1.85” part.
With only the last two digits below the rest of the quote, I had a hardtime telling where the currency pair was really trading.
“Notice anything different between my screen and your screen athome?”
“Yeah, like how the quotes are displayed.”
She winked at me. “Not quite. Look again. What’s the spread?”
I looked again. The EUR/USD was trading at 1.2103 bid, 1.2104 ask.The spread was just 1 pip! On my retail platform at home, the spread was 4pips on the same pair. I told her that.
“Right. That’s why most short-term bank traders think that tradingcurrency from home is a fool’s game. Because the spreads are so high. It’swhy Harvey is probably going to teach you to look at the longer termcharts.”
Harvey nodded. “Exactly.”
“But why can’t I trade short term even with a 4-pip spread? It seemsthat I can build a system to still make money.”
 
Looks Can Be Deceiving 4a
She nodded. “I’m not saying that it’s impossible. I am just saying thatthe fees would be outrageous. Let’s do an example.” She found a piece ofpaper and started doing some math. “Let’s say that you are going for 20pips on every trade, when you trade from home. And that you trade twice aday, and that you trade two hundred times per year. To make it simple.”
“All right.”
“And every time you trade, you are trading with one standard size lot.How much is that?”
“A standard lot is one hundred thousand dollars in currency.”
“Right. And that’s ten dollars every time it moves 1 pip. So how muchare you paying the dealer every time you trade?”
“Forty bucks.”
“Now multiply that times two trades every day, two hundred times peryear. That’s four hundred trades. Times forty dollars.”
“That's sixteen thousand dollars. I pay the spread on the winners andlosers. So I’m going to pay that much no matter what.”
She nodded, satisfied that I was getting the picture. “That’s yourmoney. If you reduce the spread, you make more money. Consider it an-other way: 4 pips, your spread, is 25 percent of 20 pips. If you are going for20 pips on your trades, you are losing 25 percent of your gains to thedealer. You could be getting 3 more pips on every trade if you traded here.Get it? It’s not just the dollar amounts we’re talking about. We're talkingabout losing 25 percent of your gains. If you lower the spread by just 2pips—you make 10 percent more every year.”
“I never considered any of this.”
She was happy to hear that. “I’m glad I could teach you something. Webelong to the church of frugality here at Sisler and Company. We spend ourtime not only getting the best return but also cutting costs. It’s about accu-mulation of wealth—we build it a bit at a time.”
“So how do you trade? You mentioned that you were in and out all daylong.”
“Well, Harry,” she started. “Now imagine that you have a 1-pip spreadon the EUR/USD. You already know that the pair can move up and down allday long. Or just up. Or just down.”
“Right.”
“Its average daily range is 130. This means that it is going to move thatmany pips on average. But in between, it’s going to move a bit up, a bitdown, and so forth. I just grab 1 pip at a time out of the market, all daylong.”
“How many pips can you get?”
“My daily goal is 40. I can do that three or four days every week.”
“Do you trade a standard lot?”
She laughed. “No. I trade Tens.”
 
  
 
112 ADVENTURES OF A CURRENCY TRADER
“Tens?”
“As in ten million. Ten-million-dollar positions. On the EUR, that’s onethousand dollars per pip.”
She was making forty thousand dollars a day. Two hundred thousanddollars every week. Ten million dollars a year. Holy crap.
I realized that she was glancing at her screen and setting up anothertrade, so I decided that I would give her some space. Harvey and I thankedher for her time and we left.
Out on the street below, we found some hot dogs. Harvey paid eventhough I insisted that I owed it to him.
“You've done so much already,” I protested.
“Well, you're going to pay me back,” he replied. “Don’t you worry aboutthat. You'll pay me back. Not now, but later. And we’re not going to talkabout that right now. For now, you just have to follow some simple instruc-tions, and we'll go from there.”
“Okay, I agree. But I do have some questions.”
He ordered another hot dog. He was eating like a machine. Two bites,and the next dog was gone.
Istarted: “I didn’t want to mention this upstairs, but Mindy is only mak-ing ten million dollars a year for the firm. Now I don’t want to seem unim-pressed, but when they are managing three billion dollars, doesn’t she haveto contribute more to the firm?”
“That’s a good question, Harry. And I suspect that George is going to betalking to Mindy about that very soon. She’s been there six months, and Iam sure she’s already made at least half her yearly goal, or more. Butyou're correct in thinking that it’s just not enough. When she was trading atabank on the West Coast, that amount of money was brilliant. It made hera superstar. But she is going to have to step up a notch if she wants to workwith George.”
“So why did he hire her?”
“Because she is a brilliant goal setter. She goes for 40 pips and she getsit, day in and day out. Over and over again. George likes consistency. Hewould rather have her making ten million per year almost automatically,than have some guy there that has a 50 percent chance of either making orlosing one hundred million.”
“That does make sense. Predictability in the returns.”
“And a lack of volatility in the performance. He wants to show hisclients that he can return year in and year out. Mindy’s trading style doesn’thave to change for any reason, ever. As volume and liquidity grows, shecan increase the size of her positions and even make more. At the bank,she was trading one- and five-million-dollar positions. She is already trad-ing about the most she can with the system she is using.”
 
Looks Can Be Deceiving 113
“And she is probably hoping that she can increase the size of her tradesto the point where she is returning something more substantial.”
“Right. And George will give her the chance to prove it. What’s yournext question?”
“Where were the accountants? They are managing three billion dollarsbut they don’t have any accountants. Or other staff.”
“It’s all outsourced. All the reporting, the reconciliation, all of it, hesigns off on it but it is done by a third party. He doesn’t even pay his ownbills there. They just trade. That is all they do. Nothing to put them offfocus.”
“That makes sense. Can you tell me again what they are doing with anoffice here on the border of Chinatown, with a bunch of old furniture? Iamsorry, but to me it still leaves a bad impression.”
He nodded. “I can’t disagree completely. I wouldn’t want to work there.But there is a story behind this. Let’s take a walk and look for an Italiansoda. And I will tell you the story of George Sisler.”
 
  
 
 
The Story ofGeorge Sisler
 
arvey knew his way around the SoHo/Chinatown border, and led me
through some alleys and backstreets until we emerged on Mulberry
Street, which was just about all that was left of a neighborhood thatonce had been home to tens of thousands of Italians. From Mulberry, weturned left onto Grand Street, where we found Di Palo Fine Foods. This iswhere, he said, we could find the very best soft drink in the world.
Harvey bought us a half-pound of mixed olives, some prosciutto(italian ham), and two cans of Avanciata, which he believed to bethe nectar of the gods and that was essentially a lightly sweetened or-ange soda. And yes, it was the very best soft drink in the world. As weate the olives and the ham, Harvey told me the story of George Sisler’shedge fund.
“George managed a group of traders for a major European bank about10 years ago. He had been a rising star in the commodities trading desk,and they promoted him to run a separate, outside-the-office proprietarytrading operation in New York. It was a team of currency traders, justseven or eight, and they were essentially running a little hedge fund insidethe bank, with the bank’s money. It wasn’t really a hedge fund, but it oper-ated like one. They made their own trading decisions, the traders werepaid a portion of their gains, and their entire mission was to produce spec-tacular returns on the bank’s own money.”
“How much money did they have?”
“At least five hundred million. It was a good deal of money at the timeand George was young. He knew how to trade but he really didn’t know
114
 
The Story of George Sisler 115
how to manage traders. You'll find that out in a moment. But first I want totell you about the office they had.”
“Was it a dump, just like George’s office now?” I asked.
“Definitely not. This office was the height of technology at the time.They had satellite dishes bringing in news from foreign countries. Theyhad direct data connections all over the world that were costing tens ofthousands of dollars per month. They had a famous decorator set up theoffice—it was amazing—the furniture and art in the office alone wereworth millions. They were perched in three thousand square feet near thetop of a forty-story tower in downtown Wall Street, with a floor-to-ceilingview of the Statue of Liberty.”
I could picture it in my head. This seemed the ideal hedge fund officelayout. “So they were set up with a perfect environment.”
“Perfect for a fund with a track record of 30 years, maybe. But not abunch of hotshot kids just out of Harvard. They demanded all this stuff andthey got it. And George led the charge for all of these toys—and had writ-ten into his contract that he would only work in that particular office build-ing with that specific view of Lady Liberty.”
“Why?”
“He was positive that the European bank would do it, first of all. Theywere late to the currency prop trading idea, and wanted to play catch-up.They feared they would miss out on huge profits if they delayed any longer.So they gave in. On top of all of this, they guaranteed George a half-milliondollars per year in salary and each of his traders a quarter of a million. Sothey were making giant money from the very start.”
“I can see where this is going,” I replied.
Harvey was eating olives so fast that I could hardly grab one out of theplastic dish in front of us. They were good and I determined that if I couldkeep putting olives in front of Harvey, he’d keep teaching me. And thefaster I learned, the sooner I could be trading and making money. I stillwanted to know more about the sell trade on the EUR/USD at 1.2200, es-pecially now that I’d seen the pair rising upward in George’s office. Hecontinued.
“They were doing well for the first six months. Really well. Probablyup 20 percent for the year. So good that they started to get a bit cockyabout their trading. They were all young, and although they'd had somegreat success early in their careers, they really hadn’t had enough failure toteach them to protect their gains.”
“Wouldn't they have some sort of system at a bank for making surethey couldn’t trade too much?”
“Most banks have automated systems for that now, yes. But at thattime, George’s bank had what they called a daylight limit, or a maximumdrawdown for the day. So if a trader lost, say, two hundred thousand
 
  
 
116 ADVENTURES OF A CURRENCY TRADER
dollars for the day, he’d be asked to close his open positions and shut downuntil the next day.”
“I remember Craig Taylor talking about this. How was the DaylightLimit determined?”
“Usually, as some percentage of capital lost,” he continued, looking abit sad at the empty dish in front of him. “No more olives. I think we needto correct that.” He stood up, and this time, he ordered a full pound of themand returned smiling. Then he started again: “The team bought and sold asindividuals usually. But as they worked on during their first year, theystarted to take on a lot of similar positions. Meaning, one guy would buySterling—the British Pound—then the next guy would do the same thing,on down the line, until they were all pretty deep into the same currency—against the U.S. Dollar, against the Swiss Franc, the German Mark, and soon. Long Sterling against everyone in a big way didn’t leave them muchroom for a correction.”
“But they had their risk limits.”
“Individually, yes. But remember, they were earning money—bigmoney—for just making trades. Imagine going from a base salary of sixtyor seventy thousand, to a base of four times that amount. Just for cominginto work every day, they were minting money. They were hungry formore—but their financial comfort sort of lulled them into believing thatany profit they made on top of the salary was just gravy. Something thatwas not as important to protect.”
“T get it,” I told him. “Because they were taken care of already, it didn’tseem like a big deal if they didn’t make any extra.”
“Right. That’s exactly right. I think George fell into this as well. Hebought a bigger house, enrolled his young daughter in a superexclusivenursery school that cost something like twenty thousand bucks a year. Hebought a Porsche for himself and a Mercedes for his wife. It got to thepoint that he was going to need the end-of-year bonus to make ends meet.”
“You mean, he couldn’t live off the five hundred thousand?”
“Right. He was raising his lifestyle faster than his income.”
“This doesn’t sound like it has a happy ending.”
“Really? This is the part I like the best,” he answered. “I like it becausewhat happened next drilled a lesson home for him that he never forgot.”
“And what did happen next?”
“Those long Sterling positions—they started to add onto them as thecurrency weakened. It did not have to fall very much for the trades to startlosing a lot of money. They had piled position on top of position until theywere losing twenty or thirty thousand dollars for every pip it fell againstthem.”
“Did they reach the Daylight Limit?”
 
The Story of George Sisler 117
He shook his head and frowned. “Nope. That’s what I was going to tellyou earlier. George never instituted that system with his group. He couldhave, but he didn’t. And it wasn’t imposed from the outside.”
“So they held onto the losing positions?”
“Yes. They did. They were all in this together, you see—and none ofthem wanted to blink first. Especially George. He should have shut thewhole thing down when they went to breakeven for the year—when theylost one hundred million, they were back down to the same amount theyhad started with. They had lost all the profit for the year.”
“And he didn’t shut it off?”
“No, he didn’t. He kept it open—remember, if he closed the trades hewould lock in a zero gain so far that year, and that would lock in a zerobonus. Holding on, to George, was the only way he saw that he could savethe profit.”
“But he didn’t have the profit any longer!”
“Exactly!” Harvey yelled. “Exactly, my boy! You are solidly dead onpoint. He didn’t have the darned profit any longer! He was holding onto thetrade, hoping it would come back—so that he could save something thathe had already lost. He had several options. But for now, let’s just say thathe and everyone in that office were holding onto the trade when they knewthey shouldn't.”
“Wasn't he worried about getting fired?”
“Harry, he had a lot of autonomy. The bank was headquartered inSwitzerland. He had negotiated a lot of freedom. He had locked up thefirm’s capital for a year, meaning they had an agreement that he wouldhave at least a year to produce returns and then they would review the suc-cess of the fund. And breakeven wasn’t going to get him fired. So he wasn’tworried about his job. He was seriously concerned about his pay. That be-came the first and most important priority.”
“Did the trade turn around?”
“Tt did for a little while. It came back and they were up by about 10 per-cent for the year—so they had only lost half their profits and could havestill been okay. But they all decided, under George’s lack of leadership, thatthey wanted to ride it out. That they were sure they made the right decisionand they weren’t going to back down. Truth is, most of those guys were inthe same financial position as George—they had overextended themselvesand only a bonus could get them out.”
The solution here seemed really obvious to me. “Why not close thetrades and climb back with better ones?”
“Because that would make sense. It would require a brain. Here’s thedeal, Harry. Traders who only think about the money are bound to blow upbecause they are less likely to close their losing positions. They don’t want
 
  
 
118 ADVENTURES OF A CURRENCY TRADER
to lose money. Or they feel that they can’t lose money. They have to win be-cause they need the money to pay bills, or buy new cars, or prove that theywere right. Trading attracts some pretty egotistical people. That’s true forGeorge and it’s true for you, and it’s true for most people who watch late-night television and buy trading software. They want to be right. They be-lieve they should be right. So they let their losers run.”
“T have heard the statement that traders should let their winners runand they should cut their losses short.”
Harvey winked. “Yep. That’s true. Even more true is that if you don’tcut your losers, you can’t have any winners.”
“How so?”
“Tt’s like you said, Harry,” he continued. The olives were gone but thestory continued. “Because they had tied up their capital in the losing posi-tion, they couldn’t take any more trades. So they were locked into a badspot.”
“What did they do?”
“They started to hedge the position.”
“What does that mean?”
“Using their relationships with banks, they actually traded the otherside of the position.”
“They sold Pounds?”
“Right. About one hundred points lower than they had bought it, theystarted to sell it. Meaning, with separate liquidity providers, they openedthe opposite position. This means that they were now locked into a one-hundred-point loss.”
“What good would that do?”
“First, it prevented them from having to be wrong. Closing the tradecompletely would mean they had to admit they were wrong. And theydidn’t want, above all else, to close the position and then see the trade go intheir favor. Think about it! They were afraid of losing money that theyhadn't earned! They were afraid of missing out on a move that hadn’t hap-pened and had become less and less likely. By the time they hedged the los-ing position with another set of trades, they had way overextendedthemselves on their capital, they had removed the chance of opening newtrades, and they were locked into a sure loss.”
“This sounds so unlike George.”
“Unlike the George you met today. But totally like the George youwould have met back then.”
Iscratched my head. “When did you come in?”
“Not yet. By this time, I knew about George and his positions. I washelping the trader who took the other side of his hedged positions. He wason the sales side of trading, and was in the business of providing liquidityfor funds and for some midsize manufacturing companies. I was helping
 
The Story of George Sisler 119
him learn not only how to quote Pounds but how to know when he shouldoffset the positions to reduce his risk, or to actually take the other side ofthe trade and build a position for the bank. He’s still working at that samedesk now and makes a huge amount of money.”
“Can we visit him?”
“Yes. Sure. We'll do that next week perhaps.”
“Great! I appreciate that. What happened next to George?”
“He held onto this losing position for three months. By then, threetraders had quit and he couldn’t hire more because he’d have to show themhis terrible trades. He started to get depressed. He came into the office everyday, and they were watching the same position, over and over. Looking for atime to get out of one side, and keep the other. Sterling fell, but they were ina buy anda sell at the same time, so that didn’t help. Then it rose back up, butthey didn’t know if it had bottomed out, so they stayed in. These were profes-sional traders making a lot of money, and they were basically sitting on theirrumps for months, watching something go nowhere. Can you picture that?”
“It’s hard for me. I imagined that professional traders would be, well,more professional. Or better.”
He chuckled, “Harry, that is the single greatest myth about banktraders. That they know more, or have access to special information, ormore profitable systems.” He was looking around for more food. When hedidn’t find any, he continued: “And maybe they do have access to all of thatstuff. Maybe. But they don’t have access to more discipline. And disciplineis all that matters.”
“You're saying that access to better information, or inside informationeven, doesn’t make a difference.” That didn’t make sense to me, and I toldhim so.
“Well, let’s say that George and his team of traders really had a greatsystem for getting into the Sterling. That’s why they bought it. But withouta Daylight Limit, or a cutoff point, what good is the system? What good isthe system, or the special inside information, if you don’t have the disci-pline to implement it according to the rules?”
“So you're saying this is about money management.”
“Sure! Of course! But it’s more than that. It’s about agreeing to a set ofprinciples that will guide you as a trader, and then never violating thoserules. That’s all that matters. I’ve been training traders for many, manyyears—more years than you would believe. They have all been profession-als. The one great distinction between the winners and the losers is self-discipline. That’s why George, at the end of the year, shut down the entireoperation.”
“How much did he lose?”
“They lost 27 percent of the starting capital. On December 26, Georgeclosed all the positions and waited for them to settle—it takes three
 
  
 
120 ADVENTURES OF A CURRENCY TRADER
business days. That ended the year with the loss. Then he packed up his of-fice and left.”
“Where did he go? Had he been fired?”
“No, Harry, he wasn’t fired. Not by the bank, anyway. They would havehappily let him go at least another year. But he fired himself. He had losthis confidence. He had gone from up 20 percent to down 27 percent. It wasa staggering amount of money to lose. He couldn’t stop thinking that he’dbeen looking at a profit of one hundred million dollars but then couldn’thang on to it. That he had violated his rules when he hedged the position.That he had played dead and let a losing position run for months andmonths without confronting it. These are basic principles that he hadlearned a long time before.”
“And without the discipline to implement those principles, he didn’tfeel able to trade.”
“Exactly, Harry. Perfectly right.”
“So he fired himself from trading.”
“Yep.”
“But you helped him? Youre the reason he’s trading again today?”
Harry shook his head. “I helped him, yes. But I only brought out ofGeorge what he already had inside himself. And that’s what I’m going to dowith you.”
With that, he stood up and I knew today’s instruction was over.
“Harry, do remember that George asked you to look into a way to dothe carry trade on the retail platform? That’s your homework for the nextweek. I want you to look into that. I don’t know if it is even possible.”
“What are we going to work on tomorrow? What about the buy tradeon the EUR/USD? Is there any chance that it will still happen? Do you thinkthat 1.2200 is a good entry?”
“Harry, I do think that 1.2200 is looking better and better. If you canjustify taking the trade on your own analysis, then I agree that you shouldtake it. Otherwise you should avoid it. But remember, if you take it, you aregoing to have to prove to me that you justified it in some way. And I'mgoing to be hard on you about it.”
“Tagree. And tomorrow?”
“Tomorrow I am going to Hong Kong, to celebrate the one-year an-niversary of working with a hedge fund manager. Then I am traveling tosee some prospective students until we meet again next week.”
“All right. Iam grateful for everything I’ve learned so far.”
“T know you are. But you aren’t out of the woods just yet. Rememberwhat I told you: No trading. You can only take the EUR/USD trade if youcan justify it to me.”
“Agreed.”
“Harry, remember what happened to George. Okay? You got me?”
 
The Story of George Sisler 121
“T understand.”
“You can lose a lot of money very quickly if you start screwingaround.”
“I understand that, too,” I said, laughing. “I am not going to trade. Ihave a lot to think about.”
And I meant what I said when I promised not to trade. As he walkedaway, moving down the sidewalk of Grand Street and then up Mulberry, Ihad a peaceful feeling that came from knowing that for right now, I didn’thave to trade, but instead I could work on figuring out the interest ratecarry trade, I could write down my notes about my visit to the Sisler hedgefund, and I could hold on to my trading capital until the time was right.
But I broke my promise. I did take a trade.
 
  
 
 
Back toSquare One
 
money. It was hard to argue with her about that. If I didn’t make
money, then we were going to have to dip farther and farther intosavings. We did have the money from selling off all our cool stuff and thesavings/severance, which meant we had $30,000. I had put $5,000 of thatinto my trading account. Gini didn’t mind at all, especially considering thatI was planning a trade with the supervision of a bank trader and it seemedmore reliable this time.
It shouldn’t have seemed like trading was urgently necessary, butwhen she spoke, it was impossible to remain patient. I had what might bethe chance of a lifetime for a currency trader—to follow an order and pickup on the momentum created by a major bank.
“The longer you take to start trading, the less in savings we are goingto have,” she said that evening. “And if you start making more good trades,we can keep more in savings, and maybe even have more to use for tradingdown the road.”
“That is true.” Although her words conflicted with what I had promisedHarvey, she was my wife first. I wasn’t married to Harvey. I didn’t have toput a roof over Harvey’s head. I didn’t have to buy him food or school sup-plies. So I decided that I would take a look at the charts.
The first chart I opened was the four-hour chart for the EUR/USD (seeFigure 14.1). Harvey told me that I could trade it if I could justify it, andthat’s what I intended to do. To miss out on a trade that he and HankDoorecker had planned—it was too much to resist. Perhaps his admoni-
ME: wife was excited for me, but she was anxious that I start making
122
 
Back to Square One 123
EURUSD - 240 min
 
LO, tte mho r+ bi2000
Huge Move on Friday
 
cc a a ee)
FIGURE 14.1 > Four-hour chart for the EUR/USD.
tion not to trade had been a test: to see if I could adequately justify a tradeon the EUR/USD. Just to see if I was really listening.
I saw nothing. There wasn’t anything here I could work with. Zero.What in the world were they looking at over at U.S. National Bank? Whatwas so inviting about selling the Euro? I could see that it had tanked on Fri-day after the jobs report. I could see that it had now risen back up a bit. Bigfat hairy deal! That didn’t give me any trade ideas. I couldn't justify sellingit now or at 1.2200, for that matter. What was going to happen at 1.2200?Harvey had said that bank traders didn’t necessarily have access to betterinformation. Well, apparently they did!
That’s when the phone rang. It was Craig Taylor.
“Harry, I hear you’ve met with Harvey. That's the word on the street.”
It was good to hear his voice. Not only did I need to thank him for set-ting me up with Harvey, but I needed help on this trade.
I told him how much I had learned already and how much I appreci-ated the introduction. Then I told him I was stuck. “I can’t figure out wherethey go with this trade idea,” I admitted. “Harvey told me that I could tradeit if I could justify it, and I sure do want to trade it.”
“What are you looking at?” he asked.
“The four-hour chart,” I replied. “I have been explicitly commandednot to look at short-term charts.”
“That’s good. You’re working from one of Harvey's favorite timeframes. So you've made a good start. What else do you have on the chart?”
“Nothing.”
“No indicators at all? No trendlines?”
 
  
 
124 ADVENTURES OF A CURRENCY TRADER
ladmitted that although I had read about all those things, I’d not foundthe time to implement them. “Well, Harry,” Craig began. “You first of allshouldn't start with the idea of trying to figure out what Harvey is thinking.That's not going to work. If you are going to justify this trade, you are goingto have to come up with some type of analysis of your own.”
“I have no idea where to start. I know what a trendline is, but I’m notsure what to do with them.”
“I gotta run, Harry. You can figure this out. But doing some testing andexperimenting on your own is going to make a huge difference.”
FORCING MYSELF TO DO SOME LINES
 
Isat in front of my computer screen for at least 20 minutes before makingamove. Determined to not give in, I prepared myself to sit there until I atleast drew some lines or plotted some indicators on my chart. I finally de-cided that I would at least draw a line at the entry price of 1.2200. I wouldstart there. That was my goal: the number that I wanted to justify. After Idrew the line, my chart looked like the one in Figure 14.2.
At least I had a starting point now. I could see where I was planning tobuy. Was it wrong of me to be back doing this trade? Although I was doingmy own research here,