Bill Lipschutz: The Sultan of Currencies

(continued)

Do you ever have dreams about trades?

On one particular occasion, I had a very specific dream the night before a balance-of-trade number was to be released. I dreamt that the trade figure would be a specific number; the revision would be a specific number; the dollar would move up to a certain level, and I would buy dollars; the dollar would move up to a second level, and I would buy more dollars; the dollar would move up to a third level, and I would buy yet again; the dollar would move up to a fourth level, and I would want to sell but would buy again.

The next day, the trade number came out, and it was exactly the same number as in my dream. The revision was also exactly the same number. Even the price sequence was exactly the same as in my dream. The only difference was that (he pauses) I didn't trade at all.

Why not?

Because I don't trade on dreams or rumors. I'm a fundamental trader. I try to assemble facts and decide what kind of scenario I think will unfold. To walk in and trade on a dream is absurd. I told my assistant about my dream, and we laughed about it. He said, 'The day you start trading on dreams is the day we might as well pack it up."

As I watched the price action unfold, the market looked good at each of the price levels. Ironically, if I had never had the dream, I might very well have bought dollars.

In your conscious state, you agreed with the basic trade. Right?

Absolutely.

Was it a matter of not taking the trade because you didn't want to appear to be trading on a dream?

Very much so. Within myself, I was very confused as to what was happening. It was a very odd experience.

Was it sort of shades of the Twilight Zone?

Just like it. I couldn't believe it. My assistant and I just kept looking at each other. When the trade numbers came out exactly as I had dreamt, he said, "Billy, come on, where did you get those numbers?"

Has this type of experience happened to you at any other time?

That was the time that I remember the best. I had similar experiences on other occasions, but I don't remember the specifics as clearly.

Do you want my theory or a logical explanation?

I'd love to hear it. How do you explain picking the exact number?

You work, relax, eat, and literally sleep with the markets. You have a storehouse of fundamental and technical information embedded in your mind. Let's say that because of some unconscious clues you picked up - maybe something somebody said, or some positions you saw certain people take, or whatever - you thought that the trade numbers would be out of line with expectations. But for some reason, you didn't want to trade on this expectation. Maybe, in this case, the expectation seemed irrational and you would have felt stupid trading on it. Maybe you don't like trading in front of the release of government numbers because of some past negative experiences. The reason is not important. I'm just making up examples. The point is that it's easy to envision how you might correctly anticipate an unreleased statistic and why such a projection might occur on a subconscious level.

Your projection of the market moving in a certain direction is even easier to explain. Given your vast experience, once you were right about the trade numbers, it would hardly be surprising that you would get the direction of the market right. Even dreaming about the exact price levels is not so absurd, because you have an exceptional feel for market swings. In fact, just the other day, I saw you pause in midconversation to place a buy order in a plummeting Australian dollar market at what proved to be the exact turning point.

All I'm saying is that all this information is in your mind, and it may come out in a dream because, for whatever reason, you haven't translated it into action. There is nothing particularly mysterious about it. You don't have to believe in precognition to explain it.

You can even argue further that playing out scenarios is something that I do all the time. That is a process a fundamental trader goes through constantly. What if this happens? What if this doesn't happen? How will the market respond? What levels will the market move to?

So you think that not backing up an expected scenario by taking a position will tend to force it out in the subconscious mind as a dream?

Sometimes-sure. I'm not speaking as an expert. I'm not a psychologist, but it seems logical to me. I'll give you a personal example. Several years ago, I had a strong feeling that the Canadian dollar was in the early stages of a multiyear bull market. The market had a good upmove and then went into a narrow consolidation. I felt it was going to go higher, but I was already long four contracts, which was a relatively large position for a single market, given my account size.

That night I had a dream that the Canadian dollar just went straight up. The next morning I came in and, right off the bat, I doubled my position from four to eight contracts. The market went straight up. I believe the reason this projection came out in a dream was that my logical mind couldn't accept taking the trading action dictated by my market experience. My logical side said, "How can I double my position when the market has gone straight up without even a slight reaction? Of course, as we both know, trades that are the most difficult to take are often the successful ones.

On a somewhat related topic, do you believe that exceptional traders are aided by accurate gut feelings about the markets?

Generally speaking, I don't think good traders make gut or snap decisions-certainly not traders who last very long. For myself, any trade idea must be well thought out and grounded in reason before I take the position. There are a host of reasons that preclude a trader from making a trade on a gut decision. For example, before I put on a trade, I always ask myself, "If this trade goes wrong, how do I get out?" That type of question becomes much more germane when you're trading large position sizes. Another important consideration is the evaluation of the best way to express a trade idea. Since I usually tend not to put on a straight long or short position, I have to give a lot of thought as to what particular option combination will provide the most attractive return/risk profile, given my market expectations. All of these considerations, by definition, preclude gut decisions. Having said this, there are instances when, despite all my planning, trading decisions are made that might best be described as instinctive.

For example, consider the situation when I attempted to buy the Australian dollar the last time you were here. In that particular instance, the Australian finance minister had made a statement to the effect that he didn't care if the currency lost 10 percent of its value overnight. How do you react? Those types of panic situations are the instances when gut feeling comes into play. During the market turmoil that followed his statement, I felt that there was no way the currency could adjust even remotely close to 10 percent before large buyers would come in and push it the other way.

How far was it down at the time you entered your buy order?

About 5 percent. Even though I was already long a long-term position that was adversely affected by the news, I just felt that, over the short term, the market was bound to rebound.

How do you gauge when a panic has run its course?

I think it's a combination of market experience and innate feel. Many currency traders operate under rules that if they lose a certain amount of money, they must liquidate the position. Those are not the type of decisions that are made rationally given the specific situation at a given moment; rather, they are general rules that have been established previously. How do you decide when that type of last-ditch selling is nearly exhausted? It's probably largely a matter of past experience that has suffused your subconscious. In this sense, what people describe as gut feel is probably better described as subconscious market experience.

What do you believe are the characteristics of the truly superior traders?

Let me start with an analogy. When I was in college, my impression was that people who were really smart could do very well, even if they didn't work that hard, and people who really worked hard could also do very well, even if they weren't outstandingly bright. In contrast, in trading, I think you need both elements. The best traders I know are really quite brilliant, and they all work very hard-much harder than anyone else. By the way, when I talk about working hard, I mean commitment and focus; it has nothing to do with how many hours you spend in the office. These traders have tremendous commitment to the markets-to their craft, so to speak. They develop scenarios, reevaluate scenarios, collect information, and reevaluate that information. They constantly ask themselves: What am I doing right? What am I doing wrong? How can I do what I am doing better? How can I get more information? It's obsessive.

Is this type of analysis something that's ongoing during all your waking hours?

Absolutely. Some professional traders may claim that they separate their personal life from their business life and are able to completely turn off on the weekends. I don't believe that for a second. I think that when they're relaxing in their sailboats, at some level they're still focused on the market.

I know you like to play golf. When you're out on the course, are you still thinking about the markets?

Probably so. The really best traders around don't think twice about how many hours they're working or whether they come in on a weekend. There's no substitute for that level of commitment.

When you're interviewing someone for a job as a trader, how do you determine whether they have that type of commitment?

Sometimes it's obvious. For example, in an interview someone might ask you, "What time do I have to come to work in the morning?" In my opinion that's a very bizarre question. Come in whatever time you believe is appropriate. "How late do I have to stay in the afternoon?" Leave whenever you want. I'm not going to tell someone when to come in and when to leave.

Besides intelligence and extreme commitment, are there any other qualities that you believe are important to excel as a trader?

Courage. It's not enough to simply have the insight to see something apart from the rest of the crowd, you also need to have the courage to act on it and to stay with it. It's very difficult to be different from the rest of the crowd the majority of the time, which by definition is what you're doing if you're a successful trader.

Many people think that trading can be reduced to a few rules. Always do this or always do that. To me, trading isn't about always at all; it is about each situation.

So many people want the positive rewards of being a successful trader without being willing to go through the commitment and pain. And there's a lot of pain.

The pain being what?

You give up a lot of things. It's all tradeoffs. It's the middle of the night, everyone else is asleep, and you're sitting in front of a machine with glowing green numbers, with a pain in your psyche because the market is going against you and you don't know whether the fundamentals have changed or whether it's just a meaningless short-term move. Those are very trying times.

Trading is such a pervasive element in your life, including being up half the night on a regular basis. Does this obsession, as you yourself termed it a little earlier, create a source of friction in your married life?

Not at all. My wife was a bond salesman at Goldman Sachs for many years. Personally, I think she would make a very good trader-she has many of the right qualities-but she doesn't want to trade. I wouldn't lessen it by saying simply that she is understanding, because that sounds so docile. She's more than understanding; she's fully cognizant, supportive, and I think she gets a big thrill out of what I do.

Why do you trade?

I like the game. I think it's a great challenge- It's also an easy game to keep score of.

With trading consuming most of your day, not to mention night, is it still fun?

It's tremendous fun! It's fascinating as hell because it's different every day.

Would you still trade if there were no monetary remuneration?

Absolutely. Without question, I would do this for free. I'm thirty-six years old, and I almost feel like I have never worked. I sometimes can't believe I'm making all this money to essentially play an elaborate game.

On the other hand, when you look at all the money I've produced over the years, I've been vastly underpaid.

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