iif_kpmp_Borsellino_Day_Trader_s_Course.pdf

For me, my introduction to trading was in the futures market, at the Merc where I was a runner (the lowest of entry-level jobs), then a clerk, an assistant broker, a broker, and finally an independent trader. The first market I traded was gold—back in the early 1980s when gold was at $800-plus an ounce—and then I moved to S&Ps soon after that pit opened up. I’ve also traded currency futures and Eurodollar futures. Clearly, my trading career was built on my early experience at the Merc and my affinity for the futures market. I thrived on the volatility and chaos, discovering that when the world around me went crazy I was able to keep sane.

Had my trading career begun differently—as an apprentice to a stock or options trader—I might have ended up trading stocks or options. But S&P futures and I are well suited to each other. To me, this was the ultimate competitive arena, the world’s largest stock index futures contract. And anyone who trades anything certainly knows that S&P futures have been an untamable market.

Also, there is the breadth of the S&P market. Institutions come here to lay off portfolio risk, making for good trading opportunities for locals like me. This translates into good trading opportunities, too, for the screen-based traders of both the S&P major and the scaled-down e-mini.

As I’ve said in Chapter 2, trading the S&Ps also allows me to participate in the broader dynamics of the market, instead of just one or a handful of stocks. Add to that the ability to go short without an uptick (as is required in stocks) and the leverage, margin, and taxation treatment, and I believe that there are some inherent advantages in trading futures.

What you trade will depend on what suits you. You may trade stocks 100 percent of the time, using the movement of the stock index futures as a guide for your trading decisions. You may trade both stocks and futures, depending on the dynamics of the day.

Whatever you trade, the fundamentals are the same. Focus on a liquid market. You don’t want to trade a thin stock that’s hard to get into or out of. Always use technical analysis to determine entry, exit, and stop points. And remember that trading without discipline is like driving with a blindfold. You’re almost certain to crash.

TRADING IN THE PIT

For some 20 years, I’ve traded on the floor of the Chicago Mercantile Exchange. While the evolution to an electronic marketplace is inevitable, I do believe that open-outcry (yelling out bids and offers in the pit, auction style) will not disappear immediately. Some markets will more easily become all-electronic—such as currency futures— especially if trades tend to be done between brokers, going from order filler to order filler. If local participation is a strong feature, such as in S&P futures, I believe that the pit and the electronic market will somehow coexist.

Readers of this book, however, will 99.9 percent most certainly be screen traders. The closest they come to the pit may be the visitors’ gallery at the Merc or another exchange, or perhaps a “squawk box” that broadcasts the activity from the trading floor (much like radio announcers give the play-by-play on the ball game). Still, there remains a fascination for the pit.

For screen-based traders, a visit to the pit is like looking behind the scenes at the filming of a movie. At the screen, you see the action as it is displayed in a dynamic but linear fashion, one tick after another. In the pit, you see what transpired to make that tick. You hear the bids; you hear the offers. You watch the hand signals and gestures as traders make trades with each other.

To the outsider it looks like pandemonium. To the trader in the pit, however, it’s an orderly marketplace with nearly instant oversight. If a price is questioned, the pit is immediately notified by an exchange employee who makes an announcement, and if the price is taken out, we know that, too.

But there is no denying that pit trading is like nothing else. There are days when it feels like you’re transacting business in a crowded elevator, stuck between floors. On other days, you’re standing around, waiting for something to happen.

The differences between pit and screen trading go beyond the physical locales. In the pit, it’s possible to make small, quick scalping trades when large orders come into the pit. Some of those trades may last less than a minute. Just by being in the pit, you will be presented

with opportunities to buy and sell—to get in and out of positions— quickly, as the market moves. This kind of scalping may be in addition to position trades that you’re making, based on your bias and analysis.

At the screen it’s virtually impossible to scalp, with the possible exception of when the market is very volatile. On those occasions, you may be able to get into and out of a trade very quickly because of the opportunity that you saw in the market. But in general, screen-based trades—even a quick entry and exit—tend to be more deliberate. You see a potential trade develop on the screen, and you make it. That trade may last minutes or hours.

The computer screen has made another difference in trading: It has eliminated the physical advantage in the pit. Bigger is better in the pit, where to be seen and heard is essential. The trading pit tends to be mostly male and mostly young. At 44, I am an “old” trader in the pit. The physical stamina to stand in that pit for hours a day is a younger man’s game.

The screen, however, is the great equalizer. Whether you’re the size of a linebacker or a ballerina, it doesn’t make any difference. Male or female, young or old, the screen has no preference. Rather, what remains the same is the dedication to the market and the discipline to trade.

There’s one more thing that may be helpful. In the pit, you are watching the action with your eyes and hearing the bid/offer action (and the accompanying frenzy of noise). At the screen, as you watch the action, you have to learn to “listen with your eyes” for what the market is telling you.

THE BIGGEST MISTAKE

People sometimes ask me what’s the biggest mistake I’ve ever made. Maybe they’ve heard the story of how I made $1.3 million in one halfminute trade on the Thursday after the crash of 1987. They want to know if I’ve suffered a one-trade loss as big. Thankfully, that’s not the case. But I’ve had my share of big losers, too.

Still, those losers aren’t the worst mistakes I’ve ever made. In trad-

ing, losses happen. They are inevitable. If you trade big size, you’ll stand to increase both your profit potential and your loss potential. That’s why you never trade bigger than your capital allows. (And remembering the 2:1 reward-to-risk ratio rule, you want to stand to make a minimum of $2 for every $1 that you could lose.)

The biggest mistake anyone could make is believing that they’ve beaten the market. Nobody beats the market, and I mean nobody. Traders may outperform a particular index. For example, money managers may say they have outpaced the performance of the S&P 500. But have they beaten the market? Have I on my best day of trading? Absolutely not.

Trading successes are the product of being in sync with the market. Your technical analysis, your trade execution, and the movement of the market are aligned. It’s what professional athletes call being in “the zone.” You find yourself buying at the low and selling at the high. You get in and out of trades that are executed with textbook precision.

But don’t ever let yourself be lulled into the feeling that you’ve mastered the market. Because you can’t be in sync with the market every day. There will be some days when you’ll have to keep your wits about you as the market gyrates, swirls, and chops its way higher and lower. Focus on making well-executed trades (I know, this sounds like a broken record). Trade what the market is dishing out. Don’t look for something that isn’t there. And never, ever let yourself believe you’ve beaten the market.

PAPER TRADING

Take a kid to an arcade some day and let him or her play a racing game. Gripping the steering wheel, the kid stares at a screen that simulates the racetrack. The sound of engines roaring and squealing brakes makes it seem real. But it’s only make-believe.

It’s much the same with paper trading. It may have the look, feel, and sound of the real thing, but it’s only make-believe. However, unlike the arcade game, paper trading can be educational. With paper

cattle—that are traded at the Chicago Merc (and the grain futures traded at the Chicago Board of Trade) were certainly the granddaddies of the futures industry. But the financial futures were the new generation. Currency futures had been around at the Merc since the 1970s, and Eurodollar futures (based on the amount of U.S. dollars on deposit overseas) were introduced in 1981.

But the S&P futures contract—based on the value of the Standard & Poor’s 500 stock index—was another animal. Here was the benchmark of Wall Street—the S&P 500—used by institutions and portfolio managers. Today, there is a host of financial futures products traded by institutions and individuals alike. They include S&P and Nasdaq majors, S&P and Nasdaq e-minis, Dow futures (on the Chicago Board of Trade), the Nasdaq 100 tracking stock (QQQ) on the American Stock Exchange (Amex), and a variety of sector indexes from biotechnology to banking.

Looking back, we can easily see that the financial markets are continuing to evolve. As long as a need and an interest are perceived, new financial products will be launched. As long as hedgers will use a product to reduce their risk exposure and speculators are willing to participate and provide liquidity, then there will be new markets on the horizon.

The one I’m watching closely is the advent of futures on individual stocks. To me, this has the potential of revolutionizing the markets. But revolutions are often very messy and potentially disruptive.

Single-stock futures will give equity traders another venue to speculate in the movement of particular issues. Plus, futures traders, who already participate in the broader indexes, will be able to speculate in the movement of individual issues. Of course, as with every significant market, there will be the obstacles to overcome. One is regulatory, as in who is going to watch over these futures on stocks? Futures are the purview of the Commodity Futures Trading Commission (CFTC). But stocks come under the watchful eye of the Securities and Exchange Commission (SEC). There is little use in debating here what agency should watch over these futures on stocks. Rather, our attention must be focused on what this means to the marketplace.

at it. The rest would either lose all their money, burn out quickly, or decide that the wear and tear on their physical and mental well-being was not worth it.

There is no guarantee I can give anyone that he or she will succeed at trading. What I do know, based on my own experience, is that you can improve your chances of succeeding with a trading plan based on technical analysis and a disciplined approach to trade execution. Beyond that, it is simply a matter of knowing yourself.

Trading is not for everyone, just as law, medicine, teaching, architecture, the arts, professional athletics, or any other occupation isn’t for everyone. Trading may interest you. Trading may be your passion. Trading may be your fantasy to make a lot of money and tell your boss to take this job and. . . .

In the least, your foray into trading will be a learning experience, about the market and about yourself. If this is your attitude going in, you won’t “lose.” You will only stand to win. Don’t start out risking more capital than you can afford to lose. If you take the position that you could lose every dime in your trading account and still have your house, your cars, your prized possessions, then you won’t be gripped by fear or ruled by greed.

You may find, as I did when I first stepped on that trading floor, that you are at home in the market. It may make sense to you on such a deep level that you couldn’t think of doing anything else. You will still have a learning curve ahead of you, and you’ll face losses. But, knowing yourself, you will know that you are cut out to trade.

Or you may do well enough, but you may find that trading was not all it was cracked up to be for you. You may find the emotional highs and lows to be more than you want to put up with on a regular basis. Having a day job you enjoy and the security of a paycheck may be far more appealing.

Or you may not do well at all. You may find that, despite all your best efforts, you are not suited for this. Your losses mount. You’re losing your confidence, your nerve, and your stomach lining. There is no joy in trading for you.

No matter what the outcome if you approach trading with a desire to learn, then there will be no real loss other than the capital that you

could afford to put at risk. The money you lost was simply tuition to attend the University of the Market, which compares with no other place of “higher education.” Classes are held almost daily, whenever the market is open. The tuition is the capital you can afford to risk. The syllabus encompasses every facet of market activity and psychological demand you can envision.

The market’s open. Now, the real day trader’s course begins.