March 6, 2011 2:32 PST

Becoming an S&P Futures Trader

Early Career

This has been a long a strange journey. I’ll start it with what didn’t happen, or more appropriately, what I didn’t know. I didn’t know about Chicago. Now I went to high school in Dearborn and college at Michigan State and visited Chicago many times. What I didn’t know about Chicago was that it is really the second financial center of the United States. That it embodied something I did not even know existed – futures. Without a doubt, if I had known than a small fraction of what I know now, I would have gone to Chicago out of college. Instead, after getting my MS in math I did the more obvious thing. I got a job in California. My first job gave me a lasting insight into how the Valley works. The project management team that hired me was fired before I arrived and the new project management team wanted to do my job themselves. More precisely, my new manager wanted his girlfriend to have my job. So within a couple weeks I contacted another company that had offered me a job and they welcomed me in. Those were the rock and roll days of Silicon Valley when it did not take much to be among the best in your field because there were so few people to compete with.

Within a couple years my urge to entrepreneurship came into the forefront as I started moonlighting as a consulting programmer. That is when I got my first professional job working with microcomputers – they weren’t really called PC’s yet. I had built my own Heathkit LSI-11/23 – a truly powerful home computer for the day with 256 kb memory, dual floppy drives and a CRT. So working on an LSI-11/23 used to control semiconductor test equipment was really exciting for me and took me out of the world of mainframes forever.

The Twist

After following the professional programmer / consultant career path for about five years and several companies that never amounted to much, I became antsy. I took some pretty interesting extension courses at Stanford. I went to night law school. Eventually I had an opportunity to start an automotive parts manufacturing company (that’s my Michigan background showing). After getting that going and profitable, I got my big lesson in entrepreneurship. Having taken a significant salary cut and made a small but substantial for me financial commitment, my erstwhile partner decided he didn’t want to pay me now that the company could afford it. My 49% ownership may as well have been nothing. He refused to sell to me, and he refused to buy me out. The end result was a settlement that essentially paid my legal fees.

Discovering New Customers

One of the things that I discovered after moving to California is that they had legalized Poker houses. I always enjoyed playing, but limited myself to maybe half a dozen times a year where I might win or lose a hundred bucks. Being the President of a manufacturing company, you run into a certain group of people that also enjoy playing Poker. So I started playing for a bit higher stakes and a maybe a couple times a month. Than as my career as an automotive executive started falling apart and my savings were running out, I thought I could make a few extra bucks if I focused more ‘professionally’ on poker. And I discovered that I could have a lot of customers who gladly paid you for a night’s entertainment at the poker table. I especially enjoyed getting up early, 2-3 a.m., and making a few bucks before going to work. Bars closed, but Poker houses were open 24 hrs. Whether I was lucky or smart, I managed to make about $80,000 in six months playing poker.

Epiphany

What do you do when you’re young; made a bunch of money playing poker; but really don’t want to spend the rest of your life in smoke filled rooms? I opened my first brokerage account. Then, in what could only be described as an act of whimsy, during a break in a meeting, I went to a pay phone (ha!) and bought $10,000 of OEX put options. That was the first stock related transaction I did in my entire life. It would not be the last. Did I mention it was October 1987? The 25-1 payout for a 3 minute phone call sure looked good at the time.

I’m No Dummy – Just Dumb

Now I had over $250,000 burning a hole in my pocket. I also was smart enough to know that it was a good time to buy things, having sold high, I could now buy low. And I was smart enough to know that I really didn’t know anything, this was definitely luck. So I went shopping for someone who could help me make more rational decisions and start teaching me about the markets. I found a broker – is Dean Witter still in business :-?

My thinking was to buy the market for a longer term play, but I did not know how. I knew the options were too volatile and short term, that I needed some time to figure this thing out. I thought there might be something like a mutual fund that followed the major indexes, but did not even know that. So my esteemed broker who seemed to know what I wanted, and seemed to be somewhat successful, put me into a spectrum of stocks. I later found out they were all stocks he owned and I was just the sucker helping him prop up his prices. And yes, almost every stock he put me in kept going down, even as the market fully recovered.

Ah, the SP’s!

I quickly discovered the S&P futures. I probably would not have done worst if I just jumped into the SP’s. But I was smart enough to know that this was something that needed at least a couple of months of study, and I still hadn’t realized how absolutely wrong my esteemed broker was. I opened up a futures trading account, started getting my feet wet in the intricacies of phone / pit trading the S&P. I discovered Esignal charting software. I built my first custom indicator showing volume pressure without the volume leaders. I studied technical indicators and kept track of all sorts of numbers. But I remained with the premise of buy low and sell high. Find the retracements and jump in. For three years I made over 100% annually, including coming in second in Norm Zadeh’s futures trading competition the one time I entered.

Why?

Why did I stop? There are a lot of reasons, but they fall into two main categories. First are the psychological issues. Trading from your home can be socially isolating. This was before the Internet and Facebook and the stuff I am trying to do now to cope with that. Along with that, nobody, at least not anybody close to you, understands what you are doing. The thought is that since you are home, you are available. With a wife and three young children the demands can be unpredictable at best. That leads to my first axiom of trading, if you trade when you can and not when the market is right, you’re trading is a hobby and you are a customer.

The second and probably as important a reason is that I had a fundamental character trait that made me want to build things, to be constructive in a way outside of making money. Now capital itself can be constructive. But I did not see how I could break out of the cycle of spending all my earnings on my family. I thought about increasing my capital base and even became a CTA. But I was already mentally prepared to go back into software development and never raised any money.

Software Development - again

Silicon Valley was still growing fast and the PC market was really taking off. Those PC’s needed commercial software. It’s amazing to me how many software projects fail; how many quality developers have never worked on a commercially successful project. In this phase of my story, I feel a little blessed that the first two projects I worked on were successful. One went public and the other was sold to a major company. Both offered me personal satisfaction and some financial success.

From there I became involved with a small sport video startup. While that never amounted to much, I get an idea for a business to do multi-media data management. That was my first pure startup. I always thought that everybody in Silicon Valley should have the opportunity to start a company and raise a million dollars. That’s what I did. But alas, my multi-media ran right into the cusp of the Internet boom, my investors fought among themselves, every co-founder had another idea they wanted to explore, and I couldn’t transition into Internet media management fast enough. That company died a quiet death.

A bit of consulting and emersion in Internet technologies led to my next startup. Through the consulting it was self funding. The primary idea was to build an XML based messaging and application server. I did all the initial work myself evenings and weekends. This was the ultimate realization of my software development career. I sold the company into what I thought would be a life altering move. Well, it was, but not the way I thought.

The price was attractive, consisting of cash and stock that projected to be worth several million. Once I got there, I realized that the management team of ex Xeroxers was better at raising money than running a business. Fortunately, I got the first years payment of a 10 year plan. Unfortunately, the investors reorganized the management team along with my future share out of existence.

On the Street

At least that’s how I felt – on the street. The Internet bust was in full swing. I had money in the bank, but not much of a plan. I started trading again. I was intrigued with the electronic platforms and being able to execute off a program. But it was more of a hobby than a plan, and I was the customer. I wrote some trading software, but didn’t have sufficient motivation to start a niche software business. I started studying trading systems, and tested more systems than I can remember. I think they all were based on ‘perfect’ execution, i.e. trade at the instantaneous cash price. None of them worked in the real world. I also tried to ‘systematize’ what I had done earlier. My thinking was that if you formalized the process sufficiently you could trade successfully as a hobbyist. I was probably more enamored with the systemization of my ideas than actually trading.

Eventually I started consulting again, working with small business clients to implement solutions based on software I had previously helped develop. Then 2008 happened. Small business consulting is probably the last thing to recover in a recession. My slowly expanding consulting business became stagnant as the more lucrative new customers dried up.

Here I Am

The other thing that happened about that time was the advent of truly powerful quad-core PC’s. Finally you could do some serious real time data modeling. I had been trying for a few years to put my software skills and trading skills together. The key for me was developing a trading context. I look back at my successful trading and realize that I had a decent intuitive feel for the trading context. I think every successful trader does. Even if you are not always right, you just have to be right often enough.

With my new found computing power, I set out to model a trading context that worked for my style of system trading. I may or may not have found it, only time will tell. I did find the confidence to take my trading out of hobby mode.

How?

How can I trade successfully? I think the two key issues that drove me out of trading have been or are being addressed. I’ve built successful software. I’ve made my contribution to the real world. Now I am building systems and software just for myself, and that is fine.

The kids are out of the house. I’m starting this blog and tweeting my trades to stay in touch with the outside world. Is that enough, or will I go stir crazy again? We’ll see.

And there’s a time constraint. I’ll give this trading/blogging experiment three months. If it works, it will go on. If not, I’ll turn another chapter.