, if you’re working with Harvey, you’re going to have thatmuch. Eventually. Don’t rush it. Let it come to you. And I’m sure thatif you think about it long enough, you’ll find a way to do a trade likethis.  It’s  got  to  be  possible  in  the  retail  forex  world,  by  playing  theswap rates off each other or something. In fact, we should talk aboutthat  again.  Right  now  I  have  to  go,  but  tell  Harvey—he’s  over  theretalking  to  Mindy  Swanson—that  you  should  stop  by  in  a  couple  ofweeks and that you’re going to tell me about how to do the carry tradeon a retail platform.
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ME: But—GEORGE: I gotta take this call.
And with that, the discussion was over. George had a phone appoint-ment that he had to take, and he just stood up and gripped my hand like hewas going to fling me out the window.
MINDY TEACHES ME HER ONE-PIP WAYS
Harvey had been chatting it up with a young woman on the other side ofthe room, and he called me over.
“Harry, this is Mindy. She only trades currency.”“Great! I was just talking to George about the carry trade.”Mindy smiled. “That’s long term. I’m all short term. I am in and out all
day long.”
“In what way?” I asked.“Look at my screen,” she said, pointing to the quotes in front of her.She had at least seven currency pairs open at once, and they were flashingquickly  enough  to  make  it  very  confusing  if  I  stared  at  it  for  long.  I  wasused to seeing the currency pairs quoted like this:
1.8500/1.8504
But  on  her  screen,  the  quotes  appeared  with  just  the  last  two  digits,
leaving out the “1.85” part.
With only the last two digits below the rest of the quote, I had a hard
time telling where the currency pair was really trading.
“Notice  anything  different  between  my  screen  and  your  screen  at
home?”
“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 seems
that I can build a system to still make money.”
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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 much
are you paying the dealer every time you trade?”
“Forty bucks.”“Now multiply that times two trades every day, two hundred times per
year. That’s four hundred trades. Times forty dollars.”
“That’s sixteen thousand dollars. I pay the spread on the winners and
losers. 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 day
long.”
“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.”
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“Tens?”“As in ten million. Ten-million-dollar positions. On the EUR, that’s one
thousand dollars per pip.”
She was making forty thousand dollars a day. Two hundred thousand
dollars 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 even
though 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.
I started: “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 ata bank 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.”
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“And she is probably hoping that she can increase the size of her trades
to the point where she is returning something more substantial.”
“Right.  And  George  will  give  her  the  chance  to  prove  it.  What’s  your
next question?”
“Where were the accountants? They are managing three billion dollars
but 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? I amsorry, 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.”
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CHAPTER  13
The Story ofGeorge Sisler
Harvey knew his way around the SoHo/Chinatown border, and led me
through some alleys and backstreets until we emerged on MulberryStreet, 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  Aranciata, 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
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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 office
layout. “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  sure
they 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
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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  Daylight
Limit 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.”
“I get it,” I told him. “Because they were taken care of already, it didn’t
seem 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 because
what 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?”
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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?”“It 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  the
trades 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
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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.”
“I have heard the statement that traders should let their winners run
and they should cut their losses short.”
Harvey winked. “Yep. That’s true. Even more true is that if you don’t
cut your losers, you can’t have any winners.”
“How so?”“It’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  other
side 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  you
would have met back then.”
I scratched 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
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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 and a 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
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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’t
feel able to trade.”
“Exactly, Harry. Perfectly right.”“So he fired himself from trading.”“Yep.”“But you helped him? You’re 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.”“I agree. 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. I am grateful for everything I’ve learned so far.”“I 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.”“