on bothsides of the market and markets tend to go in the same direction over time,no matter which delivery contract you are using. Spreads usually attempt totake advantage of short-term inequalities between delivery months—notwithin the whole market. The idea is to make more money on one side ofthe spread than you lose on the other side of the spread. In the corn spreaddescribed above, you would want the near month to rise faster than the backmonth; you pocket the difference in that case. Of course, a spread doesn’twork very well if the market is orderly with no unforeseen delivery problemsand there are times when both sides of a spread can go against you. Mostretail brokers who do spread strategies are sometimes looking to charge twicethe number of commissions because you have to do four “sides” of a spreadto get in and to get out (two round turns per spread). Hedgers and commercial traders who know how to use spread strategies often work on a large discount basis to the customer and wouldn’t be considered brokers in the samesense that I refer to in this chapter. I’m being fair to the serious guys who dothis part of the business.
Chapter 6: The Trading Police1. The CFTC, or Commodity Futures Trading Commission, is the federal regulatory body chartered by Congress to oversee futures and options trading,monitor exchanges, and resolve disputes.Appendix B: Insight into the Person of Trader X1. Ghostwriter X chose to remain anonymous when John Wiley & Sonspurchased the rights to publish this book.2. To keep the continuity of the original book and the contribution ofGhostwriter X, the name Trader X has been retained.
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Notes
173
3. Leo Melamed is the Chairman Emeritus of the Chicago MercantileExchange (CME) and is considered to be the “Father of Financial Futures.” Itwas largely through his efforts that the CME became the trading powerhouseit has become. He helped institute trading in Foreign Currencies and StockIndexes which revolutionized the CME’s growth from a small agriculturalexchange to one of the most influential financial institutions in the world.4. Milli-Vanilli was a Grammy Award winning musical duo from the 1980s—until it was discovered they were complete frauds. They lip-synced theirmusic when performing “live” and all of the recordings were done bystudio musicians who were never told what they were actually recording.They were disgraced, had their awards revoked, and eventually faded frompopular memory.
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Index
AActions, reality (basis), 71Adversity, 51creation, 52defining, 52–53lesson, 58–59self-creation, 57–58Alchemy, belief, 40–41Alcohol abuse, 56Arbitration, 86–87occurrence, 88process, 88–89Associations, formation, 118Audit, execution. See National FuturesAssociationBBack office, problems, 56Baghdad, bombing, 45–46Balance, sense (control), 122Baruch, Bernard, 130Behavior, observation, 76Black box, usage, 170–171
Blame, losses (relationship), 116Body, training, 122Book of equity. See Equity bookBoom-and-bust cycle, avoidance, 7Brief History of Time, A (Hawking), 134Brokerage houseappearance/disappearance, 60–61change, 4clearing relationship,absence, 46–47commission income, 19–20creation, 54–55market dominance, 60nonsense/problems, 55Brokerscapacity, 26characteristics, 19–20churningproblem, 15proof, NFA requirement, 16clientadvice, avoidance, 19contact, 15–16
175
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176Brokers (Continued )replacement, 17respect, 100compliance problem, 98dog and pony show, 15money, availability, 54phone selling/trading, contrast, 26problem, regulator creation, 90protection, 97role, 14term, usage, 13–14thinking/actions, childishness, 30trades, client nonapproval, 57Brucks, Connie, 156Business world, entry, 67–68Buy/sell programs, usage, 171CCapital, raising, 93Capital risk, 38–39placement, 41–42Cash currency markets, trading, 141Chartsbelief, 137usage, 30–31Chicago Board of Trade (CBOT),problems, 104–105Chicago Mercantile Exchange(CME), 160Foreign Currency Futures &Options brochures, usage, 61trader interaction, 20Churchill, Winston, 150Churningabsence, 99assumptions, 16–17encouragement, 17illegality, 15perspective, 16–17possibility, 97Clientsaccounts, solicitation, 94close out, 15
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indexcontact process, 90gains, opportunity, 26–27gains/losses, concern (absence), 20loss, concern, 6paperwork, processing, 53point of view, understanding, 100promises, absence, 99–100protection, 97raising/trading, 17–18referrals, 27replacement, 17respect, 100satisfaction, 90servicing, 95–96capability, 4–5serving, 89theft, 3–4Closing price trades, impact, 127Commissioncreation, 15generation, 26, 36income, production, 19–20Commitment, level, 25Commodity brokerscareer span, 9initiation, 51–52perspective, 21Commodity companyinitiation, 60–61setup, 62work, 62–63Commodity Futures TradingCommission (CFTC)charter guidelines, 93regulatory body, 89Commodity prices, exploitation, 123Commodity traderinitiation, 51–52success, discovery, 29–30Commodity trading, size(increase), 20–21Commodity trading advisor,definition, 157
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IndexCommodity Trading Advisors (CTA)existence, reason, 20–21money, availability, 157track record, 68Common sense, teaching (absence), 88Conflictcessation, decision, 80creation, 74, 80development, 83history, 81occurrence, 70potential, 74recognition, 83resolution, 71, 74, 105Consolidation high, 119–120Cornin the bins, term (usage), 160call options, 5CQG network, 37Crack spread, 160Critical thinking process, 48–49Crude oilmarkets (movement), PersianGulf War (impact), 18retracements, 45trade, 45DDancing with Lions, 167–168Democracy, government form, 150Desire, perception, 73Discrimination, 82–83Distinctions, issue, 80–81Dysfunctional behavior, 142–143EEnlightened monarch, governmentform, 81Entrepreneurs, interaction, 68Equity, raising, 18Equity book, 5size, problem, 26–27Equity runs, 5
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177
definition, 159information, 53problems, 56Exchange membership. See SeatExecution, quality, 79Expectationsimpact, 76–77perception, 84Experts, impact, 35–36External adversities, 60FFacts, importance, 169Fair play, 84–85Feelings/emotions, communication,10–11Fees generation, ratio, 27Fibonacci retracement, 168Fiduciary responsibility, 7–8impact, 97Fills, complaints, 98–99Financial apocalypse, question, 172Financial intangible, telephone sale(difficulty), 14–15Financial trauma, occurrence, 15Foreign currencies, trading, 61FOREX, 141–142trading, 153Free cash, investment, 27Free money, perspective, 14Free speech, right (cessation), 83–84Front running. See TradersFull analysis, 171Fundamental analysis, concept, 45Futures, trading, 123GGain/loss, knowledge, 117Gainsimprovement, 117time frame, 126Gaps, cause, 125Giftedness, impact (absence), 68–69
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178God in the Pits (Ritchie), 65Good faith, showing, 96–97Good till canceled stops, activity, 57Greed factor, 18
index
JJulius Caesar, 168–169
Liquidationabsence, 120timing, 47Livermore, Jesse, 124Local, definition, 156Losers, 137attack, 104avoidance, 106discovery, 126–127exit, 139decision, 43identification, 75concern, 47–48payment, 74philosophizing, 32thinking, 42learning, 77training manuals, selling, 36viewpoint, 44Lossesbrokers, impact, 90–91consistency, 118creation, trading (impact), 86–87reduction, 116, 117relationship. See Blametaking, 31time frame, 126women, interaction, 119Love relationships, 142
LLearningcommitment, 136–137selection, 133Lefevre, Edwin, 127Legislation, problem, 80Letter of the law, determination, 101Lifebattle, 105–106event, impact. See Tradesintegrity, importance, 144monotony, 143Life lessons, 58
MManaged Account Reports, usage, 157Margin call, occurrence, 92Margin requirement, 125–126Marketsadversity, 52avoidance, 135–136belief structure, 137–138closing, 125continuation, 116direction, determination, 30education, value, 38–39force, 171
HHammurabi, code, 83Hawking, Stephen, 134Health maintenance, 145–146Hedge account, usage, 47Hedge funds, impact, 124Hedgers, examination, 120How to Date Young Women for Men Over35 (Steele), 134Human character, failure(perception), 144IIndividual wills, 80Inequality, minimization, 81–82Informationaccess, 35assimilation, 147In the bins, term (usage). See CornIn the money option, holding, 124Inverse-ratio back spread, 124
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Indexgaming, illustration, 84inequality, 24information, existence, 35knowledge, requirement, 19moneymaking, 77withdrawal, 64movement, 122–123orders, filling, 123participants, time frame operation,125–126price level, 120price movement, buy/sell intention, 31prices, trading, 38reality, 23discovery, 26expression, 75screens, observation, 31studying, 7–8problem, 32support/resistance, reason, 44–45tradingability, 14mirror, 23–24qualification, 150requirements, 58truth, discovery, 25–26Marriages, problems, 143Melamed, Leo, 160–161, 169Men, equality (meaning), 82Middle East politics, examination, 45Mind, training, 122Monarchy, overthrow (reason), 81Moneymaking, right, 86taking, timing, 34theft, 41trading, requirements, 63–64U.S. borrowing, 83Money under management, 5Motivation, impact, 145Moving averages, complexity(variation), 43
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NNational Futures Association (NFA)audit, execution, 90CFTC charter guidelines, 93good faith, show, 93guidelines, violation, 94guilt, knowledge, 89investigation, 6–7problems, 90–91regulation, problems, 91–92rule, adherence, 27Series III registration,absence, 56violation, 56Negotiation, example, 110–113News, reading, 121–122Newsletters, offering, 36New York Mercantile Exchange(NYMEX)heating oil trades, 14opening, 46Nothing day, 121–122OOff-the-floor trader, initiation, 19One-lots, 123definition, 156trader, 156trading, 5Online trading, 171Open interest (O.I.), 129definition, 159observation, 138Open trade profits, 45–46Opportunity, destruction, 79Optionshedging instruments, 123–124speculation, 124writing, 124Order tickets, absence, 57Out-of-the-money calls,purchase, 92Out-trades, proportion, 85
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180PPaper Trading, 39Persian Gulf Warcrude oil, trading, 45impact, 8, 18Personal choices, impact. See TradingPersonal discipline, 148–149Personal reality, truth, 26Philosopher’s stone, term (usage), 158Phone lines, eavesdropping, 97Pit traders, integrity, 85–86Plato, 82, 83Point of viewchange, 73congruency, 82existence/contrast, 69understanding, 141. See also Clientsvalidation, 118Ponzi scam, importance, 8Pork bellies, trading, 34Portfolios, readjustment, 104Positionsaverage size, 27justification, 118reduction, 122securing, 119Predator’s Ball,The (Brucks), 156Premium, risk exposure, 92Price actionscomplaints, 98–99opinions, sale, 36profit, 19, 140research, 122Priceschart, representation, 42justification, 120meaning, 42–43motion, 124–125prediction, 46reduction, 119trades, liquidation, 127Private space flight, infancy, 156Probability theory, 84
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indexProblems, solving, 66–67Profitapproach, 69–70cutting, 120defining, 24guilt, 105point, determination, 31purveyors, problems, 40run, allowance, 117trading, 131Protective stop, 121Pro-Traders Hotline, 36Public, protection, 87Pyramiding, 45–46RRatios, examination, 117Realitycoexistence, 71–72conflict, 74creation, 73–74, 76defining/perception, 22narrowness, 23ignoring, 34perception, 71point of view, 87preparation, 52–53truth, relationship, 24–25Reason, defiance, 76–77Reasonable man, impact, 8Recommendations, creation, 36–37Regulatorscontribution, 81jobs, justification, 89–90letter of the law, determination, 101role, understanding, 98rules, 87Religious people, perspective, 144Reminiscences of a Stock Operator(Lefevre), 127Republic (Plato), 82Resistance number, 129–130Resting stops, filling, 123
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IndexRetail brokerage houses, problems, 4–5Retail commodity brokerage houses,sales manager, 155–156Retail commodity house, problems, 4Revolution, 84Risk minimization, 95Ritchie, Mark, 65Rookie traders, impact, 136Round-turn, definition, 157–158Rules of play, creation, 80SSales leads, 3Sales manager. See Retail commoditybrokerage housesSeat, exchange membership, 156Self, re-integration, 25Self-created adversity, 52–53Self-directed trader, action, 20–21Self-judgment, avoidance, 149Sell order, impact, 47Series III commodities broker,nonregistration, 141–142Series III licenserenewal, 95revocation, 94Series III registration, absence. SeeNational Futures AssociationSilver, purchase (suggestion), 3Singapore Mercantile Exchange(SIMEX), brokerage houseclearing relationship (absence),46–47Software, usage, 173Sons of God, naming, 80Soybeans, call options, 5Speculation, 115Speculators, open interest, 46Spiritual beliefs, development, 144Spreads, definition, 159–160Steele, R. Don, 134Stochastics, usage, 129Stop-loss order, impact, 89
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Stopscomplaints, 98–99placement, 123Subconscious, impact, 118Success, production, 67–68TTao Te Ching, 83Taxes, raising, 83Teaching. See Tradingexperience, 137Technical analysis, 29business, 48information, nonusage, 35interpretation, purchase, 38–39knowledge, 48–49sale, test, 36usage, 129, 165validity, lesson, 37–38value, 38–39Technical indicator, design, 43Technical value, offer, 138Telemarketing, perspective, 3Tenth Planet,The (Melamed), 169Time compression, theory, 165Time-stamped order tickets, usage, 95Tradersaccomplishment, 152anonymity, reason, 152characteristics, 18–19clarification, 134commitment, 153energy, focus, 170entry execution, 43front running, 85–86hobbies, 149humor, 147–148initiation. See Off-the-floor trader;Upstairs traderlearning, focus, 59–60losses, percentage, 9, 117observation, 138–140ability, 151
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182Traders (Continued )on-the-job training, 18personal life, observation, 142position, 148price viewpoint, 42–43problem, development, 21readership, 150relationship, observation, 142role, 14routine, observation, 135system trust/belief, 172–173term, usage, 13–14walking the edge, 140Tradescorrectness, 41–42execution, 52hypothetical transactions, 39life event, impact, 121margin, absence, 57pit execution, 85–86plotting, 126problems, 125–126results, 141tics, compilation, 38Trade sizeerrors, 57increase, 27restriction, 117Tradingaccountbalance, 33usage, 32–33art, 163–164business, 140career, commitment, 2commonality, 22–23creation, 24environment, belief, 103–104gaming, contrast, 84groups, professional approach, 19impact. See Lossesimprovement process, 34–35initiation, 130–131
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indexknowledge, addition, 152–153luck, impact, 21–22oblivion, 30personal choices, impact, 25presence, development, 60pressures, 2price, relationship, 137profits, self-study (impact), 25psychology, 164reality, concept, 22, 23relationships, 73–74results, creation, 24risk, 106–107routine, pattern (absence), 139stop, usage, 117study, 163–164systemsdiscovery, 40sale, 39teaching, 116, 135inability, 137thinking, 52validation, 138tracking, 56understanding, absence,137–138Truthdiscovery. See Marketstelling, 136Turnover, impact, 119UUniqueness, 66Unlearning, ability, 68–69Unreasonable man, impact, 8Upstairs trader, initiation, 19VVolumedefinition, 159examination, 119Volume and open interest(V/OI), 43, 45
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IndexWWealth, building (opportunities),169–170Wheat, trading, 105Winnersdesire, 75existence, 59payment, 74pontification, 32Winnings, allotment, 122World War III, ramifications, 45Worldwide economic situation,opportunities, 169–170
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183
Writing/rewriting, process, 133–135Written documentation,providing, 95Wrongdoing, suspicion, 96YYeager, Charles, 159Yields, flattening, 104ZZero-sum, meaning, 86Zero-sum game, 87–88performance, 103–104
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