Turtle Trading Rules

Chapter 4 The Trader Who Plays the Risk Game (2)
According to the Chicago Mercantile Exchange, a pound contract represents 62500 pounds, and the smallest price unit is 1/100th of a cent, which is 0.0001 US dollars.So, each unit of price change is worth $6.25.This means that Sam can make $62.50 per unit of the spread because he sold 10 contracts.When he sold these contracts to ACME, he bought at $1.8450 per contract and sold at $1.8452 per contract, a difference of two units.To close out his position, Sam would try to buy 1.8450 contracts at once at $10 per contract.If successful, he would have made a profit of two units, or just over $100.Sam bought the 10 contracts from a big speculator, Mr. Ace.Ace was taking a short position, betting on a drop in price—a position known as a short position.Mr. Ace may hold this position for 10 days or 10 months, depending on how the market price changes.

So, there are three types of traders involved in this transaction:

Hedger: The trader of ACME's hedging department, in order to eliminate the price risk implied by exchange rate fluctuations, he uses hedging transactions in the market to offset this risk.

Hatter: Also known as Sam the floor trader, he operates liquidity risk and hopes to earn the bid-ask spread by quickly trading with hedgers.

The Speculator: That is, Mr. Ice, who ended up taking on the "price risk" that ACME wanted to eliminate, in the hope that prices would drop in the next few days or weeks.

Panic on the trading floor

To illustrate the mechanism behind the price movement, let's change the plot slightly.Let's say Sam can't cover his short position by buying back 1.8450 contracts at $10 a contract because a broker is selling aggressively for Agricole at the market price of $1.8452 a contract Buy sterling contracts.The broker bought so much that all the floor traders started to get nervous.

While some traders may have long positions, many traders may have been short 10, 20 or even 100 contracts, meaning a price increase would cost them money.The buying move by Amundi Financial is particularly troubling because of the attitude of many big speculators and hedge funds. "How much more does Amundi want to buy?" The hatters in the venue were asking, "Who gave this order?" "Is this just the beginning of a large-scale operation?"

如果你是个已经卖空20份合约的场内交易商，你也会变得惶恐不安。假设东方汇理试图买入500份或1000份合约，这样大的交易量或许会把价格推高到每份合约1.8460美元或1.8470美元的程度。你绝对不敢在1.8452美元的价格再卖出。你或许愿意在1.8453美元或1.8455美元的价位再卖出一点，但也有可能你只想在1.8452美元的价位买回平仓，甚至甘愿赔钱选择在1.8453美元或1.8454美元的价格买回，而不再敢指望能在1.8450美元的价格买回。

In such cases, the bid-ask spread may widen—the bid price becomes $1.8450 per contract, and the ask price becomes $1.8455 per contract.Or both the bid and the ask increase to become $1.8452 bid and $1.8455 ask because the hatters who were short at $1.8452 are trying to buy back at the same price without losing money. Profitably liquidate their positions.

What has changed?Why did the price increase?Price movements depend on the common attitude of all buyers and sellers in the market, these buyers and sellers are what we call hatters, speculators and hedgers: people who want to make small bid-ask spreads repeatedly during the day, who want to speculate on Those who want to speculate on small price changes within a day, those who want to speculate on large price changes over several weeks or months, and those who want to avoid business risks.

As common attitudes change, prices change.Whatever the reason, once sellers are no longer willing to sell at the current price, but want to raise the price; when buyers are willing to accept this higher price, the market price will rise.Likewise, for whatever reason, once buyers are no longer willing to accept the current price and want to lower the price, and sellers are willing to sell at this lower price, the market price will fall.

Shared attitudes may have a "self-promoting" effect.If enough floor traders are holding short positions and a large buy order arrives unexpectedly, a panic can ensue.A large buyer may push the price up to the point that it triggers some other pending buy orders to fill, which causes the price to rise further.For this reason, experienced hatters quickly exit short positions and go only long when prices start to climb.

Go back to the example mentioned above.A floor trader who is not quick enough may soon find himself losing 10, 20 or even 50 ticks per contract.If he holds 50 contracts and loses 50 units each, his losses total $15625 ($50 x 50 x $6.25), possibly wiping out his profits for a week or even a month.At a certain level, the pain of seeing so much money go down the drain can overwhelm a hatter, throw him into panic, and buy him out of his position in a panic, no matter how high the price.In a rapidly changing market, this change may only take a matter of one or two minutes; even in a more moderate market, the whole process may only take 2 to 10 minutes.

You will find that experienced traders not only buy early to exit their short positions in time, but also buy more in passing, turn long and wait for the price to continue to rise.When inexperienced traders buy blindly in a panic, these sophisticated traders have the opportunity to sell at a premium and make another profit.

The demise of the trading floor
In the era when the Turtle Plan was implemented, futures contracts could only be traded in the trading hall of the futures exchange.In these halls, traders go head-to-head, face to face, executing trades with hand gestures and shouting.To outsiders, that scene could be described as crazy.

Now, trading floors are dying, and they are being replaced by electronic exchanges, in almost every market.Electronic transactions have many advantages, for example, they are cheaper and faster, and traders can know whether a transaction has been completed within milliseconds instead of minutes.In every market that has both electronic trading systems and traditional trading floors, trading volume is shifting to electronic markets.In fact, perhaps before this book goes out of print, there is no longer an exchange in the United States that trades futures contracts on the trading floor.

For those of us who were involved in the trading world before the electronic exchange was born, the demise of the trading floor is sad.In Chicago, there were many traders like Richard Dennis who came from humble beginnings and were making million dollar trades on the floor.For more skilled traders, the trading floor is actually superior to the electronic market.In the lobby, you can observe other traders face to face and gain insight into the psychology of the entire market.A few numbers on the display alone cannot convey this information.There are many traders who start out as order runners, the people who route trade orders from the phone desk to the trading floor.Now, such jobs are disappearing.

But no matter how much we feel nostalgia and nostalgia for the passing of the trading floor, we must see that the emerging electronic market also provides some new opportunities.Operating costs are lower, which creates an opportunity for us to use trading strategies with more frequent trades.Some electronic markets are so heavily traded that transactions worth millions of dollars have no effect on market prices.

Keep in mind that when I talk about trading on the floor in this book, I may not be talking about trading in the same way as many markets do today.However, the players and behavior in the market remain the same.Whether you trade electronically or on the floor with a broker, losing money is painful.Even if you trade electronically, the hedgers, hatters, and speculators are still there, hiding behind their screens, ready to eat you alive if you let them.

The next chapter will explore the phenomenon of psychological biases in trading behavior. These psychological biases are the root cause of the difference in concept and behavior between inexperienced losers and experienced winners.The next chapter also discusses the different trading styles and the market conditions that are appropriate for each.In the chapters that follow, we'll see how Rich's training program can turn an inexperienced novice into a successful trader in a matter of weeks.

[4]　蒲式耳：英美惯用的体积或容积单位。1蒲式耳（英制）约合36.37升，1蒲式耳（美制）约合35.24升。——编者注
[5] 1 pound is about 0.4536 kilograms. ——Editor's note
(End of this chapter)