Floor trader spent hundred million dollars to grab my 3 contracts

March 2012 TA magazine.

Positive side of $410 loss

On a positive note, 1) I followed system without hesitation.  2) Once I noticed the error, I took loss without hesitation.

Human error when detecting signal from spreadsheet.

Good news is my method remains intact.

What i learned losing a million dollars

External vs Internal Losses

The five stages of internal loss: 1. Denial; 2. Anger; 3. Bargaining; 4. Depression; 5. Acceptance

Once a person has personalized a market position and it starts to show a loss, he is uncertain when or how it is going to end (just like the person with the terminal illness is uncertain what’s coming next) and he goes through the Five Stages of Internal Loss.  He denies it’s a loss.  (“No way! Is the market really down there?  Are you sure that’s not a misprint?” ) It’s a profitable trade that just hasn’t gone his way yet.  He gets angry at his broker and/or his spouse, and/or the market.  After that he starts bargaining with God or the market – that if only he can get back to break-even, he will get out of the position.  Then he gets depressed about the losing position.  Finally, acceptance comes either because he “wakes up,” the analyst finally puts out sell recommendation or the margin clerk blows him out of the position.

Discrete Events vs. Continuous Processes

The game is a discrete event – an activity  with a defined ending point.

Invest, Trade, Speculate, Bet, Gamble

6 Psychological Fallacies: 1) The tendency to overvalue wagers involving a low probability of a high gain and to undervalue wagers involving a relatively high probability of low gain. 2) To interpret the probability of successive independent events as additive rather than multiplicative.   In other words, people view the chance of throwing a given number on a die to be twice as large with two throws as it is with a single throw – like throwing sixes 4 times in a row and then think that must mean their chances of throwing a seven next have improved. 3)  After a run of successes, a failure is mathematically inevitable, and vice versa.  This is known as the Monte Carlo fallacy.  A person can throw double sixes in craps 10 times in a row and not violate any laws of probability, because each of the throws is independent of all others. 4) Psychological probability of the occurrence of an event exceeds the mathematical probability if the event is favorable and vice-versa.  e.g. Buying the winning lottery ticket is considered much more probable than getting hit by lightening.  5) To overestimate the frequency of the occurrence of infrequent events and to underestimate that of comparatively frequent ones, after observing a series of randomly generated events of different kinds with an interest in the frequency with which each kind of event occurs.  Thus, they remember the “streaks” in a long series of wins and losses and tend to minimize the number of short term runs.  6) To confuse the occurrence of “unusual” events with the occurrence of low-probability events.  e.g. a bridge hand of 13 spades.  It’s unusual but all hands are equally probable.  e.g. If one holds a number close to the winning number in a lottery, he tends to feel that a terrible bad stroke of misfortune has caused him just to miss the prize.

Some Dollars Are Bigger Than Others.  $1000 chip in casino vs $1000 cash

Profit Motive vs Prophet Motive

Hope/Fear Paradox. Hope and fear are merely two sides of the same coin. 

When you’re long and the market is going up you 1. hope it will keep going but 2. fear it won’t.  If your fear is great enough, you will get out and hope the market turns down.

When you’re long and the market goes down you 1. hope it will turn around but 2. fear it won’t.  If your fear is great enough, you will get out and hope that  it keeps going down.

When you’re not long in the market but want to be and the market goes up, you 1. hope it will temporarily turn around to let you in but 2. fear it will keep going.  If your fear is great enough, you will buy and hope the market keeps going up.

Whether they are betting or gambling is a function of how they go about participating in the markets.  Are they exhibiting the characteristics of a bettor or gambler?  If so, then they are betting or gambling  -- regardless of what they think they are doing, or say they are doing.

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Reviewed by Ed Dobson, President, Traders Press, Inc.

This is a valuable book on trading psychology. It’s not your typical book about trading, which purports to show how to get rich by revealing secret trading strategies or can’t-lose analysis methods or by describing how the author discovered the secret to unlimited wealth and proceeded to extract it from the market.
Instead, as the title implies, it is a tale of woe from a self-admitted loser who, in the space of three months, lost his entire net worth of 1.6 million dollars and went deeply into debt. It is co-authored and self-published by Jim Paul and Brendan Moynihan, both with extensive backgrounds in the brokerage industry.
The underlying theme is that, if one aspires to be a successful trader, it is more beneficial to study the pitfalls and mistakes that lead to losing than to focus on ways to make money. The reader is shown many, many ways to trade profitably -- almost as many as there are participants in the market. Yet, ironically, the majority of traders lose.
On the other hand, there are very few ways to lose. Many highly successful traders (such as Jim Rogers, Paul Tudor Jones, Richard Dennis, and so on) are said to espouse the opinion that the most important factor in achieving success is in the avoidance of large losses, studying the factors that lead to large losses and how to avoid them, which is the major focus of this outstanding book...an unusual and innovative approach.
The authors stress that personalizing losses (for example, taking them personally rather than viewing them as a necessary part of a business venture) is a major factor leading to failure. They contend that success can actually be built on repeated failures (remember the story of Jesse Livermore?) if the failures aren’t taken personally. Conversely, failure can be built on repeated successes when the successes are taken personally.
The book is divided into three sections: The first, “Reminiscences of a Trader”, is fascinating reading. A priceless quote leads off: “Experience is the worst teacher. It gives the test before it gives the lesson.” It recounts specific details of Paul’s personal life, describing the factors in his background that produced the psychological framework and makeup to which he attributes his lack of success as a trader. His entry into the brokerage business, his career as an active floor trader on the Chicago Mercantile Exchange and the details of his final downfall and huge loss are recounted in detail.
The second section presents the lessons to be learned from his losing experience in the markets. A major theme is that there are many ways to make money in the market, but relatively few ways to lose. Most losses of significance are attributed to psychological factors.
The third section shows how to avoid losses due to these psychological factors. In practical and easy-to-understand terms, it presents a simple plan to help one understand, accept and, thereby, avoid catastrophic losses.
He emphasizes the value of having a planned, organized approach to trading. “Participating in the markets without a plan is like ordering from a menu that has no prices, then letting the waiter fill out and sign your charge card receipt. It’s like playing roulette without knowing in advance how much you had bet, and only after the wheel stopped, letting the croupier tell you how much you had lost or won.” No sensible individual would behave like this in a restaurant or a casino, yet there are countless thousands who participate in the market without a concrete plan -- the equivalent behavior in the market!
This book is a valuable addition to trading literature. Most traders, even if they have heard that the psychological aspect of trading is the most important, don’t take this caveat seriously and opt, instead, to concentrate on timing and selection methods or other techniques that “can’t miss”. They would be well advised to obtain this book and study it closely over and over until its valuable message is inculcated into their attitude toward the markets and trading.

Note: I wrote the above review of this book when it was published in 1994. It was very popular and sold well until it went out of print several years ago and became difficult to obtain. Used copies, when occasionally available, commanded high prices and were greatly sought after. Tragically, one of the authors, Jim Paul, perished in the attacks on the World Trade Center on September 11, 2001. Co-author Brendan Moynihan has graciously made arrangements recently to make a limited number of copies available again. They are available solely through him and by special arrangement through Traders Press, Inc. More information on this book is available at http://www.traderspress.com/detail.php?PKey=574, where it may also be ordered.
Review by
Edward Dobson, President
Traders Press, Inc.
Greenville SC

===============

It was a painful realization to discover that I wasn't a trader. I didn't have the patience or mechanical skills to be a successful floor trader, nor the consistency to be a successful upstairs trader. If I was going to learn how to make money trading, I was going to have to find out how others had done it. I went and read the books and articles about, and interviews with, sucessful market professionals. I studied the best investors and traders from Wall Street and La Salle Street: Peter Lynch, Bernard Baruch, Jim Rogers, Paul Tudor Jones, Richard Dennis and many more. After all, when you're sick you want to consult the best doctors, and when you're in trouble you want the advice of the best lawyers. So, I consulted what the successful pro's had to say about making money in the markets. If I could figure out how they did it, I could still pull off getting rich again. And this time I would keep the money.
Below is some of the advice the pros offered for making money.
Advice and Dissent:

“I haven’t met a rich technician.” – Jim Rogers

“I always laugh at people who say, “I’ve never met a rich technician.’ I love that.  It is such an arrogant, nonsensical response.  I used fundamentals for nine years and then got rich as a technician.” – Marty Schwartz

'Diversify your investments.' - John Templeton
'Diversification is a hedge for ignorance.' - William O'Neil
'Concentrate your investments.' - Warren Buffet
Averaging a Loss:
'You have to understand the business of a company you have invested in, or you will not know whether to buy more if it goes down.' - Peter Lynch
'Averaging down is an amateur strategy that can produce serious losses.' - William O'Neil
'Don't try to buy at the bottom or sell at the top.' - Bernard Baruch
'Maybe the trend is your friend for a few minutes in Chicago, but for the most part it is rarely a way to get rich.' - Jim Rogers
'I believe the very best money is made at the market turns. Everyone says you get killed trying to pick tops and bottoms and you make all the money by catching the trends in the middle. Well, for twelve years I have often missing the meat in the middle, but I have caught a lot of bottoms and tops.' - Paul Tudor Jones
Spreading Up:
'When you're not sure what is going to happen in the market it is wise to protect yourself by going short in something you think is overvalued.' - Roy Neuberger
'Whether I am bullish or bearish, I always try to have both long and short positions - just in case I'm wrong.' - Jim Rogers
'I have tried being long a stock and short a stock in the same industry, but generally found it to be unsuccessful.' - Michael Steinhardt
'Many traders have the idea that when they are in a commodity (or stock), and it starts to decline, they can hedge and protect themselves, that is, short some other commodity (or stock) and make up the loss. There is no greater mistake than this.' - W.D. Gann
I had expected there might be some subtle differences among the pros. After all, some were stock market moguls, while others traded options or futures contracts. But didn't these guys agree on anything? Based on the examples above, they sounded more like members of a debate team trying to score points against each other.
I had to find out how the pros made money in the markets. I had to learn the secret that all of them must know. But if the pros couldn't agree on how to make money, how was I going to learn their secret? And then it began to occur to me: there was no secret. They didn't all do the same thing to make money. What one guy said not to do, another guy said you should do. Why didn't they agree? I mean, here was a group of individuals who had collectively taken billions of dollars out of the markets and kept it. Weren't they all doing at least a few things the same when they made their money? And if the first guy hadn't lost, why didn't the second guy?
If imitating the pros was supposed to make you rich and not imitating them was supposed to make you poor, then each one of these guys should have lost all his money because none of them imitated each other. They all should be flat broke b/c they very often did things opposite of each other. It finally occurred to me that maybe studying losses was more important than searching for some Holy Grail to making money. So I started reading through all the material on the pros again and noted what they had to say about losses.
Losses:
'My basic advice is don't lose money.' - Jim Rogers
'I'm more concerned about controlling the downside. Learn to take the losses. The most important thing in making money is not letting your losses get out of hand.' - Marty Schwartz
'I'm always thinking about losing money as opposed to making money. Don't focus on making money; focus on protecting what you have.' - Paul Tudor Jones
'One investor's two rules of investing:
1. Never lose money.
2. Never forget rule #1.' - Warren Buffet
'The majority of unskilled investors stubbornly hold onto their losses when the losses are small and reasonable. They could get out cheaply, but being emotionally involved and human, they keep waiting and hoping until their loss gets much bigger and costs them dearly.' - William O'Neil
'Learn how to take losses quickly and cleanly. Don't expect to be right all the time. If you have a mistake, cut your loss as quickly as possible.' - Bernard Baruch
Now I was getting somewhere. Why was I trying to learn the secret to making money when it could be done in so many different ways? I knew something about how to make money, I had made a million dollars in the market. But I didn't know anything about how not to lose. The pros could all make money in contradictory ways because they all knew how to control their losses. While one person's method was making money, another person with an opposite approach would be losing - if the second person was in the market. And that's just it; the second person wouldn't be in the market. He'd be on the sidelines with a nominal loss. The pros consider it their primary responsibility to not lose money.
The moral of course is that just as there is more than one way to deal blackjack, there is more than one way to make money in the markets. Obviously, there is no secret way to make money because because the pros have done it using very different, often contradictory, approaches. Learning how not to lose money is more important than learning how to make money. Unfortunately, the pros didn't explain how to go about acquiring this skill. So I decided to study loss in general, and my losses in particular, to see if I could determine the root causes of losing money in the markets. As I said at the very beginning of this book, I may not be wise, but I am now very smart. I eventually did learn from my mistakes.

================

CONTENTS

FOREWORD

PREFACE

INTRODUCTION

PART I. REMINISCENCES OF A TRADER

Chapter 1. FROM HUNGER

Goose Nickels

No Little League

Chapter 2. TO THE REAL WORLD

Frat life

Is Gin a Drink or a Card Game?

Very Little Class

A Glimpse of the Future(s)

Out of school

You're in the Army Now

The Brain Watchers and the Butterfly

Chapter 3. WOOD THAT I WOULD TRADE

Chicago

Learning the Trading Floor

Life in The Fast Lane

Zenith

Chapter 4. SPECTACULAR SPECULATOR

Timber Tumbles

The Arabian Horse Fiasco

Soybean Oil Spreads

Road to Riches

The Death Knell Phone Call

Soybean Oil Gets Slippery

Vertigo

Nadir

Chapter 5. THE QUEST

How Do the Pros Make Money?

Advice and Dissent

PART II. LESSONS LEARNED

Chapter 6. THE PSYCHOLOGICAL DYNAMICS OF LOSS

External vs. Internal Loss

How External Losses Become Internal Losses

The Five Stages of Internal Loss:

Denial, Anger, Bargaining,

Depression, Acceptance.

The Five Stages of Loss and the Market Participant

Discrete Events vs. Continuous Processes

Chapter 7. THE PSYCHOLOGICAL FALLACIES OF RISK

Inherent Risk

Created Risk:

Investing, Trading, Speculating,

Betting, Gambling

Behavioral Characteristics Determine the Activity

A Dangerous Combination

Psychological Fallacies

Profit Motive or Prophet Motive?

Chapter 8. THE PSYCHOLOGICAL CROWD

Emotions and The Crowd

Conventional Views of the Crowd

What is a Crowd?

Characteristics of a Crowd

Two Psychological Crowd Models

Delusion Model: Expectant Attention, Suggestion,

Contagion, Acceptance

Illusion Model: Affirmation, Repetition, Prestige,

Contagion

Emotions

Hope/Fear Paradox

Mania & Panic: Where Hope and Fear Meet The Crowd

PART III. TYING IT ALL TOGETHER

Chapter 9. RULES, TOOLS AND FOOLS

Tying it All Together

Dealing With the Uncertainty of the Future

Decision-Making

The Plan

11 Herbs and Spices

A Plan vs. Loss, Risk and The Crowd

A Plan and Objectivity

CONCLUSION

POSTSCRIPT

EPILOGUE

NOTES

BIBLIOGRAPHY