Aug

27

 Dear Mr Niederhoffer,

I really like your website dailyspeculations. There are a lot of fascinating and interesting articles that lead to new ideas and inspiration.

I read in the "About V.N & L.K" section that you trained some very successful traders and hedge fund managers. I am a student of business administration in Germany and want to work as a trader in the future.

It would be interesting to know how the training of your traders was structured and what were the most important things you focused on during the training? If you were now in my age (25 to 30 years), how would you start and where would you try to get the sufficient education for this business?

I hope that you can help me with your insights.

I wish you all the best and hope you will continue to share your insights on the markets.

Kindest regards,

Lars Gutt

Victor Niederhoffer writes: 

This is a good question. Does anyone have a good answer besides reading a good statistics book like [the old] Snedecor, Horse Trading by Ben Green, Bacon's Professional Turf Betting, and starting a hypothetical trading account, and doing some hypotheses testing from a field they know something about?

Jeff Watson writes: 

A big question is why you would want to trade. Trading is a pretty thankless job, very tough, and maybe you only see the media presentation, or you want to tell people at a cocktail party, "I'm a trader," but I'd like to see a why.

Having a good mentor, someone that you can apprentice to, is the most important thing in learning how to trade. A good instructor is much more important than Ivy League Degrees, how to manuals, internet chat rooms, books, systems, gurus, the financial media, and all the other mind numbing stuff out there.

My mentor when I first started was an 85 year old guy who was first trained by Art Cutten. He learned well from old man Cutten, and taught me how to keep out of trouble. The main lesson to learn in trading, more than anything else, is how to keep out of trouble. Manage to keep out of trouble, keep your own counsel, and the mistress might give you a second or third date.

George Coyle writes:

Series 3 study guide is a great (relatively brief) overview of the commodity futures industry. It touches on styles of trading as well as goes through lots of the unexciting but important details (order types, etc.). (Outline of material covered in exam [pdf]). (Online version of Study Guide by Investopedia).

From there the Market Wizard books are good to look at the different styles to see which sounds the best to you.

If quant focused I would say read something on how casino games work (odds and such–Richard Epstein's Theory of Gambling and Statistical Logic book is good) and think of how that might be applied to markets with the trader acting as the casino. Focus on keeping it simple, think of what is practical and possible when working with data.

Read your books of course. Read interviews with William Eckhardt. Larry Williams' recent book (LT Secrets for ST Trading) does a good job of outlining how quant works specifically, as does Charles Wright's Trading as a Business. Livermore's How to Trade in Stocks is a good one too (less popular than Reminiscences but more of a "how to" manual).

Deitel and Deitel C++ How to Program is the best C++ manual out there in my opinion. I dodged it for years but it is crucial and so useful. www.thenewboston.com is a great website to watch youtube vids on various languages to get your feet wet (but Deitel is necessary if you really want to learn the specifics).

And just start trading. The best teacher is experience. Even if equipped with all the great logic from above it seems real experience is necessary to actually follow the rules.

Craig Mee writes:

Understand valuation. Get a handle on all things that move a market price. Maybe have an 8 week internship of your own making with 8 different dealers. Corn farmer, art dealer, financial dealer, car dealer, importer, etc, and understand that whatever you're trading, you potentially should be able to move in theory from one to the other seamlessly. You are a valuer first and foremost, and if you value it wrong, you will also see how most of these choose to cut their positions. This might help to keep in the forefront of your mind what your mission actually is.

George Parkanyi writes:

Well if you can get past the fact that he finally went bust and blew his brains out, I found Reminiscences of a Stock Operator, about Jesse Livermore, to be quite useful. The most notable things I remember are (1) "making the most money when he was sitting, not trading" – meaning a position needs time to make really big money, and (2) to Jeff's point about staying out of trouble – averaging UP a position once its already showing a profit, and never averaging down a losing position. (The latter is especially important when trading with leverage.)

Ultimately, it still comes down to a style you are comfortable with – keeping the staying out of trouble part in mind; however you do that. And this may or may not involve the things mentioned above.

David Lilienfeld writes: 

Go through some psychology texts–learn to understand human behavior and get to know one's own temperament. Understanding on an intellectual level doesn't help much if one's temperament is suited to trading. I have an old friend from high school who was on the Solomon trading in the mid-to-late 1980s. He hated it, often spent the weekends sweating his positions, etc. He moved on to be a buy side analyst, became the portfolio manager for a number of funds that succeeded pretty well under his direction and prospered. He had no trouble sleeping as a portfolio manager, and as I said, his funds did very well. A college roommate became a sell side analyst and was bored as could be doing his job. He did OK with it, but not great. He changed employers (at one point he thought about leaving the industry if he wasn't hired by someone to do something other be an analyst), started in its training program and found himself on the trading floor. He enjoyed it immensely and retired last year (I'm still not sure if he "retired" or was retired by his employer; looking at his homes, it's not as though he's wanting for much, so maybe he really did retire–but it's also not been a topic open to discussion, at least not with me). My guess is that just about everyone on this list has friends with similar stories. The bottom line: You have to know your temperament. You can learn the math, but if you don't have the fortitude, the math doesn't much matter.

The psychology part is understanding what people are about. Understanding gambling is about the mathematics of risk. Important stuff to be sure. But people matter too, and understanding what they are all about is also important.

Those are my recommendations. Lucking into a good mentor helps, but observing for a while is also one of the best teachers.


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13 Comments so far

  1. Andre Wallin on August 27, 2012 12:39 pm

    Al Brooks’ books

  2. Kirk gritz on August 27, 2012 6:47 pm

    On the next market plunge leverage your account to the maximum by selling out of the money puts and find mental support on statistics by telling yourself that this is a 1 in 100 event. Hope for the best and if it works then leverage even more by opening a hedge fund. If you blow up then rinse and repeat until you get it right. That is how the best traders in Wall Sreet are made…they are in themselves anomaly statistical events

  3. Bill Wolfe on August 27, 2012 7:25 pm

    Take my course!

  4. Doug on August 27, 2012 7:55 pm

    I would say having a mentor is huge. A good guide for me when I started was Mark Fisher’s, Logical trader book.

    An understanding that this can take years/thousands of hours. I am probably at my 5 thousandth hour, and finally I am performing well.

  5. Michael Hamm on August 27, 2012 9:54 pm

    I’m in the same position as Lars, but I live in Australia and the opportunities listed above to find a mentor or as Craig Mee mentioned, finding dealer positions are very hard.

    I’ve taken the approach to just read as many books on trading - use Amazon trading reviews to read on hedge funds, trading strategies, trading psychology.

    Try dabbling in as many different markets, time structures, instruments as you can, to see where your style will fit the trading strategies you will read about.

    Keep very detailed records of your trading successes, and have people review/audit and give you feedback on these trades. Also keep a trading diary.

    Finally, keep your expectations real, don’t think you’re going to find success overnight, and don’t give up :)

  6. astro the family dog..:) on August 27, 2012 10:42 pm

    An opinion that doesn’t include reading a good book, trading or investing books! LOL, ….but I guess you may mean.

    Markets in general are the study of human society, so I guess in a way you have to start by ‘just observing’ your own family and sorts if you have one not all people do, though they may start out with one doesn’t mean the move along with one in growing years took place. It is suggested that one man may need to walk the world to see it, as another may only to walk around his own block, in his own neighborhood to see and observe the same.

    We are taught that price movement is created by fundamental and technical structural happenings in the market place, but an underlining current to observe is just how one absorbs information in creating that decision making process of investing/trading from such. This opens a means that moves to purely ‘sentiment’, as it is the sentiment of the masses that ‘directly’ move market prices, as in stating ‘all and or everything’ that is for bargain/trade, yes all things, even human life itself.

    Suggesting this is in a way, observing the core of what is going on between human beings is as important in reading a fundamental spreadsheet or technical price chart. That the mere observant process of ‘noticing’, that on a TV morning news show soybeans are mention because they can now create ‘jet fuel’ is as an important issue to be watch in the future, for future outcome of soybean pricing, then how much is for sale/buy of the product. Noting that this example turn out to be the exact high for many years latter in soybeans from that happening.

    Suggesting and observing ‘movies’ of the day, people in all walks of life excelling and/or falling from grace in periods of booms and busts are important. The human element is everything in markets, how to observe, how to risk what you are observing, and as to how you attack and or defended from what you have observed, is all ‘sentiment’, and most times coming from all directions at the ‘same time’. It is the mover in what is happening, what had happened, and will happen.

    Yes, sentiment in many ways are to be observe, but understanding that what some may see as ‘true sentiment’ of a market is secondary to the key fact simply stated this way, ‘observe what others are not observing’. Moving here on this leaning road maybe of some interest, though likely not as the trading world that revolves around us each day, will quickly move one to observe what another’s suggest about that last good trading book out in the market …LOL :)

    Good luck…with and without the good trading books, trading and investing is a life’s journey in which few have the staying power needed.

    Now home to the Jetsons….LOL

  7. Annonymous for Obvious Reasons on August 28, 2012 9:13 am

    Re Dougs recommendation of having a mentor: my “mentor” was a closeted, but full fledged narcissist who couldn’t stand anyone else having a taste of success. Despite all the classes he taught and the articles he wrote or the shows he was interviewed on he was exactly the opposite of what he was pretending to be.

    It took many years of him slipping up in his stories for me to piece together and fully discover that he was intentionally putting poison in my ears to kill my P&L.

    As soon as I stopped speaking to him I started to come into my own as a trader.

    Long story short, be careful who you place your trust in. This business attracts some odd specimens that bite with strong venom.

  8. Ram chandra khadka on August 28, 2012 11:27 am
  9. admin on August 28, 2012 1:31 pm

    be very carefull when you start trading never to allow yourself to be in a situation where the market makers in your field set the margin and can conspire to set the prices against you. always trade in markets where there are not a handful of adversaries that set the price and threaten to damage anyone who goes against them. when getting out of trades in such markets, beware of spreads of 100% or more so that just to meet your margin calls, you can lose 100%. regrettfully the margin rules and other rules that apply to outsiders often do not apply to those adversaries that have positions against you and can only make a profit by squseezing you. even when you’re managed to level the playing field by keeping your commissions low,and bid and asked low, and not playing against adversaries who have an assymmetric advantage against you in the rules they m ust face, and the ones they make to do you in, never get in over your head.

  10. Jeff Watson on August 28, 2012 1:55 pm

    Good advice from Admin but one more thing. Don’t ever put up any extra margin….blow out of the position before it goes that far against you.

  11. Anatoly Veltman on August 28, 2012 8:00 pm

    Jeff’s last add proved to be the worst decision of my trading career: I entered Short Natural Gas one day before it did top out around $14. But instead of adding margin money and spreading position to next contract month, I did cover on merciless rally and hoped to re-Short the new month. Never got another entry, and watched gas slide to $4 without any new rally to Short into

  12. Andre wallin on August 29, 2012 6:15 pm

    Shakespeare is right when he said something along the lines of ambition is meaningless with valor. Or valor to trade and loose and pay your dues is more important than your desire to be a trader.

  13. How to be a successful trader on February 2, 2013 12:54 am

    […] of your mind what your mission actually is.” Share ThisTweetFacebookLinkedInTumblrStumbleDiggDelicious Filed Under:Uncategorized […]

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