Aug

27

Dear Mr Niederhoffer,

I really like your website dailyspeculations. There are a lot of fascinating and interesting articles that lead to new ideas and inspiration.

I read in the "About V.N & L.K" section that you trained some very successful traders and hedge fund managers. I am a student of business administration in Germany and want to work as a trader in the future.

It would be interesting to know how the training of your traders was structured and what were the most important things you focused on during the training? If you were now in my age (25 to 30 years), how would you start and where would you try to get the sufficient education for this business?

I hope that you can help me with your insights.

I wish you all the best and hope you will continue to share your insights on the markets.

Kindest regards,

Lars Gutt

Victor Niederhoffer writes: 

This is a good question. Does anyone have a good answer besides reading a good statistics book like [the old] Snedecor, Horse Trading by Ben Green, Bacon's Professional Turf Betting, and starting a hypothetical trading account, and doing some hypotheses testing from a field they know something about?

Jeff Watson writes: 

A big question is why you would want to trade. Trading is a pretty thankless job, very tough, and maybe you only see the media presentation, or you want to tell people at a cocktail party, "I'm a trader," but I'd like to see a why.

Having a good mentor, someone that you can apprentice to, is the most important thing in learning how to trade. A good instructor is much more important than Ivy League Degrees, how to manuals, internet chat rooms, books, systems, gurus, the financial media, and all the other mind numbing stuff out there.

My mentor when I first started was an 85 year old guy who was first trained by Art Cutten. He learned well from old man Cutten, and taught me how to keep out of trouble. The main lesson to learn in trading, more than anything else, is how to keep out of trouble. Manage to keep out of trouble, keep your own counsel, and the mistress might give you a second or third date.

George Coyle writes:

Series 3 study guide is a great (relatively brief) overview of the commodity futures industry. It touches on styles of trading as well as goes through lots of the unexciting but important details (order types, etc.). (Outline of material covered in exam [pdf]). (Online version of Study Guide by Investopedia).

From there the Market Wizard books are good to look at the different styles to see which sounds the best to you.

If quant focused I would say read something on how casino games work (odds and such–Richard Epstein's Theory of Gambling and Statistical Logic book is good) and think of how that might be applied to markets with the trader acting as the casino. Focus on keeping it simple, think of what is practical and possible when working with data.

Read your books of course. Read interviews with William Eckhardt. Larry Williams' recent book (LT Secrets for ST Trading) does a good job of outlining how quant works specifically, as does Charles Wright's Trading as a Business. Livermore's How to Trade in Stocks is a good one too (less popular than Reminiscences but more of a "how to" manual).

Deitel and Deitel C++ How to Program is the best C++ manual out there in my opinion. I dodged it for years but it is crucial and so useful. www.thenewboston.com is a great website to watch youtube vids on various languages to get your feet wet (but Deitel is necessary if you really want to learn the specifics).

And just start trading. The best teacher is experience. Even if equipped with all the great logic from above it seems real experience is necessary to actually follow the rules.

Craig Mee writes:

Understand valuation. Get a handle on all things that move a market price. Maybe have an 8 week internship of your own making with 8 different dealers. Corn farmer, art dealer, financial dealer, car dealer, importer, etc, and understand that whatever you're trading, you potentially should be able to move in theory from one to the other seamlessly. You are a valuer first and foremost, and if you value it wrong, you will also see how most of these choose to cut their positions. This might help to keep in the forefront of your mind what your mission actually is.

George Parkanyi writes:

Well if you can get past the fact that he finally went bust and blew his brains out, I found Reminiscences of a Stock Operator, about Jesse Livermore, to be quite useful. The most notable things I remember are (1) "making the most money when he was sitting, not trading" – meaning a position needs time to make really big money, and (2) to Jeff's point about staying out of trouble – averaging UP a position once its already showing a profit, and never averaging down a losing position. (The latter is especially important when trading with leverage.)

Ultimately, it still comes down to a style you are comfortable with – keeping the staying out of trouble part in mind; however you do that. And this may or may not involve the things mentioned above.

David Lilienfeld writes: 

Go through some psychology texts–learn to understand human behavior and get to know one's own temperament. Understanding on an intellectual level doesn't help much if one's temperament is suited to trading. I have an old friend from high school who was on the Solomon trading in the mid-to-late 1980s. He hated it, often spent the weekends sweating his positions, etc. He moved on to be a buy side analyst, became the portfolio manager for a number of funds that succeeded pretty well under his direction and prospered. He had no trouble sleeping as a portfolio manager, and as I said, his funds did very well. A college roommate became a sell side analyst and was bored as could be doing his job. He did OK with it, but not great. He changed employers (at one point he thought about leaving the industry if he wasn't hired by someone to do something other be an analyst), started in its training program and found himself on the trading floor. He enjoyed it immensely and retired last year (I'm still not sure if he "retired" or was retired by his employer; looking at his homes, it's not as though he's wanting for much, so maybe he really did retire–but it's also not been a topic open to discussion, at least not with me). My guess is that just about everyone on this list has friends with similar stories. The bottom line: You have to know your temperament. You can learn the math, but if you don't have the fortitude, the math doesn't much matter.

The psychology part is understanding what people are about. Understanding gambling is about the mathematics of risk. Important stuff to be sure. But people matter too, and understanding what they are all about is also important.

Those are my recommendations. Lucking into a good mentor helps, but observing for a while is also one of the best teachers.


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