Das kleine Buch der Market Wizards

The worse the fills are, the better your trade.

Second, I study the correlation of my trades to reduce my exposure. We do a daily computer analysis to see how correlated our positions are. Through bitter experience, I have learned that a mistake in position correlation is the root of some of the most serious problems in trading. If you have eight highly correlated positions, then you are really trading one position that is eight times as large.

It doesn’t feel like work, except when you lose—then it feels like work [he laughs]. For me, market analysis is like a tremendous multidimensional chess board. The pleasure of it is purely intellectual. For example, it is trying to figure out the problems the finance minister of New Zealand faces and how he may try to solve them. A lot of people will think that sounds ridiculously exotic. But to me, it isn’t exotic at all. Here is a guy running this tiny country and he has a real set of problems. He has to figure how to cope with Australia, the U.S., and the labor unions that are driving him crazy. My job is to do the puzzle with him and figure out what he is going to decide, and what the consequences of his actions will be that he or the market doesn’t anticipate. That to me, in itself, is tremendous fun.

Do you use your guru report as a measure of contrary opinion?
I try not to be too much of a wise guy because during major price moves, they will be right for a portion of it. What I am really looking for is a consensus that the market is not confirming. I like to know that there are a lot of people who are going to be wrong.
So if you see that most of the members on your guru list are bullish at a time when the market is not moving up, and you have some fundamental reason to be bearish, you will feel stronger about the trade?
Yes, much stronger

I assume that the price for a market on any given day is the correct price, then I try to figure out what changes are occurring that will alter that price.
One of the jobs of a good trader is to imagine alternative scenarios. I try to form many different mental pictures of what the world should be like and wait for one of them to be confirmed. You keep trying them on one at a time. Inevitably, most of these pictures will turn out to be wrong—that is, only a few elements of the picture may prove correct. But then, all of a sudden, you will find that in one picture, nine out of ten elements click. That scenario then becomes your image of the world reality

The currency futures market is not efficient in several of the most important respects. First, hedging usually has a specific dollar and date requirement. For example, if I need to hedge $3.6 million for April 12, the bank just takes it. The futures market, however, trades only for specific dates and fixed contract sizes, so the hedger is not precisely covered.

In situations where a surprise news development or the release of an economic statistic out of line with expectations causes a sharp price response in currencies, does the interbank market react less violently than the futures market, or do the arbitrageurs keep the two markets tightly linked?
The two markets are well arbitraged, but those are the moments when a very swift arbitrageur will make some money. The markets do get a little bit out of line, but not a lot.

mark/yen cross, you price it in dollars, not in terms of one of the two currencies.
That’s right. You simply say: Buy $100 [million] worth of marks and sell $100 [million] worth of yen

I try to avoid a point that floor traders can get at easily.

The Heisenberg principle in physics provides an analogy for the markets. If something is closely observed, the odds are it is going to be altered in the process. If corn is in a tight consolidation and then breaks out the day the Wall Street Journal carries a story about a potential shortage of corn, the odds of the price move being sustained are much smaller. If everybody believes there is no reason for corn to break out, and it suddenly does, the chances that there is an important underlying cause are much greater.
It sounds like you are saying that the less explanation there is for a price move occurring, the better it looks.
Well, I do think that. The more a price pattern is observed by speculators, the more prone you are to have false signals. The more a market is the product of nonspeculative activity, the greater the significance of technical breakouts.