugene, O re g o n . H is m o n ito r- lin e d office is next to his house in the w oods. S teve is a n o th e r c a n -d o person. This is the them e am ongst th e trad ers I fin d m y s e lf w o rk in g with. He single-handedly built a professional q u a lity grass te n n is c o u rt on the side o f his m ountain along w ith a 3 -h o le g o lf c o u rse a n d a putting green. H ow he m ade the tim e is a m y ste ry b ecau se ever since I have know n him , Steve has been in his office 2 4 /7 .

W e form ed a productive research p a rtn e rs h ip . I w ro te a daily lax with trading signals and com m entary to p ay fo r th e research. Nick was Steves full-tim e program m er. H e w o u ld ta k e a d a y o r tw o to program m y ideas and then Steve set dozens o f b a c k -te stin g ro u tin e s to run overnight. Two days later I received h u n d re d s o f pages b y fax. Steve followed u p by FedExing h ard copies o v e rn ig h t. T h is was when the Internet was in its infancy. People w o u ld still p u m p page after page into a fax m achine or even send a large envelope th ro u g h th e P ony Express.

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M y collaboration w ith Steve com bined the best o f th e theoretical and real w orld. H e was n o t o n ly a n ace statistician b u t a diehard trader as well. H e was receptive to m y ideas, a n d i t tu rn e d o u t to be a trem endous learning experience for b o th o f us. For exam ple, in o u r early testing, the results seemed too good to be true. I f b o th a buy and a sell signal were generated o n the sam e day, th e p ro g ram was only counting the w in n in g trade. It takes extra sc ru tin y to d o u b le check back-tested results, b u t th e alternative is to fin d o u t th e h ard w ay by betting m oney an d losing dollars. T h ese in itial ovcrly-optim istic runs convinced m e I was going to fin d a p o t o f gold a t th e e n d o f the rainbow. Steve h a d a m assive d atab ase, w ell b e y o n d th e size f o u n d a t m ost firms. H e was know n for his w o rk o n scasonals a n d pro d u ced different reports for the exchanges. H e pioneered ru n n in g correlation studies on everything from 5 -m in u te ch arts to w eekly data. H e ran seasonals o n individual stocks before it becam e p o p u la r elsewhere. O n e system he developed b o u g h t th e three m o st o verb o u g h t futures m arkets (based o n a high stochastic reading). I t th e n sold o u t one if it fell o u t o f th e to p three. I t was a clever relative stre n g th system . M odeling a n d backtesting are like falling d o w n a ra b b it hole. T im e Melts away, an d after m an y days, you m ay o r m ay n o t e n d u p w ith anything worthwhile. B ut if you do n o t try going dow n every possible path, you m ay miss som ething. A n d i f you d o n ’t f in d a n y th in g new, at least y o u kn o w y o u looked. I t is a n en jo y ab le, a ll-c o n su m in g process for m e. Steve tau g h t m e to th in k o f m odeling in term s o f actuarial tables w hich is th e basis for th e seasonal trades. In o th e r w ords, a seasonal trade m ig h t be “Buy B onds— M ay 2 1 , exit Ju n e 14.” H ow ever, th e trade is n o t necessarily tim in g sensitive. You m ig h t b u y o n M ay 2 1 , b u t th e m arket co u ld sell o f f for a few days. It m ig h t n o t m ake its high o n Ju n e 14, b u t perhaps a few days beforehand. Yet y o u will show a p ro fit. T h is “window*’ has a p o sitiv e e x p ectatio n . I f yo u

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com fortable th in k in g th a t th e m arket o r relationship w ill revert back in to its previous range.

C rude-1999: January dow n seasonalfails, m arking the sta rt o f a m ajor uptrend.

But the market is NEVER wrong. O n e day, L arry C o n n o rs sto p p e d by m y office w ith his partner fro m his latest b o o k p ro je c t. W h y w o u ld th e y driv e o u t to th e Pinelands o f N e w Jersey? T h e y h a d w ritte n a b o o k to g eth er an d asked i f I w o u ld w rite a n en dorsem ent. T h e nam e o f th e bo o k was Investm ent Secrets o f a H edge F u n d M anager— great title! I knew little about th e publishing an d m arketing side o f the business, b u t Connors was interested in d o in g m o re projects. W e h it it o ff a n d fo r th e next few m on ths, talked o n th e p h one. H e m ailed m e a hilarious m ockup m aking fu n o f all th e hy p ed ads perm eating th e trading magazines.

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"Look, 1 bought here and sold here and made $6000 off an initial investment o f $100. You too can learn the secrets for only $29.99. B ut wait, there’s more! Buy now and you will receive a $49 research report— FREE!” And it had my picture pasted on it. I still have it somewhere in my files along w ith articles, notebooks and test results spanning 35+ years. We talked karate— Larry was a master in Muay Thai. By now 1 was a few m onths away from gening my black belt in Tae Kwon Do. D id we bond over searching for the most efficient way to destroy the enemy? H e lived in Malibu and I had grown up on the beaches one hour south. We both had families and ferocious work ethics. Larry was keen on doing a book together and anyone who can make me laugh has m y anention. I've never worked so hard in my life as I did on that project, which is why I never wrote another book until now. T h e year was 1 9 9 6 .1 was getting up at 5 AM to write, trading from 8 A M - 4 PM , and then back to working on the book in the evening. Larry self-published it, which was even more work since we did the form atting. Steve M oore did the backtesting and tables for us which we printed in the back o f the book. My husband, Skip, came up with the title, S tm t Smarts. T h e p rinciples in th e b o o k rem ain th e sam e.

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IHtS

w h e r e I s h o u ld sit. I t g av e m e c o n f id e n c e in a n u n f a m ilia r business e n v iro n m e n t. L B R G r o u p w a s g r o w in g in A U M , o r uA sse ts u n d e r Manage­ m e n t." I t w a s all w o r d o f m o u t h b a s e d o n o u r p e rfo rm a n c e . While L B R G r o u p g re w , m y h u s b a n d w a s t h e u l t i m a t e M r. M o m . He c o o k e d , h e b a k e d h is o w n s o u r d o u g h b re a d , h e m a d e oyster stew. He d i d th e d ish e s, h e to o k E rik a to sc h o o l, h e b o u g h t tu rk e y decorations f o r t h e c e n te r o f th e ta b le a t C h r is tm a s tim e . H e w o u ld ru n out and p ic k u p a m o v ie a t B lo c k b u s te r V id e o e a c h w eek . J u s t like the cliche h o w h o u se w iv e s w a tc h so a p s, h e w a tc h e d g o lf, b aseb all, basketball, f o o tb a ll, a n d h o c k e y a ll sim u lta n e o u s ly , all ta p e d , fast-forwarding f r o m o n e to a n o th e r . I d i d t h e y a rd w o r k , w h ic h , in a tw ist o f fate I n o w lo v e d . T h e s a m e roses t h a t h a u n t e d m e as a k id w ere now my a f te r n o o n th e ra p y . I h a d o ccasio n al p a n ic a tta c k s . A s m u c h as I p r id e d m yself on the w a y I c o u ld w easel t h r o u g h a tr a d in g flo o r c ro w d o r w eave through a ir p o r ts o n th e w a y to a m e e tin g , c ro w d e d s h o p p in g m alls d id me in. O n e la te a f te rn o o n o n a w e e k e n d w h e n th e sto res w ere n o t crowded, m y h u s b a n d a n d I w e n t to th e m a ll. H e w a n d e r e d o f f a n d I got lost I fro z e a n d b r o k e o u t i n a c o ld sw e a t. T h e r e w a s n o obvious destina­ t i o n , n o t r a d e to ex ecu te! F r o m t h e n o n , h e b o u g h t m y n y lo n s , m y su its , m y earrings; e v e r y th in g e x c e p t f o r sh o e s. T h e r e w as n o in te r n e t in th o se days and t h u s n o o n lin e s h o p p in g . H e d i d a ll th e g ro c e ry sh o p p in g , too. It w o u ld ta k e m e tw o h o u r s to g e t 10 ite m s . P e rh a p s it w as th e number o f d e c is io n s I h a d t o m a k e fo r m y liv e lih o o d . I c a n d e a l w ith markets o n a s c re e n , b u t 1 c a n 't d e c id e w h ic h b r a n d o f d o g f o o d to buy. I bet I s a v e d 3 ,0 0 0 h o u r s o v e r t h e y ears b y n o t s h o p p in g . • ** A f te r a su c c e ssfu l y e a r o f tr a d in g , 1 b u i l t a n e w o ffice o n the side o f t h e h o u s e . I t h a d m assiv e c a th e d r a l c e ilin g s, h ig h w in d o w s where w e c o u l d w a tc h t h e b ird s o n th e tre e s o u ts id e , a n d a cozy fireplace

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at our back. I was happy as a clam never having to leave my house other than to go to the barn or play tennis. M y husband still liked to go to visit the Exchange w hen m y daughter was in preschool. O n e day he brought a new person back to the house. Rick had recendy moved to Philadelphia. His wife was now the principal ballerina for the Philadelphia Ballet. She could not have weighed more than 85 pounds, and I rem em ber her fine, petite features, colorful scarves, and vivacious personality. Rick was a meticulous blue blood who looked like he had been bom with a silver spoon in his m outh, but he was truly a hard worker. He was previously employed by Sjo, Inc., a managed futures firm run by Susan Sjo, Stig Ostgaard, and Irwin Berger. It was a well-known trend-following firm like the original Turtles. Rick knew how to place orders and he knew how to w ork size, so I invited him to be part o f my team. We had everything in place to continue to grow. * * *

My m om was always bringing people into our house when I was growing up. She used to joke that she was the Underground Railroad for Salvadorans. But it was no joke. A young lady nam ed Rosa came to live with us, and m y m om called her a pretend sister. She helped keep the household running because m y sister took up considerable time with her disabilities. M y m om learned Spanish, Rosa learned English, and before you knew it, m y m om was helping bring Rosas family and friends over. El Salvador was a mess in those days, and you really could claim political asylum, b u t It was a lengthy process. We had graduate students living with us who worked with special-ed children and one m o n th , there was a friend from M ontana w ho lived with us. I never knew who was going to be sitting at the dinner table. So, years later, w hen I was the one w ith the “cool house out in the country," I never thought it weird to invite random traders or colleagues in under m y roof. It was one giant extended family with a few animals throw n in to make a full rounded zoo.

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O u r h o u se w as k n o w n as MC a m p R a s c h k c ." E v e ry weekend, trad ers from N ew York o r P h ilad elp h ia c a m e to h a n g aro u n d our pool in th e su m m e rtim e . M y h u sb a n d w as th e c o n s u m m a te h o st. H e had a n endless su p p ly o f p eo p le to tell h is b aseb all sto ries— always about h is p itc h in g in th e m in o r leagues fo r th e Y ankees. H e repeated his s to ry a b o u t o rd e rin g pizza in th e d u g o u t w ith R o n G u id ry dozens o f tim es. I k n e w th e n e x t lin e b y h e a r t, a n d th e n th e lines after that, like so m e o n e w h o has seen th e R o c k y H o r r o r P ic tu re sh o w a few too m a n y tim es. I w as th rille d becau se I n e v e r h a d to o p e n m y mouth. M e a n d th e A rt o f C o n v e rsa tio n ? N o t. H e b o u g h t sto n e cra b claw s, p la n n e d m u r d e r m y stery dinners, a n d organized fantasy football leagues. It w as a reg u lar com m une. My fam ily a n d M ik e w e n t o n ski v acatio n s w ith S teve M o o re. Frank took u s o n h is lu x u ry to u r b u s to A d a n tic C ity f o r d in n e r . A n d we went in to P h ila d e lp h ia to see R ic k s w ife d a n c e w ith th e ballet. Best o f all, th e m a rk e ts w ere w ell b eh av ed , so all w e re h a p p y a t th e com m une. A s alw ays, th e re is a b it o f th e c a lm b e fo re th e s to r m . Som etim es, it sta rts w ith tin y ripples. Steve h a d in tro d u c e d m e to G e o rg e, o n e o f th e b est m eat brokers o n th e floor. E verything is a lo t m o re fu n w h en y ou have a good broker. T h e re is confidence th a t y o u r ord ers are g e ttin g ap p ro p riately executed a n d th e in fo rm au o n passed back fro m th e p it is legit. You feel you have a secret edge even th o u g h n o b o d y k n o w s a n y b e tte r th a n anyone else. I n ev er m a d e g re a t m o n e y in th e m e a ts , b u t th e y w ere o n e more m a rk e t to o ffer a d ifferen t flavor w h ile w a itin g fo r trad es to line up in o th e r m arkets. T h e m eats are p ro n e to m a k in g V b o tto m s , unlike the g ra in s w h ic h can ta k e forever to base o u t. T h a t a n d th e y have strong se aso n al te n d e n c ie s. 1 s ta rte d tr a d in g th e p o r k b ellies a little bit at a tim e . A n d little b its p lu s little b its a d d u p . I w as still e n am o red with S tev e’s seasonal p ro g ra m . O n e d a y G e o rg e called R ic k to ta lk m e a ts . MH ey , y o u better be c a re fu l w ith th e se bellies."

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“W hat’s up?” Rick asked. “Look, you guys have the largest position in bellies, an d everyone In th e pit knows w ho yo u are." H ow could anyone know w h o w e w ere a n d w h a t m y p o sitio n was? But back In the early nineties, they d id. Perhaps o n e o f the clerks on the order desk let o u r nam e slip. It was easy to see w h ich firm was creating the tickets. T his situation was n o t a good th in g because i f th e m ark et starts to weaken, th e p it know s th e y have y o u by th e p ro v erb ial balls. They are nor going to m ake it easy fo r y ou to g et o u t a n d th e risk is a vicious one-w ay flush in to first no tice day. O u r p o sitio n was over 450 contracts w hich d id n o t sound so big at th e tim e b u t tu rn e d o u t to be a lo t o f pork bellies. Each contract was 4 0 ,0 0 0 p o u n d s o f p o rk bellies. O n e h u n d re d contracts rep re sen ted 4 ,0 0 0 ,0 0 0 p o u n d s o r 8 0 ,0 0 0 ,0 0 0 p ieces o f b acon. F o u r h u n d r e d c o n tra c ts m a d e e n o u g h b a c o n to to p 150,000,000 h am burgers. 1 w as n o t ready to ta k e d eliv ery o n a M cD o n alds franchise. P ork Belly futures sto p p e d tra d in g o n th e CM E exchange in 2011 due to low volum e. O n e could say they were eventually replaced by B itcoin futures, a telling co m m e n ta ry o n th e evolution o f th e industry. “Rick, we gotta lay low for a bit.” We did n o t call another order dow n to th e m eats for three weeks. We sat and waited for the p it to forget ab o u t us. Eventually they did, and by then the bellies were getting th e seasonal lift we w ere playing for. After a m o n th , we peeled o u t o f som e each day. I never traded the bellies again. U nfortunately, th e pigs were to have th e last laugh a decade later. • •• Rick took trips u p to N ew York to m eet w ith o u r brokers a n d schmooze th em over spaghetti meals. M ost o f th em w ere Italian. In return, o ur orders were taken care o f in the opening rotations. A good

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o n In b o th , I u sed S teve M o o re ’s site , M R C I , fo r its free c o rre la tio n tab les w h ic h h e still p u b lish e s today. A n o th e r b e n e fit o f tr a d in g w ith a p r e d e te rm in e d u n it size is th a t it is o n e less d e c isio n n e e d e d d u r in g th e tr a d in g process. T h e re are th o se w h o a d v o c a te a d ju s tin g th e p o s itio n size to th e in itia l risk to nev er risk m o r e th a n 1 -3 % o f th e c a p ita l. B u t w h o w a n ts to tak e tim e in th e h e a t o f b a td e to d o calcu latio n s? A lw ays tra d e th e sam e size b u t a d ju s t th e s to p in ste a d . F o r e x a m p le, I a m n o t g o in g to risk m o te th a n 5 0 0 d o lla rs p e r c o n tr a c t in th e n o te s . I f th e v o la tility is g reatly e x p a n d e d , th e n m y u n i t size m ig h t b e h a lv e d ,

and th e d o lla r

sto p d o u b le d , b u t e v e ry th in g is d e te r m in e d a h e a d o f tim e . I p refe r very w id e sto p s be c a u se i t Is esse n tia l to h a v e s o m e th in g in place b u t th e n it is easy t o a d ju s t t h e ris k p o i n t o n c e th e p o s itio n is o n . T h e t r u t h is t h a t i n m a n y m a rk e ts w e d id n o t k e e p re stin g sto p s in th e m a rk e t. T h a t is a n aw k w ard th in g to d o w h e n th e p o sitio n size is large. B u t w e d id k n o w w h e re a n d w h e n w e w ere w ro n g ! I h a d five p eo p le n o w in th e office o n th e side o f th e h o u se . W h e n tra d in g slo w ed , w e w a tc h e d th e sq u irre ls sw in g o n th e b ir d feeders h a n g in g o u ts id e . T h e c lu n k y C R T m o n ito rs w e re lin e d u p in a ro w b e n e a th th e a rra y o f h ig h w in d o w s fa c in g th e trees. T h e firep lace w as alw ays b u r n in g in t h e w in te r. M ik e s u p p lie d a n en d less sta c k o f C D s b y fem ale sin g e rs lik e S h a w n C o lv in , S a ra h M c L a u g h lin , a n d K .D . L an g. L B R G ro u p w as g ro w in g , a n d I a d d e d m o re p ro fit ce n te rs. W e h a d a seasonal s p re a d p ro g ra m th a t u se d S teve M o o r e s research w ith a 2 - p e rio d R O C to tim e e n trie s . B o b B u ra n tr a d e d th e v o la tility b re a k o u t sy ste m a t n ig h t o n th e overseas m a rk e ts. W e m a d e m o n e y in th e J G B s a n d g ave i t b a c k in th e F T S E . T h e r e w e re tw o o th e r assistan ts as w ell. W e w ere a te a m . W e c o u ld d o o u r respective tasks w ith o u t saying m a n y w o rd s. I t s f u n n y t o s p e n d so m a n y h o u rs close to so m e o n e w ith o u t ta lk in g m u c h .

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Laura to o k a trip to o u r office every three m onth* to help m e stay on to p o f things. T h e re were 10 m any m oving parts to ru n n in g th e CTA . O n e n ig h t we w en t to see th e Team A m erica m ovie in theaters after a long day at th e office. T h a t m ovie is so vulgar and over-the-top, b u t hilarious. I rem em ber looking over d u rin g one o f the raunchiest, funniest bits and seeing m y business m anager, I-aura, trying to act like she wasn't laughing. It was like a th ird grader w ho knows they can't laugh in class, w hich only m akes whatever happened a m illion tim es funnier. "Laura, you can laugh at the movie!" She looked so surprised and then bu st o u t giggling. Soon after, I flew dow n to Tennessee, b u t for a different reason than to visit Laura. A few m onths earlier, Steve M oore had introduced me to R obert Sparks. T h e Sparks were based o u t o f M em phis and were huge In th e cattle business a n d agricultural m arkets. I had the great pleasure o f m eeting Robert's father, W illard Sparks, w ho founded Sparks C om m odities and was part ow ner o f R E F C O , one o f the largest com m odity trading firms at the tim e. T h eir division raised money for LBRGroup. W e soon had m ultiple accounts and funds we traded, and so the Sparks Invited m e to their M em phis office. T h e trip was m em orable because I left w ith a bo n d position on that blew up w hile I was on the plane. T here was a radical surprise econom ic report, and I had not left good Instructions w ith m y now overstaffed office back hom e. H ow docs fate pick th e tim ing o f these outliers? It can't be random . W hatever th e real reason, it keeps me eternally hum ble. I was about to m eet m y largest clients face-to-face for the first tim e w ith a two standard deviation move against us in the bonds. I think It was In M ay 1995, b u t m y subconscious’ tendency towards repressing bad m em ories makes it h ard to be sure. T h e opportunity to see th e Sparks' operations was quite inter­ esting to I had to collect myself and p u t on a poker face. T hough my face was calm, my stom ach was churning. Each m orning, W illard

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c o n d u c t e d a m e e t i n g in w h i c h s e v e ra l e c o n o m i s ts , fundam ental a n a ly s ts, a n d tw o w e a th e r m e n g a v e t h e i r fo re c a sts f o r th e day. Itwai a n in f o r m a t i o n o rg y . O n e w e a th e r p e r s o n p r e s e n te d th e American m o d e l , a n d t h e o t h e r s h o w e d t h e E u r o p e a n M o d e l. T h e modeli o f fe r e d c o n f lic tin g v ie w s . W h a t d o f u n d a m e n t a l tra d e rs do when t h e r e a r e c o n t r a d i c t o r y w e a th e r m o d e ls ? O f c o u r s e , m y technical m o d e ls w e re n o t so h e lp f u l e ith e r w h e n t h a t b o n d fa t tail outlier hit. T h e S p a r k s m u s t h a v e s till b e e n o k a y w i t h m y perform ance b e c a u s e th e y le t m e u s e t h e i r t o w n h o u s e i n t h e C a y m a n Islands, c o m p le te w ith d a t a fe e d s a n d c o m p u te r s . W h e n I g o t b a c k h o m e , I h a d t o d o s o m e s e rio u s rethinking in t h e li g h t o f th e fia sc o b o n d tr a d e . I d e c id e d I d id n o t like being a b o ss , o n ly a tra d e r. T h e r e w a s r o o m f o r o n l y o n e c o o k in m y kitchen, a n d t h a t w a s g o in g t o b e m e . S o m e tim e s i t is h a r d t o d raw the line, I f f o u r p r o f i t c e n te r s a re g o o d , w h y s h o u l d n ’t five b e even better! M o r e tr a d i n g stra te g ie s m e a n t w e c o u l d h a n d l e m o r e m oney. But it d o e s n o t w o r k t h a t w ay. M o r e p r o g r a m s a ls o le a d s t o m o re exposure w h ic h tra n sla te s to in c re a se d risk . A n d I d i d n o t w a n t to track people o r o t h e r s y s te m s , o n l y m y t r a d i n g . I t w a s t o o m u c h to handle. M u ltita s k in g w a s ta k in g t h e f u n o u t o f tr a d in g . S o , I le t everyone go e x c e p t f o r R ic k a n d f ig u re d t h e t w o o f u s c o u ld d o okay. T h e h a r d e s t t h i n g t o d o is t o s a y g o o d b y e t o s o m e o n e , especially i f y o u d o n ’t w a n t t o h u r t t h e i r fe e lin g s. I w is h e v e ry o n e around me c o u l d m a k e fa b u lo u s to n s o f m o n e y a n d b e a b ig h a p p y family that I m is s e d g ro w in g u p . I t is d if f ic u lt t o s e p a ra te b u sin e ss a n d pleasure, w h i c h is w h y I h a d t o le t th e m g o b u t a ls o w h y i t w a s so awkward. W h a t d o y o u d o w h e n y o u ta k e a lic k in g ? P ic k y o u rself up by t h e b o o ts tr a p s y e t a g a in . S t e p o n e r l a k e a few d a y s o f f t o c le a r t h e a ir a n d regain objectivity. S t e p t w o i B e p a t i e n t a n d w a it f o r a 9 5 % s u r e th i n g trade. S t e p th r e e s M a k e t h e tr a d e o n s m a ll size. S t e p f o u r s C o n v e rt! “ M o r tim e r , w e ’r e b a c k !"

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I re m e m b e r w a tc h in g A n d re A gassi in th e F ren c h o p e n in 1999. In th e final, h e w as d o w n th e first tw o sets a n d cam e close to losing th e th ird . B u t h e m a n a g e d to save th e b re a k p o in t a n d u p o n d o in g so, h e p u m p e d h is fist h ig h in th e air. C o n v ert! Seize th e m o m e n t u p o n th e first sh ift in m o m e n tu m ! H e w as still d o w n , b u t th e change in en ergy w as p a lp a b le. E ven h e k n e w it. A gassi w e n t o n to w in th e th ird , fo u rth a n d fifth set to ta k e th e final. H is d e te rm in a tio n a n d perseverance alw ays s tu c k w ith m e w h e n I w as in th e situ a tio n o f m ak in g b a ck a loss.

This is the story o f a trader’s life. Keep putting one foot in front o f the other. “Don’t look back, you can never look back. ” — Don Henley

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u r g r o u p a t C a m p R a s c h k e in c lu d e d a h o d g e - p o d g e o f m a r k e t e n t h u s ia s t s w h o m F r a n k h a d c o lle c te d . O n e o f t h e m w a s a y o u n g fe llo w w h o h a d w o r k e d f o r L o u is D r e y fu s tr a d i n g ca sh

c o m m o d itie s . H e w a s i n c h a r g e o f ju i c e c o n c e n t r a t e a n d t o m a t o p aste. H is sp e c ia ltie s w e re p in e a p p le , c ra n b e rry , a n d o r a n g e ju ic e . H e h a d a n e n l i g h t e n i n g o r a n g e ju ic e s to r y t h a t re fle c te d m y s e n tim e n ts a b o u t f u n d a m e n ta ls . O n c e a year, t h e t o p o r a n g e ju ic e ex e c u tiv e s f ro m D re y fu s m e t in B razil t o assess t h e firm 's h e d g e s i n f r o n t o f a n o r a n g e ju ic e r e p o r t. T h i s re le a se w a s t h e e q u iv a le n t o f a ll th e u n e m p l o y m e n t r e p o rts f o r th e y e a r b e in g c r a m m e d t o g e th e r i n o n e d a y —a real " T r a d in g P laces’* r e p o r t . T h e t a l k i n g h e a d s t o o k o u t a p ie c e o f p a p e r a n d m a d e a c h e c k lis t. T h e y p u t a ll t h e re a so n s w h y th e y s h o u ld r e d u c e t h e size o f t h e i r h e d g e s i n o n e c o l u m n a n d all t h e re a so n s w h y th e y s h o u ld in c re a se t h e size o f th e ir h e d g e s in th e o t h e r c o lu m n ( Very scientific!). T h e s e p e o p le h a d m o r e in f o r m a tio n o n t h e o r a n g e ju ic e m a r k e t th a n 161

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any oilier firm, They owned the crop, the processing plants, and the distribution systems. But even though they knew what the report was going to be, they could not predict how the market would react to the news.

It's never the news Itself but always the msrket’a reaction to the news that Is most telling. I managed multiple accounts at Sakura Dcllsher, a clearing firm, and was trading a guaranteed fund for them as well. Guaranteed Funds came about In the mid-nineties. T hey were Japanese fundi where the principle was supposed to be guaranteed. Futures are highly leveraged. So, the cosh which Is not used for m argin can Instead be used to purchase notes or zero-coupon securities. These then guarantee the principal at maturity. Several managers were selected to trade each fund w ith the theory that diversification smoothed volatility in the individual performances. Instead, one o f the managers had a considerable drawdown and that In turn shut down the rest of the managers. T he fund could not afford to lose anymore. We had only traded the fund for five m onths when It got axed due to another managers losses. Investors then had their m onies tied up for the three-year term. They had to count on the Interest accrued to moke them whole again. The popularity o f this product did not last long, even in Japan where Interest rates were close to zero. Rick and I went to Chicago to visit Leo M elam ed, the CEO of Sakura. Leo was a prom inent figure in the Chicago landscape. He was one o f the most Important people in the evolution o f the futures industry. Leo had started o u t as a ru n n er ac th e C M E (Chicago Mercantile Exchange) and worked his way up to the chairman of the CM E in 1969 at age 37. Sakura Dellsher was founded by him in 1965. He was instrumental In creating the SP futures, currency futures, and Globex. Eventually, he led the exchange to go public in 2002. He probably held every title o ne could hold at the CME.

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W h e n w e w ere in h is o ffice, th e m o s t n o ta b le th in g b e sid e s th e fine a rt w as a set o f h a n d - d ra w n c h a r ts ly in g o n to p o f h is d e s k . L eo excitedly called u s o v er a n d s h o w e d us th e tr e n d lin e s h e h a d d r a w n h ig h lig h tin g a s ig n if ic a n t c h a r t f o r m a tio n . D e s p ite h is e n o r m o u s resp o n sib ilities o f r u n n in g m a n y b u sin e sse s, h e still f o u n d tim e to u p d ate his daily c h a rts b y h a n d . W ow l I w as im p re ssed . H e g racio u sly signed tw o o f h is b o o k s fo r u s, a n d w e w e re le ft s ta n d in g th e r e w ith

a new

b u rst o f in s p ira tio n .

T rad e lo c a tio n is essen tial w h e n tr a d in g o n a s h o r te r tim e fra m e , an d I tra d e d o n a tig h t tim e fra m e . O n th e flip s id e o f t h e c o in , th e m o st Im p o rta n t th in g w ith a lo n g e r -te r m t r e n d fo llo w in g a p p r o a c h was to g et th e tra d e o n . T h is w as R ick ’s m o t t o — “g e t th e t r a d e o n .” You c a n 't a f fo r d t o m is s t h e o n e m o v e w h i c h m i g h t m a k e y o u r m o n th i f y o u w ere a tr e n d follow er. W h e n e v a lu a tin g tr e n d fo llo w in g systems, w e tested for decay. F o r e x am p le, w h a t h a p p e n s i f w e e n te re d th e o rd er 24 h o u rs later? T h e p ro fit e x p e c ta tio n s h o u ld n o t b e d e p e n ­ d e n t o n th e in itia l tr a d e lo c a tio n . B u t w ith s h o r te r - te r m te c h n ic a l trad in g , it w as m o re i m p o r ta n t to e n te r o n r e a c tio n s o r r ig h t a t th e sta rt o f a b re a k o u t. I h a d a fa n ta stic S P b ro k e r, o n e o f th e b e s t in th e business. H e w as e x c e p tio n a l a t w o r k in g a b id o r o ffe r s in c e w e still had to call o u r o rd e rs d o w n to th e p it. I o n ly lik e d p la c in g tra d e s fo r th e SPs. A ll o th e r o rd e rs g o t p assed o f f t o R ick . T im e ly v o lu m e d a ta was n o t tr a n s m itte d to th e sc ree n s in th o s e d ay s, so i t w as im p o r ta n t to g et a sen se o f v o lu m e a n d h o w d e e p t h e d e c k s w ere. W h e n I to ld m y b r o k e r a t m y c le a rin g firm th a t I n e e d e d a g o o d S P b ro k e r, h e t o o k m e d o w n t o t h e f lo o r a n d i n t r o d u c e d m e t o D am o n . D a m o n h a d n o t d o n e an y o rd e r e x ecu tio n for fem ales before. R ig h t a fter I said m y n a m e , I said, "I d o a m in im u m o f a h u n d r e d contracts.* I th in k h e w as a b it su rp ris e d . I t w as 1 9 9 1 , a n d th e ra n g e in th e SPs w as relativ ely sm a ll. I t w as th e “ b ig " S P c o n tr a c t b e fo re th e e m in is w ere c re a te d , so 1 0 0 b ig c o n tr a c ts w e re th e e q u iv a le n t o f 10

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m illio n dollars' w o rth o f sto ck . I c o u ld see h im w avering bcrwxa ex citem en t a t a new b ig c lie n t a n d a leery skepticism like he « a calking to a h illy crazy p erso n . *I f you’re goin g to tra d e th a t size, y o u 're g o in g to need a direct lin e to th e Bool W h en y o u w a n t to ex ecu te an order, call me and I w ill personally m ake it happen.* T h is m ean t I g o t m y ow n p riv a te “b a t phone.* T h e phone did n o t ring; o n ly a lig h t w ould b lin k o n D am o n s en d like the president callin g som e secret op erativ e in th e m ovies. W h en I picked u p m y p h o n e, D am o n answ ered instantly, l i a s usually o n e o f tw o responses: I'd sa y ~HL H o w s it looking?" “Pea-shooters only.*

On "H o w s h looking?* “Size b id a t d o u b le nickels,* w h ich w as slick speak for 55. O u r ooow asarions lasted o n ly a few w ords, b u t th is was all dm w as needed. 1 am n o t a g ifted conversationalist. Pea-shooters woe die sm all exchange n y m b r trad ers (locals) w ho trad ed 1-2 lots. Usually m m ean t th a t it w as q u ie t a n d th e b ig trad ers w ere in th e break room h av in g lu n c h a n d p lay in g A n y lig h t v o lu m e day after dm becam e a p ea-sh o o ter day. T h e first d a y I h a d m y d ire c t lin e , I w aited u n til the markets w ere a b o u r to d o se . T h e n 1 « 1 U 1 a n d sa id , “Sell 100 SPs now." It w as th e o p p o site o f w h a t m o st p eo p le d id , b u t a t least be realized 1 w as serious. In th e p re -in te rn e r d ay s, th e tra d in g floor was physical a n d u n ru ly W om en in th e p it w ere rare as hens* tee th , w hile women tra d in g o ffs ite w ere ak in to flying ptg s. S o , com in g in as an indepen­ d e n t w om an tra d e r a n d im m ed iately m ak in g trad es unlike anything th ey ’d ev er seen p u t som e p eo p le o n a le rt. A fte r o n e o f m y early g o lf trad es, D am o n to ld m y dexk, "Wow sh e's g o t balls.* J u s t lik e A a r, I w as in .

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D a m o n w a s t h e b e s t. A t o n e r im e h e d i d e x e c u tio n f o r T u d o r Jo n e s, M o n r o e T ro u t, T o b y C r a b d , a n d L o u is B a c o n . T u d o r a s k e d to m e e t p riv a te ly w ith D a m o n i n C h ic a g o . H e s a id h e w a s d u n k i n g o f g iv in g t h e m a jo r ity o f h is S P b u s in e s s t o h i m . D a m o n a s k e d w h y h e h a d p ic k e d h i m t o d o h is e x e c u tio n , a n d T u d o r t o l d h i m h e fig u re d D a m o n g o t h i m a n ic k e l b e t t e r 5 0 % o f t h e rim e . I t a d d e d u p t o a n a d d itio n a l 2 m illio n i n p r o f its t h r o u g h o u t a y ear. O n e tim e , T u d o r g a v e h i m a n o r d e r t o b u y 9 0 0 S P s t o e x e c u te in a 1 0 -m in u te p e r io d . D a m o n w o rk e d th e o r d e r a n d g o t a n e x c e p tio n a l fill. P au se. A ll h e h e a r d o n t h e o t h e r e n d o f t h e lin e w a s , “O h — o h ." “W h a t s w ro n g ? " “You're a g o o d b ro k e r, b u t a n y tim e y o u b u y t h a t ty p e o f q u a n tity ; 1 e x p e c t t o m o v e t h e m a r k e t i n t h e d ir e c t i o n y o u ’r e b u y in g a n d se e th e p ric e s rally u p q u ic k ly t o d i e u p s id e ." T h i s w a s n o t a g o o d s ig n . S u re e n o u g h , t h e m a r k e t b r o k e s h a rp ly a f te r t h a t , a n d i t w as a siz ab le loss a t t h e e n d o f t h e d ay .

A trader learns a lot by watching how a market absorbs

the buying o r selling.

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was in v ite d to sp e ak a t a n a n n u a l “T A G " (T ech n ica l A nalysis

I

G ro u p ) c o n fe re n c e , w h ic h sh o w c a s e d p r o m in e n t te c h n ic a l analysts. T im Slater started these conferences after h e h a d fo u n d ed

C o m p u T ra c, a ch arrin g p ro g ram acq u ired b y T elerate in 1985- D o w

Jones th e n p u rc h a se d T elerate in 1 9 8 9 . T im o rg a n iz e d th e T A G sem inars to p ro m o te tech n ical analysis tools, a n d h e h a d in v ited m e to lecture. I d id n o t feel c o n fid e n t in m y sp e ak in g skills. I grew u p as a p ianist, sittin g in fro n t o f th e key b o ard fo r u p to six h o u rs a day an d letting th e strings a n d h am m ers d o all th e talk in g . M y conversa­ tio n skills w ere abysm al. I still h a d m y float ta n k in m y h o u se. S om e people call float ta n k s ‘sensory d e p riv a tio n tan k s,’ o th e rs to u t th e ir benefits to th e im m u n e system , b u t th e y are p erh ap s even b e tte r for m ed itation. I sp e n t an h o u r a t a rim e in m y flo at ta n k rep eatin g , “I a m cool, calm , a n d collected’ over a n d over, several tim e s a w eek. W h e n I delivered m y p re se n ta tio n a t th a t first conference, I w as in th e zone.

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I have no idea o f w hat I said, b u t it was well received. I repeat my m antra to this day whenever 1 feel a b it flustered. “1 am cool, calm, an d collected." T h e other m antra I learned from a hypnotist when I was in high school is, "I am loose, lim p, an d letting go." Just keep saying it over and over. "Loose and lim p and letting go." A nd breathe. T im asked m e if 1 w ould like to speak for the D ow Jones offices overseas on an annual tour. I never took vacations, so this was a grand o p p o rtu n ity to see the w orld yet be in touch w ith the markets, still working. M y husband had no interest in traveling; this would be an excellent adventure for me. T h e first trip was to Singapore and Kuala Lum pur, the capital of Malaysia. T h is was a fascinating trip for several reasons. T he traders were a m ix o f M uslim s, B uddhists, C hristians, and H indus, and h a lf o f them were women! A fter o u r m orning talk, the organizers arranged a lunch for everyone, and I sat at a table where the majority o f traders were w om en. H ow was it th at so m any w om en were able to be b an k traders? I f som eone had visited th e U nited States in the m id-nineties, they w ould have been hard-pressed to find any women o n institutional trading desks. I d o u b t there were any at Goldman Sachs. T h ey explained th at in their culture, the m en were the ones w ho brought hom e the paycheck b u t th en tu rn ed the m oney over to the w om en w ho managed the household an d finances. W omen were considered to be far m ore responsible w ith th e m oney than men. At least th at was the story I was told by th e female b an k traders. I found I could still log m y daily num bers an d fax the trading plan to R ick for the fund and so, for tw o to three weeks each year, I contin ued to travel to a different p a rt o f the w orld to work with b a n k traders an d institutional clients. O n a n o th e r tour, I traveled to Singapore, Perth, Melbourne, Sydney, and N ew Zealand w ith Perry K aufm an and his wife, Barbara. Perry has d o n e som e o f the finest research in m y opinion, and he m ad e a lasting im pression o n m e. H e rem inds m e o f a clean-cut

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version o f Dr. E m m ett Brow n from B ack to the F uture— a brilliant academic professor w ho can explain things in plain English. T his was a terrific o p p o rtu n ity to learn from him . H is background was in engineering an d finance w ith a strong quantitative b e n t w hich was right up m y alley. H e cam e u p w ith th e u n iq u e idea o f m odeling “Price Shocks,” o n e o f th e m ore challenging things to m odel since they d o n o t happen often a n d are unpredictable. F or exam ple, the Chernobyl disaster in 1986 led to price shocks— large gaps, in m any futures m arkets, especially th e ag ricu ltu ral co m m o d ities. D oes a trader p uke th e po sitio n o u t a t th a t p o in t o r d o th ey d o u b le up? T h a t is the trick in m odeling these events since each case is unique. O n e o f Perry's m ain theses was th a t as m arkets m ature, th e noise level increases. As m o re m ark et p articip an ts e n te r a m arket, each with different tim e horizons, trad in g ranges expand, stops need to be wider, an d th u s th e initial risk is higher. T h is is b ad for tren d following systems. Perry spoke ab o u t this in th e late nineties, an d it is easy to see how this tendency has gone to extrem es 20 years later. Though the noise is greater th an ever, w hen a m arket does breakout, an efficient m ove te n d s to u n fo ld . D o g -p ile. S o m etim es i t is a straight-line m arkup o r m arkdow n w hich can last for days w ith o u t any significant reactions. O n ce the m ove is over, th e m arket often rotates in an endless consolidation period w ith num erous whipsaws. T h e ability to m odel these "state changes,” from consolidation to trending, is a challenge fo r system developers. You can't lu m p all the data together w hen there are tw o diam etrically opposed states at work. Suffice to say, Perry is n u m b er o ne in m y book w hen it comes to system developm ent. Perry a n d I c o n tin u e d to cross p a th s in ra n d o m ways. O n c e w hen in Florence w ith m y daughter an d husband, w e turned dow n a little cobblestone street a n d surprise! W e bum ped into Perry and his wife, Barbara. B arbara w as a m em ber o f the C M E for 25 years and o n the floor for 10 years. She still trades, an o th er testim onial to

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h o w co n s u m in g th is business is. E rik a lo o k e d a t all o f u s a n d without m issin g a b e a t, " L e ts all go fo r a gelato!” I n S in g a p o r e , I w e n t t o a fle a m a r k e t a n d f o u n d th e m ost m a rv e lo u s r a m s h e a d a d o r n e d w ith d e c o ra tiv e p la te s a n d metal stu d s . I t h a d fo u r h u g e c u rly h o rn s . H e w as n a m e d R affles, after the fo u n d e r o f S ingapore. Raffles g o t a free b e r th o n m y e n su in g flight to A u stralia a n d th e n to N e w Z e a la n d . I d o u b t th e airlin es w ould let y o u schlep th o se b u lk y th in g s in th e overheads now adays. B ut Raffles m a d e it safely b a c k to m y office in N e w Jersey w h ere I p ro m p d y hung h im above th e door. N o b o d y c o u ld c o m e o r go w ith o u t th e watchful eyes o f R affles sta rin g a t th e m . I t w as s o r t o f c re e p y in retrospect. W h e n I m o v ed to C h ica g o , h e w as h u n g above th e d o o r o f o u r office th e re — in fact, w e m o v e d m u ltip le tim e s, b u t R affles always came w ith us. R a ffles w as m y g o o d lu c k g o d , b u t years later I fo u n d o u t t h a t R am s* h e a d s a r e s a c re d i n w i t c h c r a f t a n d S a ta n is m . D e a r L ord! H a d I u n w ittin g ly p u t a c u rse o n m y offices? T o c o n so le m yself, I visited W ik i­ p e d ia w h ic h sa id th e E g y p tian ram -g o d w as also identified w ith th e G re e k g o d Z eu s. A ra m is a n o n -c a stra te d a d u lt m ale sheep, so 1 to o k i t th a t th is essentially a d d e d a n ex tra p a ir o f balls in m y office. * *

*

S u e H e r re ra d ro v e to m y h o u se in S o u th e r n Je rse y to interview m e fo r a b o o k . S h e w as a T V b ro ad caste r fo r a financial new s network a n d w as w r itin g a b o o k o n w o m e n i n th e in d u s tr y called W omen o f th e S treet. S u e w as fa m o u s a n d e v ery o n e k n e w h e r n a m e . O kay, not everyone, b u r i t w as n ic e t o see a fe m a le in a p r o m in e n t position. W e c h a tte d lik e w e w ere lo n g lo st frie n d s w h ile m y h u s b a n d cooked

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in th e k itch en . Axle, th e fam ily D a lm a tia n , p o k e d h is h e a d in th e office. T h e only o th e r fem ale frie n d s I h a d w ere e ith e r fro m th e b a rn or from playing tennis. H o rses a n d te n n is— m y g irlfrie n d to p ics. I t s easy to m ake conversation w h e n y o u h av e a c o m m o n su b je c t, b u t I never k n ew a n y fem ales in th e m ark ets. I w ish S u e h a d lived closer. I spoke o n T V th ree tim es in m y career. T h e first tim e w as in L os Angeles fo r K W H Y , o n e o f th e first sta tio n s t o o ffe r d a ily m a rk e t news. I t w as in th e early n in e tie s, a n d I w as sp e a k in g a t a n M T A conference in O ra n g e C o u n ty . O n e o f th e organizers h a d a rra n g e d it, an d I th o u g h t it w o u ld b e a novel experience. T h e s tu d io w as in a horrible, seedy p a r t o f to w n . I w as w earin g a silk s u it, a n d it w as a ridiculously h o t day. Inside, th e re was a full a rra y o f m a k e u p p e o p le , h air people, b rig h t lights, a n d a cra m p e d set. E v e ry th in g d e sig n e d to m ake o n e w rithe in m ax im u m d isc o m fo rt. I w as o n ly o n th e a ir fo r 10 m inutes, an d th e m ain th in g I rem em b er is th e D o w w as p lu n g in g the w hole tim e I w as talking. It w as o n e o f th e biggest d o w n days th a t year, an d I was squirm ing in fro n t o f a cam era w ith p a n cak e sla th e red over m y face. W h y w as I m issing th is fab u lo u s tra d in g day? I d id n 't even have anything to sell, n o advisory services, n o b o o k s, n o n o th in g . T h e second tim e I sp o k e w as o n th e set w h e re th e y film e d U'/all Street W eek in B ethesda, M a ry lan d . I felt lik e a ro c k s ta r w h e n a b ig black lim ousine p ick ed m e u p a t th e a ir p o rt a n d d ro v e m e th r o u g h rolling green hills to th e stu d io . I d id n o t care w h a t th e m a rk e t w as doing because this was a u n iq u e experience. T h e o th e r gu est speaking w ith m e w as B ernie Schaeffer. H e specialized in s to c k o p tio n s a n d m arket research for investors. W e w ere asked w h a t stocks w e th o u g h t w ould d o well over th e n e x t year. A re y o u k id d in g m e? I h av e a h a rd tim e ju st g ettin g th e n ex t d ay rig h t. I have n o id e a w h a t is g o in g to happen over th e next six m o n th s. 1 h o p e I said s o m e th in g s m a rt, b u t I am sure n o b o d y rem em b ers anyway. In th e stu d io , I b u m p e d in to Jim m y R ogers w h o w as r o u n d in g the com er. Jim m y was, well, classic Jim m y. S h o rt a n d friendly, w ith a

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TRADING SARDINES Saturday m orning, I asked, “W hat would you like to do for your

b irthday today, H on?" T h inking a leisurely drive up the coast to his o ld spring training fields m ight be nice. “W ell, 1 really w ant to take a drive o u t to see this town called W ellington." H e had seen a reasonably priced house with a barn and tennis courts advertised on the back o f m y Dressage magazine. He was thinking he could entice m e dow n to the land o f golf courses w ith the lure o f having my ow n barn. Sure enough, we start driving dow n S outhern Blvd, and it was nothing but pawn shops and tattoo parlors, exacdy as I had suspected. In 1996, once you got past the cheesy strip malls, the roads were two lanes w ith cow pastures on both sides. W hen we drove through the grand en try w ith water fountains proclaim ing “W ellington,” it felt like we’d landed on a different planet. T h e first thing we did was to drive to the stadium where they held th e polo games. W ellington started o u t as the tow n where the Palm Beachers w ent to w atch polo on the lone field where there was space an d cheap land to build o n. It is now hom e to over 45 polo fields. W e got o u t o f ou r red convertible sports car, it was still a notch down from the other cars parked there, and we walked across the grassy p olo field. Som eone m ust have com e o u t at 5 A M and shaved every blade w ith a razor to get th e perfect cut. Ic was a pristine blanket o f lush, green velvet— the polar opposite o f the sloppy, white stuff sm othering our yard up north. A fter that, we drove the short distance to the show grounds where th e hunters an d jum pers com pete. W e were hungry, so we stopped a t th e food court. N o ham burgers a n d o rdinary fare to be found here— it was all French crepes an d seafood tacos. A nd there were baskets o f geranium s hanging from w rought iron lam p posts in every direction. A n d then there were the horses! I felt like a dirty old man in S outh Beach w atching topless m odels parade by in the sand. My ja w d ro p p ed to m y knees. M illion-dollar horses were everywhere,

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waltzing to and fro. M agnificent prancing athletic animals with glistening coats and sexy, lush, swinging tails. I was sold. Sign me up.

Wellington was going to be our new trading center o f the universe. I bought two lots across the street from the showgrounds. A crew cleared the dense jungle of mclaleuca trees. A friend who worked for me was the first to move there. He sent me a picture after it rained, and the entire five acres was a foot under water. Argh, I knew it. I bought proverbial Florida swampland. As it turned out, most of the lots were like that. All one had to do was pay for 1200 truckloads of din to build up the lot. My dad was a builder for a few years when I was growing up, and I felt confident I could build too. I was still in m y “the m ind can do anything" phase o f m y life. I designed the house, found a draftsperson to draw up plans and a contractor to build it on a costplus basis. Besides the house, there was a separate office, barn, grooms apanment, riding ring with night lights, and a courtyard fountain. One o f Franks friends had a Mooney, and we flew it back and forth from New Jersey to Florida. It should come as no surprise that the construction ended up taking a lot longer than planned. I am good about enthusiastically jum ping into projects, but have unrealistic expectations about timelines. Laura found a townhouse to rent in Wellington and had already moved. My husband also rented a place so our daughter could start school. Rick bought a house and moved with his wife. I was the only person stuck in New Jersey holding down the fort and waiting for the new office completion. Rick and I worked together over the phone. We had an ideal working relationship. H e could read my m ind half the time, though I could never read his. Rick is one o f the most conscientious people

TRADING SARDINES

m

In th e w o rld , w h ic h Is a g o o d th in g sin ce l am n o t. T h e small, cap ital b lo c k letters he used to d o c u m e n t o u r trades sat perfectly a to p straight ruled lines. H is attention to detail was Impeccable. One F riday aftern o o n w h en we h ad a suable p osition In th e grains, the m ark et started to w eaken. I d o n o t like b ein g lo n g a m arket which sta rts to m ake new lows o n th e day In th e aftern o o n , especially on t Friday. 1 to ld R ick to sell the beans an d d o s e o u t o u r positions. H e called m e alter th e close th at day. 'L in d a , we have a problem* F ro m th e to n e o f his voice, th e first th in g th a t cam e to m ind was replacing m y nam e w ith ’ H ouston.* *U m , yes Rick?* 'W e ll, there w as an error w ith th e bean trade,* he said. 'O K . u m m , go o n * K now ing h im , I co u ld hardly fathom what e rro r c o u ld have occurred. 'W e ll. I to ld th e brokers to sell 3 0 0 beans, b u t Instead, they b o u g h t a n o th e r 3 0 0 beans* As M urphy's Law w ould have It, a cro p rep o rt cam e o u t after th e close o n Friday, a n d It was a n ugly o n e for th e beans. I told Rick w e s h o u ld n o t have a problem because every b ro k er o n the floor has recorded lines. Right? I was w rong. T h is tim e there was a new group o f grain brokers w h o h ad started clearing th ro u g h R and Financial th e w eek before. T h e ir h ead b roker was o u t sick, an d o f course, they d id n o t have recorded lines Installed yet. T h e real problem was, we d id n 't either. R ick w as trad in g o u t o f his house u n til I co u ld m ove. Putting a reco rd ed line o n his p h o n e was so m e th in g I h a d n o t th o u g h t o f at th e tim e. Beans o p en ed dow n o n S unday n ig h t a n d im m ediately hit lim it d o w n . T h e y co n tin u ed lower for th e next few days. By the time w e w ere able to peel o u t o f o u r tw ice th e norm al size p osition under c h a o tic p it c o n d itio n s, 1 h ad given back 8 0 % o f th e year's profits. I c o u ld h av e fo u g h t an d taken th e b ad trad e to arb itratio n , b u t that w o u ld have tak en m any m o nths.

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Dili I feel angry? Wronged? Sad? I felt nothing. A big black hole of nothingness. No reelings, just colors. Just one color— black. I was programmed growing up to keep putting one foot In front of the other. Don't look back. Only move forward. So, the feet keep marching onward and the feelings get left behind in the dust. There Is nothing more demoralizing than watching the majority of your hard-earned profits disappear In a lew hours. And this was not the first time it had happened. Black Monday, the bond fiasco, and many other random outliers had done similar damage. I had to clear my head, take my lumps and move on. If there Is a time when I feel totally out o f control, 1 flatten, Time to start with a clean slate. Forfeit a turn and exchange all your scrabble tiles for seven fresh ones. I had hit my max drawdown point and did not want to lose one more dime. This time 1 flattened the whole business. "From the ashes arises the Phoenix." This Phoenix needed to get burnt to a crisp before being born again.

"Linda, tut have an error... *

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1 c a lled a g o o d frie n d , R o b e rt, a n d cold h im I w as th in k in g o f c lo s in g ev ery th in g . 1 h a d w o rk e d h a rd to b u ild a fab u lo u s business w ith g re a t p e o p le a n d w o n d e rfu l c lien ts. B u t 1 d id n 't th in k it was p r u d e n t to m a n a g e m o n e y w h e n th e h o u se w as still n o t finished. A n d I h a d to d e a l w ith a n im p e n d in g m o v e. H e to ld m e h e saw m a n y p e o p le over th e years m ake m id -life sw itches o r career changes. T h in g s w o rk e d o u t all th e b e tte r fo r it. H e gave m e h is blessing and s a id it w as o k a y to s h u t d o w n . M y c lie n ts e n c o u ra g e d m e to stay in b u sin e ss a n d said it w as o k a y i f I d id n o t tra d e u n til I m oved. It did n o t feel rig h t, th o u g h . I n e e d e d to clear th e air. I still w an ted to end t h e y e a r sh o w in g a p ro fit. M y o n ly lo sin g y e a r in m y career thus fa r h a d b e e n in th e b e g in n in g w h e n I b lew o u t in th e C ity Service ta k e o v e r deal. L a u ra h a d e n o u g h p rag m atism fo r b o th o f us. S he stayed focused a n d h a d c o n fid e n c e w e w o u ld c o n tin u e to m a n a g e m oney. Rick e n d e d u p ta k in g a n o th e r jo b w ith a h e d g e fu n d , th e n w ith Toby C r a b e l s office a n d la te r w ith G e tc o . I w as so rry to lose h im because h e w a s a c o n s u m m a te pro fessio n al.

“Profits are like eels, how easily they slip away.** Confusion d e Confusionesy 1688, one o f the first books on trading.

26

MAKINGWAFFLES

O

nce the big m ove was over, Laura and I started another fund called "W atermark Fund.” N o more m anaged accounts— it was too m uch o f a hassle back in those days. It was far more efficient

to trade one pool o f money. W aterm ark was an offshore fund as well since m ost o f m y previous clients had offshore operations. It was domiciled in the Caymans. W e were back in the hedge fund business again. It was easier in those days to start these types o f funds, b u t the process was still quite a b it o f work. Laura had great contacts from working w ith sharp people she knew w hen she was at 6800 Capital. T h e new p roperty h ad a separate trading office w ith satellite dishes, generators, and built-in propane tanks for backup. But for all our doom sday preparations, w e could n o t foresee the things which were to unfold around the comer. O n e day in th e m iddle o f trading after I moved, the generators kicked in for no reason. A t least we knew they worked. I was getting quotes from a giant satellite dish outside. It was a 4-foot silver saucer 179

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th a t looked like it co u ld sh o o t laser beam s. B u t w h en I w ent to place an order, th e p h o n e lines w ere o u t. A side fro m th e office chugging aw ay o n th e generator, th e electricity w as o u t o n th e w hole block. U n beknow nst to m e, th e n ex t-d o o r n eig h b o r decid ed to plant a giant ficus tree w ith o u t first checking w ith th e city w here th e underground lin e s w ere. H e w as in c o m m e rc ia l c o n s tr u c tio n a n d som etim es certain peo p le th in k th e y can g et aw ay w ith stu ff—-especially since w e lived o n a d ir t road. I h o p p e d o n m y b ik e a n d ro d e to the end of th e drivew ay w here I saw a g ia n t claw p o ise d h ig h in th e air, a black ho le b e n eath it. “H ey!" I called o u t. “W h a t th e h eck d o y ou th in k y o u 're d o in g ? ” A bew ildered c o n s tru c tio n w o rk er ju st stared speechlessly. T h e n e ig h ­ b o rh o o d pow er a n d telep h o n e lines w ere d a n g lin g fro m th e claw , lik e tan gled spaghetti. C ell p h o n e s w ere o n ly ju s t c o m in g o n th e m a r k e t, b u t I d id n o t have o n e yet. I le t o u t

have a cellphone?"

a few m o re ch o ice fo u r-ie tte r w o rd s befo re I to o k o f f o n m y bicycle to fin d a neighboring farm w here so m e o n e h a d a cell phone. I needed to m ak e a call a n d g e t o u t o f m y p o sitio n s quickly. It was th e late n in eties w h e n te c h sto ck s w ere o n fire an d nobody h a d seen P E ratio s a t th ese levels. R e m e m b e r, w h e n relationships p u sh o u tsid e th e ir h istorical ranges, it is a sig n to be positioned in th e d ire c tio n o f th e m ove. S u ch w as th e case w ith valuation levels w h ic h w ere w ell above th o se se en in th e p a s t n u m b e r o f decades. I n te r n e t a n d te c h n o lo g y sto c k s w e re g o in g p a ra b o lic . Every day b ro u g h t a n o th e r 5 0 -p o in t gap u p in a s to c k w h ic h w as now in the trip le digits. T raders e ith er loved it a n d p lay ed th e m o m e n tu m game to th e h ilt o r fo u g h t it a n d g o t ta k e n o u t o f th e gam e. I had a savvy e q u e s tria n f rie n d w h o to ld m e a b o u t th e trad es she m ad e on her

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Blackberry at red lights while driving her kids to school. And she was making money! A nother tim e, the T V was on In her house when I stopped by one m orning. T he financial network was on. Instead o f talking about stocks, Joe Kernan was m aking waffles! T he fat lady was singing, but we could n o t hear her over the TV. * * •

How do you know when to short a market? W hen the price stops going up! I p u t on a sizable short position In the N A S D A Q futures as the index started to roll over. T he lure for traders on the short side was the markets went down a lot faster than they went up. O ne way to measure profits is how m any dollars are m ade per u nit o f time. The more time you are in a m arket, the m ore risk you assume. T he Internet and tech stocks broke hard, and I caught a 7-digit windfall in the NASDAQ futures. But it was bittersweet because m y husband decided that w ould be the perfect tim e to serve m e papers for a divorce. Talk about tim ing my trades. “Laura, I'm sorry, b u t we are going to have to close our fund. I think we are going to be distracted for a bit. It does n o t look like it is going to be an amicable divorce." “OK. W hatever you need me to do." “Don't worry. W ell get back up and running w hen this is over with." Every trader I knew from the trading floors who w ent through a divorce easily lost a m illion dollars in the process. I was not going to let that happen to me, and it was n o t right by m y clients. My husband froze my personal accounts since he was sure I was hiding monies offshore. I was not, b u t it cost m e a zillion hours to produce records proving I was not. G od bless Laura because she did much o f the work during this awful period. Members o f the technical com m unity served as a lifeline. My friends consisted o f my horse trainer, the people who worked for me, and ex*floor traders or market technicians. I did not have girlfriends

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to m eet for coffee. I did n o t have anyone to b itch to w hen tim et were tough. B ut I always had o th er traders a n d technicians I could talk to ab o u t charts and technicals. I spoke in C anada for th e C a n ad ian T echnical Society, in New York for Bloom berg, for dozens o f org an izatio n s ju st to h o p on a plane and get o u t o f town. A nything to stay b usy a n d be in a different city from th e divorce. I loved speaking ab o u t the m arkets. It w as th e to p ic I knew best. I was invited to speak in Dallas for a technical society. A few years earlier I m et V ic Sperandeo a t an M T A m eeting. A g roup o f 10 o f us had d in n er in the traditional basem ent grill we to o k th e speakers to after a talk. V ic is a trader I look up to— a direct, independent thinker w ith plenty o f g u m p tio n . H e h ad p u b lish ed his first book, Methods o f a W all Street M aster, w h ich is still o n e o f m y favorite books. It’s all m eat, com ing from som eone y o u k n o w does n o t have to toot his ow n ho rn . I to ld V ic I w as flying to D allas fo r business an d he got m e a room a t the M ansion, to p digs to stay in a t th e tim e. I rode up th e elevator w ith th e b an d m em bers from U 2 w h o w ere in town for a concert. I d id n o t even realize w h o th ey w ere— I was so focused on m y o w n w orld in those days. V ic was q u ite forw ard th in k in g . I t w as in th e late nineties, and he to ld m e h e th o u g h t it w o u ld b e a great idea to sta rt a fund that o n ly traded in products such as m etals a n d energies. Com m odities th a t h ad a finite supply. H e was w ay ah ead o f th e tim es. I used this tim e to d o m ore w o rk o n m y positive feedback loop m odels. T h e m ajority o f the tim e w h en price m oves sharply, it has a reaction in the opposite direction— ev en i f ju st a sm all check back. In system dynam ics, this Is referred to as negative feedback. Mean reverting strategies c o u n t on negative feedback. T h ese corrections are self-regulating oscillations th a t serve as a stabilizing price factor. But there are also less frequent periods w h en th e p rice m ovem ent triggers m ore m ovem ent in the same direction, am plifying o r accelerating the

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move underway. For example, the crash o f 1987 was one such case when portfolio insurance kicked in. As the price fell, it generated more selling and forced liquidation, thus accelerating the downside freefall. My process is as follows; Identify the conditions that precede the positive feedback loops that are not generated by a news event, iden­ tify what characteristics m ark the move as it is just starting, and then note what the expected range o f outcom es look like from there. It is not so different than m odeling any range expansion system except it uses m om entum functions instead o f price functions. It is easy to observe what the best trades look like after the fact. For example, there is an increase in volume, the m arket makes consecutive higher highs and higher lows o r vice versa, and the hourly bars increase in range. It is a process o f deductive logic. I called the first m odel “PF3’s”. It measured the positive feedback in three separate ways. T h e first derivative o f each indicator was in a position to be increasing. A nother critical p a n o f the process is to model what happens after the signal fails to deliver an expected outcome. For exam ple, if a PF3 co n d itio n fails to lead to range expansion, this can be a powerful signal to trade in th e opposite direction the next day. It is easy to see how this is a Bayesian process o f adding one new piece o f inform ation a t a tim e into the system. I f A happens, then expect B. If B does not happen, then expect C . I f B does happen, then expect D . T h e decision tree is n o t as im portant as the process, but to start the process, you have to have the model. There is a field in systems theory called “system dynamics” which tries to make sense o f the nonlinear behavior o f complex systems. You can Google it and see how nifty it would be if we could borrow concepts to model markets and price behavior. T he main useful thing I extracted was this concept o f positive feedback loops. And this was ten years later. So, take it for w hat it is w o rth -a grain o f theory at the least.

184

TRADING SARDINES Steve M o o re d id (he early (eatin g fo r m e w h e n w e had our

research partnership in (he m id-nineties. T h e re was a nom inal statis­ tical edge-1 later tried to explain th e co n c e p t a t a conference. After view ing th e sea o f glazed eyes, I deleted all fu tu re references to this area o f w ork. Som etim es som ething needs to incubate and crystallize for a few y ean . T h e n it can b e w o rth revisiting w ith a second wind.

You have your braint in your head. You have yourfe et in your ihoet. You can rteeryourselfany direction you choote. You’re on your oum. A nd you know w hatyou know. And YOU are the one whdU decide where to g o ..." — Dr. Scute

27

THE Y2K BUG

I

n die spirit o f perfect tu n in g , a co m p u ter proficient fellow b y the nam e o f James, contacted m e. “D o y ou need a ny technical help with Y2K com ing up? A re y o u r co m p u ter! ready to h a ndle it?* “I don’t know, should I b e concerned a b o u t Y2K?“ People often

contacted m e o u t o f th e blue— n o d o u b t from th e c h ap ter in the M arket W izards book. Perry K aufm an later to ld m e, “I m u st confess th a t I was o n e o f the culprits th a t caused th e problem . H ist, w orking for N ASA a nd next w riting compilers. I f you don’t remember; th e problem was th at we stored th e d a te as 6 0 0 2 1 5 fo r 2 /1 5 /1 9 6 0 . W e never p u t th e first two digits o f d ie year for tw o good reasons: first, w e didn’t have the com puter m emory. Two extra digits for every date was a gigantic use o f space w hen you have a 4 K m em ory (th at’s 4 ,0 0 0 w ords o r 8,000 bytes) w hen today's storage is m easured in terabytes. I don’t th in k anyone today can conceive o f a 4K com puter; You have lOx m ore in y our toaster. T h e second reason is th a t, in 1960, th e year 2000 185

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w as vcry» very, far aw ay a n d w e w ere all y u u n g . W h o cares w hat will h a p p e n In 4 0 years? W e’ll w o rry a b o u t It t h e n - o r n o t. A n d , you see th a t w e all g o t th ro u g h It, so It n ev er really m a tte re d . Ju s t a small so ftw are fix.” T h e fellow w h o c o n ta c te d m e a b o u t Y 2K , Ja m e s, w as a savvy tech n ical guy w h o h a d tra d e d a v o la tility b r e a k o u t system w ith his b ro th e r. H e w as q u ie t, h an d y , a n d th e p e rfe c t assista n t. M y now-ex m o ved o u t, a n d Jam es m o v ed in to a g u est s u ite o n th e side o f the h o u se. C a m p R aschkc c o n tin u e d to live u p to Its re p u ta tio n : "home a n d g a th e rin g place fo r r a n d o m tra d e rs fro m all w alks o f life.” It w as

a blessing

to hav e h e lp o n th e p ro p e rty . W e stu c k to a

ro u tin e . Jam es a n d I w o k e a t 5 :3 0 A M , w e n t to th e gym , cooked eggs, a n d w ere ready to tra d e a t 7 :3 0 A M E 5T . I f E rik a w as w ith her D a d , a t th e e n d o f th e day, I w o u ld rid e th e h o rses, c o o k fish and sw eet potatoes a n d b e b ack in th e o ffice u n til 11 P M . It was my ideal lifestyle after finalizing m y div o rce. F o r C h r is tm a s , m y d a u g h t e r a n d I b o u g h t J a m e s a parrot. L o oking back, I am n o t sure w h o w a n te d th e p a rro t— Jam es o r Erika. W e gave Jam es a m ag n ificen t red -a n d -g reen m acaw n a m e d Sara. This b ird tu rn e d o u t to b e o n e n o isy s u c k e r a n d h a d a vocab u lary o f 200 w o rd s. S he w as a n exotic a d d itio n to o u r tro p ic a l paradise. S he sat in a seven-foot w h ite cage n e x t t o th e p o o l in fro n t o f our o ffice d o o rs. T h e p o o l w as sc ree n ed in , c re a tin g a 10 0 -fo o t extended o u td o o r liv in g area. In F lo rid a, th e sc ree n s are a p ro tectiv e measure t o k eep o u t Florida's sta te b ird , th e m o s q u ito . F earless o f those nasty b lo o d su c k ers, w e k e p t th e o ffice d o o r s w id e o p e n to en jo y the air. T h e o n ly p ro b lem was th a t I h a d a n ag in g D a lm a tia n w ith a bladder c o n tro l p ro b le m w h o w as n o lo n g e r a llo w e d in th e office. W h e n A xle trie d to c o m e in to th e o ffice, I y elled , “Axle, out!" S o o n , S ara c a u g h t o n to th e d aily r o u tin e a n d b e c a m e th e bouncer a t th e o ffice d o o r. A n y tim e s h e sa w A x le a p p r o a c h in g she would sq u a w k , "AXLE, O U T ! A X L E , O U T ! ” T h e w h o le neighborhood

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could hear her. She developed her vocabulary further by reciting our catchphrascs for better or worse. 1 also had a Pom eranian nam ed N a/dnggie. At lunch we would play fetch w ith her, a gam e she co u ld play forever. Sara w ould shriek, "G O G E T IT, G O G E T IT." H er m ost overused phrase was, "TRADE ALERT! T R A D E A L ER TP She learned this from hearing our com puters (Ire o ff in the m iddle o f the day. Sara was a great source o f am usem ent, b ut I was glad she left w hen James moved. No more distractions and sunflower seed shells crunching beneath our feet. Back to my place o f Zen.

I was doing business through Sakura Dellsher. Victoria had been taking my orders for the previous three years o n their trading desk. We never talked m uch because I was n ot a phone person, b u t one day I m entioned I had horses. She was enthralled, so I invited her to come to visit for a week. Victoria was one o f the funniest people I ever met. I suggested starting a small chat room to have a business to pay Laura and James. M y accounts were still frozen during the divorce. I dictated, Victoria typed, and we did this for a few y ean. She was a pro in the markets, having worked in Switzerland for a trading firm, and had m oved to C hicago to w ork for Leo M elam ed at Sakura. T h e m ain thing I rem em ber about the next two yean was laughing

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n o n sto p as she cracked jokes in th e ch a t ro o m . A frien d opened an acco u n t for m e so at least I could trad e u n til m y divorce settled and m y accounts were unfrozen. W e w ere ro ck in g a n d rolling again. Every few years w hen o ats d ro p p ed below 1 2 0 ,1 p u t o n a sizable trade. Eventually, th ey always m oved back u p. T h is particular year 1 h a d to roll th e po sitio n in to th e n e x t series as th e fro n t m onth was approaching first notice day. T h is is th e d ay th a t notices can be issued b y th e sellers to those h o ld in g lo n g futures to tak e delivery o f th e physical com m odity. 1 w aited u n til th e last m in u te a n d turned to V ictoria. I d ro p p ed m y ch in a n d p eered over m y glasses. “We re g oing to take delivery o f these oats.** V ictoria ju m p e d as th o u g h she h a d to u c h e d a h o t stove. She sw ung her seat around and said, “W hat? W h a t are you talking about?0 I d id n 't b lin k . M y k n ee w as rap id ly b o u n c in g u p a n d down, w hich m ean t I was in a schem ing m ode. “I'm serious, w e re taking delivery o f these oats." V ictoria d ro p p ed h e r jaw. W h a t I h a d p ro p o sed was legitimately fucking insane. M a in ta in in g m y com posure, I tu rn e d a n d p o in te d tow ard the patio. “A n d we're going to store it there." I jab b ed m y p o in ter finger as th o u g h I w as in a n air fencing m atch . “T h a t p o o l can hold about 3 0 ,0 0 0

gallons o f w ater. I reck o n I c a n hav e so m e o n e com e and

d rain th e p o o l o n M onday. T h e n w e'll h au l th e oats d ow n b y truck a n d d u m p it o u t back. I figure w e'll be able to feed th e horses for th e n ex t year." V ictoria looked a t m e a n d th e n to th e p o o l an d th e n back at me. I co u ld see h e r trying to figure o u t i f 1 h a d lost m y g o d d am n mind. T o h e r credit, yes, I h ad , b u t th a t h a p p e n e d a lo n g tim e ago. “So, do you w an t m e to call the exchange o r som ething? I've never taken delivery o f an y th in g before." I sn o rte d th ro u g h m y n ose a n d h o w led w ith laughter. “You city girls w ill believe A N Y T H IN G !"

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Victoria p u t h er han d to her heart an d let o u t a huge sigh. “You scared the shit o ut o f me! I thought you were serious about your pool silo, you brat!” W e were crying w hile laughing. I rolled m y position to the next front m onth, and the oat trade becam e a ru n n in g joke. W e caught one heck o f a nice move to the upside, and the pool rem ained intact.

Long Oatsfrom 1 2 0 —should we take delivery Here are some o f the m ore hilarious sayings I credited to V ictoria when she was w orking the chat room : • The Tim e Frame Justification System. T h is is w hen you are in a trade w hich does n o t feel com fortable an d scroll through different tim e frames u ntil com ing across one th a t seems to fit your bias. Yup, w hen you resort to engaging in the tim e fram e justification system, it is a sure sign th a t you are in a bad trade.

19 0

T R A D IN G S A R D IN ES

• T he S h ort S k irt Trade. V ic to ria w as try in g t o e x p la in to a new er c lie n t th a t sm all b u ll flags a t th e e n d o f a s w in g a re scalps o n ly Be q u ic k to lo c k in p ro fits. T o q u o te h e r, “ W h e n y o u trade, y o u know , sh o rt sk irt, n o u n d ie s , q u ic k in , q u ic k o u t a n d d o n ’t g e t caught.* * Bee*s B u tt Trade. T h is is w h e n a c o il g o t s o tig h t, i t lo o k s like th e p o in t o f a b e e s b u t t ; i f y o u ’re o n th e w r o n g sid e , yo u ’re g o in g to g e t s tu n g . B efore I m o v ed to F lo rid a , I re sc u e d a h a n d s o m e th o ro u g h b re d h o rs e fro m a n a u c tio n h o u s e . T h e b a r n o w n e r c a lle d m e u p a t 1 A M sin ce sh e k n e w I w as th e o n ly o n e w h o w o u ld an sw er, le t alone ta k e th e h o rse. W ith s n o w o n th e g r o u n d in th e m id d le o f February, I m a d e m y h u s b a n d d riv e o u t th e r e t o p ic k u p th is h o rs e th a t was d e s tin e d to b e c a r te d o f f f o r s la u g h te r t h e n e x t m o r n in g . 5 5 0 0 . S O L D ! F ie w as a n o th e r race tra c k re je c t, th e c o lo r o f coffee. 1 nam ed h im Bucky, fo r S tarb u ck s. I t w as m y u n d e r s ta n d in g th a t h o rses from th e tra c k labeled as “g eld in g s" w e re c e rtifia b ly c a stra te d . T h is tu rn e d o u t to b e n o t th e case w ith B ucky. I b r o u g h t h im d o w n to F lorida a lo n g w ith th e o th e r h o rse s I h a d a c c u m u la te d . U n b e k n o w n s t t o m e , B u c k y w a s s t i l l i n t a c t o n o n e sid e . R ecessed cajones. I f o u n d th is o u t th e h a r d w ay. I h a d b e e n in v ited to g o fo x h u n tin g w ith a n exclu siv e c lu b in S o u th F lo rid a . I f y o u are q u e s tio n in g w h e th e r th e r e is f o x h u n tin g in F lo rid a —y o u a re rig h t to d o so. I t w as n o th in g lik e P e n n s y lv a n ia o r N e w J e rs e y w h e re I h a d h u n te d b e fo re , b u t n o n e th e le s s , p e o p le d re s s e d in fu ll form al h u n t a ttire .

W e were in th e flat scrub w ith m akeshift fences to ju m p over. O n this p articu lar occasion, th e h u n t m aster w as g o n e, a n d his daughter w as leading th e h u n t. A t th e fu rth e st p o in t o n th e co u rse, Bucky soared over th e coop, refused to sto p a n d im m e d ia te ly m o u n te d the h u n t m aster’s daughter’s horse fro m b e h in d . W ith h e r o n it. A n d me o n Bucky. N o t a p retty sight.

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I w as h u m ilia te d in f ro n t o f e v ery o n e a n d w as to ld to im m ed iately d is m o u n t. I h a d t o w a lk t h e e n tir e w a y b a c k h o m e a n d it w as h o t. A n o th e r w a lk o f sh a m e . A f te r t h a t , I s c h e d u le d B u c k y f o r s o m e serious surgery. T h e y p u t h i m fla t o u t o n h is sid e a n d w e n t se arc h in g fo r th e m y ste rio u s recessed cajorus t h a t w a s d r iv in g h is te s to s te ro n e sk y -h ig h . T h e v e t a c k n o w le d g e d h e c o u l d n o t f in d w h a t h e w as lo o k in g for. B u t t h e h o r s e n o w h a d a h u g e in c is io n t h a t n e e d e d a tte n d in g to w h ic h m e a n t m e g iv in g h im in je c tio n s o f a n tib io tic s ev ery few h o u rs . T h e re w as a little frid g e o n m y o ffic e n e x t t o th e d o o r t h a t led o u t to th e b a m . I h a d a c o lle c tio n o f s u p e r lo n g h y p o d e r m ic n eed les o n to p a n d k e p t t h e m e d s in s id e t h e frid g e . O n th is p a r tic u la r day, it w as rid ic u lo u s ly h o t a n d t h e A C w a s n o t k e e p in g u p . I h a d 2 8 m o n ito rs, 12 C P U s , a sso rte d p r in te rs a n d ro u te rs , a n d th e n th e re w as V ic to ria a n d m e. T h e o ffic e w a s stu ffy , a n d w e o p e n e d t h e d o o r s to let a cross b reeze t h r o u g h w h ic h d i d n o t h e lp . M e a n w h ile , w e w e re ru n n in g d ie c h a t ro o m a n d tra d in g as i f e v e ry th in g w as u n d e r c o n tro l. E x cep t, w e str ip p e d o f f o u r b ra s a n d to ss e d t h e m i n t o th e m id d le o f th e flo o r, g ig g lin g . A s V ic to ria a n d I to ile d a w a y in th e o ffic e , th e r e w as a rev o lv in g cast o f c h a ra c te rs o u ts id e t h e o ffic e w e g av e n a m e s to . H o rs e s h o e M a n , F eed M a n , a n d H a y M a n . N o t v e ry im a g in a tiv e . A t t h a t m o m e n t, F eed M a n b a rg e d i n t o th e o ffic e , w o n d e r in g i f w e n eed ed ex tra b ag s o f g ra in f o r th e w eek . H e h a d a h a b it o f b a rg in g in . A s h o r t d u d e in a c o w b o y h a t, b o o ts , a n d a b ig b e lt b u c k le w h o d ro v e a F o rd F -3 5 0 p ic k u p tr u c k . V icto ria a n d 1 lo o k ed a t ea c h o th er. T h e n a t th e bras in th e m id d le o f th e floor, th e n a t th e n eed les o n t o p o f th e frid g e, screen s b lin k in g th e p rices o f c o m a n d b o n d s in th e b a c k g r o u n d a n d p ro c e e d e d to c a rry o n as i f n o t h i n g w a s h a p p e n in g . M o m e n ts lik e th e s e m a d e so m e o f m y m o r e m iserab le years, d iv o rce hassles a n d all, so m e o f th e fu n n ie st. G o o d th i n g tr a d e rs h a v e a sic k sen se o f h u m o r!

MR. BILL

surveyed th e sea o f a sso rted b o d y sh a p es fillin g t h e local fa m ily

1

gym a t 6 A M . Ja m e s w as d e te r m in e d t o s h e d 2 0 p o u n d s a fte r m oving to F lorida, a n d I w as d e te rm in e d to g e t i n to p sh a p e after

m y divorce. W e h a d a p a c t to rise a n d sh in e a n d b e a t th e g y m five

days a w eek a t a n h o u r I w o u ld m u c h r a th e r b e sle ep in g . M y r o u tin e w a s g e ttin g o ld a n d sta le . S it-u p s ? Y a w n . B ic e p curls? U n in sp irin g . W h o w a n ts t o b re a k a sw eat a t th a t h o u r o f th e m o rn in g ? I lo o k e d a r o u n d fo r in s p ira tio n , a n d m y eyes c a u g h t th e w h ite sh irt o f an elderly g e n tle m a n w h o lo o k ed lik e M r. M iyagi fro m th e K arate K id . T h e g o ld n a m e ta g o n h is c o tto n tra in e r's s h ir t read “M r. Bill." H e h a d a b o d y lik e Ja ck L aL an n e. I ey eballed h im fo r th e n e x t h o u r w a tc h in g h im w o r k o u t in a m eth o d ical fash io n , b efo re a p p ro a c h in g h im . “W ill y o u tr a in m e?” I h ad w o rk ed w ith tra in e rs in N e w Jersey, b u t n o n e w h o w ere 3 5 years older th a n m e. E veryone in th e to w n o f W ellin g to n k n e w h im as “M r. Bill,” a n d h e h a d b e e n a figure a t th e g y m sin c e 1 9 8 0 . 193

TRADING SARDINES

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'D iet* is a misleading w ord. E ating chicken, tuna, egg whites, and fish 6 o r 7 times a day was lots o f work. A nd, eating w hen you are not hungry is fun only if it is ice cream . T h e brain runs typically on carbs, b u t it can sw itch over to ru n n in g o n fats w ith a pro p er Keto diet. I was n o t eating enough carbs o r fits , so m y I Q slowly plummeted tow ards 90. N o t exactly conducive to trading. O n th e other hand, m y body fat fell below 17% w h ich is low for a girl. I forgot how to carry o n a conversation, b u t a t least I could fit in to m y skinny jeans. 1 used to joke w ith m y best frien d th a t girls w a n t three things in life: m oney, love, smd to be th in . S om ehow w e seem to only end up w ith tw o a t a tim e. W e are in love smd have m oney, b u t then we get fat an d happy. O r, we are stressed because w e do n ’t have money, but th en w e lose w eight an d can fit in to all o u r skinny clothes. Or, we are too busy w orking o u t an d m aking m o n ey a n d don’t have time to find love. I fell in to th e latter csunp. I am still w aiting to score three for three sim ultaneously before I die. I entered th e S outh F lorida bodyb u ild in g c o m p e titio n 11 w eeks la te r a n d w o n th e m iddlew eight division. Frankly, it is n o t like there are dozens o f fem ale com petitors in this event, b u t I will take m y cheap accolades where I can get them . I h a d a friend take pictures o f m e because I knew it was unlikely I w ould ever be th a t lean again. M r. Bill never com peted. B u t he d id 2 0 0 p u ll-ups o n his 8 2 "1 birthday. REAL pullups, n o t the fake half-up kind. H e said h e was never g oing to d o th a t again because it was g oing to kill h im th e next tim e. H is biggest love in life is his great-grandchild a n d family. H e is the happiest person I know. T h e re are c o m m o n th re a d s a m o n g th o se w h o are successful in life a n d have reached a level o f excellence in th e ir chosen field.

MR. BILL

197

Success is n o t defined by m o n etary sta n d ard s b u t by levels o f happiness, personal fulfillm ent, an d m astery in their discipline. Mr. Bill has achieved this lofty plateau. I f you substitute the w ord ‘trading" for "training,” M r. Bills lessons are the perfect recipe for success in the markets. Mr. Bill says a good foundation is a key to everything, whether it is bodybuilding or trading. H ow can you start on a journey towards reaching competency, let alone mastery, if you don’t start from a base o f solid principles! If you take shortcuts the cracks in the foundation will show up later and inevitably hold you back. . To start, there m ust be a robust m ethodology used to b u ild a foundation, and this has to be applied CO N SISTE N T LY . For example, when working out, it is essential to work the muscle groups in a particular older because blood flows from one group to the next. There is a logical rationale behind everything, even if you can’t see the results for a while. A good foundation is built on basics-core exercises for the major muscle groups. Proper technique is everything. Mr. Bill always says, “If you have the proper technique in w hat you do, you will be able to accomplish twice as m uch in h alf the tim e.” This certainly applies to the bottom line in trading. Keep a core group o f markets and strategies that you trade. D on’t try to do too many things at once. Follow your program consistently using proper technique when it comes to managing your trades. Proper technique is the equivalent o f good habits. Even though a trader may n ot see immediate eye-popping results in the bottom line, it is the habits that will eventually enable the trader to clim b to a higher level by using more leverage. It is the sound foundation and practices that give a trader confidence that their goals are achievable. Rituals are the primary tool used to achieve consistency. T hey are not just a tool, b u t a lifestyle. Mr. Bill’s routines start w ith how he wakes up. Shave first, then brush your teeth, the same way every day. Next, his cup o f coffee with condensed milk, his one sweet luxury

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c o n tin u e to elim in a te all th e d is tra c tio n s a n d w a s te d tim e engaging in friv o lo u s activities. T h e p e rs o n w h o s ta rts to fo llo w a consistent tr a d in g p ro g ra m w ill se t h ig h e r g o als, su c h as o n e d a y ru n n in g a successful m o n e y m a n a g e m e n t b u sin e ss o r s triv in g fo r continuous n e w a c c o u n t h ighs. T o s u m u p M e . B ill’s le s s o n s : S t i c k w i t h t h e b a s ic s , fo llo w a m e t h o d o l o g y , b e c o n s i s t e n t , u s e r i t u a l s t o a c h ie v e c o n s is te n c y , c o n c e n t r a t e o n y o u r f o r m , k e e p r e c o rd s o f y o u r p r o g re s s , a n d a b o v e a ll, p r a c t i c e p o s itiv e th in k in g !

29

ANIMAL KINGDOM

W

hen I was growing up, I lived in a converted storage room . It was originally used for tools and was attached to the garage w hich was later rem odeled into a family room . Even though

my living quarters were 6 by 9 feet— the size o f a prison cell— this was every teenagers dream . M y parents slept upstairs in the opposite side o f the house, m eaning nobody, and I m ean nobody, could hear me com ing or going w hen I was supposed to be sleeping. Except for the ham ster in the fam ily room . It turns o u t ham sters are nocturnal animals. T his one had an over-sized plastic ham ster wheel in its cage. A squeaky "exercise spinner." N obody w ants a fat hamster. O n e night I couldn’t take the noise any longer. It was 3 A M , and the household was deep in the REM stage o f their snoozes. I w ent into the kitchen to look under the sink for anything in an aerosol can— preferable som ething toxic like an t spray. I was planning on fumigating that ham ster. In a perfect w orld, I hoped to wake in the m orning with him dead in his cage, no trace o f any mysterious poison.

201

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“Aww, th e little g u y m u s t h av e h a d a h e a r t a tta c k exercising in his w h e e l last n ig h t* Snicker. I w o u ld n o t h av e a d m itte d to a n y th in g i f h e h a d d ie d — a testi­ m o n ia l t o m y la c k o f te e n a g e m o r a l in te g r ity t h a t w o u ld m ake my m o th e r w in ce. B u t c o m e m o r n in g , th e h a m s te r w as cozily curled up in h is shavings, ex h a u ste d fro m h is sq u e a k y w h eel ex p lo its, b u t alive n o n e th e le ss. G o d has m ysterious w ays o f p ay b ack fo r m y evil th o u g h ts an d deeds fro m 2 0 years earlier. T h e universe m a n ife ste d a strin g o f an im al deaths o v e r a f o u r - m o n th p e r io d , e x q u is ite ly tim e d fo r m a x im u m trading in te rfe re n c e . I w as n o w a sin g le m o m in a h o u s e h o ld w ith E rik a, tw o dozen a n im a ls (2 6 to b e exact, c o u n tin g th e g erb il bab ies), a n d tw o staff who w o rk e d in th e office. V icto ria h a d m o v ed fro m C h ica g o a n d lived in the b a r n a p a r tm e n t. S h e w as su re E rik a n e e d e d a b ird . L ik e a b ird is going t o m a k e u p fo r th e ab sen ce o f a fath er. W e b o u g h t a b eautiful white A fric a n lo v eb ird t h a t E rik a n a m e d D e w D r o p . E rik a a n d I w ould kiss th e b ird g o o d n ig h t, p u t h im in h is cage w h e re h e c o u ld w atch over her w h ile sh e s le p t, a n d th e n t u r n o f f th e lig h ts. “A yeeeeeee, A yeeeeeeeT B lo o d -c u rd lin g screa m s e c h o e d d o w n th e sto n e hallw ays a t 3 AM. T h is s o u n d w as b e y o n d raccoons m a k in g m isc h ie f in th e attic above m y b e d r o o m . S o m e o n e h a d b e e n M U R D E R E D . I d a rte d o u t o f bed in th e d ire c tio n o f th e s h rie k w h ic h h a p p e n e d to b e c o m in g from my d a u g h te r s ro o m . D e a d , a t th e b o tto m o f its cage, w as th e A frican love­ b ir d . H o w d id m y d a u g h te r k n o w i t h a d d ie d w h ile sh e w as sleeping? H m m . S h e s o o n co n fessed in -b e tw e e n m assive so b s th a t sh e took the b ir d t o b e d w ith h e r to c u d d le . W h ile sle e p in g , sh e ro lle d over on top o f it, s u ffo c a tin g th e in n o c e n t, p u r e w h ite D e w D r o p . N eedless to say, I g o t n o sleep t h a t n ig h t, a n d sh e re fu se d to g o to sc h o o l th e next day. W h y d o th e s e th in g s h a p p e n o n n ig h ts w h e n w e h a v e m axim um e x p o s u r e i n t h e m a r k e ts , a n d th e r e a r e s ig n if ic a n t e c o n o m ic data

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reports o r th e E C B M o n e tary Policy release? E C B days can b e m y w orst trad in g day o r m y best. T h e y w ere m y w orst u n til I realized they were m y w orst a n d th e n I tried very h ard to co n centrate so they w ould n o longer be m y w orst. D oes th a t so u n d convoluted? T h a t is w hat m y brain felt like th e n ex t m o rn in g . I slogged do w n as m uch coffee as possible a n d prayed fo r th e w eekend to co m e w ith o u t m e m aking too m an y errors. For th e next tw o m o n th s, E rik a slept in m y b ed a t n ig h t. T h e ghost o f th e A frican lovebird was still lingering in h e r room . Victoria was insistent th a t Erika needed m ore pets. I was convinced that she d id this to punish m e, in a so rt o f friendly, sadistic way. M y role was to buy food for all o f them . Food an d horseshoes. I could have bought ten pairs o f M anolos, Sara Jessica Parker specials, for w h at it cost to shoe 6 horses in F lorida. I w as happy to w alk aro u n d barefoot because th a t is how 1 grew u p in S outhern C alifornia. E xcept w e had fire ants in Florida, so yo u had to b e very careful w here you stepped. I heard th e funniest sto ry w hen d riving E rika to th e bus sto p o n H ow ard S terns radio show. It w as a co n test as to w h o h a d th e m ost tragic love story. T h e w in n er was a gu y w h o g o t h o t a n d bo th ered over a girl he m e t a t a bar. A fter a few drin k s, th e y decided to get frisky an d roll aro u n d in th e bushes outside. U n til o n e m o th e r o f all m o thers so u n d e d th e alarm a n d a th o u sa n d fire a n ts b it h im simultaneously. N o th in g like having sex o n to p o f a fire a n t m o u n d . H e ended u p in th e hospital. You o n ly need to h ear a sto ry like th a t once to look w here y o u are stepping. V ictoria decided th e next best th in g w o u ld b e to get E rika a pair o f gerbils. W hy? Every k id has gerbils. Besides, th ey d o n ’t need a noisy exercise wheel like ham sters do. T h e p e t store assured us these were tw o fem ale gerbils. H o w d id I expect a store clerk getting paid m in im um wage to d eterm in e th e sex o f a gerbil correctly? O n e m o n th later, o n e o f th e gerbils had grow n m u ch fatter than the other. It m u st be hogging all th e food. N o , it w as ab o u t to give

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b ir th to te n babies. V icto ria said i f y o u d o n 't rem o v e th e father from th e cage, he will eat th e babies. W h y d o d a d d y gcrbils eat their young* N o clue. A ll 1 k n o w is w e h a d to k e e p h im in a sep arate cage, and b o th o f th o se cages w ere in E rik a s b a th ro o m . It was ju st after 2 :3 0 P M , th e last h o u r a n d a h a lf o f th e trading d ay o n a W ednesday. N o t a n y W e d n e s d a y b u t F O M C m eeting day. H isto rically, th is is o n e o f m y b e s t tr a d in g days. I have a n elaborate ritu al. S h u t o u t all o u tsid e influences, close a n y unnecessary programs o n th e C P U s so th e re is n o risk o f latency, a n d lo ck all th e doors so n o b o d y can c o m e in . T h e crazy F O M C g y ra tio n s h ad begun. “Eeeeeec! Ay-ccceccec!M T e rrify in g how ls w ere re v e rb e ra tin g th r o u g h th e house. Loud e n o u g h to sh a k e th e glass d o o rs o n m y office b u ild in g . D a n n y Kay, th e m a le g e rb il, h a d m a d e a sw an dive from the to p o f h is cage d irectly in to th e to ile t below . H e w as floating bellyu p in a sta te o f rig o r m o rtis w h e n E rik a f o u n d h im . I had built a se p a ra te office specifically to in su la te m y se lf fro m th e distractions o f tra u m a tiz e d c h ild re n . M y c o n tr a c to r h a d failed to d o his job like th e sto re clerk w h o h a d failed to sex th e gerbils correctly. W hen was th is g o in g to end? I t tu r n s o u t, w e still w e n t th ro u g h a cat dying, a d o g d y in g , a n d w o rst o f all, a h o rs e h a d to b e p u t dow n over a fo u r- m o n th p e rio d . I f w e d o th e m a th o n th e p ro b a b ilitie s th a t tw o anim als would d ie o n tw o o f th e c h o icest tr a d in g d ay s, y o u w ill see it is n o t that far-fetch ed . I h a d 2 6 c reatu res ( in c lu d in g th e te n b ab y gerbils). The average life expectancy o f th e assorted h orses, p o n ies, cats, dogs, birds, a n d gerbils cam e o u t to 10 years. T h e re w ere a b o u t six Big Event days a m o n th i f w e c o u n t th e h ig h a le rt e c o n o m ic r e p o rt days: F O M C E C B , sig n ific a n t electio n s. T h e o d d s t h a t a n a n im a l w ill die on one o f th e se 7 2 days o v e r th e n e x t y ear is a r o u n d 1 o u t o f 5 0 . I f we have 2 6 a n im a ls, th is tran slates to 2 6 /5 0 m e a n in g a r o u n d a 5 0 % chance th a t o n e lan d s o n o u r ro u le tte w h eel. S q u a re th e p ro b ab ility since the

ANIMAL KINGDOM

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event o f one animal dying is independent o f the others and you got 25% odds that two animals die on a significant trend day in one year. • «* This is ballpark thinking. It is how the markets work. My brother likes to call it M pseudo-m ath.N H e is a genius and has an advanced degree in applied mathematics. It means everything is a fuzzy variable and you never have to give an exact answer to anything. If I did not keep so many animals around, the m ath would be no good. So, while we think the odds o f any one thing going wrong and upsetting our plans are low when you consider all the assorted stuff which can go wrong and add up the individual probabilities, the odds are high that something comes along and screws up w hat was otherwise a great plan. C ount on hitting som e potholes, because they are there. T he best you can do is to minimize the damage they do. T he m ain creature w ho refused to die was Axle, the Dalmatian. W hen I won the South Florida bodybuilding middleweight title, a client immediately mailed m e three pounds o f chocolates. Sadistic client. Maybe he thought I w ould trade better in a state o f insulin shock instead o f carbohydrate depletion. I ate half o f the three-fbot platter o f chocolates and p u t the rest o f the tray on the island in the kitchen. I stepped outside to go over to the barn and throw up. Axle snuck into the kitchen and ate the other half o f the chocolates while I was gone. I thought chocolate was supposed to kill a dog, b u t he refused to die. H e didn’t even get sick. T he dog would burp and move on to the next edible (or inedible) thing in the house. Axle was the reincarnation o f Rasputin. We nam ed him this after a previous incident w hich happened in N ew Jersey. A client came to visit my office w hich, at the tim e, was still in the basement. A very dark, dank, and unglam orous space. W e were talking about markets when I thought, "W hat’s that horrid smell?” I looked around but could see nothing except Axle slinking o u t o f the office w ith his tail between his legs. T hen I spotted it. T here on the m otded gray carpet

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w ent into the office. Intense m arket focus dictated m y every move until I walked o u t o f the office an d back in to the kitchen around 10:30. O h , crap. Black acrid sm oke w ould be billow ing from the stove. Burned another pan. It is n ot good for the earth’s environm ent to waste so m any frying pans. W h e n I ran o u t o f frying pans, I started m aking protein shakes. H ow m uch harm can you do blending powder and w ater w ith crushed ice? Nazdoggie d id n o t care. She tro tted back and forth from building to building with a p erpetual sm ile o n h e r P om era­ nian face. O h , there was a lousy econom ic report? L ook, th e sky is b lu e, th e su n is shining, and I am such a hap p y little doggie. Interestingly, none o f th e people w ho worked in m y office ever said an y th in g about the anim al farm . I m ig h t as well have posted a sign a t the entrance to th e driveway: E N T E R A T Y O U R O W N R IS K O F B E IN G S L O B B E R E D O N BY A D O G , S N O R T E D O N BY A H O R S E , O R H A V IN G EARDRU M S R U P T U R E D BY A PARROT.

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on Shear was a good friend o f m ine. H is brother had been the specialist in one o f the pits I traded in at the PHLX. Ron founded Carlin Equities and owned one o f the largest propri­ etary trading firms, Generic Trading. I was visiting Ron in his office on a trip to New York in the late nineties and happened to m ention the chat room I started while waiting for m y divorce to setde. He suggested he was interested in som ething like that for his traders. H e had 800 prop traders w ho needed trade ideas. Ever since the M arket Wizards book came out, I w ould get random calls o u t o f the blue. O ne was from Chris, w ho w ould call m e a t 2 o’clock in the morning. "H ey Linda, Linda! I faxed you a chart, can you take a look at it?” I tried to get m y tired m o u th to m ake sounds. "C hris, do you know w hat tim e it is? You w oke m e up. I can n o t take a look at your chart. Please do n ’t call m e a t these hours.”

R

This went on over several weeks. Chris emailed m e that he had been studying Ticks while on vacation on some island, or that he 209

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c a m e a c ro ss a c h a r t f o r m a t i o n h e w a n t e d m e t o a n a l y z e . T h e d u d e w a s p e rs is te n t w ith t h e c ra z ie s t u n l i m i t e d e n e r g y . T h e w o r s t p a r t was, h e really d id h a v e a n ey e f o r t h e c h a r t s . O n e d a y I sa w o n t h e c a lle r I . D . t h a t C h r i s w a s c a l l i n g m e , so I a n s w e re d t h e p h o n e a n d s t a r t e d t a l k i n g b e f o r e h e c o u l d , " C h r is , I h a v e a n id ea. H o w w o u ld y o u lik e a jo b ? B u t y o u m u s t p r o m is e never t o c a ll m e a f te r m i d n i g h t a g a i n , n o m a t t e r w h a t ." R o n w a n te d s o m e o n e t o m a k e s t o c k c a lls f o r h i s 8 0 0 t r a d e r s . So, w e d i d a th r e e -y e a r e x c lu s iv e w h e r e w e p r o v i d e d s t o c k a n a ly s is for R o n 's f irm . I b r o u g h t C h r i s o n b o a r d t o p r o v i d e a n e n d l e s s s tre a m o f e q u ity tr a d e id e a s . A n d w e k i l l e d t h e m a r k e t s . C h r i s w a s t h e m aste r o f b e in g a b le t o re v e rse o n a d i m e . W h e n t h e m a r k e t w a s ra lly in g , he w o u ld n a il t h e b u ll flag s in a d o z e n s to c k s . " C h r is , t h e m a r k e t is l o o k i n g a b i t t o p p y h e r e . I ’m g e t t i n g sell d iv e rg e n c e s a n d n o n - c o n f l r m a t i o n s b e t w e e n t h e in d e x e s ." “O k !" H e t o ld th e tr a d e r s i n t h e r o o m , " S e ll o u t e v e r y t h i n g ." A n d we w o u ld s t a r t w o r k i n g t h e s h o r t s id e . C h r i s d i d n o t t r a d e d u r i n g this p e r io d , so h e r e m a in e d o b je c tiv e a n d d i d n o t s p e a k a b o u t h is p o sitio n . B e fo re w o r k in g f o r m e , h e w a s i n t h e c o n s t r u c t i o n b u s i n e s s fin ish in g t h e i n s id e o f s k y s c r a p e r s i n N e w Y o r k . W o r k i n g f r o m b lu e p r in ts d e m a n d s a g o o d s e n s e o f s p a t ia l r e l a t i o n s h i p s , a n d t h u s C h r i s had a n e x c e lle n t e y e f o r t h e c h a r t s . H e d i d n o t h a v e a n y c o l l e g e e d u c a t i o n , o n l y s h e e r I ta lia n c h u tz p a h . I a m n o t s u r e h e e v e n f i n i s h e d h i g h s c h o o l . H e c a m e w ith t h e n ic k n a m e " B ig D a d d y " a n d is o n e o f t h e h a r d e s t - w o r k i n g a n d f u n n ie s t p e o p le I k n o w . N o t h i n g t h e y t e a c h i n s c h o o l p r e p a r e s you f o r t h e s to c k m a r k e t , s o h e w a s w e l l - p r e p a r e d . C h r i s liv e d u p in N e w Y o rk . I d r o v e m y c a r u p t h e r e t o m e e t h im f o r a c o n f e r e n c e w h i c h w a s h e l d a t t h e M a r r i o t o n T i m e s S q u are. P a r k i n g is a b i t c h i n M a n h a t t a n a n d v e r y e x p e n s i v e . M y c a r was n o t h i n g fa n c y , a n a v e r a g e b l a c k J e e p .

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W hen we pulled up to the M arriot, C hrii laid to the doorm an, "You know w ho I am?" T h e doorm an's eyes scanned his Inner mind, trying to figure o u t If he recognized Chris. T h e doorm an was large and dignified, dressed as fancy as a character In costume at Disneyworld. Before he could m uster a response, Chris continued. "I am Big Daddy." T h e doorm an stared at C hris and blinked. "Yup, I am Big Daddy. You do know who I am, don't you?" T he doorman nodded his head, suddenly acting as if he realized Chris was famous, but he still couldn’t quite place him. “O f course, sir.” "1 need for you to take care o f this car for me, can you do that?" “Yes, sir." “Good. N ow 1 am going to take my friend inside." We walked in and left the doorm an w ith m y Jeep running so he could valet it which he ended up doing for free. In the late nineties, O cto b er 16, 1998, to be exact, the Fed made a surprise move to c u t interest rates by a half-percentage point. T his was going in to the last h o u r an d it caught Wall Street by surprise. T h e SPs rallied 50 points in five m inutes while the Dow rallied 330 points. T h is was before electronic trading, too. Fifty points on the big SPs contract w ould be an expensive lesson if you did n ot have a stop in place especially since at the tim e they were trading just above 1000. C hris h ad a stop in place an d only got slippage o f 6 points. T his is why I paid C hris n ot to trade after that incident so he could concentrate full tim e and remain unbiased for Ron’s traders. D am on, m y SP broker, had q u ite a few o th er horror stories though. His partner had a protective buy stop on a short position at 1232. T he futures were trading around 1226 when the news hit. But by the tim e it took o u t 30, there was such an influx o f orders that almost every buy stop got filled at the high around 1325. His partner was filled there too, costing him $105,000. Slippage o f 93 points was

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unheard of! It goes to show that even floor b roken standing next to the pit can get screwed along with everyone else. This was one tape bomb I managed to miss.

IT'eihteuUy afternoon... 95points up in 5 minutes. Sutprist! W hen the bear market hit in technology stocks in 2001, most traders could not trade from the short side. Over the next three yean, it was awar o f attridon for stock traden and the prop shops. That is the beauty o f the futures markets. There is always something to trade from cither the long or short side. Plus, there was no updek rule at the dm e as there was for shorung stocks. Any tim e the index futures popped their heads up we played W hack-a-M ole (aka "hit the bid") until the SPs bottomed in late 2002. The chat room kept me on m y game during w hat was an other­ wise unbearable period o f my life. I was so happy w hen the divorce was finalized. T he process was a depressing grind— three years of

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docum ent production and bickering. All th e s tu ff th at 90 % o f divorces entail, designed to m ake one th in k twice ab o u t getting married again. But the chat room provided humor! We let our hair down and cracked jokes. We called the turning points o f the inrraday swings and stayed in the game. We tan periodic research projects. I promised to share our research with anyone in the room who did their work. T h e room became the ultimate talent pool. Every individual who came to work for me when I ran the fund came from the chat room . It had som e o f the best, brightest and most talented traders as members, I still have m onies invested in three funds started by traders w ho gained experience in the chat room. And, my best friends w ith whom I trade online with every day came from the room. I never made a dime from the room because every bit o f revenue it created went towards creating jobs for others. I had Laura, James, Victoria, Chris, two other moderators, someone to run the video, do research, run the trade sheet routines and handle custom er support. It was an excellent way to pay it forward by creating jobs for aspiring traders. Most people need a transition period w ith som e alternative income to make their way to full-time trading. T he room also provided m e w ith a stru ctu re a n d k e p t m e accountable during a period when I was not handling client monies. It placed a lot o f demands on my time, b ut it was how I found Nigel, Judd, Roland, and other future trading colleagues. A nd I laughed my ass off at Victoria's jokes while watching every tick in the SPs. Big Daddy seemed to know everyone. O n e o f the people he met at a party in New York found her way dow n to C am p Raschke in Wellington where she stayed for a few nights. Flavia C ym balists is one o f the most delightful and authentic souls. She has a P h.D . in cognitive psychology b u t prefers to be called an “uncertainty specialist.* H er published paper, H ow George S o n s Knows W hot H e Knows, was a good source o f raised eyebrows in an era where the

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tren d was tow ards quantifying everything. Flavia to o k th e opposite approach. W h a t in fo rm atio n can th e ex perienced trad er gain from listening to themselves? She was ahead o f her tim e w hen it comes to m indfulness. She to ld m e a b o u t h e r frien d sh ip w ith G eorge Soros a n d how h e listens to h is back. I f h e h a d o n a g o o d position, his b ack d id n o t b o th er h im . H e c o u ld rid e o u t a b it o f h eat o r noise a n d be p atien t. B u t i f his b ack w as b o th e rin g h im , m o st likely his p o sitio n was w rong. I am n o t sure if th is w o u ld fly as a leg itim ate to o l these days for a m ulti-m illio n dollar hedge fu n d m anager, b u t there is a lot of tr u th to this. W h a t does th a t G reen L ight G O fe e lin g jW like? The o n e w here th e w in d o w o f o p p o rtu n ity is th ro w n w ide open and stays open a few m inutes longer th a n usual? W h e n yo u know you’ve g o t a tiger by the tail a n d th e w in d s are fillin g y o u r sails. Green light, go! Step o n th e gas, pedal full th ro ttle, m ake a ru n for it. How m a n y o f those tim es d o w e get p e r year? M ay b e two? Perhaps four, i f a trad er is lucky. T h ese are th e types o f trades th a t new er traders im agine hap p en in g to experienced pros w h o p u ll d ow n seven digits in tra d in g pro fits year after year. B u t tra d in g is a gam e o f patience a n d g rin d . W eeks tu rn in to m o n th s. W ill th e volatility ever come back? W ill a m ark et ever break fro m its n arro w in g w eekly trading range? A n d rig h t w hen w e are d o s e to fo rg e ttin g w h a t riding that b ig wave feels like, a tsu n a m i h its. I k now m yself a n d m y p attern s b y now. T h e re are days when I com e in an d m y positions are against m e fro m the day before. I mark m y trades to the d o sin g price o f each d ay a n d use th a t as m y baseline fo r th e next day. I t does n o t m a tte r w h ere th e trad e w as initially established. I had confidence in m y roadm ap th e day before, and that w as w hy I held overnight, {fow l am sta rtin g o u t m y day underwater from th e overnight activity. B u t I also k n o w th a t In the past these situations have tu rn ed o u t to be som e o f m y best days. So, I don’t get discouraged by sloppy overnight activity. Instead, I get ex d ted about

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the day. I know I have come back so many times before, and a down morning means nothing on any decent timeline. Experience c o u n ts n o t ju s t i n k n o w in g th e m a rk e ts , b u t in u n d e rs ta n d in g y o u r o w n p e rs o n a l tr a d in g p a tte rn s .

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was trading m y personal funds an d rebuilding e q u ity after th e

I

divorce chopped m y net w orth In half. I gave m y ex m ost o f the cosh because 1 w anted to keep the house, barn , a n d horses. T h is

was okay with me. 1 w ould not have been able to build the career I did without him taking care o f the household and being M r. M om . After enough losses throughout a trading career, w hat Is building u p capital yet one more time? I was

a real pro at m aking m oney back by now.

James was still m y assistant, and I had tw o o th e r traders sharing my office as well. O n e o f them had a television, so m e th in g I d id n o t keep in the office. O n e m orning we all saw w hat appeared to be small plane flying into little blip on

a big T V

a big building.

It looked like a n accident,

a a

screen.

Steve M oore called m e on th e p h o n e, "D id w e see that?" M y Initial thought was an airplane had gone o f f course, o r th e pilot had had

a heart attack. A nd

then we all w atched In h o rro r as th e second

plane h it the other W orld T rade Center, 217

218

TRADING SARDINES A few m o n th s earlier, I h a d m o v e d m y m a in bu sin e ss to Refcos

tra d in g desk in N ew York w h ich w as o n e b lo ck fro m th e W o rld Trade C e n te r. H av e y o u ever ex p erien ced a n ig h tm a re w h e re y o u can only m o v e in slow m o tio n ? L ike try in g to jo g in q u ick san d ? M y largest p o sitio n h a p p e n e d to b e sh o rt E u ro d o llars. I t is th e last p osition a tra d e r w a n ts to have w h e n d isa ster h its . B y th e tim e I p ick ed up th e p h o n e a n d called to clo se o u t m y p o s itio n , th e p h o n e s were u n m a n n e d . R efcos office in N e w York h a d b e e n ev acu ated . T h e U S E xchanges sto p p e d tr a d in g a n d sta y ed closed for five days. T rading in th e b o n d m ark et screeched to a halt. I w atch ed every tic k in th e D A X for five days. I t was m y w ay o f reassuring m yself that th e w o rld was still tu rn in g . W h e n th e G e rm a n m ark ets closed in the m id d le o f th e day, I w a n d ered a ro u n d th e h o u se h o ld in g Nazdoggie, m y P o m eran ian d o g close fo r c o m fo rt. T h e F ederal Reserve added $ 3 0 0 b illio n in liq u id ity o v er th e n e x t th re e days. G o ld rallied $70. T h e U S d o lla r p lu m m e te d , a n d w h e n tra d in g re su m e d in th e Euro­ d o llars, th e y w ere radically h ig h er. O u c h . A fte r w a tc h in g th em for n o m o re th a n an h o u r o r tw o , it becam e q u ic k ly a p p a re n t th a t they w ere n o t g o in g to co m e b ack d o w n , so I b it th e b u lle t a n d closed out m y p o sitio n . I h a d rec c n d y m a d e b a c k th e m o n e y I h a d p a id o u t in m y divorce. A n d n o w M r. M a rk e t w as ta k in g it aw ay y et again. Four step s fo rw ard , th ree step s back. • ** E le ctro n ic tra d in g replaced m y d ire c t-lin e b a t p h o n e s to the pits. N e w execution softw are w as p o p p in g u p every day. Ja m es a n d I tried m a n y ex ecu tio n p la tfo rm s o v er th e n e x t few years. W e encountered la ten cy issues a n d glitches in every o n e . A r o u n d th is tim e , I was out in C a lifo rn ia a t a c o n v e n tio n in O r a n g e C o u n ty . I h a d flow n out th e re to m a k e p eace w ith m y D a d w h o w as o n h is d e a th b e d . I t was a flu k e th a t I sto p p e d b y th is in d u s tr y co n feren ce. I w a n d ered th ro u g h th e d e s e rte d c o n v e n tio n c e n te r hallw ays. It w as 7 P M o n a F riday n ig h t. E veryone w as g o n e . I h eard p ian o music

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co m in g from a ro u n d d ie corner. D a m o n , m y o ld S P b ro k e r fro m th e n ineties, sat a t th e k ey b o ard p la y in g “M a y b e I ’m A m azed ” b y Paul M cC artney. W h o w o u ld have k n o w n h e w as a n acco m p lish ed m usician? W e h a d d o n e business to g e th e r fo r o v er a d ecad e , b u t I knew n o th in g personal a b o u t h im . A fter I sto p p e d p la c in g o rd e rs in the pit an d the m arkets w en t electronic, D a m o n a n d I h a d lo st to u ch . But fate m e a n t fo r o u r p ath s to cross o n e m o re tim e . I t tu rn s o u t h e used to be th e lead g u itarist fo r a ro ck a n d roll b a n d w h ic h to u re d the co u n try for a year. I d id n o t tell h im I w as a p ia n ist b u t in ste a d b atted m y eyelashes a n d enjoyed h is playing. D am o n a n d his tw o p artn ers b u ilt sta te -o f-th e -a rt, ro b u st execu­ tion software. It was used b y p ro p shops to tra d e th e a rb b etw e e n th e 10-year notes a n d th e 30-year b o n d s, (also called th e N O B a n d F I T spreads). H e offered to set m e u p w ith th e ir P h o to n T ra d e r so ftw are an d in o n e w eek sh ip p e d a n e w C P U w ith t h e tr a d in g p la tf o rm already installed to m y F lorida office. I e n d e d u p d o in g all m y b u si­ ness th rough his firm , F u tu re P a th , after th a t. O n e m o rn in g I w as talk in g to D a m o n o n th e p h o n e . I to ld h im before th e m arkets op en ed th a t I w an ted to b u ild a sizable lo n g posi­ tion. T h e stock indexes h a d a b re a k o u t fo rm a tio n , a n d m y m o d e ls show ed p o ten tial fo r a glo rio u s tre n d day. D a m o n to o k n o te o f m y m arket se n tim en t a n d agreed. 1 b eg an b u y in g o n th e o p e n in g a n d accum ulated 6 0 0 lo n g SP e-m in is. I so ld 100 to b o o k p ro fits, test th e m arket a n d get a feel. I lik e d o in g a b it o f tra d in g a t tim e s to g et additional feedback o n h o w stro n g o r w eak a m a rk e t is. I o fte n p u t som ething o u t a n d th e n i f I have to b u y it b a c k a b it h ig h e r to a d d to th e original p o sitio n , I w ill. N o t to o lo n g after, D a m o n w alk ed in to th e risk co n tro l c e n te r to talk to o n e o f h is em ployees. H is risk guy said, “W ow , L in d a is se llin g q u ite a b it!” D a m o n lo o k e d o n th e screen a n d n o tic e d m y a c c o u n t selling 1 0 0 c o n tra c ts every 10 seconds. R e m e m b e rin g o u r co n v ersa tio n fro m th e m o rn in g , h e w as confused after 1 h a d sold so m u c h . I h ad reversed m y p o sitio n to 6 0 0

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sh o rt as th e m arket was scream ing h ig h er. H e called to ask w hy 1 had ch an g ed m y m in d a b o u t th e d ire c tio n o f th e m a rk e t. ‘ W h y d id y o u ju st sell 1 2 0 0 cars?” (C a rs w as slang fo r contracts in o u r parlance). “W h a t are y o u ta lk in g ab o u t?” I h a d b een ty p in g o n th e w ro n g k e y b o a rd a n d every tim e I hit ‘ E n te r* i t sold a n o th e r 1 00 c o n tra c ts u n b e k n o w n st to m e. 1 kept th e execution m o n ito r o ff to th e side because th e fluctuating P and L a n d ladders w ere d istractin g . I o n ly w a n te d th e m a in m arket quotes in fro n t o f m y free. I w as try in g co h it ‘ E nter* to ch an g e a chan a n d c o u ld n o t figure w h y it w as n o t c h a n g in g as I p o u n d e d away at ‘ Enter* m u ld p le tim es. ‘ Fucld Fuck! Fuck!* T h e d u c k g o t left o u t o n th is one. I im m ed iately h u n g u p o n D a m o n . T h e SPs w ere five points h igher now. I b o u g h t b ack th e sh o rts ‘a t th e m arket* an d doubled up o n th e lo n g side. By th e e n d o f th e day, th e m a rk e t w as significantly higher. F o r th ree decades, I have k e p t tw o sayings a t th e b o tto m o f my d aily tra d e sheet:

“Correct Mistake* Immediately” and “Winners Admit Errors” ‘ C o rre c t M ista k e s Im m e d ia te ly * h a s sa v e d m e m illio n s o f dollars— literally. I a m n o t q u ite as fast to a d m it errors, b u t I learned th a t th e m ark et forces y o u to accep t th e m s o o n er o r later. It’s cheaper t o g e t i t o v er w ith s o o n er th a n later.

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ike a n d I m et th ro u g h th e M T A in th e early nineties. H e was

I

one o f m y best friends in th e industry, b u t th e n again, M ike was probably best friends to a lo t o f people. B o m in Brooklyn,

he attended H arvard Business School after leaving th e N avy in th e position o f w h at is now d ie N avy SEALS. H is career included 50 years o n th e floor o f th e NY SE. O ver th e years, I h eard hu n d red s o f M ike's stories a n d quotes. H e to ld m e a story a b o u t w h en h e w as a b ro k e r o n th e exchange floor in an oil stock. T h is stock h a d trad ed in a 3 /4 p o in t range for the prior tw o weeks. V olatility w as a b it different in those days. T h e brokers, including M ike, h a d in stru ctio n s to notify th e ir clients if the stock trad ed above 2 1 . W h e n it finally d id , th e y all ra n to the phones to contact th eir custom ers. D u rin g this tim e, an order cam e into th e p it to sell 2 0 ,0 0 0 shares a t 2 1 . Since all th e brokers w ere o n the phone to th eir custom ers, th e specialist to o k th e shares. W h e n the b ro k e n returned to th e p it b id d in g 2 1 , th e specialist sold o u t his

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T h e in te rn was very p ro ficien t a t gam ing, so w e created a trading g a m e. I t co n sisted o f strategically p laced B uy a n d Sell sto p s o n 100 lo ts in th e indexes. H is jo b w as t o scalp o u t fo r 3 -4 ticks once an o r d e r trig g ered . A crazy g am e b u t q u ite successful. I f y o u tak e away th e d e c isio n -m a k in g pro cess w h ic h o v erw h elm s m a n y p eo p le and fo cu s o n o n e task, Le.t exit fo r a few ticks, y o u e n d u p w ith a steady e q u ity cu rv e. T h e size, m a rk e t, en try , a n d d ire c tio n are determ ined a h e a d o f rim e . A ll y o u h av e to d o is m a n a g e th e tra d e fo r a few m in u te s a n d ex it. T h e p ro b le m fo r m o s t is th e y g e t b o re d o r think th e y c a n g e t c u te a n d im p ro v e u p o n th e gam e. T h e S P g am e o rig in a te d fro m a p ro je c t I sc h em ed u p w ith Brett Steenbargec. W h a t is th e m o st effective w ay to tra in traders? I based th e g a m e o n th e O O D A lo o p : O b s e rv e , O r ie n t, D e c id e , a n d Act. I t w a s as d o s e t o s im u la tin g m y ex p e rie n c e in th e o p tio n s pits as I c o u ld im a g in e . B rokers w a lk e d in to th e c ro w d , a n d th e m arket m a k e rs d id n o t k n o w i f th e y h a d b u y o r sell o rd e rs. N o b o d y knew th e o r d e r size o r w h a t s to c k w a s g o in g t o d o n e x t. I t w as as i f the b r o k e r w as to ss in g a h o t p o ta to i n to th e c ro w d in th e fo rm o f an o r d e r to fill im m ediately. T h e trad ers h a d to th in k o n th e ir feet how th e y w e re g o in g to h e d g e th e tra d e . W e d i d exercises to sim ulate rhi» p ro cess w ith a g r o u p o f 3 0 tra d e rs fro m th e c h a t ro o m fo r six w eek s. *** Y ou c a n o n ly h e lp so m e o n e w h o w o u ld h av e m a d e it o n their o w n anyw ay. You c a n n o t in still a k n a c k , ju s t h o n e i t a n d accelerate its re fin e m e n t. A n o th e r p r o je c t I d id w ith A n d re w L o s colleagues e x a m in e d th e e m o tio n a l p ro file o f su c cessfu l tra d e rs . T h e m ain p ro b le m w as th a t i t w as d iffic u lt t o se p a ra te th e surv iv o rsh ip bias. A re t o p pro fessio n al tra d e rs successful b ecau se th e y are unflappable u n d e r p re ssu re a n d th u s less p r o n e t o b e in g reactive? O r, d id they d e v e lo p a th ic k e r sk in o v e r tim e? T h e c o n c lu s io n w as, th e longer a t r a d e r h a d b e e n t r a d i n g , t h e less t h e i r e m o t i o n a l sensitivity.

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However, it was n o t clear i f to p trad ers h a d th o se traits w h e n th ey were starting o u t. O v e r tim e, w e becom e desensitized to everything. I had several m o te assistants over this period, n o n e o f w hom had a college degree. T h e y w ere sm art a n d d riven. T h e best th in g ab o u t this business is you d o n 't have to have a form al ed u catio n unless you are going to engage in a qu an titativ e discipline. C h ris referred a y o u n g tra d e r fro m N e w Y ork n a m e d H arry . Victoria had left, a n d I needed som eone to type fo r m e a n d execute orders. H a n y was hom e-schooled by his F rench father, spoke several languages, and excelled in m ath . H e was a scraw ny k id w ith glasses and bad teeth. H is d ad d ied, leaving H arry w ith a sm all in h eritan ce and a lack o f m otivation to p u rsu e h ig h er studies. I am su re H arry had an I Q well above 145. H e w as hysterically funny. A n absolute riot to have around. O n M o n d a y m o rn in g , H a r ry w alk ed in to th e office a n d h is glasses were gone. H e had Lasik d o n e over th e w eekend o n his eyes. T h en he w ent o n a m ission to gain w eight a n d b u ild m uscle. I’ve never seen anyone pack o n 20 p o u n d s, n o n e o f th e m fat, in such a short period o f rime. I was trying to trade, an d m y assistant was binge earing Cheerios and chicken at his desk th ro u g h o u t th e day. I p u t u p with it because he was so en tertain in g an d he a n d Jam es h ad becom e great friends. H e was also gpo d a t his job. T h e next m o n th , he had all his teeth capped. A g leam ing w h ite smile greeted m e each m orn in g . Packages arrived in m y m ailbox for Harry: designer clothes purchased o n A m azon a n d eBay. O n e was a blue Versace pajam a type o f o u tfit. Jam es a n d I n ick n am ed h im “H arry th e Sm urf," a n d th e n am e stuck. O n e day, I was try in g to concentrate an d I hear this noise com in g from th e desk next to m e, chhh chhh, chhh chhh. I look over, a n d H arry was spraying his nipples w ith an aerosol antiseptic after getting th em pierced th e night before. I alm ost fell o u t o f m y chair. S oon th e tran sfo rm atio n o f H a rry was complete. H e looked like the consum m ate professional gigolo. Sadly,

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I h a d to fire h im w h e n h e s ta rte d c o m in g in la te a fte r s ta y in g u p all n ig h t in M ia m i. N o t to o lo n g after, w e sa w H a r r y o n T V . T h e first h u r ric a n e w as a b o u t to h i t i n S o u th F lo rid a a n d th e re h e w as, swim m in g in th e o c e a n a n d ta u n tin g th e h u g e w aves. T h e c a m e ra crews f o u n d h im , a n d h e f o u n d n a tio n a l n o to rie ty . H a r r y e m b a r k e d o n a s ix - y e a r a d v e n t u r e o f w o r l d travels, c h a r m in g p e o p le a r o u n d th e g lo b e . H is in c re d ib le p ic tu re s o n Faceb o o k w e re v iew ed b y th o u s a n d s . H e a te w ith th e ric h e st o f th e rich a n d s le p t w ith th e p o o re st o f th e p o o r, e x p lo re d ev ery c o rn e r o f the e a r th , a n d e scap ed c o u n tle s s b ru s h e s w ith d e a th . O n e d a y h is nine lives r a n o u t, a n d h e m e t h is d e a th ta n g lin g w ith d r u g lords o n a m o to rc y c le tr ip in M e x ico . H a r r y D e v e rt d eserves a m o v ie m ad e of h is life, th o u g h h e is n o lo n g e r h e re to c h a r m a n y o n e in to m ak in g it.

In tern , B ig D addy, D a m o n , H arry, a n d a colleague, p a llin g a ro u n d in F lorida A fte r H a r ry left, C h ris s e n t d o w n a n o th e r referral f ro m u p north. S h e w a s a lre a d y fa m ilia r w i t h th e P h o t o n so ftw a re sin c e h e r m om

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used it, so she fit in p erfectly d o in g m y ex ecu tio n . L ike H arry , she didn't have an Ivy L eague pedigree, b u t sh e w as d a m n sm a rt. S he was a m ath w iz, w h ich w o rk ed o u t w ell fo r E rik a w h o w as suffering th ro u g h th e p e rfo rm in g a rts satellite sc h o o l o f th e F lo rid a p u b lic school system a n d desperately in need o f a tu to r. I am forever grateful th a t sh e h e ld d o w n th e fo rt th ro u g h th e last hurricane w hile I was in C h ica g o . T h e w in d s sh re d d e d th e 1 0 0 -fo o t long screen enclosure over th e p o o l, to p p led n u m ero u s trees a n d blew the ch im ney o ff th e roof. T h e electricity a n d w a te r w ere o u t fo r eig h t days. B ut, o u r fem ale in te rn w as u n p e rtu rb e d .

Anyone can be anything in this business, and formal education has little to do with it.

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here is a well-known expression: the teacher learns more than the student.

T

T here was a b rie f period where I hosted a three-day confer­

ence every two o r three years. I sum m arized the findings o f m y m ost recent research efforts an d taught m y approach to th e m arkets. It forced m e to update m y previous research an d p u t it in tables which I m ade into thick m anuals fo r the arrendres. I to o k pride in there conferences and strove to m ake th em th e crem e d e la crem e for the industry. T h e m ost beautiful hotels, cocktail parties, first-class lunches and dinners, an d even full audio tapes o f th e conference. Lots o f planning w ent into these, m uch o f which Laura h a n d m , We stopped doing them after a few years w hen the F u n d grew and it becam e too m uch work. B ut before it all ended, I booked th e conference a t the Saint Francis hotel in San Francisco. T h e S ain t Francis is a luxury ho tel o n U n io n Square. Built in 1904, it m anaged to survive th e terrible earthquake o f 1906.

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U nfortunately, the fires w hich follow ed g u tte d th e inside. T h e reno­ v atio n elevated th e elegance a n d lu x u ry to th e p la tin u m standard. Reagan. Ford, Q u een E lizabeth, a n d m a n y celebrities stayed in the rich gold an d red velvet suites. T h is chichi a n d sn o b b y backdrop was a n ironic setting for a tra d in g conference. U n fo rtu n a te ly , th e w e e k e n d s c h e d u le d tu r n e d o u t to be less th a n tw o weeks after 9 /1 1 . T h is u n fa th o m ab le event affected people in d iffe re n t w ays, so airlin e s a n d h o te ls issued full refunds. The uncertainty in th e air w as th ick er th a n a San Francisco fog. W e called th e clients a n d gave th e m th e o p tio n fo r a full refu n d if they chose n o t to com e. H ow ever, I w o u ld still b e h o p p in g o n a plane and proceeding w ith th e conference i f th e y w ish ed to a tten d . 1 figured an y o n e show ing u p h ad to b e a h ard co re trader. A n d , I was right. T h e re was o n e atten d ee w h o sto o d o u t in to ta l co n trast to the finery o f th e hotel. H is m uscle T -sh irt revealed m assive black tattoos covering his arm s a n d shoulders. H e h a d a g o ld earrin g in one ear an d his shaved head gave o f f a S inbad th e Sailor vibe. H e nicknamed h im self G enghis. H is slo u c h w ith h is arm s across h is chest and legs stu c k o u t in th e m id d le o f th e aisle b ro ad cast, ‘ O kay, prove to me y o u are th e best a n d th a t it w as w o rth m y m o n e y to com e here* Everyone has a sto ry in th is business. G en g h is jackham m ered co n crete fo r 2 0 years. A rth ritis took his knees as prisoners, an d his h earin g w as sh o t. I t w as n o w ay to grow o ld . H is cousin to o k a K en R o b erts cou rse a n d d ab b led in options. G en g h is follow ed alo n g b ra n c h in g o u t in to fu tu res. H e borrowed 3 0 ,0 0 0

dollars o n a credit card to o p e n a tra d in g acco u n t (yes, you

c o u ld d o th a t u n til 2 0 0 7 ). N o d o u b t th e co st o f th e conference and h o tel w e n t o n th a t cre d it card, to o . H e satisfied th e three-G Rating; G u ts, G u m p tio n , a n d G rit. A t th e e n d o f th e co n fe re n c e , G e n g h is m a d e a restin g offer. I f I ev e r n e e d e d h e lp in a n y w ay, ev en m u c k in g th e stalls, he'd b e th ere. I d id n o t n e e d an y o n e u n til I h a d to ask H a rry to leave

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after his lifestyle becam e too m uch o f a distraction for professional operations. Genghis cam e o u t for a few weeks an d stayed for six months. H arry continued to hang o u t with us on a social basis, and we were all fast friends. I told Genghis he could continue to trade for his account, b ut I needed someone to type for me. H e loved to trade the openings in theSPs. “Genghis, what are you doing, blindly fading every opening gap?" “Its a burning dog. I have to trade the burning dog.” "W hat the heck? What*s that?" “Well, have you ever met anyone who wants to pet a burning dog?" Hm m , n ot a pleasant image, b u t definitely one Genghis would use. The main point he was trying to m ake was people feel uncom ­ fortable with large opening gaps. “OK. if you would like to tu rn this into a tradable strategy, let s model it. Let's create a structure we can quantify to trade around." We hunkered dow n for the next two days. T en-hour stretches, the tattoo m an and me. W e w rote dow n every data point for the previous three years which had a gap opening in the SPs o f greater than 2 points. We then noted the maximum excursion on both sides of the opening price. It was n ot m eant to be a mechanical trade, b ut I wanted to draw Genghis's attention to the values th at m ight be significant regarding risks and targets. Sometimes doing things by hand reveals subde nuances. For this three-year period, if the SPs gapped by m ore than 4 points, the m arket retraced a m in im u m o f 4 points 76% o f the time. N ot a bad start. T h e flaw in this type o f modeling is that fixed variables such as 4 points do n ot account for periods o f expanded volatility and range. For example, later in 2009, the SPs had gaps three times as big as the average gap we were modeling. But at the rime, 4 points was significant, and we had a lot o f fun around this concept. 1 loved it for the pure novelty o f the name— “burning dog."

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G enghis b ro u g h t his girlfriend o u t from C alifornia, and they re n te d a to w n h o u se . H e rem ain ed p a rt o f o u r c o m m u n e until H a rry sp lit for good. H a rry was a m ag n et fo r fu n , life, humor, a n d stress relief. I was itching to get back to m anaging m oney after m y divorce was finalized. M y trading funds were freed. Everyone m oved on. I ran into Genghis ten years later on an airplane w hen he was flying back from N ew York after attending his best friends funeral. He no longer lived in Florida an d was a single m an. W e did n o t talk about m arkets o r business, b u t I assum ed he was successful a t whatever he was doing. H e was the type o f person w ho saw only the possibilities, never the lim itations. Later, I em barked upon building | a “theory o f everything and modeling th e universe." S tart o f f by asking, w h at is the distribution for th e tim e o f day this 4 -p o in t objective is hit? I f th e b u rn in g dog d id n o t get its 4 p o in ts by n o o n , there w ere higher | odds th e m arket w ould m ake new highs o r lows in the afternoon. T h e perm utations o f this type o f m odeling are endless. M ultiple models are like the limbs o f a tree. You m ust have a large n u m b er o f m odels, and they m ust be robust, lasting ideas. Build the tree in your m in d w ith deep roots and strong branches and then hang the leaves o f experience. T his concept was from Charlie Munger, Vice C hairm an o f Berkshire H athaw ay an d one o f th e finest thinkers in th e w orld. A n o th er essential step is to layer o n to p o f o u r m ultiple model tree a form o f Bayesian process. S tart w ith p rio r m odels and prob­ abilities a n d th e n con tin u o u sly u p d ate th em as new information unfolds. “O n e d ata p o in t a t a tim e." To go one step further, we can even w eight these new pieces o f inform ation. A n d as the volume of

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information increases exponentially, you see how easy it is to fall down a rabbit hole. T h e tw o m ost im p o rta n t takeaways in u n d erstan d in g these principles are: 1) We are lim ited in o u r ability to forecast th e future. 2) Following a process systematically is essential.

One data point at a time.

34

1 1 igcl pulled into my driveway in a silver bullet of a sports car, j \ | leaving cinematic trail of dust behind him as he roared down I V the dirt road that led to my entrance. He was dressed sharply, but subtly. It it always funny meeting someone from an online chat room for the first time—you never know what they’ll look like, or sound like for that matter, I'm not sure what I expected Nigel to be like, but he made a dashing first impression,

%/

The car was a silver jaguar XKE convertible. He got a new one o f lease once every three years, Once he bought one o f lease before hit old contract ran out, 101 gpt to drive it for six months. You would think a convertible in Florida would be a blast, but in the summertime, it rains every afternoon, so I never put the top down. It still felt like driving a jama Bond car, "Thills quite a place you b e here* Even though he knew more about computers than I ever knew, he acted impressed by our whirring machlna and blinking weens. 235

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23 6

“T h a n k you, we’re still fig u rin g o u t h o w to stream line out network.” “I understand that all too well.” Nigel developed sophisticated distribution software and sold his company at the top o f the 2000 Internet bubble. Unfortunately, he was unable to cash o ut his shares until a year after the bubble burst. Initial lockup periods are a bitch. H e figured if you could lose that much in stock value you ought to be able to m ake th at m uch too. So, he became involved in the m arkets. H e m oved to W est Palm Beach to make it his full-time trading hom e. W h en he discovered his condo building had poor Internet connectivity he m entioned it in the chat room. I invited him to come and check o u t m y office. James had since moved back west, and I welcomed a technically savvy colleague. T h e day after he visited, I received a huge bouquet o f flowers from him as a thank-you. H e was classy an d understated, and even though I thought o f him as a com p u ter g u ru an d aspiring trader, I was n ot surprised at all when we found o u t he was an accomplished swing dancer. In all the years we d id business, I don’t think I ever saw him wearing jeans or sandals. Even in Florida, he never dressed like he was headed to M argaritaville. Nigel was a genius at coding an d back-testing. A fter talking to him , I realized th at if he cam e o n board, I could start up my fund again. M anaging m oney brought m e great satisfaction. I was the kid who w anted to bring an apple to th e teacher, to please m y piano teacher with my latest song, to have som eone say, “G ood job!” I loved making m oney for clients an d being near the to p o f the performance board. I was one o f the biggest clients in m y fund. I preferred to keep m y dollars in a formalized trading program . B ut, I knew better than to think I could manage ru n n in g a fu n d w ith ju st Laura and myself. It’s a lot o f work. Nigel was all-in; he knew m y style from subscribing to the online group the previous year. I m ade him an d L aura partners in the fund

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and was back in the hedge fund business. It is difficult to find a good name for a fund these days. T h e astrological constellations, precious metals, and Rom an gods are all taken. I nam ed it the G ranat Fund after a famous dressage horse. H e was big-boned, ugly, an d blind in one eye b ut he w ent on to w in the 1976 O lym pics w ith C hristine Stuckelbeiger. T hey stayed at the top o f the world rankings for years. My core group o f clients from the previous decade jum ped back on board. I never had to advertise or pay someone to raise m oney no r did I make it a point to go to the industry conferences. I was fortunate. In addition to Raffles, assorted other icons lined o u r office. A colleague gave m e a chain link license place th a t fram ed the words, “Coja un Pato." T his is Spanish for m y overused swear phrase, “fuck a duck.’ I think he was telling m e to tone it dow n. Just before the downturn o f 2008, Nigel found a dartboard w ith stocks o n each tab. H alf o f the companies vanished in the econom ic dow nturn. We ceremoniously stuck a dart in each com pany o n the dartboard as it went bankrupt. After we ran o u t o f darts, we resorted to thum btacks. W hen the board was half full, I came up w ith th e idea o f m aking dog bones with the symbols o f the vanished com panies stam ped on the top. “LEH for you, M ER for you. Here, feed the dog a bone!” I found dog bone recipes and contacted a m anufacturing com pany in Miami. It was a great idea, b ut I lacked follow-through.

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M ik e E p ste in w as t h e o n e w h o o r ig in a lly i n t r o d u c e d m e to A n d rew L o at M IT . A n d rew a n d h is co lleag u e, Ja sm in a , w ere writing a b o o k title d T h e H eretics o f F in a n ce: C o n v ersa tio n s w ith Leading P ractitioners o f T echnical A n a lysis, j a s m in a c a m e t o F lo rid a to inter­ view m e a n d stayed a t m y h o u se fo r a few d ay s. I t tu r n s o u t she liked rid in g h orses, to o . W e se t u p a v id e o c a m e r a in m y o ffice a n d taped a fte r th e m ark ets closed o n e day. I t o ld h e r s h e c o u ld rid e one of th e h o rses in th e b a rn a n d m y g ro o m w o u ld g e t th e h o rse ready for h e r w h ile she ch a n g e d . J a sm in a w a s a tall, t h i n b lo n d w ith a Ph.D . S h e lo o k e d like a lib ra ria n , glasses, h a ir p u lle d b a c k in a tig h t bun, a n d s h irt b u tto n e d u p to th e to p . I w ill n e v e r fo rg e t w h e n she came b a c k in to o u r office a fte r c h a n g in g In to r id in g c lo th e s. I asked her, “Ja sm in a , w h a t is y o u r fav o rite h o b b y ? " “ I ju s t love tim e series d a ta ." A n d w ith th a t, she n o n c h a la n tly w h ip p e d o f f h e r glasses, pulled th e p in o u t o f h er h air h o ld in g u p h e r lo n g b lo n d locks, a n d marched o u t th ro u g h th e o th e r office d o o r to th e b a r n in h e r slim rid in g pants. N ig e ls jaw d ro p p e d to his k nees. H e c o u ld n o t sp e a k fo r a t least five m in u tes. I t was so m e th in g I w ill n ev er f o rg e t I ju s t love tim e series data. N ig el a n d I e m b a rk e d o n a n 8 -y ear jo u r n e y m o d e lin g everything u n d e r th e su n . W ith h is h e lp , I b u ilt u p o n th e f o u n d a tio n created fro m years o f m o d e lin g w ith M o o r e R e se a rc h C e n te r. A m odeling p ro c e ss s ta rts o u t b y a s k in g s im p le q u e s tio n s . F o r e x am p le, what h a p p e n s i f y o u e n te r o n a b r e a k o u t o f th e firs t 1 5 * m in u te b a r after th e o p e n in g ? W h a t is th e d is tr ib u tio n o f h o w m a n y tick s y o u can get in th e n e x t 15 - m in u te bar? W h a t h a p p e n s i f y o u e n te r o n a breakout o f th e 15 -m in u te b a r g o in g in to th e last h o u r a n d ex it M O C (market o n d o se )? Is th e re a d is tr ib u tio n p a tte r n s h o w in g th e m o s t com m on tim e fo r h ig h s o r lows? T h e p e r m u ta tio n s a re e n d less. M u c h o f m y m o d d i n g uses tim e -b a s e d ex its. E x it o n th e dose o r t h e n e x t d a y 's d o s e , E x it a f t e r o n e h o u r . E x it w h e n E urope d o s e s . T im e -b a s e d exits a re n o t d e p e n d e n t o n th e ra n g e o r volatility

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conditions, an d they are robust. W e also use A T R functions (average true range) to quantify the m arkets structure. It is sim ilar to w hat Art Merrill did w ith F iltered Waves, w hich he w rote in the 1970s. H e used percent functions to q u an tify th e swings. T h e tric k was to use w ide enough param eters to stay above th e noise level. A rt’s engineering background led him to be th e u ltim ate m ark et statistician. H e was one o f the first to q uantify how prices ten d to close higher th e day before U .S. H olidays. I m odified a version o f W elles W ilder’s volatility stop and reverseengineered p aram eters based o n A T R s. M o st professional traders know things intuitively from experience. However, w e are all subject to different cognitive biases. M odels help us keep a n o p en m in d a n d guard against biases. T h ey differ from m echanical system s b u t are an integral part o f th e trad in g process. Som e o f th e best w o rk was m odeling op tim al exit strategies for specific structures. W e also d id u n iq u e tim e o f day w ork show ing the distribution as to w hen th e highs a n d lows were m ade for various markets. W e found ways to q u an tify th e degree o f trendiness and create actuarial tables for individual m arkets. I have volum es o f code and strategies an d testing runs. A bout 9 0 % o f it led to n o th in g , b u t the other 10% was gold.

All you need is one good idea.

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WARHORSE

here is the line delineating between our da/ to day lives, the markets, and trading? Over time, it fades into a fuzzy blur and our common-sense fades with it. Efficiency becomes a part of every decision. I built my stable next to my office so as not to waste any time once the markets closed. I could be on top of a horse within five minutes, and that includes changing into my britches. My barn hand would be waiting for me, ready to hand off one horse and then the next. These magnificent steeds were gracious saints to put up with me vaulting from my war desk onto their backs. The discipline of dressage is about relaxation, suppleness, and eliminating tension from the horse. Imagine your ballroom dance partner shows up for a competition after getting caught in a major traffic jam. You are attempting to dance a graceful waltz, two beings becoming one, but your partner is anxious and upset, and keeps stepping on your toes. The poor horses. My barn was directly across the street from the major showgrounds in Wellington. I was competing that weekend, but the

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show's scarred on Fridays. Since my ride rime was around 11 AM, who would notice if I slipped away, rode my test, and came back 1$ minutes later? 1 was already in my shad-belly and white britches. All I had to do was to put on my white gloves, top hat and zip up my boots. My bam hand had the horse braided and tacked up and I was planning to sneak in a ten-minute warm-up. The day was March 20, 2003. One hour before my ride rime, the US announced it was invading Iraq. Nobody had prepared for this. What to do? I was not ready to trade the markets in the heat o f batde. I might as well slip across the street, ride, and see how the dust settles when I get back. I hopped on Black Beauty and trotted over to the show ring. If you have been so fortunate as to witness the expressive dancing horses that compete in dressage in the Olympics, you are familiar with their distinguished decorum. Dressage on a 1200-pound animal is like coloring within the lines with a dull crayon; there is no room for error. The Dressage Test: Enter at A , at X , Halt Salute. The rider bows ■heir head, the horse stands frozen, and both show respect to the judges. I entered the ring on Black Beauty, his dappled ebony coat glistening in the sun. X Halt Salute. Black Beauty reared straight up on his hind legs. In front o f the judge. In the middle of the dressage ring. For all the world to see. There was nowhere to hide. Fuck a duck. There was so much tension in my body that he must have felt an electric current pulsing down all four legs as if he had been stung by an oversized wasp. The wasp was me, thinking about the implications o f the War in Iraq on the markets. After a mortifying ride, we slunk back to my bam. Back in the office, I might as well focus on the Iraq invasion gyrations. I surely couldn’t ride. The stock market, metals, crude oil, die Euro currency, and most commodity currencies began a multi-year rally after that announce­ ment. I don’t subscribe to the belief that news and events like war

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drive m ark et tren d s. A t th e tim e, th e bearish se n tim e n t readings were sky high. T h is im plied th a t there was a n excess o f cash o n th e sidelines— th e n u m b e r o n e variable in m y b o o k th a t drives trends. O ver the next four years, th e D O W w ent from 6 1 0 0 to 10,850, gold from 5 80 to th e 900s, co p p er fro m 7 0 to 4 0 0 , a n d cru d e oil from 30 to 120. T h ese lo o k like historical m oves o n th e weekly charts, b u t th e fact is th a t th e last fo u r decades th a t I’ve b een trad in g have all had crazy periods, to th e upside an d th e dow nside. T h is was no different from th e blast o ff in stocks th a t sta rted in 1982. D espite having traded th ro u g h m a n y big m oves in th e past, there still is no way o f know ing th a t this, too, is going to be th a t type o f move. I still have to take things o n e day at a tim e. T h e energy o f the m arkets controls o u r entire lives. I t is subtle and insidious, so w e are n o t aware o f h o w w e com e across to others. C an you sh u t o ff th a t electric cu rre n t w hen you w alk o u t o f y o u r office? I f n ot, those aro u n d you m ay b e gettin g zapped m ore th a n you realize.

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HURRICANE FRANCIS

n 2004, two back-to-back hurricanes hit Wellington. It put our stringent backup and redundancy planning to the test. The last major storm to pass over Wellington was in 1964 and damage had been minimal. Who would even think hurricanes would be an issue 22 miles inland from the coast of Palm Beach? Since my house seemed to be the best prepared, I ended up with 10 people under my roof. Nigel, interns, my daughter and different folks who worked for me bunkered down in the office when Francis hit. We had plenty of time to close our positions “just in case," but the winds were not forecast to be severe. What was not predicted was how much rain would fall. The supersaturated ground along with 90 mile-an-hour winds toppled trees on top of the power lines. It took 10 days to restore the power to my block. The backup generators kept the computers running. Quotes came in from the intact satellite dish. But the Internet was down, and the cell towers had blown over. Cut off from civilization despite

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being able to m onitor every tick! A foot o f water flooded the roads so n obody could leave tow n. T h e em pty gas stations rem ained boarded up. A few adventurous people to o k canoes to the streets. O u r big p ro b lem w as th a t th e g enerator was n o t hooked up to the main house or the well pum p. August is the m ost hum id m onth in Florida. Im agine ten traders living under one ro o f for a week and a half, no air conditioning, an d no w ater for showers or toilets. Yet we watched th e m arket m ove like any o th er day. T here are only so m any poker gam es an d jigsaw puzzles a group can do before each person starts eyeing another's jugular. D ebris filled the sw im m ing pool ruling out refreshing dips to cool off. A sole rice cooker plugged into the office o u tlet heated up cans o f soup. I wish I had taken delivery on those oats! T h e barn hands filled tiashcans w ith w ater from a neighbor’s b arn so a t least th e horses could drink. T h e day the airports teopened, our intern left Florida for good. I am sure he never returned. T h e stores were n o t prepared for a power outage, an d refrigerated foods spoiled. S outh Florida was a mess. Now, here’s the kicker. Two weeks after life returned to normal and electricity h ad been restored an d refrigerators restocked, hurricane Jeanne h it. N obody predicted the crazy p ath it followed. It veered away from Florida, m ade a 360-degree loop over the A dam ic Ocean a n d th e n circled b ack again. T h e re are sophisticated forecasting m odels for w eather systems w hich run o ff supercom puters, and they can’t even get a gigantic hurricane’s p ath right for the next 48 hours, let alone 24 hours. W h a t m akes people th in k we can do any better in th e financial markets? Two m ajor hurricanes w ith in three weeks h it m y house, and th ere h ad n o t been any w ith w inds th a t speed for over 60 years. Coincidentally, H urricane Jeanne m ade landfall 2 miles from where Francis had hit. D avid H an d w rote a thought-provoking book called The Im probability P rinciple— W hy Coincidences, M iracles and Ran Events Happen Every Day. H e presents the theory and m ath why rare

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TRAVELS WITH ERIKA

continued to have th e o p p o rtu n ity to travel th e w o rld o n busi­

I

ness. Erika becam e m y travel co m p an io n . W e w e n t to Paris for a conference shortly after th e Iraq W ar invasion in 2 0 0 3 . A ngry

protestors flooded th e streets. I to ld h e r to say w e w ere C a n a d ia n i f anyone asked because parts o f th e w o rld w ere furious a t A m erica. She looked dow n a t her hoodie th a t h a d th e R am ones presidential seal on it. I to o k h e r to Ja p a n fo r a w eek w h e n I sp o k e in T o k y o . W e stayed w ith a p ro m in e n t trad er an d his fam ily in th eir house o n th e outskirts. It was a narrow concrete structure, six stories tall. E rika and I were o n th e to p floor w here w e slept in a trad itio n al tatam i room , which is a glorified way o f saying w e slept o n th e floor. E rika h a d to go to th e bathroom in th e m iddle o f th e n ig h t. W h e n she w e n t to flush the toilet, she noticed a keyboard w here th e flusher should have been. All o f th e characters w ere in Japanese, so finding th e “flush" b u tto n was hopeless. N o t w an tin g to leave a surprise for o u r hosts 249

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testam ent to previous trading successes, replete w ith a pool, a tennis court, an d a squash court. E rika was a d e c e n t ten n is player for her age and Victor took her outside to play ten n is w ith her. Afterward, everyone gathered in th e living ro o m to listen to his friend Laurd play the piano. Am erican a n a d o rn ed th e walls. T h e re was not one square inch th at was left uncovered. T h e w h o le scene m ight have been a backdrop for a Fellini m ovie. T he best trip Erika and I to o k together was to S outh Africa. Most o f the investors in m y fu n d w ere F u n d o f F unds o r pools o f money. Adam, a talented m anager from Jo h an n esb u rg , ran o n e such fund in London. W e becam e good friends, a n d h e visited m y office in the States m any tim es. In retu rn , I o ften co n n ected w ith him when I traveled to Europe. H e was getting m arried to an American girl he met a t college. T h e w edding was in C a p e T ow n, A frica, an d Erika and 1 were invited. W e stayed at the N elson hotel in C ape Town, an elegant British colonial landm ark. Erika is still upset w ith m e for limiting her indulgence o f sweets displayed o n th e lo n g tables a t tea time. M y clients Either flew us o n a priv ate p lan e to th e Londolozi game reserve where we enjoyed a fo u r-d ay safari in Eve-star accom­ m odations. It is m y m ost m em orable trip o f all tim e. T his is why we w ork so hard, so we can experience fabulous travels an d adventures, build memories, an d occasionally even forget a b o u t th e markets.

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GIRLS’ NIGHT OUT

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eople don’t see many female faces in the financial industry, but that is because m any o f them are working behind the scenes. Back in the early nineties, before I started m anaging money,

a friend from the M TA introduced me to a gal w ho was trading a system for him . H e had designed the system w hich was marginal at best, but then he paid her to trade it. G o figure. W ho are you going to get mad at if there is a losing period? T he system you designed or the person pulling the trigger? She said it was a thankless job. T he plus side was that we became friends. Cheri and I would talk on the phone commiserating over our trades. “Hey! W hy don’t you com e down to New Jersey for a week? It would be fun to have someone to trade with!* Before the days o f the internet, texting and Skype, our choices o f socializing were by phone or in person. “It would be great to get out o f Chicago this summer. H ow about in three weeks?*

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“It s a deal! Looking forw ard to m eetin g you!" C heri arrived three weeks later, a teeny tin y person wearing big earrings w ith an even bigger personality. She was well versed in the m arkets and in trading. H er father was a trad er in th e cu rren cies o n th e floor o f the M ercantile Exchange. H e had sold his grocery store business and bought exchange seats. C heri could read a ch art b etter than anyone and was a natural in th e m arkets. She becam e p a rt o f my cliquefriends w ith Steve M oore, friends w ith m y brokers at Gerald, and friends w ith D am on. I adm ired th e w ay she co u ld m ake friends so quickly w ith anyone. D am o n gave h er his “num bers," the suppon and resistance levels he w orked u p for th e floor traders each day. I called her on the phone each m o rn in g , “D id D am o n give you his numbers?" I was m ildly jealous, n o t because I w anted the numbers, b u t because she could develop an in stan t ra p p o rt w ith anyone. For m any years, a n y tim e I traveled to C hicago I stayed with C h e ri. She show ed m e g reat sp o ts to e a t, w e w e n t o u t on her boyfriends boat, and she had the best w ardrobe: colorful jean jackets, giant earrings, and cute T -shirts. Fem ale trad in g buddies can be fun! O ver tim e, I w ent to her w edding, w atched h er becom e a mom, and go through a divorce, all the cycles o f life. A n d th en we slowly lost touch, talking once a week, th e n once a m o n th , then once a year. Laura was ready to m ove o n . H e r h u sb a n d was approaching retirem ent, and after living m any years o n a m ilitary base, Laura had had enough. W ho could pick u p th e slack as o u r business manager? Cheri came to m ind. She was n o t crazy ab o u t w here she was currently working, so w hat better w ay to g et back in touch? “Ju st th in k , you’ll b e ab le to w o rk fro m h o m e an d see your children o ff to school!" C h eri h ad n o idea w h a t sh e w as g e ttin g in to . She had been handling the com pliance for a registered RIA on the securities side of the industry, b u t now I was throw ing h e r in to the w orld o f the NFA,

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CFTC, CTA, an d C P O . A n array o f acronym s well b eyond RIA (Registered Investm ent Advisor). Laura had been so exceptional at her job that I had no idea just how com plicated it was. She graciously agreed to work a few m ore m o n th s to train C h eri, b u t I b et people are ignorant as to how m any m oving parts there are to operating ou r business. C heri had to navigate o u r sea o f attorneys, accountants, auditors, clients, m e, and m y team w ith a very sh o rt learning curve. Completing the ice bucket challenge, the m arkets turned dram atically south in 2008, shortly after she started w ith us. C h e ri to ld m e later that Laura called her to give her a “heads upM th a t M F G lo b al was about to bite the dust. I don’t know i f th a t m ean t to pack h er bags or stock up on extra bottles o f ibuprofen o r w ine.

Cheri and I started a once a m o n th girls’ n ig h t o u t com prised of-—what else— female traders! D am on had introduced m e to Lisa, a tall, blond ex-professional volleyball player w ho was the first female In the N A S D A Q pit. She had started o u t clerking for h er bro th erin-law, and before long, she was sw inging 100 lots in th e N A S D A Q

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futures as well as b o n d s. Sue w as a n o th e r tall b lo n d w h o traded in th e Russell futures before th e IC E exchange snagged th em . A nd then there was C arolyn w ho occasionally cam e in to to w n , as well as one or tw o o th e r gals. A n d E rika h a d m o v ed to C h ic a g o a n d was working for m e for a year. D o you th in k w e talked a b o u t th e m arkets? I w ill never tell.

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DAMON

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t was n o t to o long after th a t I started d a tin g D a m o n , m y original SP broker. “D atin g ” is n o t q u ite th e w o rd w h en o n e p erso n lives in C hicago a n d o n e lives in F lo rid a, b u t after o u r p a th s k e p t

crossing at in d u stry conferences, his visits to F lo rid a becam e longer. D a m o n first v isited m y F lo rid a h o u se in 2 0 0 2 w ith h is sixyear-old daughter. I p u t h er o n E rikas w h ite pony, a n d she th o u g h t everything was grand. B u t th e n D a m o n saw th e dogs, cats, birds, an d horses, an d it’s n o w o n d er 1 d id n o t see h im again fo r tw o years. H e m ust have assum ed th ere was n o ro o m in m y life fo r h im a n d a t th e tim e, he was right. T h e re was n o ro o m fo r anyone o th e r th a n E rika and o th er assorted m o u th s to feed. T h e m arkets w ere m y preferred com panion. W e h ad great d ate n ights every n ig h t in m y office, ju st m e a n d m y ch arts, chill o u t m usic, a n d d im lig h ts. T osca, Peace O rchestra, Z ero 7 , Air, a n d Blue Six. So ro m an tic. O n e tim e w e m e t u p in Las Vegas a t a conference w h en I was still d ating an o th er person w h o m D a m o n h a d com e to k n o w as well (aw kw ard). D am o n b ro u g h t his d ad along fo r th e trip . 257

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“Hey, I’m here in Vegas! W hy don’t you an d your dad join my boyfriend and me for dinner?* T his was a typical interaction between Dam on and me, even though the subplot was already brewing. Naturally, he didn’t bat an eye a t this m odey crew dinner A m “Sure, where do you guys w ant to meet?* T h e only thing was, I didn’t have any reservations. At least not for dinner. “It’s Vegas. W e can find a spot!" D am on recognized m y naivete because he im m ediately set to work finding a place to eat. H e called on e o f his Chicago restaurant business contacts to make som e calls. Soon enough, he texted me and said he had a reservation for four people at the steakhouse at the Venetian a t 7 PM. W e all m et outside; m e, m y boy frien d a n d D am o n and his blue-collar Chicago-bred dad. Everyone was gracious enough, but it was d ear Dam on felt like he had to wrangle his father a bit in the present company and upscale Las Vegas restaurant. W e walked in and saw a long line o f people. T h e hostess was telling everyone it war a two-hour wait, which was m ostly her way o f getting people to leave. D am on slid past the line an d gave them his nam e an d the hostess beamed at him. “O h , Jim m y Bannos’ friend! R ight this way!" D am on ordered a $250 bottle o f w ine because it was a ‘business d in n e r’ After the waiter poured th e w ine, D am on’s dad asked in his boom ing Chicago voice, “C an I get an ice cube for m y wine?* D am on was visibly distraught. H e cried to whisper, “Dad, that glass o f wine cost sixty dollars. D o n ’t p u t ice in it." H is dad had no interest in whispering. “I always p ut ice in m y wine!" D am o n was redder than the wine itsd£ 1 had to interject, so I give him a look and said, “T h e man. Wants. Ice. In his wine." My boyfriend d id n o t even d rin k wine, which was another sign.

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D a m o n w as still red in th e (ace, a n d o n e o f th e guys fro m Every­ body Lover R aym ond w as a table over try in g n o t to lau g h a t us. I t was a m em orable ev en in g a n d o n e w e still lau g h a t. **m T h e firs t tw o F lo rid a h u r ric a n e s h a d c o m e a n d g o n e w h e n D am on cam e u p w ith th e u ltim ate pick u p line. “ W h y do n ’t yo u com e u p to C h icago a n d I’ll set y o u u p w ith a b a c k u p h u rric a n e office." I was n o lo n g er d a tin g an y o n e, so h is p lo y w o rk e d . L ittle d id he know th at he w ould g et suckered in to h elp in g m e p u t m y h o u se b ack to gether after th e h u rrican e s h it. T h e p o o l solar p an els rico ch eted in to th e yard, ta k in g r o o f tiles w ith th e m . T h e w in d sh re d d e d th e barn’s ceiling fans in to m a n g le d m o d e rn a rt. R a in g u tte rs b e n t a t u n n atu ral angles. T h e re w as a n endless list o f m in o r d in g s to o sm all for a professional service, b u t th ey w ould b e glaringly noticeable svhen it com es to p u ttin g a house o n th e m arket. T h a t th o u g h t w as crossing my m in d as w e sp e n t m ore tim e to g eth er a n d E rika w as g e ttin g closer to leaving fo r college. E ach m o n th , I s p e n t a w eek in C h ic a g o a n d D am o n sp e n t a w eek in W ellin g to n . R um ble rum ble. P itter-p a tter-p itter-p a tter. R acco o n s in m y attic? It was bad en o u g h th a t I was n o t g e ttin g en o u g h sleep fro m w hatever w orld m ark et event w as g o in g o n a t th e tim e . B u t th ese d a m n c rit­ ters w ere p arty in g above m y b e d ro o m a t n ig h t. I c o u ld h e a r th e ir little feet. D a m o n h a d b e e n stay in g fo r th e w eek, a n d h e sw ore h e could n o t h ear an y th in g . T h is m a d e sense sin c e h e h a d b lo w n o u t his eard rum s playing lead g u itar w ith h is b a n d in h is tw enties. I still m ade h im clim b u p in to th e attic. I w ould have d o n e it myself, except I’m a girl? N o , it w as a hu g e a ttic a n d I trie d o n ce, b u t it w as im possible for m e to get over to th e sectio n above th e b e d ro o m . You h a d to tip to e across th e rafters w h ile h o ld in g a flashlight a n d h o p e y o u d id n o t m ake a m isstep in to th e flufiy in su latio n . D a m o n ’s m a n h o o d w as o n th e lin e. H e m a d e th e tre k in th e sw elterin g F lo rid a h e a t a n d

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w a ite d f o r th e ra c c o o n t o j u m p o u t a t h i m . A n y m o m e n t . I t never d id . H e ( b u n d n o t h i n g , n o t e v e n a n i m a l d r o p p i n g s . W e c o n c lu d e d a f te r m u c h d is c u s s io n t h a t th e r e m u s t h a v e b e e n s q u i r r e l s ru n n in g a r o u n d o n th e r o o f tile s. W h i c h is w e i r d i n F l o r i d a w h e n y o u only h a v e p a lm trees. W h e r e d i d t h e s q u i r r e l s c o m e f r o m a n d h o w d id th e y g e t o n to p o f th e ro o f? W e w ill n e v e r k n o w , b u t D a m o n proved h is c h iv a lry t h a t n ig h t. I w as tr a d in g f r o m t h e C h i c a g o o f f ic e w h e n H u r r i c a n e W ilm a h i t th e fo llo w in g year. N ig e l w a s a g e n i u s w h e n i t c a m e t o s e ttin g up in f ia s tr u c tu re . O u r sy s te m s a n d p o s i t i o n s w e r e b a c k e d u p e a c h day acro ss a n e tw o r k o f m u l t i p le C P U s a t d i f f e r e n t l o c a t i o n s , in c lu d in g W e llin g to n a n d C h i c a g o . L B R G r o u p h a d f u l l r e d u n d a n c y every w h ic h w a y u p a n d d o w n . I t m i g h t s o u n d lik e o v e r k ill, b u t m y share o f o u d ie ts w as b e y o n d r a n d o m .

Nigel, Damon, and I in our new Chicago office.

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JUDD AND THE START OF REALLY BIG THINGS

udd is another trader I came to know through our online trading room. H e started clerking on th e floor o f th e C B O E in the equity options in 1992. T h e next year he m oved to the C M E exchange to trade in the LIB O R pit. Traders do n ot usually go o ut o f

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their way to seek out the dullest market on the planet, b u t w hen you are young and eager to trade, you go where there is a job offer. Judd said the LIBOR market was in a 2-tick range for one year. 9680 bid, offered at 9681. T he next year. 9681 bid, offered at 9682. Talk about a patience game. H ow does one trade a m arket like this? Contracts are spread between m onths or hedged with Eurodollars, and there are lots of scratch trades. A t the end o f 1994, Orange County, California, declared bankruptcy after losing 2 billion in over-leveraged bad investments. T h e L IB O R m arket had a 40-tick jum p. O n e could say every dog has its day.

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n ig h t. W e all m e t o u t fro n t a n d w e n t d o w n th e n a rro w seedy corridor to c h e c k in to w h a t lo o k e d lik e s o m e th in g o u t o f T h e T w ilig h t Zone, O n e g u y m a n n e d th e re c e p tio n b o o th , a n d th e re w ere little bars in f ro n t o f h im . “T h is is it?" D a m o n asked. N ig e l d id n ’t say a w o r d , b u t h is lo w e r ja w s h ifte d a little bit as h e lo o k e d a r o u n d . “W e ’re ju s t sle ep in g h e re . I t’s fine.” I tr ie d t o lo o k nonchalant. N ig el is a b it o f a cle a n frea k , a n d I saw h im lo o k over a t Dam on k n o w in g ly . I c o u ld n ’t a d m it it y e t, b u t th e p la c e w as a disaster, and w e h a d n ’t ev en se t f o o t in o u r ro o m s . T h e h allw ay s w ere n o t up to c o d e , b a re ly w id e e n o u g h fo r tw o p e o p le t o pass. N ig e l o pened his d o o r first. T h e re w ere n o w in d o w s a n d n o clo set. A ll th a t w as missing w as th e c h a lk o u tlin e o f a b o d y . Y ou c o u ld n ’t e scap e i f th ere was a (ire, w h ic h w as a real p o ssib ility , b e c a u s e t h e r o o m w as h eated by a c h e a p p lu g - in sp a ce h e a te r. S o , y o u h a d to d e c id e b etw e e n freezing a n d tr y in g to sleep w ith a fire h a z a rd . W e a g re e d t h a t it w as crazy, b u t w e w eren ’t g o in g to f in d a n o th e r p la c e a t 11 P M a t n ig h t. The sh o w e rs w ere so d irty , t h a t n o n e o f u s sh o w e re d , w h ic h w as mostly h ila rio u s in lig h t o f o u r p ro fe s sio n a l itin e ra ry in th e city. T h e n e x t d a y w e g av e o u r p r e s e n ta tio n s . I t w as follow ed by a p r iv a te v ie w in g o f C h r is tie ’s a u c tio n ite m s . A fo u r-c o u rse dinner to o k p la c e in a n e le g a n t r o o m b r im m in g w ith flow ers. O n e o f the N e w E d g e’s p a rtn e rs h a d flo w n b a c k h o r n F ra n c e th a t afternoon and b r o u g h t n u m e r o u s w in e s to s a m p le . T h e ju x ta p o s itio n betw een the re a lity o f o u r h o r rid , se ed y sle e p in g q u a r te rs a n d fin e d in in g among m illio n s o f d o lla rs o f a r t w as su rre a l. N ig e l a n d I sa t a t a ta b le w ith s o m e o f th e la rg e r F u n d managers, tr a d e rs m a n a g in g b illio n s . I s t a r t e d t h e c o n v e r s a tio n sh a rin g our rese a rc h in ste a d o f a s k in g q u e s tio n s . S h o w in g m y card s a t th e outset c o m p e ls o th e r s t o o p e n u p , a n d th e y d isc lo se th in g s th a t th ey might n o t o th e r w is e sh a re . W e w e re sm a ll f ry a n d n o th r e a t to anyone’s

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business. W e f o u n d o u t e v ery o n e w as u sin g sim ila r tim e slicing algorithm s to d o th e ir execution. It is w h a t I h ad alw ays d o n e in th e nineties; giving o rders to th e b ro k ers in th e p its to w o rk a specified n u m b er o f co n tracts o ver a specified p erio d . T im e slicing is a w ay to say to th e execution p latfo rm , “Buy 1000 contracts at random tim e intervals in ran d o m quantities, h a lf th e tim e w ork a b id , h a lf th e tim e tak e th e offer. D o th is o ver a th re e -m in u te period.'’ T h a t Is an ex am p le, b u t th e p o in t is n o b o d y c a n see th e size w orked o r d e te c t w h a t is g o in g o n . T ra d e rs th i n k th e y c a n read the b o o k o r o rd e r flow to m ak e a trad e. B u t it is im possible w ith iceberg (hidden) orders a n d different algorithm s ru n n in g am o k , often fighting each other. P lus, m o st large o p e ra to rs place o rd ers th ro u g h m any firm s across m an y accounts. O u r research o n tra d e m an ag e­ m ent an d execution algorithm s co u ld fill a book. In th e g ran d schem e o f things, it m eans little, so lo n g as a tra d e r follow s o n e sim ple rule: never let a loss get to o big. N ew E dge spo n so red th e investors' co n feren ce. T h e y b ro u g h t together asset allocators a n d in tro d u c e d th e m to 2 -3 C T A s in th e hopes o f in creasin g th e ir b u sin e ss. T h e m a jo rity o f N e w E dge's business w as in s titu tio n s a n d h e d g e fu n d s, v ery little retail. W e attracted th e a tte n tio n o f several larg e asset allo cato rs, in c lu d in g M a n n F inancial. T h e p ro b lem w as th e y o n ly allocated in m in im u m units o f 50 m illio n dollars. A n d th e y d id n 't w a n t to b e th e largest investor in th e fu n d , w h ich ru led u s o u t. T o o b a d fo r us, w e w eren't big enough. *** T h e "carry trad e" w as a p o p u la r strateg y fro m 2 0 0 2 to 2 0 0 7 . Investors borrow ed m o n ey in yen w h ere in terest rates w ere low an d invested i t in h ig h er-y ield in g currencies. I t w as a c ro w d ed trad e, m eaning too m any people were In this sam e position. W h a t was going to happen w hen people needed to unw ind? I trad e by technicals since

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I have not had much luck using fundamentals. But I am aware when there is a market imbalance implying a crowded trade. The yen was a ripe situation. It had left a bear trap or false downside breakout on the weekly charts. I tried twice to put on a position, both times unsuc­ cessful. The third time I knew I got it right. It was our cue to load up. I don't mind trying a few times if there is a basis for a position but the timing is off. The real key is to make it pay and use maximum leverage when the trade starts working. I told Judd to keep buying yen. and the ensuing rally made our year. T h e yen went straight up for die next five years as global interest rates came crashing down.

One morning, Judd came into the office w ith Ninja shirts for us. It was his way o f saying he felt p a n o f the team. We had also put on a significant shon position in FXI after it spiked to 73 in the fill of 2007. It ended up trading below 20 a year later. It was the best stock

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trade we ever m ade. I am sure J u d d th o u g h t o u r hedge fu n d w as o ne big party. Ju st like th e Las Vegas casinos th a t su ck y o u in w ith a few w inning trades an d p ure O xygen pip ed in to th e gam bling halls, every soaring high te m p ts y o u to p u sh y o u r lu c k ju s t a b it farther. T h e D ow h a d b een rallying fo r five years o ff its 2 0 0 2 low s an d made a high hi O cto b er 20 0 7 . T h e broad m arket was show ing m arked signs o f deterioration fo r th e n ext three quarters. By Septem ber 2008, it looked like it was ready to fall o ff th e cliff. I like g oin g h o m e sh o rt at the end o f a sloppy w eek. O n th is p a rtic u la r Friday, I step p ed o u t on a lim b an d p u t o n a b ig s h o rt p o sitio n in th e aftern o o n —over 6 0 0 SP futures an d 6 0 0 Russell futures. I h a d to leave th e last h o u r o f th e day to have a d e n tist fix a cracked m olar. I w as in th e d e n tist chair w hen I go t a call fro m Ju d d . “Hey, Linda, th e SPYs are tra d in g u p th e equiv alen t o f 2 2 SP handles after th e close." “Aghh a aghh." "Okay... I ju st th o u g h t I ’d call a n d let y o u know ." “A ghh a aghh." It is im possible to yell "Fuck!" w h e n d ie d e n tist has y o u r m o u th propped o p en a n d y o u r jaw is n u m b . T h e sub-prim e m ortgage crisis was heatin g up. T h e U .S . Treasury announced after Friday's close chat it w as step p in g in to take over Fannie M ae an d Freddie M ac. T h e m arket appeared to w ildly approve o f this move. It looked like th e SPs w ere goin g to gap u p a t least 4 0 points higher o n Sunday evening’s reopening. T h e re was n o th in g one could d o except w ait fo r th e m a rk e t to s ta rt tra d in g again. A n d try to get a good n ig h t’s sleep in th e m ean tim e. Come on. L et’s go. You can Jo this, A G A IN . F ight. F ight. G otta g et th a t m oney back. I am going to get th a t m oney back o u t o f sheer concentration andfocus. Keep m y head in the gam e. I f I check o u tfo r one m inute, la m d ead H ow m any tim es have I h a d to fig h t to m ake back a crazy b lip ?

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O th e r traders m ig h t slam th e desk in an g er a n d g et REALLY M A D . 1 h ad already practiced th ro w in g paperw eights th ro u g h the d o o r 2 0 years earlier. I h a d b een se n t to jail th o u sa n d s o f tim es playing M onopoly an d bum ped in Sorry even m ore. “It s just a g am e” 1 tell myself. B ut th is gam e w as m y life. *** M y k nack for b ein g o n th e w ro n g side o f outliers or, m in i black swans, only seem ed to increase after th a t. N assim T aleb coined the term “Black Swan,” w hich he defines as, “T h e disproportionate role o f high profile, h ard to predict, a n d rare events th a t are beyond the realm o f norm al expectation.” I t is right u p there w ith flying pigs and th e C hicago C u b s w in n in g th e W o rld Series. Two m o nths later, D am o n an d I traveled to H o n g K ong. T h e b o n d m a rk e t h a d b e e n lo ts o f f u n to tra d e b ecause th e G lobal

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financial crisis wan creating b c a u c o u p volatility. "F u n " In th!« cane ii a tongue-and-chcck term , as o n a n y given d ay th e b o n d s could be eith er m y bent trading m arket o r m y w o r n . It wa« a lasting love-hate relationship. W e were sh o rt way o u t o f th e m o n ey b o n d call options. T h ey were set to expire in a few days. In H o n g K ong, I set u p m y tru s ty la p to p in a sw anky hotel, O u r w ood-paneled su ite o n a h ig h flo o r faced th e harbor, which w as obscured by a th ick haze o f sm o g . T h is d id n o t m a tte r because I m ainly eared ab o u t In tern et co n n ectiv ity so I co u ld keep an eye on o u r positions. U nfortunately, th a t n ig h t (I w as n o w in the opposite tim e zone), th e Fed a n n o u n ced th e sta rt o f Q E (quantitative easing), It consisted o f S 8 0 0 b illio n in asset pu rch ase s. T h e b o n d s jumped 24 handles over th e n ex t few days. T h e y w ere tic k in g up like they overdosed on V iagra w ith som e ste ro id s tossed in . W h o needs sleep anyway?

Face ripper

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Pay no a tte n tio n to th e m an b e h in d th e c u rta in . Slow the breathing. W hat d o I do? G et smaller, T h e first course o f action in a bloodbath is always to get smaller. W hen the price stops going up* I can sell back o u t again. Taylor is forever chanting in m y car: “Take It back when you arc wrong* p u t It back o u t again w hen you think you arc right." Clearly* I was wrong. 1 had to relax m y body. Count* one* two* three, four. G et m y bearings. Keep paddling over the rapids and focus on som ething on the horizon. It did not m atter how far out o f the m oney those options were, it was still a bloodbath. I am not sure how b u t we managed to minimize the dam age after a few days o f high-anxiety trading* b u t we did. These situations are th e type o f events w here even if a trader can break even or m ake money, it extracts a toll from your psychological capital. T h e streets o f H ong K ong had rows o f shop fronts with dead ducks strung up by their necks In the window, I was starting to feel like one o f those ducks.

I lie to myself that I am the best gam e player around. I love to win. I love playing games. But w hen you lose, do games cost this m uch In psychic capital? T h is is a m uch bigger pot than even T V poker. 1 talk to myself— Be brutally honett. D id those rose quartz crystals helpl D id m y James A llen books helpl D id the 5 thousand herbs and vitam ins helpl H ow about the binaural beats a n d m ediation? My

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m ira cle b o o k s say, b rain w ash th e m in d a n d i t w ill believe. Tell it e n o u g h b u llsh it a n d it believes. Face ripper [fays rip-per] -n o u n 1. A m a rket advance w ith extreme in te n sity so m uch th a t i t takes sk in a n d h a ir a lo n g w ith i t fro m the fa c ia l area. D iffic u lt to detect in advance, b u t upon a rriva l the feeling is instantaneously recognized. 2 . C om m on situ a tio n typically experienced b y those w ho are "short in th e hole. u

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BULLS AND BEARS MAKE MONEY AND PIGS GET SLAUGHTERED

he m ajority o f m y clients w ere F u n d o f F u n d s. T h e se are m o re

T

substantial funds th a t allocate to individual m anagers a n d funds w ith the goal o f building a diversified, non-correlated portfolio.

M y program fell u n d er th e d u b io u s tid e o f “sh o rt-te rm system atic.” “D iscretionary short-term system atic,” to narrow it d o w n even m ore. W h ich is a catch-all te rm th a t m e a n t w e w ere n o t tre n d follow ers, m echanical quants, long/short, o r event-driven. T h e re is a fine a rt to blending m anagers, so th ere is n o n -co rrelatio n b etw een p rogram s. W e always seem ed to d o b est w h e n th e o th e r fu n d s w ere d o in g w orst, b u t this w as ran d o m . O n e year th e grains m ig h t b e o u r best perform ing m arket, the next year the SPs an d an o th er year th e Bonds or th e yen. G alen B urghardt w rote a research p aper explaining th e b len d in g o f managers in a F u n d o f F u n d portfolio. “O n e o f th e m o st pow erful 273

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tensions in the world o f m oney m anagers is th e pull between assets th at perform well on their ow n an d portfolios th at perform well W h a t w e found was th a t team players o u tp e rfo rm superstars* Managers with low correlations to others produce th e best possible Sharpe ratio for the Fund. It was m ore im p o rtan t to find programs which complemented each other as opposed to seeking o ut the one -two superstars w ith superior perform ance. A Sharpe ratio is one of m any measurements o f risk. W hat astounded m e was th at som e o f the allocators kept even better stats on our positions than we did. T h ey usually dropped by ou r office once or twice a year for a due diligence check. O n e tim e a client walked in w ith ream s o f sheets. H e had it down to daily and m onthly satisfies. W hich m arkets had been our best and worst performers? By how m uch? W h a t was the average margin used for each market? H ow m uch tim e d id it take to make back drawdowns in each market? W h a t could I say? I was under the microscope twice a year. “Yup, that looks about right to m e* I’d a y as I tried to remember w hen we lasted traded rough rice. O u r fu n d had one o f the best statistics on peak to valley drawdowns. T h is is the tim e that elapses before m aking new equity highs. I f only we didn’t have those pesky drawdowns at all. Allocators wresded w ith w hen to c u t a m anager loose for lack o f perform ance. W hat should they do if th e draw dow n for a trend follower was m ore extensive than usual? H o w long should they keep a CTA who was n ot m aking back a loss? T h e last thing you want to do is ditch a trend following program a t its lows because that is probably the rime it is due for a big w in. B ut, how d o you know for sure they are going to com e back this time? It was no different than a m anager debating w hich stocks to p ru n e from a portfolio. H ow do you know the markets have n o t changed? Perry Kaufman was firmly convinced the increase in noise levels over th e years would

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d o o m th e tra d itio n a l tre n d follow ers w h o ra k e d i t in in th e early eighties. So far, th e sta tistic s f o r th e p a s t d e c a d e h a v e p ro v e d h im right. W e h a d lo y al c lie n ts . T h e y w e re s h a rp , w e ll-c a p ita liz e d , a n d seasoned in th e business. U nfortunately, 2 0 0 8 b o u g h t tro u b le to som e o f o u r b e st clien ts. W e h a d large a llo c a tio n s fro m R B C (R oyal B a n k o f C an ad a), b u t th e y closed th e ir en tire m a n a g e d f u n d p ro g ra m s d u e to losses fro m o th e r m an ag ers. T h e v o la tility in th e fin an cials w as extrem e. U p u n til 2 0 0 8 , th e y h a d n ev er h a d a lo sin g y ear fo r th e ir d iem s. Schoenfeld h a d m o n ies p laced w ith u s, a n d w e h a d d o n e w ell m aking m o n ey fo r th e m . H ow ever, th e y e n d e d u p s h u ttin g d o w n all their m anaged a c c o u n t pro g ram s. A n d so o n a n d so o n d o w n th e list. O u r priv ate in d iv id u al clien ts w ere o k a y a n d g ra te fu l w e w ere a n offset to th e draw dow ns in th e ir sto c k po rtfo lio s. I t w as a co in cid en ce th a t it seem ed like w e d id b e s t w h e n th e m a rk e ts w ere fa llin g o u t o f bed. I liked to tra d e fro m th e lo n g sid e as m u c h as I lik e d to tra d e from th e sh o rt side. U n fo rtu n ately , w e lo st a th ird o f o u r assets u n d e r m an ag em en t th e v ery y ear w e h a d o u r b e s t p e rfo rm a n c e — 2 0 0 8 . W e h ad $ 1 4 5 m illio n u n d e r m a n a g e m e n t, a n d in o n e fell stro k e , w e d ro p p ed to $ 1 0 0 m illio n . It takes a lo t o f w o rk t o b u ild u p c lie n t relatio n ships. I t involves e s ta b lis h in g b o t h t r u s t a n d r a p p o rt, a n d this takes tim e . S o, it w as a loss n o t o n ly o f a g o o d c h u n k o f o u r m a n a g e m e n t fees b u t th e in ta n g ib le frie n d s h ip s t h a t c o m e w h e n d eveloping bu siness relatio n sh ip s. I t is n a tu ra l t o w a n t to p r o te c t y o u r c h ild r e n f ro m t h e m o s t stressful professions. I m a d e su re m y d a u g h te r h a d n o in te re s t in trad in g . S he w e n t to a p e rfo rm in g a rts sc h o o l in m u sic a n d ch o se to go in to vocal p e rfo rm a n c e to b e c o m e a n o p e ra singer. ‘ E rik a, y o u r jo b in life is t o s in g b e a u tif u l m u s ic a n d m a k e everyone fo rg et fo r tw o h o u rs ju s t h o w crazy a n d stressful th e w o rld can be.* W h a t a n o b le calling!

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D a m o n a n d I flew to M ia m i in th e s p rin g o f 2 0 0 9 to hear her sin g th e lead in an opera a t th e U n iv ersity o f M ia m i. I t was a long overdue w eekend getaway. Seasonal p a tte rn s gen erally w o r k w ell in th e m eats an d grain m arkets. Lean hogs te n d to h ave a n ic e rally in th e spring. I don’t trad e th e m eats unless th e re is a c o m p e llin g c h a r t form ation or a Strong seasonal. T h e re has to b e a basis fo r a p o sitio n trade. That w eek I p u t o n a sizable position in th e hogs fo r th e first tim e in many m o n th s. D a m o n an d I w ere w alk in g th ro u g h th e M ia m i airport on S u nday afternoon to catch a flig h t b a c k to C hicago. W e walked past a k iosk w ith freshly p rin te d n ew sp ap ers th a t w ere piled up to waist level. O n th e fro n t page w as a p ic tu re o f a c u te b ab y pig holdings hy poderm ic needle in its m o u th . S w ine flu h a d s tru c k th e U.S.! I knew n o th in g a b o u t sw in e flu. T h is n e w v iru s originally came fro m a strain th a t lived in pigs, b u t i t w as a h u m a n transm itted virus w h ich required n o c o n ta c t w ith pigs. S till, n o b o d y is going to touch p o rk w hen you have em otionally charged buzzw ords like “killer swine flu* circulating; in th e m edia. M onday m orning b ack in C hicago, trad in g was n o fun. T he frontm o n th hog contract opened d ow n lim it. W h a t a drag. N o t only did we have a substantial long position in th e m eats, b u t w e w ere also long the grains. Every agriculture m a rk e t w as c o m in g u n d e r liquidation pres­ sure. H ogs g ot slaughtered. T h e f ro n t-m o n th h o g contract continued d o w n lim it for several days, like w a te r d ra in in g d o w n a giant vortex. It was a cru m m y w eek for pigs a n d th o se w h o ow n ed them . I follow ed m y n o w sta n d a rd g am e p la n f o r dealin g w ith unfore­ seen events: G et Sm aller. R e d u ce size d o w n to th e p o in t where the eyeballs sto p b u lg in g o u t. Jesse L iv erm o re h as a q u o te , “Sell down to th e sleeping p o in t* T h ese sa m e ev en ts ca n th e n create opportunity, th o u g h i t m ay com e in a d iffe re n t m a rk e t. Y ou d o n ’t have to make m o n e y b ack in th e sam e m a rk e t y o u lo st i t in . T h a t has m ore to do w ith ego.

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In the markets, it is essential to stay in the game mentally. Some­ times it feels like ru n n in g a m arathon. T here is th e tem p tatio n to give in when you h it the wall, h u t once you check o u t mentally, you are quitting. I say to myself, “I am going to m ake back a draw dow n because I can concentrate better th an anyone else.” However, you can’t force an o p portunity to happen. It is a m atter o f faith th at y o u r routine and rituals will eventually give y o u the edge again. The game is m ore im portant than anything else in the world. U ntil I walk o ut my office door. T h en I am focused on tennis, weightlifting, gardening, riding— anything except th e m arkets. It is as if a giant switch dicks o ff in m y brain. Unless I am in a draw dow n in w hich case I can only keep th at switch dick ed o ff for so long before it starts to creep back in the form o f anxiety. I w onder how I can be playing outside when I should be fighting to make m oney back. D am n. T here is no worse feeling th an being in a drawdown, even though you know it is p an o f the game. It is just a cycle, b u t it still stinks.

Sw ine flu . Guess which way we were positioned two days before the news broke.

|jci severance. T h e best trades are often m aking back losses. Throughout our journey down the road o f outliers, Judd and Nigel never once questioned m y process even though I made plenty o f m istakes. T h ey were the ultim ate support netw ork. They were sharp, thoughtful, and above all, am azing friends. Fast forward to M ay 2010. T h e SPs had rallied through 2009. They made a small low first quarter o f 2010 and were now correcting an overbought condition. I was looking for a spot to buy. There are three guidelines to tape reading. T h e first is: always watch price relative to a reference point. It can be another price such as the day’s opening, a daily swing high or low, or the level at which one entered a trade. In this case, the reference point is static. If you are w atching price relative to an oscillator or another market, as you would if you were m onitoring for a momentum divergence, the reference price is dynam ic— always moving. Tape reading is about relationships. W hat is the length of the previous downswing or upswing? W hat is the length o f the current downswing relative to the previous downswing? In this case, the last daily corrective swing had been about 100 SP points. The current correction was approaching this same length. T h e second thing I watch for is the m om ent the price stops going down (or up). You do not w ant to try catching a falling knife. Waic for the momentum to slow and for the price to start trading in a few ticks* range. It needs to establish support. Below this support is your in itial risk. A reaction m ust start q u ickly in the opposite direction. Tape reading is also about w atching for aberrations— unusual activity, heavy volum e, significant gaps, anything out o f the ordinary. T h e previous week, the SPs had been trading in the low 1200s. Now the market was approaching 1125 to 1130, down 90 points. I started buying 100 lots at a tim e, expecting the price to begin reacting up a bit. T h e trade was good for about 1 m inute.

B U L L S & B E A R S M A K E M O N E Y -P IG S G E T S L A U G H T E R E D

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B efore y o u c o u ld say “C o w a b u n g a ,” th e p ric e d ro p p e d eight h an d les in 10 seconds. M y first in s tin c t w as, “O h crap. T h e re m u st have b een a nuclear ex p lo sio n som ew here.*’ I h it th e F L A T T E N b u tto n so fast, I felt blessed w e g o t filled w ith o n ly six p o in ts o f slippage fro m 1122 — 1 1 1 6 . I t w as th e m o st a m o u n t o f m o n e y I h a d lost in th e least a m o u n t o f tim e , o th e r th a n a su b stan tial o v ern ig h t event gap. O ver th e n ex t five m in u te s, th e SPs d ro p p e d a n o th e r 7 0 p o ints. T h is tim e th e p rice really sto p p e d fillin g a n d starte d to a ct a b it bouncy. W e still h a d n o idea w h a t w as g o in g o n , b u t th ere was an o p p o rtu n ity to trad e fro m th e lo n g side. 1 re -b o u g h t a n d th e n b o u g h t som e m ore, d o in g a b it o f tra d in g a lo n g th e way. A t th e e n d o f th e day, we w ere b a ck to b re a k even.

A n y n u m b e r o f evenings so u n d ed like this: “H i, honey. H o w was y o u r day a t th e office?” “A h h h , it w as okay. T h e m ark et en d ed u p unchanged.”

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TR A D IN G SA R D IN ES “ D i d y o u m a k e a n y m o n e y to d a y ? ” “ N o , i t w a s a n o t h e r fla t d ay .” W e jo k e d a b o u t th is a lo t. S o m e tim e s th e re w as so m u c h volatility

t h a t y o u fe lt lik e a g e n iu s For n o t lo s in g m o n e y . I h a v e t o s e p a ra te w h e t h e r o r n o t I d i d m y j o b f ro m w h e th e r o r n o t 1 m a d e m o n e y . T h e r e a re p l e n t y o f d a y s I m a d e m o n e y b u t felt I w a s s l o p p y a n d d i d n 't f o llo w m y p la n a s w e ll as I c o u ld h a v e . T h e re a r e a ls o d a y s t h a t I t h o u g h t I w a s c r is p a n d p re c ise b u t d id n ’t e n d u p m a k i n g m o n e y . It's i m p o r t a n t t o fo c u s o n th e p ro c e ss a n d realize t h a t i t w ill le a d t o t h e p r o f its lo n g e r t e r m . D o n 't lo o k a t th e P & L , l o o k o n l y a t t h e p r ic e s t r u c t u r e a n d t r a d e it. I t is b e n e fic ia l to have a s p o u s e o r p a r t n e r w h o is a ls o in t h e m a r k e ts . It's to u g h fo r p eo p le o u t s i d e t h e m a r k e ts t o r e la te t h e c ra z y th in g s t h a t h a p p e n . N o t to m e n t i o n t h e stress! W h a t d o e s a h e a r t s u r g e o n ta lk t o h is p a rtn e r a b o u t w h e n h e g e ts h o m e ? H o w d o e s a f ig h te r p ilo t s p e a k to h is w ife w h e n h e c o m e s b a ck ? T h e r e a re lo ts o f field s w h e r e i t is h a r d to relate t o i f y o u a r e o n t h e o u ts id e . D a m o n , m y o r ig in a l S P b r o k e r, a n d I g o t m a r r ie d i n 2 0 0 8 . W e r a re ly ta l k e d a b o u t m y p o s itio n s , t h e m a r k e ts , o r t h e f u n d . S till, it's n ic e t o k n o w y o u h a v e a p a r t n e r i n a v e r y t im e - c o n s u m in g lifestyle. M y f ir s t h u s b a n d w a s a t r a d e r w h e n w e m e t, a n d w e n e v e r talk ed a b o u t t h e m a r k e ts . I f w e h a d , I a m s u re o u r m a r ria g e w o u ld have e n d e d s o o n e r t h a n i t d id .

Focus on the process and it leads to profits in the long run.

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n e day, th e m a il c a m e w h ile J u d d , N ig e l, a n d 1 w e re in th e office e a tin g l u n c h . W e a lw ay s a t e a t o u r d e s k s. Judd*s w ife p a c k e d h i m a h e a lth y fa re o f h a r d -b o ile d eggs, to m a to e s , a v o c a d o s , a n d

ra isin s. N ig e l h a d a p e rs o n a l c h e f w h o c o o k e d h i m tw o w e e k s ' w o r t h

o f g o u r m e t m e a ls a n d s h r i n k w r a p p e d t h e m i n t o in d iv id u a l p a c k e ts . N ig e l's lu n c h e s w e r e fiv e s ta rs e v e ry day. In c o m p a ris o n , m y g e n e ric w a te r-p a c k e d c a n o f tu n a lo o k e d m i g h t y s a d , b u t i t w a s q u i c k a n d easy. M o s t o f o u r m a il w e n t t o o u r b u s in e s s m a n a g e r. O n th is o c c a s io n , a b ig f a t m a n ila e n v e lo p e m a n a g e d t o f in d its w a y t o u s. T h e r e w e re se v era l c o p ie s o f t h e la te s t B a rd a y H e d g e q u a r te r ly n e w s le tte r. I t s u p p lie s re se a rc h a n d r a n k in g s o n C T A s a n d H e d g e F u n d s. In sid e , it sh o w e d th e G r a n a t F u n d ra n k e d 1 7 th o u t o f 4 5 0 0 f u n d s fo r b e s t 5 -y e a r p e rfo rm a n c e . O u r f u n d w as in th e t o p t e n r a n k in g s f o r m a n y o t h e r c a te g o rie s a s w ell. I n e v e r l o o k e d a t th e s e r a n k in g s . O u r b u s in e s s m a n a g e r w a s in c h a rg e o f s u p p l y i n g t h e d a t a f r o m t h e a c c o u n t a n t t o t h e re se a rc h 281

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firms. She was my Interface with the outside world. If I look at these types o f things, I risk them messing with my head. It shouldn’t matter when you believe in your models, but I was superstitious o f outside influences. I do best when I can keep my game as pure as possible. In this case, though, I felt a sinking in my heart when I saw the BardayHedge reports. “Wow, look at this! We’re right at the top o f national rankings!” Judd's voice was a notch up in decibels. “O h, great. This is worse than being on the cover o f Sports Illustrated.” I felt jinxed. My mother was a huge believer in “whatever thoughts you put in your head have a way o f manifesting themselves.” This came from her mother who believed in Parking Fairies. When I was growing up, anytime we drove downtown and needed a spot for the car, my mom said, “You just watch, the Parking Fairy has a spot just for us!” And a car would pull out in front o f the opera house or theater. Mom zipped right in, smiling. My great-grandmother emigrated from Germany when she was 21. A Mormon family sponsored her. O n the boat over, her luggage was lost, so she boarded a train by herself with no possessions and headed out to the Wild, Wild West. She had an incredible ability to see the silver lining in every cloud. This is how I grew up. My mom lectured every day, “The glass is half full, if life gives you lemons, make lemonade, and wear rose-colored glasses.” This is the power o f positive thinking, but if you let doubts sneak into your head, it can work in reverse. N ot too long afterward, I was working out at the gym with my trainer, a different gym and a different trainer. He was a top gymnast from Romania and had become a renowned natural bodybuilder. We always followed one o f four routines with lots o f stretching. On this day, he decided to do something different: high-speed drills in a semi-lit room with a slippery wooden floor. I was wearing the wrong

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type o f shoes fo r th is. W h ile sh u fflin g sidew ays a t b re a k n ec k speed, I trip p e d over m y o w n tw o feet a n d w e n t fly in g sidew ays across th e ro o m like a c an n o n b a ll. I la n d e d full-force o n to p o f m y rig h t shoulder. T h e fractu re w as so severe th a t even a fte r reco n stru ctiv e surgery a n d m u ltip le p in s a n d screw s, it to o k te n m o n th s o f physical th erap y before I regained so m e range o f m o tio n . I a m rig h t-h a n d ed , so it w as im possible to use a k ey b o ard , m o u se o r even a p e n to log m y n u m b ers. M y th irty -y e ar ro u tin e w as in te rru p te d . It is u n av o id ab ly em b arrassin g to w a lk a ro u n d w ith y o u r a rm in a sling a n d g et sy m p ath etic in q u iries as to w h a t h a p p e n e d . “I trip p e d a t th e gym .’* A n in ev itab le pause. “O h ..."

***

.

T h e silv er a n d g o ld m a rk e ts h a d a fa b u lo u s lo n g -s id e p la y u n d e rw a y b u t n o t w ith o u t w ic k e d v o latility . I lo v e d tr a d in g th e silver m ark et. T h e sw ings c an b e w ild . I t is o n e o f th o s e m a rk e ts th a t is e x cep tio n ally g o o d a t d riv in g th e m o s t a m o u n t o f p e o p le crazy before it m akes a n ifty m ove. I t w as d a rn e d n e a r im possible to co n cen trate, th o u g h , w h e n I w as ru n n in g to a d o c to r’s a p p o in tm e n t o r physical th e ra p y every o th e r day. M y s h o u ld e r b e ca m e infected. W h y d id I have to deal w ith th is in co n v en ien ce? I w as n o t w o rk in g o u t, a n d w h e n y o u a re a d d ic te d to p h y sica l exercise, it’s easy to b ecom e depressed. I n o lo n g e r h a d m y horses to rid e either. A n d th e precious silver m a rk e t w as d riv in g m e b o n k e rs. W in e? T o o o b v io u s. V odka? T o o tasteless. I g o t a d o g . A sixm o n th -o ld P u li, a H u n g a ria n sh eep h e rd in g d og. T a k in g th e p u p p y d o w n th e elev ato r a n d o u tsid e in to th e sn o w w as m y exercise. O K , I d ra n k w in e , to o . I d ecid ed to tra d e o u t o f o u r c o n d o fo r a b it. N ig e l w ro te m e a p ro g ram fo r th e X -tra d e r h o tk e y p a d . I t in te rfac e d w ith th e P h o to n platform ’s A P I. I c o u ld place o rd e rs u sin g a n y o n e o f 1 20 h o tkeys w ith o n e d ic k . M y o w n s e t o f n u d e a r b u tto n s . W ay b e tte r th a n m y

TRADING SARDINES

o ld b a tp h o n c . N o m o re m o u s e o r k e y b o a rd s t o d e a l w ith , I could m a k e tra d e s o n e -h a n d e d . P ro g ra m m e d to ta ste , th e h o tk e y s w o r k e d lik e th is: " A J * b u y 3 0 0 S P s a t t h e m a r k e t . “A 2 “ s e l l 3 0 0 S P s a t t h e m a r k e t. “B 1 * b u y 1 0 0 G o l d o n t h e b i d , s h o w i n g 2 0 a t a t i m e . “C l “ b u y lO O b o n d s , j o i n t h e b i d . “F I “ D o n o t to u c h t h a t b u t t o n . S ta y a w a y f r o m t h e F I e je c t b u tto n .

O n e m o r n in g w h e n I w as tr a d in g , m y c a t j u m p e d u p o n to p o f m y d e sk . T o n i w a s a s c ra w n y b a r n c a t I h a d a d o p te d in N ew Jersey. I b r o u g h t h e r w ith m e to F lo rid a , a n d s h e n o w liv ed w ith us in C h ic a g o . S h e w as a H e m in g w a y c a t w ith six to e s o n e a c h fo o t. I sc o ld e d h e r in a p e t- m o m v o ic e , “N o , T o n i, y o u are n o t allo w ed up h ere,” a n d p ic k e d u p all six p o u n d s o f h e r to th r o w h e r o f f th e desk. 'W ith m y b a d a rm a n d a w k w a rd a n g le , h e r fa t to e s to u c h e d d o w n a n d h it m y h o t-k e y p a d . B le e p B le e p . S h e e x e c u te d several tra d e s.

T r a d in g m a k e s m e tir e d .

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T o n i d e c id e d to m a k e a tra d e in B ean O il, a m a rk e t I h a d stopped tra d in g . T h u s , I h a d n o t ro lle d to th e n e w fr o n t-m o n th c o n tra c t. I t m a d e fix in g i t e x tra trick y . I t w as o n e d a y fro m g o in g first notice. T h is w as th e m a rk e t m y c a t c h o se to tra d e w ith h e r tw e n ty -fo u r fat to es— 1 0 0 c o n tra c ts , n o less. I t to o k a b it o f p a tie n c e to g e t o u t o f th a t s n a fu . S h e ju m p e d u p o n c e ag ain a n d ex ec u te d tw o m o re trades fo r m e b e fo re I s h u t th e o ffice d o o r o n h er. T h e f u n n y th in g is, all th re e tra d e s e n d e d u p b e in g sm all w in n e rs . F o rtu n a te ly fo r her, she h a d sev eral lives left.

F ix m itfalrw im m ediately.

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H fl

r a b S p r in g ” w a s t h e n a m e g iv e n t o t h e t u m u l t u o u s e v e n ts

M Jk in N o r t h A f ric a a n d t h e M i d d l e E a s t i n t h e w i n t e r o f 2 0 1 1 ■

K a n d 2 0 1 2 . T h e la s t t i m e t h e m a r k e t s a w th i s t y p e o f v o la tility

a n d e x p a n d e d r a n g e s i n t h e S P s f u t u r e s w a s i n t h e fa ll o f 2 0 0 8 . M a n y o f t h e g y r a tio n s f r o m t h e A r a b S p r i n g d i s c o r d h a p p e n e d in t h e E u r o p e a n s e s s io n a t n i g h t ( w h e n U .S . tr a d e r s a r e s u p p o s e d t o b e sle e p in g ). I s e t m y c l o c k t o w a k e u p a t 2 : 0 0 i n t h e m o r n i n g , s a t in f r o n t o f t h e m o n i t o r s i n t h e c o n d o a n d t h e n s q u e e z e d i n a n o t h e r h o u r o f s le e p b e f o r e h e a d i n g o f f t o t h e o f fic e i n t h e m o r n i n g . A ll th e r e c e n t s tu d ie s s h o w s le e p is t h e m o s t i m p o r t a n t t h i n g f o r o n e ’s h e a lth — m o r e i m p o r t a n t t h a n d i e t a n d e x e rc ise . A n d i t is e v e n m o r e c ritic a l f o r o n e ’s a b ility t o t h i n k . O f c o u r s e , w h e n y o u a r e t i r e d , y o u are n o t t h i n k i n g a b o u t th is . I n 2 0 0 8 , I c o u l d d o n o w r o n g . H o w e v e r , i n t h i s v o la tility , I c o u ld d o n o r ig h t. I w a s z ig g in g w h e n 1 s h o u l d h a v e b e e n z a g g in g . W h ip s a w e d w i t h a w e t l e a t h e r c a tta il. 287

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"Thank you, Sir! May 1 have another?" T he market sucked me under In the riptide, and each time I came up for air, I was hitting the crest of the wave instead o f the trough. In a few days, I dug a seven-digit hole. I was well on my way to digging to China. Every trader has been there. "Can I start the week over again? Please? I promise not to get out o f bed this time." 1 was feeling demoralized when my daughter called me. She lived a few miles away in the West Loop of downtown Chicago. 1 told her I was super bummed at my loss o f discipline and that it had cost me dearly. There have been many times during my career where I made mistakes and ended up depressed for a few days. I know the routine well by now. There is little one can do to shake it off except to wallow in it until it disappears, like a thick San Francisco fog finally lifting. Time, the magic cure for everything. Erika told me she had a present for me. She was going to come to meet me at work and then we could go back to the condo together which was a mile away. She brought me a bright pink Victoria's Secret cape made out o f sweatshirt material. Soft and comfy except totally wrong for a trading office filled with guys. When we got back to the condo, she showed me her other present. It was something her college roommate from the University of Miami had given her a year ago. She had saved it for a much-needed occasion. We decided to go for a long walk. O ur condo was a penthouse on the corner o f Lake Michigan and the Chicago River. It was next to Millennium Park. We walked and talked for four hours, exploring all the statues, gardens, and unique Icons in G rant Park. We trekked around the Field Museum, along the edge o f the lake, and through the grassy soccer fields. I can't ever remember babbling so much. Hiking for hours with Erika rivaled the endorphins I felt on my first seven-digit trading day. Except, unfortunately, my account balance had gone in the opposite direction.

A WALK IN THE PARK

289

I t tu r n e d o u t t o b e s u c h a n a m a z in g day. A lo n g w a lk w ith m y d a u g h te r a n d n a tu r e s u re b e a t w a llo w in g in d e p re s s io n f o r a fe w day s u n til I g o t m y a c t to g e th e r a g a in . W h en p eo p le exp erien ce ch ro n ic sleep d e p riv a tio n , th e y becom e too tir e d to re a lize h o w tir e d th e y a re a n d th e ir c o g n itiv e a b ilitie s a re m u ch w orse th a n th e y th in k th e y a re. T h ere a re a d verse severe p e rfo rm a n c e consequences. I t is lik e th e h a p p y d r u n k a t th e p a rty , to o d r u n k to a d m it th a t h e’s h a d too m a n y, w h o in sists h e c a n d r iv e h im s e lf h o m e safely, o b livio u s to h is co g n itive d e fic it.

Don’t trade when tired. P E R IO D .

44

THE BIGGEST LOSS IS YET TO COME

t was a considerable pause to realize th a t I h a d b u ilt a m ulti-

I

m illio n dollar business th a t w as d e p e n d e n t o n m y a b ility to function a t all tim es. T h u s began a n ew c h ap ter d o w n a big expensive rabbit hole. 1 thought it tim e we move towards autom ated functions and algorithmic trading. It requires an intensive infrastruc­ ture. I loved the pure, simple trading gam e f had developed over the previous three decades, b ut how could I d o justice for m y d ie m s i f I something happened to me? W hat i f 1 was o u t o f commission? O r set 2 AM alarms thinking I m ight find exciting trading opportunities in Europe? O u r team had the brains and research to develop strategic algorithms. At the very least, H FT, high-frequency trading, could make an attractive profit center. W hen I had my accident, I brought another talented colleague on board as a partner. I had known M ark for th e previous decade since he, too, had been a chat room member. H e was a consultant with Me Kinsey and was proficient in system developm ent and co d in g So 1 made a not very well thought o ut decision to buy a technology firm

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292

chat I h ad invested in a few years earlier. T h e firm h ad 144 servers a n d w as w ritin g its ow n gateways. W e w ere in C hicago in 200 9 and th e tim e seem ed rig h t. 1 h a d always th o u g h t it im possible to create m echanical system s a n d H F T (high-frequency trading) algorithm s th a t w ere ro b u st. N o w th ere was a glim m er o f light at the en d o f the tu n n e l. T h e re w ere n o certainties, b u t at least there w ere possibilities. T h e F u n d was u p to a tra d in g level o f $14 5 m illion. It was difficult p u ttin g m o re m o n ies to w o rk w ith m y cu rre n t style o f trading. W h e n I started in th e business, m y initial area o f study was delta, th e ta , g am m a, a n d beta. N o w I h ad g rad u ated to a different school o f acronym s: A P I, F IX , T C P , SSL, a n d D M A . C olocation, cost o f racks in d a ta c en ters, failover, a n d requests p e r second. M y head w as sw im m in g . I h ire d a n ew C T O o n th e recom m endation o f m y b ro th e r. T h e costs fo r w ritin g n ew gatew ays entered th e parabolic stage. T h e C M E was b u ild in g o u t new d ata centers in Aurora, Illinois. W as th is essential fo r o u r business? I set o u t to ste er a n e w sh ip w ith o n e left arm . L itd e d id I know th e sh ip w as a b o u t to collide w ith a n iceberg th a t n o b o d y could see. (S p o iler alert.) T h e firm I p u rch ase d h a d m o st o f its cu sto m er accounts at M F G lo b al. T h e revenues fro m these accounts covered th e costs o f offices a n d 17 em ployees. I t w as a b ig m o n th ly n u t to cover th e C T O s, C F O s , p ro g ra m m e rs, a n d co m p lian ce officers. It does n o t take long to g e t th e p ic tu re o f w h a t h ap p e n s w h en clien t business goes away a n d th e expenses rem ain . T h is is a co m p licated sto ry because G ra n a t F u n d was tangled up in th is to o . Its m a in tra d in g a c c o u n t w as a t M F G lo b al. A fe w y e a rs e a rlie r, M a n F in a n c ia l p u rc h a s e d th e cu sto m e r ac c o u n ts w h e n R efco declared b ankruptcy. T h e C E O o f Refco hid $ 4 3 0 m illio n in b a d d eb ts fro m th e au d ito rs a n d investors. W h en h is scam s cam e to lig h t, G ra n a t F u n d s acco u n ts m oved from Refco. M a n F in an cial th e n sp u n o f f th e b ro k era g e d iv isio n a n d n am ed

THE BIGGEST LOSS IS YET TO COME

293

it M F Global. It was only six years later th a t M F G lo b al declared bankruptcy as well. T h e week before, M F G lobal s stock was actin g crappy. H av in g already been through R efcos debacle, w e m oved m o st o f th e fu n d s o u t o f M F Global, leaving $ 1 .2 m illion fo r m arg in to cover b o n d futures and options. Friday, the C F T C w en t in to M F G lobal s offices to talk w ith them . By Sunday, th ere w ere ru m o rs o f bankruptcy. T h a t night, D am on and I w ere driving back from In d ia n a w here we had heard m y daughter sing in a n o pera a t In d ia n a U niversity. D am on was driving in th e p itch black p ast w in d m ill farm s a n d co rn fields w hile I was trying to fin d news o n m y iP ad. T h e fierce w in d was driving the turbines frill tilt boogie as fast as 1 2 0-foot blades can spin. Schubert piano m usic w o rm ed its w ay in to m y consciousness. D er E rlkonig (T he Eifking) is o n e o f th e m o st b eau tifu l pieces o f G erm an song ever created. It is in G erm an w h ich is already a p re tty terrifying language. Even th e w ords, “I love you," Ich L iebe D ich ,a ie difficult to say w ith o u t sounding sinister. S aid em phatically, y o u sp it all over the person you love, literally show ering th e m w ith affection. “Iccchhhhh liebe diiicccchhhh!” T he poem is by Johan W olfgang von G oethe, th e G o d o f G erm an poetry in m y o p in io n . As a n aside, th is p o o r m a n is d o o m e d to have his nam e m ispronounced for all o f eternity. G E T H , G E T H A , G E T T A , G U R T H . C h ic a g o ev en h a d th e a u d a c ity t o n a m e a street after him , w hich people p ro n o u n ce G E R D A as i f th e y w ere pronouncing the w ord for chronic acid reflux. T h e re is o n ly supposed to be a shadow o f a n R p ro n o u n ced in th e m id d le o f his n am e. I t s pronounced G E r-ta. You glide over th e r as gracefully as y o u can . You m ay th in k this is picky, b u t I sp e n t a lo t o f m o n ey fo r E rika to learn that, so I feel it is w o rth m en tio n in g . T he piano part starts, trem bling agitatedly in th e right h a n d w hich creates a sense o f urgency and anxiety. T h e left h a n d m im ics th e racing hoof beats o f the horse. After 14 bars, the narrator sets th e scene: “W h o

298

TRADING SARDINES W h e n I was in the m idst o f a depression alter m y shoulder injury,

I called Steve W ard w h o was a super friend. H e is a trading coach in L o n d o n a n d h a d given lectures for clients o f m ine. “Steve, I am n o t sure w hat is w rong w ith m e, b u t m y usual motiva­ tio n a n d energy are gone.* “W ell, w h a t d o you d o for fun?” “Fun?” “Yes, F -U -N . W h a t d id you d o w hen you were living in Florida?" “W ell, I w o u ld go o u t an d ride m y horses every day after the m arkets closed.” W h e n I m oved from Florida, I sold m y horses, m y barn, and my saddles. C losed o u t all m y equestrian positions. I had moved on to m y G reek stallion (D am o n ). C ity traffic can be a bitch in Chicago, a n d it was poindess to ow n an d train a horse unless I could ride 5-6 days a week. A fter th a t call, I fo u n d a newly b u ilt b am outside o f Chicago w h ic h was less th an an h o u r co m m u te away. I had to get a horse again. I called several horse trainers I used to w ork w ith when 1 had been show ing in F lorida. O n e called m e back th e next morning. “O h , Leeeeenda, I ju st returned from G erm any last night and was looking a t horses for clients. I saw the perfect horse for you, even b etter th an M onopoly.” M o n o p o ly h a d been m y G ra n d Prix horse, an d there was no b e tte r horse th an M onopoly. However, he saw the big red X on my back. “Easy sale, check here, big com m ission.” I knew this b u t it was okay, so I to o k M arco at his word. I did n o t have th e tim e o r energy to shop around for horses. “O K , M arco, send m e die video, and I will look at him .” His 13-year old son he to o k along on the trip had shot the video. It was either o u t o f focus o r film ing th e d irt footing. I did n o t care. I was feeling desperate.

WHAT DO YOU DO FOR FUN?

299

“ M a r c o , o n y o u r w o r d I w ill cake h i m . B u t y o u r w o r d is o n th e lin e h e re .” H e w a s r id ic u lo u s ly e x p e n s iv e , r id ic u lo u s ly w o r t h i t , a n d h is n a m e w a s “ R ic h ie R ic h ." S erio u sly .

D e s p ite s ta y in g fit a n d h a v in g a h o b b y b a c k in m y life, I w a s s u re I w a s g e t t i n g c a r ly -o n s e t A lz h e im e r ’s o r d e m e n tia . W h a t e lse c o u ld e x p la in th e h o r rib le fo g b la n k e tin g m y m in d ? I t o o k a t r ip t o F lo rid a t o se e a p h y s ic ia n f r ie n d w h o s w itc h e d h is s p e c ia lty f r o m s u r g e r y to a w e lln e ss p ra c tic e . H is n a m e w a s A la n , a n d h e w a lk e d i n t o t h e r o o m a f te r I h a d s o m e te s ts r u n . “ H o l y co w , L in d a , y o u r c o r tis o l levels a re o f f t h e c h a r t. I h av e n e v e r se e n re a d in g s th is h ig h .” I d i d n o t k n o w w h a t t o say. Y o u m e a n t h e tig h tn e s s in m y th r o a t th a t o n ly g o es a w a y f o r a fe w sw e e t m in u te s w h e n I ’m liftin g w eights? “A re y o u r e fe rr in g t o stress?” M y b o d y s to p p e d p r o d u c in g n e e d e d levels o f h o rm o n e s , in c lu d in g te s to s t e r o n e , e s t r o g e n , a n d p r o g e s t e r o n e . I h a d s e v e re h y p o t h y ­ r o id is m . E v e n t h o u g h I h a d a h e a lth y d ie t, ex ercise d , a n d d i d n o t h a v e a fa m ily m e d ic a l h is to ry , m y b o d y c h e m is tr y a n d m e ta b o lis m w e re p r e t t y m e s s e d u p .

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com m on excuse they had). W oe is m e— entering the next decade com peting against young lads in their early twenties. So, you can’t judge a book by its cover. N ow the reader says, “Tell us w hat they were doing. W e w ant to know the secret!” T h e secret is— each focused o n doing one thing and one thing only once they sat down. N o internet, n o social media, no talking, no T.V. Gam e m ode only. T h e first intern used Bollinger bands on 5-minute charts and made countertrend trades in the SPs. He waited until the middle o f the day when the volumes were lighter and there was no risk o f getting run over by a strong morning trend. The second intern had the opposite strategy. H e entered early in the morning, using a M A CD oscillator. Sometimes he took a little bit o f heat, but he played to capture the sweet spot o f the m orning trend. He traded SPs, the Euro currency, and gold. Both did well with two opposite styles. Neither looked for confir­ m ation from the other or anyone else. Both stayed ofif the internet and refrained from other distractions. It goes to prove the power of concentration and tape reading as well as staying methodical in what­ ever you do. O n e market, one strategy and voila—even a neophyte Frenchic could do just fine. D ay trading, no less. They did so well, it m ade m e feel old. O ld and slow. It was not long after that I moved m y office o u t to the suburbs. A tim e to w ork, a tim e to rest.

46

FULL CIRCLE

dosed the G ranat Fund and deregistered as a CTA and C P O . I

I

was one o f the original investors in m y fund. I d id n ot believe in trading a separate personal account while managing money. I was

just another dient. H an k Pruden’s lecture in Santa Barbara forever echoed in my ears, “Be your own best client and do your analysis in a room with no windows o r doors* T h e Fund had a class o f 2 x 1 leveraged shares, and this is where m y m oney stayed for nine years. When I shut down the Fund, m y account had increased by more than 900%. Through the power o f com pounding, I had become the largest investor. I moved to Florida for six m onths o ut o f the year. I did not want to spend cold, miserable winters in Chicago. A bona fide Snowbird. I bought another barn in W ellington and took the horses down to compete in the w inter dressage festival. And, 1 started working out with Mr. Bill again. M y friend w ith w hom I won the bodybuilding contest w ith 15 years earlier is still at the gym every day. H e is now 30 3

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84, and continue* to be a role m odel to all around him, and mott im portantly to me, T radcn are alwayi looking for the iccret*. Strategic*, indicator*, algorithm*, anything to make money. Mo*t do not recognize the hard work it take* to do reiearch and development. And even more underestimate the countleu hour* required to gain experience. Few have the pcrievcrance and attitude to ttick out the tough time*, but none of thia matter* if you don't have your health and can't control the itrcai levdi. T h e d u it ictilei. T rading continue*. T h e Earth doe* not itop turning. New player* enter the arena convinced they are going to be •m art enough to figure out the market*, create new algorithm*, and reap the lucky fruit* o f a mythical printing preu. "Luck it the reiidue o f effort." I am *ure that m oit undcreitim atc the time and energy required to achieve com iitent profitability. I f you believe, never give up, and focu* on trading above all el*e, the market* provide unlimited abundance. I am living proof. 1 have been on the wrong *ide of every type o f black iwan, crazy advene move, and tough break. But here I am, In front o f m y tcreen* every day and playing the belt game in the univeric! 1 am ever io lucky m y daughter itayed out o f the trading business and i* an excellent linger. 1 have four m agnificent dreuage honci, barn* in lllinol*, and farm* in W ellington. Above all, I have the most wonderful husband, Dam on, my original SP broker from the eighties. Give, and everything you give will come back to you tenfold. Stay hum ble but remain confident. A nd never forget, if you don’t know who you are, the market* are an expemive place to find out. " L ift th o u ld n o t b t a Journey to th e grave w ith the Intention o f a rriv in g ta ftly In a p re tty a n d w ell-preserved body, b u t rather to tk ld In broadside In a clo u d o f sm oke, thoroughly used up, totally w orn out, a n d loudly proclaim ing 'W ow t W hat

a R idel’”— Hunter

S, T hom pson, The P roud M g/sw ayt Saga o f a D esperate Southern G entlem an, 1955-1967

EPILOGUE

am supposed to write on how the market! have changed, how my

I

nyle of trading might have changed, b ut all that is garbage. T he game hai not changed: the markets are going up or they are going

down or they are chopping endlessly In noise. Period. It occurred to me that writing is much like composing music. My Initial writing efforts were like those o f an eight-year-old writing a few lines for the piano. Mozart, 1 am not. I have had six books outlined for fifteen years, but I never found the tim e to write because trading took priority. T he markets don't stop for anyone. Fait forward four years after my daughter graduated from Indiana Unlvenity with a masters in vocal performance. She could not officially graduate until she gave her master recital which she had put on the back burner. So we made a pact: 1 would write a book by the time she gave her concert. T hat was a three-month deadline. As fate always has It, those were three exceptional m onths o f volatility in the market. The book stalled again because I could not pull away from the screens. I learned several lessons from this. Trading is crazily addicting. I took it for granted the markets were my sports court because this

305

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TRADING SARDINES

is th e m ain gam e I have always played. I d id n o t th in k o f it as an ad d ictio n because it was m y life, w h a t I knew , m y m edium . Take m e o u t o f m y gam e a n d 1 flop o n th e to p o f m y desk like a fish out o f w ater. So, th is b o o k brew ed for several m ore years never getting w ritte n . I t is n o t even o n e o f th e original ones I outlined. T h e second lesson I learned is h o w difficult it is to learn a new craft. I have w ritten m any articles over th e years, even half o f a book 2 3 years earlier. T h is project was different. W ith a fam ily history of A lzheim er s an d dem entia, I d id n ’t w an t to take it for granted that I w ill rem em ber things in a n o th e r ten years. Stephen King suggests reading an d w ritin g as m u ch as possible. Like a newbie studying the m arkets an d trading, I im m ersed m yself in trying to figure out how to m ak e w ords spill o n paper. T h is to o k an o th er 2-3 years. I enlisted the aid o f m y daughter. W h o knows m e better than she? She was w ith m e a good p a rt o f this journey, grow ing up in a house filled w ith m ark et culture. All m y friends a n d associates were uncles to her. She traveled w ith m e, an d I traveled w ith her. A nd she knows I really d o use four-letter w ords b u t w ould n o t have had the honesty to w rite th e m i f she d id n o t p u t th em back w here I to o k them out.

PARTINGSHOT rom one o f th e first T rad in g b ooks w ritte n in 1688:

F

PWhoever wishes to w in in th is gam e m u st have p a tien ce a n d money,

since the values are so little constant a n d th e rum ors so little fo u n d e d

on truth. H e who know s how to endure blow s w ith o u t being te rrifie d by the m isfortune resembles th e lio n w ho answ ers th e th u n d er w ith a roar

and is unlike th e h in d w ho, stu n n e d by th e th u n d er tries to fle e . I t is certain that he who does n o t give up hope w ill w in , a n d w ill secure m oney adequatefo r the operations th a t h e envisaged a t th e sta rt. *— Jo sep h de la Vega - C onfusion d e C onfusiones Fuck a D uck, g e t m e out. *— L in d a R aschke

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ACKNOWLEDGMENTS

T

his b ook w ould n o t be nearly so entertaining w ith o u t the input from m y m illennial daughter, Erika. She encouraged m e to study w riting for tw o years a n d th e n show ed m e th e w ay w ith her

hum orous rewrites. I h o p e she w rites her ow n bo o k o ne day because it will surely be a best seller. T h an k -y o u to J o h n M o n te si, m y e d ito r a n d so m u c h m ore, (another m illennial w ith a p e n c h a n t fo r Jo a n D id io n .) Jo h n was instrum ental in a d d in g c o lo r a n d conversation as well as being a positive an d u p b eat friend. Yes! I can see th e light a t the end o f the tunnel too. Just o n e m o re sw itchback, o n e m o re hill, 3 m ore hours until the su n com es u p a n d th e m an u scrip t w ill be finished. Jo h n is a fellow n ature lover w h o d oes n o t ow n a TV. T h ere is hope for the hum an spirit w h en m y g eneration has passed. I know Jo h n has an im portant novel b rew ing inside h im . M any thanks to T erry L iberm an for being m y Yoda after I retired. Terry was m y sounding board, never offering opinions b u t prom pting m e to keep rearranging th e puzzle pieces to see w hich one fit best. N o m atter w hat I w rote, it w as “terrific,* “awesome,* an d “fabulous,* even th o ugh I en d ed u p rew riting things m any times. I m ad e tw o w o n d e rfu l frie n d s w h ile sp e ak in g in A ustralia: M andi Pour R afsendjani a n d A ndrew Swanscott. B oth saw the early 309

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310

m an u scrip t a n d provided en co u rag em en t a n d helpful comments. T h ese tw o am azing people prove th a t distance m eans nothing in today’s w orld, even in opposite tim e zones. I am happy to call them best friends. T han k -y o u to th e follow ing people for taking the time to make th o u g h tfu l co m m en ts a n d perceptive edits. It takes professionals valuable tim e to co m b som eone else's m anuscript, and I am very appreciative: G reg M orris, T o m M cC lellan, Perry Kaufman, Tom Aspray, Steve W ard, Brett Steenbarger, Dave Landry and Jay Kaeppel. A shout o u t to Rangan Padm anabhan, m y on-line trading buddy in Texas for his dem ented com m ents and edits. "Now I get it. Now I see w h at you w ere talking about.” H e is o n his way to becomings to p ranking hedge fu n d m anager. T h a n k -y o u also, to L arry W illiam s, L arry C onnors, Victor Sperandeo, Ju d d Brody, Steve M oore, Carley Garner, Toni Hanson, an d M ick Ieronim o. I am so lucky to have such great friends.

E rika a n d /, July 4, 2 0 1 8 - Alaska

ACKN O W LEDGM EN TS

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Special thanks to Hector Seda for transcribing my material from years past and telling me how “easy'’ it was to write a book. 1 naively believed him. Soheil Zargarpour showed me the equivalent o f how to run a 4-minute mile. I gave a lecture in which I mentioned my struggles in writing. He approached me and said he had a system for writing. *How to write a book in three and a half days by chunking it into 90-minute blocks.” I believed him. It was actually a year later that I finished the book, but who is counting. Just knowing that it COULD be done is sometimes all one needs. And the word “system” struck a chord. He panned my early writing efforts. “No, no, N O. Pretend you are walking into the room. Now, what do you see?” Show not tell. He is destined to write a great screenplay one day. My loving husband, Damon Pavlatos, made this story possible by adding so much to my life.

GLOSSARYOFTRADINGLINGO

3 /1 0 o scillato r — S im ila r t o th e o sc illa to r o n th e o rig in a l S ecurity M a rk e t R e search c h a r ts . I t is t h e d iffe re n c e b e tw e e n a 3 a n d 1 0 -period s im p le m o v in g average. A 16 -p e rio d sim p le m o v in g average o f th is is o v erlaid o n to p o f th e faster oscillator. API - A pplication p ro g ra m in terface, o r th e softw are th a t allow s tw o ap p licatio n s t o ta lk t o e ach o th e r. A T R —A verage T ru e R a n g e in a n N - d a y sim p le m o v in g average o f th e tru e ran g e values. A u ction T h e o r y — H o w p e o p le a c t in a u c tio n m a rk e ts in c lu d in g su p p ly a n d d e m a n d ch aracteristics a n d in itia tin g a n d responsive behaviors. Big R o u n d N u m b e r — P rice levels fo r a m a rk e t usually in increm ents o f 100 a n d 5 0 0 . F o r ex am p le, 2 7 0 0 is a b ig r o u n d n u m b e r in th e SPs. 100 is a b ig r o u n d n u m b e r i n a sto c k . B ig R o u n d N u m b ers can serve as m a g n e ts fo r p ric e w h e re it th e n b eco m es a su p p o rt o r resistance level. Box —a relatively n e u tra l o p tio n strateg y w h ere a tra d e r is lo n g a bull call spread a n d lo n g th e co rre sp o n d in g b ear p u t spread in th e case o f a “lo n g " b o x , a n d v ice v ersa fo r a “s h o r t box." I t u sed to b e a play w h e n in te re st rates w ere h ig h . 313

TRADING SARDINES

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C arry T rade - A strategy w here tra d e rs b o rro w m o n e y in a low interest rate currency (in this case, th e Yen) a n d invest in a highyielding currency to capture th e difference b etw een th e rates. City Service —An oil and gas com pany established in 1910. In 1964 it created the brand nam e, C IT G O . It w as acquired by Occidental Petroleum in 1982. Colored Trading Jackets - Each clearing firm h ad its ow n designated jacket color. T his allowed th e floor clerks w h o collected the order tickets from the traders to k n o w w h ic h tra d e rs cleared through w hich firms. Som e o f th e larger clearin g firm s included First O p tio n s o f Chicago, Speer Leeds, M e rrill L ynch, an d Drexel Burnham . C P O - C om m odity Pool O p erato r C T A —C om m odity Trading Advisor D ouble Nickels —a price th a t ends in 55. T h e SPs w ere trading at 462.55, or double nickels. Drexel Burnham - a leading US-based investm ent firm . It was forced into bankruptcy after inside trading violations a n d assorted other offenses. FIX —Financial Inform ation E xchange. T h e p ro to co l used for real­ tim e exchange o f securities transaction a n d tra d e inform ation. G reenm ail - T h e practice o f b u y in g e n o u g h shares in a stock to threaten a hostile takeover, fo rcin g th e ta rg e te d com pany to purchase the shares back at a prem iu m . H a n d le - T h e whole num ber fo r th e price q u o te . T h e handle for b onds when they are trading at 1 3 2 '1 6 w o u ld th e 132. L B R 3 1 0 - the 3/10 oscillator o n C Q G s c h art. L o n g Liquidation F lu s h -T h e opposite o f a “S h o rt Squeeze.* A rapid selloff in a market when m ost m arket participants are already long. O p e n O u tc r y - T h e form o f com m unication used in the trading pics involving verbal shouting a n d som etim es h a n d signals. O P M - “O th er People's Money." Slang used fo r m anaged accounts.

GLOSSARY OF TRADING LINGO

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O pportunistic trading - Strategies that take advantage of short term market inefficiencies or directionally based trades. Q uotron —T he first financial data terminal to display stock quotes on an electronic screen. T he company was started in 1960. Straddle - A n options strategy which is long both calls and puts speculating that there will be a big move either up or down (long straddles), o r short both calls and puts speculating that the stock will stay within a contained range (short straddles). TR1N - the ratio o f advancing to declining issues divided by the ratio o f up volume to down volume. (Created by Dick Arms, it should be called the “Arms” index.)