Pit Bull

by Martin Schwartz

  Audrey and the banker’s wife had gone to the ladies’ tee way over on the left, so it was just me and the banker. “You’re up, Marty,” he said.

  I stood on the tee and addressed my ball. This would be my biggest shot of the day. I had to hit it just right. I thought about what the pro had been telling me during my lessons. “Set the ball on your left shoulder. Keep your head down. Bring the club back slowly. Don’t break your left arm. Swing through the ball.” I put the ball on my right shoulder, picked my head up, jerked the club back, bent my left elbow, and lunged at the ball. Whack.

  I looked up as the ball sailed deep into the woods. Perfect. What a shot. “Gee, too bad,” the banker said. “You’ll be lucky to find that one, Marty. Do you want me to come over and help you look?”

  “No, no, don’t bother. I think I know right where it went and if I have any trouble, I’ll just drop another ball. What’s another stroke on a score like mine?”

  I dashed into the woods, ducked behind a big tree, pulled out my phone, and punched in Collins’s number. “Tommy, cover those fifty contracts, NOW!”

  I made $60,000 on that trade and nobody was the wiser, at least until Landis pried it out of me. “Marty,” he said, “I don’t have to tell you that your behavior’s not normal.”

  “Normal?” I said. “Who wants to be normal? Doc, what you’ve got to understand is that ever since I was five, I’ve tried to be abnormal or supernormal. Get ahead, get ahead, get ahead. I’m a trader. No trader’s normal. If I wanted to be normal, I’d put my money in an index fund and be an analyst. The only thing I want normal is my temperature.”

  “Marty, you’re like an alcoholic. You’re addicted to your own adrenaline. You get so high, so manic on the action that comes with trading, that you can’t stay away from it. Then you get so exhausted, so run down, that it’s like a hangover, and you’re so depressed that the only way you can feel better is to start trading again, until you make yourself sick. You have to figure out what you really want.”

  Therapists are like backboards. You just keep bouncing things off of them until you feel like you’ve finally found your groove. And that’s what I did with Landis for the next six months. I kept bouncing things off of him until I started to see what I really wanted. When I was lying on the operating table fighting for my life, I’d made a pact with myself that if I ever got out of the hospital alive, I was going to spend less time trading and more time with Audrey and the kids.

  I had enough money for now and if I ever needed more, I knew that I could earn it. That was my gift. I had the knowledge to wake up in the morning with a clean slate and go into the war room and make $20,000, $40,000, $80,000 that day. So what if I’d never beat the Porkys of the world at managing money? I could beat them in other ways. After my own near-death experience, the loss of a child, and Audrey’s battle with breast cancer, it was time for me to stop sniffing fire hydrants and start smelling the roses. I decided that, like Sandy Koufax, I was going to walk away at the top of my game.

  But where would I go? I had to get out of New York because Landis was right, I was addicted to trading. If I stayed in New York with my old friends and my old lifestyle, I’d keep falling off the wagon and sliding back into Porkyism. Besides, I was tired of the cold and the gray. I wanted to go someplace where it was warm and blue. I decided that to save myself, I’d move us all to Florida.

  Changing my lifestyle and cutting our ties to New York took great courage. Audrey and the kids didn’t want to go. Their lives were geared to the City. What did they know about Florida? What did I know about Florida? Florida was a place you went to retire, and I was only forty-eight. A big part of me didn’t want to go. It would be such a hassle: selling the apartment, moving my business, moving twelve rooms of furniture, buying a new house, redecorating it, trading in the old car, buying a couple of new cars, schools for the kids, insurance, bank accounts, and a hundred other things. And I’d really miss New York, the galleries, the museums, the beach house, being close to the heartbeat of the Street, seeing Inside Skinny and my other buddies.

  On the other hand, in New York, I’d go outside to try and hail a cab, and if it wasn’t raining, I’d get one, but it would take forever. There was noise, and garbage, and someone cutting you off trying to make the light, there was a panhandler on every corner, the sirens were wailing, and there was nothing to look at but bricks and asphalt. Bricks and asphalt, that was New York.

  In June of 1993, we sold the apartment and moved to south Florida. It was quiet, and clean. The other drivers meandered politely along, probably because they were mostly octogenarians. There were no muggers, no panhandlers, no bricks, no garbage, and nothing to look at but old guys in sans-a-belt slacks, old ladies in tennis shoes, green palms and blue water. I couldn’t adjust to this environment. Audrey had a new house to work on, the kids had a new school to go to, I had nothing but my work. Once we got organized, I went into my nice new bright, clean, office overlooking the ocean, pulled all the drapes so I could see my screens, and called Collins at the Merc.

  This wasn’t right. I called Landis. “Doc, all I’ve done is exchange a dark office in New York for a dark office in Florida.”

  Landis gave me the name of a therapist who he thought could help me. I made an appointment with my new Florida doc. After a few sessions, he said, “Marty, you’re too serious, your wife’s too serious, and you’re raising your kids to be too serious. You’re in Florida now. Go play golf, sit on the beach, read a book, relax.”

  “Of course, we’re serious,” I said. “Life is serious. You know, you either win or lose, and winning is much better than losing. After you win, you can pay a therapist to get fixed up.”

  For the past few years, I’ve been paying, and paying, and paying, bouncing more and more balls off of the backboard. What I’ve discovered is that there isn’t enough time in the day to be a good son, a good brother, a good husband, a good father, and still be a good trader. I’m a perfectionist and I want to do everything right, but to trade the way I have to trade takes fourteen hours a day. As I’ve gotten older, I’ve tried to take shortcuts like having an assistant to post my charts, transcribe my hot lines, and reconcile my sheets, but the shortcuts don’t work. I had a plan, and I built a machine just the way I wanted it, and I tuned it to perfection, and now it owns me.

  I’ve tried to set my goals lower, play smaller, and be an investor as well as a trader. I play on the Battling Barristers, a softball team dominated by superannuated lawyers. I spend at least two afternoons a week on the golf course. Sometimes I go down to the beach and just sit there, watching the waves roll in. Often, I wonder if this is where I want to be, if I made the right decision, but then I think of Manhattan in February, and how I’d be running around sniffing the hydrants, and I know that I was right to get out of New York.

  Inside Skinny called me after he went to Dan Dorfman’s wedding a while back and he told me that Porky from the Bronx was there. “The guy musta weighed three hundred and fifty pounds,” Skinny said. “He parked himself at the buffet table and didn’t move the whole time. All the other guests hadda squeeze around him if they wanted something to eat, and all he could talk about was this takeover, and that merger, and this leveraged buyout, and that IPO, and how he’d made a fortune on all of them. Dorfman was afraid that Porky was going to blow a hole in the back of his heart and croak on the spot.” It was the same old story, ubi est mea.

  That same day, I’d played golf in the morning with my son, had lunch with my mother, gone swimming in the afternoon with my daughter, and had a candlelight dinner with my wife. I didn’t even think about trading. Well, maybe just once or twice. In that sense, maybe I had beaten Porky. If I’d kept running my funds and stayed in New York, I would’ve been right there next to him. All the top dogs would’ve been at Dorfman’s wedding.

  Despite all my best efforts, I’m still addicted to trading. A little over a year ago, when everyone else was making money, I was in a prolonged losing streak and feeling
depressed. I was sure that I was right and the market was wrong, but as usual, the market didn’t give a shit. My Florida therapist told me that I had to go cold turkey and give up trading entirely for one week. I agreed, but just before my next appointment, I saw that the move I’d been waiting for for months was just about to happen. I called Collins, bought forty S&P contracts, and told him to call me just as soon as the market turned. I slipped my vibrating cell phone, the one I’d gotten for golf, into the breast pocket of my jacket and went to my session.

  As we were talking, I felt the phone vibrate. It had to be Collins. “Excuse me,” I said to my Florida therapist, “I have to go to the can.”

  I ran in, locked the door, and called Collins back. As I’d predicted, the S&Ps were up and the market was turning. “Sell,” I whispered into the phone. I’d just made $30,000. Now I felt like Sandy Koufax.

  “See,” my therapist said as I walked back into his office all smiles, “you seem much better. Taking a week off is just what you needed.”

  Hey, what could I say? I’m a trader.

  The Pit Bull’s Guide to Successful Trading

  The reason a lot of people do not recognize opportunity is because it usually goes around wearing overalls looking like hard work.

  —Thomas A. Edison

  Hard work is the primary reason why I’ve become so successful, but hard work’s just part of the equation. By nature, I’m a gambler with a good feel for numbers, and, as I’ve mentioned before, Amherst taught me how to think, Columbia Business School taught me what to think about, the Marine Corps taught me how to perform under fire, and Audrey taught me the importance of money management. These are the five blocks that must serve as the foundation for constructing a trading methodology.

  Methodology

  After nine years as a securities analyst, I decided to make a complete transition from fundamental analysis, the use of economic data to forecast individual stock prices, to technical analysis, the study of price and volume independent of the underlying economic data. Your trading methodology has to fit your personality. You have to understand your strengths and your weaknesses. It took me nine years to figure myself out.

  My strengths are dedication to hard work, dogged persistence, ability to concentrate for prolonged periods, and a hatred of losing. My weaknesses are insecurity, fear of losing, and a need for constant reinforcement and frequent gratification. A trader, like a chain, is only as strong as his weakest link, and it’s your weaknesses that must dictate your trading style.

  I’m a scalper. By that I mean that I’m in and out quickly, always, always, ALWAYS! I’m often in and out in five minutes or less, never more than a couple of hours. Initially, I adopted a short-term trading system because I had limited resources and needed a consistent string of small winners to build up my capital base, but as I became more successful, I discovered that short-term trading was what gave me the most reinforcement and gratification. I just love to hear the cash register ring. It’s the sound of the market telling me that I’m a winner, again and again and again.

  Most books on trading say that you only have to be right three or four times out of ten if you cut your losses quickly and let your profits ride. That doesn’t work for me. I cut my losses quickly, but I take my winners just as quickly. I need to be right seven or eight times out of ten.

  I’m a boxer-counterpuncher. I spot an opening, jump in, score, and jump back out. In and out, in and out, a point here, a point there. I’m not going for the knockout, but at the same time, I’m making damn sure that I don’t get knocked out. That’s my style, and I tailored my technical analysis and my methodology to fit it.

  Before you step into the ring, know exactly how you want to fight. Take my buddy Inside Skinny. While I’m at my desk crunching numbers, he’s out schmoozing it up over martinis, fishing for hot tips. Hard work is not one of Skinny’s strengths. And Skinny’s no boxer-counterpuncher; he goes for the knockout, all of the time, every time. He’ll go into ten trades, and be wrong on eight of them, and he won’t care, because he makes enough on the other two to end up way ahead. Or take Porky from the Bronx. He’s so huge, he’s got so much talent on the payroll, he’s ready for anything that comes along. His strengths are his size, his organization, and his appetite for any deal that will make him money. I tried to compete with Porky, and it nearly killed me.

  Tools of the Trade

  I’m a scalper and a market timer, and I’ve developed my tools accordingly. Here they are.

  The Dow Jones Industrial Average (DJIA on the Quotron) is the most widely quoted measure of stock market price movement. Changes in it provide me with a quick snapshot of the direction of the market.

  The New York Stock Exchange Net Ticks (TICK) shows me how many stocks on the NYSE had a last tick that was up netted out against those that were down. My friend Mark Cook has developed several strategies using net ticks that are very helpful during this new era of continual computer trading programs. For example, a strongly negative number like -1000 is often a time to go countertrend to the decline; a strong sell-off has been too rapid (it’s either news induced or program generated) and the market is likely to rebound. The opposite is true when the TICK is + 1000, which is usually caused by a computer buy program. When the buy program ends, the market usually drops back down over the short term. Another short-term trading trick is when the DJIA opens up and the TICK is -200, for example; this usually means that there is more selling pressure in the broad market and the DJIA is being held up by only a few stocks, so you can usually go short.

  The Short-Term Trading Index (TRIN) is primarily a short-term trading tool that shows me whether volume is flowing into advancing or declining stocks. It is calculated by taking the ratio of (up issues/down issues) divided by the ratio of (up volume/down volume). If more volume is flowing into advancing stocks than declining stocks, the TRIN will be less than 1.0; if more volume is flowing into declining stocks, the TRIN will be greater than 1.0. A TRIN less than 0.80 is an indication of stronger buying bias; above 1.20 is an indication of greater selling pressure. It can help key you in to strong or excessive buying or selling pressure.

  The Dow Jones Net Ticks (TIKI) is the net number of the thirty Dow Jones Industrial stocks ticking up or down. A value of -26 to -30 or -26 to -30 often suggests that a buy or sell program has just gone off, because it is unusual for all the DJ stocks to be ticking up unless a buy program was buying all of them at the same time, for example.

  The Standard & Poor’s 500 Stock Index (SPX) is important because it is the underlying index on which the S&P 500 futures price is based. It is an inclusive index made up of 500 stock prices including 400 industrials, 40 utilities, 20 transportation, and 40 financial issues. The SPX is constructed using market weights (stock price × shares outstanding) to provide a broad indicator of stock price movement.

  The New York Composite Index (NYA) is an index made up of all the stocks listed on the New York Stock Exchange and weighted according to the market value (stock price × shares outstanding) of each security.

  The QCHA (rhymes with “gotcha”) is the average percentage movement for all exchange-listed stocks on an unweighted basis. This market-breadth indicator helps me identify divergences. For example, if the Dow is down twenty points, but the QCHA is +0.12 percent, this shows that the broader market is acting firm and it’s a fake-out trade. You can usually go long for a quick profit when the Dow Jones starts to turn back up.

  Feel free to use my tools, but don’t think that you can just pick them up and start making money. To make yourself into a skilled craftsman, you’ll have to find the tools that feel right to you, and use them over and over until you learn how they work, what they can do, and how to get the most out of them.

  Market Analysis

  Listening to what the market is saying takes extreme concentration. Like a doctor monitoring the health of a patient, I take the pulse of the market by keeping charts on my indicators and checking them every ten minutes during the tradin
g day.

  I record the pulse reading on the exact half hour by drawing a box around the indicators. Then I overlay a red or green arrow between each boxed set to reflect whether the New York Composite was up or down from the previous half hour and by how much (see Exhibit I).

  This exercise forces me to focus on how the market is trying to move. This is critical when the market is making a major move and I may be positioned incorrectly. Without this information, I might freeze and not react in time.

  I’m a synthesizer. I like to bombard my brain with lots of opinions from various sources. I reread faxes that came in during the week and I try and put my own unique stamp on other people’s ideas, incorporating them into my own thoughts about where a particular stock, an industry, or the market as a whole is heading. Here are some of the services that I use. There are many more, and everyone has to find the ones that best match his or her time horizons, trading philosophies, goals, and work ethics.

  Exhibit I

  Amshar Management Report by Terry Laundry (Nantucket, MA); amshar@worldnet.att.net; http://www.amshar.com; 1-888-228-2995.

  Terry does a longer-term overall outlook (i.e., months-years) based on his Magic T Theory—the notion that superior investment periods can only last as long as the prior cash buildup phase. His indicators have become the cornerstone of my approach to analyzing various markets.

  Lowry’s NYSE Market Trend Analysis (North Palm Beach, FL); 561-842-3514.

  Lowry’s does a daily update of each day’s breadth action and changes to short-term and long-term buy-sell signals. The quotes are a calculation of buying power, selling pressure, and short-term buying power. Weekly, Lowry’s writes up their observations on the week’s action from an intermediate-term perspective with short-term adjustments, based on historical patterns of the three indexes.