Review of “Inside the House of Money” by Steven Drobny and how it relates to the Gestalt Shift
In this post I review “Inside the House of Money: Top Hedge Fund Traders on Profiting in the Global Markets” by Steven Drobny. The book is a modern version of Jack Schwager’s Market Wizards in that it contains techniques that don’t rely on some kind of outright mispricing in the markets that were once prevalent in the 80s. Furthermore, this book contains only interviews with “global macro” style fund traders. This is arena of finance that is about big changes in monetary policy and geopolitics that trickle from currencies and bonds all the way down to individual companies and commodities. I believe Inside the House of Money is a must have for currency traders who are looking to profit from position trades on fundamental and behavioral trading.
Jim Rogers, the Pioneer
The book contains interviews from a wide variety of institutional traders and specialties. Drobny speaks with a prop trader (Christian Siva-Jothy), a Chicago floor trader and manager (Yra Harris, Praxis Trading), Jim Rogers of commodity and currency fame, fixed income traders from London Diversified Fund Management, an emerging market trader, and an anonymous currency trader among others. What’s interesting is that even though the instruments they traded were different, they all looked at instruments in other markets to find imbalances and they all looked at how policies (fiscal, monetary, and geopolitical) were changing. Although few expressly admitted it, nearly all utilized their own framework of behavioral analysis to determine an imbalance to profit from those few macro themes that appear each year.
Drobny essentially asked the interviewees the following questions: Where do you source your information? What constitutes a good opportunity? How do you size your positions? What is the time frame of your trades? How have markets changed over time and how have you adapted? If the market is a zero-sum game, where does your edge come from? Are you long or short gamma? Of course there are examples of their best trades and worst trades. I was surprised by the level of detail with which the traders elaborated on their strategies. The only disappointment was when the trader assumed that the reader knew about some esoteric concept or left out some information that would’ve been useful. For example, the currency trader explained how there are usually only 3-4 macro themes a year at most, yet it’s hard to stay out of the market so he always has positions on. He doesn’t really explain how he decides on a directional bias or generally how he makes entries. That said, each trader in this book have enough comments to spur ideas for developing a trading framework.
Particularly of interest in “Inside the House of Money” to many readers in this community would be the interview with the Currency Specialist. His view of trading and the markets was very influential in my philosophy regarding the current style of trading I do. He emphasizes that news is coming out every few seconds but no new information over all this noise really occurs for a long time. The trader asserts that the real information really comes and identifies opportunity, it is usually in the form of a perceptual, or Gestalt shift among the market participants. What I found most useful in his interview was his explanation of reading central banks. If you flip on Bloomberg most analysts are blasting numbers from every single economic indicator imaginable and speculating on how X event can cause Y price movement, but they often forget that central banks (with few exceptions) set currency rates in the long run. The central banks where many of the imbalances are found that allow one to change their trading bias.
In summary, I recommend getting the book if you are interested in the style that I trade with (global macro). Don’t just read the currency interview. Markets are interrelated and the things each of the traders look at are similar. I believe you might find some useful strategies and ideas from each of them.
