Q&A with Lewis J. Borsellino, founder of www.TeachTrade.Com, an educational web site for stock and futures traders that features "Market Calls" on stock index futures, stocks and options. Mr. Borsellino is also the author of The Day Trader: From the Pit to the PC (John Wiley & Sons, May 1999). Called "one of the biggest and best traders" in the S&P pit by CNBC, Mr. Borsellino trades S&P futures on the floor of the Chicago Mercantile Exchange and off-the-floor at his Chicago-based trading firm.
1. What's the difference between scalping on or off the floor?
Scalping on the floor of an Exchange is dramatically different from scalping and/or day trading at a computer. When you're trading off the floor, the trades are usually longer in duration - 5, 7, 9 minutes, an hour, two hours, half a day � -- than when you're trading in the pit. For me, personally, when I'm trading in the pit, I can trade hundreds of contracts within a minute or two. That's if I'm truly scalping.
When you're trading on the floor - with the brokers and locals and amid all the market activity - you're part of the market. Locals in the futures pits are really like the market-makers in stocks, providing the bids and offers for the institutional players.
When I trade on the floor, I have a definite bias of whether I want to be long or short. I have my technical research that shows me the support and resistance areas that I want to buy and sell. For example, I may want to buy them at 1500 and have a mental sell stop in at 1496, and a profit objective of 1508. But when I'm on the floor and I see S&Ps go down to 1499, 1498.50, 1498 � I'll be buying on the way down too. Then as it turns around and goes above 1500, I'll be buying and selling out of those positions up to my profit objective. Off the floor, I buy 1500, put a sell stop in at 1496, and look to exit at 1508. I'm not scalping the way I would be on the floor.
2. Do you personally use pivots down on the floor?
Every morning my traders and I have our "Morning Meeting," which we also feature on the web site, TeachTrade, under Market Calls (LINK). We highlight the pivots that are likely to emerge for the day. We use a combination of technical analysis to determine these pivotal areas, above which the market is likely to be bullish and below which it becomes bearish.
3. Can a new trader with a good knowledge of the S&P's come onto the floor and have somewhat of a minimal learning curve, or do the rules of the pit differ dramatically from off the floor - such as your "spot" on the floor, whether the locals know you or not, etc.?
Wherever your trade - whether it's in a pit or off the floor - you have to know your environment. Trading on the floor is dramatically different than when you're at your PC in your home or in a trading firm. If you've been successful trading S&P's off the floor and you know that market well, you can make the transition to the floor, but it will take time to master that environment. It's not only your "spot" where you stand, it's also the pace of the pit, the ebb and flow of the orders, and trading with open outcry (shouting out your bids and offers) and using hand signals, instead of "pointing and clicking" with a computer or picking up a phone and calling a broker.
Another challenge of the pit is not to be unduly influenced by large locals as they 're trading and the overall excitement and emotion of the pit, which is very easy to become caught up in. I know there are some off the floor traders who really like the "squawk box" that gives them the action and the noise of the pit. Others are distracted by it because it influences them too much. When you're on the floor you have to be able to shut out the noise and the confusion.
4. What charts do the floor traders look at before the day and while they are trading?
There are not different charts for traders off the floor and on the floor. We're all looking at the charts. But one of the interesting things for on-the-floor traders is how do you extract yourself from the front-line action that is making those charts! Here's what I mean, when you're off the floor, you're looking at a support or resistance area that's being violated. You say to yourself, looking at your price chart, this is where I should buy or sell.
But when you're on the floor, you're in the thick of things. That chart you're looking at is really plotting what's happening around you. Off the floor, you may look at what appears to be a good top in the market, which you should be selling. When you're on the floor - having looked at that same chart - it's hard to sell when you see a lot of buys being executed at the top because some stops have been run, or to buy when you see the sells coming in.
When you're on the floor, you're living the action that's on the chart. You have to identify where you are as part of that chart without getting caught up in the emotion.
5. Do floor traders use beepers for alerts when approaching key moving averages?
In 1986, I was among a group of traders who bought the original rights to Gann. I put a chartist in my office and, every half hour or when need be, a runner would go up to the office and bring the charts down to me. Then we evolved to using a pager, which he would use to page me to tell me about a market move. Then we moved to alpha numeric pagers that he could use to send me a message. Now, at the Merc, we're allowed to use wireless headsets to connect with our technicians.
6. Do guys trade off the "basis?"
The basis (futures versus cash) is one indicator. But the key to being a successful trader is not being tied to just one indicator. There are so many possible indicators out there - the premium or discount to cash, correlation with bonds, the correlation among stock indexes, etc. A good trader knows how to look at all the indicators and decide which is dominant given the tone of the market at the moment.
7. How many people who come down to the floor make it to the point where they can make a living at it? And of those people what is the single biggest factor separating them from those who do not make it?
The rule of thumb is that for every 10 people who come to the floor to trade, 2 or 3 will be able to make some money. Then perhaps 1 trader will make a really good living. In any business, including trading, about 80% of the volume is done by 20% of the people. The biggest single factor that separates those who are successful from those who are not is discipline. This discipline - both mental and physical - enables you to stick by your plan, to control your emotions, and to handle both your losses and your profits without shaking your confidence or developing a huge ego.
8. How have you dealt with the transition from the floor to off-the-floor trading? Are there skills that you have acquired on the floor that are transferable to the upstairs trading desk?
Probably the biggest factor in trading off-the-floor versus on the floor has been the different dynamics. As I said earlier, when I'm trading on the floor, I can make far more trades than when I'm at the PC. Why? Because the action on the floor is instantaneous. I buy-sell-buy-sell-buy-sell in rapid succession. Off the floor, I make fewer trades, but when I do they tend to be a larger position and I may hang onto them longer. The skills that are transferable from the floor to the trading desk is the ability to gauge market sentiment. Watching the screen, you can see the market building momentum, for example, to break through a resistance level. Or, you may see a rally fade before it reverses. Either way, you have to be in sync with the market. You can't pick the top or the bottom. You have to let the market establish it's own levels.
9. You undoubtedly have seen hundreds, if not thousands, of traders come and go. What would you tell anybody thinking of coming down to the floor - or for that matter, what would you tell someone considering day trading - before they make that commitment?
When I first went to the floor, I began as a runner. Even though I was a college graduate, I had to start on the bottom rung. Why? Because trading is unlike any profession. You can have a PhD in nuclear science, and it won't do you any good when it comes to trading. The market demands and education of its own.
That's one of the reasons why I started TeachTrade.Com. It's an educational web site for stock and futures traders that includes market calls on stock index futures, stocks and options - as well as tutorials and lessons. The Market Calls, for example, allow you "look over our shoulders" as we trade - seeing where we'd get long or short or sit on the sidelines. That's essential, because the best form of education is imitation.
The goal is to help day traders know exactly what they're getting into. The media and the television commercials have portrayed day-trading as some sort of bonanza that will enable anyone to become a millionaire. The truth is 70% of stock day-traders aren't making any money, and the average life span of a day trader is about three months. Whether you want to trade on the floor or off the floor, you have to educate yourself.
10. When a big "A" local steps up to buy a falling market, is there a way to tell if he is covering or initiating a position? Will there be a different type of reaction by the locals.
Being a major player in the pit, there are other locals who will watch me when I'm buying or selling. I've used that to my advantage. For example, there are times when I really want to sell the market, I might be in there bidding, instead - and I'll use an order filler to execute my sell orders. If I want really want to buy the market, I'll do the opposite - I'll be selling and the order fillers will be buying.
On the other hand, the S&P pit is a small enough place that it's pretty easy to see when a big local is amassing a position. The other players know whether that local is long or short.
11. If you are listening in on the LOS player to the floor and the market breaks through a support level, and there is no noise (crowd roar) is that a good place to get long futures or stock? What would you be looking at to make your trading decision?
The noise can help you if you know how to interpret it. For example, say there is a big roar from the pit, as stops have been run, and then there is quiet. That quiet means there is no follow-through on that move. That's usually a good place to fade that rally or that break.
12. If you were a new trader, what would you look for to get experience?
If you want to trade on the floor, try to get an internship or an entry-level job at a brokerage firm. This will expose you to all aspects of trading and give you a good foundation from which to build. If you're doing this on your own --perhaps as a second career - you must educate yourself not only on the techniques (how to enter an order, etc.) but on the emotional and psychological aspects. As I say in TeachTrade.Com, I believe 90% of trading is psychological and emotional.
Whether you trade on the floor or off, you have to make this your life. You have to become totally dedicated to trading, the way the market moves, the emotional and psychological side of it, all the nuances �
13. How important is it for a new trader to trade small?
It's very important. Here's why. The biggest evil that can befall a new trader is trading too big. Truly, there is no such thing as an under-capitalized trader, I believe. There are only traders who trade too big for the amount of capital that they have and for where they are on the learning curve. Here's what happens:
A new trader begins with one S&P contract or 200 shares of stock. He does really well for one month. Then he starts thinking that if he had been trading 3 S&Ps or 600 shares of stock then he would REALLY be making some money! What happens is, he increases his trade size and, as a result, he's increased his risk level, which he's not used to. This then begins to change his emotional decision-making process.
The first commandment in our 10 Commandments (LINK) at TeachTrade is to trade for success and not for money. But when a new trader suddenly faces more risk than he's been used to, he begins thinking about the money on the line. That will impact his trading decisions.
14. How about money management ideas for a new trader?
The key to trading is money management, and that entails keeping your risk and reward in balance. Our rule of thumb is that for every $1 you lose, you must make at least $2.00-$2.50. Put another way, for every $2.00 you make, you can't risk more than $1. To do that, you must keep your losses small and let your profits run. Plus, you have to know yourself and the kind of risk that you're comfortable with.
15. Would you recommend a new trader scalp or be more position-oriented?
As I've said before, scalping from the floor is far different (and easier) than scalping at the screen. That having been said, I think all new traders - on the floor or at the screen - have to get used to trading frequently. When I bring a new trader to the floor, I want to see him trade as many as 30 contracts a day, all one-lots. I want him to get used to buying and selling frequently, just for a scratch (or no profit, no loss). Same thing at the screen, get the feeling of buying and selling frequently. Get over being "trigger shy." And you have to know how to get out of position quickly, particularly if it goes against you. The hardest thing for most new traders is to get out of a losing position when the market turns against them.
Do you know how to turn a day trader into a position trader? Have the market move against him. Then he'll hang on and on and on �
16. Are the floor guys concerned about all the talk about regulating day traders? Essentially, upstairs stock day-traders aren't radically different from the guys on the floor. So, presumably, if they regulate us, they'll lump you guys in as well.
I'm really not concerned about regulation of day traders. Retail day-traders and investors are already signing reams of disclosure documents, and many are still taking on too much risk for the amount of capital they have. How can you regulate people to protect them from their own greed? While I hate to draw an analogy with gambling, it's like going to Vegas and standing outside the casinos with a warning sign telling everyone their odds of winning. The casinos would still be full.
Instead, and as a matter of good conscience, brokerages and clearing firms should offer more education and resources to their clients. That's why TeachTrade has met with such success. Our site is for traders, by traders, and we have no commission-ties to brokerages. We tell people what it's like to trade, and with our market commentary, we let them "look over our shoulders" as we go short, go long or sit on the sidelines. Our motto is institutional-quality research (now available for free) at retail prices.
17. Being an "A" local, do you sometimes find it hard to buy a few hundred cars without all the other locals front-running you?
I don't believe front-running is a huge problem. But I can tell you one thing, when you're putting on size (taking a large position), if you're wrong, you can get all you want! Seriously, you can amass as large a position as you want. The only question is how far you want to step out to get them.
18. How frequently does the floor run stops?
The beauty of having an arena like the S&P pit is that there are so many people in the pit, all of whom have a different opinion. Those different opinions end up as different stop areas. True, sometimes they congregate around the same areas, since technical research tends to pinpoint similar levels. But the role of the local on the floor is not to set off the stops. That's what some people believe. The locals are there to provide liquidity and to take advantage of the markets during those times when the market is out of equilibrium because of big orders coming in.
19. How about the open outcry system vs. the rise of electronic trading? Could electronic S&Ps ever have the liquidity that the pit has?
I think liquidity could be a problem for a volatile contract such as S&Ps. The contracts that will most easily adapt to an electronic venue are high-volume, low volatility contracts such as currencies and eurodollars, which tend to be dominated by institutional players who trade "order to order." S&Ps, however, still have an important local presence in the pit. In fact, a recent study found that some 50 percent of all S&P trading is executed through a local, versus only 10 to 20 percent in eurodollars or currencies. The local is necessary in S&Ps during exceptionally high volatile times when speculative buyers and sellers must step in to handle the orders that come into the pit. At the same time, I believe that electronic trading is here to stay. Take a look at the success of Eurex, the all-electronic European exchange. Clearly this shows that an electronic exchange is viable.
What will happen, I believe, is that a hybrid marketplace will develop. Eventually, we'll see electronic trading of the S&P major (not just the E-mini) during the day, side-by-side with the pit. The customer will have the choice of how and where orders are executed. Where the volume goes, the market will follow. Open outcry will be here as long as locals on the floor are needed to provide liquidity.
20. Let's talk a little about your book. The book was entertaining and insightful, and I especially enjoyed your views on the "personality" attributes of successful traders.
Thanks. I wrote the book for several reasons. With the day-trading boom, I saw there was a real need to let people know that this isn't "easy" or a slam-dunk for retail investors. Trading is hard, and it takes discipline. That's what a lot of retail investors don't understand. They think they can buy the bid and sell the ask and be a millionaire. The fact of the matter, day-trading stocks or futures takes a professional approach. It's not for hobbyists.
The second reason is, as a floor trader, I wanted to give readers an inside look at what it's like to be "in the pit." And, I wanted to pay a tribute to my fellow traders and to futures trading in general.
I do believe that there are some personality attributes that are common to successful traders, including discipline - both mental and physical, the ability to assess and manage risk, the ability to devise and stick with a plan based on technical research, and so forth.
So many people responded positively to the book - they wanted to be able to trade as I do - that I founded the web site, TeachTrade.Com
21. Give us a little background on yourself . How did you get involved in trading? What were your early experiences as a trader? Did you get 'tossed' around and lose money when you first got started? If so, how did you overcome that?
When I started trading, I was in the gold futures pit. Gold was at $800 an ounce in those days and liquidity was drying up. I was having a very difficult time largely because I was under-capitalized, which is a common problem for a lot of rookie traders. I was also plagued by outtrades, and I found some traders tried to intimidate me into eating errors that weren't mine simply because I was new. But being an athlete - I played football at DePauw University - and not being the kind of guy you can easily push around, I didn't swallow the outtrades that I wasn't responsible for.
Still, I was getting discouraged because I'd make money two or three days in a row, and then give it all back --- and then some - at the end of the week. Most weeks I was barely making enough to make my seat lease. I had to earn money at night to help support my trading.
Then I had the luckiest mistake of my life. It was during the Falkland Islands crisis. Gold was moving on every bit of news. One day we saw a news flash that the Falklands had surrendered. Gold dropped $50 an ounce. Then came the second headline - there was no surrender. Gold rallied $50. I was trading fast and furiously and, according to my trading cards, I had bought at the low and sold at the high. As I checked my trades with another trader named Mike, however, we saw that we were "sell-sell" at the high. That meant we each thought we had sold to the other. Now gold was $50 lower. "I'll buy yours and you buy mine," Mike told me. That's what we did - and we each netted about $57,000 on the outtrade. I had sufficient capital for the first time, and I went off to the new S&P pit. That's where I've been ever since.
22. Do you use support and resistance numbers? If so, do you calculate support and resistance via the 'pivot' formula or some other method?
Trading without technical research would be like driving blindfolded. You have to use technical research that includes support and resistance numbers, pivots and so forth. If you don't use research, you might as well go to Vegas and put your money on the pass line.
23. Do you hedge while you are trading? If so, with what instruments?
No, I do not hedge. I go home flat most days. And the number one rule I follow is "buy low, sell high." I'm not being facetious. Too many times traders forget that rule.
24. Do institutions such as Merrill and Goldman hedge their proprietary S&P trades?
Very few desks on the institutional level take directional positions. However, if Merrill or Goldman, for example, is buying, that does not necessarily mean it's for their proprietary desks. It could be for a hedge fund that's a client, or for a variety of different trades. Some of those could be directional trades.