case of the fan, he would be expecting this problem, but thatcan only mean he wanted to create a breeze. Since the purpose of abreeze is to cool the individual then the most likely reason that anyonewould be sitting at a desk, doing work, who didn’t want papers to blowaway, who was creating or expecting a breeze, is because it was toohot at the desk on which work was probably being done and the mostlikely setting was an office of some kind.Today, because most office buildings where work is being performedare climate controlled and air conditioned for the most part, the windows remain closed and a fan is not required, a paperweight would notbe a crucial component to completing a task free of interruption. Sowhy are paperweights still common on many desks when they are nolonger needed? Most paperweights are of design, construction, or assembly that offers a unique something to consider it for besides its apparentfunction. They have clocks, sayings, descriptions, metaphors, and so on,all within their construction that must make an impression of some kindbefore they are purchased because they serve no purpose by their apparent function and in fact, are completely unneeded in most office environments. No one would buy them unless they contributed in some wayto the purchaser.Therefore, that relationship must exist in the mind of the owner andnowhere else. A paperweight therefore serves to validate some componentof its owner’s thinking that is important to him or her alone. Paperweightsserve no other purpose in most cases. Do you see how conclusions thatappear random, in fact, are based on observations and critical deductions?How much more so is price action to be considered?Here are a few thoughts on using technical analysis from my pointof view. Let’s say you are looking at stochastics. Most people who usethem work in certain time frames to compile them. What are thosetime frames? Does this differ depending on the market being traded?They will then form a conclusion about what those numbers mean at
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some critical point. Then they will do something, putting themselves inplay. Where is that point?It works sort of like this: Everybody using stochastics is probablythinking this market is overbought. Therefore, if they are long, theymust start to consider liquidating; otherwise they wouldn’t be trustingstochastics in the first place. The people who want to short this marketare thinking the same thing, but from the sell side to initiate. The latebuyer “doesn’t want to miss it.” If this is actually happening, then theyare executing against each other. Therefore, O.I. (open interest) won’tmove very much because the same contract is simply being transferredto another body to hold if the old shorts aren’t getting out yet. (Onegets out, but one comes in.) That means the market must move higherbecause some of the longs will wait, but the old shorts are nervous andmust cover. (What they expected didn’t happen.) Therefore makingthe new shorts nervous, then they will cover, and the market is running out of potential shorts because they are already getting in. Thisprocess will happen until everyone quits all together and the O.I. dropsat that point. So, when the shorts bail (those that thought the marketwas overbought and got in) and the longs bail (to take their profits),the market is ready to go the other way. Now it is time to short thismarket.If you can see that this “overbought” point is also at some “resistance” number, you now have two good reasons why the market mightbe vulnerable to moving south. This is a different process than “trusting the chart” or “doing what the stochastics say to do.” Do you seethe critical distinction? Just because something says “overbought” doesnot mean it is time to sell. It might mean it is time to sell but only if themarket is running out of people who want to play and only if they aredeciding that because enough of them believe what the indicator tellsthem. This is why a market that is overbought can continue to climb,sometimes for weeks, before breaking. Maybe no one is watching thatparticular indicator except you. Sometimes the people who want toshort that market get spanked two or three times before they finallyquit. Who is that? How long have they been spanked? How manytimes will the average person trading that market, who is trying to sellit and using stochastics to tell him where, going to execute? What is hisemotional state at that time? Once it breaks, does he rush right back
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because he “knew that would happen” and he wants his money back?If he does, why would someone buy to let him in? How would youknow that is what he is doing? What are the clues this is happening?Do you see what I’m getting at? No? Good. Thank you for the newtires on my car. Wanna play again? I need new rims, too.Bernard Baruch, one of the great business minds of this century, wasan excellent trader in his own right. He never spent more than 30 minutes or so each day “analyzing” the markets he would trade. Sometimeshe did it in bed while having breakfast. If you find you are spending alot of time “analyzing” your market, be careful. It is completely possibleyou are expecting that analysis to tell you something or do somethingfor you it can’t do. Carefully review your thoughts. Listen to what theyare. You are vulnerable at that point. I look forward to enjoying yourmoney with great relish. Please, take all the time you need.For those who are not trading now, but wish to get started, I havea final summation for you. You and your trading are the same thing.What I’ve hoped to communicate here is that who you are determinesyour results. When you execute, you place your thoughts into an actionthat you believe creates a profit. It is the same for everything in yourlife. In everything you do, you have an expectation of a benefit—otherwise why do it? When you critically examine who you are, you willalways uncover how you are thinking. By knowing as much as you canabout your thinking you will discover how you make actions. If you takethe step of examining everything in your life, past, present, and future, youwill see that your thinking has played out in your actions, thereby creating the results you have (the “life” you have created for yourself). If youhope to trade for profits, there must be something behind that action thatis prompting you to pull the trigger at that precise spot. Find out whatit is. You must become a student of yourself. Forget the markets. Studyyou. When you understand yourself and how you personally create youractions, you will be able to control your executions. This means you willtrade only when you know you can profit, not because of something. Atthat point you will make 100 percent winning trades. Anyone could learnto do it.You cannot succeed at trading by “studying the markets” becauseno market moves based on what people know. Markets only move basedon what people do. They make those actions from the quality of theirthoughts. Since no one is thinking anywhere near their true potential, it
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follows that their actions will never be of any quality either. This is 80 to90 percent of the people who participate—probably you right now.You will never trade for consistent profits until you know why youdo what you do and why everyone else does what they do, because bothof you cannot be right in this game. Until you are thinking (and therefore acting) correctly against price action, you will never know whyprice action is what it is.You cannot know that until you know yourselfbetter than the other market participant knows himself. To win at trading you must know why everyone else is losing. You must know whyyou lose to understand how everyone else loses. When you know howlosing happens, then, and only then, can you execute against the loserto win. Trading is not about markets; it’s about thinking. Since most ofthe participants aren’t thinking, that is your edge. Never trade until youare there. Otherwise, I will take your money. Believe me, I am out therelooking for you and I know how you think.Lastly, I quote the good book:There is no end to the expressing of ideas. Excessive devotion to booksand the studying of opinion is tiresome and wearying to the mind.—King Solomon, the wisest man thatever lived, Ecclesiastes 12:12That’s it. See you at the dance.
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Appendix B
Insight into the Personof Trader X1
by Ghostwriter X
I’m a joker who has understood his epoch and extracted all he possibly could from the stupidity, greed, and vanity of his contemporaries.—Pablo Picasso
I
am a ghostwriter. I have been published under my own name, butI earn part of my income by ghostwriting. At this writing I am 42,married, no kids, and business takes me between Chicago and NewYork regularly. I have already written eight books, some for major publishers, and others for smaller companies. My books are everywhere, atevery bookstore, on the Internet, in mail order catalogs, in the backs of
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magazines, and, occasionally, on TV. I write for magazines you’ve seenon every newsstand. With ghostwriting, I assist authors with the completion of their manuscripts for a fee, but the credit always goes to the“author.” In some cases, very little is actually contributed by the author.2In the case of assisting Trader X with his manuscript, the relationshipwas unique. He made it very clear he expected me to ask questions tohelp him clarify his thinking, but to never add to or embellish what wediscussed or write anything on my own.Why is this unique? To put this in perspective, every author thinkshe has an idea for, or has written, the next sequel to Gone with the Wind.Every day, wannabe authors call me or send me their manuscripts fullyconvinced that the world will stop turning if people don’t drop everything they are doing to absorb their essential wisdom. At the very leastit will be at the top of the New York Times bestseller list for weeks. It isenough to make me laugh sometimes. That is why I only work withauthors I like and believe in. Authors that have guts, originality, andsomething to say. Trader X is one of the good ones. He wanted helpin communicating every part of his experience. He felt that by askingthe right questions, the “hard questions” as he put it, he would remember more details. He also felt that someone could help him choose thekinds of words and phrasing that would make this interesting readingfor everyone. He showed me two books in his library to illustrate whathe meant: A Brief History of Time by Stephen Hawking and How to DateYoung Women for Men Over 35 by R. Don Steele. Trader X felt that bothbooks took a difficult subject and communicated the essential elementsconcisely and with style. I agreed completely.Anytime I felt I could help Trader X clarify a thought, passage, orconcept, he would listen with great interest and then decide yes or no.It surprised me that he was usually easy to work with. He was confident, but never arrogant. When I mentioned to him that he didn’t needto have his ego validated, when I assumed he would be full of himself(most traders are), he said, “That’s for women to do.”Throughout the process of writing, he was concerned that themanuscript would be “too long.” When I reminded him that one mustexpect a certain length in communicating anything effectively, TraderX mentioned that he didn’t want to be rebuked like Mozart was bythe Holy Roman Emperor: “There are too many notes, Herr Mozart.”
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In the spirit of the verbal parry I shot back, “Which notes are those?”Instantly he replied, “In this case, it’s your job to find out.” It was thefirst of many times I would lose the round, but together I think wehave won the war.The result is that through the process of writing and rewritingthis book it has very little of “me” in it. The one exception is thisappendix. He agreed to let me write it the way I wanted. Trader Xfrequently asked me, “Is this what you really think? Am I really likethat?” When I reminded him that it was my point of view; not necessarily what everyone might think, he said, “Of course, stupid question.Just do what you think best.” In getting to know him, I found theconcept of writing anonymously on his part intriguing, and I decidedto do the same.I spent many hours with him, simply observing what he didthroughout his day-to-day routine. My hope was to see the end resultof where he was by virtue of where he came from. I wanted him toreveal as much as possible. He stressed that I “make sure people realizehow easy this is.” Later, I understood he was joking. I think he wantedme to remember that the facts are the facts and that to pontificate ontheir nature from a constant point of view might lead the reader tobelieve that eventually everyone could understand. Time after time hewould explain in great detail his pet peeve. To him, most people whowrite books about trading try to make it all seem ridiculously simpleto the common reader. They run around claiming that their method iseasy to use and understand, and in the end really do a disservice to theentire industry. Trader X believes that these authors offer these overlysimple solutions in hopes of encouraging the most ignorant lay personto open an account and use their approach, buy their system, subscribe totheir newsletter, and so on, and in the end waste more money and time.But Trader X did the same thing; he wasted years believing there reallywas a magical solution. “Boy, if I had a rocket launcher,” he would say,quoting Bruce Cockburn.Trader X told me about the brief period in his life when heattempted to “teach” trading. He said it was a truly frustrating experience. Unlike other guys out there, he was brutally honest with hisstudents, telling them the specific steps and actions they would have totake in order to succeed in this business. He was also blunt about the
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potential risks. He mentioned that of all his students, only two stoodout in his mind. One man decided that trading wasn’t for him. TraderX explained to me that he believed that man really understood himself.Trader X went on to explain that to discipline one’s desire for profit insuch a way as to completely stay out of the markets until one is readyis a true mark of success that can be applied to any field. Trader X alsomentioned that this student would likely know how to time his tradesby waiting for the best point to execute. He said there was anotherside of the coin too—this man tended to hesitate at the best point toexecute. Furthermore, as a “rookie” trader, this man would often missthe bulk of a market move and have a tendency for lower profits anda high degree of regret in his thinking. This would have a tendencyto come out as “rushing to the next trade,” which would then createlosses. Therefore, his results would probably have been net losses, at leastfor a period of time. For this man to realize the potential and stay outcompletely demonstrated a keen awareness of his own state of mind.“It’s probably good that he chose to stay out,” Trader X told me. “Ifhe would have committed to trading, he probably would have done itso well he would have gotten it all. There would have been none leftfor the rest of us to get.” Quite a frightening thought. Trader X believesthat student will succeed at anything he finally decides to do, but hedoesn’t believe that the man was “scared off.”The other individual he could remember from his teaching dayswas a guy he still knows well. In fact, this is someone Trader X considers one of his best friends. This man always tells the truth. “Tells it likeit is,” as Trader X likes to explain. While writing this book, Trader Xnever hid his losses or mistakes from me. During those times, he wouldcall up his friend and they would spend time talking on the phone.Frequently, his friend would help him clarify his thinking. It was fascinating to watch and be part of.After a string of losses, his friend commented, “You are an uninfected carrier of brilliant thinking.” Trader X confessed, “At the time hewas right.” Trader X also respected the fact that his friend had an unwavering commitment to learning the true nature of price action. Hereis a classic Trader X explanation about his friend: “This guy startedwith a clean sheet of paper. He threw everything he had learned up tothat point out the window. He started with one-lots. He asked himself
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the hard questions. If he had losses he always asked himself where hispersonal point of view caused him to hurt himself. I never heard himsay once that it was the market’s fault. He never blamed anyone oranything. He kept asking where the loser was and he was determinedto never be that person.” From Trader X this type of compliment isextremely rare.He summed up his “teaching” experience this way:You can’t teach trading. You can only provide a means of helping someone discover what trading really is. People I wouldattempt to teach the markets to never could grasp the conceptof being the loser. They didn’t want to accept that all these pricetics were really people’s beliefs. They all wanted to figure outwhat “the market was going to do next.” They didn’t believethat the charts or the numbers were just clues to what peoplewere thinking about. They thought that if X happened, then Ymust be next. They thought that there was some constant thatthey could find. They simply didn’t believe it was the study ofhow they personally interpreted what they saw. They refusedto accept that if they were thinking like every other loser; theywere going to be the next loser. They never could understandthat what they thought about didn’t matter. They never wouldlook inward and admit to themselves first, “I am the loser.” Itwould not fit in their head, no matter how I tried to reach intothem, that every loser is thinking about the price, not what that pricereally represents.Trading is not about the price.Trader X continued:Every one of them saw the markets as prices going up, thenprices going down. They never could grasp that people believeone thing, now they believe something else. They couldn’taccept that if what they believed was different than what wasactually the belief structure of the market, they would always bein the wrong spot. They thought trading was about buying andselling something. They would never understand that trading isreally about anticipating where you take a stand by saying toeveryone who is in the market, “I don’t think you can continue
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to believe what you believe anymore, you will have to get outabout here.” When I would explain to them or show them howthat fact was disclosed by these things (I would show them achart and the volume and open interest), they would alwayssay something like: “But such and such number was bullish/bearish.” “Such and such report is coming out Friday.” “Theindicator such and such was bullish/bearish.” “The trend issuch and such.” “This is how Ed Sekoyta trades.” “This is whatPeter Stodielmayer says.” It was always some argument that wasattempting to validate their current thinking. Worse yet, theywanted to simply add what I showed them to their currentarsenal of tools. It simply wasn’t possible to them that all thatreally didn’t matter; only what the market participant believedabout all that. Or what he had already believed about that andnow he must make a new choice. All of which means believesomething else.After I was full of information for the millionth time, Trader Xbacked off and completed his thoughts on the matter:They all thought you could figure out where “the market wouldgo next” by somehow combining and dividing all of the previous prices. When that didn’t work, but my trades in the samemarket from the same side did, they thought I had some secretI was holding out on. They would always ask, “How did youknow that would happen?” When I would tell them, “I didn’tknow. I only guessed based on what I had come to know,” theythought what I did was simply guess and therefore I really hadnothing of technical value to offer them. When I would do it overand over they concluded I was some mystic or something. It wasreally frustrating. That frustration spilled over into my trading aslosses. When I realized this was one of those constant things inthe business that would never change, I quit trying to “teach.”I was content to just take their money by outtrading them.Day after day, even while we worked on this book, Trader X wouldconsistently take money from the markets. Watching him work fascinated me. We would sit for hours in front of the trading screen and
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discuss everything from philosophy to Shakespeare, from the spaceprogram and the design of aircraft to alchemical history, and the trendsin social thought from medieval times to the present, and he would stillpull money out of the markets. He would be watching his computerscreen and explain to me precisely what was happening.Here is an example of one of his typical explanations: “Now watchthis, that is the last bunch of losers getting out. There they are, that’stheir stops liquidating with the loss. Right now they are all sittingin their offices saying ‘I knew I should have waited.’ They can’t standthat so they will try to get it back. That means the angry ones willdo the same trade from the same side in about an hour or so, especially if prices move back to their original entry.” He would continue,“Okay, the winners are probably thinking I have to do something righthere, they probably will move their stops up. The pit wants those stops.When they force the market into those stops, the losers will jump onthose prices. Their thinking is probably, ‘I’m gonna miss this trade ifI don’t,’ but the pit needs their blood to get out. Once that happensthe market will come right back. This is free money, I’m getting in.”Since I’m not a trader, most of what he said wouldn’t make any senseto me. He told me, “Those that trade will understand.” Then he added,“Most of them will think I’m guessing.”His daily trading routine has absolutely no set pattern. Sometimeshe won’t go into the office for days. If the currency he was tradingwould make some huge move and he missed it, Trader X would lookme in the eyes and say in the most deadpan manner, “You’re right. Themarket has completely run out of opportunities.” Sometimes he wouldcome in, sit for a few minutes, execute a trade, liquidate, and then leave.Sometimes that whole process would be less than 20 minutes. Stillother times he would work straight for 24 hours trading up a storm.I once made the mistake of asking him “How did you know thatwould happen?” He looked at me truly bewildered and finally said, “Ettu, Brute?”Trader X then offered this explanation: “Look, I have trained myselfto observe what is happening. When I turned the screen on and sawthat it was all in play I simply took the money that was there to get. Ifthe whole process would have took 48 hours that’s how long I wouldhave been here.”
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I first met the author at a downtown trader hangout called theCactus Cantina. It’s on Wells at Van Buren, in Chicago. It was a Fridayand the place was packed. I assumed that everyone in the business oftrading was there. Not having been intimately exposed to the marketsbefore, I found the conversations going on around us fascinating. Itwas all about what the bond markets were doing, why soybeans wereclimbing, who just got his “dick slammed in the drawer” trading theS&P 500 Index, and so on. A mutual friend who is not in involved intrading introduced Trader X to me. When I asked our mutual friendhow he had become acquainted with Trader X, he replied, “We metat a night club. He was on a date with a female body builder.” I soondiscovered that aside from the markets, Trader X is almost exclusivelyfocused on women. Specifically, Trader X is focused on women and“walking the edge” as he calls it. Simply put, he runs on two tracks,women and trading.On our first meeting we talked for a moment or two, exchangingthe basic pleasantries. Initially he was very guarded. Later he told methat he had to assume I would be one of those individuals who had noclue. Once he understood I was completely open to him and his ideas,Trader X let his guard down, but never completely. As the conversationslowed I began to ask him about the trading business. “What do youwant to know?” he asked. “Well, my first question is what do all thesepeople do?” His immediate answer was, “They are attempting to profitfrom price action.” Then he added, “But most of them don’t knowhow to do that very well, if at all.” I replied, “They seem to be discussing things with some authority.” Trader X quickly said, “Of course theyare,” and said nothing more. I asked if it was okay to start taking notes.“I hope you don’t get writer’s cramp,” he said. “But let’s not do thatnow.You may not want the job anyway.”His reply intrigued me more. I knew right then, I would be ghostwriting this book.That was the beginning of our relationship. As we talked that night,Trader X struck me as someone who knew exactly what he was capable of doing. I didn’t know it at the time, but I was to discover thatstatistically he is among the top in his field. He could be consideredone of the best traders in the world. After getting to see both his lifeand his business, I found out that his results are impressive to say the
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least. Almost everyone I know would have quit and done somethingelse long before succeeding at his level in the trading business. Usingthe documentation he was willing to show me, and after doing independent research on my own to verify what he told me, I learnedthat he is able to outperform approximately 93 percent of those whocompete in the markets.After seeing his point of view and understanding what he has personally experienced, I can understand why he would choose to do itanother way; that is, to never put himself in a position of working withpeople who would attempt to control his activity, process, or the wayhe trades. Due to his willingness to take adversity head on, and thehigh demands he places on those he chooses to work with, Trader Xappears enigmatic.When we went to work on his manuscript, I suggested that heinclude more detailed information on his trade results. He had some veryinsightful comments on my recommendation. “First,” he said, “The worldis full of skeptics. Most people won’t believe the numbers. The resultswill always be ‘too high’ or ‘too low’ to someone. People in this businessnever believe you are doing as well as you claim anyway. Second, I’mnot doing this to sell books, trading systems, or expect people to believewhat I know is the gospel. Third, every time I start talking my gainsI start losing.” Enough said. I had the opportunity to observe him tradeand I can tell you he knows exactly what he is doing.Trader X is a full-time trader, working from a small office in thefinancial district of downtown Chicago. At the time of this writing, heis trading in the cash currency markets. He consistently told me, however, that it didn’t matter which market you traded in. They were allfundamentally the same. The basic skills can be applied to any market.The chapter on regulation (Chapter 6, The Trading Police) will shedsome light on why he trades almost exclusively in FOREX today. Hetrades completely alone without a staff of any kind. At the time of thisrepublication, Trader X does not trade for a client base anymore, preferring instead to provide market analysis to those individuals whosubscribe to his commentary. Currently, he is not registered as a SeriesIII commodities broker at any firm; although those who know himare constantly asking him to work with them through their firms. Hebelieves people want him to work with them because they think he has
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some kind of “secret” about the markets. He also believes that they toosomehow wish to have access to the “secret.” Trader X’s eloquent replyto all this was, “In the land of the blind, the one-eyed man is king.”As I began assisting him in completing this book, Trader X insistedthat I spend time observing his personal life and his relationships. Hebelieves everything in his world either helps or hinders his trading.Trader X is single and living alone. He is 47 years old at the time of thisrepublication. He has never married and has no interest in marriage.When I asked him why, he said, “I’ve never met a woman worthy ofmy affection. Bill Gates will be selling apples on a street corner beforethat happens.” Quite a pithy answer. He dates several different womenand is always in the company of females. I’ve personally had the pleasure to meet many of the women he dates, and they all were exceptionally unique combinations of intellect and beauty. Most women areattracted to his mind and the way he views life. He is not particularlyattractive to look at, but that doesn’t matter to the women who findhim interesting. In fact, I’ve seen him talk to a woman in a bar for afew moments and then proceed to have her on his arm the rest of thenight. He has no children (to the best of his knowledge), but as he says,“It’s not from lack of effort.” In one respect he is completely uniquewith regards to women. Every woman he is dating knows about all theothers. He never hides anything. All of the women he dates know theywill always be competing for his attention. For some reason, they allaccept this situation. I guess they see it as a personal challenge.Trader X says that he has never been in love. To him this isn’t aproblem, but he is sure it will happen when the timing is right. TraderX is not looking for love, but he believes it is looking for him. The“love relationships” all his friends indulge in are great entertainmentfor Trader X. He literally howls with laughter when one of his friendsstarts or ends a relationship with someone else he knows. He findsall the fights, disagreements, and power struggles to be one predictable mess. Trader X always asks his friends to explain their reasons forbonding in the first place. “Watch the fireworks with those two,” he’llsay, while getting a personal chuckle from the frustrations of others.“Neither one of them knows what they are doing.”Women who date men for their money are a constant source ofhumor to him. Trader X loves to watch the dysfunctional behavior both
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parties exhibit. It still amazes him that men are that stupid and thatwomen think they can hide their true motive. Sometimes he makes betson who will leave first or cheat first. Sometimes the bet is how long itwill take to reach the guy’s credit limit. He really does view relationships and women as a kind of tinker toy set. His point of view can bestbe summed up by his view on monogamy, or as he calls it, “monotony.”“Fifty-two percent of all marriages end in divorce. Of the other 48percent, statistics show half of these are unhappy, but they stay togetherfor some reason. In addition, statistics also