was Derek Buending. Derekwas a natural. Although I call him my nephew, he’s my cousin Ani’s son.His uncle on his father’s side was a great options trader, and betweenme and the rest of our family, Derek was well-versed in the ways of thecapital markets.
Upon graduating from high school, he decided to leave Houston andcome to Chicago to work in the markets before going on to college. He hitthe CME ﬂoor like a dynamo! He soaked up information like a sponge andseemed to easily grasp every concept I discussed with him. He would callme at the end of a day and ask about the session—about the fundamentals
JWPR006-11
JWPR006-Bouroudjian
March 23, 2007
8:35
Char Count= 0
184
SECRETS OF THE TRADING PROS
moving the market and the news events that seemed to affect the entiretrade. After a month he told me that he was interviewing for a job withKingstree, a proprietary trading group in Chicago.
Kingstree was no ordinary prop shop. It was the premier trading groupin the city, with a waiting list a mile long of hopeful traders looking foremployment. When Derek told me about the interview, I made sure I loweredhis expectations by disclosing that he would be up against not only collegegraduates but MBAs looking to learn from the best. Derek was introducedto the ﬁrm through someone he had met on the train. As luck would have it,this turned out to be the person who was responsible for the psychologicalevaluations that are an important part of hiring any trader for the ﬁrm. Itwas no surprise to me, but according to the evaluation, Derek was almostperfect for the job. The only drawback was his age—Derek was only 18!
I received a call from Kingstree’s company psychologist, who told mehow impressed he was with Derek and how he thought Derek would, oneday, become a great trader. It was a very proud moment for all of us—hisparents, his uncles, and the rest of the family! We all knew that this wasa tremendous achievement for Derek at such a tender age. He was ableto land a job that MBAs were dying to get! He took to trading just like hetook to everything else he attempted in his life: with vigor and enthusiasm.Derek began trading the ﬁxed-income market with an eye toward tradingthe equities at a future date. His trading, at ﬁrst, was very spotty. He hada difﬁcult time mustering the courage to trade. He had understood everyother element needed to become a good trader except for the courage ittakes to trade. He called me one evening to talk about the issue.
I remember spending a great deal of time talking about the variouscharacteristics that I thought were needed to be a great trader. I told him toavoid the obvious land mines, such as adding to losing positions or cuttingwinning trades short, but the bulk of the conversations I had with Derekcentered around the human behavior and basic emotions that drive themarket. He understood the fundamentals of the trade, but he was lackingthe human experience needed to fully understand the emotional side of thegame. Over the course of the next few weeks, Derek began to understand thetrue nature of the market. He grasped the emotional side more quickly thananyone else I have ever met. He focused himself on the various elementsthat drive investment capital and started to make winning trades. His tradingcareer had begun, but he was putting college on the back burner.
I expressed to him how important it was to go to school while he wastrading in order to learn more about the macroeconomic factors within theeconomy. His youth caught up with him during the course of a couple ofsessions, and he started to lose money for the ﬁrm. We talked about thefact that he was struggling, and I reiterated that he was playing in the bigleagues. As Dan Frishberg of BizRadio is fond of saying, there is no minor
JWPR006-11
JWPR006-Bouroudjian
March 23, 2007
8:35
Char Count= 0
Risk Management
185
league on Wall Street! Finally, after a meeting with his mother, Ani, and callsfrom his father, Steve, in Texas, he decided to go back to school. Before heleft I told him what I would have wanted others to say to me under the samecircumstances. The markets will always be here. No matter when you comeback, there will always be a market to trade. I told him that he understoodrisk and reward, but life would teach him about the rest. I explained to himthat courage is the key to everything, and that I thought I understood whatthat meant. I wished him luck when he decided to go back to Houston forcollege.
In February 2006, Derek was in a horrible car accident. Six years earlier,his sister, Stephanie, had died in a car accident at the age of 16. As I gotword of Derek’s accident, my thoughts immediately went to his parents,Ani and Steve. They were reliving a nightmare! After two weeks of ﬁghtingfor his life, Derek died. I ﬂew to Houston to pay my respects to his parentsand be with the rest of the extended family. It was dreadful to be buryinganother of Steve and Ani’s children. I met many of the doctors and nurseswho worked desperately to help Derek pull through. Anyone who wasn’tworking at the hospital at the time came to the funeral home and attendedthe service.
One nurse spoke about my cousin Ani. It so happens that at the sametime Derek was in the hospital, another family was there with a child whowas struggling to survive an accident, and that child died. When Ani heardthis, she went to comfort the other family. She told them how she had al-ready lost one child and would likely lose the other one, too. She assuredthe parents that, slowly, day by day, the pain lessens, although it nevercompletely goes away. When I looked at my cousin Ani and her husband,Steve, I realized that everything I had ever thought about courage was non-sense! This was courage personiﬁed! We buried Derek on a rainy Februarymorning, and a piece of us all died with him.
I tell this story because I ended up learning much about a subject Ithought I knew well. The courage that I talk about when discussing tradingis nothing compared to the real courage it takes to live with some of thehorrors in this world. There’s an old saying on the ﬂoor of the exchanges:It’s only money; we can always get more. This is another way of sayingthat there are more important things in the world than making a winningtrade; life is precious, but money is replaceable. I never understood the fullmeaning of that—until we lost Derek.
In loving memory of my nephew, Derek Buending.
JWPR006-11
JWPR006-Bouroudjian
March 23, 2007
8:35
Char Count= 0
186
JWPR006-IND
JWPR006-Bouroudjian
March 23, 2007
8:31
Char Count= 0
Index
AADM. See Archer Daniels MidlandAdvancing market, psychology, 126After-the-fact analysis, 101Allied Crude Vegetable Oil Reﬁning
Company, 162
scandal, 163–164
Alternative investments, efﬁcient
frontier (relationship), 58–61
Anti-futures rule, 84Anti-random walk, 108Arana, Ed, 127–128Arbitrage. See Index arbitrage; Risk;
Statistical arbitrageexecution. See Goldman SachsCommodity Index; Nasdaq;Russell arbitrage; Standard &Poor’s
opportunity, creation, 82out of bullets, 43
BBack-ofﬁce services, offering. See
Futures commission merchants
Baker, Jim, 111–112Bank National Paris (BNP), CN
acquisition, 45
Barings
customer funds, usage, 173long positions, liquidation, 173–174losses, 172trades, 171
Bartiromo, Maria, 168Bauer, Steve, 127Bernanke, Ben, 152–153
Bartiromo interview, 168
Bifurcated market, creation, 108Bingisms, 11
learning, 12Black, Fischer, 3Black-Scholes mathematical models,
Archer Daniels Midland (ADM),
usage, 113
marketplace involvement, 10
Asian order, completion, 38–39Asset allocation, 37–39. See alsoForeign exchange
collection, 54instruction. See Sungorder, execution. See Nikko
Securitiesstrategic model, 37
Asset class, status. See Managed fundsAssets, noncorrelation, 64Athletes, trader ability, 22–23Averaging down, process, 23–24
Black-Scholes model, usage, 3Blog. See WeblogBloomberg TV, 130, 165
market commentary, 37TV appearances, 11, 159BNP. See Bank National ParisBOD. See Chicago Mercantile
Exchange
Bond portfolio, allocation, 179–180Boom/busts, cycle (relief), 151Bouroudjian, H. Jack (1987 crash,
impact), 12
Bouroudjian’s law, 112
187
JWPR006-IND
JWPR006-Bouroudjian
March 23, 2007
8:31
Char Count= 0
188
SECRETS OF THE TRADING PROS
Brokerage community, proﬁt
Charts
(decrease), 75–76
Brokerage houses, productstructuring, 68
Brokers, selection, 125Brosowski, Fred, 93Brown, Stephen, 110Buending, Derek, 183–185Buffett, Warren, 14Bund futures contract. See London
International Financial FuturesExchangeBush, George H.W., 111Business cycles, understanding, 94Business programs, report, 42Business television, popularity, 159Business TV
truth, search, 168–169Business TV, usage, 158–160Buy program, 41Buy-and-hold strategy, incorporation,
109
Byrne, Adrian, 20, 124
CCapital
ﬂows, 49–50management, 40redistribution, 177risk, 134taxes, impact, 177–178
Capital markets
September 11, impact, 99structure, 96
approach, 114
Capitulation trait, examination,
144–145
Cargill, marketplace involvement, 10Carter, Jimmy, 152Castrovillari, Nick, 125CBOE. See Chicago Board Options
Exchange
CBOT. See Chicago Board of TradeCFTC. See Commodity Futures
Trading Commission
Charting price action, 102
examination, 100–102points
DeCore/McLaughlin, opinion, 103usage. See Nasdaqpresence. See Tradingproblems. See Technical analysis
Chicago Board of Trade (CBOT)
commodity prices, increase, 114–115competition, 80Dow Jonesdeal, 73futures contract, 72–73
FBI, impact, 74ﬁxed-income pits, 55founding, 2impact. See Equity futures franchisemedia relations, 139improvement, 139
momentum, 74nonperishable commodities, trading,
115
runner, experience, 19
Chicago Board Options Exchange
(CBOE)
OEX/SPX options, 31OEX/SPX pits, involvement, 27
Chicago Mercantile Exchange (CME //
Merc)
agriculture markets, 30board of directors (BOD), 72
meeting, 105
ED options market, 32equity index committee, 46FBI, impact, 74founding, 2history, 76–77liquidity providers, impact, 8matching engine, 83membership, interests (balance),
71–72
metamorphosis, 82Nikkei futures pit, 171problems, 74runner, experience, 19September 11 events, 131
JWPR006-IND
JWPR006-Bouroudjian
March 23, 2007
8:31
Char Count= 0
Index
189
S&P futures pit, 55S&P options pit, 31stock, 181trades, 87upper trading ﬂoor, 98Closing orders, impact, 49CME. See Chicago Board of TradeCN. See Cooper NeffCNBC, unemployment numbers(release), 98–99
CNBC TV, 130, 165
appearance, 11, 159Santelli guest, 139
Commerz Futures, 4, 57, 59
Bund traders, responsibility, 83capital, repatriation, 82competition, 68
Commodity broker, Fisher (meeting),
93
Commodity exposure, seeking, 64Commodity Futures Trading
Commission (CFTC), creation,15
Commodity prices
housing industry trend sensitivity,
148
Cooper Neff (CN), 27–28
acquisition. See Bank National Parisstatistical arbitrage, usage, 45
Cooper Neff/BNP proprietary trading,
79
Corporate events, importance,
44–45
Corporate proﬁts, 146–147
relationship. See Equity pricesCourage. See Investors; Traders
types, 182–183
CPI. See Consumer Price IndexCRB. See Commodity Research BureauCredit Agricole Futures, 74, 166Crude oil markets, run-ups, 51CSFB, 124CTAs. See Commodity trading advisorsCurrencies
differentials, 26–27futures, 126volatility, increase, 64–65Customers, importance, 67–69
DDeAngelis, Tino, 162–163DeCore, Dennis, 15, 178
increase. See Chicago Board of
Trade
inactivity, 43index arbitrage career, success,
Commodity Research Bureau (CRB),
27–28
8
Commodity trading advisors (CTAs),
59database, 66portfolio, 63strategy, 60track records, 61
Conference Board, consumer attitude
surveys, 150
Consumer conﬁdence, economic
report, 150
Consumer Price Index (CPI)
data
change, 143usage, 142–143
market observations, 112opinion. See Charts; Marketsstrategy, trading, 40–41
Default risk, 148Deﬂation, impact. See StocksDelta-neutral traders, 6Derivatives, trading. See HarvardEndowment Fund
Deutschmark/yen, differential, 26–27Diawa, 38Direct allocation method, 66Discipline. See Investors; Traders
importance, 181–182
Distan, Ralph, 94Diversiﬁcation. See Real portfolio
economic report, 147–148increase, deceleration, 147–148
diversiﬁcation
gaining, 57
JWPR006-IND
JWPR006-Bouroudjian
March 23, 2007
8:31
Char Count= 0
190
SECRETS OF THE TRADING PROS
DJIA. See Dow Jones Industrial
Average
Dollar-denominated Nikkei contracts,
171
trading, activity, 172
Double commission, usage, 124Double-digit inﬂation, 141Dow Jones 30, examination, 47Dow Jones deal. See ChicagoMercantile Exchange
Dow Jones futures contract. See
Chicago Board of TradeDow Jones Industrial Average (DJIA),
changes, 84
Due diligence, 61, 66Duffy, Terry, 78Durable goods
economic report, 149–150orders, 149–150
EEarnings, importance, 47–49Economic activity, health, 150Economic Contrarian (radio
program), 99
Economic growthamount, 150translation, 146–147
Economic releases
categories, 145–153explanation, 137
Electronic markets, growth, 82Electronic platform, usage, 85Electronic trading, increase, 96Electronically traded products,
popularity, 81Elliott Wave Theory, 90, 99
impact. See Fisher
Elner, Andy, 111E-mini
announcement, 76–77concept, 73
growth, 79–80
product
growth, 84proliferation. See Futurescommission merchantscommunity
volume, increase, 78
version. See Nasdaq; Russell 2000;
Standard & Poor’sEmotions, impact. See MarketsEquity futures franchise, CBOT
impact, 75
Equity Owners Association (EOA), 74Equity prices
corporate proﬁts, relationship, 149increase, 146–147
Equity-ﬁxed income AA, 39Error risks, 124Escape to the Futures (Melamed), 76,
87
Economic uncertainty, impact. See
Eurex, impact. See London
Stocks
Economy
deterioration spread, 111Fed, impact, 145ED. See EurodollarEfﬁcient frontier
relationship. See Alternative
investments
understanding, 58
Efﬁcient market theory, product, 117EFP. See Exchange for physicalElectronic futures marketplace,
creation, 76
Electronic futures trading (EFT), 74
International Financial FuturesExchangeEurodollar (ED) futurescontract, margin, 86establishment, 79pit, Aranas work, 127Eurodollar (ED) options
market. See Chicago Mercantile
Exchange
pit, trades, 4
European bourses, closure, 38European currency
consolidation, 126creation, 39
JWPR006-IND
JWPR006-Bouroudjian
March 23, 2007
8:31
Char Count= 0
Index
191
European order, completion,
Eastern philosophical precepts,
38–39
Exchange for physical (EFP), 40
activity, 42
occurrence. See Index arbitrage
Exchange-traded funds (ETFs), 50–52.See also Standard & Poor’sDepositary Receipts
introduction, 76market relationship, 32Exposure, management, 171
incorporation, 98
Elliott Wave Theory, impact, 94examination. See Soybeansinterview, 92–98speculation, 97
Fitzgerald, Cantor, 130Flight to quality, 142FOMC. See Federal Open Market
CommitteeForeign exchange (Forex)
FFASB 133 deﬁnition, 65FCMs. See Futures commission
merchants
Fear
greed, relationship, 123–126relationship. See Panic
Federal Open Market Committee
(FOMC), 151
Federal Reserve (Fed)
actions, 141central bank behavior,
152
cycle
easing, 147tightening, 145, 147economic report, 151–153funds rate, 95–96impact. See EconomyFiandaca, John, 124–126Fibonacci numbers, usage,
144
Fidelity Magellan (Lynchmanagement), 13
Financial futures, Melamed (impact),
73Financial markets
economic backdrop, impact,
148success, 166Fisher, Ted Lee, 91
approach. See Technical analysisconcept. See Structural analysisdiscipline, 94
Forex-related asset allocation, 39–40futures, establishment, 79market
spreading, 26–27U.S. dollar demand, impact, 53
traders, 159
Forward rate agreement (FRA)
traders, 10
FRA. See Forward rate agreementFriedman, Milton (impact). See
International Monetary Market
Frishberg, Dan, 184–185Fund managers, selection, 66Fundamentals
deﬁnition, 14–15discussion, 91
Futures
contract. See Chicago Board of
Trade
deﬁnition, 2FCMs, proﬁtability, 167industry, highlight, 131–133managers, power/proliferation, 62trading
Holy Grail methodology, 67, 100revolution, 77–79
usage. See Managed futures
reasons, 2–3
users, deﬁnition, 2–3
Futures commission merchants
(FCMs), 57
back-ofﬁce services, offering, 132competition, 59impact, 86–87platforms, offering, 86
JWPR006-IND
JWPR006-Bouroudjian
March 23, 2007
8:31
Char Count= 0
192
SECRETS OF THE TRADING PROS
Futures commission merchants(FCMs) community
change, 78e-mini products, proliferation
(desire), 79evolution, 85–86limited liability, 82
Futures market. See Stock indexes
creation, 2daily price movement, 50long/short positions, 59
GGambling, 178–179Gamma long, instruction, 5Gann methodology, 90, 99
examination, 94
Gault, Bobby, 121, 126–128Gault, Mirth, 127–128GDP. See Gross domestic productGeneral Electric, 180German hierarchy, impact. See
IndividualismGill, Phupinder, 131Global futures exchanges, growth,
96
Globalization, impact, 159Globex
creation, Melamed (impact), 73session. See Stock indexesstock indexes, trading, 83
Goetzman, William, 110Gold markets, run-ups, 51Goldman Sachs, involvement. See
Markets
Goldman Sachs Commodity Index
(GSCI), 8arbitrage, index, 9
Google, addition. See Standard &
Poor’sGordon, Scott, 131Grasso, Dick, 84–85Greed, relationship. See FearGreenspan, Alan, 31, 112
appointment, 153Gretzky, Wayne, 22
Gross domestic product (GDP)economic report, 150–151foreign countries, 141
GSCI. See Goldman Sachs Commodity
Index
Guaranteed fund, 67–68
HHadley, Greg, 113Hager, Kent, 28Haines, Mark, 44, 130Haircut, 86Harvard Endowment Fund
control, 11derivatives trading, 56
Hedge fund
concept, 48investments, money ﬂow, 59
Hedging, 9–10Helms, Steve, 178
movement. See Standard & Poor’s
500 futuresposition trader, 30
Holy Grail methodology. See FuturesHousing, economic reports, 148Housing startsimpact, 148rate, change, 148Hughes, George, 22Human factor, technological variable,
166Hunt, Nelson, 160Hunt, William, 160Hunt brothers, impact. See Silver
marketHurricane Katrina, 137
IIMM. See International Monetary
MarketIndex arbitrage, 40–42
nuances, 42–43strategy, 41universe, EFP activity (occurrence),
43
JWPR006-IND
JWPR006-Bouroudjian
March 23, 2007
8:31
Char Count= 0
Index
Indexes
examination. See Russell Indexrebalancing, 43–44
Individualism, German hierarchy
(impact), 167
Inﬂation
impact. See Stocksinterest rates, relationship, 147–148rate, change, 148
Inﬂationary pressures, signs, 146Information
availability. See Investorsdanger, 161–164location process. See Professionalsnetwork, 164–165
creation process, 164obtaining. See Marketspower, 169retrieval, technology (relationship),
169
universality, 165–168value, 155
Initial public offering (IPO), 181
market, action, 110
Institutional asset allocation order,
execution. See Nikko SecuritiesInstitutional customer base, impact, 68Institutional orders, usage, 85International Monetary Market (IMM)
creation, 73
Melamed/Friedman, impact, 2
Internet, usage, 158Intraday price aberrations,
randomness, 109Intraday volatility, driving, 129Intramarket spreader, 26Investments
decisions, alteration, 168–169disappointments/opportunities, 71efﬁcient frontier, relationship. SeeAlternative investments
luck, usage, 178–179three-to-one write-offs, 152
Investors
courage, 182–184discipline, 181–182
193
information, availability, 117portfolio, correlation diversiﬁcation,
65
security, false sense, 123–124taxes, impact, 177
IPO. See Initial public offeringIrrational exuberance, 31
state, 112
JJapanese candlestick charting
methods, 90
Japanese stock market, Nikkei 225
measurement, 172JDSU, addition. See Standard &
Poor’s
Jobs Creation Act (2004), 53Jobs data, tracking, 146John Labuszewski, involvement. See
Nikko Securities
Johnson, Kenny, 128Jones, Paul Tudor, 48
KKC-CO, 28Kellogg School of Management,
107–108
Kingstree, 183–184Krause, Jim, 131Kumar, Alok, 110Kupcinet, Irv, 155
LLate-day phenomenon, 52Leary, Timothy, 92Leeson, Nick, 172–174Lef `evre, Edwin, 94Legging the spread. See SpreadsLehman Brothers, 138Lemming mentality, 15–16Lemmings, jumping, 15Leverage, 8–9Liddy, G. Gordon, 72LIFFE. See London International
Financial Futures Exchange
JWPR006-IND
JWPR006-Bouroudjian
March 23, 2007
8:31
Char Count= 0
194
SECRETS OF THE TRADING PROS
Lintner, John, 58–59. See also Potential
Role of ManagedCommodity-Financial FuturesAccounts in Portfolios of Stockand Bonds
Liquidation only transaction, 161Liquidity, 6–8
addition, 152characteristic, 41migration, Bund trader
responsibility. See LondonInternational Financial FuturesExchange
providers. See Standard & Poor’s 500
futures pitsqueezing, 161
providers, impact. See ChicagoMercantile ExchangeLive cattle market, involvement, 26Lo, Andrew, 116
work, importance, 117
London International Financial
Futures Exchange (LIFFE)
Bund futures contract, Eurex
(impact), 77
liquidity, migration (Bund trader
responsibility), 83Long Term Capital Management(LTCM), leverage ratio, 61Long-term positions, holding, 157LTCM. See Long Term Capital
Management
Lynch, Peter. See Peter Lynch methodmanagement. See Fidelity Magellan
MMalkiel, Burton, 106Mallon, Tom, 171Managed Accounts Report, 62–63Managed funds, asset class (status),
63–65
Managed futures
fund, concept. See Multistrategy,
multiadvisor managed futuresfundstocks, 64
structures, 65–66usage, 55
Margin calls (coverage), capital
(request), 161
Market psychology, 120
driving, 123impact, process, 133–134understanding, 134–135
Market trading
homework, 12–13knowledge, 10–11lessons, 11–12
Marketplace
euphoria, 121–123psychology, 119
Markets
average, underperforming, 117capitalization, 69change, September 11 (impact),
142
collective consciousness, 126–127condition, contrary opinion, 102efﬁciency, 116