Wednesday, December 16, 2009

Not on strike, just busy...

I've not forgotten about you, dear Blog and readers of the Blog. It's the holiday season and I'm in the middle of an exceptionally busy trading week and trying to wrap things up here at the end of the year.

On top of that, next week, Katie, Brisbane and I are packing up the family truckster and driving to Seattle to spend the holiday with my family. 19 hours, per Google Maps estimation, which is a long haul. So, we've got XMAS stuff to do here, last minute gift and craft projects we're knee deep in and everything else that comes with preparing to drive North for 2 days.

So, hang tight, there will be plenty of good stuff coming up as I make time for new entries...

Tuesday, December 15, 2009

YouTube Tuesday: Ho x 3

The Dan Band. If you don't know Dan Finnerty and the Dan Band, chances are you do you just don't know it. If Dan Band are ever near you, you owe it to yourself to see the most fun and most original live show you will ever see. Anyway...

This is one of the few original tracks Dan has recorded and it's pure genius. I mean prostitutes need some Christmas joy and the song has such a happy story; what's not to love? Who better to sing Ho Ho Ho than Dan Finnerty and The Dan Band? Nobody, that's who.

While I love everything about the Dan Band I must admit that the backup singers are probably the best part. You want proof? Pay attention from 0:59 through the chorus and tell me you didn't LOL yourself or start rockin out to their backup singer stylings or emulate their smooth moves.

Friday, December 11, 2009

So long, friends...thanks for the memories

Whoa! Don't freak out, y'all! If I was gonna do something brash I would use a far more eloquent and cryptic title...

No, this post is about saying goodbye to...surfboards. You see, since I started surfing I've only sold a single board to a stranger and that board I sold had some bad juju in it so I was happy to get rid of it.

But with the current economic climate in the United States of Bryan and a lack of TARP relief funds to pay off stupid debts, ridiculously high living expenses in SoCal and endeavoring to start a new life as a trader...I find myself in a situation where I need to raise capital. Looking in the garage at my own surfshop amassed over the last 8 years I made the difficult decision to sell off some old friends.

The first board I sold a couple weeks ago was a custom single fin made by Surf Rx here in HB. I remember when I bought that board being tempted to never surf it in favor of hanging it on the wall as abstract art. That, of course, never happened and I can remember several memorable rides like they happened last week when they were in fact rides from years ago.

The second board I sold just earlier this week was the only used board I've ever bought. Since I bought it for so cheap and sold it at a reasonable price I think that board only cost me $40 to own/surf for a little over 2 years. Not really gonna miss that one; it wasn't my bag and I just held onto it because my friend Mike told me a long time ago to just hold onto all my boards instead of selling them...a practice that's nostalgic when times are good though not very rational when times are tight.

This weekend I'm selling a 3rd board which is an almost identical replica (in terms of dimensions, not appearance) of another custom board I own. I bought this one with removable fins in the belief/hope that I would be traveling a see how that's panned out. I love the design of this board and it's a brilliant shape by arguably the best shaper of this type of board anywhere on Earth.

The final board I'm selling is a 5-fin Bonzer, handshaped by Malcom Campbell (who invented the Bonzer over 30 years ago). I got it about 3.5 years ago now and it's awesome. I don't like it as much as the other 3 Bonzers I own but it's still a cracker of a board. This one will be tough to see go. I'm selling it at a price that I believe is lower than what it's worth because surfers are the cheapest, greediest bastards out there when it comes to buying anything used but what can ya do...

All in all, it's sad selling these boards for a few reasons. Obviously, it's sad selling off boards that were all custom made for me and letting someone else enjoy them for the rest of their days; I become attached to every board the second I pick it up. But, it's also sad having to sell them to raise capital to pay off pesky debts, etc. It's one thing to sell a board because it doesn't work for you or you want to get money to pay for another board but it's another to sell a board to pay for something other than surfing.

But, it had to happen and I'm fine with it now. They're going to good homes, I'm getting the money I need and I have no doubt that I'll be filling their places in the board rack sooner rather than later.

So long old friends...thanks for the waves and the memories...

Tuesday, December 08, 2009

YouTube Tuesday: His light show is better than your light show

Do you remember this house from a few years back? This is the original bad-ass Christmas light show house syncronized to the Trans-Siberian Orchestra. This display consists of over 25,000 lights and took 2 months to set up. People can drive by and tune their radios to a certain frequency and listen to the Trans-Siberian Orchestra while watchting the show in perfect synchronization. Miller Lite used this house in a commercial the following Christmas season so with luck the guy got compensated for his fun Christmas light project in addition to bragging rights for best neighborhood light show.

It's pretty epic and while there may be others out there that are bigger or better, this is the one that started it all and that's still worth something in my book.

So, here ya go. Get yourself in the holiday mood!

Sunday, December 06, 2009

Trading wrap-up

This wraps up our week-long trading post extravaganza.

What did we learn this week?

 - We learned what futures contracts are, where they're traded and that they're the only instrument I would ever trade.
 - We saw what open outcry is and (hopefully) gained an appreciation for the way trading used to be handled and the characters that make floor trading so great
 - You saw what a day in the life of this trader is like, however boring that may be
 - You hopefully learned that no matter how you slice it, trading is always better than investing and becoming very active in your investments is a very good thing

 - We learned that while trading may be gambling,  I'm the Casino

If you ever want to learn more about what I do or about trading in general don't hesitate to ask. It's difficult for me to offer you investment advice as I'm anything but an investor. As a trader, I'm only concerned with the ride, not the destination, and that may be different than your desired investment goals. But, if you're getting active in handling your investments I can probably offer a bit of advice from time to time.

If you read through the entire week of posts, I congratulate and thank you. If you picked up just a couple posts, that's cool too. If you've only read this, then you must feel like an idiot and I concur; go back and read the posts starting on Monday and your sins will be forgiven.

Saturday, December 05, 2009

What is a trader and why do I trade?

The function of trading in various markets on a macro scale is for what's called price discovery. Price discovery is the act of, well, discovering what prices a market will bear. The traders will test various price levels which force other traders and investors to show their hands and act/react accordingly. This provides liquidity, which basically means that traders are providing the movement necessary for other traders and investors to enter/exit the market at the prices they want. Without traders, the market does not know what prices will be accepted or rejected. If you own Apple stock and you want to sell it, how do you know what price you can sell it for? You look at the prices that traders have fought over and established.

It's for this reason I liken the trading/investing universe to a battlefield. On the front lines are the traders; the ones that will take the biggest gains/losses, relative to their positions, and find out where the enemy is, what their weaknesses are and what offense schemes to run. Battle lines are drawn in the sand so people on the bull side of the market (the buyers or people wanting price to go up) know where they stand and the bear side of the market (the sellers, or people that want price to go down) know where they stand and they do battle with one another. The traders are relentless and the line in the sand (the price of an instrument) changes constantly.

The investors then follow behind in the path the traders have made and establish their positions in a safer environment, though still not the safest of positions. Finally, bringing up the rear, are the hedgers who are investors that are trying to protect other trades/investments they have established. These are typically the safest positions because with a hedge the hedger is not looking for a profit but simply trying to protect a price they have established in a related instrument. Farmers are classic hedgers. They have a certain amount of crops they will deliver at harvest so they hedge their positions by locking in prices well before the harvest so they can deliver their crops at prices that will most likely bring them a higher price than the rest of the market will be able to get.

Personally, I trade because I love it. I'm fascinated by the movements in any given market and feel that I am part of a living, breathing organism. That may sound trippy, but I assure you that a market is indeed an organism that acts and reacts to stimuli, requires nourishment, shows signs of distress, joy, elation, depression; you name it a market will do it. If you were to sit with me for a week and watch price develop and see the way that prices react at areas of support and resistance you'd see what I'm talking about and understand that a market is indeed a living organism.

I started trading full-time this past summer after spending a year or more learning about trading, experimenting with various strategies and gathering the courage to do it full-time. It's not easy, folks; not at all. I completely underestimated the psychological/emotional aspect of trading, thinking it was more important to learn HOW to trade rather than learn how to manage emotions such as greed and fear. Anyone can learn HOW to trade but very few people can learn how to have an emotional detachment from trading and treat it as a business, bounce back from losses and reign in the high of winning before it clouds your judgment. I try to focus not on making money but on my execution. I know that if I execute properly and focus on being more efficient in my entries and exits the byproduct of my success will translate to a higher win percentage and more money in my account. By not worrying on making a certain amount of money it lets me trade more freely and just enjoy what I'm doing, though it's still really hard to see losses and keep going once I've banked a nice profit. It's something I will always be working on and maybe the best thing about trading is what it's teaching me about myself and how to take control of my emotions and learn discipline and processes that are important not only to trading but so many things in my life. It truly is an amazing thing, trading, and I'm really stoked to be a part of this living, breathing organism each and every day.

Friday, December 04, 2009

I'm the Casino, Part II

OK, so you had to wade through that 1st part to get to the payoff: why I'm the casino.

Where I differ from the gamblers and other traders is through the system I trade. Without divulging everything about what I do, all you really need to know is that my system does not rely on luck or winning streaks as I'm the casino. I'm on the side of the market that dictates the direction price moves, either up or down. I have a quantifiable edge that I employ in every trade I make. I don't run into winning or losing streaks, I simply follow what the market tells me and take what I'm given. I don't press, I don't have to adjust my system based on market conditions or how I've done over the last few trades, I just trade.

The casino doesn't earn all of it's profit over a couple days, it earns the profit slowly. I'm the exact same way. I don't look to make a single HUGE trade that makes a month's worth of profit or one that erases a series of losses from a losing streak like so many other traders out there. I prefer to make many trades and take just a little each time and let the profit compound over time. I don't know if you've been to Vegas recently, but they're still building hotels and casinos and the skyline is cluttered with giant money-making skyscrapers so making money slowly but surely is pretty damn effective for casinos and it's no different for this trader, though I've yet to build a skyscraper. HA!

Casinos and I also share a similar business/growth plan: leverage. Rather than trying to make more on each bet, casinos have figured out that you just have more ways to generate more outcomes. Bryan/Casino comparison time!!!

Let's say a casino has a daily goal to make $100,000 though Craps. Rather than trying to get that entire amount from a single craps table, what does a casino do? Yup: they just put out more tables...let's say 10 cuz I don't want to do the hard math. So now, instead of trying to get $100,000 from a single table, they just need each table to pull in $10,000. While getting $100K from one table may have been possible it was a much more difficult task than simply aiming for $10,000 per table.

Trading is no different.

Let's say I have a daily goal of $1,000 (easy math) by trading the eMini S&P or ES as is it's commonly called. If I'm trading 1 ES contract, that means I need to make 20-points on that one contract. It can be done, but it's VERY difficult and depending on the daily volume it can be pretty much impossible. So what do I do? I start trading more contracts; let's say 10. Now, I just need to make 2-points which is multiplied by the # of contracts I'm trading and my 20-point goal is met. 2 points is a much easier goal and much less stressful as you're not trying to swing for the fences but just need to hit a nice single to be successful.

Are other traders the casino? Yeah there are plenty of traders that operate as if they were the casino, though we're the exception to the rule. I believe to be a successful trader you MUST be the casino, otherwise you're destined to be a failure; a gambler that operates at the mercy of probabilities and luck and must know when to walk away and when to run.

Am I going to change the way that the majority of people view my profession as anything but a different form of gambling? No, and that's fine. I'm hopeful that maybe this enlightens some of you and helps you understand that while this may be gambling, I'm the casino and my business is simply to take advantage of a quantifiable edge on each and every trade and slowly amass profits while watching other traders go up and down on the roller-coaster that other traders/casinos and myself force them to ride.

I'm the Casino, Part I

No matter how hard I try to explain it, people will always say this about trading:

"It's just like gambling."

You're right; it IS like gambling. There's one thing those people are neglecting to understand:

I'm the casino.

We'll get to that a bit later. Right now, we've gotta get a few things out into the open.

So, people think of trading like gambling for one simple reason: You risk money on an unknown outcome and stand to either lose that money if your prediction is wrong or gain money if your prediction is right. After all, risking anything without knowing the outcome is gambling, pure and simple, right? Let me pose this comparison that should open your mind to trading as a legitimate business.

When people start a business, what do they do? They invest money into the business based on the belief that by investing the capital resources into that business, their capital will grow, though many businesses fail and those people lose that money. In many cases, they lose ALL their money because one cannot predict the future and the money risked is on an unknown outcome. Sound familiar? How is this not gambling? You risk money on an unknown outcome in the hopes of profiting on the risk you take. People don't like to call starting a business gambling, probably due to some long-standing social stigma that it's OK to risk capital when you setup a shop to hawk your wares or services, but trading is gambling because...well, I don't really get why people call it gambling. Maybe it's because they're uninformed and fear what they do not know. I'm guessing people see it as a risk/reward sort of thing and the speed at which gains/losses occur, as well. Not many local hamburger stands will earn a $1mm profit or lose everything in less than a year, yet you hear both those stories from the world of trading every day via whatever trading/investing site you choose to visit. I believe it's also because with trading you're risking capital each and every trade whereas starting a business is really just 1 big initial investment followed by additional capital invested into the business to maintain it. But I'd argue that trading is a safer bet because instead of going all in, you're simply paying a small ante each time and your bankroll grows slowly.

So, back to the casino. Why do casinos stay in business and how do they make money? They have what's called an "edge." This edge is the statistical advantage they have on every bet that is made on one of their games. Some bets like the pass-line on a craps table (which is my favorite table game) have a very small casino edge of around 1.4%. So, for every $100 bet, they are expecting to earn $1.40, per their calculated edge. Sticking with craps, some bets have an incredible house edge like an "any 7" bet, which has a house edge of 16.67%. Combine all of these different bets and you have the overall casino edge on ALL the games they operate.

So what does this have to do with trading? Well, each trader works on a certain trading strategy or system that gives them an edge, just like the casino. This edge is in effect the expectation of your system. For some traders, their edge is extremely high for others it's very low. For a great deal of traders, it's actually a negative expectation, whether they know it or not, which is why it's estimated that something like 95% of the traders lose. (not sure I totally agree with that #, but to some degree it is true...)

The key thing to understand about trading is this: there's an expectation of loss. There is no trading system with a 100% win rate and you're going to expect to take losses. However, there's an expectation of winning as well and although a system may expect to take losses, it should end up being net positive at the end of the day. This is very difficult to grasp for the human mind. Imagine if you were a musician and only played 75% of the notes properly? Or, that you were a lawyer and successfully litigated only 55% of the cases you brought to trial? You probably wouldn't last long yet there are trading systems that only need to be successful less than 50% of the time to be wildly profitable and successful. In that respect, trading is sort of like baseball. A career .400 hitter is getting a fast pass to Cooperstown, yet he only hit the ball 4/10 times on average.

Where I believe that trading (at least in the responsible, effective way I practice) differs from gambling is this. Gamblers are on the losing end of the stick before they even place a bet; there is a negative expectation. Therefore, an incredible amount of their success is built on luck. Sure, poker is a different beast because there is actual strategy and craps to a degree can be "gamed" as well with some great strategies that ensure you last at the table a very long time and fight the negative expectation. However, you're always still reliant on luck and must keep track of the wins/losses and remember the house edge. There's the element of "I'm due" in gambling, implying that the house is winning more right now than it statistically should and the tables are bound to turn your way soon. You ever hear the saying "this table is HOT"? Well, this is the human mind qualifying the current statistical climate of a game, which of course, is complete and utter nonsense. There is just as much chance you are going to throw a 7 whether the previous 100 rolls were 7's or anything but 7. Dice have no memory and do not react based on what happened earlier, plain and simple.

You gotta know when to hold 'em and when to fold 'em isn't just a great song lyric, but a very accurate description of the gamblers dilemma as their mind tries to figure out whether they are part of a statistical anomaly or just going with the flow. Effective trading, on the other hand, is very different. You're not reliant on luck or probabilistic forces that are out of your control. You control your destiny and to some degree dictate the destinies of others, much like a casino.

Part 2 coming up a bit later this afternoon...

Thursday, December 03, 2009

Trading > Investing

There's a simple equation you should memorize:

Trading > Investing

Why is trading better than investing? I'm glad you asked, otherwise this post would have been pretty short and boring.

What do investors do? Investors invest money into an instrument (primarily stocks and bonds) and after a certain amount of time they cash out and accept whatever their investment has grown (or shrunk) to. 401k's, IRA's and so forth are classic investment vehicles. They only profit when the price of the instrument rises and they rarely if ever will cash out of their positions before the date they are needed (such as retirement, funding an education, etc.).

What do traders do? Traders do the same thing, but their time-frame is much shorter and their expected payouts are much smaller. When things start going badly, traders get out and don't weather the storm like an investor would. Time-frames may be seconds, they may be months. Rarely will traders hold positions for very extended amounts of time, especially if you're a futures trader as in most cases the contract you are trading will expire within months.

Simply put, investors are only concerned with the destination while traders are only concerned with the ride. Traders profit when instruments go up and when they go down, depending on their position. Investors only benefit when prices go up.

Take a look at this chart, which I've annotated to illustrate how a trader versus an investor would handle the situation.

 (Click to enlarge)

This chart is for the S&P 500 futures continuous contract. While this example only covers a few months, this chart could span a few years; the point is long vs. short-term time-frames. Both the trader and investor enter on the same day (9/3/09) and while the trader and investor exit on the same day (11/23) the trader reverses their position when the price begins to turn downward and vice versa when price turns upward again which gives them a net of 5 trades from start to finish.

Granted, this is a perfect scenario as I have the trader bailing near the peaks and valleys of each wave but it shows clearly the difference between a trader and an investor and there's no reason a trader could not pick off those peaks and valleys. The trader makes almost 200% more than the investor in the same amount of time simply by trading rather than investing. Oh, and this is only picking off the major peaks and valleys. If we speed up the chart and pick off the smaller peaks and valleys contained within I'm guessing the profit is probably 500% more and if you speed it up to the time frames that I trade you're probably looking at 1000% or more profit with near perfect execution (not quite there yet. HA!).

The lesson here is this: Trading will ALWAYS be more effective and profitable than investing simply because it takes advantage of reversals in price and at a minimum keeps your money out of the game as price retreats and potentially makes you even more if you happen to go short when prices retreat. If you start at A, why only worry about Z? Traders want to make decisions at every letter of the alphabet and as a result they will be far more prosperous than investors.

There are, of course, drawbacks and catches with trading. Most notably, trading takes time and effort. Depending on your time-frame you could be looking at a full-time profession like mine or at the very least a few hours of research each week to decide what to do with various trades. Trading also increases your transaction costs. For me, each trade costs on average $5 per contract per round-turn (going in and getting out). Therefore, on most days I'm looking at transaction fees of about $50 which translates to around $12,500 a year. Crazy, huh? For a relatively active investor/trader in stocks, lets say that each trade will cost $10 and you execute 20 stock trades a month so you're looking at $200/month in fees or $2,400 a year. There's also tax implications with trading as each time you trade and net a profit Uncle Sam will hold his hand out for his share. But, in the end, the benefits/profits WAY outweigh the costs of trading versus investing.

Should you trade? Absolutely!! Would I recommend trading like I do on an intraday basis, holding for seconds or minutes at a time? No way. But, if you have the ability to self-manage a 401k or dabble in stocks as an investment vehicle you owe it to yourself to look into various longer and shorter-term trading strategies. Don't listen to the people that say that trading is difficult and costly due to transaction fees and such. These are the people who are lazy or are investors and have made mistakes investing and watched their portfolios dwindle to nothing as they try and weather the storm while the traders pulled their boat out of the ocean long ago. I don't mean to sound callous but I don't have much sympathy for people that had a choice in what to do with their investments, saw the storm coming and decided to sit around and wait it out rather than pull it all out and seek shelter. It's irresponsible and shows a complete lack of pro-activity on their part and it's not like trading would require a ton of time. What's an hour or 2 every week to keep up with your investments? A small price to pay to ensure that your hard earned money doesn't end up going down the drain...

I'll get off my horse now, but take a look at various investment sites or ask me about some trading strategies on a longer scale (say, holding weeks or months at a time) as I want you to be far more profitable as a trader than you'll ever be as an investor.

Wednesday, December 02, 2009

A day in the life of this trader

So, you want to know what it's like to be a trader? Well, here's what the typical trading day is like for this trader.


My alarm goes off and I hit snooze for 30 minutes, yet I'm never really asleep, just lazy and milking every second I have in bed. You want honesty, you got it!


The "cash market" opens. While futures are traded round the clock, the majority of the action comes during RTH (regular trading hours) when the NYSE and NASDAQ markets are open for trading. These hours are 6:30am - 1:00pm Pacific time. The first 30 minutes are a feeding frenzy. Hundreds of thousands of contracts are traded and price exploration is intense. This is typically the highest probability time to trade and I take advantage when opportunities arise.

6:30am - 11:15am

I trade. What else can I say here? The agriculture markets open at 7:30 Pacific time and close at 11:15am and since I enjoy trading these markets quite a bit, this is when the majority of the action for me takes place.

11:15am - 12pm

I watch. The East Coast gang tends to take a break during the middle of the session which slows the movement down and reduces the volume, which tends to leads to erratic and unpredictable markets. If a perfect trade setup shows up, I'll take it, but this is definitely not the best time to trade.The ag markets are closed so now it's just oil, the indicies (DJIA, S&P 500, NASDAQ), currency and the bond markets that are open.


The final hour of the day ramps back up as people tend to unwind their positions or stock up for the rest of the week, so the activity gets a little crazy and the volume spikes leading into the closing bell. If quality trading opportunities arise I take them though I don't force the issue as this is not the best time of day to trade. At 1pm I'm all done trading, if I haven't stopped already.

1pm - 5pm

I recap the activity in each market and log certain stats such as volume, range and signals generated. I then get a feel for each market and what the following day has in store by evaluating the possible news and events that will move the various markets. If I'm waiting for swing trades to setup that will be held for days on end, an entry signal may have been generated and if so I will need to prepare to execute the trade at the beginning of the session the following day or when the next session starts in the later afternoon.

Time moves pretty fast when you're trading though the mid-day doldrums can be really boring. The nice thing is that I trade so many markets and various contracts that if it's slow in one market another one is bound to be working. Grains slow and there's a bunch of news affecting the strength of the dollar? Trade oil. Indicies flat as a pancake and oil sucks but the crop report came out an hour ago? Go trade the grains.

My Setup

I use a dual-core Dell 9200 with dual 20" monitors. It's sole purpose is for trading as I perform all my other tasks on my iMac. It is attached to a UPS battery backup in the event of a power failure and in the near future I hope to add a 2nd broadband Internet connection as a backup in case the first goes down; with no power and no Internet connection, I am dead in the water and if I happen to be in a trade when either event occurs I could potentially lose a bunch of money. Here's what my trading computer looks like:

left monitor

The monitor on the left (what you see above, click to enlarge) displays my charting software MultiCharts, which is running an indicator called LOGIC which was developed by my mentor William Schamp. It's utterly brilliant and discussing the indicator/system would take several posts, which I'll get to later. I watch this screen all day and click through the tabs on the bottom to see various markets and time frames as I hunt down perfect trades. This screen is showing the grain markets: corn (gold), soybeans (green) and wheat (purple). If you can make it out, each individual bar on each of these charts represents 49 contracts traded, the top of the bar being the highest price traded the bottom being the lowest price traded during 49 contracts. During the slow times, these bars are drawn slowly...during crazy busy times in the market these bars will be drawn in less than a second.

right monitor

The monitor on the right (screenshot above, click to enlarge) is connected to my broker. This is where I execute all my trades. What you see is called a DOM (depth of market) or a price ladder. The one on the left is for the ES (S&P 500 eMini) and the one on the right is for the YM (mini-Dow Jones Industrial Average); you can see the contract symbols at the top of each window (remember Monday's lesson). I have tabs at the bottom of this screen that have DOM's for every contract I trade so I don't have to type each symbol in, which is a total PITA. In the center of the red and blue columns is the price. The highlighted areas you see are the depth of market, which shows how many contracts are cued up to be bought or sold at the associated price; the exchanges only feed me the 10 inside bids and asks...some traders would kill to find out the depth of market further than 10 out...I don't really care. The yellow bar in the middle is the last transaction, which bounces between the "bid" and the "ask" which are the people wanting to buy and sell, respectively. The window in the middle of the screen is called a "time and sales" window which gives me a visual indicator of the transactions that are going through, in this case for the ES. Red are sell orders that were filled, green are buy orders that were filled and the # indicates how many contracts were filled with each order. I filter this window to only show orders of 10 contracts or more as anything less is small fries retail traders (like myself) and I really only care to see what the REAL money is doing. Check out the video below that shows you what this screen looks like at the end of a day when there is a frenzy of buying and selling.

So, that's it. It may seem boring and simple but that's the way I like it; the way I need it. It's extremely important to have a regimen you follow religiously and have your trading environment memorized like the back of your hand because it increases your ability to execute when the market starts getting out of control and the desire to panic sets in.

Tuesday, December 01, 2009

YouTube Tuesday: Open Outcry

I'm a futures trader. I buy and sell futures contracts for fun and profit. You can try and complicate the process, but in the end that's all it really is. I trade electronically on the Chicago Mercatile Exchange, NY Mercantile Exchange and Chicago Board of Trade. Before the advent of electronic trading, these marketplaces operated using a process called "open outcry" and they still do, just not as much as they used to. This process is a simple auction system where buyers attempt to buy contracts at the lowest price possible and sellers attempt to sell at the highest price possible until both parties agree on a price. The gesturing, yelling, shoving and whatnot is simply used to gain the attention of prospective buyers and sellers. You've got a contract you want to sell @ 1104, so flash 4 fingers with your palm OUT and get the attention of someone who wants to buy them from you (look for someone with 4 fingers up and their palm IN) and do it fast before they sense the market is moving lower and decide to lower their bid.

Sadly, open outcry is slowly fading into the horizon. The overwhelming majority of futures contracts are traded electronically and several exchanges have switched to 100% electronic trading. There is simply too much demand for these products that it makes open outcry inefficient and damn near impossible considering the sheer volume. But, the essence of what I do is no different than what floor traders's just not as loud, violent or exciting. There's a great deal of nostalgia and respect watching people trade in an open outcry exchange and myself and thousands of other traders across the globe owe everything to the open outcry system and the markets that were established so very long ago using the exact same bid/offer system we still use today.

For today's YouTube Tuesday, here's a glimpse into what the essence of trading and open outcry is. This is a trailer for an upcoming documentary called FLOORED. It is filmed on the floors of the Chicago Mercantile Exchange and the Chicago Board of Trade; exchanges I participate in (electronically) each and every day. It's a sort of homage to days gone by and the characters that still participate in an open outcry environment and a way to let the rest of the world--hopefully--gain a respect for and understanding of markets that affect their lives each and every day, whether they realize it or not.