Apr

8

A trader at the Grand Bazaar in Istanbul where gold trading has been going continuously for 550 years, amid shouts of 10 whole ones for chocolate tomorrow, a trader in sweats and a wool cap notices my screen, and says "Gold? That's what we love to deal." "Yes," I say, "and stocks and bonds, and oil and grain". "Ah, that's what we love," he says. "Tell us about market trading in the States. What's it like?". I start to tell him but… [where to begin?…]

At 4 am in the morning, a sleepy trader wakes up and finds that prices are climbing. He's short. He looks at the screen and notes they're up 5 points. Thank goodness, he says he saw the price of the stock market on his screen, and it wasn't the bonds he's short… The bond price was a mistake. But then he looks again, and the bonds have risen 6 points. He learns later that day that the minutes of the Open Market Committee were released secretly to 100 politicians and bank officials, on a "need to know" basis and that they were acting on it 10 hours before the release.

The stock market opens down 200 Dow Points, and you buy a line. It quickly goes down another 100 in the first 5 minutes. And you're down a few big. A news flashes across the screen that Janet Yellen just gave a talk to selected Democrats at a closed door meeting, and the market spikes up so you have a 2 tick profit of a grand or two. You quickly get out, thanking your lucky stars that you're not broke, and indeed you have a profit. The market continues to go up, and ends up 400 down on the day, and if you had just held your position you would have been able to retire and pay for the education of all your kids.

You stay at your screen for 48 hours straight, nursing a losing position that's being hammered by instability in Europe. The market is very thin, and you need a big move and big news to get out. Finally after waiting without sleep or food, you go to the refrigerator to get a coffee for 30 seconds, and in that time an announcement that the ECB is stepping in comes out and the market rises to where you would have had a profit, but by the time you get back there's only 2 contracts bid for, and by the time you find enough liquidity to get out, your loss is gigantic.

You're sick in the hospital bed, all wired up with tubes and lines but they're on rollers. A mentor comes from California to visit you to see and comfort the family. You have a big position, and have to trade it. But your ashamed to be looking at at the prices, while he's here to see if you're alive. So you go to the bathroom trailing your lines behind you, and your friend says to your wife, "I guess the kidneys are in desperate shape".

You have a big position in gold, and it's gone against you 100 bucks. You pick up your terminal and you find that Goldman had issued a bearish report on the metal the previous night. Their next report: "As predicted, gold has plummeted to 600. Our prediction was right on target. But we said sell at 800 and it only reached 795 overnight so we missed 5 bucks of the move."

A lot of people have asked me why so many hundreds of thousands trade short term in America. Almost all of them lose. Almost all of them base their trades on mumbo jumbo things that are completely random. The only constant is the vig they pay to the house, which is often 25% of their average gain or loss on the trade. The chances they'll end up a winner is less than the parts in a warehouse spontaneously assembling themselves into a beautiful girl.

I asked an eminent psychologist who has written many books on the market about it. And he said there is a feeling here that no pastime is good unless it causes pain. Most of the traders feel guilt about their childhood, and what horses asses they were and what evil thoughts they had. They wish to atone through trading where the pain of a loss is infinitely greater than the rare occasions that they make a comparable profit. I don't know enough about psychology to know if he's right, but as I suffer through the trading year, and take our small profits on every big move in my favor, but lose it all in the few big moves against, and the little woman says, "when are you going to learn to cut your positions by 90%", I think he may be on to something.

A trader from South Africa comes to your office, and says he's been following your blog for years, and you're the one person in the world that can appreciate his methods. He says he has an IQ of 190 and was on the Olympic handball team. He has the ability to predict the exact range of the day in every market. But his marketing firm won't let him trade unless they execute the trades for him and he wants you to back him. You tell him that being able to predict the range is useless for making profits as far as you're concerned. He leaves the office, curses you out and says he'll be throwing mud on your well deserved and soon to be utilized grave.

A weather forecaster is introduced to you at a party by a friend. He informs you that he's been able to forecast correctly a month in advance the last 7 major droughts in the Midwest. He wants you to subscribe. You ask him why he doesn't just make a killing on these things himself. He informs you he would but he was caught big in one of his forays and lost his stake.

An expansive trader who knows stocks and bonds but knows nothing about the grains decides to take a position in soybeans. He buys a few hundred contracts at the market before the open, and it opens limit up and closes limit down. He finds that he didn't get out before the delivery notice, and his broker informs him that he's now storing 10 big train loads of soybeans in a warehouse at a charge of 10,000 a day + interest.

A trader opens a position in a short put spread selling 20,000 of premium. It goes in his favor for a few days, and it's 15% away from his higher strike price and potential loss. He checks with his broker on the margin and finds that he has 1,000 of premium left but the required margin is 1.5 million. He calls up to find if it's a mistake. "No, that's correct, during the last 3 days before expiration, we assume 10 scenarios, and take the worst which in this case was an immediate 30% decline in price. Furthermore, we're charging you 5,000 a day in Exposure Fees, to compensate for our extra risk. And yes, we just doubled our charges, because we got hit for a 300 big loss on Swiss franc positions, so don't complain."

The lone trader does his analysis and doesn't worry about being taken because he is just one guy trying to make a few trades. And then his setup happens and he takes his position…and the market does exactly the thing that will cause him the biggest loss. How can this be? he thinks. He is just one clown trying to clip a few ticks or points, here and there, not worthy of being a target. But he starts to suspect that maybe he is just one of a thousand clowns, or ten thousand, who are all doing exactly the same analysis at precisely the same time and taking the same positions, which are exploited by a better algo in a co-located box somewhere with huge backing. This "thousandth clown theory" starts to gnaw at him, makes him doubt.

Orson Terrill adds: 

An investment bank with operations in Houston hires an MBA from one of the most prominent business schools in California, he's also the son of the CEO of one of the largest banks in Latin America, and surely there will be huge deal flow for them. They put him on with great access and freedom. Instead of putting on a bad trade of several hundred thousand, he's able to executes several hundred million, accidentally, and loses several million in the first day. He ends up being a high paid restaurant manager, for his financial acumen and pedigree, and he sets the place on fire.


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10 Comments so far

  1. Charalampos on February 7, 2015 9:06 pm

    Hello dear Victor, it makes me doubt,for couple or years. And it still question to me, how to get consistency.The mistakes are more clear now. Over trading.closing positions to fast.emotionaly atached to losses.to be onset, I look at price action,OHLC.yestarday OHLC , so charts is what i look at.Working on pschlogy, trying to clear all bad thoughts.Thousand clown theory is what I think of.siting here thousand km from US with no news feed,with no experience about how it works,.if I had chance to sea how locals or any other profitable firms work,at least I could make,better desijions.Intra day is made of a lot of noise,it is hard to be on right direction.at 30, it is more scary to think that it is about paying vig,but for person like me with no statistical background,there is no other way,than just looking at charts, as much as I can,to find anything that can help me to pay for live.Story of Lone trader:)

  2. Pacific SW on February 8, 2015 9:57 am

    Vic, this being a public forum you probably wont reply, but have you ever thought YOUR method is mumbojumbo and you were just smart enough to stay your whole career on the right side of the drift, with humongous leverage? Think about it.

    Your junkyard-boeing analogy doesnt hold water. Soros way works. Munger way works. Icahn way works. Even buffett way works. Time tested. To the $ billions. Yours didnt stand the test of time, not once, but multiple times and this is the most robust stat test. Maybe you were just lucky to skim enough OPM residuals to provide a comfortable life for your family, and more power to you, but otherwise to an outsider, this looks like a huge waste of one’s abilities.

  3. anand on February 8, 2015 8:06 pm

    is it too late at 33 to retrain as a dentist?

  4. Jim Davis on February 27, 2015 3:03 pm

    The market is a circus.

    Profits are made trading against clowns, and not elephants.

  5. Rob Ivanoff on February 28, 2015 4:31 pm

    Vic, i appreciate how awesome your writing and thinking is, and your insights. Keep it up!

  6. Commie Pinko on March 2, 2015 10:21 am

    The markets are rigged to the benefit of the oligarchs.

  7. Philipp on March 2, 2015 6:01 pm

    “A lot of people have asked me why so many hundreds of thousands trade short term in America. Almost all of them lose.”

    Too gloomy. Trading is a zero-sum game. That means half of them lose and half of them win.

    If you believe in efficient markets or random walk, than housewifes and hedge fund managers speculate with exactly the same odds. They win some and they loose some.

  8. Just Financial News / Further reading on March 3, 2015 5:51 am

    […] - Day traders: “The chances they’ll end up a winner is less than the parts in a warehouse spontaneously assembling themselves into a beautiful girl.” […]

  9. Not Philipp on March 3, 2015 12:18 pm

    “Trading is a zero-sum game. That means half of them lose and half of them win.”

    Actually no, it means that for every winner there is a loser. But the winner can by the same person in every trade, and actually that’s pretty much the case.

    The loser always resembles the first commenter. The winner is always the insider moving on information that the first commenter doesn’t know about yet, and probably never will.

  10. hastalasiesta.org on March 14, 2015 5:46 am

    I usually do not comment, however I read some of the responses here What is a Trader, from
    Victor Niederhoffer : Daily Speculations. I do have 2 questions for you if you tend not to mind.
    Is it simply me or do some of these responses look like they are left by brain dead folks?
    :-P And, if you are posting at additional social sites, I’d like to keep up
    with you. Could you list of every one of your social networking sites like your twitter feed, Facebook page or
    linkedin profile?

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