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But what they really mean is that they either paid $500,000 for their house, or had it appraised at $500,000 a couple of years ago when they got a second mortgage. In truth, right now the market is glutted with homes offered for $500,000 and there are no buyers to speak of-the market is almost totally illiquid. That $500,000 figure may work on a financial statement for the time being, but it has nothing to do with market value.

The same thing can happen to you if you trade in illiquid or "thin" markets. Prices can change very rapidly, moving right through your stops so fast that you lose perhaps twice as much as you planned on. So avoid thin, illiquid markets. Trade the front month in the commodities and currencies, and the active, high-volume stocks and options.

Rule Number 13: Never initiate a position in a fast market.

This is a rule for upstairs traders-people who rely on electronic information systems for the latest price quote. A fast market is one in which transactions ate occurring so fast on the floor of the exchange that the people recording the transactions cant keep up with the pace of the price changes. It is a formal declaration made on the floor as a waming to participants who trade by watching the latest print on a screen.

In other words, in a fast market, what you see on the screen is not necessarily what you get. It can be sorely tempting to buy a breakout or sell a break into a fast market. You w atch prices skyrocketing or plunging, and those dollar signs start appearing in your head.

One new trader in my office who didnt believe this mle sold the S&P futures into a fast market break. His fill was 16 ticks ($400 per contract) below where he plac ed his market order. Even then, according to the screen, he was up 16 ticks on the trade when he placed the buyback order. His fill was 10 ticks above where he sold them-a $250 per contract loss on the trade. And if this wasnt lesson enough, he made the same mistake on the following day and got bumed again. I dont think hell ever trade a fast market again. Your trade is only as good as the information you base it on. In a fast market, the information is totally unreliable, so DONT TRADE!

Rule Number 14: Dont trade on the basis of "tips." In other words, "trade with the trend, not your friend." Also, no matter how strongly you feel about a stock or other market, dont offer unsolicited tips or advice.

Just in terms of odds, when you consider the hundreds of thousands of people involved in the markets, what do you think the chances are that one of your acquaintances knows something that the rest of the world doesnt? If he or she really does know something, then the chances are that it is "inside" information, and trading on inside information is illegal.

But 999 times out of 1000, the so-called "tip" is just someone elses opinion. Henry Clasing, in his book The Secrets of a Professional Futures Trader, points out that consistent winners tell virtuall no one the details of their activities in the marketplace, while consistent losers "tell virtually anyone who will listen the details of their market activities, to the point of campaigning for their point of view." Psychologically, people who are eager to give out tips are probably seeking recognition and admiration. For sure, they arent doing you a favor. So, if you get a tip, my advice is to say "Thanks, but no thanks."

I took a tip . . . once. When Jim Bmckie, the former head of compliance at the whom I had dealt with before when we had some trouble at Ragnar, came to Interstate, we had a small reception for him. I was leaving, literally one step from being out of the door, when I heard a familiar voice, "Hey Vic, Vic, wait a minute!"

I tumed and a friend of mine came mshing up to me. He said in a hushed tone, "Vic, Dataforce. " I said, "Huh?" And my friend replied, "Vic, tmst me, put

this one away for the kids." He told me that Artie Wagnar, who ran the OTC desk at Lehman Brothers, had given him the tip. Artie was then like a god in the OTC business; his record was phenomenal.

So, just out of curiousity, I looked up the stock. It was at 7/g and traded over the counter. In those days, I was trading so well that I looked at this stock as a kind of "perpetual option." How much lower could it go than 7/8?

How about 0? Thats where it went. I bought almost 350,000 shares of that stock, that "perpetual option," and it fell to absolutely nothing. To make matters worse, when it was at 3 7 cents, I bought another 350,000 shares, thinking this time it must move up. It didnt . . . zero. When the price quit printing, I tried to look up the company, and I couldnt even find it. Not a phone number, no address, it just vanished.

One little step would have saved me from ever hearing my friends tip. Some tip. As my best friend. Norm, says, "Put enough money into the bank this one for the kids tips, and the kidsU grow up in an orphanage." He also offers the following sage advice when you smell a tip oming: "Say excuse me, I have to go to the bathroom. And then avoid the tipster for the rest of the night."

Just as you shouldnt listen to tips, you shouldnt offer them. It may be an admirable thing to want to help your friends out, but if you have a friend who trades, exchange ideas and discuss trading tactics in general. If you really want to be a good friend, then dont make recommendations; your friend has a mind-let him or her use it.

The main point of this rule is that there is never a good substitute for your own judgment. If you dont have enough confidence to trade based on your own judgment, then dont trade. Follow the trend, not your friend.

Rule Number 15: Always analyze your mistakes.

A losing trade isnt necessarily a mistake, and a mistake isnt necessarily a losing trade. You can make a good trade and lose money, or you can make a mistake and still make money. If you follow the rules and lose, then just let it go; you dont need to analyze it. Say to yourself, "Oh well," and move on to the next trade. But if, for example, you close out a position too early and then watch your would -be profits keep coming in, think about what you have done.

The most important reason to analyze your mistakes is that mistakes and failures are always the best teachers; they reinforce the fact that you should always follow the rules. If you can truly and honestly identify the reasons you make a mistake, then your chances of making it again are much less.

Most often, mistakes are rooted not in ignorance, but fear: fear of being wrong, fear of feeling humiliated, and so forth. To trade well, you have to conquer fear; and to conquer fear, you first have to admit having it, which means admitting your mistakes and analyzing them. Ill go into this in much more detail in the final part of the book.

Rule Number 16: Beware of "Takeunders."

I got a call one day from a friend of mine who was on the board of a major company.

"Victor," he said, "XYZ just agreed to merge with ABC. You gotta buy XYZ, its a sure b et." "Fred," I said, "is this legal, you telling me this?"

"Absolutely! We dont have anything to do with either company, and theyve already made the announcement; it just hasnt made the wires yet."

So I looked at the price of XYZ, which was at $6 per sh are, and I bought a small position. Two weeks later, the companies merged ... ABC bought out XYZ at the agreed upon price, $4.50 per share! I lost on the trade and dubbed it "a takeunder."

I guess this was the second time I traded on a tip, and it was th e last. It was the only time I ever got a tip that came true. There was a takeover, but it was actually a takeunder. Since then, Ive always shied away from alleged "takeover stocks."

Rule Number 17: Never trade if your success depends on a good execution.

When Norm was managing Merrill Lynchs intemational options trading desk, he kept a list of excuses they got for poor or untimely executions. One day, he put in an order, and after 10 minutes he

still didnt have a fill. He called the floor: "Hey, whats goin on here, 10 minutes and no fill!" The floor broker, without a moments pause said, "You see, I was on the market makers left side, shouting, and I thought he heard me. Finally, I went up and nudged him, and said, "Did you get that? He said, "Get what? Dont you know Im deaf in my left ear?" Yeah, sure.

One of the biggest losses of my life occurred because of a clerks error. It was in the 1982 -1983 era, when the S&P futures and the NYFE futures were traded heavily (the NYFE contract was the Ne w York equivalent of the S&P contract). I was long 350 S&Ps and short 500 NYFEs in an arbitrage play. I was looking to get out. I called Paul, my Chicago floor broker, on my direct line and asked him for a market. "40-45, size bids and offers," said Paul.

I hung up the phone and immediately bought the 500 NYFEs back to cover my short, so I was then naked on a 350-car (a car is one contract) long S&P futures position. Then I tried to sell my S&Ps, which, according to Pauls quote, were 40 bid. When I got to my broker in the S&P pit, I found that the market wasnt 40-45, but 20-25! As it tums out, Paul read the wrong hand signal!

If the market had in fact been 40-45,1 would have been in a profitable position. Had I known it was actually 20-25,1 would have never bought those NYFE contracts back-4 ticks was a lot in the days before programs.

Instead, I was just barely up, and I decided to play the S&P position for a while. Then some bad news broke out about a tax bill, and the S&Ps dropped 2 to 3 points before I could liquidate the entire position, and I lost hundreds of thousands of dollars on the trade.

Now this is an extreme case, but the point is that you will he handicapped by bad executions sometimes, and you never know when. Make a habit of double checking and verifying quotes when you can. If something looks or feels fishy, question it. Never mind that they are busy on the floor. Their job is to give you good information, the best possible executions, and timely reports.

I dont mean to knock floor brokers. If you ever get a chance to visit the floor of an exchange on a busy day, you should. It really gets hectic sometimes, and brokers are human; they make mistakes. All Im saying is dont get caught in the trap of thinking these people are infallib le machines. Protect your interests, shop for the best and most reliable firms, and double -check whenever possible.

As another example, I recently developed a day-trading system for the S&P futures. On paper, it looked great, and I tumed it over to Douglas, my trading associate, to put it to the actual test. In principle, the system worked pretty well. But what I didnt count on was losing three ticks on the entry, and three ticks on the exit. Who would have dreamed that the market was so thin that trading a few lots on a test mn could move the market 3 ticks! But it did, so we had to adjust the system to allow for the volatility of the executions.

Rule Number 18: Always keep your own records of trades.

It is sometimes tempting, especially when just trading on your own account, to pick up the phone, place your order, and not write everything down because your brokerage firm does it for you. But brokerage firms make mistakes.

With each order, write down the date, the time, the instmment, whether it was a buy or a sell, the opening fill, and the closing fill. Compare your records regularly with the reports from your broker. If you dont keep records, you have no way to verify the accuracy of your brokers reports.

Rule Number 19: Know and follow the Rules!

For every trading mle, there are probably five known ways to break it, and no doubt, traders will find a few more ways as time goes on. Ive listed eighteen mles, so by that reasoning, there are at least ninety ways to break them. And, each time you break a mle, thats one more way to lose money.


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