Photo Op explanation

In an attempt to actually back up my claims of longevity, I've added a photo to the header of this page. Though to be honest, I'm not sure if your belief in my story is actually something I desire.

The picture fits a few trading metaphors. Some are more popular than others and some are simply those of my colleagues on the trading desk. I want to explore a few of these and how they play into my psychology and temperament.

1. There is so much _____ (money, assets, wealth) on the side lines.

• Mr Practical Thinker, often mocks this theory. His logic is as follows: If you own stock A and sell it, what are you going to do with that money? Buy another stock (not on the sidelines), exchange it for another asset (buy a house or a boat...again, not on the sidelines), or throw it into the banking system where they get to use it (not on the sidelines). Unlike the little guy pictured here, he doubts that such a system really exists.

2. The grass is greener on the other side of the field.

• This is a truism on so many levels. Whether we're talking about markets, women, or opportunities, the best ones are always the ones we wish we were involved in. However, in a grander scheme, they're all just a football field. Some might have been maintained a bit better, watered more, perhaps even had some artificial upgrades, but when it comes to the game (in this specific illustration: trading) the field is just a field. We play our game and go home. Nothing more. There is may be a better field somewhere else, but the illusion has made many a trader leave the market they know and love to chase the ones that look greener...and then I came back poorer.

3. It's a marathon, not a sprint. Even this little guy (in the photo) will get across the field eventually.

• As in investing, that marathon approach has never really appealed to me (yes, I understand the compounding of returns, but still). As in trading, that is the phrase I use when I'm booking a lot of losers and instead of trading them, I have just simply stuck them in the position to deal with later.

4. Your progress should be as constant as the yard marks on a football field.

• This makes sense to me. If your results are consistent and easily tracked, you have a replicable system. If you're erratic and following your logic is about as clear as mud, you are just monkey throwing darts. My goal is to always have the process right and then rely on the counsel of the guys around me to trade it well. I want people to be able to look back and say they understood the trade and the reason I'm out of it.

5. Guarding the Left Hash.

• This has been my motto for some time now. As a scout team linebacker in college, I was an expendable body that could be put almost anywhere with very little recourse. During a frustrating mid-season practice the Offensive Coordinator finally snapped and sent the entire offense on a disciplinary lap (the was quite the painful experience for 300 lbs linemen). As they jogged, the scout defense was given new 'assignments'. Apparently, I wasn't a) very good  b) very important  c) not going to ever be able to give them a good 'look'  d) painfully slow  e) all these and more! My job, as it was described, was to just 'Guard the left hash'. Rather than take offense, I made it my job in life, to never be that disposable again. I fought to be irreplaceable and to always walk with my head up so that my crown didn't slip off my head. Some thought I was arrogant, but confidence looks very similar to those that have none. So for me, Guarding the Left Hash is the maturation of a scout-teamer into a trader and all the swagger that goes with it.

Finally, my market is saturated with powerful spreading algorithm traders. These boxes are lightning fast, accurate and self correcting. It is impossible to 'out-quick' them. But they have a serious flaw, they don't reason like we can. Granted, many of them actually "see" more of the market than we do, but they can't differentiate from the puke and the panic buyer. I think that there is only one real advantage we still have over the trading skills of a computer. That is our ability to know ourselves and to trade with a pure, unadulterated opinion of the environment surrounding us. An opinion formed on the back of a lot of hours, a multitude of paid 'dues', and the belief that we have matured and have no problem Guarding our Left Hash.

~LH

Guarding and Grinding

At times the environment is simply conducive to the aggressive, long style trading that I've grown accustomed to. Most of my grinding comes in the form of 'Micro Interest Rates' (usually Fed Funds and Euro Dollars) and a surprise move in the discount window Thursday created a porthole of opportunity to press the positions I felt as if I'd been milking for so long.

Hindsight trading is 20/20 and as usual, I wish I'd emptied my entire holster on Friday afternoon instead of holding back the last few rounds. In talking with some of the other traders around the desk, they too all expressed a feeling of lament for being reserved in their efforts. Yet, there's something to be said about that bit a reservation. It's that piece of me that has probably produced some of the longevity I've enjoyed through my trading career.

I discussed some of my early trading venues in an earlier post, but I didn't truly earn my trading stripes until I stepped into the Bond Options pit at the CBOT as an autonomous local. This pit, more than any other, taught me to press a winner but to never be without bullets.

It was the spring of 2005 and the volatility was getting cheap. Though none of us were clairvoyant, we could all feel a trend starting to develop. This trend would continue for almost 3 painful years and would encapsulate nearly 20% of the all-time low month/month volatility readings including a mind boggling 4.2 print in August of '06. {Historical Vols} But this is the place where I learned to watch the few titans amongst the our pit locals.

These "3 Kings", as I'll call them, were traders that would never sell premium on the first pop, rather they would sit back and watch what real paper was doing.  They all possessed that unique ablitiy to fearlessly buy it higher and sell it lower. As if they were all taught by the famed Jesse Livermore (Reminiscences of a Stock Operator), they never saw it as chance to empty their pockets when the first bid appeared. Rather, they were the ones buying it (usually through the pit brokers) from all of the smaller locals, myself included. Not that I wasn't happy to sell my book for a perceived profit, but it confused me as I watched the 3 Kings books swell under the immense weight of millions of dollars of gamma.

Then it happened. The real paper showed up. Not that small retail customers deck, no, these were the big houses that had to move a position. I suddenly learned an enriching lesson: real paper is 'price-insensitive.' They needed the options and they were willing to pay up in order to get them. Guess what, I was fresh out of bullets. I had let go of the options I had stomached as losers for the last 2 months, and for what? 4 extra ticks? It hardly seemed worth it. Yet there, across the pit in their own corner, the 3 Kings continued to bid premium in the face of paper. The unthinkable occurred next. It was like a game of chicken and PIMCO blinked. Their bid jumped 10 ticks and the 3 Kings unloaded the wagons. They dumped every bit of the longs they'd gobbled from the locals and in the process they even offered all the little guys around them a chance to get some real edge. They had created a marketplace and they had dictated what the price would be.

My first game-changing lesson was complete. I saw that if you sell on the first pop, you haven't guarded your longs and now you may miss the real trade. I would have plenty more opportunities in the next few months and years to practice this skill and ultimately refine it to the point I felt comfortable pressing it. The real mark of a learned skill is the ability to teach it to others...but that's another story.

One down. A multitude left. And as I finish this, I realize that my holster is re-loading quickly.

LH