that he didn’t intend for me to show up atWakeman and find Herb Johnson, just so I could pull mini-Napoleon out ofa partner meeting so that he could listen to me offer a lame apology that Ididn’t even truly want to give.
But when I apologized to Valerie, her face brightened. “Really?” shesaid.
“Really. I mean it.” And I did. The saying of the apology created someof the sincerity. The speaking of the words also cleansed me a bit. I stood abit taller and felt a bit happier. When I returned to Harvey, I said so.
“That's no surprise. That’s good. You don’t need the burden of an angryyoung lady who works the reception area. She would give you problems
 
  
 
98 ADVENTURES OF A CURRENCY TRADER
forever. You have to cast all that aside, all the negativity you have storedup inside.”
I did not ask him about apologies that I would owe to my former em-ployer. That was something I didn’t want to do and I am sure I would notget the words out of my mouth before I was escorted out of the building.But apologizing to my wife? That was something I would do as soon as Igot home. I needed all the help I could get, and I couldn’t expect to haveher help if I could not be honest with her.
“Now,” he said, “you’ve earned your first lesson about why I am takinga trade. Remember you were asking about my reasons for wanting to sellthe EUR after it rose upward?”
“Of course. I actually wanted to put on the same trade—when I foundout you and Hank were planning to sell the Euro, I decided that I wanted tobe part of it. I did not want to miss out on the opportunity to make money.”
“No one wants to miss out on money. It’s a huge problem for many newtraders—they cannot resist following the idea of another person becausethey don’t want to miss out. But you should know that I don’t actually havethat Euro trade that you're talking about. I don’t necessarily want to sellthe EUR/USD at 1.2200. It’s not something that I am going to do for sure.This is the danger in jumping in on a trade because you hear about some-one else taking it. You take it, but in the end, that other person might not,and then what do you have? A trade with no backup, no planning, no ra-tionale other than you didn’t want to miss out.”
I gulped. That was not good. I was now planning to place an order totake a trade that I thought had substantial backup. But I was on my own.No Harvey, no U.S. National Bank standing behind the order. Suddenly, Ifelt dumber than ever. I was going to lose my trading account any momentnow with plans like this. I could feel it. All the money I put in there wasgoing to go up in flames. I needed to stop trading.
“But Craig said—”
“Craig was looking at his order screen and saw Hank Doorecker test thewaters. An order 200 pips above the current market price is way too far offto leave out there. We do actually want to sell in the near future, but wewanted to see how much enthusiasm was out there for it. It’s not like some-one else was going to trade that far out of the market.”
“So really, why did you do it?”
“We want to sell. We do. That is for sure. But we want to only sell afterit’s gone up a bit. Hank has a theory that he has tested for many years thatifhe puts an order out there, way out there, that it will tempt people to bid.I don’t agree. It is so far away that it is really just showing them our cards.Ilike to hold my ideas closer than that.”
“How so?” I was now feeling better. At least Harvey really did want tomake a trade on the Euro. I just didn’t know where. So the idea wasn’t so
 
Coming Clean 99
far-fetched, after all. And I might still be able to piggyback on the trade.That is, if 1 could now find out what the trade would actually be.
“I want to see the price rise, then I'll make up my mind. I don’t have todo anything sudden or immediate.”
“You sound really uninterested in trading. Like, if you do or you don’t,it doesn’t matter. If you don’t trade, you won’t make any money.”
He grinned. “I was hoping you would get around to that.” He leanedcloser to me but did not lower his voice: “Harry, if you do trade, you won'tmake any money.”
This hurt. But he did not back off.
“Are you upset about that? I can see that you are. It’s natural. I used towork with a lot more traders. The one thing that everyone asks me is, howare they supposed to make any money when I am telling them to be patientand not trade, or to be patient and look at the long-term charts? They saythat if they don’t trade, they can’t make any pips and if they can’t make anypips, they don’t make any money. But the reality is that until that point, allthey have proven is that if they do trade, they lose money.”
I could not dispute it. He wasn’t telling me this because he hated me.He was telling me this because he wanted to help me. And he was right.
“I agree that you’re right. I have proven that when I trade, I losemoney.”
“Yes you have. One thousand dollars in the toilet on one trade. Thatwas a huge amount of your account. You will learn more about moneymanagement over time, but the basic premise is this: you have to under-stand that taking more trades does not mean you will be making moremoney. Especially for a new trader.”
“How do you know about my trade?”
He smiled. “Your forex dealer? The guy who started it?”
“Yes? What about him?”
He smiled again, this time much wider.
“You know him?” I asked. Then I said it again, this time more sure:“You know him. You probably worked with him five hundred years agowhen you were trading the Florentine Peso against the German Potato.”
“Not quite. But yes. I did work with him years ago. He’s an old friend. Ihaven’t seen your account statements but he did tell me about the loss.”
So this is how Harvey knew so much about me. He knew everyone inthe business.
“Back to business, Harry,” he told me. “Does it make sense that if youmake more trades right now, you don’t necessarily make more money?”
“That makes sense.”
“Why? Explain to me why it makes sense. I want to hear it from you.”
Istopped and thought about it for a moment. Just thinking about this,I could sense that what he was teaching me was true. “You're saying, if I
 
  
 
100 ADVENTURES OF A CURRENCY TRADER
understand you correctly, that a beginning trader has no idea why he is tak-ing trades. He is making trades to, well. . . just to make trades. It’s terribleto realize this, you know. I am feeling pretty stupid now.”
“Tell me why you feel stupid.”
“I feel dumb because I just wanted to be like Craig. I thought that if Itraded the short-term charts, that is where the action would be. That iswhere all the movement would be, right after a major economic report.And I sort of just assumed that, because it was moving a lot, I could cap-ture a bunch of it. But I have no idea how to do that. I was using software,or hearing rumors about trades that other people take. I wasn’t basing mytrades on any kind of analysis.”
“And?”
“And what?”
“Harry,” he started. “That’s an excellent start, but there is more to it.You're correct that new traders have no idea why they are buying or sell-ing. They are usually buying because they bought software that teachesthem that they don’t have to think for themselves, or because price isshooting upward, or because they heard a rumor that someone else wasdoing it. The rumor trades are the worst because you can’t even confirmthat it is true, and you have no idea if the rumored trade is actually for real.And you can’t talk to the trader to find out if he actually takes the trade youheard about. But there is more than that.
“When you said that you are not basing your trades on any kind ofanalysis, what did you mean?”
I told him that I didn’t really know what I meant. But I knew it wastrue.
“A solid, honest answer. But it’s no good,” he replied. “You gotta do bet-ter than that.”
Ithought for a moment. “I meant to say that I’ve now started to assumethat a good trader is going to have to do some type of his own analysis be-fore he takes a trade. Some kind of a plan. Some kind of a checklist ofthings to look for.”
“Excellent!” Harvey cried out. No one paid any attention or turned tolook at us. Apparently, he was known to scream like this.
“A checklist,” I continued, “would guide me through the process ofmaking sure that I am following something that works. So if I took a trade,and I am just making this up, but it is sounding really good, that means thatIam implementing a system.”
“Right! Right again!” he exclaimed. “That means you are implement-ing a system. And if you have a system that you are following, it doesn’treally matter if the trade is a winner or a loser, as long as you understandthat over time the system is going to return profits. The goal is to makemoney, right?”
 
Coming Clean 101
“Right!”
“The goal is not to make trades. Can you see the confusion with peo-ple? They want to make trades, just like a gambler wants to pull on theslots, or a dope head wants to get high. They are doing it for the sake of get-ting the rush. They are not serious about making money. Can you imagineif a brand-new lawyer at Wakeman wanted to step into the courtroom andrepresent the largest corporation in the world, on his first day on the job?”
“Yes, I can imagine exactly what Herb Johnson would say.”
“He would throw him out onto the street. A new attorney doesn’t earnthe right to step into a role that important until he proves that he can betrusted with that much authority. And a new trader is no different. Untilyou can prove that you don’t have to trade, you are not going to ever dothis successfully.”
“Prove that I don’t have to trade. It makes sense now, but it’s nearlymelting my brain to think like this.”
“It’s melting your brain because you are thinking about two things atonce. You are thinking about supporting your family. And you are thinkingabout making good trades. If you combine those two concepts, you get azero equity balance in your trading account. Why?”
“You're asking me?”
“Yep. Why is that true? Why is it the case that a trader who is trying topay the bills is going to be far more likely to lose his account?”
This didn’t make sense to me. Wasn't it good to be hungry for profits?Couldn’t a need to make money drive a trader to do better, not worse? Itold him this.
“You are defending the concept because you are living in this very situ-ation,” he told me.
That could be true. I didn’t argue with it. He continued.
“You want to believe that a new forex trader who needs to support hisfamily is going to be driven to be the best. But that’s an image you’ve con-jured up in your head. A new forex trader is more likely, because he has tofeed his family or pay his electric bill, to make a bunch of dumb trades.”
“Because he’s got to make money, and how else is he going to makemoney unless he trades?”
“Right! Right again!”
“That makes sense now. And a new trader, like me, has maybe seenother people do this on television, or someone like Craig. And we thinkthat trading profitably is just the act of pushing some buttons. We expect itto be easier or simple or .. .”
“Or what?”
“I don’t know. I guess we expect it to be less like a job.”
“Bingo. You've got it. You understand it perfectly now. Trading is just ajob, like filing stuff away at some windbag Midtown law firm founded by
 
  
 
102 ADVENTURES OF A CURRENCY TRADER
Thomas Jefferson or something. And traders don’t want to hear that trad-ing is going to be like a job. They want it to be sexy. They want to imaginethat they can just sit down at the computer at any time of day, and theforex market will be there ready to offer them golden pips served by a but-ler. They don’t work for it. They think all they have to do is want it.”
“Saying it is like a job makes it sound awful.”
“You're right. It does burst the image. Does it change your mind aboutwhether you want to do it?”
I shook my head. “Of course not! I want to do it more than ever. It'sokay if it’s like a job. I am fine with that. It still seems like a better job atleast. Better because I don’t have to have people yelling at me. Better be-cause I can set my own hours. Better because it will pay more over time.Better because I can see my family more often.”
“Harry! Harry!” He reached out and grabbed me by the cheeks. “Youdon’t understand! You are about to try to be successful at one of the mostdifficult jobs on the planet. You want to be a trader! You know how manypeople can do this and make money at it? Hardly anyone! And you knowwhat? The people who do well at this don’t necessarily get to see their fam-ily more often. They might have people yelling at them. They might havehorrible hours. And at the start, it pays worse than picking up garbage.”
He was now staring down at me and didn’t look happy.
“Yes?”
“IT thought we were making progress. But we’ll have to talk again to-morrow.”
I was devastated. Where had I gone wrong? If trading was going to bemore difficult, give me less family time, not make me any money right now(because I wasn't going to be trading), and would involve people yelling atme with longer hours, then what in the world was I thinking? Why not justback out now? Ihad gone from superhappy and on top of the world, to de-pressed that I could never succeed at doing this for a living, and even if Icould, I wouldn’t like it anyway!
Harvey broke me out of my thoughts. “Stop sulking, kiddo. You're notout of the woods yet. I got more bad news for you. And we’re going to getthe bad news tomorrow. I want to get it all out of the way.”
I straightened up. “All right,” I agreed. “I am ready for whatever youwant to teach me. I am a bit confused, but I can take it. I want to do this.”
“Despite what I just told you?”
“Yes, despite the fact that you just burst the bubble and made tradingsound like a job as a filing manager.”
“Good. That is good, Banes,” he replied. “This conversation has done agood job over the years at busting through the myths. But it usually takeslonger. And usually creates way more depression. So we’re going to speedthings up, like I said. We’re going to get the bad news out of the way.”
 
Coming Clean 103
“What's the bad news?”
“I am going to take you to a hedge fund tomorrow. It’s a firm that isrunning two billion dollars in other people’s money.”
This didn’t sound bad at all. It sounded downright fantastic!
“You might think it’s going to be fantastic,” he said to me, reading mymind. “But you're going to see that it’s pretty dumpy.”
 
  
 
 
Looks CanBe Deceiving
 
land, on the border between Midtown and Chinatown, we stood at a
receptionist’s desk that appeared to be just a door set on top of twosawhorses. The receptionist had a computer, but it was running so badlythat I could hear it clanking around. And instead of a fancy flat-screenmonitor, he had a huge clunky monstrosity that looked like it belonged ina dump. There wasn’t any sign or notice of where we were. Either thiswas a superprivate hedge fund or it was doing so badly that it didn’t wantany attention.
What kind of hedge fund was this? While we waited in the receptionarea I thought I’d find out what kind of fly-by-night operation had dumpycomputers and ratty carpet.
“What kind of place is this, Harvey?” I spoke in a low voice so I wouldn'tembarrass him or myself. We were waiting for the chief trader or somethingand I didn’t want to be caught talking trash about his trashy office.
“You'll find out in a moment.”
And that’s when the owner of the place, or the chief trader, or what-ever, walked into the room. He was looking dumpier than everyone andeverything else in the place. He wore a suit that was at least 700 years old,and his shirt was frayed at the cuffs. His hair stuck up straight in the back,where he had fallen at his desk or something. Although he had a brightsmile, I kind of felt sorry for him. He held out his hand and I wondered if itwas clean enough to shake. I did anyway.
[: a plain-looking 25-story building, in a so-so looking part of no-man’s
104
 
Looks Can Be Deceiving 105
“Harry Banes, meet George Sisler,” Harvey said. I winced. The man hada strong handshake and wasn’t afraid to use it.
“Thanks for meeting with me,” I offered. I hoped we could get this overwith quickly and then we could go see the $2 billion hedge fund that Har-vey had talked about.
We walked through a (not surprisingly) old door and out onto whatwas apparently George’s trading floor. It was a scattered group of more olddoors sitting on top of sawhorses, sitting on top of old carpet. The com-puter screens looked newer, but the 20 or so traders were all wearingeither older suits (even the young guys) or casual clothes. The other thingthat looked remarkably different was that there were an equal number ofmen and women here or perhaps even more women than men. All thetraders that I saw had the same things on their screen: an Excel spread-sheet up with a bunch of columns stretching into eternity, a set of pricesflashing quotes for several currencies, and charts. The place wasn’t quiet,but it wasn’t a playground either. I could tell that I was standing in themidst of a focused crowd.
I figured that we would sit down inside George’s office for a chat, butwhat I didn’t understand at first was that the entire room had no private of-fice. It was just one room, sitting high enough that we had an excellentview out the windows of a Chinese restaurant, an overflowing dumpster,and a parking lot with cars stacked on top of each other Manhattan style.Inside the room, beside the desks, there was a broken 30-inch televisionand a watercooler. This was one classy place!
Because George had no office, we sat down at his desk, which was inno way distinguishable from any of the other desks. It wasn’t bigger; itdidn’t have more screens; it was not in a prominent place (like the center)of the room. But it was spotless. There wasn't one piece of paper floatinganywhere. Nothing out of place. It felt very strange to be sitting down for ameeting about this guy’s business, while everyone else was easily withinhearing range.
Despite all my impressions of the place, Harvey seemed delighted tobe here. This appeared to be something of a reunion between him and aformer student (who apparently needed some help). From the moment wehad entered the office, Harvey was scanning the room, grinning and happyand altogether way too jolly about everything he saw. Walking in betweendesks, he was shaking hands with people he knew, bending down to lookat their screens, asking about trades, and basically acting like he was theMayor of Piptown.
“Harry,” he told me as he finally came over to sit down next to us, “isn’tthis a great place? Now, Harry, this is how to run two billion dollars.”
I was speechless. George wasn’t. He said: “Three billion.”
 
  
 
106 ADVENTURES OF A CURRENCY TRADER
Harvey lighted up. “Howdy do! Wow! Fantastic, George. Not asurprise.Are you up 50 percent for the year?”
“Yes. We are. We have really been hitting it good for the past fourmonths.”
It was possible that Harvey would now explode into shards of happi-ness. I imagine his head flying off his body, but still smiling and still com-menting about how cool this place was. At the same time, I was havingtrouble keeping my own head attached to my body. Had I heard right? Wasthis George Sisler guy really managing three billion dollars? Could he notafford some nicer stuff? This was nothing like what I saw at ErnestWellington, or other major banks, or on business television.
I could tell that there was going to be a lesson here for me and that,like everything else Harvey had told me so far, it would overturn some mis-taken assumptions about the business of trading.
Harvey spoke and broke me out of my daze: “Still hitting singles?”
George nodded. “Yep. Still hitting them.”
And then Harvey looked at me. “It’s time for you to ask questions,Harry. Ask George anything you want.”
Thad lots of questions. But most of them I thought would be insultingor at least inappropriate.
“Go ahead,” Harvey said, responding to my thoughts. “Ask him any-thing. George already knows you're wondering why his office looks likea dump.”
LINTERVIEW GEORGE
 
George didn’t have much time for me. But in the time we talked, I learned aton about how a hedge fund works, and about what I was going to need todo to be successful.
Me: Harvey was right. Iam wondering about your office.
GeEorGE: It’s not that spiffy, I know. But we do get the job done.
Me: If you are managing so much money for other people, why not up-grade just a bit? For clients?
GeorGE: You can imagine that youre not the first person to ask. But theanswer is that Iam no longer impressed by wealth, or really a show ofwealth. I have come to believe in the obvious truth that showing offwealth is not the same thing as being wealthy. Material possessions areto be used in the process of building wealth. But showing off wealth ortrying to look better than other hedge fund managers—that’s not whatthis place is all about.
Me: What is this place all about?
 
Looks Can Be Deceiving 107
GeorceE: The accumulation of wealth. We want to earn the most amountof money with the least amount of risk, while spending the least amountof money on overhead.
Me: Sounds okay with me. But why can’t you also accumulate somedesks? Normal chairs? Don’t your clients expect to see someone whoappears, well...
GeorceE: More successful?
Me: Right. I didn’t mean for it to sound bad.
GeEorRGE: It doesn’t sound bad at all. You see, my clients expect to makethe most amount of money possible. So I don’t charge them a manage-ment fee. Most hedge funds will charge a fee of 2 percent of total assetsunder management, plus about 20 percent per year of the profits. What's2 percent of three billion dollars?
Me: Um...
Harvey: He is a math genius.
Me: Um...
GEorGE: It’s sixty million dollars.
Me: [silence]
Harvey: [silence]
GeEorGE: This year we'll walk away from 60 million dollars in possiblemanagement fees that we could just pay out to ourselves in this office.Instead of putting that sixty million dollars in our own pockets, we'llreinvest it, we'll put it to work. That sixty million by the end of next yearmight be worth eighty million. And guess what? We get a cut of the prof-its. So if we do well, we get paid well. Do you see how charging a man-agement fee like 2 percent would reward us even if we were notperforming well?
Me: [silence]
Harvey: George, I think he’s still thinking about the sixty milliondollars.
GeEorGE: Ha! I don't blame him. My wife thinks about it all the time. But,think, Harry. Think about it for a moment. If you invest your money withme, do you want me to be rewarded if we succeed, or if we fail?
Me: If you succeed. If you fail, I want to take my money elsewhere.
GeEorGE: Right! And if we fail and still take 2 percent of your money everyyear, that seems ridiculous. Completely at odds with what is obviously atrue principle: A money manager should only be compensated if heearns money for his clients.
Me: That does make sense. So how much money do you earn when yousucceed?
GeEorGE: We charge the standard 20 percent of profits. This year, we’vemade a billion dollars. We had a big win when we bought a chain of su-permarkets in the Midwest, and then sold them to a larger chain. Right
 
  
 
108 ADVENTURES OF A CURRENCY TRADER
there that deal was five hundred million dollars. If we stopped tradingright now, we'd take in an incentive fee, at the end of the year, of abouttwo hundred million dollars.
Me: Do you mostly buy companies? Then sell them?
GeEorGE: No. The supermarket deal was dropped in our lap—we havea guy here who trades for us, and he was a grocery analyst at a majorWall Street firm. He liked what he saw in this Midwestern chain.We manage some money for the CEO of a major U.S. chain, andwe told him that we were going to bid for the business. We had no in-tention of keeping it for a long time, but we realized we could get agreat deal on it and then resell it later after we trimmed it up a bit.First he told us that he wasn’t interested, and six months afterwe bought it, he told us that he was, and we sold it to him at a majormarkup.
Me: And this was a one-time-only type of deal?
GeEorRGE: Yes, that’s a good way to put it. A deal too good to pass up. Wegenerally trade a lot of currency and foreign stocks and bonds. We don’tdo much in the United States, really. We see the growth overseas andthat’s where we are focused.
Me: There aren't very many traders here.
GeorcE: Right. I hate managing people. These people manage them-selves. We hardly ever hire. When we do, I offer a million dollars asa signing bonus and we don’t have a lot of trouble getting the peoplewe want. This is totally and completely a performance-based busi-ness. Each of these traders manages as much of the capital asthey can justify to the rest of the team. Each one is an expert inone area—Mickey Cochrane over there borrows money in Japanand buys British, Brazilian, Australian, and New Zealand bonds. He’smaking a killing for us right now and it looks like it’s going to keepon moving.
Me: He borrows money in Japan?
GeEorGE: Right. This is what is called the carry trade. Ever heard of it?
Me: No. I don’t think so.
GeorGE: I'll describe it to you. I hope that it blows your mind like it didmine the first time I heard about it—and keep in mind, I was a year outof Goldman Sachs and should have already known about it. Are youready?
Me: Ready.
GeEorGE: How cana person or a company borrow at low interest rates?
Me: Good credit.
GeEorGE: What else?
Me: From a bank offering a competitive rate.
 
Looks Can Be Deceiving 109
GeEorGE: Excellent. Perfect. What would you say if I told you that rightnow, I can borrow a hundred million dollars from a Japanese bank at 1percent interest?
Me: I would say you should buy yourself a new television and somecouches.
GEORGE: Very good! Probably true. But what else?
Me: I would say that you should look for a way to earn more than 1 per-cent on your money, since you are going to have to pay back the princi-pal and the interest.
GeorGE: Brilliant! That is correct. Well, guess what? We can go to our bro-kerage firms—Bear Sterns, Goldman Sachs, for example—and depositthe money. They will let us leverage that money a few times over. So wecan invest with three hundred million dollars. That's called investingwith leverage.
Me: Sounds even better now.
GeorGE: And if we go out and buy a basket—or a collection—of foreignbonds that earn a combined average of 7 percent, then we are earning 7percent on three hundred million.
Me: But you only have to pay interest on one hundred million!
GeEorGE: Bingo! Give the man a banana. You're right on target. We borrow,and then we invest with leverage.
Me: So you are, in essence, earning 21 percent on that money annually,minus the 1 percent interest on the loan.
GEORGE: Right. That is exactly right. Now it gets more complicated, ofcourse. Mickey has to move money around, and has to open and closetrades to get into the best collection of bonds and so forth. And wepay fees and commissions on the trades we take. But that’s the basicstrategy.
Me: Very cool. I want to do that. Can I borrow from a Japanese bank?
GeEoRGE: Theoretically, yes. But practically, probably not. You probablycan’t get the trade going right, unless you have a few million dollars. Doyou?
Me: Very no. Definitely no. I wish.
GEoRGE: Well, if you’re working with Harvey, you're going to have thatmuch. Eventually. Don’t rush it. Let it come to you. And I’m sure thatif you think about it long enough, you'll find a way to do a trade likethis. It’s got to be possible in the retail forex world, by playing theswap rates off each other or something. In fact, we should talk aboutthat again. Right now I have to go, but tell Harvey—he’s over theretalking to Mindy Swanson—that you should stop by in a couple ofweeks and that you're going to tell me about how to do the carry tradeon a retail platform.
 
  
 
110 ADVENTURES OF A CURRENCY TRADER
Me: But—GeEorGE: I gotta take this call.
And with that, the discussion was over. George had a phone appoint-
ment that he had to take, and he just stood up and gripped my hand like hewas going to fling me out the window.
MINDY TEACHES ME HER ONE-PIP WAYS
 
Harvey had been chatting it up with a young woman on the other side ofthe room, and he called me over.
“Harry, this is Mindy. She only trades currency.”
“Great! I was just talking to George about the carry trade.”
Mindy smiled. “That’s long term. I’m all short term. I am in and out allday long.”
“In what way?” I asked.
“Look at my screen,” she said, pointing to the quotes in front of her.She had at least seven currency pairs open at once, and they were flashingquickly enough to make it very confusing if I stared at it for long. I wasused to seeing the currency pairs quoted like this:
1.8500/1.8504
But on her screen, the quotes appeared with just the last two digits,leaving out the “