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Bill Lipschutz The Sultan of Currencies
In a training course with Forex in its name, it would be inappropriate to ignore the advice and
experience of Bill Lipschutz The Sultan of Currencies. Bill was featured in both Market Wizards and The
New Market Wizards books. He was in his early 30s when he earned that recognition from author, Jack
Schwager, and is still going strong.
In this largest of all financial markets, there has been only a handful of high-stakes players. Most are
unknown to most of the financial community, let alone the public, although they sometimes take
positions measured in billions of dollars. Bill Lipschutz is one of these traders. Prior to the books by
Schwager, Bill had managed quite deliberately to maintain virtually total public anonymity for his entire
career despite his huge trades.
Lipschutz gained his reputation at Salomon Brothers when the currency options market, Salomons
currency options department, and he all started at the same time and prospered simultaneously. It may
be helpful for your perspective, though, to know this:
Bill traded his personal account that was funded by a $12,000 inheritance when he first started at
Salomon. He steadily grew it into a small fortune of $250,000 in about four years. Then he lost it all in
just a few days as a result of a series of bad trades. He never traded a personal account again. It has
been estimated, however, that Bill Lipschutz is personally responsible for creating more than billion
dollars in FX profits for Salomon Brothers over eight years.

There was a particularly telling moment in Schwagers interview when he asked the following question:
Ive always been puzzled by the multitude of banks in the United States and worldwide that have large
rooms filled with traders. How can all these trading operations make money? Trading is just not that
easy. Ive been involved in the markets for nearly twenty years and know that the vast majority of
traders lose money. How are the banks able to find all these young trainees who make money as
traders?
Bills answer: There have been a lot of studies done on [the] question [of whether the banks
profitability is due to the advantage of earning the bid/ask spread on customer transactions or
primarily due to successful directional trading]. [One] study concluded that if Citibank (the largest and
probably the most profitable currency trading bank in the world at that time) traded only for the bid/ask
spread and never took any position trades, they probably would make $600 million a year (at the time
they usually made about $300 million to $400 million a year in their trading operations).
Assume youre a trader for a bank and youre expected to make $2.5 million a year in revenues. If you
break that down into approximately 250 trading days, that means you have to make an average of
$10,000 a day. Lets say an unsophisticated customer who trades once a year and doesnt have a
screen comes in to do a hedge. You do the trade at a wide spread, and right off the bat youre up
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$110,000. You know what you do? You spec your buns off for the rest of the day. Thats what almost
every currency trader in New York does, and its virtually impossible to change that mentality. Because
if youre lucky, youll make $300,000 that day, and youll be a fucking hero at the bar that night. And if
you give it all back Ah, the market screwed me today.
Is that trading? Even at Salomon Brothers, where theres a perception that everyone is a trader, it
came down to only about a half-dozen people who took real risk. The rest were essentially just making
markets. That nuance is lost on most people.
Schwagers follow-up question: If it werent for the bid/ask spread, would the banks make money on
their trading operations?
Lipschutz: Probably not in conventional position trading in the way you think of it. However, there is
another aspect of directional trading thats very profitable. Take Joe Trader. Day in, day out, he
quotes bid/ask spreads and makes a small average profit per transaction. One day a customer comes
in and has to sell $2 billion. The trader sells $2.1 billion, and the market breaks 1 percent. Hes just
made $1 million on that one trade.
In a lot of markets thats illegal. Its called frontrunning.
Bill pointed out that its not illegal in the interbank market, because the broker is not putting his order in
front of the customers. Hes basically riding his coattails.
Between these two factors frontrunning and having to make up the spread you can see that the
small trader is already at a disadvantage. Piled on top of that, the inability of the average trader to
analyze volume makes it a David and Goliath contest. Bill explains the volume dilemma this way:
Foreign exchange is all about relationships. . . . your ability to be plugged into the information flow it
all depends on relationships. You need to be plugged into the news and to know what the market is
looking at.
Foreign exchange is a very psychological market. If you move the market 4 percent, for example, youre
probably going to change the market psychology for the next few days. [Size is] a huge advantage in
foreign exchange.
Unfortunately, as retail platform traders, we dont have the ability to identify size transactions that
move the market significantly. We dont know if the movement is being caused by one massive order or
many small ones. That is a disadvantage that must be understood and overcome.

So, there you have it yet another discourse about seemingly insurmountable odds against you. You
might think Im trying to discourage you from trading in the FX markets. Such is not the case.

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Every financial market that serves as a deep well of profitable opportunities for the institutions that
depend on them for their enormous wealth have their own methods for going after your money. Stock
markets have their specialists that maintain a fair and orderly market in the stocks they trade by
stepping in with their own capital to help reduce market volatility when there are not sufficient buyers
or sellers.
Really!? Do you think they might be afforded some lucrative opportunities by seeing both sides of every
trade? Im just sayin.
I have personally sold substantial sums of secondary stock offerings from the premier financial
advisory in America to people just like you. These offerings contained exorbitant, almost criminal
bid/ask spreads that produced monstrous profits for my employer. And they immediately tanked after
being transferred from the underwriter to the portfolios of my clients.
The pits of the futures exchanges could just as well be called traps. Its a good ole boys world, folks.
They are on the inside, and you are on the outside.
If you are ever going to be a consistent winner in any of these markets, you must know your adversary
and his tactics. You can ignore all this reality or choose not to accept it, but you do so at your own peril.

Aside from this negative stuff, the interview focused on Bills trading philosophy and tactics, all worth
adding to your library of knowledge that will make you more successful.
Bear in mind that Bill Lipschutz is a fundamental trader.
Does he believe that stops have a tendency to get picked off in exchange-traded markets? Yes, he
does.
Risk Control: Always know exactly where you stand. Dont concentrate too much of your money on one
big trade or group of highly correlated trades. Always understand the risk/reward of the trade as it now
stands, not as it existed when you put the position on.
Losing Streaks: When youre in a losing streak, your ability to properly assimilate and analyze
information starts to become distorted because of the impairment of the confidence factor, which is a
by-product of a losing streak. You have to work very hard to restore that confidence, and cutting back
trading size helps achieve that goal.
Entry and Exit: Bill is a scale trader scaling in on entries and out on exits.
Winning Percentages: You have to be able to let your profits run. I dont think you can consistently be a
winning trader if youre banking on being right more than 50 percent of the time. You have to figure out
how to make money being right only 20 to 30 percent of the time.

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Decision-making: You dont want to hold a position when you dont understand whats going on.
Many people think that trading can be reduced to a few rules. Always do this or always do that. To me,
trading isnt about always at all; it is about each situation.
On Being a Trader: The best traders I know are really quite brilliant, and they all work very hard much
harder than anyone else. . . . when I talk about working hard, I mean commitment and focus; it has
nothing to do with how many hours you spend in the office.
Its not enough to simply have the insight to see something apart from the rest of the crowd; you also
need to have the courage to act on it and to stay with it. Its very difficult to be different from the rest of
the crowd the majority of the time, which by definition is what youre doing if youre a successful trader.

Takeaways:
1. Recognize the adversarial forces that are competing with you and the odds that are against you.
Know your enemy.
2. Understand how the institutional side (the other side of the trade) of this market works.
3. Determine whether you want to be a fundamental trader (and what that takes) or a technical
trader, and why.
4. Fold the wisdom of one of the most successful Forex traders of all time into your trading plan.

I wish you the best in all your trading
Raleigh Lee
The Traders Tao Organization
www.traderstao.com