My Crazy First Year of Trading

My new coworkers called him The Zuck. It wasn’t because of the fact that every other word out his mouth rhymed with “zuck”, and it was a few years before the other guy in the hoodie hit the scene. It was just a shortened version of his surname, Zuckerman. My new boss was straight old school; a foul-mouthed, flat-topped Jersey guy, the size of a house, who had sharpened his teeth–or rather fangs–trading in the pits of the Mercantile Exchange. He wasn’t a pat-you-on-the-back type of guy; he was more a bite-your-head-off boss. It wasn’t unusual for a trader to escape his office following one of his “trading evaluations” in floods of tears. I will never forget my introduction to The Zuck; on my first day as a professional proprietary trader, I gave him a friendly look and smile as he emerged from his office, and he blasted out, “What the fuck are you looking at?!”

Unsurprisingly, The Zuck wasn’t into elaborate and structured training programs. I had expected that I would have months of meticulous classroom education ahead at this new job of mine; instead, I was handed a software manual and a computer and told to get going. I would have two weeks trading on simulation, and then I would go live, trading real money.

Talk on the testosterone-laced trading floor, located in the heart of Texas, revolved around “killing it”, trading “big size”, and “making G’s”. Therefore, after graduating from my “training program” and being handed live ammunition, I transformed into the trading version of Rambo. Not knowing any better or having anyone to teach me anything, I went crazy. I traded like a wild man and used that live ammo to mainly shoot myself in the foot.

The pain couldn't have been too bad because I kept my finger on the trigger–even finding a glitch to allow me to trade “more size” and, therefore, cause more damage. Although I was only allowed to trade 100 shares of each individual stock, for some strange reason, I wasn’t limited to the number of different stocks I could trade. So while I couldn’t trade 200 shares in a single stock, I could trade 100 shares in 20 different stocks at a time. With this trick up my sleeve, it took me little time to master the impressive act of losing thousands in a single day.

My wild approach and the boisterous atmosphere made the trading floor feel more like a casino floor–and since I was playing with the house’s money, the losses didn’t sting that much. The problem was that I wasn’t the disciplined blackjack player in this casino, I was the fool going for broke on the roulette table. It would probably have been best for The Zuck to act like a “pit boss” and cut my limits, or at least kick me up the ass. However, I escaped his wrath and the only punishment I received was courtesy of the markets, which at this time were even more temperamental than my boss.

The markets were wild. The dot.com bubble had burst, and investors were further spooked when Enron blew up. Enron was an energy company that was the darling of investors until its accounting books turned out to be fraudulent, further eroding investor confidence. Things seemed like they couldn’t get worse…

During my second month on the job, I walked into the office and saw the shocking images of smoke billowing from the first World Trade Center. While most of us stared at the TVs with our jaws dropping, many of the veterans sat glued to their computer monitors with their fingers pumping. I was too –and too shocked–to realize that this was exactly the kind of event that creates the market volatility that a trader thrives on.

Those savvy veteran traders didn’t have too much time to trade because it was promptly announced that the markets would be closed indefinitely. After a week or so off–and after letting all this horrific news sink in–it was announced the markets would reopen, and we went back to work. Although we were seldom given guidance from the senior traders, I do remember that on this occasion, one of our more respected colleagues stood up in front of the whole office and gave an impassioned speech right before the markets reopened.

He told us that it was his patriotic duty that day only to buy stocks; he was not going to short and he encouraged the rest of us to follow his noble lead. I respected his morality and wondered how many of his fellow senior traders would get on board. It turned out that few followed, and the ones that did paid dearly because the markets got hammered. It’s another excellent example of how morality and trading don’t mix.

The markets eventually steadied, but my PNL did nothing but hemorrhage. I was lost, and without any type of meaningful trading plan and the mindset of a gambler, I managed to achieve the remarkable feat of losing almost $40k in less than five months. The fact that my secondary evening job was as a door guy at a nightclub didn’t help matters. As soon as I left the trading floor, I would head home, take a quick nap, and then typically work at the bar till at least 1 am before having to be at the office by 7:30 AM. While working the door, my bartender buddy would offer me free and irresistible, ice-cold beers, which only made things worse.

The environment at the office felt more chaotic than at the nightclub. Not only did we have a crazed boss and no training program, but midway through my first year at the office, a good chunk of the firm’s most profitable traders decided to leave and start their own outfit. This business naturally has high turnover, I’ve seen thousands of traders come and go over my career, making me feel somewhat like a death row inmate, not wanting to get too friendly to the guy next to me, knowing that it’s only a matter of time till that seat lay cold and empty. Fortunately for these traders, and unfortunately for the firm, they weren’t being led to the electric chair, instead they were escaping the madhouse for far better compensation. I just wished that I could have gone with them and relieved myself of the 40k debt hanging over my shoulders. Unsurprisingly, the invite never came.

After the renegades jumped ship, things seemed pretty bleak. Fortunately, this upheaval forced the owner to make some needed changes. Out went The Zuck, and in came a more professional and forward-thinking management group. A proper training program was introduced, and a spirit of cooperation and friendly competition was encouraged to foster a productive environment to spawn some new profitable traders. To complete the transformation, the firm dropped its generic “Zone Trading” title and was renamed Kershner Trading after the owner.

The new management appreciated just how important a role the overall environment is for each individual trader’s chances of success. It’s necessary for a rookie trader to be surrounded by experienced and successful peers–even if these successful traders aren’t kind enough to share their winning strategies or provide any type of mentorship or coaching. Success finds a way to seep from trader to trader, like some type of benevolent virus. Surrounded by winners, the confident trader has the attitude that if others can do it, they surely can too. This mindset is mandatory in a job where a fellow co-worker raises the white flag or is shown the door every week. It’s no surprise that with this ceaseless body count, the trader needs constant reminding and reassurance that it is, indeed, possible to succeed.

Many of the traders who left in the purge had been using the rather malevolent “rookie sniping strategy,” so many of us were actually glad to see the back of them. Regardless, the stock of elite traders needed to be replenished–either by bringing people in or elevating those on board to that level. My new bosses understood that healthy competition is a more effective motivator than verbal abuse, so they started rewarding the top traders in each category with a cash prize and other goodies each month. Management did a fantastic job of promoting these intensely competitive contests, strategically placing computer monitors (or, rather, let's call them scoreboards) throughout the office displaying every trader's profits (or, rather, let’s be honest and say that, at the time, most of us had losses).

The size of my losses, and the embarrassment of having them broadcast across the office, should have been enough motivation for me to get my act in order, but competing in these competitions definitely added a little fuel to my fire. I was probably more focused on beating the other rookies and winning dinner at a fancy restaurant than the real prize of keeping my job and my trading dream alive.

The management clearly knew that trading is, by nature, a competitive sport. With a slim chance of survival, trading naturally attracts a group of ultra-competitive combatants. In fact, most trading floors at prop firms are filled with ex-athletes, gamers, and poker pros. Add in an extreme amount of testosterone, and you start to understand why some of these trading offices more closely resemble gladiatorial arenas than professional work environments. To compound the competitive element, traders at the office were divided into teams, and appointed a senior trader as a coach.

This program was a step in the right direction and the new structure gave new life and hope to my trading. Ultimately, it was still on my shoulders to turn things around. In spite of my continued losses, I still had confidence that I would make it but knew I needed to take action. The first step was to stop the bleeding. I had been trading like a wild man, intoxicated by the rush of big swings in my PNL (although saying “swings” is putting it kindly, as it was more of a downward spiral). I had been reckless and had ignored the most important lessons any new trader should learn and abide by..CUT YOUR LOSSES.. and KEEP THEM AS SMALL AS POSSIBLE!

Let me emphasize the importance of these words for all traders, especially newcomers. Losses are inevitable, but the number one priority for a new trader is to keep them tight and get your trading education as quickly and cheaply as possible. Cutting losses quickly will not only reduce the financial hole that you will no doubt dig yourself into at the start; even more importantly, it teaches discipline, which is a prerequisite for any successful trader.

I will begrudgingly accept that an experienced trader who is consistently profitable has earned the right to widen those stop losses, but a new trader has no such privileges and must keep those inevitable early losses as small as possible. Loose risk management is the number one cause for budding trading careers going up in smoke. Here’s all you need to know about the first year of trading: Keep your losses as small as possible and get in the healthy and necessary habit of punching out of losing trades!

When I made the switch from being completely reckless to adhering to risk management principles, I was suddenly relieved by not having to constantly deal with the mental anguish that accompanies big losing trades. My PNL improved and my confidence grew. This newfound dedication to cutting my losses also led me to discover the ultra-fast trading world of scalping, which has been my home ever since.

Before diving more into scalping, let me first quickly categorize the different trading styles. For simplicity's sake, I will put them into two groups.

• Scalping describes a style of trading in which trades are held for seconds, minutes, or, in some cases, hours. The skilled scalper takes profits quickly and covers losing trades even more quickly.
  

• Position Trading (as well as Swing Trading) revolves around holding positions for hours, days, weeks, months, and maybe even years. The position trader relies on technical and fundamental analysis and hopes to ride the momentum of the markets.

You could say I started my trading career as a position trader. My initial trading strategy consisted of buying a stock, or basket of stocks, and hoping the market would show me mercy. If the market was unmerciful, which it tended to be, I would typically hold my position until my daily loss limit was met, and I was forced to cover. My reason for entering one of these “wing and a prayer trades” was typically some exotic technical pattern, maybe a “bullish pennant” or a “cup and handle pattern”. I might occasionally hit a home run, but the vast majority of my trades were strikeouts. I was basically using the same strategy that 90% of the traders on Twitter use, and despite their bluster, I’m almost certain they suffer the same results.

Scalping is different; it’s more about reacting than hoping. The skilled scalper is still technically at the mercy of the markets, but is constantly adapting to the dynamic situation, staying nimble and not attaching themselves to one side of the market. A scalper realizes that even though a trade setup might look perfect, the markets might not want to cooperate, and there is no point in fighting the markets. The trick is to look for warnings that the market is kind enough to share and act accordingly.

A warning could be a big seller in the order book, breaking news, or a sudden nosedive in the broad market. For example, it might look like the perfect long position, but if a huge seller pops into the order book, the skilled scalper quickly covers their position and looks for the next opportunity–which may even mean switching sides and shorting that same stock in front of the big seller.

Scalping revolves around agility and speed, making it more like video gaming, but discipline is the most essential trait for any successful scalper. Cutting and keeping your losers as small as possible becomes paramount when your winners aren’t as big. Although home runs are possible, the scalper aims to hit singles and doubles. These winning trades don’t have to be huge, just bigger than the losers. If a trader (any trader) can follow this mantra, he or she doesn’t even need to be right most of the time–even in my best months, my win rate typically hovers around 50%.

It all makes perfect sense to me, and that's why I have always resisted the temptation to switch sides and become a position trader. I don’t want to go to bed knowing that some random geo-political event overnight in Asia could destroy my trading account; scalpers sleep like babies (apart from the occasional level 2 order book dancing in our heads). Why would I leave myself to the whims of the market? The position trader speculates by thinking or hoping that a stock will go up–and that sounds like gambling to me.

I say this partly tongue in cheek because I know successful position traders, and certain position trades offer plenty of edge, such as that $LVS trade I spoke about earlier. But ultimately, for me, it makes sense to scalp. Why not use these amazing tools available, such as order books, and why not operate mechanically instead of being exposed to the unpredictability of the markets?

My conversion to scalping helped slow my losses to a trickle, but I still needed some winners–and they were proving hard to find. Winning trades require good strategies, but mine were all duds.

It was tough extracting actionable information from the few profitable traders, but I still remembered how the group of traders who recently left had operated. How could I forget? I still had emotional and financial scars from the times they had picked off erroneous orders of mine. They fed on errors, looking for “free” cash. While I wasn’t about to torpedo my colleagues, I did realize that I needed to look for errors and take advantage of the opportunities they presented. I needed to find glitches.

Inefficient markets are the perfect place to look for such strategies, and even my semi-trained eyes were able to see that the stock market was not functioning perfectly. The early 2000s were a time of seismic changes in the stock market structure. The old-school NYSE market specialists, who strutted around on the stock exchange floor like creatures of an ancient era, were fighting a losing battle to protect their turf from a batch of new and competing electronic exchanges.

These electronic exchanges pathed the way for the second wave of attack, a full-on invasion by automated trading bots. The battle was intense, and the transition from the traditional market structure to the electronic market structure was messy, presenting countless opportunities for skilled glitch hunters. The regulators also contributed to the ripe pickings, bringing in new rules and regulations to tackle the problems and issues brought on by these changes in the market structure. Unfortunately for them–and fortunately for traders–many new rules and regulations just added to the chaos. I won’t get too technical here, but I highly recommend reading Dark Pools, by Scott Patterson, for more background on this tumultuous time in the markets.

Now that I had narrowed my focus to these inefficiencies and glitches in the market, the next step was to find a specific glitch and take advantage of it. The problem was that most glitch strategies relied on speed, and I’ve always been pretty darn slow on the keyboard. I knew my odds were going to be better if I found a strategy that was less reliant on speed and had fewer vultures fighting for the scraps.

Automated trading had been around for a while by 2001, but the trading bots weren’t the ruthless cash-printing monsters that they are today. Nowadays, stealthy bots have mastered the game of entering and exiting the market with as little detection as possible, but they didn’t use to do such a good job of hiding their hand. Even with very little successful trading under my belt, I found that I could spot some of these clunky bots at work. For instance, they would always use the same electronic exchange and always display the same order size and often chase the bid or offer of the stock they were attempting to buy or sell.

I was able to start to take advantage of some of these bots, eventually perfecting my lagging 3M ($MMM) trade that I mentioned earlier, and ate away at my debts. My meteoric progress and the gaming aspects of these strategies gave it the feel of my younger days when I would use a cheat code to advance on my favorite video game. In fact, glitches are the trader's version of cheat codes! My new “cheat code” had transformed me into a turbocharged Pacman, only I was gobbling up cash, not pixels.

I was finally getting ahead of the market that had beaten me so badly for so long, applying a little discipline and finding a winning strategy had made all the difference. I felt on top of the world, and my confidence grew. After a $10,000-month in June 2002, I was only a few thousand dollars away from covering my losses and receiving that monumental first paycheck I had dreamed of.

In July 2002, I crossed that line into profitability in style, pushed by a huge wave of volatility that had laden my $MMM strategy with what I previously thought were unattainable profits. I finished that July with $90,000 in profits! Not bad for a 22-year-old playing a glorified video game