Lewis Borsellino: Part II
In Part 1, veteran futures trader Lewis J. Borsellino answered the question, “Why have you succeeded at this game when so many others have failed?” His conversation with Marc Dupee continues:
Marc Dupee: How or when will you pyramid your trades while screen trading?
Lewis Borsellino: Do you mean how will I add to a position? Well, one of the things we never do is add to a loser. We never average. We’ll pyramid the trade as we see different areas of support and resistance being tested and firming up and we look for consensus of all three of the indices moving in the same direction; definitely when we’re trading Spoos and Nasdaq. If we get all three moving the same way, that’s when we like to jump on and add to our positions.
Dupee: I suppose that makes it a little clearer now, particularly since we’ve seen such bifurcation between tech and the blue chips.
Borsellino: Very difficult trading. I think from October to almost February of this year has been one of the most difficult times of trading that I’ve seen in a long time.
Dupee: Really?
Borsellino: Yes, because of the disconnect. Here you are watching Nasdaq making all-time highs, and you want to buy the Spoos but they keep beating them up. Every time the Nasdaq makes a new high and you go to buy them — the S&Ps get a little rally. Then the Dow sells off and the S&Ps sell off and you get chopped up.
Dupee: Do you have a clerk near the Nasdaq pit?
Borsellino: Actually the Nasdaq’s right in front of me. So I can see it and I can see the board. And I don’t flash orders up there. If I want to place an order, I tell my clerk on the phone. He’ll call the desk and put in the order for me.
Dupee: You said you like to do low-risk trades; two to three bucks a stop.
Borsellino: Especially upstairs. Definitely upstairs.
Dupee: Is that what you use as a stop loss rule?
Borsellino: My stop loss rule is, whatever your stop loss is, I want it 2 1/2 to 1. If I’m willing to risk $2 on a trade, than I have to make $4 1/2 in profit, it’s a 2 1/2 to 1 ratio. For every dollar I risk, I want to make 2 1/2.
Dupee: And will an upper channel be what you’ll be looking for to determine what that upside potential will be?
Borsellino: Exactly.
Dupee: How do you keep yourself balanced when you’re on a run?
Borsellino: (Laughs). You know what, it’s just 19 years. In 1987, I made $4.4 million. In 1988, I made $90,000. Okay? So I’m the ultimate doom-and-gloom guy, and that’s what I look at. You know most professional traders like to trade from the short side. Me, I’ve been a bull since I’ve walked into the pit: I love to buy them. I keep telling guys, you want this thing to crash? You remember 1988 when business dried up and brokerages laid off 30% of the people. You want a healthy market, let’s keep going up. Look, I’ve seen up and I’ve seen down and I understand that you’ve got to stay calm. The minute you start to believe in all the accolades that they throw at you, then that’s when the market’s going to show you. I’ve seen it happen to the biggest guys. I’ve seen Richard Dennis take $600 million and lose 300 of it in six months. And Neiderhoffer too. (Famed trader Victor Neiderhoffer once traded for George Soros — Ed.)
Dupee: And these two were both trading off the floor . . .
Borsellino: Right, but I’ve seen guys on the floor who’ve had tremendous runs and then all of a sudden the next thing you know they’re trying to borrow money from you.
Dupee: So is that their egos–that they believe everybody telling them they’re so great — that had something to do with why they crashed.
Borsellino: I think that what happened is they had a temporary loss. They’re very good traders, both of them. But what I think happened is they had a temporary loss of discipline. And they had too much pressure on them to perform from their customers. And when that happens, your plan and your logic sometimes get thrown out the window. I see it with my new traders. The worst thing that can happen for my new trader is he comes in and his first five trades are all winners. And I got a cocky kid on my hand and the next thing I know, he’s in my office the next day telling me he lost everything that he made in five days plus double that. And, you know, he’s got my foot up his ass and me telling him, all right, now you don’t have a job anymore. It’s because I preach that to them. I’m unusual. When I have a bad day, or a couple bad days in a row, or I’ve overtraded and I’ve lost a lot of money, I go out and I buy something.
Dupee: Retail therapy?
Borsellino: I go out and I buy something. Not to make myself feel good. But to remind me what a dollar is and what it gets me. To remind me that I’ve been fortunate to be earning the living that I have over the past 20 years, and have been fortunate to have been good at what I do.
Dupee: In dealing with losses you’ve said that you view losses as loans made to somebody else in the market, to somebody else in a zero-sum game. Can you expand on that a bit and on how that view helps your trading?
Borsellino: Well, that’s my psychological edge. That’s that competitive nature coming out of me. When I’ve had a bad day. . . in futures, for every winner there’s a loser. It is a zero sum game, where with stocks it’s not. It definitely gets my adrenaline flowing when I’ve had a bad day. Especially when I’ve made stupid mistakes, rookie mistakes. I go home and I work out and I try to exhaust myself because I know I’m going to be up all night waiting for the market to open and the bell to ring, so I can get back in there and get my money back.
Dupee: That’s what you write about in the book, that losses are loans to somebody else. But that doesn’t really calm you. You still want to go get that money back. It’s a temporary loan.
Borsellino: It’s a temporary loan. Hopefully! That’s the way I’ve viewed it over the last 19 years. And that’s part of my competitive nature and the idea of trading for success. I’ve said it a million times to people around me; it’s not the money. The money has been very good and it has been a product of being good at what I do. But it is the respect and admiration of your peers it’s the ability of me to be able to compete against the other person and me against the institution and me against the market. Trading has the highest highs and the lowest lows, Marc, and hopefully throughout your trading life you experience them both and there are more highs then lows and you know how to deal with them both.
Dupee: You mentioned that back in the days when they allowed dual-trading, the system worked to your advantage because you were already handling 30-, 50-, 100- lot size and bigger and it gave you the confidence to pull the trigger on your own trades, leading you to become the biggest trader in the S&P pit at one point, transacting up to 1/4 million contracts annually with a notional value in excess of $62 billion. Could you describe what is like to be, as you say in your book, “in the market flow” or in the “zone” trading, as you describe especially when you are in the zone trading that 100-lot size?
Borsellino: It’s a two-edge sword. It’s like being Michael Jordan. Going out there every day and everyday people want you to score 50 points. And you’ve got that pressure and you’ve got your own pressure on yourself and the ability to do it. And guess what, when you are in the zone and you’ve got everything going for you, you can’t do anything wrong. You can throw 50-lots and 100-lots around and you’re exiting them and turning profits with them and so on. And when you’re out of that zone, just like Michael Jordan, and all of a sudden you’re only hitting 15% of your shots, well it’s the same thing that happens with trading.
I compare trading to professional athletes a lot. The emotional side of it and the psychological side. When everything is clicking, you can do no wrong. And then when you’ve had a few losing days in a row, then you’re out of sync. And when you’re out of sync everything you do is wrong, even if it’s a five-lot.
But the one thing that I’ve learned is that you can’t read your own press. You don’t always have to be the biggest guy; you don’t always have to be the biggest trader. You have to be the most consistent trader. And yeah, to this day I’ll still take a 100-lot, I’ll take a 200-lot. But more on my terms and not on the terms that I’m trying to prove to somebody, “hey, I’m Lewis Borsellino, I’m the biggest trader.” At 25 to 30 you’re a little more cocky then when you’re 43. I don’t have anything to prove to anybody anymore at this point.
Dupee: Do you think it would be possible for a trader without the dual trading pit experience to develop that kind of sense, that you have trading size and being in the zone like that?
Borsellino: Oh definitely. I’ve been around some young, new stock traders that have had seven figure years already.
Dupee: The SOES guys you were working with?
Borsellino: Some SOES guys and some people that have got enough capital behind them. You’ve got to understand that you look at some of those Nasdaq stocks. They have more volatility and more swings and more volatility than the S&P itself. So if you jumped on ^RMBS^ and caught a $180 move, or if you caught Qualcomm last year, than you caught some of the opportunity that is out there. We are actually doing a lot more stock trading than we ever did.
Dupee: Yeah, with the volatility there in some tech stocks, it makes sense.
Borsellino: Not only volatility, the trading programs that we have for commodities are working better with the equities than they are with the commodities, because of the volatility in the equities.
Dupee: I read in an interview that you did with an European journalist, that you mentioned that your” biggest weakness stems from the fact that you’ve been successful as a trader with a propensity for making profitable trades”. What does that mean?
Borsellino: I said that? My biggest weakness?
Dupee: Yes, does that ring a bell? With an Italian journalist?
Borsellino: Oh, all right. I think what happened was when I’ve talked about other business decisions that I’ve made outside of the trading realm or even in the trading realm, I’ve never been the type of person to get involved in other business and so on, because of the independence that I have as a trader. The independent life that you get and the ability to say to somebody, look, I don’t need your business idea, I don’t need your investments, I’ve passed on some very good ideas that were very profitable. And it makes you sometimes too independent, and maybe sometimes closed-minded in your business decisions. One of the reasons the money management . . . here I am explaining to people why I’d be a good money manager. I’ve survived for 20 years guys and I still have people questioning me. Not that I’m egotistical but when I look at other money managers, I’ll ask them a series of questions and I’ll find out they haven’t had 1/10th of the trading experience as I have. So that is where I think he quoted me from.
It’s hard for me sometimes to explain why I would be good. But that is why the Web site took on the focus it did. Here it is the democratization of information and I’m finally able to open up my brain and show people what you have to do to be a successful trader. Not that I’m the best trader who ever lived, but I’ve lasted 20 years and this has been my formula of success. I often make the analogy to that to the golf swing. You look at all the different golfers out there and they all have different body types. And they all have different swings–except at the moment of impact, they all look the same. So there are a lot of different traders out there, different personalities, different makeups, but when you get down and you do that interview with them Marc, you’ll find out they all have the same qualities when it comes to discipline, structure and so on.
Dupee: You wrote for CNBC.com last January (2000) where you say “one thing never changes: If you want to know what the setup for the market is today, study where it’s been for the past several days or longer.†You mentioned earlier in the interview about price points and about your analysis. I’m curious how you use volatility, how you put that into your analysis, of technical support and resistance?
Borsellino: Let’s say you’re trading in a real volatile market, you buy the 1500s and you’re willing to risk 400 points because that’s what your research is telling you. Well in real volatile markets, it may go down and stop you out at 94, turn around on a dime and rally through your 1500 and go another 1000, 1500 points and here you’ve missed the move because you got stopped out. And what happened was because the markets are volatile and the volume that’s being traded, you know, it has a bigger whipsaw. So when we see those, when we see that sort of volatility, what we’ll do is we’ll cut our size back and then expand our stops so that we ultimately have the same risk but we’re adjusting for the volatility.
Dupee: Or if you have a strong directional bias, you could benefit by doubling up on your order.
Borsellino: Yeah but when you’re talking about volatility what will happen though is that the bounces, say you’re short, the bounces will be bigger. With extreme volatility you’re better off cutting the size back and expanding the stops so you don’t get stopped out of the move. Normally, if you’re getting a trending market, that’s when you can sell ’em sell some more, sell some more and it trends very orderly to your exit point. Same thing with buying, in an upward trending market.
Dupee: Is there a standard, or most common method of calculating pivots in the S&P pit?
Borsellino: No. Everybody does different pivots. And the terminology that they use is different. One of the good pivots that people like to use is when you got the opening range. And we’ve traded below the opening range and then we come back and go through the opening range. And then you have your moving averages that people use. We use a combination of a lot of different things. We use a combination of a lot of different research. I mean we use stochastics, we use Fibonacci we use Gann we use a combination of things together that I don’t think other people do. And the thing about technical analysis is–think of it as being an auto mechanic. You’ve got your engine but they’re always tweaking it to try to get it to go faster and try to run smoother and that’s the same thing that we do with our technical analysis. Sometimes the bonds are the leaders and you’re watching the bonds and they’re going to give you an indication of what the market’s doing. …Sometimes there are different underlying stocks or a group of underlying stocks that will tell you what the market is doing. So that’s why we have our analyst with 25 different screens.
Dupee: So in the S&P pit, what a lot of people look at in the pit is the opening range. What time frame is that, the first half-hour?
Borsellino: Right, no the first five minutes. I mean the first minute that the market opens up and the opening range is established. That’s a big one. Old highs, old lows, intraday highs, intraday lows, those end up becoming pivots.
Dupee: I spent a day in the S&P pit on Veterans Day last November (1999). One of the clerks pointed out that the e-mini volume was exceeding the volume of the S&Ps, and apparently that was unprecedented. How do you think electronic trading will affect open outcry or have your opinions on this subject changed since you wrote the book.
Borsellino: As the public becomes more educated in the trading of futures, I think eventually open outcry may fall by the way side, depending on how big and if the volume comes. But you have to remember what the role of the local is: he’s there to provide liquidity. And until there is enough retail and institutional participation to absorb that liquidity, then the open outcry will exist.
Dupee: If you were starting out now what would you do differently?
Borsellino: I don’t think I’d do anything differently. (Laughter) I think that I may have expanded more within my field.
Dupee: What does that mean?
Borsellino: I would have branched out and done other ventures and have been more open-minded about other things.
Dupee: Other markets?
Borsellino: Other markets, but then I’m a firm believer that you can trade Eskimo futures, ice futures, as long as you’re a trader and it moves you can trade it. But I think I would have gotten into the equities more. Like I said three years ago we started doing equities. I think I would have been into the equities more than I have, because I’ve always watched them. We have 65-70 stocks we watch every day, to give us an indication. And I’ve watched some big moves go and didn’t participate in them because I was participating in the S&Ps.
Dupee: It’s hard to have your attention focused everywhere.
| “…people who are good at discipline and controlling their emotions… not becoming like a deer-in-the-headlights sort of trader after… losses — and able to handle the winners without getting a big head — those are the ones that succeed.” |
Borsellino: Right. But here we’re watching these and we’ve seen some big moves made in them and that’s why two years ago we started trading more equities. And we’re actually getting more involved in that.
Dupee: For someone starting off now, how would you advise them to proceed?
Borsellino: First thing, I would advise them to do is get as much education as they can about the markets. Try to get a job at an exchange or at a brokerage firm or find a reputable person who has been trading for at least a couple of years so they can align themselves with them. I’d also tell them to go to Teachtrade.com and get some very good lessons on what they’re going to experience as a trader.
And I would ask them to attempt some simulated trading; it’s a good idea but my experience with simulated traders is they are always eight out of ten winners. But then when they get to the real thing they are lucky if they have one out of ten. So what I do with my new guys is I make them simulate, I make them work on the floor, and I make them do all of our research. Right now we have three of our stocks guys doing all of the charting updates and so on, right now. And I make them do from three to five hours of research a night. And independently of one another, I make them give me the research on the 60 stocks and their opinion of how it has been formulated. That is what a lot of trading is, it’s consensus building. I have three different analysts who work analyzing S&Ps and so on and they’re not allowed to talk with one another.
Dupee: It sounds like you bring others along with you whom you sponsor.
Borsellino: At first I brought my brother, my cousins and when I became successful I got so many relatives that found me! And I did it because they were my relatives and friends. And then about four years ago I started sponsoring people. We have four guys on the floor trading and we’ve got six guys up here trading. And I have another four people in training right now doing research that are wannabe traders. And then we have on staff three more people that do nothing but technical research. We have a team concept and we include the people that are doing the research in the profits with the traders. Which is good, because what I’ve found over the years is a lot of people who are good at research are terrible traders. They just don’t know how to pull the trigger.
Dupee: That’s a good way to pool different people’s talents. How or where does the average trader go wrong?
Borsellino: That’s another thing about trading. There have been so many guys over the years where I’ve said, “This guy will definitely make it,” and he doesn’t make it. And there are guys I go, “This guy doesn’t have a chance,” and he ends up being my best trader. It all comes down to one thing. I call it the emotional side of trading. And people who are good at discipline and controlling their emotions and knowing how to pull the trigger and not worrying about the losses.