One of the questions most asked of me when I speak at conferences or to a group of clients is “Where do you get your information?” It’s a question I asked as a new trader and one that should be on the lips of every partic- ipant in the marketplace. There are many ways to acquire the information needed to remain competitive, but the effectiveness of the information is determined by the type of trader the person is. There are three distinct types of traders when it comes to the need for information. The first type could not care less about anything other than the bid and offer and the flow of orders in the market. The second type keeps up on current events just
enough to get a feel for the macroeconomic landscape. But the third type is my favorite—the information junkie.
What kind of trader could not care less about the surrounding world when trading? It would surprise many average investors and retail-based traders that some market participants would risk capital without looking for the guidance offered through information and research. In fact, some of the most successful traders and investors on the floor of the Chicago Mercantile Exchange (CME) have made fortunes by understanding the nature of the edge rather than basing trading decisions on information. I’ve met traders who don’t read a thing before they enter the trading pit, relying instead on pure gut feeling rather than any information from the newspaper or the Internet. Average investors tend to perceive professional traders as being in the know about what is going on.
In other words, professional traders are on the inside, whereas all other market participants are on the outside. Nothing could be further from the truth, however. The reality is that the average informed individual has a better understanding of both geopolitical events and macroeconomic trends by staying informed. The average scalper standing in any pit at any exchange could not care less which direction the market moves as long as the edge is in his or her possession.
A trader who has a tendency to stay mildly informed usually relies on technical work to guide trading decisions. I know many traders who look at the world through the eyes of a technician with no desire to understand the geopolitical nature of the market; instead, they base every position on technical analysis of the market. There are very few people who fall into this category, although some have been very successful. Usually scalpers, who also hold long-term positions, find themselves staying somewhat informed, but not to the extent of the information junkie.
I always thought it must be very difficult to put on a position in the market without doing as much due diligence as is humanly possible. It’s been my experience that traders who fall into third class, for the most part, fail. The problem lies in the fact that it is very hard to be both a scalper and a position trader at the same time. Usually, a scalper who turns into a position trader got stuck on one leg of the scalp, which renders a scalper useless. Once a position has been established, the trader can no longer remain objective and flexible—he or she now needs the market to move a certain way, period!
As I said, my favorite kind of trader is the information junkie. When I first arrived on the floor back in the early 1980s, information was very hard to obtain. This was in the days before the Internet and even prior to the pro- liferation of the personal computer. All information was received through TV, print media, and word of mouth. I immediately realized the importance of having adequate information when it became clear that knowledge was
the key to profitability. I’m not talking about insider trading; I’m talking about having the network and the resources available to filter out the noise and find the truth. Many of the things I have discussed so far in this book, such as the 2:40PMorder imbalances and the days of the month when capital
flows are committed, were considered a few years ago to be information that was available only to professionals. But as information becomes more readily available to the general public, the effectiveness of the information is somewhat diluted. Today’s information junkies are addicted to the Internet and have found that technology has infiltrated every aspect of their lives. Between the BlackBerry phenomenon and the advent of the cell phone, staying in touch with the world around you has never been easier.
I’ve always been fond of reading the newspaper to get my daily dose of information and opinion. I rely on the Chicago Tribune and the Wall
Street Journal for guidance. Occasionally I read the New York Times but
only when there are larger political issues that I want to understand. For those of us who rely on information for everything, the Internet has been the saving grace. It’s hard to imagine a world without being able to Google any topic you could think of. This phenomenon has turned everyone who has access to the Internet into a semiexpert on any given topic. Recently when oil prices began to drift higher and higher, the traders with open crude oil positions started to watch certain things such as the rig count in the Persian Gulf and other obscure data that they had never followed or even looked at before. Even today the media has become very familiar with terminology that once was the exclusive domain of wildcatters and oil service employees.
BUSINESS TV
When I talk with traders and reporters who appear on TV, I’m often surprised at how little they really know. There are certain individuals who have my utmost respect, such as Rick Santelli, but there are others who seem to be trying to justify their opinions rather than give an accurate read on the mar- ket. I find that at times I might be a little too bullish for the market condition, but I have my own rationale for being bullish and find very little reason to change my long-term view. I will always give a reasonable argument for any positions I have about the market condition and do the necessary homework before I go on the air. But there are others who don’t qualify what they are saying. People who appear on business television or radio broadcasts and tell the audience that they are bullish or bearish better have sound reason- ing to back up their opinion. They don’t necessarily have to be right; after all, we’ve learned that calling the market is an art not a science. But it is a
responsibility to listeners and viewers that public financial commentators use sound fundamental logic to support any analysis they offer.
One of the interesting things to watch for is the way the different re- porters feed off the information received by other reporters. Sometimes when I’m watching an interview on one business channel, I find the other business channel commenting about what’s being said on the first channel. One reason for this might be that there are only a handful of media outlets, outside of the Internet, that give anyone reporting on the market the needed background. With only two major business television stations, CNBC and Bloomberg, the world is collectively watching the same thing.
When I go overseas, I’m amazed at the number of traders who recognize me from my appearances on CNBC or Bloomberg TV. I’m surprised because these are European traders trading European markets, not dislocated Yanks trading from abroad. Many of these traders and portfolio managers see me via the Internet, keeping a close eye on the markets in the United States along with their positions at home. With the world becoming a much smaller place through globalization, the incestuous relationships among the global markets cannot be ignored.
Traders in Chicago and New York are strange in that they think the world revolves around them and the products that they trade. Whether it is commodities, equities, or bonds, traders making the market think they are the center of the universe. It really wasn’t until the ruble meltdown in 1998 that traders in the United States realized that what happened on the other side of the world while they slept was just as important as events that occurred while the U.S. market was open. Forex traders had known this for years, but the rest of the U.S. financial services industry was slow to catch on. This period forced traders to begin paying attention to the movement of both the Asian markets and the European markets in order to gauge what would happen when the U.S. market opened. It used to be that the U.S. market set the trend for the entire world, but that is no longer the case. The size of the various markets around the globe and the amount of U.S. capital invested in those economies forced the close-knit relationships among all the major equity markets around the world.
Back before business television became as popular and widely accepted as it is today, the most important tool for any trader looking for information was the newswire. The most famous wire services are Reuters and Dow Jones, both of which are still used today by the majority of the trading population. In fact, if you were to go to the floor of any major exchange, you would see a large TV monitor strategically placed somewhere around a trading pit or post. There are traders who, even today, cannot trade unless they are staring at a newswire in search of information that might move the market. These traders have turned the gathering of information into an art form.
Some of the greatest traders in history have been information junkies who were absolutely addicted to the newswires and now have found solace in the use of the Internet. It’s the information junkie who follows the obscure releases that the average trader ignores. If I were to ask the average S&P trader what the car sales figures are, or what the retailers are showing for any given week, I would be met with a puzzled look and a shrug of the shoulders. But the information addict knows every detail that is moving the market. In fact, I find that these traders are the best sources to have when preparing for the day ahead.