My background

I have been an equity derivative trader for 14 years managing multiple bn $ equity derivative portfolios. I have been profitable every single year of my career throughout all market environments (low / high vol regime, baisse / hausse). My responsibility was two-fold: On the one side arbitrage strategies & proprietary trading and on the other side market making to private and institutional clients. I started working for one of the leading Investment Banks in 2006 and made it through the financial crisis. I have seen ‘it all’: Making 100s of m$ in profit, desks losing 100s of m$, whole teams being fired, teams being traded like soccer stars between banks, fraud, hybris, crazy casino bets, absolute depression, god syndrome… the whole spectrum of human psychology. One day I might write a book about it 😉

I became very good at trading and making money, though that as my main motivation had a very negative effect on my life in general. (It took me a while to figure that one out.) But in 2019 I had an awakening moment, when I recognised that the whole money game I was playing for so long was inherently flawed. (More about our relationship to money here.) The catalyst was this article on the 9th of April 2019 about my employer being involved in ‘bringing money’ out of Venezuela. That opened my perception to the ethical dimension of what I was involved in beyond what was legally ‘fine’. That month I resigned.

Since then I took a break from the money theme. Over the last months I am starting to explore my own experience and expertise with money from a new, more sane, perspective. With the intention to share my experience so that others can learn from it without losing themselves to money. As I had for long.

I am providing that context for you to qualify my assessment below: I have a sound foundation for the views I am sharing. That said they are just my subjective perspective and experience. They are definitely not definitive and relate to trading not to investing.

My realizations

It was definitely an exciting time. Especially initially.

I made tons of mistakes – some costed +6/7 digits $ and almost my job others made me $$ – and was definitely lucky as I also had a few great role models around me.

But after a while I recognized some patterns.

The main reason that I made net positive profits every single year during my career independent on the market environment (in contrast to the majority of my colleagues with a prop mandate) was that I pretty soon realized I don’t know better than anyone else / the market and fully focused on exploiting the information advantage I had through using the bank infrastructure and network and then also through building my market specific expertise. (You might be surprised many people around me believed they ‘know’ more than the market and continuously placed bets based on that flawed understanding.)

From a trading perspective (im not speaking about investing) everything else then exploiting access to information is ‘just’ gambling, luck or personal development, which in itself might be really an adequate reason, because you’ll get to know yourself – with leverage 🙂

I recently started reflecting on my learnings over the years and the patterns I have personally witnessed and applied. I like to think of it in 3 pillars (analogue to the Trivium):

I) Information:

(Access to more) information means potential.

The market participants who are long term successful independent on the market environment or cycle exploit usually an advantage in information. That can be (some or all) access to:

1. Insider information: Information that is not publicly available.
2. Market data: Such as trade flow, e.g. leading to front running orders of other participants.
3. Network: Relationship with market movers, the people who ‘own’ the market share / intelligence of that specific market.
4. ‘Good’ research: (Most research is not ‘good’.)
5. Multiple exchanges & professional trading systems: To ensure direkt market connectivity and fastest execution.
6. Deep market insides & expertise: One knows the fundamental principles and cycles of that market and recognises its pattern.
7. Your own psychological motivations and compensation tendencies: Most importantly: How you dysfunctionally compensate fear, stress or greed.
8. Your own objective risk & balance sheet capacity.
9. Professional advantage & market share: The higher the market share in a niche, the more one can potentially exploit that as one can ‘move’ the market. And flow attracts more flow. Also one of (multiple) reasons why e.g. professionals / hedge funds can beat the market (at times) is that they e.g. pay for research access and in exchange get favourable quotes for (derivative) transactions / block trades. At the same time exploiting competing market makers in their quest for market share by squeezing them. That can even lead to such extreme cases as being able to buy beneath and sell above mid market. Or just ‘pump and dump’ the market. Which means they can enter a trade with an initial profit. Instead of crossing the spread as most market participants have to and start with a loss.

One must also learn to filter the noise from the signal. E.g.:

1. You can never really rely on someone else’s conclusions, recommendation, strategy or system. What I very often encountered: People were lucky and found the right strategy for a certain market regime and made huge amounts of money. They then believed and implied they ‘know’ how to make money. Though objectively they were just lucky. And (many of them) failed later in another market environment.
2. There is no free lunch and always some risk involved. Even in the classic sense of arbitrage, there is risk such as execution or regulation.
3. Most research is crap and biased. It just attempts to explain current market views rather than adding anything substantial or ‘outside the box’ thinking. Also there can be (huge) conflicts of interest. E.g. companies which are covered can be clients or pay for research.
4. Incomplete market / trade information: Often publication of trades are delayed (or not published at all, e.g. OTCs). You might just see one leg (part) of a multiple leg trade. It’s not as straight forward to read the actual direction and positioning.

II) Understanding:

You must transfer (access to) information into understanding. Understanding ist power:

1. Don’t trade financial instruments you don’t understand. And – here is the paradox – also be aware that you probably never fully understand the instrument. Even professional market makers / participants don’t fully understand the instruments they are trading (my observation). All (derivative) pricing models are based on assumptions and theories. The more exotic the financial instrument, the more assumptions are built in. I have seen it many times that models did not work out as predicted (even for ‘simple’ assets such as stocks and futures). And also that models were calibrated to cater to ‘own needs’.
2. You must master your own psychology. And get to know yourself from imposter to (illusory) superiority. Though here is the ‘problem’ for your own fulfilment: The more rational you become the better you will be in trading. And to some degree one could say that is a good thing because you are not controlled by your emotions anymore. However at some point that huge (monetary) incentivization to become more mechanical and rational will conflict with your soul and humanness.
3. Also be aware that you enter into the game ‘competition’ which is not reality. The underlying premises of economic theory are ‘the management of scarce resources’ and that humans are ‘rational’. Be aware that are just assumptions, it is not how the world is or we are. And that premise leads to a distorted and limited worldview and incentivises behaviour which is not in line with how life really is: Cooperative and abundant.

III) Application

You must be(come) consistent with:

1. Operational excellence: E.g. trade only what you consciously decided to trade. For the very least always double check yourself. I’ve seen (and experienced myself) how the ‘fat finger’ destroyed fortunes.
2. Your Focus and Dedication: You must be willing to make trading your full dedication. There is no overnight success. Financially there might be: I have seen people making ‘overnight’ fortunes based on luck, bets or (insider knowledge) and also retire from that. Though that probability is negligible: I have more often seen people losing fortunes and in some occasions their existence by trading based on bets and hybris. Betting is not a route you want to travel. As that mindset is – independent on the actual financial reward – not a place of substance and fulfilment. It’s not success but an addiction and perpetuation of lack.
3. Mastering your Psychology: Do what you set out to do. Independent on fear, doubt, hybris, euphoria. Every single day. And continuously reiterate: Learn > Apply > Results > Adjust > Apply > Results…

Conclusion

Your ‘why’ and focus matters most:

If you want to trade to make money, you should most probably not start trading. Only if you are willing to make it your full time profession over years and built and exploit your informative advantage. But even then you should ask yourself: Why do I want this really? The motivation is usually not joy but rather getting away from lack or ‘no money’. Which is not really an inherent and intrinsic motivation. Hint: Ask yourself: What would I love to do, once I had money? The answer represents a true motivation and probably is not to ‘make money’ 😉

If you want to learn more about yourself, trading can be an excellent opportunity. You will encounter YOU with leverage 🙂

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Now I’m curious, what’s your conclusion after reading through?

Let me know in the comments!