Category: Phantom of the Pits

Phantom of the Pits

Chapter 5. Rule One

Chapter 5. Rule One

 

 

at the right time for that answer. I remember as a child playing out that situation, as it was better to
get my Dad to agree to something when the mood was correct.

When gathering Phantom’s insight on the reasons of this book it wasn’t clear until I caught him at
the right time. It was after a big move in the grains.

ALS – Phantom, I see you agree on the subject today and I need to know just why is this particular
time the right time on your reasons for this book?

Phantom – This day is an example of the reason for this book. The grain market did a total surprise
on most traders. Oh there were those who were fortunate to be on the right side but most of them
took their positions off too soon. I wanted to discuss the shock most traders get on a day like today.
A great number of traders got what we call killed today in the grain market. Most all the new traders
are now wondering what they did wrong today. There isn’t anything they did right today because
they most likely don’t know what the right thing is. I don’t mean that all traders are in the dark.
I am talking about those who fail to understand what to do and if they do don’t carry out that
requirement. I am going to express the importance of doing the right thing from the beginning of a
trade and at the right time.

Many traders and most new traders aren’t even aware that the market can do what it did to them
today. I have often said that the BIG money is on the surprise side. I should perhaps have said the
Big losers are on the familiar side or the popular side of a trade. I call that the expected side.
Today gave us several reasons for a surprise. Those being that harvest pressure is strong and this is
a day you expect there to be more selling by the producer than normal. Expecting prices to be
pressured by hedging and seasonal influence is the correct way to trade in most minds.
You can’t argue with probabilities. It is not what the trader does with his trades until the market
starts a big move like today’s which separates the big winners and big losers. There were more big
losers today than big winners.

There are traders who because of today can’t make their next months car payment or their house
payment now. It just didn’t ever occur to them that what happened today was even a possibility.
They were over positioned even though they thought they had a good protection plan.

They used stops ok but they forgot to tell the broker to place the order. Everything they did was
based on their thoughts of how much they could take out of the market today. Their trades are
designed to lose but not because of the good traders or the way the market works but by their own
hand. The worst part is that they don’t even know it was at their own hands.

It is sad anytime a person’s heart gets pulled from their dreams but even worse when they lose
money too. Sometimes they lose a fortune in such a little period of time. It has happened to every
trader. It happened to me when I was smarter than the market. Why does it happen? Mostly because
a trader’s plan doesn’t consider what if I am wrong. Their thoughts are always expecting to be right.
Herein is the key to being a successful trader. I have learned this over and over again in my trading
career. I haven’t found one trader to tell me what I am going to tell you. The reason for our
agreement to give something back is that all of these BIG losers are doomed from the start unless
they are given the knowledge of what the market can do to them. The blame is within their own
responsibility and not anyone else’s fault.

Six months ago we started our journey in presenting one of the most successful sides to a market
strategy. On the forum there have been exceptional traders who have read the information I gave

and not understand the simplicity of what I said. We will have a better exposure of presenting the
same information in this writing.
I never want to see a homeless person and always wonder how they became homeless. If traders
aren’t aware of what the market can do against them as well as for them they will head in that
direction. Many homeless people I have talked with have had bad luck.
In most of our lives we will experience an evening out of luck. In trading if you have bad luck you
will eventually have to stop trading. To be prepared for that bad luck is a requirement in trading.
You will not survive if you do not plan for bad luck. My first steps in trading remove the bad luck
altogether.
ALS – I know what you are going with here. Should we put this in red letters and double the size of
the print here?
POP – Yes, I think that would be proper but traders must discover for themselves what I am telling
them. It will save them from an outcome, which they never discover, until it is upon them. So let us
not over emphasize the most important point of any trading plan here as we will drill it into their
plan until they survive at all cost in trading.
There are those who in a modified way do exactly as I suggest but may consider it more money
management than a plan for trading positions. Every broker tries to limit a customer’s exposure and
protect them but the key word is limit. Putting a limit on something infers that you actually can put
a limit on exposure when having a position established. You really only have a ballpark limit in
most cases. It seems to be worse than thought in looking back.
I shall present two main rules in trading of which both are required to be successful. Every trading
plan must start with the understanding of these rules. Before I give the first rule it is important that
what we say is understood correctly. Next it is important to have this rule become second nature in
all of your trades. The second rule I shall state and explain after the first is adapted into behavior
modification by the traders reading this.
I need to ask you a few questions to better present my rule number one. When the walk light comes
on, assume there is traffic which will run the red light at each intersection you cross. What do you
do now before you cross the intersection?
ALS – I would double check and look both ways before crossing.
POP – Of course that is the correct answer and you know what I am after. Now just because you
looked both ways before you crossed and each time you cross you looked both ways, and there
wasn’t ever any traffic, which ran the stoplight, is there reason to stop looking at each intersection?
Your answer of course is no you won’t stop looking.
What kind of limits did I just give you? Are they life saving limits before you cross the intersection?
Yes, they certainly might be but you will never know that if you follow the restriction each time
you cross the intersection. You can’t know if it saved your life for you prevented it by looking each
time. But what if you don’t look and you lost your life. You certainly won’t know you should have
looked either.
Does the restriction tell you that if you look there will never be any traffic run the stoplight? No.
Does your experience of crossing and looking tell you what the probability of someone running the
light will be?
You can make an assumption based on you knowledge at this point. What does an assumption do?
It actually presents criteria based on proven facts which are a possibility. It in no way gives you a
high probability or low probability but the best answer you can present.
I don’t want to lose you in this thinking but to point out that it’s the same in trading as in crossing an
intersection. We need to make our best assumption of what is possible. We must plan for that

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assumption in trading as long as it is a possibility and not just when it is probable. This is a very
important point in understanding rule 1 correctly!
If you were never to look at the intersection until proven wrong for not looking, wouldn’t it be too
late? It is the same in trading. You must protect yourself from any possibility in trading and not just
protecting yourself when the probabilities are high. This will be the surprise side in trading.
The surprise side is a possible outcome but not a very high or likely probability like today’s grain
trade. When someone gives you a gift, you are surprised by it. Getting that gift was not a high
probability. However, you are prepared for that surprise because you say Thank You!
Most traders plan only for the probability side and that to them is always what they consider the
winning side. This is the biggest mistake you can make in trading. You must plan for the losing side.
How you understand your plan is how you will react to a situation. You must learn that when you
are told not to do something in trading, it is not ever the same thing, as saying you must do the
opposite.
I often get feedback telling me I told someone to do what I never said. As an example I will tell you
not to sell beans today. Would you tell me I told you to buy beans today? It’s not funny because
most traders would. This is what I mean by correctly.
We have covered assumption and correctly in my terms of what I expect you to understand in the
first rule and second rule. If you don’t have those correct you will not be able to fully understand
and accept the two rules for trading required in all plans.
ALS – Let me get this straight! When you say to not do something you are never telling me I must
do the opposite. Seems simple enough. Thanks for making that point by example.
On your meaning when you say assume, you are telling me there is a possibility or probability
based on some fact of the situation which requires me to acknowledge and always have a plan for
the possibility or surprise side in trading.
Your meaning of the surprise side of trading is the side, which presents the possibility but not the
highest probability. Am I correct on this?
POP – It really is quite simple. After our dialogue it will be more clear to the traders as to how to
interpret our rules. I don’t want any misunderstanding. I say with a high probability that the readers
will read again our dialogue.
We often don’t understand how news stories get out of context but it can be done pretty easily. Lack
of proper assumption is a routine by Lawyers a lot of the time. They’ll ask someone something like
who is in the picture and when they find out it was the defendant their next question is were you
there when the picture was taken.
In their case it might be proper for information gathering but you as a trader must have proper
assumptions as you can not know exactly how a market is going to react each day.
Trading is not a favorable game in most circumstances and that is what we must use as our
assumption in trading. The big mistake made by traders is thinking and expecting trading to be a
favorable game.
You have execution costs or slippage when getting in and out of a position as well as commissions
as a cost factor to be subtracted from your winnings or added to your losses. The market spends
much time in an unpredictable mode. Trends both short and long term do exist but not one hundred
percent of the time.
The correct way to control positions is to only hold them once they prove to be correct. Let the
market tell you your position is proven correct but never let the market tell you that your position is

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wrong. You as a good trader must always be in command of knowing and telling yourself when
your position is bad.
The market will tell you when your position is a good one to hold. Most trader do the opposite of
what is correct by removing positions only when proven wrong. Think about that. Your exposure
and risk is much higher if you let the market prove you wrong instead of your actions removing
positions systematically unless or until the market proves your position correct.
Let me give you an example before we state the first rule. Today let us say you sold beans just like
your plan said to do at 630 on the open. If that position did not prove you correct you must in order
to reduce risk remove it. You decide what is correct according to your plan. (Example) let us say
you expected hedging to come in early and the price to drop from 5 to 8 cents in the first hour.
It didn’t even drop 3 cents so you remove the position. Say you removed it at 629. Just because it
showed a profit of 1 cent when you got out did not declare it a good position. However, your exit is
a better exit than if you made the market tell you the position was wrong. When you remove the
position because the market proved you wrong, it is always a higher loss and on stops it is usually
with higher slippage also.
This is not the same as removing the position because the market proved you wrong say buying
back at 645 on a 642 stop. By making the market prove you correct in order to hold a position is
acknowledging that trading is a losers game and not a winners game. If you only remove your
position because the market proves you wrong you are acknowledging that trading is a winners
game.
You never want to be in a position, which is never proven correct. If you only get out when the
market proves you wrong it is possible to have higher risk due to the longer time period required to
prove your position wrong. We will further clarify these thought for you further into the book.
Here is rule number one!
RULE NUMBER ONE
IN A LOSING GAME SUCH AS TRADING, WE SHALL START AGAINST THE
MAJORITY AND ASSUME – WE ARE WRONG UNTIL PROVEN CORRECT! (We do not
assume we are correct until proven wrong.) POSITIONS ESTABLISHED MUST BE
REDUCED AND REMOVED UNTIL OR UNLESS THE MARKET PROVES THE
POSITION CORRECT! (We allow the market to verify correct positions.)
In rule 1 it is important to understand we are saying the one criteria for removing a position is
because it has not been proven correct. We at no time use as criteria for removing a position the fact
that the market proved the position incorrect. There is a big difference here as to how we treat all
positions from what most traders use. If the market does not prove the position correct, it is still
possible that the market has not proven the position wrong.
If you wait until the market proves the position wrong you are wasting time, money and effort in
continuing to hope it is correct when it isn’t. How many traders ever hoped it wouldn’t be proved
wrong instead of hoping it was correct? If you are hoping it is correct it obviously wasn’t ever
proven to be correct.
Remove the position early if it doesn’t prove correct. By waiting until a position is proved wrong
you are asking for more slippage as you will be in the same situation as everyone getting the same
message.
What makes this strategy more comfortable is that you must take action without exception if the
market does not prove the position correct. Most traders do it the opposite by doing nothing unless
they get stopped out and then it isn’t their decision to get out at all as it is the markets decision to get
you out. Your thinking should be – when your position is right you have to do nothing instead of
doing nothing when you are wrong!

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I don’t mean to repeat and repeat but in this case you will better understand the more you read it. It
is very critical in your success in trading. Over time it has proven to be the rule which keeps the
losses small and keeps a trader swift and fast to take that loss. A person thinking when the market
proves a bad trade is counter to what is productive.
By using the rule properly you are productive and don’t have to face the demoralizing affect of the
market when you have a proven wrong position. This enables you to continue to trade with the
proper frame of mind. You are more objective in your trading this way than letting a negative reenforce
your thinking. This way you only let good trading re-enforce your thinking and actions.
ALS – Phantom, Not everyone is going to agree with your first rule. There will be traders who don’t
feel this is a good rule for them.
POP – Look at it like you would buy a new car. The dealer says you can drive the car which you
think you want for a month and we will give you credit toward another car if you don’t want to keep
it. Ok after a week you decide you don’t want this car because it just isn’t right for you. You take it
back and the dealer says you only owe eighty dollars for rental.
You don’t buy the car and keep it until it proves to be the wrong car for you, which could be months
from now. If you did you would lose more of what you would have to pay for the car. Most traders
keep their position until it proves to be wrong for them. I say don’t keep any position unless it
proves to be correct.
ALS – Yes, but who is to say a position which was not proven correct turns from a bad position to a
correct position?
POP – That is the kind of thinking most traders have. They fear being wrong when they get out and
that the market will show them they should have stayed with the position. If they don’t take early
losses it becomes more difficult to take a loss as it gets larger. However, the market assumption you
must make is that big losses will eventually take you out of trading.
My rule one is to address the swiftness needed in keeping your losses as small and quick as possible.
It won’t always prove to be correct but you will stay in the game this way.
Which would you chose? You have an opportunity of a ten- percent probability of making money in
the long run if you take a position until you have lost ten- percent of your equity or made ten
percent. Or take the opportunity to have a ninety-percent probability of making money if you only
keep a position for three hours unless they have proven to be correct by that time. It is pretty clear
which choice you would make.
It is that most traders don’t know what their choices are when it comes to assumptions of what is
possible in trading. Keep in mind that traders are usually unaware that trading is a loser’s game. He
who loses best will win in the end!
Why not make a time proven decision to change your behavior to trade the method, which gives
you the best long-term outlook. Trading is not gambling! Treat it as a business where you only want
the best merchandise for the shortest possible time in order to have the maximum profit with the
least possible chance of failure. That is what rule one does for you.
ALS – I can see the need for much discussion and review on your first rule.
Phantom – It’s critical to have rule one in force by next surprise day. The one thing, which teaches
most traders to take a small loss, is a big loss.
ALS – Yes, but that is expensive behavior modification. My wife, Karen just gave another parallel
example of your rule one. She points out that you don’t go buy clothes, take them home and wear
them until they prove to be wrong for you. Instead you try them on and make sure the have a proper
fit and look before you buy them. I like her thoughts along this line.

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POP – You can see in ordinary life you try and spend the least amount of money and have the least
amount of waste. Why should you do it differently in trading?
ALS – The answer is surely that in trading there are human elements which take over. Everyone
knows them and most likely have come face to face with them. They are fear and greed.
POP – We must remove the emotional element as quickly as possible in trading. If you can do it
before you put a position on, you have a good start.
Note: In order to give some insight on Phantom’s rule #1 several traders have indicated their
experience with it as presented on the traders forum. The following is a copy from one such trader.
Author: M T
email:
An anecdote about Rule #1
I’ve read phantom’s postings about rule #1. The price action must confirm the position or get out
quick. What I have done in trading is to enter a position, and have a chart position that is a good
spot to exit if price moves adversely. This would usually either be the previous swing point, which
if violated would be a signal for possible new trend and would definitely be the signal for me to exit
my position, or the first 15 minute high (resistance) and low (support), if it was violated adverse to
my position.
So that meant that there were times when I entered a position and the price action was flat or
slightly adverse but not so adverse as to violate my predetermined chart exit position.
I would stay in because there was no violation. I thought this meant I was following rule #1. I was
staying in, not because the price action “confirmed” my position, but because the price action did
not “confirm” my stop loss chart signal. I was thinking that this is what Phantom means. I have to
tell you that with this strategy I was keeping my losses small, just by the nature of my plan.
But I was unwittingly violating Phantom’s rule #1. I thought I had modified my behavior but in
reality I was “behaving” incorrectly. It’s a very subtle thing, I believe.
Then, last night, in a restless sleep thinking about my trading, an inspiration came to me.
(don’t laugh too hard). A lot of my losses had come after I had been in a trade for an hour or longer,
where price action was mostly flat, but my stop point was never touched. I realized I would have
been better off if I had just gotten out in the first 15 minutes. It would have been a loss, but it would
not have been as much of a loss as my chart stop point would give me.
Then I realized that is what Phantom means. My position was not confirmed in those first 15
minutes! It wasn’t violated according to the nuances of my plan but it also was NOT confirmed. Get
out.
Well, low and behold I went back over the last 3 months of trading and using the exact entry points
(fills) that I used every day and reviewed what would have happened if I had followed this 15-30
minute confirmation rule. Let’s just say it made a huge difference. I know backtesting is not
completely reliable but it was significant.
Anyway, thanks Phantom. I’m still learning. I’m still here trading. Started with only a 5K account,
daytrading, and I’m still alive w/o following your rules even. I’m below breakeven. Let’s see if I can
change that. I’ll keep you filled in. Once again, many thanks. You once asked for rule #1 stories.
Well, there is mine.
Cheers

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Note: The following is an excerpt from a message which Phantom had presented to help understand
rule 1.
Behavior modification is knowing the limits. Let us use basketball shooting as an example. Say you
shoot and see after 1000 shots you average less than 50% baskets made. This means you have a
better chance of missing than hitting. With practice let us say you now hit 55% of your shots. You
would expect to say when you shoot that you have a better chance now that the shot will go in than
not. Same in trading, you must know what the limits are!
In trading most of you have a greater chance of being wrong than right! Trade accordingly which
means expect the limit (being wrong more likely) in your trading.
How can you come out ahead? In the short run you can only with luck but in the long run luck tends
to evens back the other way. You must trade in the long run! So what is a trader to do in a losing
game? You must trade in the long run!
How can you trade in the long run? Only way I know is that you must keep your losses small and
take more small losses than small winners to come out ahead. This often means washing a position
for the sake of being able to keep in the game.
Theorem being now to assume your position is wrong until the market proves what you positioned
is correct. Keep your losses quick and small. Don’t ever let the market tell you you’re wrong.
Always let the market tell you when your position is correct.
It is your job to know you are wrong and not the markets job.
The other side of the coin is that you will get positions, which are correct. You must be bigger at
that time. This will require a rule 2, which is designed around adding to winners in an unfavorable
game to come out ahead in the long run. When you are correct, you must continue to use rule 1 to
keep losses small.
It’s ok to be wrong small but never ok to be wrong big if you expect to trade in the long run.
Trading is not easy. Most traders just let the market do its thing. The correct way is that you do your
thing and control your positioning. You control you positions by using rules, which keep you in the
game. Rule 1 is the most important rule in any trade plan. Rule 2 will be the other side of the coin,
which must be dealt with if you are expecting to remain in the game in the long run.
Learn to be wrong, fast.
“IN A LOSING GAME SUCH AS TRADING, WE SHALL START AGAINST THE MAJORITY AND
ASSUME – WE ARE WRONG UNTIL PROVEN CORRECT! (We do not assume we are correct until
proven wrong.) POSITIONS ESTABLISHED MUST BE REDUCED AND REMOVED UNTIL OR
UNLESS THE MARKET PROVES THE POSITION CORRECT! (We allow the market to verify
correct positions.)”
—POP


Chapter 4. Preparation for Trading

Chapter 4. Preparation for Trading

 

 

When several traders who use the Futures Magazine traders forum learned that there would be a
book on Phantom of the Pits they made suggestions. We are going to start this chapter according to
Ulrich Eckardt, a young trader who was born around the time Phantom was learning his first
behavior modification about trading.

When Ulrich was in the States as a youngster, his uncle wanted him to paint the stove pipes on his
roof. Excited as any child at a young age to earn money he was eager to start. He grabbed the paint
and a brush and decided to hurry on the roof.

His uncle stopped him and gave him his first lesson in trading or life for that matter. His uncle
proceeded to tell him the requirements of completing a job. First you must be properly prepared.
Second you will do the work and last you will do the clean up.

It seems we can follow that train of thought just fine. First we must be prepared!

ALS – It’s a step everyone must go through to get to where traders want to be in trading. To prepare
oneself for trading is just as important as any aspect. Without it a trader does not have the
foundation to continue in trading. Where does a trader start to prepare to be a successful trader?

POP – Too many beginning traders and established traders take the easy route and expect the
markets to be cut and dry of what is required of them in their trading careers. They will paper trade
and have fairly good success. This in no way prepares them for trading.
They must be prepared in every way. That means mentally as well as physically and emotionally.
Priorities must be in the proper place including family, friends and environments.

ALS – Where do you suggest they begin?

POP – Get your office ready! Pick out your office where it is comfortable for you to have quiet time
and a proper place to relax. Trading is going to be an all out effort if they expect to climb the
mountain in front of them.

The first thing is to get a comfortable chair. It must be a proper chair in order to start behavior
modification immediately.

ALS -(laughing) I really have heard strange things but really? The readers are going to think this is
a Joke book! A chair?

POP – I’ll tell you the reason for that remark about the chair being so important. There is
significance in what I am going to tell you about the proper chair. You see some traders think that
the market is to position and lean back and wait to get stopped out or take their winnings. It’s not.
That is where your chair is going to save you more than it cost you.

Don’t get one of the lean back easy chairs as they will be too comfortable and like the markets, you
must be reminded daily that you can never let yourself get too comfortable in your market positions.
Don’t get a standard rocker, especially if you have a cat with a long tail, as it moves all over the
place. What kind of chair do you think I am talking about?

ALS – I’m suppose to ask the questions! I know your chairs that is an easy one to answer.
POP – Ok, I’ll give you the answer anyway. You want to get what is known as a slider-rocker chair.
One that rocks back-n-forth over its own base without moving over the floor. Even get yourself an
ottoman. The big reasons are as follows: First in your trading career you will find that the markets
go back and forth without going anywhere a lot of the time.

Your slider rocker chair will remind you of this every time you use it. That step is important to drill
into your thinking. Your chair will not move around the room but rock back and forth. Second in
your trading you will find you do not ever control the market but only your position. Your chair is
the same way as you can stop your position wherever you wish.

I want you to drill that into your thinking also. I will repeat what I just said because it is important.
You can stop your position wherever YOU want! You wouldn’t think of letting the chair oscillate if
you didn’t want it too. Same in trading. You can stop the markets oscillation any time you wish.
Simply stop (remove) your position.

ALS – I knew you had a good reason for the proper chair. Do you really believe this helps?
POP – How much easier can it be? No one has to remind you to stop your chair from rocking back
and forth. You will do it without thinking. Your trading position will often times need to be stopped.
It must become second nature to automatically do it at times. This simple symbolic gesture for your
office will save you lots of distress in your trading.

Note: Shortly after the part about the chair was written and permission from Ulrich Eckardt to post
the draft he sent the following about a comfort couch he once had. It reads as follows: just thought
I’d tell you a story about a very comfortable couch I used to have in my office.

It was back, when I traded the financials very actively. The DM had a strong resistance and I
decided to go short. I was proven correct with about 40 ticks and was very tired. So I sat down on
the couch and slowly fell into sleep.

When I woke up again, about 1 1/2 hours later, I had to find out, that resistance was broken and
stops accelerated the contracts to new highs 200 points above my entry.

I don’t have this very expensive couch anymore. I could have sold it, but I really needed to carry it
out on my own and throw it away.
Regards – Ulrich

ALS – Ok we are now prepared with an office and a chair. What next?

POP – Next we want a clock with accurate time. A battery operated clock so you don’t have to reset
it often. The most important part of the clock is to get one that actually talks to you and gives you a
reminder of the time by talking. Instead of looking at the clock for time it will remind you what
time it is.

It’s another symbolic point to start behavior modification. You see we remember things well when
we associate them with something else. Memory experts will tell you this also. When the time
announces you must realize that you are required to work with your positions and not let the market
work on your positions.

You must always act promptly and deliberately within your plan. The clock can be used to reinforce
your thinking and behavior.

ALS – Aren’t you making an assumption that traders are clear to be free while the markets are open?
Doesn’t this leave out the poor trader who works two jobs and seldom has time to kiss his wife let
alone trade your way?

POP – So it seems but No I am not making that assumption. My concern in preparing a trader to
trade is to put behavior modification immediate from the beginning. The chair is to be used
whenever any trading plan is developed and thought is given to what the market possibilities on
your position might be.

The clock is to be there to remind you of promptness every time it announces. The office set up is to
give the trader the message of importance to be in control of their positions and not delegate it to

the markets. Your office is important because you must be in control. Remember we use to have our
small space in the pit and what did we call it?
ALS – Your Office. We have our office with a chair and a clock. What’s next?
POP – You must establish a routine in order to set up the environment of each trading day. Allow at
least one hour prior to the opening of your market. In this hour you should exercise from 10 to 20
minutes. This really does keep your mind sharper. The next thing after your shower you should
spend one or two minutes giving thanks to your higher power and explain what you are going to do
with the funds you earn. Don’t be selfish about it.
This actually gives your sub conscious a reason for being a successful trader. Last of all face the
north and acknowledge you actually know which way is up. This gives you a better sense of well
being by confirming to yourself that you are in total control. You will need that total control when
you follow your trading plan.
ALS – Not everyone can do or would want to do as you suggested!
POP – I know! Some will be at work or on their way to their work but they can still do those things
as they are in commute. It is important to acknowledge the reason for trading regardless of your
situation or reason. Thirty years ago I would have thought it very strange to take these steps.
ALS – Do you do these things?
POP – Yes, in my own way I do. Every trader whether beginning or established should set up a
routine to follow as I suggested. There is more benefit from it than can be seen at first thought. ALS
– It all seems like a lot of work and we haven’t started our learning process yet.
POP – The most important person in your trading is yourself. Take care of the minor details early
and you will have your routine. It is more of a positive re-enforcement of what you are expecting
from trading.
ALS – Are we ready to start yet?
POP – A couple of more items. You need to acknowledge your reason for trading each day. If you
can’t afford to buy the chair and the clock then you should postpone trading until you can. The
reason being that you need every aspect of trading in your favor. If you do it all right there will be
better times ahead.
The next thing I suggest is to get a favorite book to read. The last thing I suggest is to pick out a
person who you admire most in your life for their accomplishments.
ALS – What would your favorite book be?
POP – I shall tell you of a suggestion from a very brilliant trader. His suggestion is “The Art of
Warship” by Sun Tzu. The book was written about 2500 years ago, and forgotten for a long time.
Since it was in Chinese, there are different translations. The best one is with a word from James
Clavell. He based his noble house saga characteristics on that book.
The book discusses rules for war in ancient times, but can be translated into business-life, private
relations and even trading. Sun Tzu rules have been alive for 2500 years now and still fit perfectly.
ALS – Why is a book important?
POP – On bad days instead of could-a, would-a or should-a you must expel your feelings of defeat
as soon as possible because if you don’t it will affect your next days trading. Read that book if just
for 10 minutes. Make it a routine.
ALS – I guess I have a few things to learn myself. You said to pick out the one person who you
admire most. Why? Who do you admire most?

Pop – There is a great deal to be learned from the person you admire most. You will need to
understand your ability to become an admired person if only in your own mind. I have changed my
most admired over the years and now that person is younger than I.

There are many reasons I admire my choice. I’ll give you the most important reasons. She gives and
gives of herself each and everyday. She is not selfish and she truly cares about her fellow men,
women, children and all life on this planet. I admire that so much. I hold her responsible for
showing me the light. She is the only Oprah I know.

ALS- Does she know you feel that way?

POP – No, but it is important to let your most admired person in your life know that they are indeed
most admired. It goes right to the positive example you need in your trading life. Do it! Let them
know even if there is no time for their acknowledgment. You have done your part at that point. It is
good mental food.

ALS – Are we ready to start learning to trade yet?

POP – I would say that for me I am prepared now for the job.

ALS – I guess Preparation for trading is a different process than most imagine. I really thought we
were going to get into the learning process of how to trade and setting up a program to trade. Are
we going to get into the specific ways to trade?

POP – Keep in mind we want to guide and not give specific advise on trading. There are basic
requirements which determine a winner from a loser and that is what I am after in this insight.
There are as many ways to trade as there are traders but the basic fundamentals required are seldom
presented to the trader.

It is important to present a plan which keeps the trader in the game over their lifetime. Let us
expound on that subject in your book. We can address trading methods in detail at later writings. I
have been trying to give some examples on the forum to help traders understand where I am coming
from in my rules of Phantom trading.

We will answer some of their specific questions on trading later. I read a short book called “Notes
to myself” several years ago and it was but a self-diary which had been published. It was a small
book but it really had great insight. I liked the idea.

We can all learn from other people’s insight on subjects that we are investigating. It in no way is
advise but we can make our own minds up by knowing those thoughts. This is more of my purpose
in answering you questions for this book. It puts the traders on a one on one basis for understanding
the complexity of the markets and helps establish criteria for an overall plan with the most
important points at the front of a trade program.

More often than not these simple thoughts are not used or known by most traders. It’s sad that
everyone feels they have a great fortune hunt in front of them and there isn’t a lot of thought
required in how trading actually unfolds.

What subject do you want to discuss next?

ALS – It’s beginning to be a surprise to me and knowledge learned new again.

“Priorities must be in the proper place including family, friends and environments. ” —POP


Chapter 2 – Your Book

Chapter 2 – Your Book

ALS – Phantom, can you remember the first advice you ever heard from another trader?

POP – No, I can’t ever remember any advice. I don’t mean to be ungrateful to all my many friends and colleges but I really don’t remember any advice. In fact that is part of the reason I want to pay a debt to other traders. I don’t think anyone ever gives much advice because they feel it is putting them at a disadvantage. Of course it isn’t the case but most traders behavior is determined early in their lives. That is why I feel behavior modification is critical.

ALS – I can see the critics already starting to line up to point out your big point of trading is behavior modification! Are we going to write an entire book on behavior modification? If so we will have to give this book away. Not only that but also what creditability does Phantom of the Pits have to anyone?

POP – Nothing would please me more than to give the books away. Or perhaps we could ask Futures Magazine to sponsor it for all the publicity they would receive. Accurate insight is what we are going to give every trader who reads this book. It isn’t enough to point out requirements. I want to give them guidelines so they can chose their own destiny.

ALS – Sort of like change your thoughts and you change your destiny, huh?

POP – This is exactly where we want to be. No promises, no requirements, no false hopes and no undue influences. Exactly the way it should be. Traders must make their own millions. I only need to be responsible for keeping them in the game forever.

ALS – Phantom, I don’t make my money from writing so how about making it a little easier in writing this book for me. Guide me a little in what you want to convey to the traders in this book.

POP – I have an idea, which presented itself, when I viewed some of the other trader’s questions on the forum I frequent. They don’t know the important questions other than from their own experiences in trading. Eventually they will come upon all of the situations I want to protect them from getting into. However, I don’t want to give specific trading advise or any outdated information like I wrote in some of my documentation of the 70’s. Why don’t we call upon the traders from the forum to guide us in the knowledge they are seeking for this book?

ALS – Great idea! I am impressed with several traders but this one Trader I know he will respond. But we don’t want to exclude any of the others traders so I guess we kind of make them Phantom of the Pits Too!

POP – I like the idea. No losses to throw out is what I enjoy.

ALS – Ok again! You Win! You are right!

POP – Funny, I have had years to hear what you just said. I really don’t hear that anymore. I mean you win and you’re right. Trading is not those statements. A trained trader understands success as you lose well and you’re wrong small. Trading is called coming out on the small loser’s side and being rewarded with knowing how good you have been wrong. 8 It requires a balanced life to sustain the meanness of the markets. Traders never plan for the bad days and there are bad days. It is when it affects their lives that they must make a new choice. Either change their behavior or go down in defeat.

ALS – There’s our subject again. Are we going to get tired of hearing the truth of trading?

POP – Traders have a choice. Either face the truth of trading or look for the nearest exit. Speaking of facing the truth, I don’t know what your plans are but I have a mind for a good 2 inch steak served up for dinner. Chow for now!

ALS – You ever eat crow?

POP – Surprisingly in my early years no but in my mid years yes. I think that’s what you

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Chapter 1 – Phantom’s Insights

Chapter 1. Phantom’s Insights

 

The following is an interview with one of the most powerful traders I have ever known and whom I consider the best trader I have ever known. His purpose in this agreement of this interview is to help those who have that ability and desire to become the best traders they can possible be. There is no claim to fame so to speak but only the honest effort to bring to other traders the insight of a very difficult business of trading for a living.

ALS – Phantom, why do we start this book without knowing who you are for others to admire and thank?

Phantom of the Pits – I remember being on a train after one of my first trading days and thinking of how I had doubled my account in that one day. I looked around and was so proud of what I had done but not one person on the train knew or would even care if they did know. At that point my direction was self-driven in seeking out what was possible in trading. I know more now than I knew then. The markets as a trader have humbled me more times than I wish to remember. It’s always easier for an observer to put their finger on a problem than the one who is wrapped up in the situation. That is who I am! I am the observer and I wish to point out the line in the sand. I don’t know who puts the line in the sand but I clearly see it. Who remembers he who points out the line? You may call me Phantom of the Pits from here forward and we shall remain as the shadow of your writings.

ALS – After over three decades of trading why haven’t you written a book sooner?

POP (Phantom of the Pits) – I have but they have all seemed to be outdated because knowledge is quicker in coming than in writing I always wanted to have it exact. I have made mistakes and to give my mistakes to others seemed to be admitting I was wrong. It has taken years to understand that being wrong is what trading is all about.

ALS – Surely there are those who know you and appreciate what you have accomplished in your trading career. Why don’t you accept their recognition?

POP – I have always believed that there are two sides to a coin. In fact I find out that there are times when you could argue a third. I won’t take credit for what I have accomplished. There are no guarantees and I have been put on notice a few times. My success is nothing without putting a bucket full of water beside the pump to prime it for the next trader, the other side of the coin. There will always be those who drink all the water from the bucket (the third side of the coin.) Why shouldn’t the thirst of others be fulfilled when it can be done so easily?

ALS – To You what is the most important aspect of trading?

POP – Behavior modification without doubt is the key to trading success. Not only in how we think but also how we act in certain situations. We must adapt to changing situations which we have no control. We often must change the situations of which we do have control when trading.

ALS – Let’s start your writings and insights into successful trading from any background you can give us of your trading! Is there any important point you wish to make about your trading background.

POP – My only point is that I am not different from any of the readers who will read this. How I got started or who I am makes no difference in trading. Let us not dwell in such trivia, which has no significance in how your readers will succeed. What was is and what is was but a breath after the markets close.

ALS – Ok, with me if it is ok with you that we get started with our behavior modification of trading! 6

POP – Ok with me but a little history on my first access to behavior modification as a child. My brother was at a tour of a blacksmith’s shop in his youth and watched the blacksmith take channel lock pliers, hold a horseshoe, hit it with a ball pin hammer a few times to shape it, and then put it into a fire to temper the metal. Upon removing the horseshoe from the fire and dipping it into water, a tempering process, he laid it down! At that point my brother picked it up and threw it down on the ground. The blacksmith looked at my brother and said “Hot isn’t it son?” Well my brother said “It don’t take me long to look at a horseshoe!” That taught me more in trading than anything else. Trading is not taking long to look at a horseshoe. Don’t ever forget that!

ALS – Trading is like a hot horseshoe?

POP – Your losers are your hot horseshoes! Note: Phantom has observed and participated in an internet forum sponsored by Futures Magazine in an effort to pay his debt to other traders. Many sharp traders frequent the forum as well as beginning traders. One remark of interest in observation of the forum by Phantom was as to how effective knowledge can travel today compared to the late 60’s and early 70’s. It is Phantom’s thought that he who has the most toys will not win but he who has the most knowledge and can change their behavior to what is needed will take it home.

“It should never take long to look at a horseshoe”—POP

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Chapter 3 – A Little History

Chapter 3. A Little History

 

ALS – Let us get into a little of your background without breaking the rules here. How did you come upon the name of Phantom of the Pits?

POP – It all comes from the respect I have been given in the Pits. I started Pit trading in the early 70’s after some early off floor introductions to commodity trading.

ALS – Why did you decide to trade on the floor instead of Up above (off floor with quote machine) as most traders?

POP – I really liked the challenge and excitement of floors trading. The appeal of being in complete control at all times seemed to be a dream of all traders. I certainly felt I could do well on the floor by being in total control. I had a few friends who advised me to buy a membership and get on the floor. It happened so fast.

ALS – We both know you are Phantom at showing up on the floor over the past several years. Can we get into some of your experiences on the floor?

POP – You know we all had so called offices on the floor in the Pits. Each day prior to the market open we would all go stand in our little 3 by 3 foot office. Every day there was this trader named Cindy who would make her office one tier in front of mine. I remember her name as her career start was as a Math teacher. Her husband was a GM at the music FM radio station I always liked to tune to listen to easy music. I actually knew more about her than she ever knew. Each day she would wait until she was sure where the market was headed and position. It happened that I was strong into taking profits on the 3rd wave of buying or selling. It apparently was her break out indicator. She would always take my offer below the last trade for selling and before she carded it would say ” I hate trading with you because I always lose when I take your trade.” I never forgot that statement which she would make. Losing never stopped her from staying with her plan as she knew to lose small and go with her program. I am sure she has made lots of funds over the years. I sort of felt bad when she would say what she said but it started me thinking about losing. Her mind was set correctly in trading. Funny how little incidents shape our belief in trading, some good and some bad.

ALS – She was never afraid to take your trade even though she felt she lost from it most of the time?

POP – She had convictions. A lot of the other traders would shut up and back off whenever I would make an offer. I was starting to pick up a reputation for being correct and the traders would start to follow me. It actually would hurt my execution and that is where I discovered that EXECUTION is critical. If you can’t EXECUTE in getting in, you sure can’t execute to get out. It wasn’t a mental thing but a hindrance in my trading plan.

ALS – So what did you do to overcome this execution problem.

POP – I started to play games with my trades. Actually the Funds do it now. It is so artificial but they fall for it. It worked like this. If I had a position and I wanted to take profits I would pretend I wanted to add to my positions. So I would Bid the market instead of Offer. I had enough follow me that they too would Bid the market. I would turn the Bid and instead hit the Bid and sell my positions.

ALS – Seems like a good strategy. Did it work most of the time for you?

POP – Well I felt bad about getting the other traders out of position by using this little game so I decided to just hit the Bids when I wanted to get out. If there weren’t enough Bids at the last price I would let the market work itself down to a point I was out. Today the funds must use fades because they must go at the market to position. This is a problem if they don’t know the liquidity at the time. In the long run it won’t make much difference as short term influence isn’t as you would think. I also learned to not stake it all on one price. A long time friend taught me the range strategy. It works for me.

ALS – What did you usually trade at first?

POP – You know the only answer I am going to give you! Anything that moved! By that I mean movement has less risk. You wouldn’t think so ordinarily but in a move you can have a smaller position and make a better return. In a dead market you tend to position too large and Wham a news story runs the market and you weren’t prepared.

ALS – But don’t moving markets chop you around more?

POP – There is integrity about the chop as trends, which develop, give you a good range to work with if you don’t get emotional about it.

ALS – Maybe we should interrogate that statement in a later chapter. How did the other traders treat you when you first hit the pits?

POP – They would yell at me to take my profits and to step off of first base. I didn’t mind their remarks except one. They would say “well it is only money” and that made me mad as I took it personal when I would throw money away. I started out with such a small amount of money and I couldn’t stand to lose money at first. I got even with the other traders for that remark. I would watch them and when their shirts would expand and their ties were too tight and finally their face would turn red I would yell at them “TAKE YOUR LOSSES!” It wasn’t long before we had an understanding. I actually was doing them a favor in telling them to take their losses. To this day I call this out to myself when the market isn’t working my position correctly. The big start of my behavior modification I suppose.

ALS – How have your Pit friends and your recent friends treated you over your trade life?

POP – You know I have just really found out recently how loyal my friends can be. If you do something which they remember it is without fail that they will be loyal to you. They respect me more now than at first. That respect is not just out of trading but knowing that true friends look beyond your face into your heart and soul to find you. It is very touching.

ALS – You don’t seem to floor trade much anymore. Is there a reason?

POP – You look on the floor and you see it is a young persons game out there. I am not saying that is the success now because it is more than youth in this business which makes you a successful trader. I trade upstairs because I understand the markets better at a distance and can trade more markets. Being on the floor is limiting as a trader. A floor trader is more of a scalper than a position trader is. I like the latitude of being able to set up various criteria for different markets and not depend on my own execution in the pit to position.

ALS – Would you give other traders advise to start on the floor? POP – I am asked for advice often but I don’t like to ever give advise. I only like to give guidance, as all traders must make their own bed. They must make their own efforts to learn. It is their decision as to how they will make their plan on trading. I can help guide them away from bad behavior but it is their own determination, which makes them a success.

ALS – Have there been any of your associates over the years who have given you a difficult time in your trading?

POP – Only through ignorance! I can forgive all that. Those who don’t learn are their own enemy.

ALS – What must they learn?

POP – Most important they must learn that they don’t have to make SELF LEARNED mistakes. They are always better off to learn from OBSERVED MISTAKES. It can be pretty costly to make mistakes in this business. You can not really tell someone what to do but often if you guide him or her they will be more receptive to making the right decision.

ALS – How do you differentiate between self learned mistakes and observed mistakes?

POP – Let us say you go to an eye doctor and he asks you if you can see better out of lens a or lens b. You make a choice and then he goes to the next step by asking you again if you can see out of lens c or d better. This continues until you have the best lens criteria for your eyes. Well any mistake you make is a self directed mistake and it will hurt only you . No one can teach you not to make this self learned mistake. Now if you tell the eye doctor you are blind in your left eye when he says cover your left eye and he then says cover your right eye, then you have an observed mistake. You wouldn’t make that mistake and since you were affected by that mistake even though it wasn’t your mistake you will remember better. It is better to learn from a mistake which affects you directly that is made by someone else. You have to be mistake aware in trading because there are so many lessons.

ALS – I see. I mean it is clear what you mean on mistakes. Learn from others mistakes and it is cheaper than learning from your own mistake?

POP – I think you have it.

ALS – Do you ever go into the pits much anymore?

POP – To sharpen my thoughts on a market and to re-enforce the proper behavior I often do go back. There is always something to learn from it. ALS – What happens when you walk into the pit?

POP – At the end of the trading day there are those who come up to me an say “I knew it, I knew you would be selling today, I should have known the market was going down.”

ALS – So you move the market?

POP – It seems to be their thought but it isn’t the case at all. You see if I am selling to take profits I am aggressive in doing just that. It is that I have a position to get out of and it so happens there are others doing the same thing. Maybe they have a signal close to mine. It is inaccurate to think anyone moves the markets. If they could I wouldn’t trade! The truth is that the BEST LOSER is the long term winner.

ALS – One of the traders had some good suggestions on phases of this book. He calls step one preparation. Let us continue in that suggestion from the “Futures Forum.”

POP – Suits me fine. I have seen them grow from my early years and I also have loyalty.

ALS – Note: Phantom’s criteria for this insight book is to share with the traders on Futures Forum. Final copy will be somewhat different and expanded. This creates a more timely effort in writing his insight. “The truth is the BEST LOSER is the long term winner.”—POP

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