Spent lot time the library reading annual company reports

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THE NEW MARKET WIZARDS

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Contents
Preface ________________________________________________________________________ 4 Acknowledgments________________________________________________________________ 5 Prologue _______________________________________________________________________ 6 PART I Trading Perspectives _________________________________________________________ 7 Misadventures in Trading __________________________________________________________ 8 Hussein Makes a Bad Trade _______________________________________________________ 11 PART II The World's Biggest Market___________________________________________________ 12 Bill Lipschutz: The Sultan of Currencies ______________________________________________ 13 PART III Futures-The Variety-Pack Market _____________________________________________ 33 Futures-Understanding the Basics __________________________________________________ 34 Randy McKay: Veteran Trader______________________________________________________ 35 William Eckhardt: The Mathematician________________________________________________ 45 The Silence of the Turtles _________________________________________________________ 57 === Michael Carr === __________________________________________________________________ 58 === Howard Seidler === ________________________________________________________________ 59 Monroe Trout: The Best Return That Low Risk Can Buy __________________________________ 61 AlWeiss: The Human Chart Encyclopedia _____________________________________________ 71 PART IV Fund Managers and Timers___________________________________________________ 74 Stanley Druckenmiller: The Art of Top-Down Investing __________________________________ 75 Richard Driehaus: The Art of Bottom-Up Investing______________________________________ 84 Gil Blake: The Master of Consistency ________________________________________________ 91 Victor Sperandeo: Markets Grow Old Too _____________________________________________ 98 PART V Multiple-Market Players _____________________________________________________ 107 Tom Basso: Mr. Serenity _________________________________________________________ 108 Linda Bradford Raschke: Reading the Music of the Markets ______________________________ 113 PART VI The Money Machines_______________________________________________________ 119 CRT: The Trading Machine________________________________________________________ 120 Mark Ritchie: God in the Pits______________________________________________________ 122 Joe Ritchie: The Intuitive Theoretician ______________________________________________ 130 Blair Hull: Getting the Edge_______________________________________________________ 138 Jeff Yass: The Mathematics of Strategy _____________________________________________ 147 PART VII The Psychology of Trading _________________________________________________ 154 Zen and the Art of Trading _______________________________________________________ 155 Charles Faulkner: The Mind of an Achiever ___________________________________________ 156 Robert Krausz: The Role of the Subconscious _________________________________________ 165 PART VIII Closing Bell ____________________________________________________________ 172 Market Wiz(ar)dom_____________________________________________________________ 173 A Personal Reflection ___________________________________________________________ 181 Appendix: Options - Understanding the Basics__________________________________________ 182 Glossary _______________________________________________________________________ 184

With love

Here's what I believe:
1. The markets are not random. I don't care if the number of academicians who have argued the efficient market hypothesis would stretch to the moon and back if laid end to end; they are simply wrong.

7. To excel in trading requires a combination of talent and extremely hard work-(surprise!) the same combination required for excellence in any field. Those seeking success by buying the latest $300 or even $3,000 system, or by following the latest hot tip, will never find the answer because they haven't yet understood the question.

8. Success in trading is a worthy goal, but it will be worthless if it is not accompanied by success in your life (and I use the word success here without monetary connotation).

My thanks to those who graciously agreed to be interviewed for this volume, freely sharing their thoughts and experiences while refraining from requests for cosmetic changes when presented with the finished manuscript for review. (Not all those I interviewed proved as accommodating; the exceptions do not appear in this book.) In a number of cases, the traders I interviewed had nothing to gain from participating, at least not monetarily, as they either do not manage any public funds or are not open to further investment. I am particularly appreciative of their cooperation.

I would like to thank my wife, Jo Ann, for reading the original manuscript and providing some well-directed suggestions, all of which were taken. Mostly, I must thank Jo Ann for enduring yet another year as a "book widow," not to mention keeping the kids quiet so that I could sleep in the mornings after those all-night writing sessions. My three wonderful children-Daniel, Zachary, and Samantha-were as understanding as could possibly be expected for any group aged eight, seven, and three in accepting all those hours stolen from our time together and activities foregone as a result of my involvement in this work.

One cold winter morning a young man walks five miles through the snow. He knocks on the Jademaster's door.

The Jademaster answers with a broom in his hand.

-from The Trader's Window,

ED SEYKOTA

On the lecture tour following the completion of this book's predecessor, Market Wizards, certain questions came up with reliable frequency. One common question was: "Has your own trading improved dramatically now that you've just finished interviewing some of the world's best traders?" Although I had the advantage of having plenty of room for dramatic improvement in my trading, my response was a bit of a copout. "Well," I would answer, "I don't know. You see, at the moment, I'm not trading."
While it may seem a bit heretical for the author of Market Wizards not to be trading, there was a perfectly good reason for my inaction. One of the cardinal rules about trading is (or should be): Don't trade when you can't afford to lose. In fact, there are few more certain ways of guaranteeing that you will lose than by trading money you can't afford to lose. If your trading capital is too important, you will be doomed to a number of fatal errors. You will miss out on some of the best trading opportunities because these are often the most risky. You will jump out of perfectly good positions prematurely on the first sign of adverse price movement only to then see the market go in the anticipated direction. You will be too quick to take the first bit of profit because of concern that the market will take it away from you. Ironically, overconcem about losing may even lead to staying with losing trades as fear triggers indeci-siveness, much like a deer frozen in the glare of a car's headlights. In short, trading with "scared money" will lead to a host of negative emotions that will cloud decision making and virtually guarantee failure.

This particular trade provides a good illustration of one of the principles that emerged from my interviews for Market Wizards. Patience was an element that a number of the supertraders stressed as being critical to success. James Rogers said it perhaps most colorfully, "I just wait until th'ere is money lying in the comer, and all I have to do is go over there and pick it up. I do nothing in the meantime." In essence, by not wanting to trade, I had inadvertently transformed myself into a master of patience. By forcing myself to wait until there was a trade that appeared so compelling that I could not stand the thought of not taking it, I had vastly improved the odds.

During the next few months, I continued to trade and my equity steadily increased, as I seemed to be making mostly correct trading decisions. My account grew from $0 (not counting an initial $4,000 deposit that was quickly withdrawn once profits more than covered margin requirements) to over $25,000. It was at this juncture, while traveling on a business trip, that nearly all my positions turned sour simultaneously. I made some hasty decisions between meetings, virtually all of which proved wrong. Within about a week, I had lost about one-third of my gains. Normally, when I surrender a meaningful percentage of my profits, I put on the brakes, either trading only minimally or ceasing to trade altogether. Instinctively, I seemed to be following the same script on this occasion, as my positions were reduced to minimal levels.

I was eager to speak to Ed so that I could relay my trading experiences and glean the benefits of his insights. Unfortunately, at every break during the seminar, each of us was surrounded by attendees asking questions. We were staying at the same small hotel m San Francisco. After we got back, I asked Ed if he cared to go out and find a spot where we could relax and talk. Although he appeared a bit beat, he agreed.

We walked around the area trying to find something that resembled a comfortable local bar or cafe, but all we managed to find were large hotels. Finally, in desperation we wandered into one. In the lounge, a loud band and a truly bad singer were belting out their version of what else-"New York, New York." (I'm sure if we were in New York, the band would have been playing "I Left My Heart in San Francisco.") This certainly would not do for a quiet conversation with the man I hoped would be my temporary mentor. We sat down in the lobby outside, but the strains of the music were still uncomfortably loud (yes, Virginia, there are sounds worse than Muzak), and the atmosphere was deadly. My hopes for an intimate conversation were quickly fading.

The moral here is: You don't always have to be in the market. Don't trade if you don't feel like it or if trading just doesn't feel right for whatever reason. To win at the markets you need confidence as well as the desire to trade. I believe the exceptional traders have these two traits most of the time; for the rest of us, they may come together only on an occasional basis. In my own case, I had started out with the confidence but without the desire to trade, and I ended up with neither. The next time I start trading, I plan to have both.

*The Elliott Wave Principle, as it is formally called, was originally developed by R. N. Elliott, an accountant turned market student, Elliott's definitive work on the subject was published in 1946, only two years befors his death, under the rather immodest title: Nature's Law-The Secret of the Universe. The application of the theory is unavoidably subjective, with numerous interpretations appearing in scores of volumes. (SOL-RCE: JohnJ. Murphy, Technical Analysis of the Futures Markets, New York Institute of Finance, 1986.)

So initially, from Hussein's perspective, the invasion of Kuwait was a good trade-large potential and limited risk. However, as so often happens, the market changed. President Bush committed the United States to the defense of Saudi Arabia by sending in troops and spear-headed the passage of UN resolutions aimed at convincing Hussein to leave Kuwait. At this point, Hussein could probably have negotiated a deal in which he would have withdrawn from Kuwait in exchange for some disputed territorial gains and port rights-a quick profit. However, although the trade had started to deteriorate, Hussein decided to stand pat.

Next, Bush sent a stronger signal by doubling U.S. forces to four hundred thousand-an action indicating not only that the United States was ready to defend Saudi Arabia but that it was also establishing the capability for retaking Kuwait by force. Clearly the market had changed. Hussein ignored the market signal and stood back.

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It is estimated that, on average, $1 trillion is traded each day in the world currency markets. The vast majority of this currency trading does not take place on any organized exchange but rather is transacted in the interbank currency market. The interbank currency market is a twenty-four-hour market, which literally follows the sun around the world, moving from banking centers of the United States, to Australia, to the Far East, to Europe, and finally back to the United States. The market exists to fill the needs of companies seeking to hedge exchange risk in a world of rapidly fluctuating currency values, but speculators also par-ticipate in the interbank currency market in an effort to profit from their expectations regarding shifts in exchange rates.

In this huge market, there has been only a handful of high-stakes players. Ironically, although these traders sometimes take positions measured in billions of dollars-yes, billions-they are virtually unknown to most of me financial community, let alone the public. Bill Lipschutz is one of these traders.

"Yes," I said, "that's a very interesting coincidence, but could you fill in the details? How about some specific stories?" He responded again with generalizations. My hopes for the interview went into a rapid nosedive.

I've done interviews that I knew were dead in the water after the first hour and have ended up ditching the results afterwards. However, this interview was different. Although I felt that I was getting very little useful material during the first one or two hours of our conversation, I sensed there was something there. This was not a dry well; I just had to dig deeper.

He took me into an office that had a glass wall facing out onto a large trading room, with a view of an electronic tape running across the wall. I sat with my back to the tape, and the whole time he was interviewing me, he was also watching the tape. He started firing questions at me, one after die other. Here I am, a college kid, wearing a suit and tie for the first time in my first formal interview, and I had no idea what to make of all of this. I answered each of his questions slowly and deliberately.

After about ten minutes of this question-and-answer process, he stops abruptly, looks me straight in the eye, and says, "OK, forget all this bullshit. So you want to be a trader. Every fucking guy comes here and tells me he wants to be a trader. You said you're trading your own account. What stocks are you trading?" "I've been pretty involved in Exxon recently," I reply.

A few weeks later, I received a call from the fellow who ran Salomon's recruiting program. He said, "We have a bit of a problem. Sidney Gold wants to hire you, but Kaufman also wants you to work for him. So we worked out an arrangement where you'll split your time between the two." I ended up working the first half of the summer doing research for Eh-. Kaufman and the second half working on the options trading desk.

At the end of the summer, Sidney offered me a job. Since I still had one semester left in business school and also had to finish my thesis for my architectural degree, I arranged to work for Sidney during the fall semester, with the understanding that I would return to school in the spring.

That's exactly right. But that whole trading approach actually fit very well with my own tape-reading type of experience.

==== Did you return to the equity options department when you finished Cornell? ====

==== It doesn't sound like very much. Was there more to it? ====

No, that was a tremendous amount. Clearly you have never worked for Salomon. The company is all about the culture of Salomon Brothers.

I didn't even know what a Deutsche mark was. But, then again, no one in the department really knew much about currencies.

==== No one? ====

That's not how Salomon did things. At Salomon everything was home-grown. You're asking questions like you think there was some sort of written business plan. The reality was that a few senior people got together one day, and one said, "Hey, shouldn't we really start a foreign exchange department?"
"Okay. Who can we get to mn it?"
"How about Gil?"
"Okay. Hey, Gil. Do you want to run the department?"
"Sure, F 11 do it."
Gil came from bond arbitrage. He had no experience in currencies. His idea was to get a bunch of bright people together, figure out how this foreign exchange stuff worked, let them trade the product around, and see if they could make some money.

With no one in the department having any real background in currencies, how did you get the experience to know what to do?

Foreign exchange is all about relationships. Your ability to find good liquidity, your ability to be plugged into the information flow-it all depends on relationships. If you call up a bank and say, "I need a price on ten dollar [$10 million] mark," they don't have to do anything. They can tell you, "The mark dealer is in the bathroom; call back later." If I call up at 5 P.M.and say, "Hey, Joe, it's Bill, and I need a price on the mark," the response is going to be entirely different: "I was just on my way out the door, but for you I'll see what I can do."

==== As someone brand new in the business, how did you develop these contacts? ====

==== Why is that? ====

I have a reputation as being one of the most-if not the most-hard-assed players in the market. I never, ever, ever, ever, cut anybody a break, because I figured that at Salomon everybody was trying to knock us off. I was sure that if the tables were reversed, no one would ever give us a break. My view was always that these are the rules of the game. I don't give any quarter, and I don't expect any quarter.

My business in trading currency options was exploding, and the Philadelphia Stock Exchange was where they were traded. (The over-the-counter currency options market was only just starting at the time.)

==== So you did it more to protect the exchange. ====