commodity trading represents lessthan about 5 percent of the public investor’s interest in the first place.Add to this the fact that all brokers are paid only a percentage of commissions generated and you have a very volatile income situation at itsbest. The bottom line is that even with a superior, never-ending-saleslead flow, the average broker has to bust his rump to bring in accountsand hope that the commissions generated becomes a decent incomebefore he goes broke. This is why there is such a high temptation to dotrades just to create a commission, which is also known as churning.“Churning” is a term to describe a certain behavior brokers do togenerate their income. It is considered unethical and is, in fact, illegal.If a trade is done without the client’s knowledge, that is a “churn.” Theidea being that if your relationship is strong enough with the client, hewon’t mind. Since those trades are always losers, some clients do mind.Now the broker has to do a “dog and pony” show around it. Someclients buy this—but the ones who don’t, the broker knows that clientwill complain if he does it again. Therefore, if any trades are performedthat include this client, the broker will make the phone call to get theclient’s approval. The broker does run the risk that the client will say“no.” This client will probably be closed out at some point because thebroker can’t earn an income from him. Or the income is “too small.” Ifa client doesn’t mind, that broker knows he can now trade that clientwith impunity and will make a good income from that client until allhis money is gone. This whole show will happen until the regulators“catch” this broker and then either a fine will happen or he is expelled.If a client who allows this to happen changes his mind (usually at thepoint of total loss), then the broker might get sued. So he settles.This whole problem would not exist at all if brokers would calltheir clients on every trade; but since most trades are “thought of ” at
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the moment the broker turns his screen on, there isn’t enough timeto call all his clients before the “market gets away from him.” If brokers would plan their trades out, then there would be lots of time tocall everybody and get approval. This problem also wouldn’t happen ifowners would pay their brokers a base salary and train them on howto trade. Or find someone who knows how to trade. But that is toomuch work. Additionally, if a broker would take power of attorney onhis accounts, then he could trade anyway he wants; but then the regulators assume if you do that you intend to churn them anyway. So theNFA immediately asks this broker to “prove” he wasn’t churning. Howdo you do that? If you tell the regulators, “I have power of attorney,”they say, “Why do you need it?” Sooner or later any broker who haspower of attorney will give it up because he says, “How can I prove Iwasn’t churning? If I like a market, but I have a loss, the NFA thinksI did that trade just to get paid. I can’t win.” The end result is that ifyou want to trade for your clients, and stay out of trouble, you can’thave more than a handful of them because you can’t call them all—allday long—while the markets are moving. If you plan out a trade andcall everybody, what happens when something changes? Do you putthe client in anyway, knowing he would lose or do you make all thecalls all over again? Suppose you couldn’t reach someone and he suesyou because you “missed” the trade for him and he just assumed youwould take care of him because you “know what you are doing.” Thishappens.The bottom line is that if you try to run your business efficientlyby using all the tools that you have a right to use, the regulatorsassume that is “churning,” no matter what your intention is. Therefore,most guys just do it anyway and hope for the best. You can make$100,000 a year for years before someone says: “Hey, you can’t dothat.” Now you can afford the right attorneys. So who cares? Also,many owners simply ask the broker “Did you call your clients?”Unless the owner has brains enough to hire a “sales manager” smartenough to require the brokers to hand in the tapes of every conversation regularly, the broker just says “yes” and that’s the end of it.Often, the broker has only one tape, and he just keeps recording overthe old conversations. If the client doesn’t say something today aboutwhat was done yesterday then it is “old business.” Personally, I think
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the issue of “churning” is total B.S. The purpose of the markets is toprovide unlimited opportunity. Sometimes that means five executionsin one day, sometimes it means nothing for a week. If all those tradesare done during the last day of the month, the regulators say: “Youwere trying to pad your commissions before the end of the month.”What do you do? If I saw an opportunity, and the markets gave itto me on that particular day, now I’m “churning” instead of providing an opportunity to the client and myself. If I’m a day trader, thatmeans I’m looking for something every day. If those commissionsadd up to some number the regulators arbitrarily conclude is “churning,” then someone else decides how much opportunity my clientscan have from the unlimited opportunity the markets provide. Whydon’t they just pass some law that says, “No one can be as successfulat this as possible because we have to protect people from churning”?Regardless of what anyone tells you, many brokerage houses actually encourage churning, although they pay lip service to regulators andcustomers by saying, “We have every control in place to prevent that.”The fact is, when a broker churns, they just hope he makes enoughto pay for whatever lawsuit might come in. Now consider that mostclients are losing anyway. So the broker is doing two things with mostof his time: trying to replace the losing clients with fresh equity ANDtrying to convince the loser that he should stick around a bit longer.The average commodity broker is not able to handle both on a consistent basis to keep his book of tradable equity growing every month.This is exactly what I went through. I would raise a group of clients,put them in a trade, hold their hand as they lost, and do it all over againnext month. If I was good enough, I could make $10,000, $20,000,$30,000 (my end) each month. Then my head would explode from thepressure. I would take a break for a week or two. More often than notthis would coincide with the next “sell an up market” recommendationfrom the company. Sometimes I would come back to find the companyshut down without anyone thinking to call me or mail me my paycheck. This was often around the same time my personal income wasgone. Add to this the pressure of looking for work once or twice a year.Is it any wonder that friends or family think you are crazy? Or thatbrokers drop like flies? To this day I question the sanity of some of thewives of the brokers I worked with. Why put your family through that?
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True, there is a certain romance with “being on the edge,” the thrill ofdoing something that would turn most people into lawn furniture; butthe fact is that kind of life will kill you. I saw it happen.In August 1990 the first Persian Gulf War began, which eventually created the amazing move in the crude oil markets. At that timethe markets literally went wild with euphoria. It was something trulyamazing to witness. We were on the phone 18 hours a day raisingequity. No one had time to spend the money we were making. Therewas no end to the people willing to invest to get rich. The guy at thedesk next to me opened a $1 million account in less than two minutes on the phone, the first time he ever talked to the client. The “salesmanager” was actually charging the brokers more money for leads sothat he could pocket more for himself. The brokers, myself included,were paying it gladly. It was insane. It was without a doubt one of themost unique experiences of my whole life.One day a buddy and I went to lunch for about an hour and whenwe returned there were paramedics taking one of the brokers out ona gurney. Apparently, this broker actually had a fatal heart attack rightthere in the office and died while on the phone talking to a prospective client. The buddy I went to lunch with didn’t miss a beat and said,“Who gets his leads?” Such was the greed factor in play at that time.Where could I find time to become “expert” enough at market priceaction to make winners of my clients?Now let’s talk about traders. I know some people won’t like this,but as a group, traders are some of the least knowledgeable and leastskilled people involved in something that is considered a “professional”occupation. There is no formal process to get ready for trading. It isbasically on-the-job-training. Most pit traders net out less than $75,000a year. In other professions, such as doctor or attorney, that kind ofmoney is a given. To become a “professional” trader, you have to putup a reasonable amount of money as your starting capital, pass a testto trade on the floor, and buy a seat or find a clearing house to leaseyou a seat.1 That’s it. Most of these traders blow all their equity in ashort time and go back to being doctors and attorneys. Some tradersstart by being a floor runner, work up to clerk, and then find someone to stake their entry into the pit. This is done through the “buddysystem” on the floor and is a highly political, good ol’boy network.
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You would be amazed at how many people end up trading in thepits for no other reason than they were drinking pals with a localwho wanted to retire.2 No real training just cojones—and believe me,the cojones factor is responsible for more losing traders, financial catastrophes, and general market mayhem than you would like to believe.Consider that about half of floor traders are undercapitalized in the firstplace, and you can begin to see why trading is not an easy thing to dowell. Suppose this guy is supporting a family? What do you tell yourspouse when you blow out and you have to sell the house?For the typical, off-the-floor trader (an upstairs trader), gettingstarted is even easier. All he has to do is fill out an application with aclearing firm and give them a check. Then he simply calls the floor andgives his order to a trader in the pit who executes it for him. Upstairstraders, or people who trade their own account, are no different thanpit traders.They are all attempting to profit from price action. Most of thetime they have done nothing more than the most basic research orunderstanding of what is going on. The fact is, of these two groups oftraders plus the public client, about 80 to 90 percent close out theiraccount (or have it closed for them) at a loss. The average accountlasts about four to six months. Where does all that money go? I’ll talkmore about that later.Now in fairness to the good traders out there, and the ones whohave net winning years most of the time, I’m not trying to disparage the whole group. Some trading groups take a very professionalapproach to their market presence. Many large firms require universitydegrees, certain market knowledge, and require their traders to workunder very close scrutiny. But this approach is not as common as youmight think. My point is only to illustrate that the world of trading andthe world of brokerage are not easily integrated.To their credit, some people realize this problem is real. Some brokers never advise their clients of anything; they simply charge a fee fordoing what the client wants. Many traders do the same thing and nevertrade for themselves, they just stand in the pit and wait for someone tohand them a piece of paper and simply execute the order.I have a close friend who is always the number one or two producer in commission income to his brokerage house. He makes about
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$250K every year, year in and year out. He never went to school, neverdid anything else. He doesn’t care at all about his client’s gains or losses.He expects them all to lose and he really considers himself a “whitecollar bookie.” Over a few beers he has told me more than once hecan’t believe this business is legal. If a client happens to call a winnerfor himself, he just expects that money to be converted to more commissions over time. He is never wrong. He is truly a “broker.”As a side note, I actually worked with him side-by-side for a whilebecause I figured, since his customers were such consistent losers,I would clean up if I listened to what they did and did the exact opposite in the markets. “Fade them,” so to speak, which actually happenedfor a short time until I couldn’t stand working there from all the otherstuff that went on. To continue, I have another friend in the pits at theChicago Mercantile Exchange (CME). He trades a very complicatedstock index spread. He has made over $1 million in some years. He isa true student of himself and the markets. He would never considerlooking for a client or trading for clients.To show you how wide these two thinking patterns are, let meillustrate: Guy #2 thinks Guy #1 is sort of a commodity clown—asource of entertainment. He will roar with laughter when Guy #1 tellshim about his latest blowout and some of the things his clients will say.I remember Guy #2 asking Guy #1 what he thought of the currentprice of S&P 500 Futures. Guy #1 actually replied, “That’s the stockindex one, right?” Guy #2 calls Guy #1, “The common man’s millionaire ‘cause it’s all his money!”Remember that bridging this gap is an entire business in itself.That’s why the world of Commodity Trading Advisors (CTA)exists.3 That’s where the whole support industry of books, tapes, seminars, trading systems, and the like comes into play. These people understand that to attempt doing both is VERY DIFFICULT at best and thefailure rate is high. Even if you had unlimited capital and unlimitedaccess to knowledge as a trading advisor, a self-directed trader workingfor the public, or the public itself; based on the statistics you probablywill still be a net loser. Having learned what I have, what still amazesme is that every year the business of commodity trading gets bigger andbigger. There is always someone who fancies himself a trader, a broker,or both, and is willing to dance into a lion’s den to prove it. There is
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always someone willing to invest their money with these people. Thecommon thread behind all of this is that everyone thinks they canmake money, it is easy to do, and they already know what they need toknow; however they decided that.Very few people realize doing one orthe other is hard enough.This is what happened to me. I was told what I was told, andthrough my own ignorance accepted it. I figured I knew what I neededto know even if the company didn’t. I thought doing it all was easyenough. Where my problem developed is now very simple. It neveroccurred to me that I might be in a game whose real rules I didn’tknow. Throughout my life everything I ever attempted was met withenough success to somehow convince me that success only worked acertain way. So naturally, this business must not be any different. I wasnot equipped to see when it didn’t work that way. In fact, I was soentrenched in this thinking that I never knew to even consider looking at it any differently. I was a “commodities broker.” The markets“should work like this.” And the people in the business “should belike this.” As time went on and the real rules were in play, my naturalassumption was that something was wrong. Since I could alwayscontrol my environment before, I was sure that I could find a wayto control this one too. As the markets more and more tried to communicate to me that this game was somehow different than others,I continued to interpret that information as only a set of circumstancesthat didn’t fit with my established picture of reality. I was convincedthat the problem was an external thing and therefore subject to forcesI could exert upon it. In every other financial arena, I would worklong hours if I needed to, study what I needed to, do what I neededto, and I would make money in droves. My clients would benefit fromour effort together. It was only a matter of time. When I would dothese things as a broker/trader and get my clock cleaned the problemcouldn’t be me because I knew what worked. I have to repeat this: Itnever crossed my mind that I didn’t really know this game.By now you may begin to see how confused anyone can become.If there is nothing wrong with me, it must be bad luck, or a programmed attempt to make me suffer, or any number of things. I justwasn’t capable of seeing it any other way. Stop and add the financialpressure, or the government breathing down your back, or people you
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trusted screwing you, and you can begin to see how your mind wouldconvince you of the worst. Then drive the last nail in the coffin withthe use of alcohol and drugs. Reality takes on a completely differentand horrifying perspective.Back to 1993. On the verge of losing my sanity, I came to mysenses. Up to this point my concept of reality was based on a set ofpersonal experiences. Since everyone’s experiences are different, thenit follows that everyone’s concept of reality also must differ. This hit melike a ton of bricks. Until that point I really believed that “reality” wasbasically the same for everyone. What would lead anyone to accept this?For starters, have you ever stopped to think that you surround yourselfwith people who basically agree with you and your train of thinking?If you are a sports fan, how much time do you spend hanging out atthe local chess club? If you are a Democrat, how many Republicans doyou play chess with?At the most basic part of our thinking, we tend to define reality aswe personally choose to define it. If someone else’s reality is in conflictwith our own, we tend to think someone is “wrong” and the other is“right.” I had spent my whole life up to this point dealing with peoplewho thought like I thought. They saw business and success in a similar fashion. We all had similar results. The fact is the markets are madeup of people who all think differently for their own reasons. The onlything we have in common is that we all participate together. In thisrespect, it’s like riding the subway or standing on a street corner. Theguy next to you could just as easily be an axe murderer or the presidentof General Motors. Each has a different perspective of reality and whatis happening around him. In trading the only thing we have in common is that we are buying and selling in the same place—each of uschoosing to look at the markets in our own unique way.This was new to me. This was not the world I was used to being in.At that point my thinking practically went faster than I could handle.I had been defining myself as a successful person who was now a commodity broker; when in fact, I was a commodity broker who wasn’t asuccess. My profession began to expose me to a new reality, which inturn began to open up a completely different set of variables. It mightbe possible that all my life experience up to this point meant nothing in this new world, this new paradigm. Until that moment, I saw
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the markets and the business of trading as nothing separate or uniquefrom everything else I had ever done, only different. As I accepted thepossibility that the markets and trading might have a completely distinctive reality all its own, a flood of questions ran through my mind. Whatwould this reality consist of? How is it created? Who creates it? Howdoes it differ from what I already know? How can I understand it if Ihave no basis to compare it to?I could go on but here’s the point: What became astonishingly clearwas how absolutely narrow my personal method of defining realityreally was. There was no room in my head at that time for anything thatdidn’t immediately and neatly fit with the established set of perspectives I currently held to (the implications of this are truly staggering ifyou let yourself run through the whole gamut of possible life experiences). If the markets have a reality all their own, then the reason somany people fail is because they refuse to find out what that substancetruly is and adapt to it. Market reality must be something so completelyunpalatable or unacceptable to most people that they would rather failat trading than embrace it. Of course, that is exactly the case.The true reality of trading and the markets as a whole is somethingthat most people would rather die than accept. Market reality onlyfunctions one way, but we bring a personal definition to the table whenwe trade. We are trying to make sense of what we perceive, and theonly basis we have to do that with is our previous world and life view,perspectives, and belief structures. The end result is that we as traders“see” the market differently than everyone else, but the market itself isonly functioning one way and will never be any other way. So the truestate of trading reality is in conflict with what we personally think itis. We can choose to define it any way we want. It’s the definition thatcreates our gains or losses.If you ask me what that reality is, my answer is “absolutely nothing.” The market you trade is nothing more than a mirror. What do yousee in any mirror? That which is put in front of it. Only what you wantto see by what you put in front of it. The mirror itself is nothing. Themarket is only what you bring to it. It really is “no thing.”Before you throw this book down as being overly simplistic, esoteric, or philosophical with no trading value, I want to remind you thatthis is my personal story of my journey through the markets and what
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I came to learn. It is not a how-to book on trading. Before you throwthis out, I would encourage you to consider this basic and very deepconcept and let it roll around in your head: What is everyone else lookingat in the mirror?When I came to understand that the market’s reality is only areflection of my own, I began to consider myself a true trader. At itsmost basic level the desire for profit in any financial endeavor is basedon the ability to observe some kind of inequality somewhere and feedthat inequality with some kind of effort designed to push that inequality in your favor. We call this a profit. But what really is the market?A constant inequality that we, all of us who participate, wish to seepush in our favor. What is our effort? Executing a trade. What is ourprofit? Buying low and selling high. What is the true nature of the market’sinequality?Discovering that, my friend, is the dance, the art of trading.The price I paid for that knowledge is my unique experience and thenature of my reality. There was no other way for me to discover thatexcept the way I did. No other way was possible given the state ofmind that I had brought to the table. How could it be? Until I was ableto understand it was impossible to understand. Until all the mitigatingfactors in my life positioned me to ask myself the right questions, itwas completely impossible for me to observe my thinking and perspectives for what they were: Closed to the true nature of the reality I wasimmersed in. Please think this through: Can you see that your personalconcept of reality may not be the actual reality the markets really function under?Looking back, all the pain I endured was completely self-created,as was my ability to get through it. Your trading and your results are createdonly by you and you alone. There is nothing else involved in any trading of any kind. My understanding came once I was willing to acceptthat the entire market and all price action are a perfect reflection ofmy own thoughts. The true study of the markets is the study of yourown thoughts. That’s not to say technical or fundamental analysis of themarkets doesn’t have its place. It’s just that people who trade greatlyoverestimate their true usefulness.So, in the fall of 1993, after “ruining” my life by accepted standards,I affirmed the possibility that my view of reality was nowhere close to
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the truth that I needed to discover in order to profit from all that themarkets were capable and more than willing to pay someone. By someone, I mean anyone. No one is better equipped than anyone else is.I chose to accept that my personal choices were responsible forevery one of the agonizing disappointments, all the pain, all the losses,all the bad business partners, the bankruptcy, and all the mistakes. Itwas all the result of my personal choices—made through the lens ofmy personal perspective of reality—and nothing else. I put myself herethrough ignorance. Thank God I wasn’t dead, on drugs, or worse. Thereare worse things. That’s why people kill themselves, because from theirpoint of view, death is better than the reality they have created forthemselves.I decided to discover the truth about the markets at any cost. Whathappened was an ongoing process of self-disclosure that remains to thisday the most difficult thing I’ve ever done, but has yielded the highest rewards I could ever ask for. Without any doubt I can stake all I amor could ever hope to be on this one fact: The only way to consistent trading profits is through self-study. By that I mean real self-study.The kind that brings you face-to-face with what you don’t want tosee. The kind that confronts the deepest part of who you are or thinkyou are. The kind that causes you to change your behavior, how youspend your time, the ones you associate with; even those you love andwhy. That kind of self-study I wasn’t prepared for any more than anyone else would be. That takes guts. Courage. Blood, sweat, and tears (ifyou have any pride in yourself). I chose to go to the wall with this. Thisprocess continues every day, through every minute of every trade. Evenwhen I am not currently in a position, this process continues. Every partof my life contributes to this process. Every thought, action, motive, oractivity contributes and, at the same time, has the potential to detractfrom my results. This takes a level of commitment, not lip service. Thisis the hard edge. Dividing between the individual parts of yourself andconstantly re-integrating what you find. It’s saying goodbye to somethings and owning other things in a way that cannot be compromised.It’s lifting outside of yourself and considering what you really see. Itmeans a constant change knowing that the change is the only permanent part of you. It is the journey and not the destination. The destination is always someplace new, yet always the same: To take out money.
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When I chose to uncover what the real market realities were andthe true nature of my own personal reality, I realized it was impossiblefor me to act in the capacity of a “broker.” I could no longer continueto sell an investment to someone who knew nothing about the markets, and do it in such a way that he or she would be exposed to aneedless loss just so I could get paid. I couldn’t sell someone on heatingoil going higher if I really thought the market was more likely to movelower. If a client opened an account hoping to make a gain, I neededto be in a position to give him a fair shot. Only a true trader could dothis. I was absolutely convinced that you could profit from price action.I became a student of how, in the deepest sense, the markets actuallyworked and what created them. Only by doing so could I ever hopeto give a client the best possible opportunity for a gain. Even thoughI would continue to raise equity for the purpose of trading I could nolonger see the business of commodities as only that. As time went on,the amount of time I spent raising funds became less and less and thetime invested in understanding the real nature of price action (andmyself) became more and more.This new attitude created all kinds of conflict with brokeragehouses. They want brokers on the phone selling, not trading. Tradingis simply the messy little necessary evil that generates commissions.They view every minute you aren’t on the phone selling as “losttime.” They only tolerate the 30 seconds of each day allotted to executing trades because that is the only way to get the commissions.They want brokers to spend those 30 seconds writing a ticket for a50 lot (meaning 50 commissions) instead of a five lot. The conversationgoes something like, “Oh, you’re in? Great, how many round-turns4?That’s all? Well, get back on the phone.”This creates tremendous pressure if you are really trying to tradewell. There’s more to this next story, but let me describe how one relationship ended. Here was this owner’s reason for firing me: My commissions were so small compared to himself and others at the company.I had the smallest book of equity as well. He also had this suspicionthat I was “stealing” leads that he provided, which wasn’t true. (Whatwas I going to do with them, line my bird cage?) I had taken a smalloffice downtown to concentrate my efforts. He assumed all this wasleading up to me leaving to start my own company, and it was hisblood that was going to get me there. He figured he would beat me
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to the punch. When I asked him to look at my trading equity, my sales,and commission history from the time we began working together, herefused. I implored him to use his common sense and realize I had nointention of hurting him in any way. He absolutely refused to listen orchange his mind, but I was on to something.Here’s what he missed: I had raised only about $25,000 in new cashin 90 days (compared to what I had previously done this was peanuts).Every client of mine on the books had nice gains, after fees and commissions during that time. Every other client on the books at the samecompany was losing. The ratio of fees generated as a percent of totalequity was only average, but the average size of my positions never committed more than 30 percent of total equity on deposit. In other words,I was trading smaller but more often and realizing consistent commissions while making gains for the client. In addition, every trade was discussed with the client and the client gave permission to do each trade.I followed every NFA rule. Many at the company didn’t. No client wasever in a position to wake up one morning with all his equity gone.If this stupid @#%$ would have thought this through, hewould have realized that within six months the commission incomewould have been exponentially bigger than it was. Furthermore, tradesize would have also geometrically increased, and the clients wouldall be profitable, or at least still in the game. All this would be accomplished while taking on less risk to do it. Not to mention that thoseclients might all send referrals and continue to invest more free cash. Ifthis idiot really had thought it through, he could have had every clientunder management at the company in the same position. Instead hekilled the golden goose.In this business this happens every day. Shortsighted owners screwing themselves and everyone who trusted them because they thinkthis business is only about commissions. This is one of the realities thatI had to accept. Brokerage houses just want commissions. They don’twant you messing up the process of converting client equity into commissions as fast as possible with the ridiculous idea of trying to makemoney for your clients. To continue being a broker would only continue the problem. That’s why I chose to go completely on my own.I would become a trader.