Read The New Market Wizards: Conversations with America's Top Traders Online
Authors: Jack D. Schwager
If there is a single theme that keeps recurring in this volume, as it did in
Market Wizards,
it is that psychology is critical to success at trading. Certainly this idea is repeated strongly in the Basso interview. However, there is a more important lesson here: In order to achieve success in life, you must have the right mental attitude, without which success in trading is a Pyrrhic victory.
If trading (or any other job or endeavor) is a source of anxiety, fear, frustration, depression, or anger, something is wrong—even if you are successful in a conventional sense, and especially if you are not. You have to enjoy trading, because if trading is a source of negative emotions, you have probably already lost the game, even if you make money.
Basso is far from being the most successful trader I have interviewed in terms of performance statistics, but he is probably one of the first I would choose as a role model. Essentially, adopting such a model implies the following prescription: Combine your enthusiasm, energy, focus, devotion, and discipline to becoming the best trader you can be, but once you have done that, there is no point in agonizing over the details. Maintain the perspective of viewing unfolding market events as you would view a movie. Don’t worry about the adverse market moves if you’ve got it right in a long-term sense. And if you haven’t yet developed a fully sound approach, then learn from your losses and view them as tuition for trading lessons (always making sure you never risk more than you can afford to lose).
Basso’s advice to view your life as a movie may sound passive on the printed page, but that is not the feeling that comes across on a personal level. Basso is suggesting that you enjoy and experience your life with the same involvement and intensity you would an engrossing movie, but at the same time, maintain the sense of perspective you would have if you were watching a movie. Don’t take your problems too personally. The universe will still be there tomorrow.
L
inda Bradford Raschke is so serious about trading that she traded right through the last day of her pregnancy. “You didn’t trade while you were in labor?” I asked her half-jokingly. “Well, no,” she said, “but then again, it was four
A.M
. and the markets weren’t open. I did, however, put on a trade about three hours after I gave birth to my daughter. I was short some currency contracts that were expiring that day. It seemed like such a good trade that I couldn’t bring myself to give up the opportunity of rolling the position over into the next contract month.” As I said, Linda Raschke is very serious about her trading.
Raschke knew that she wanted to be involved in the markets from an early age. When she was unable to land a job as a stockbroker after graduating from college, she got into the routine of hanging out on the floor of the Pacific Coast Stock Exchange every morning before work. Although the driving motivation for her daily visits to the exchange floor was her fascination with the markets, this routine eventually led to an opportunity to become a trader. One of the exchange locals befriended Raschke and taught her the basics of options. Impressed by Raschke’s enthusiasm and quick ability to grasp market concepts, he provided her with a trading stake.
Raschke spent six years as a floor trader, initially at the Pacific Coast Stock Exchange and then at the Philadelphia Stock Exchange. With the exception of one catastrophic event early in her trading career, Raschke made money steadily as a floor trader.
In late 1986, when injuries suffered in an accident forced Raschke to trade from an office, she discovered that she much preferred off-the-floor trading. Thereafter, she set up her trading office at home. Although many floor traders who try to make the transition to office trading encounter major difficulties in the first year of the changeover, Raschke’s first year off the floor was actually her best ever. She continued to be a consistently profitable trader in subsequent years.
When I first met Linda Raschke, I was impressed by her ebullient demeanor. I was shocked when she told me that she was suffering from Epstein-Barr Syndrome—a malady whose hallmark symptom is chronic loss of energy. “What you don’t know,” she said, “is that I have spent the better part of the past four days resting to build up enough energy to make this trip.” (Although I had offered to travel to her home to do the interview, Raschke wanted an excuse to make a day trip to New York.) Even so, I could hardly imagine what she must be like when she is fully healthy.
Raschke believes that she contracted her ailment because she had just pushed herself too far—simultaneously trading full-time, taking care of an infant, dealing with hordes of workers as her home was being remodeled, and actively pursuing her hobby of training and riding horses. Raschke even manages to be upbeat about her illness. “I feel a tremendous amount of good has come out of this,” she explains. “Instead of trying to cram in everything before I turn thirty-five, I now realize that at thirty-three I’m still really young and that I have many years of great opportunities ahead of me.”
The first few hours of the interview were conducted at my office. We then continued our conversation at a local Wall Street area restaurant. I kept eyeing my watch and hastening our conversation along throughout dinner, because I was aware that missing her next scheduled bus home would mean a four-hour wait. Although Raschke seemed relaxed and unconcerned, I didn’t want to be responsible for her being stranded at Port Authority Bus Terminal for that length of time. There are far better places to spend four hours (a Turkish prison, to name only one).
When did you first get involved with the markets?
My father loved to trade the markets, although he never made any money at it. Being the oldest of four children, I was enlisted to help him leaf through hundreds of stock charts, looking for some specific types of patterns. My first real involvement in the markets came when I attended Occidental College. The school had a program wherein ten students were selected each year to manage a trust set up by an anonymous donor.
What did you know about the markets at that time?
Not much. We made decisions based almost strictly on fundamentals. Anyone in the group could come up with an idea, and it would be implemented if approved by the majority.
What did you learn from that experience?
I just learned that it was an awful lot of fun.
Did you get a market-related job after finishing college?
After graduating college, I went up to San Francisco to try to find a job as a stockbroker. I must have applied to every brokerage firm in the city, and I was turned down by all of them. They didn’t take me seriously. To them, I was just a young kid who had graduated college. I was repeatedly told to come back in four or five years. I finally ended up taking a job as a financial analyst with Crown Zellerbach, a paper company.
As fate would have it, my office was only two blocks away from the Pacific Coast Stock Exchange. Since I didn’t have to be at work until 8:30 and the exchange opened at 7:30, I started spending the first hour of my day at the exchange.
What did you do there?
I just watched what was going on. After a while, people noticed I was there, and some of them went out of their way to explain things. One trader explained the pricing of options to me, and I thought, “Gee, I can do that.” It didn’t sound like such a big deal. The truth is that once you get down on the trading floor, you find that the traders come from all walks of life. You don’t have to be a rocket scientist to be a trader. In fact, some of the best traders whom I knew down on the floor were surf bums. Formal education didn’t really seem to have much to do with a person’s skill as a trader.
How did your transition from observer to participant come about?
The person who had explained the basics of the options market to me thought that I would make a good trader and offered to back me. At the time, I was applying to graduate schools to get an M.B.A. I thought to myself, “I can either go to business school to get my M.B.A., or I can trade on the floor of the stock exchange—hmm, which do I want to do?” It wasn’t a hard decision.
On what basis was he willing to back you as a trader?
What has impressed me about other people whom I have ended up training or backing is their level of interest. If someone has a strong enough interest or desire, it usually overcomes other obstacles. I think he was impressed with my interest in the markets.
How big a stake did he give you?
As was standard procedure for traders backing other traders, we set up a partnership, in which I was the general partner and he was the limited partner. He put up $25,000, with the agreement calling for a 50/50 split of the profits.
How were you making your trading decisions?
I would just buy options that were underpriced or sell options that were overpriced and hedge the positions with other options or stock.
Wasn’t it difficult for you as a novice to be competing with more experienced brokers trying to do the same types of trades?
No, the options market was just incredibly inefficient in the early 1980s. You didn’t really need an IQ over 100 to make money. After my first three months, I had made about $25,000.
Around that time, I got involved in selling calls on Cities Service, because the options were overpriced. And why were they overpriced? Because the stock was a takeover candidate.
Did you know that at the time?
Oh sure.
But did you know how to factor that situation into the price?
I thought that I did. At the time, the stock was trading at $32. At the prices at which I was able to sell the options, I knew I would be okay as long as the stock price didn’t go above $55. Unfortunately, the takeover was announced the afternoon before the options expired, and the stock jumped from about $34 to $65. Suddenly, I discovered that you could lose $80,000 overnight.
So overnight you lost all your profits and your initial stake, and you were still in the hole for $30,000. Who was responsible to make up that deficit?
I was, since I was the general partner.
Do you remember your emotional response at the time?
It wasn’t so bad emotionally, because I had seen other traders around me lose much greater amounts in sudden takeover situations. They were able to survive after taking hits of several million dollars. In comparison, my situation didn’t seem that extreme. Also, I felt that in any business where you could lose money that quickly, you had to be able to make it back.
It almost sounds as if you were able to shrug it off.
I don’t want to make light of this experience, because it was intimidating being faced with a mountain of debt at the age of twenty-two. In fact, I still had $10,000 in debt left over from college student loans. Fortunately, I was able to find another backer, and everything worked out. Overcoming that experience gave me the confidence that I could overcome anything that might happen in the future.
How did you do after that point?
I made money steadily.
What made you decide to abandon floor trading for trading from an office?
In late 1986, I had a bad horse riding accident. I fractured my ribs, punctured my lung, and dislocated my shoulder. I found it physically very uncomfortable to stand on the floor. That was the first time I started sitting upstairs and trading off a quote machine. I thought it was great! There were all these indicators and different markets I could watch at the same time. Over time, I evolved my own trading style in the S&P futures.
What is your trading style?
My niche is short-term trading, which is how I make my bread and butter. The occasional long-term trades are frosting on the cake. I believe that only short-term price swings can be predicted with any precision. The accuracy of a prediction drops off dramatically, the more distant the forecast time. I’m a strong believer in chaos theory.
[A basic concept of chaos theory is that for aperiodic systems—i.e., systems that never exactly repeat themselves and hence never find a steady state, such as weather or the markets—slight differences in variable values or measurements can be magnified to have huge effects over increasing periods of time. The technical name for this phenomenon—sensitive dependence on initial conditions—has become better known as the Butterfly Effect. As James Gleick described it in his excellent book,
Chaos: Making a New Science,
“In weather, for example, this translates into what is only half-jokingly known as the Butterfly Effect—the notion that a butterfly stirring the air today in Peking can transform storm systems next month in New York.”]
There are too many unpredictable things that can happen within two months. To me, the ideal trade lasts ten days, but I approach every trade as if I’m only going to hold it two or three days.
I’m also a firm believer in predicting price direction, but not magnitude. I don’t set price targets. I get out when the market action tells me it’s time to get out, rather than based on any consideration of how far the price has gone. You have to be willing to take what the market gives you. If it doesn’t give you very much, you can’t hesitate to get out with a small profit.
I put a great deal of effort into getting the best entry price possible. I feel this is probably one of my strongest skills. In day trading, a good entry price is critical because it buys you time to see how the market will react. If you buy because you think the market should bounce, but it only goes sideways, you’d better get out. Part of the trading process is a matter of testing the water. If your entry timing is good enough, you won’t lose much even when you’re wrong.
Some of the best trades come when everyone gets very panicky. The crowd can often act very stupidly in the markets. You can picture price fluctuations around an equilibrium level as a rubber band being stretched—if it gets pulled too far, eventually it will snap back. As a short-term trader, I try to wait until the rubber band is stretched to its extreme point.
How do you determine when the market is near such an extreme?
One of my favorite patterns is the tendency for the markets to move from relative lows to relative highs and vice versa every two to four days. This pattern is a function of human behavior. It takes several days of a market rallying before it looks really good. That’s when everyone wants to buy it, and that’s the time when the professionals, like myself, are selling. Conversely, when the market has been down for a few days, and everyone is bearish, that’s the time I like to be buying.