empt to minimize the risk” from their point of view, which is whatfiduciary responsibility and skill are supposed to do. If I executed acomplicated combination of futures and options to reduce or eliminate the risk completely (which is possible), that might be “churning.”If something in the market changes and I reverse or liquidate to protect my client, and couldn’t reach him immediately (he is out of townor something), that could be “unauthorized trading.” If I was executinga hundred-lot trade for 30 different clients and missed a time stampsomewhere, that might be “failure to comply with required recordkeeping.” Who knows?What if they “eavesdrop” on my phone lines and hear me say “thisis a lot of fun” and determine that is a “guarantee” the client wouldmake money? All the NFA has to do is form any of those conclusions and I am out. Or spend all kinds of time and money to “educate” the idiots who work over there. The fact is most clients will nevertrade with someone like me in the first place. What chance do theyhave with a broker who could care less in the first place? And it’s theNFA that puts the broker in a position to think like that to “protect”himself?Who needs it?I could go into all the other stuff the regulators impose on theclient–broker relationship. I could show you how this creates orderimbalances, how it affects the pits, and so on. I won’t do that right now.My head hurts. I suppose that will have to wait for another book. If noone has shot me first.The thing that really broke my heart about all this is that it doesn’thave to be this way. There are ways to have controls on people’s behavior that can’t control themselves. There are ways to do that withoutcreating an environment that fosters the uncontrolled. There are waysto help the uncontrolled see that it is in their best interest to changetheir behavior. There are ways to keep bad clients out.You don’t have touse threats, punishments, or restrict freedoms to do it. It’s tragic that
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part of the problems we all face every day come from authorities whoprobably mean well. Nobody wants to get ripped off. Sometimes the“little guy” suffers an injustice that he or she didn’t have to. Well, thathappens to everybody. It happened to me too. That is life. It’s a dangerous world. Once you cross the line in your thinking that says “everybody’s guilty until they prove different,” you create a whole other set ofproblems. By the assumption of guilt, the innocent are now vulnerable.The guilty just hope they aren’t caught. Statistically, certain things areunrealistic to expect. “Everybody should have a job.” “No one shouldbe hit by a car.” “No one should lose money.” “Everyone should behappy all the time.” The list is endless. Once you cross the line and startexpecting the unrealistic to be certain by legislation, you run the riskthat someone who is just doing their best in a difficult situation willget run over in this zeal to make the world a painless place.I have to say this. I hated writing this part of the story. I love thebusiness of trading. I will never do anything else, and I fully expect tohave positions open the day I finally check out. It’s too much fun andthere is too much money to get for all those other things that life cangive you. I couldn’t leave out this part of the story. Understanding howregulators work in general and in the trading world in particular waspart of what I learned. For what it’s worth, the following paragraphsare my insights into working with the regulators.If you are a client wishing to trade for himself always rememberone thing: If your already overburdened broker thinks that you will be acompliance problem, you will open yourself up to all kinds of headaches.No one is going to want to work for you.You are too much “risk.” Leavethe guy alone. Don’t ask him for help, that exposes him to “risk.”Do it yourself and don’t complain at him about fills, stops, andprice action. The guy has to do three, sometimes four steps to get youin or out, and if he misses one of them, someone who will never helphim make a dime is going to be all over his ass. When he makes a mistake, for the most part they are honest ones. If your phone was ringingoff the hook constantly, and everybody you were talking to was in ahurry, you might miss something too. If you get a fill back that is 10tics off your expected price, it is not his fault. Don’t scream and yelland expect him to drop everything to find time and sales, or phone hisback office about the rotten service. Now the regulators, or someone
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who is afraid of the regulators, will want to know why he is “shortchanging” someone. If the guy is a pro, he knows already if you aredue something, or if something should be checked. That is the natureof this business. Grow up and deal with it the way the rest of us whoaren’t happy once in awhile have to do. If you think the service is great,tell him. Now he will work harder for you. All day long people arecomplaining. When you place or move orders, get the ticket numberand used it. Don’t make the guy guess it’s you. Errors that are avoidable happen like that. Clients sound alike. Don’t say, “It’s me, cancel mystop.” Use your account number so that he doesn’t have to look it upall the time. Be as professional about this as you expect him to be. Helphim do this easier so that he can operate with the freedom of mindthat no one is going to “hassle” him.If you are a client who has never traded before, remember that there areno promises made. You are responsible for the losses if you have them.Nothing causes losses except trading. If you’re not happy, go home.Don’t threaten or complain or ask all kinds of stupid questions abouthow it happened. It happened, that’s it. Nobody is stealing from you.It’s next to impossible to do. Either you or your broker were wrong,or both. You did know the risk, don’t say you didn’t. If you agree totrades you are not being “churned.” End of story. Don’t be the guywho makes it hard for a broker to tell it like it is. The more you thinkit is him personally, the more he will attempt to justify the trade toprotect himself. Now you will get even less help from him, or he willclose you out because you are a risk. Either way, the fact is, you agreedto trade. It doesn’t matter if he said something that didn’t pan out, thatwas only his point of view anyway. If you were willing to accept hispoint of view in the first place, then be prepared to accept that it maynot be shared by the market. You weren’t going to share any of yourprofits with him, were you? Why should you expect him to carry theburden of your losses? If you think you will make money, go for it.If you end up with losses, don’t be a crybaby and expect “mommy anddaddy” to bail you out. You are an adult like your broker is. He is ina tough business; tougher than you’ll ever know. Give him credit forwhere he’s at and what he’s trying to do with his life. He doesn’t get apension like you do. Don’t make it harder for him to service his otherclients who understand this.
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If you are a broker, give your clients a little respect. The good ones trustyour judgment. They expect you to give them a fair shot. Don’t sugarcoat the risk. Do your homework and accept it when a client says no.Don’t coerce them into doing something if you can tell that they reallydon’t want to get started or do this particular trade. There are otherpotential clients. Commissions will be there sooner or later; the business is huge. Don’t rush. If the client says yes, then do your absolutebest to find the right point to do the trade. Don’t force the issue. If youmissed it, tell the client you missed it. If it might take another week, tellyour girlfriend she has to wait for the fur coat.Your job is to protect hisequity. In the long run the client will respect you. If the trade is a winner, don’t take credit for it. It was never your money at risk.You did thejob the client paid you for and that is that. Don’t expect your clients toblindly follow your lead the next time. You have to earn your clienton every trade. Follow the rules. Do it in the white. If the regulatorsget all over you, try to understand their point of view. All the powerof the government boils down to is whether or not the government’srepresentative wants to use it or thinks he needs to. Don’t give him areason to do so. Cooperate, and if it means a little extra work then itmeans a little extra work. Do it all the way. If they don’t think you arethe man they are looking for then they will leave you alone. Just prayyou never have to go through what I did. Sometimes the regulatorsare singling you out for reasons of their own. If they do, take it a stepat a time. If you are in the white, eventually you will win but they willnever go away. Don’t work for someone who expects you to bend therules in any way. Leave so fast you leave your coat behind if he says, “I’llhandle that for you.” You will end up out of the business through nofault of your own. That’s what almost happened to me.Lastly, if you are one of the regulators, the spirit of the law determines theletter of the law; not the other way around. If you are on the audit teams,think about that. If you process paperwork or are involved in keeping registration current, please remember that most of the people inthis business aren’t out to screw anyone. They just want to work. Dowhat you can to keep them earning an income. Don’t put them ina position where they spend four weeks or more waiting for something. Or they missed some little thing “this time” that is in their filealready. That causes pressure to trade too fast when they finally get on
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the phone. You call it “churning.” They call it “eating.” If you help towrite the rules, stop and ask if any more of this B.S. is really needed. Ifyou enforce those rules, try to see how many of them don’t help in thefirst place. Asking somebody to spend his time on something that youand I both know is just going to sit in some file somewhere is pointless and it makes it harder to service the client. Try to see that you onlyhave a job because the 12 cents from every trade goes to you. Don’tmake a broker pay you twice. Don’t make a broker’s life harder than ithas to be, because if you do he will get angry at your lack of concernfor his position. Then they snap. Who knows what will happen then? Ifyour job is to protect the client, how can you do that if the client’s onlycontact to this industry is under all sorts of pressure from you?That’s it. I hated this part. I hope someone remembers that.
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Chapter 7
The Last WordYou sure you want to do this?Life is a gamble at terrible odds; if it was a bet you wouldn’t take it.—Tom Stoppard
S
ome people think the concept of trading as I’ve described here isreally barbaric. Personally, I do feel that way. It is a very base ideato “kill and eat something today.” Let’s face it; that is how a zerosum game is played. Whose idea was it to make it this way? It wasn’tmine.That’s the way it is, baby—brutal. I learned to understand it, acceptit, and exploit it. One other thing happened that I learned from. It iswhat I want to talk about for the last few pages.No matter what you personally choose to believe about the tradingenvironment, you can’t make money at this unless someone else losestheirs. To make a million can only mean someone else (or a group of103
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them) had to lose exactly that same million. Who was that? What didhe experience from that loss? How did that affect his hopes, his dreams,his family, his friends, and even his destiny? I’ve known people who’vecommitted suicide, become drug addicts, lost their homes, becomealcoholics, started beating their wives, gone insane—the list goes onand on.You never hear about that part when CNBC has a tag line thatreads something to the effect: “Soybeans unexpectedly went limit downtoday in heavy trading.” Sometimes it takes months for someone to goballistic; sometimes just one trading session. All the pain, problems, andhell never stop. Every year this business gets bigger. The markets gomerrily along as “portfolios get readjusted” or “yields flatten out.” It’sall saying the same thing, “You lost on your side—sorry.” Every yearthe stories that could be told get created. My story is not unique byany means, just that I’m still here through all of it and prospering.Throughout this book I’ve been really hard on the “loser.” I makeit sound like I have a biased point of view on that person, like he is aconcept more than an actual person. To some extent he is a conceptbecause most people will never see the actual individual whose moneythey took. That didn’t happen to me. I knew of one guy, and it was avery sobering experience. Let me share it with you.One day I was walking through the Chicago Board of Trade andsaw this man holding his sobbing wife. I had never met the man, buthad seen him around the markets. What I never knew about him untilthat time was that he had been trading for about 15 years only forhimself. He had blown out completely and his wife had come to hisoffice to help him clean out his desk. As it turned out, through mutualacquaintances, which I didn’t know we had, I learned the whole story.We were having a few drinks when one of the guys asked, “Didyou hear about (so and so)?” “No,” I said. When he told me the wholestory I was totally shocked. This trader’s wife was dying of cancer. Theemotional stress of this turmoil had caused him to go belly up. He losteverything. Since he had only been a trader, he had no way to supporthis family or cover the costs of medical bills. He had no other skills. Hewent into a tailspin. Later, he killed himself and left his family and hisdying wife alone. This was the same man I saw in the CBOT that day.Up until then, it was just tragic. The next part made it real.
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Someone asked, “What was he trading?” The answer was wheat. Bycoincidence I had been trading wheat for the time in question. “Fromwhat side?” I asked. “Long,” was the answer. I was trading shorts. “Fromwhere (meaning prices)?” The numbers were almost the same as mine.I was the actual person on the other side of his trades, or at least oneof them. I had his money (or at least some of it). Instead of seeing themarkets as “prices,” it hit me that there were real people on the otherside actually experiencing the results of those losses in a very real andpermanent way. I had been the conduit to some of this man’s devastation. From that point on I had a huge emotional struggle develop thatwas completely unexpected.Every time I took money out of the markets, I would rememberthis guy’s face. I began to think that I was involved daily in putting people into their graves (at least financially).I began to feel tremendous guilt over my profits. This lasted longenough for me to lose tens of thousands dollars. If I was to keep trading,I had to find a way to reconcile this conflict or I would end up just likehim. Nothing could prepare you for this. I can’t give you a two-centanswer for a million-dollar question, but I resolved that conflict. I foundthe meaning in this conflict and what it can teach us.Here’s what I think I learned: Life is a battle. There will be winners and losers. Losing is really part of winning. By putting people ina position of losses I am helping the better souls learn how to becomewinners. Those winners will have losers to pay them and those losers(the better ones) will become winners. The cycle goes on forever. If itsounds pompous, I can’t help that. I’m not being pompous; I’m tryingto find value in the fact that I kill and eat people every day. Some don’tsee it coming. Does anybody really want to inflict that kind of pain onsomeone else? And know they are doing it?Did you know that in Africa there are tribes that actually apologizeto the animal they kill? They ask its spirit to remember that they havea responsibility to care for their families and they need the meat to dothat. What is going on there? If I were a gazelle, as soon as I saw thoseguys coming, I would head the other way. When you’re dead, who caresif they apologize? In the markets you are the gazelle or the hunter. Youcan’t be both. Most people will say that this point of view is not realistic.
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They say this because people who trade are supposed to know the risk ofwhat they are doing. If we are all adults about this, then we can all acceptour results. I agree with that most times. Sometimes I can’t. It hurts me toknow that sooner or later I will be a part of someone’s untimely financialdemise. Maybe that person didn’t know what he was doing and wouldnot have been eaten if he had known.If you are going to kick a sleeping lion in the face, you had better know what you are doing. Most people don’t know this risk whenthey trade. I admire those that know this risk and embrace it. I take alot of pleasure in trying to outsmart him knowing he is trying to outsmart me. Most times I win; sometimes I lose. Standing right next tohim is somebody who has no idea that he is going to maybe shipwreckhis life. That guy is the real loser. I’m talking to that guy right now.Don’t be that loser if you can help it. If you are going to start a war,know how to win it. The winners always write history. Stop and thinkwhat is possible to you personally if you have losses. Think about theemotional cost, all the financial pressures, or the stress on your lovedones. I believe this is deeper than, “only trade with money you canafford to lose.” Why? Well think about this possibility: If you are notemotionally prepared to lose, your losses might depress you.Your behavior changes slightly. People ask, “What’s wrong?” Some admit they havelosses, others won’t. You answer “Nothing.” Maybe you don’t want tohear your friends say, “I told you so.” Your spouse senses something iswrong. Maybe the feeling of losing ten grand and admitting it to yourspouse is simply too painful. Maybe she concludes you are unhappy inthe marriage.Your boss sees you lack something on the job. Maybe yourbehavior causes you to be passed over for a promotion. These things arereal. Most people never see the potential for connection in there somewhere. This list is endless. It’s not a game at that point.Think about the real risk of trading because it’s not about money. Itcould mean some or all of your life. I’ve seen it happen. It happened to me.It still happens every day around here. It very well could happen to you.If you accept that risk and you lose, you are to be admired for trying to better yourself. Welcome to the war. If you are ignorant of thisrisk, wise up. It’s no challenge to kill a child. In fact, it is embarrassingand wasteful. It hurts to admit you’ve done it. If you pretend this riskisn’t there, you are a fool.You deserve to lose. I’m sorry I had to be the
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guy who devoured you. Next time don’t kick me in the face. If youdo, you better have a big gun pointed at my heart, in which case I willsay, “My turn to die.” Then I’ll ask you where you got that big gun andcan I have one too. In the final analysis, it’s not about money; it’s aboutevolving. Those who don’t are food for those who do. Sooner or latereveryone gets a chance to be both. Just do yourself a favor and neverstop evolving. I would like to meet you.Otherwise, I will eat you.
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Chapter 8
In ConclusionI think most of the people involved in any art always secretly wonderwhether they are there because they’re good or there because they’re lucky.—Katharine Hepburn
I
t was a beautiful fall day. The air was crisp. The sun was shining—aperfect day for a drive to look at the changing colors.Winter wouldbe here soon and it would be a while before I could enjoy the dayslike I want. I decided to go for a drive. No place in particular. I headednorth on Lake Shore Drive from about Burnham Harbor. I thoughtI would go north on Sheridan Road up to Winnetka or so and thenback. The last few sailboats were motoring over to the locks, going intostorage for the season. A few brave souls were out jogging along thelakefront.You could see the waves breaking a little higher on Oak StreetBeach because the winter winds off the lake were starting. It was a
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postcard-like setting for me. I really enjoyed all this. It was the middle ofthe week, early afternoon. I had the Drive almost to myself, unconcernedabout anything except the hum of the engine. I felt great. I decided togive the car a little push.You guessed it. Flashing lights, the siren. If you have ever drivenLake Shore Drive, north from downtown, you know how easily this canhappen. It’s five lanes in some spots, posted 45 mph, but you can easilydo 80-plus when no one’s around. Apparently, I wasn’t even in the sametime zone by the time I stopped according to Officer Friendly. Sheeze,I was only in third gear for crying out loud. I had two left I could haveused, why don’t you just be thankful? Well, I knew I had a problem:ticket for sure, maybe even a ride back to the clubhouse too. I had created some conflict, how was this one going to work out? I really had noidea what I would do, but I knew where the starting point was. I wasn’tthinking about “talking my way out of it” or anything.All I knew is that he had the advantage, but I had the first move.As he approached the car, I watched him in the rearview mirror. He moved quickly, so I knew he was angry. His hand was on hisservice revolver, but in Chicago that is to be expected. I did nothingand kept both my hands on the wheel where he could see them incase he was the twitchy, Barney Fife type. When he got to the driver’sdoor he banged on it with his flashlight. He knew that would piss-offmost people. He wanted an excuse to unload on me. My response tothat, if he didn’t like it, would certainly justify at least a ticket. Maybehe had the capacity for violence, which for a Chicago cop is practically a given. I continued to just observe and wait for enough clues.“Yes, Sir,” I said. “I’ll roll down the window.”“You think you’re hot s— in this ride, don’t you?” was the firstthing he said. I had my answer on how to win. The trade was executedright then. As they say in tennis, advantage-in.“Oh, no, officer, I only just bought this car about a month orso ago. I work so hard I never have time to enjoy it. Take a lookat the odometer; I think it’s still less than 1,000 miles. I must confessthe temptation just got the best of me. I can’t believe the first time Ilet it out a bit I got stopped. I’m really sorry I put you through thetrouble, Sir.”
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“You were going 83 miles per hour; the limit’s 45. I should takeyou in.” This man was not happy.“Yes, Sir, you could do that. I would hate to put you through allthat trouble but you are the boss.”He went on for a moment or two about how unsafe that speed wasand that’s when I had him cold. Dead to rights. If it had been a trade,I had his money and there was no way he was getting it back. I almoststarted laughing when I realized how easy he gave me the opportunityto take the profit. Up to that point I still had no idea how to finallywin, only clues that I had to consider in an attempt to win. If I didn’tfind it, I was going to jail, probably. But he gave it to me without having to look for it anymore. I then chose to add to the position that hadthe potential and executed again.“Yes sir, you are right. But that is why I bought this car.” (Lie.)“How much do you know about ____________?” (I won’t tell youthe make and model, but there were only a handful in the whole country at the time.)“What’s that got to do with anything?” he asked me.“Well, I’ll show you” I said, “While you are writing this up let megive you the nickel tour. Is it okay if I get out?”“Sure,” he said. I knew I had his interest then. He knew somethingwas going to be different about this stop.So I showed him the air dams and explained why they contribute to the car’s stability at higher speeds. I threw in some stuff of myown about, “When the air is colder it’s denser so they work better.” Ishowed him the suspension (we had to get down on our knees to lookunder the car) and explained how that works in conjunction with theair dams. Then I explained the reason the car is mid-engined is becausethat helps it remain more balanced and contributes to its overall stability.I went on about how that helps the brakes work better and the car resistspins. I told him the car was engineered for panic braking and avoidingpotholes on the bad Italian roads, so naturally it works even better ongood asphalt like Lake Shore Drive. I told him the whole reason I got alittle ahead of myself is because I really believed I was safer here than onthe Dan Ryan Expressway with all those nuts. Basically, what I told him
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was all technically true, but I put it in the frame of reference he gave me,the issue of safety. Personally, I bought the car to run wild with it. I dothat every chance I get. I could outrun a helicopter if the road was longenough and I was willing to deal with that conflict.He didn’t have that perspective. In fact, he basically told me thathe believed anyone who owned something like this was intending tobreak the law when he accused me of being “hot s—.” Once he madethe distinction that “ownership equals unsafe,” I knew his point of view.Now the trade was confirmed as a winner and he had no chance. Itwas over for him. It was a simple matter to put my actions into hisframe of reference, thereby resolving the conflict in a way that validatedhis point of view. I let him “win.” But in doing so he saw my point ofview as being the same as his. Therefore, he actually lost and gave uphis position to mine. Then I did what was only the right thing to do.Class and style, baby.“Have you ever driven one of these, officer?”“No.”“Why don’t I ride with you?”So off we went. We drove up and down Lake Shore Drive finallyarriving back to his squad in about 15 minutes or so. The whole timeI kept asking him, “Can you feel how stable the car feels?” “Can youfeel how those brakes make you feel safe?” “Can you see that eighty feelslike forty?” The end result is, of course, no ticket. He has to drive someDetroit derelict all day long. But today, he got to drive somethingthat was out of his reach, maybe forever. Do you think he woke up thatmorning thinking he would be behind the wheel of a state-of-the-artengineering marvel that he’d never even heard of before? Somethingthat costs more money than he gets paid in two or three years? (Maybehe was just jealous.) Who knows where it could have gone? We neverdiscussed his family, how long he’d been a cop, what he likes to do forfun or to relax, all those other places to connect. The possibilities werecompletely endless. He even apologized for stopping me and thankedme when we parted. Imagine what the conversation must have beenlike back at the precinct. Do you think I will ever get a ticket from anyof those officers if I’m pulled over? I’ll probably have to let them alldrive sooner or later. Damn, I should at least ask for gas money.
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Would any of this have happened if I had done something different?Like “make a case” for myself? Or focus on how frustrating it was toget pulled over? Or if I would have been concerned with my ownpoint of view in any way? For me, it was his point of view that mattered. Everything is like this—especially the markets. The Art of the Tradeis the process of getting to the point where you can begin to see thetrue nature of reality, doing it in a way that is completely divorced fromyour perception of what that reality should be, always attempting toadapt yourself to that reality as it unfolds around you. Once you beginto discover that, you can begin to exploit price action in any market inany time frame. You will never arrive because that reality is constantlybeing created differently by those who participate. Therefore, you mustbe constantly creating differently as well. Otherwise, when you danceto the wrong tune, you get eaten.It’s like this: “This is what the market says, this is what I do.” But that“What is it really saying right now?” question is the art.What I choose to learn—and believe every trader needs to at leastconsider—is that everything in your life and everything in your personalthinking can contribute to that process. Every circumstance, every event,every person, every situation I might find myself in has the potential, ifI let it, to teach a lesson on the nature of how people think, how theyfunction as a group and what causes them to do certain things. Mostimportantly, it is how I personally interpret this constantly unfoldingreality that is created by these people. The markets themselves taughtme this. I learned that there are only two points of view: the other person’s and the best one. What I think is of no consequence. Mine mustbecome the best one. Nowhere is this truer than in a zero-sum game.The end result is the ability to do or become anything you could everwant to be. All that takes is money. And money in a never-ending supply is what the markets can give you. In any amount you need or want.That’s why we trade in the first place.But, you won’t get a penny of it unless you are willing to hear itsvoice. It only speaks one way. By God, I was willing to stop talking