Successful traders take home millions of dollars in bonuses. Many investment banks put up huge amounts of capital for proprietary trading. The most notable is, of course, Salomon Brothers (now Salomon Smith Barney). Other outstanding players include many of the best-known investment banking houses and hedge funds. Trading for market making is part of a dealer's business. Day trading involves taking advantage of short-term volatility. Scientific approach-based trading and arbitrage play high-stake games. Headlines like George Soros made $2 billion betting against Bank of England and John Meriwether took a $12 billion position in Italian tax-driven arbitrage trade are fascinating. This chapter discusses the fundamentals for successful trading, arbitrage strategies, and technical trading techniques.
This is a great story for trading.1 One cold winter morning a young man walks five miles through the snow to the jademaster's place to learn about jade. The young man comes in and they sit by the fire, sipping hot green tea. The jademaster presses a green stone deeply into the young man's hand and begins to talk about tree frogs. After a few minutes, the young man interrupts. “Excuse me, I am here to learn about jade, not tree frogs.” The jademaster takes the stone and tells the young man to go home and return in a week. The following week the young man returns. The jademaster presses another stone into the young man's hand and continues the story about tree frogs. Again, the young man interrupts. Again, the jademaster sends him home. The young man interrupts less and less. The young man also learns how to brew the hot green tea, clean up the kitchen, and sweep the floors. Spring comes. One day the young man observes, “The stone I hold is not genuine Jade.”
In trading, you may look at hundreds of systems, study with dozens of gurus (genuine or fake), or spend money and time on various books on trading. Probably for most people, they teach you that you cannot use them. And that is a great lesson, which you will never learn until you have learned it. Put it differently, you cannot buy success. You have to make it yourself. It comes from within. You need to have the feel for it and