circle of the tradeRecord keepingIdentification of opportunity to profit• Becoming a TraderProper executionMoney managementPhysical health
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• Use of technical analysis and the theory of time compression• Conclusion• Printed materialThe audio package includes a trade syllabus, illustrations, note cards,and a booklet of thoughts by Mr. Jankovsky as an additionalsupplement.Full details including availability and current pricing can be found onMr. Jankovsky’s web site at www.myforexbriefings.com. Additionallyon the web site are complete details of his twice-daily live internetFOREX broadcasts, special education and training programs, archivesof his past content, schedules of his personal appearances and speakingengagements. Some content is free for the asking and some requires membership to the web site. Trial memberships are available and depending onyour trading background you may qualify for a discounted full membership. Complete contact information for Mr. Jankovsky is also listed on thesite.You can also contact him through the following methods.E-mail: cfginquiry@hotmail.comSkype: TheLionOnlineYahoo IM: TheLion_Chicago
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PostscriptHe who can see three days ahead will be rich for three thousand years.—Japanese proverb
I
originally wrote this postscript for the second printing of Dancingwith Lions, that is, the first edition. I have updated my thoughts hereand removed the outdated. Now that John Wiley & Sons is thepublisher, some of what was first written here is no longer applicable.There are some things I left in because I feel they help keep continuitywith the original point of view that I offered as Trader X. I no longerdeal with the same people whom I did when I first wrote this. For thatreason, the risks that being anonymous helped me to avoid are no longerthere. I do my own thing my way and I don’t fear repercussions now.This postscript is intended to offer a timelier look into the changes inthe industry and with me. I think biographical information needs to beupdated until the person dies. We all should be growing and evolvingand for better or worse; it is what it is. I sincerely hope that you see thatthe markets and trading are part of that evolutionary process for yourselfas well.If you ever come across a copy of the original DWL, you wouldnotice a few errors and omissions. Because the first publisher chose to
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produce a second printing, I asked if it would be okay if the errorsand omissions were corrected before we went to press the second time.In the interest of producing a quality product as well as an accurateone, the publisher agreed. I wanted to add this postscript on my ownbecause, in the years since I wrote this, some things have changed forme that I thought a new reader might benefit from—also a confession.First, there were two deliberate misstatements of material fact thatI included in the first printing. I did this for my own edification, as anexperiment. I hope the reader doesn’t take offense at this, but I thinkit sheds light on the true state of mind for most traders. In Chapter 3I made reference to a certain renaissance mathematician. In AppendixA I offered a quote from Shakespeare. In all the copies of DWL thatwere sold or given away for review, nobody (not one!) brought it to theattention of the publisher (or me) that both the spelling of the name“Fibonacci” and the century of his influence were inaccurate; or thequote from Julius Caesar referred to a character from Hamlet. As I mentioned before, I have never found anyone connected to the markets thathas done any of their own research into the person of Fibonacci; letalone understand what he was all about or what he was looking for.Fibonacci had little interest in markets or commerce except for the “science” of alchemy, which he hoped to exploit, literally, to make goldfrom lead. I thought it would prove my point quite nicely that mosttraders are not investigating anything about the true nature of technicalanalysis if I put right in front of them so obvious an error. Fibonacci retracement is accepted as a legitimate method of predicting price movement.Fibonacci had no intention of his observations ever being applied tomarkets or pricing. He was about uncovering the grand design and harmony between nature and mathematics. In fact, fractals are part of hislegacy. But in his time, money was still an unsophisticated concept. Theworld was only beginning to experience the first real banking revolution, whose most notable purveyor was the Medici family of Florence,Italy; which to this day has an influence.Fibonacci would say: “You missed the point.”The correct quote from Julius Caesar is “The fault, dear Brutus, is notin our stars, but in ourselves, that we are underlings.” I had replaced Brutuswith dear Horatio, the friend of Hamlet. The fact that the average person who considers himself educated has never read Shakespeare with any
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critical consideration is an indication of the true state of ignorance mostpeople operate under. I don’t mean to imply that all traders are ignoramuses or that all people with formal educations are morons. Certainly,I did not mean to suggest that someone who has read Shakespeare casually is stupid—if anything I would hope a casual reader would spendmore time with him. I think my point is simply to note that in thecourse of publishing something for public consumption, nobody hadthe presence of mind to “get the facts straight” before printing. Howmuch of what you and I consume as conjecture or opinion is accepted asfact, simply because somebody somewhere “says so”? How much of thatkind of thinking goes on in the markets day-to-day? How much do youdo yourself? It also goes to show you the nature of how “experts” areoften self-created because most traders accept the point of view: “If soand so said it, then it must be true.” People buy the “experts” books andapply their techniques without question. Until they lose. If you are goingto trade, then check your facts. Most certainly, check out how muchopinion you are willing to swallow.Also, my apologies to Mr. Leo Melamed, his name was spelledincorrectly. That one wasn’t intentional. All these errors have been corrected before we went to press with this printing. Additionally, I haven’tput any more in (to the best of my research beforehand). As a side note,my sincere thanks to the trader who sent me a copy of Mr. Melamed’ssci-fi book The Tenth Planet. I’ve been trying to find a copy for years.Whoever sent it must have thought very carefully because it was autographed by Mr. Melamed himself. Look me up, I owe you a Heineken.Before we run out of paper, I wanted to spend a minute or twosharing some additional insights with you. At this point in history, theworldwide economic situation provides some astounding opportunitiesto build wealth. I want you to remember that what is happening now isfundamentally no different than any other time in history; just uniqueto the forces that brought us here. If you look at the number of automobile companies in existence prior to World War I and the numberthat control the market today, it is very similar to the number of .comsthat were publicly traded only a few years ago and the number thatwill be here tomorrow. Every industry has a period of development,growth, fallout, and consolidation. The “new” industries or economicchanges are not new, only different. Remember too that knowledge is
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increasing at a phenomenal rate. It has been conservatively estimatedthat it has taken almost 300,000 years of human history to compile oneexobyte of information. It will take only until 2003 to compile anothertwo. Now at 2008, with quantum computers just around the corner,the information we routinely take for granted as “normal” will nowbecome “useless” because it is so common. We are living in a time ofinformation overload.But it is important to remember something. That information isstill used by people who have not changed one cipher. Because humanbeings still operate on a fixed system of information processing, evaluation, and action, the world today offers more opportunity than everwhen you understand how people form their conclusions. The basicstructure that creates the markets has never changed, only the information that is valued by traders to create their urge to action resulting inan execution. Focus your energy on discovering not only how tradersthink but also on what they value. Today, there is a prevailing undercurrent of thought that says: “Information is the key to uncovering marketprice action.” I postulate that this information overload will create asense of powerlessness and confusion in the mind of most traders. Theywill be driven to a state of inaction and overload due to the fact thatthey cannot process everything there is now to consider before making atrade. They will then subjugate themselves to something that can compile this huge amount of information they believe they cannot assimilate for themselves. That would be a computer.I believe the end result will manifest itself as more and more trustin computer-generated trading systems. The use of neural-net software,artificial intelligence, matrix nodes, and so on will be given the “carteblanche” to execute transactions. The final authority to expose a bank,brokerage house, hedge fund, or even a government to market risk willbe abdicated to a “black box” sitting somewhere on an executive’s desk.Why is this important? Because the box is only as good as the programmingthat runs on it. The box will never be better than the programmer whoprogrammed it. Who is that? What market assumptions has he made?What is the presumption the system operates from? What hypothesis doesthe system make and where is that incompatible with human factors?The reason I feel this is the best thing ever for traders is simple.Once the box “goes down,” or interprets the market in a way that
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“doesn’t make sense,” or says “stand aside” when the market is trending likea ski slope, someone with little or no market experience will be forcedto panic or “change the plan.” When that happens, you will have peopleexecuting trades (at considerable size) for reasons that have nothing todo with the needs of the market. Sometime, somewhere, there is goingto be a Bill Gates wannabe who is more afraid of losing his job thanknowing how to liquidate a loser. Someone will “hope it comes back”by the time their bank opens in Asia. Someone will add to a loser “justuntil the system is back on-line and tells me what to do.” The seeds ofthis are already in place.Witness the predictors from New Mexico—computerized buy/sellprograms on Wall Street, online trading with “full analysis” at no additional charge. We, as a group, are willing to trust our financial healthto systems that never can take into account any specific market event andthe choices made to liquidate. They are all models that work on averages,that compile information over years. Any one event is the anomaly. As anytrader knows, it’s the anomaly (read: the unexpected) that throws allbets into a cocked hat. When people panic, they do not act rationallyand all trading systems (no matter how complex) can never account forirrational behavior. They cannot predict it, nor can they time it, nor canthey explain it.The staggering thing is the amount of market force that can berealized by a computer when it manages several billion dollars. Are youwilling to let someone bet your retirement fund on a machine thatwasn’t even invented 40 years ago? The basics of economic thoughtand monetary systems have evolved over thousands of years. The lessons of manias, panics, and busts are ignored by all these computerizedsystems because none of these systems are sophisticated enough to consider how crowds actually behave. A market is a crowd driven by greed,fear, and hope. No machine can account for the human element andwhen you let a machine swing a billion-dollar trading line, you leavethe human in a position of fear like the world has never known. “Whatif the computer is wrong?” What irrational behavior will develop whena billion-dollar hedge fund computer says “liquidate” into a marketbreak when the trader’s “gut” says: “Hold on until the close”? Whatif the trader overrides the system and has to answer to the regulators,shareholders, board members, and the like if he or sheis wrong? What if
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the computer is wrong? Who is responsible to make the excuses to the investors?Who decides to liquidate or initiate?I’ll tell you who: Someone who was watching television six hoursa day when he was still in high school, someone who was in gradeschool on October 19, 1987, someone who still plays Zelda or Diablo IIwhen he is home from running simulations at Merrill-Lynch, someonewhose father is a big client at Prudential, who graduated cum laudefrom Harvard Business School without ever trading a single share ofstock and then was hired to run a hedge fund. Every one of these people are people I have met and watched work. Every one of them isusing a computer simulation created for the markets at considerablecost. None of them have ever stood in a pit. None of them have everseen a bear market.None of them have even gone without a meal even once. None ofthem will ever be able to survive even one day of “unexpected” priceaction. None of them can answer the question “What if . . .?”What am I saying? We are all headed for a financial apocalypse? No,not that at all. I’m saying that the issue of trusting technical analysis andcomputers has reached a level that makes understanding the humanelement more important than ever, due to the size of the money andthe computing power. All this money ultimately controlled by an individual who trusts a massive software program. What is the quality of thesoftware? How well does this guy trust it? At what point will the individual say: “No, the software is wrong at this point. I’m going to do. . . .”In the final analysis, the software is only as good as the person whotrusts it and believes it will generate consistent profit. The need for critical deduction, intuition, and discipline has been engineered out. Thepundits feel that is a benefit. The fact is any seasoned and net-profitabletrader will tell you the human element is by far the most critical. Thedifference is similar to the general who has fought for his life in combat a dozen times, and a 2nd lieutenant newly graduated from WestPoint. Who do you want running the show? Who would you rathertrust with your life if it were you or them?The trader’s trust and belief in the system still casts the final die.When he bails on the system, he bails on the market. I think theissue of understanding the proper place to buy or sell in any marketwill evolve into understanding how people come to trust computer
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software. Perhaps the length of time it has been used will play a roll.If you discover that a certain market participant has just invested in anew piece of software, perhaps he will pitch it in 90 days if it has beenlosing. Maybe this will help uncover where he is executing. Watch whobuys it next. Perhaps a bank has just spent several hundred million onan ownership position with a “state-of-the-art” software company todevelop a proprietary chaos-theory trading system. Perhaps they publish their financial position. Perhaps you see they are holding large longpositions in the Euro year to year just prior to this investment. Perhapsthey are looking for a new system to recoup their losses in Euro lastyear. Perhaps the system is supposed to give them a cost-effective wayto creatively finance their losses. Notice if this particular software company has had several banks use their service, all with similar results overtime. Fade the stock of the next bank that buys their “improved” product. Great short potential there, I think.I suppose I could go on for hours. I simply want the reader to consider that the amount of trust placed in artificial trading approachesmerely increases the potential for failure geometrically. Sooner or laterwe will all get the wake up call. It doesn’t matter who or when. It ismy sincere hope that you as a trader will come to understand that therenever has been, nor will there ever be, a magic bullet. By placing thefinal and complete trust in yourself first, you can uncover how to exploitthose who cannot. The world is your oyster.I hope you have enjoyed reading. Thanks again.Jason Alan JankovskyFormerly “Trader X”Chicago, IllinoisSpring 2008P.P.S. One last thing, I was surprised to learn that another authorhas used the pseudonym “Trader X” and also publishes in the trading arena. There is no connection of any kind between myself and thisother Trader X. As far as I can tell, we both came up with the samepseudonym while working independently. I hope to avoid any confusion due to content. Additionally, you cannot copyright a nom de plume.
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Notes
Foreword1. Trader X was my pseudonym. Obviously I am no longer anonymous. Theforward was originally written by Ghostwriter X and most of what he contributed to the book is left as it was originally written. Please see the Read MeFirst for more details on the differences between the two published books.2. I no longer trade for customers, although, at the time this was written, it wasa serious concern for me. I no longer have any conflicting relationships thatmight expose me to this risk (to the best of my knowledge), but I wanted tokeep this in.3. Ghostwriter X is a real person who assisted me in completing the originalmanuscript. He wishes to remain anonymous.Chapter 1: The Early Years1. The sales manager of most retail commodity brokerage houses is usually someone personally related to, personal friends with, or some other version ofbeing “buddy-buddy” with the owner of the place. This includes people whoowe the company money and are working it off (including debits, lawsuits,advances against commissions that were never earned, or drug problems),someone sleeping with the owner (male or female), someone the owner owesa favor to, or any number of people that have a job but are not qualified todo it or have no idea how to do it. At one company, the owner’s ex-wife(who was sleeping with the top broker there) demanded a job or she woulddisclose the owner’s affair with the wife of another owner. He made her“sales manager” with something like $60,000 base salary. After three monthsof total insanity trying to get stuff done, he finally fired her; partly becausethe relationship between he and the wife of the other owner was over and he
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actually had moved to another city to start a “branch office” for the company.You wouldn’t believe what I’ve seen. . . .2. Private space flight remains in its infancy. Virgin Galactic (Richard Bransonand Scaled Composites) most likely will be the first to offer “pay to fly” services that might be considered within reach of the average individual. Thereare many other companies involved and it is only a matter of time beforespaceflight is as common as intercontinental flight. I’m looking forward tofinally flying.3. One-lots is market slang for the position size of one contract. If you are a onelot trader, you are as small as you can get and still be in the game. Some peoplewho trade stay at this size for the entire life of their account, partly becausethey can’t afford to do any more size and because of money managementand risk control. A one-lot trader is never taken seriously by anyone becausehe (or she) is only going to be around long enough for someone else to takehis money anyway. Most traders will start as one-lot traders and work up tolarger size; the theory is “if you can do it with one contract, you can do itwith a hundred contracts.” This is partly true, but the fact is since most people don’t know what they are doing, a one-lot trader will probably never getany bigger, so he becomes like the flea on the lion’s back. He’s irritating, buthe moves around a lot and sooner or later he’ll go somewhere else—or he’scrushed anyway.4. Gordon Gecko was the name of the antagonist character in the movie WallStreet, played by Michael Douglas, Gecko was the perfect capitalist seeking only his own best interest. He is most remembered for saying, “Greed isgood.” The movie was released in 1987 and remains a favorite of market participants. I like to think of myself as a Gordon Gecko with a soul.Chapter 2: The Day I Bought the Low1. A seat is the term for an exchange membership. There are many differentkinds of seats available at all the various exchanges. A seat gives you the ability to trade directly in the pits, or now with the electronic systems, the abilityto clear transactions as a market maker directly with the clearing corporation.2. Local is market slang for an independent pit trader who trades only for himself, has no other clients, and lives in the area. Locals are an important partof the liquidity in the markets. Most locals are people whose father was atrader and the family owns the seat at the exchange, was personal friendswith someone who owns a seat, or is someone who has enough cash to buyor lease a seat. Locals are often the stuff of legends. Tom Baldwin, Charlie D.,and Richard Dennis were all locals. Read Connie Brucks The Predator’s Ball:The Inside Story of Drexel Burnham and the Rise of the Junk Bond Raiders (1989)if you want to see how these guys think. Talk about the razor’s edge.
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3. A commodity trading advisor is usually someone (or a team of two or three traders) who has little or no experience in the futures or options markets, but hasdeveloped some kind of “system” that they believe is a unique and profitable method to execute trades with. In many cases, these people have produced a hypothetical track record of trades this system would have done inthe markets, but in reality those trades were never done because the CTAhas no investment capital under management yet. The trade approach is presented to you (the potential investor) with the intention of demonstratingthat “what we do works and you can make money” or “our computer software or proprietary methodology has uncovered a special relationship that weuse on your behalf ” or some equally assumptive position that is predicated ona what-if about the past market price action that every one of these CTAsbelieve will be easily duplicated from here forward. If the system works for ashort time with what little money the CTA has managed to find, the marketing people pull out the stops. Within a short time the CTA has all kinds ofmoney available; but now the quality of the market has changed to somethingthe system doesn’t work well with. By that I mean the system is a trend follower or something, but the market has gone into an extended phase of consolidation between two price areas (in other words it’s not trending anymore).The system gets chopped to pieces looking for the resumption of trend. TheCTA now proceeds to lose most or all of his equity in a short time. Look upa few copies of Managed Account Reports to see how fast these guys come andgo. Many of them have closed shop on one group of investors, massaged theirsoftware/system a bit, reformulate what they have learned, rename what theydo, and start all over again next year with a new group of customers. All thesepeople take fees regardless if the system is working, and if it does work, theytake a percentage of gains too. You as an investor have less than a 15 percentchance of a 10 percent gain in one year. Additionally, look at the percentageof these CTAs who are losing in less than a year. Explain to me how 80 to90 percent of these people can have drawdowns at almost any time, a newgroup of hundreds of them show up to the markets each year, and there arestill thousands of investors with millions of dollars willing to get their buttskicked so hard it changes their last name? God I love this business!4. Round-turn is market slang for a buy and a sell that completes the process ofgetting into and then getting out of any market being traded. A round-turn isassumed to mean one contract traded. So if you have done a hundred roundturns, that means a total of 100 contracts today; which might mean you did10 separate 10-lot trades—or 100-lot trade. Or some kind of combinationbetween number of executions, how large they were individually, and whatthey all added up to. If you have done a round-turn that also means you werein and out of the market and you don’t have any other positions currentlyopen—unless you say something like “I did 50 round-turns and I’m holding10 bonds long overnight.” The point is, that anyone who hears how many
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notesround-turns you have done today can simply multiply that number by yourshare of the commissions and know how much money you made today. Youshould hear what this sounds like at the bar. If all the round-turns I hear discussed actually happened, then apparently I drink dollar drafts with guys bigger than Neiman-Marcus.
Chapter 3: Technical Analysis1. Romper Room was a popular children’s television show from the early 1950s tothe mid-1990s with various hostesses and syndications, including the broadcast from Chicago during the 1960s. The show featured “Mr. Do Bee” and“Mr. Don’t Bee” character, a bumblebee who attempted to teach children thedifference between good and bad behaviors in the classroom. Most peoplethat I know from the markets lean more toward being “Mr. Don’t Bees.”2. Philosopher’s stone was a term used by people who practiced alchemy. Duringthe time in history when alchemy was accepted as a legitimate science, thosewho practiced it had a problem: No one had ever actually transmuted someelement into something else. No matter what they did no one was ever ableto turn lead into gold no matter what they tried. The assumption then developed that there was some necessary ingredient that was required to completethe process. I guess no one thought to suggest “maybe this isn’t possible.”Anyway, at the time of this belief, religious fervor was at it’s height in medieval Europe. The point of view of people practicing the science of alchemysort of combined the inner spiritual workings of man with the science itselfproducing a hybrid belief structure somewhere along the lines of “Only aman pure in heart could ever learn the secrets of God Himself.” Apparentlyeveryone involved in this science came to conclude that what was missingwas something God himself had “hidden” in the earth somehow and it wasthe “philosopher” or the man concerned with God’s own character, whowould be the man to find it. So the “Philosopher’s stone” became the objectof almost every noble person’s search. With it he could finally complete thealchemical process and learn how to make gold just like God could. Nobodystopped to think that this whole concept was founded on the greed instinctin the first place. What I found amazing when I studied alchemy is how manypeople did things like imprisoned chemists who were working on it “untilthey solved the problem” (many died there), fought wars over land that wassupposed to have the philosopher’s stone in it (guess which conflict that onewas), promised they could do it by prayer alone (and were imprisoned inchurches), or were even beheaded for suggesting it was not possible to do(those people were “heretics”). Some people made fortunes by simply saying“If you give me some gold, I’ll tell you where to find it.” People will believealmost anything if money is involved. If I ever figure out how to exploit thatbelief I will own every one of you.
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3. U.S. Air Force Brigadier General Charles Yeager (retired) is considered bymany to be the single most qualified air-to-air combat pilot alive (that’s whyhe still is alive). A World War II ace and postwar test pilot and consultant, hislife was featured in the movie The Right Stuff, which documented his (andthe first astronauts’) contribution to the early U.S. manned space program. In1947, at the controls of the rocket-powered Bell X-1 research aircraft, he successfully broke the sound barrier for the first time without losing control ofthe aircraft. At the time, that was considered the riskiest thing a pilot could dobecause everyone else who had tried it before went home in a body bag (orat least what they could find of the unfortunate pilot). There are some thingsyou can’t “pretend” to do.4. Volume is the number of contracts traded during the trading session, usuallycounted as the daily volume. Open interest is the number of futures contractsthat have not been liquidated at the close of trading for that day and will beheld in the market overnight.Chapter 4: Adversity1. Equity runs is a market term for the computer-generated accounting, created by the clearing firm, which shows you all your clients and their accountnumbers, the previous day’s trade activity, open trades your clients are holding,how much in fees they have paid to date for the month, what your requiredmargin for the positions open is, and how much equity your clients have onthe books to trade with today. Some equity runs will provide you certaininformation about your option positions such as “long in the money,” time toexpiration if you have written any options, implied volatility, net long/shortan equivalent amount of futures, and various other data. Most brokers can’tread them except to say: “I have XXX positions on that if I liquidate I willhave XXX more completed round-turns to add to my monthly fees.” A broker is supposed to check his run for errors, which can include trades he didn’tdo, trades that were not cleared properly, trades from the wrong side, tradesmissing, trades in the wrong account, and other kinds of accounting nightmares. Most of the errors are caught at the clearing firm but sometimes thebroker himself made the mistake. Often, the broker doesn’t notice an error; ordoesn’t notice it in time. Now he “eats” the error or forces his client to “eat”it. In any case, how would you know if you don’t even get one? No equityrun can tell you if you have active orders in the market. Add to that the problem that some brokers forget their orders, forget to place them, forget theirpositions, or don’t come in at all that day. Some brokers don’t even read theirequity run, they just check it every now and then to count the commissionsfor the month.2. Spreads is a trading strategy where the trader attempts to capture the changein the underlying basis between different trading months of the same or
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notessimilar commodities. For example, if there is a small amount of corn “inthe bins,” but the potential for the new crop is to come in larger, a tradermight spread between new crop and old crop corn looking for the old cropto gain in price faster than the new crop. There won’t be enough corn tomeet demand until later so the old crop should become more expensive relative to the potential new crop. The trader would buy the old crop contractand sell the new crop contract at the same time giving him two contracts inthe account. In corn this trade might be done between the July (old crop)and December (new crop) contracts of the same year. You can also spreadbetween different commodities if they have an economic relationship; such asthe “crack spread.” This spread is done between products in the energy complex as the relative price of crude oil changes against the finished productsmade from crude oil such as gasoline and heating oil. Spreads are usually lessrisky than outright long or short positions because you are actually