Book Reviews, Trading

Book Review of Secrets of the Trading Pros by H. Jack Bouroudjian

The full title of this book is Secrets of the Trading Pros: Techniques and Tips That Pros Use to Beat the Market by Hagop Jack Bouroudjian (2007).

Jack had been a floor trader, ran the equity futures operations of Nikko Securities on the Chicago Mercantile Exchange (CME) floor, and served on the CME board of directors from 1996 to 2002. He has a website now at The Jack B. Show.

This book does not cover any trading methodology per se, but covers a lot of general information about the markets. And because Jack was a CME director, the book gives more insights into what it was like in the pit days, and the transition to electronic trading.

One very interesting point from the book was made by Ted Lee Fisher from Chicago Grain, whom Jack interviewed. He views the ‘edge’ as being able to catch the market just as it is turning, while most are still oblivious. The edge is not about buying at the bid and selling at the ask, but taking the ask when the price is going higher, or taking the bid when the price is turning lower.

I also took away a good quote the from the book: family is what is important, money is always replaceable.

Trader Types and Personalities

  • Scalpers
    • High energy, short attention spans.
    • Usually former athletes, tennis and hockey players make the best traders.
    • Able to play both offense and defense simultaneously, and able to think a few steps ahead of the game.
  • Spreaders / Option Traders
    • Quick and flexible thinkers, able to look at numbers and figure risk and value instantaneously.
    • Not in the market to take risk, methodically search for mathematical anomalies and lock in profits immediately.
  • Position Traders
    • Energy level almost nonexistent.
    • Put on passive positions, ride the winners, cut losers.
    • As a position trader, your brains are working all the time, and you keep looking for an informational edge that might drive the market one way or the other.

Leave Your Brains at Home When Scalping

  • If you think too much about it, it becomes possible to think yourself out of every trade made as a local.
  • It is imperative not to think about the notional value of the position or the amount of risk acquired.

Trading Opportunities

  • Asset allocation
    • Large strategic trades by institutional adjusting their asset allocation. These tactical movements would drive the market on a short-term basis.
    • If the order’s origin is foreign, the order is usually 75% complete by the time Europe closes. A domestic order will usually continue into the bond close at 2pm CST.
  • Index arbitrage
    • Pay attention to the basis to get a hint about if and when the market might turn in the opposite direction.
    • The ERP market allows the arbs to flip positions between cash and futures.
    • When the Street is out of inventory, sell programs are difficult to be executed because short-selling is cumbersome.
  • Index rebalancing
    • Buy the stock (or indices in which the stock has a heavy weight) that will be added, and short the index where the stock will be added.
    • Index funds must make changes to their portfolios by the close of business.
  • Closing orders
    • Synthetic funds give investors exposure to equity markets through futures positions.
    • These synthetic funds would execute buy and sell orders against the close of the stock market, which creates a large trade at 3pm Chicago time, the cash close.
    • These large closing orders create price aberrations which smart traders can ride on.
  • European close
    • There is usually a flurry of activity around the time the European bourses close at roughly 11am Chicago time.
  • Sector rotation
    • If the S&P 500 is strong and the Russell 2000 is weak on any given day, it is a sign that there could be a rotation out of small-cap stocks into the large-cap companies.
  • Stock imbalances
    • At 2.40pm Chicago time, 20 minutes before the cash close, stock imbalances are released in order to find an orderly way to correct the imbalance rather than have a surprise ending to the session. That is why the market has one final move at the end of the day.
  • Russell Index
    • If the S&P 500 is strong and the Russell 2000 is weak on any given day, it is a sign that there could be a rotation out of small-cap stocks into the large-cap companies.

Liquidity Benefits Technical Analysis (Ted Lee Fisher)

  • The larger the volume and open interest of a market, the more valuable technical analysis becomes. If you take a very small market with very thin participation, it becomes easy to pus the market around and distort price movements. Overall, you can’t ultimately disguise the pattern,  but you can distort things. So the larger the volume and the larger the participation in a market, the better it is for a technician.

EnteringT at the Turning Points is the Real Edge (Ted Lee Fisher)

  • In the pit, you have the edge if you had bought at the bid, so can scratch the trade or have the opportunity to sell at the ask.
  • The part of the edge that most people don’t understand, and it’s integral in my style of trading, involves giving up the perceived edge because I don’t normally buy the bid, or sell the offer….. The edge, when you really understand it, is buying or selling the market as it’s turning. There’s a magical moment when that five offer is turning five bid after you just bought it! That’s where the edge really becomes useful to an aggressive trader, who’s trying to catch the market when most are oblivious.
  • In the old days in the pit, I would be standing there, and the market would trade to a new high. Well, now, it’s well offered at that price, guess what? I’m buying it. And guess what? Everybody’s happy to sell it to me. But then I’m buying fives, fives are trading — all of a sudden it’s five big! The traders who didn’t lay it off to another local just spread out the position using another contract, but now they’re short at five, and it’s five bid. They no longer have the edge.
  • That’s the biggest secret about understanding the market and about understanding trading and about what the edge is. Perception and reality can be confusing — what you think is the edge and what is the real edge are two different things. And until you recognize that the edge is fluid, not absolute, and are willing to flow with the edge, then you’re going to find trading very difficult.

Gifted Traders are Reactive

  • Most gifted traders have this ability to react to the market condition instead of trying to predict the future by using a mathematical equation. It’s almost counterintuitive that to be a proactive trader it’s important to be reactive. Identifying a pattern, or lack of a pattern, gives good traders an understanding of how they should react in order to position themselves for the next major price move.

Traders Were Asked to Be Patriotic for September 11

  • Even though the market was poised to open significantly lower, the opening was accompanied by a strange mood of reserved activity. It is not well know that trading desks of the major proprietary operations were asked not be aggressive. In other words, the largest traders, which included the index arbitrage community were asked to be patriotic with their trading.
  • The same traders who were normally sharks were as tame as dolphins as the first day of trading commenced. It was widely felt anyone who tried to profit from the attack was simply unpatriotic!
  • With hindsight, one thing is clear: Whenever there is a terrorist attack, it is a wonderful buying opportunity for stocks!

Family is What is Important

  • Bobby Gault: Remember, it’s only money, and we can always get more. Family is what is important!
  • There are more important things in the world than making a winning trade; life is precious, and money is replaceable.




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