CHAPTER 1

PROSPERING IN THE POSTCRASH ENVIRONMENT

The markets have never been a pretty place. Just ask those Dutch traders whobought into the tulip mania back in the seventeenth century. You think the realestate bubble was bad? Imagine paying the modern day equivalent of $10,000 for asingle tulip bulb, sight unseen. Where were the attorneys general and the SECenforcers back then, when they were really needed?

To be frank, I like my markets just the way they are, warts and all. And I'mconvinced that world capitalism would get a lot worse if we didn't have a goodplace to make bad decisions, at least between 9:30 a.m. and 4:00 p.m. New Yorktime. Maybe that's why I cringe whenever government bureaucrats or stateprosecutors step onto our sacred ground.

You see, we earn a living when other people put on their dumb hats and buy toohigh or sell too low. No, folks like us don't build bridges, sell suits, or leadtheir flocks to salvation. To be realistic, we contribute absolutely nothing tosociety except pure liquidity and an aggressive attitude. And you know what? Iwouldn't have it any other way, because the trading game works directly with themachine language of the world monetary system and is the only profession I knowthat doesn't depend on a boss, a company, or an economy. At its core, our uniquebusiness feeds ruthlessly off the excesses of the marketplace, and it justwouldn't be the same without all the manipulation, misinformation, and monkeybusiness.

Many former investors now hate the financial markets and anyone who prospersthrough trading or speculation. With biblical fervor, these folks believe thatjustice must rain down on the greedy bastards who still appreciate themarketplace or prosper from its existence. Amazingly, many of these self-righteous critics still follow the market's every twist and turn through theirfavorite news channel or Web portal. Talk about hypocrisy!

I have a standard response whenever I get attacked for my continued faith intrading, capitalism, and the modern markets. It goes something like this: Whywaste your time if you're getting angry and upset reading the financial news?Take up knitting instead, or, better yet, join a political party. I'm sureyou'll be much happier in your misery, and Mr. Market will be a much kindergentleman without your daily attendance.

To quote a famous fictional trader, greed is good. Greed pays the bills and getsthe kids through college. Greed also performs an important community service. Itrelieves the misinformed of their excess capital and gives it to those moredeserving of its ownership. Indeed, pure unadulterated greed greases the engineof worldwide market inefficiency. And, without question, the twenty-first-century trader must be greedy in order to develop the predatory style requiredto prosper in our modern electronic markets. This fact of life may bedistasteful to folks who still believe in the tooth fairy or in Robin Hood, butthe rest of us understand there will be a loser for every winner, and everyonewho plays the financial markets has to choose whether to take—or gettaken.

THE PARADOX

The next two declarations are true on multiple levels, but they're also totallycontradictory. The markets (a) are the same now as they were one hundred yearsago, with timeless principles moving the tape, and (b) have changed radically inthe last decade and no longer operate according to timeless principles. Thereinlies the challenge for traders at all levels as we head into the second decadeof the new millennium. In a nutshell, we've read all the technical analysisbooks, attended all the seminars, and listened to all the market gurus andtalking heads. But nothing, absolutely nothing, has prepared us for the surrealscience fiction landscape we're now forced to navigate each day.

Of course, it starts with the trading bots. We knew the influence of programtrading would grow when we saw its handiwork between 3 and 4 p.m. New York timeback in the 1990s. But who could have predicted that coldhearted algorithmswould become the overriding force in price development, on a daily basis, just10 years later. On the surface, computerized trading is a great addition to themarketplace because it adds significant liquidity to the ticker tape. But thesealgorithms lack the singular force of nature we could always count on throughoutour years of flipping stocks, futures, and currencies: they operate without thetwin emotions of greed or fear.

That's right, trading bots won't panic when they find themselves on the wrongside of the market and won't get euphoric after good news delivers a windfallprofit. In other words, they don't act or react to the financial markets likeyou or I, our neighbors, or those suits on Wall Street. They're cold,calculating, and totally focused on their one-minded goal to move the markets intheir favor. Sadly, today's state-of-the-art algorithms wouldn't work with suchdiabolical precision if the market's historic center of gravity still existed.For all our complaints in the 1990s about the NYSE specialists and Nasdaq marketmakers, those savvy middlemen kept the trading bots in a controlled space, fromwhich we flesh-and-blood players could coexist in an uneasy peace.

That delicate balance was lost, perhaps forever, when electronic executionsystems killed the middlemen around 2005 and replaced their overriding role inmaintaining orderly markets with the ephemeral barrage of bid-ask prices thatnow flash across our screens at the speed of light. Retail traders like you andme have been forced to operate since that time in a desolate Mad Max landscapethat has become the centerpiece of our twenty-first-century auction place.

Wait a second. If things are really that out of control, why don't weall just give up and find another moneymaking hobby, like poker or macramé?Well, as it turns out, you can only screw around so much with the modern marketenvironment before it bites back. Whenever the tape gets a little too crazy,manipulated, or downright...