Sayings from the Floor

Up to now, I haven't discussed any of those "hot" techniques most of you bought this book for. I'm sure some have already skipped the first few chapters and are busy reading The Theory of the Opening, Fib Time Trading, etc.

I understand how the things I've written in the last chapters are like castor oil to many. They are so contrary to what you commonly hear about futures trading that I'm sure many of you are wondering, "Just who is this guy? Is this really right?"

The ancient book of wisdom says that out of two or three witnesses shall every fact be established. So I am going to give you that second witness (and a few more besides that). Read the words admired by some of the best traders that ever existed, words I call "Sayings from the Floor."

Over the years I've heard many traders discuss the markets. I've read many interviews by the big names in futures trading. Over and over again, you hear the same secrets of success, the same books mentioned, etc. So I've compiled what I call the "Big Three" of successful futures trading:

Most successful traders had someone special who helped them when they started out and showed them what to do.

If you want to be a winner, pattern yourself after somebody you know who is actually winning in the same circumstances you find yourself. What's possible for a floor trader may not be possible for a public trader who is paying that $45 initiation fee every time he or she trades. If you can't watch the market eight hours a day, you shouldn't assume the methods of your local "Joe the Daytrader" are going to be of any use to you, despite his glittering track record.

The greatest enemy of successful futures trading is trading on emotion rather than on a rational, well-executed plan.

I've never heard of or read about any big-time futures trader that didn't have at least one (usually it was more than one) horrible trading experience that made them painfully aware of this fact.

There is no bible for futures trading, but there are least three books that are cited again and again.

If you cornered a big name and asked him, "What should I read to become a successful futures trader," he would probably mumble something about reading a basic manual about futures trading (like the one the Chicago Board of Trade puts out).

That's a good answer since a great deal of mastering any profession is just knowing what people are talking about. It's amazing how people will spend years of study and thousands of dollars to become a lawyer or a doctor, but somehow they think they can enter the high-income profession of futures trader without doing a bit of preparation. Finishing school won't make you a successful lawyer or doctor, but unless you acquire a base of market knowledge, you can't possibly hope to succeed.

Again and again I've seen public traders lose tens of thousands of dollars and be none the wiser after all their time and money. They should have put that lost $10,000 into buying every futures book they could find. All that time watching prices could have been poured into a self-directed "college course" learning about the market. This wouldn't have given them the self-disci pline they also need to succeed, but it would have given them knowledge, which is one side of the two-sided coin known as successful futures trading.

A basic training manual is not the simple secret of the universe that guarantees you will become a millionaire overnight. Neither is reading everything you can get your hands on, although that is a far cheaper and less painful substitute for the normally dreadful trading results of novice traders.

But for those who must have a "secret-of-success" book, when pressed, those big names do mention three books again and again. These books are no substitute for truly studying the market and learning how to control your emotions by actually trading. But they must have something special to be mentioned over and over again by successful futures traders.

The first is Reminiscences of a Stock Operator by Edwin Le-fevre.1 First published in 1923, it was brought back into print because it was publicly mentioned by several prominent futures traders. In my observation (probably because it has been around longer than the other two books), this is the book most often mentioned by big-name traders as influential to their careers.

The next is Viewpoints of a Commodity Trader by Roy Long-street.2 Roy was actually trading when I first started in the futures business as a broker. But he was only a name, a wispy legend, until I read an interview of him in the now defunct Intermarket magazine. After reading Longstreet's interview, I was inspired to read his book. If you can't find it, next time you are in Chicago, stop off and read the copy housed in the Board of Trade Library.

The last book is Market Wizards by Jack Schwager,3 which is a collection of interviews mainly with well-known New York traders. This book deserves all the praise that's been heaped on it, although I think at least some of its success is due to what I call the "Reggie Jackson factor." Reggie was a great ballplayer

1 Edwin Lefevre, Reminiscencesofa Stock Operator, reprint of 1923 ed. (Chicago: Traders Press, 1985)

2 Roy Longstreet, Viewpoints of a Commodity Trader (New York: Fraser Publishing Co. 1947)

3 Jack Schwager, Market Wizards (New York: Simon & Schuster, 1989)

when he played in Oakland, but he didn't become "Mr. October" until he played for the Yankees.

I suspect Roy Longstreet's track record was comparable to most of the Market Wizards interviewed by Schwager. One of Jack's wizards, Michael Steinhardt, had an awful track record in 1994. But as the denizens of the Big Apple are fond of saying, "If doesn't happen in New York, it doesn't happen."

The following are selected quotes from these books plus quotes from floor traders I have known. I call them "Sayings from the Floor" since you hear the same things again and again, repeated in different ways, from floor traders and other successful futures traders.

"It takes a man a long time to learn all the lessons of his mistakes. They say there are two sides to everything. But there is only one side to the stock market; and it is not the bull side or bear side but the right side. It took me longer to get that principle fixed firmly in my mind than it did most of the more technical phases of the game of stock speculation."

—Edwin Lefevre, Reminiscences of a Stock Operator

My friend Neal Weintraub heard this once from a trader: "The way to make money in this business is not to be smart, just avoid being stupid (by betting everything you have on a few trades)."

"It never was my thinking that made the big money for me. It was always my sitting... It's no trick to be right on the market. You always find a lot of early bulls in bull markets and early bears in bear markets Men who can both be right and sit tight are uncommon."

—Edwin Lefevre, Reminiscences of a Stock Operator

"When I am long with a large profit, I get into my car and leave town. At each town I come to, I call the office and reduce my position & I always took my profits too soon."

—Roy Longstreet, Viewpoints of a Commodity Trader

At this point, I'd like to stop and say that the last two quotes are not necessarily contradictory. Futures trading, because of the lower margin and commission rates, has a different pulse than stocks. The usual rule of thumb (as told to me by one floor trader) is: "Double your money, take your profits. If you still like the market, start a new position as if you had never made a dime."

With 5 percent down, a 5 percent move in futures doubles your money. Commissions are a tiny fraction of the underlying contract. With stocks, you must put up 50 percent margin, so you need a 50 percent move to double your money (which, due to inflation and growth, is generally easier to do in bull markets. Unfortunately, markets move down faster than they move up, even if, in percentage terms, stocks tend to go up farther than they move down).

In stocks, it doesn't make sense to take 2 percent profits when your commissions (in and out) are 2 percent. You must have the patience to wait for those 50 percent (usually) up moves. In futures, you need the discipline to get out when you've doubled your initial stake and not yield to greed. You can't pyramid a winning position by violating the Psychological Law of 10/20 Percent—which is very easy to do when the market moves in your direction. Or, as Longstreet put it:

"A good general never risks all of his troops in the front line at one time."

—Roy Longstreet, Viezvpoints of a Commodity Trader

"The average man doesn't wish to be told that this is a bull or bear market. What he desires is to be told specifically which particular stock to buy or sell. He wants to get something for nothing. He doesn't want to work. He doesn't even wish to have to think. It is too much bother to count the money that he picks up from the ground."

—Edwin Lefevre, Reminiscences of a Stock Operator

"People don't want to learn how to trade. They want to be told what to do."

—Common floor saying

"A loss never bothered me after I take it. I forget it overnight. But being wrong—and not taking the loss— that is what does the damage to the pocketbook and to the soul."

—Edwin Lefevre, Reminiscences of a Stock Operator

"The greatest loss is self-confidence."

—Roy Longstreet, Viewpoints of a Commodity Trader

"The speculator's chief enemies are always boring from within. It is inseparable from human nature to hope and to fear. In speculation when the market goes against you, you hope that every day will be the last day—and you lose more than you should had you not listened to hope—to the same ally that is a potent success-bringer to empire builders and pioneers, big and little. And when the market goes your way you become fearful that the next day will take away your profit, and you get out—too soon. Fear keeps you from making as much money as you ought to. The successful trader has to fight these two deep-seated instincts.

He has to reverse what you might call his natural impulses He must fear that his loss may develop into a much bigger loss and hope that his profit may become a big profit."

—Edwin Lefevre, Reminiscences of a Stock Operator

Another old floor trader saying, as quoted in Market Wizards, reads, "Put stops where they can't be reached (easily)." The idea is to make sure your analysis (at least temporarily) was bad if you are stopped out. That way you won't pull your stops or immediately reenter the market on the same side without stepping back and analyzing the situation afresh.

Market Wizards also contains another common saying: "We don't trade markets, we trade money."

"That is one trouble about trading on a large scale. You cannot sneak out as you can when you pike along. You cannot always sell out when you wish or when you think it wise. You have to get out when you can, when you have a market that will absorb your entire line. Failure to grasp the opportunity to get out may cost you millions. You cannot hesitate. If you do you are lost."

—Edwin Lefevre, Reminiscences of a Stock Operator

"The big players always tip their hand."

—Michael Marcus, as quoted in Market Wizards

"Amarket can and often does cease to be a bull market long before prices generally are ready to break. My long expected warning came to me when I noticed that, one after another, those stocks which had been the leaders of the market...did not come back."

—Edwin Lefevre, Reminiscences of a Stock Operator

"Three drives to a top" is another common floor saying I heard long before I heard of R.N. Elliott. By the way, the three drives to a top of a commodity bull are quite different than those of a stock bull (more on this later).

"I like the short side of the market because there is less company."

—Roy Longstreet, Viewpoints of a Commodity Trader

Consider this facetious floor trader saying: "When you're long, you're wrong." This saying contains these kernels of truth: bear markets go down faster than bull markets, and during the start and middle of bull markets, selling points are usually easier to identify than buying spots.

"Observation, experience, memory, and mathematics: these are what the successful trader must depend on. He must not only observe accurately but remember at all times what he has observed He must always rely on probabilities—that is, try to anticipate them. Years of practice at the game, of constant study, of always remembering, enable the trader to act on the instant when the unexpected happens as well as when the expected comes to pass."

—Edwin Lefevre, Reminiscences of a Stock Operator

The worse the fills are, the better the trade.

—Bruce Kovner as quoted in Market Wizards

"Now, ordinarily a man ought to be able to buy and sell a million bushels of wheat within a range of 1/4 cent. On this day when I sold 250,000 bushels to test the market for timeliness, the price went down 1/4 cent. Then, since the reaction did not definitely tell me all I wished to know, I sold another quarter of a million bushels...the price went down 1-1/2 cents on my selling Such being the case, what was the only thing to do? Of course, to sell a lot more. Following the dictates of experience may fool you, now and then. But not following them invariably makes an ass of you. So I sold 2 million bushels and the price went down more. A few days later the market's behavior practically compelled me to sell an additional 2 million bushels and the price declined further still; a few days later wheat started to break badly and slumped off six cents "

—Edwin Lefevre, Reminiscences of a Stock Operator

Two more common sayings are: "The best charts are the ones you never see," and "You're never far from (take your pick): a Gann Line, an Elliott Wave Extension, a tech point, etc."

Ninety percent of traders are taught to look at two basic indicators: momentum measures (like stochastics, RSI, percent R, etc.) and chart formations. Since 90 percent are losing, maybe it's time for you to find the charts you never see running in Investor's Business Daily and stop looking for some esoteric reason why you lost ("I missed this Gann line," ad nauseum) in the charts you do see.

"Every time you tell somebody what you know, you sell yourself on its importance."

—Roy Longstreet, Viewpoints of a Commodity Trader

"Trading is like baseball. Winning is 90 percent defense and knowing when to swing for a three-run homer. If you strike out, remember Ruth struck out more than he homered."

—Floor trader speaking to me years ago

"Traders often enter the 'Hall of Mirrors'... They see only success (wherever they look)."

_Roy Longstreet, Viewpoints of a Commodity Trader

"Yesterday's hero, today's goat" is an old floor trader adage repeated to me in many forms (a good thing to remember when you see the next George Soros touted to the skies by the media).

On that note, I better stop. I could go on and on. Get those three books, read them yourself, and take a small step on the long road that leads to successful futures investing.

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