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I'd like to share with your readers an experience I had using delayed quotes verses "real-time."
Since delayed quotes for all exchanges, including equipment rental run about $100 a month, verses about $300 a month for the CBOT exchange only, I decided to save money.
I wasn't trading the S&P-500, the mini S&P, or anything with a great deal of volatility. So my thinking was volatility and speed wouldn't be much of an issue, generally speaking, since prices seem to hover around price action for a while without moving very quickly. In other words, if you're trading grains during winter or some other market that isn't exhibiting a lot of volatility it seemed to be a good way to save money.
Was I wrong? I went short two December copper @72.55. Not one, but two. Why, because I was greedy. The intra-day, daily, monthly, and yearly trends were all down. Talk about trading with the trend - how could I go wrong? Other indicators gave me a sell signal also.
My stop was in at 73.00. Not more than 15-minutes after the fill at 72.55 my broker called with the 73.00 stop order hit and filled. I ran to the computer and looked at the screen. Prices were around 72.70. I sat and watched this $500 unprofitable trade unfold before my eyes. I felt like a person on a plane that's going down and is going to crash. You know you're going to crash and it's just a matter of time. Of course, the consequences are not near as dire.
It's money and not my life. But the sense of impending doom is kind of the same. It already happened. I knew it happened. Now I'd watch it happen -- with my DELAYED quotes. Needless to say, I won't be using them again to trade from.
P.S. -- If I had "real-time" quotes, I may have jumped back in and reversed the position and went long. But there was no way I would do that and not be able to monitor that trade accurately and correctly. Also, then I'd be trading against the trend. Anyway, timeliness and accuracy are of utmost value in these highly leveraged markets.
There's One Born Every Minute - William Green
Jake Bernstein has a lousy record trading fixtures -- but has made plenty trading on investor gullibility.
"I'm teaching you something that I know works," says Jake Bernstein. "It's real simple." Bernstein, 51, is in a Washington, D.C. hotel meeting room mesmerizing an audience of aspiring futures traders. Want to make a killing trading futures? All you need to know, says Bernstein, is that many seasonal price patterns occur year after year. Buy live hog futures on Oct. 30 and sell on Nov. 27. That's a trade that would have made you money almost every year in recent decades, he claims. Bet on the S&P 500 March contract to rise from Jan. 12 through Jan. 18. For 15 years, he says, this trade was a winner 93% of the time.
Does anyone believe his nonsense? Unfortunately, yes. Intoxicated by the promise of easy money, audience members line up to buy Bernstein's products, among them his books, with titles like The Seasonal Trader's Bible and The Best of Bernstein: A Treasure Chest of Jake Bernstein's Market Wisdom.
His monthly newsletter costs $400 annually; his weekly newsletter costs $895 a year. He sells three other newsletters, plus video courses and a CD-ROM ($695) that lists 60,000 seasonal trades. He offers telephone hot lines and charges up to $2,500 per person for his two-day seminars.
Yes, you can fool some of the people all of the time. Commodity Traders Consumer Report, a respected futures publication, tracks the trades Bernstein recommends in his $895 flagship newsletter. If you had acted on these weekly tips from 1988 through 1992, you would have lost money for five consecutive years (assuming typical transaction costs).
Let's say you set up a $20,000 trading account in 1992 and executed the newsletter's recommended trades for that year. Your account would have been wiped out. In 1996 you would have lost 95% of a $20,000 account. Bernstein's response: "There are always losing periods."
He professes to be an expert on the psychology of trading. His qualifications? In registering with the Commodity Futures Trading Commission, the Montreal-raised Bernstein wrote that he held a master's degree in psychology from Chicago's Roosevelt University. In fact, he never completed his master's studies.
In the 1980s Bernstein hooked up with an outfit called Robbins Trading and helped to manage futures accounts for investors. James Roemer, who co-managed money with Bernstein, says: "Jake is brilliant, but he can't manage money to save his life . . . He'd get scared, buy at highs and sell at lows . . . He kept losing money."
Bernstein found an easier way to get rich. Instead of just trading futures he would trade on investor gullibility. In 1996 he starred in an infomercial that has aired on nearly 400 TV stations. It hypes a video course ($180) called Trade Your Way to Riches. In it a farmer named Harold Henkel tells viewers how well Bernstein's approach has worked for him. Henkel, however, now admits that he lost money trading in 1996 and 1997 while using Bernstein's products.
On his website Bernstein offers to set up customers with his "personal" brokers at Fox Investments, a division of the Chicago brokerage firm Rosenthal Collins Group.
Suppose you take Bernstein's recommendation and set up an account at Fox with $5,000 -- the minimum that Bernstein says you need to become a trader. Your commissions would be $60 to $80 per trade, about three times more than savvy retail customers pay. Bernstein's weekly newsletter offered 195 recommended trades last year. At that rate, a small trader's commissions alone might amount to more than double his or her original investment. Needless to say, Bernstein receives a slice of the brokerage's commissions. A Fox broker appeared in Bernstein's infomercial, touting his seasonal trading approach. Says Bernstein: "There's no arguing with history." Say we: Where are the regulators when you need them?
Commodity Shark - William Green
JAKE BERNSTEIN is not alone. Another prominent purveyor of hype is Ken Roberts, a college dropout and former life insurance salesman. Roberts convinces neophytes that they can become successful traders with a grubstake of only $1,000.
In 1983 he self-published The World's Most Powerful Money Manual & Course, a mail-order book that intersperses tips on futures with platitudes about getting "everything you want (mentally, physically, and spiritually)." He claims to have sold more than 300,000 copies. At $195 each, that adds up to nearly $60 million.
Roberts, who touts futures trading as "the world's one perfect business," charges $2,695 for his advanced trading seminar. He hawks trading charts, a course on options, a newsletter and his novel, The Rich Man's Secret. He also owns a piece of a California brokerage firm, Main Street Trading. It charges commissions so high -- $95 a trade --they virtually assure that most small active traders will lose money. The hype has paid off for Roberts. It has brought him tens of millions of dollars and an Oregon mansion with a cigar room. But where are the customers' mansions?
Read more: By William Green - Management, Strategies, Trends - From March 9, 1998 Issue
A Brief History of PEPS & Kurt Amacher's 3-D System
We were both wrong! I didn't pay $95 but $495 for PEPS in September '86. After that, I cut out his ads in Futures Magazine (with all those charts studded with astounding buy and sell signals), and they show him (Ramesh Veghela) began charging $695 in October '86 and $985 before April '87. From April '87 on, the price seems pegged at $985.
You were right about the indicators he used: a 9-day slow stochastic and a 9-day RSI. He compared their movement to the price movement of the underlying commodity and sought divergences between them. He told me he got the idea looking at charts in Commodity Perspective. He saw this pattern repeat over and over -- possibly even when it was absent! He made a trading method out of it, and the rest is profits.
Before buying, I recall asking him why he was selling such a hot idea. "Ah, well, you see, John, this is a very good question . . ." and off he'd go into how he was a struggling grad student in Wisconsin, trying to collect enough funds quickly to set up a super-duper computer system to test this idea thoroughly and develop even better ones. Yes, he wanted my money to test the idea he sold me! Confidence, man.
When I bought the "system," I was annoyed how much his signals lagged the market, so I called and asked how he overcame this bothersome feature. He began the Dance of Multiple Indicators, paternally advising me not to put all my eggs into his single (ill-woven) basket. We didn't talk after that, but I continued to collect his ads, remarking in each how brilliantly PEPS performed last month. One couldn't ask for a better rear view mirror.
My recollection of paying $95 was correct, but it was for Kurt Amacher's 3D system. This one looked for divergent behavior between current and forward deliveries. In reality, it was a loss-leader intended to entice you to buy his $2,400 system, Predictor. I did and it used a novel way of drawing triangles on price charts to pinpoint the day that prices would reverse. I still think it's pretty clever, although one can generate so many triangles, you don't know which ones to believe. Worth the money? Hell, no.
That'll do it for now. It was great talking with you! I'm glad to hear you're doing well, and I hope the "Real Success method" works out well for me, too. I'll keep you posted on my progress.
Day Spread Trading of T-Bonds - Stephen Goldfarb
I have been considering a conservative trading idea involving day spread trading of T-Bonds. There may be other futures on which this concept may be better adapted. I would be interested in getting feedback about this idea. Let us say that the spread between the near month T-Bond and the next 3-month period (e.g., June/September) varies during the day by a small, but tradable amount.
For example, the two contracts may, at the narrowest spread, be 8-tics, and the widest spread, 12-tics. That is a 4-tic spread. Each tic in T-Bonds is worth $31.25. The idea would be to enter an order to sell the near and buy the far at an 8-tic or less spread, and liquidate by buying back the near and selling the far at a 12-tic or better spread. That would be a gross profit of $125 less, say a $25 spread commission for a net of $100.
If the liquidating spread price is not reached, one assumes liquidation at the close. For purposes of the example, I assume that one could get out at least even, or perhaps with a 1-tic profit to pay the commission. Reality may differ.
The concept does not depend on anticipated disparity, as might occur when a spread is entered between two different contracts, such as S&P 500 and Value Line, and held for an extended period. It depends on non-directional intra-day undulation.
The spread variance in the example should be considered hypothetical. The spread appears to vary on any given day.
I have no meaningful experience with this kind of trade. I would be interested in the mechanics of the trade, and opinion of the feasibility of doing the trade. Some questions:
- Can one enter a spread trade based on the size of the spread, without specifying specific buy/sell prices? That is, to enter when the spread between contracts is 8-tics or less.
- What are typical bid/ask prices in T-Bonds?
- Assuming the near and far contracts reach the anticipated spread at which one wishes to trade, how capable are floor traders at identifying the spread, and entering the trade as specified? How long must the spread persist for the floor trader to act?
- This concept is based on expectation that spreads will not, on an intra-day basis, become wildly disparate. Therefore, no stop loss points would be entered. How realistic is that expectation?
- Does anyone trade in a way that is similar?
Any general comments and contributions on this concept would be welcome. Steve 510-658-1050 Voice/Fax or e-mail address: CMVD52A@Prodigy.com
Losing Sight of the Long for the Short - Rick Ratchford
Short-term or long-term? Which do you subscribe to? If you are a short-term trader, you obviously like to get in and out of a trade in just a matter of a couple of days or so. If you are a long-term trader, you want to ride a move for most of its duration, allowing counter moves (retracements) to temporarily erode your paper profits in expectation of the market resuming its move in the direction you want to go.
Which is better? Well, that is debatable, and also depends on individual skills. If you have the skill to time short-term moves, you can make a good return short-term trading. However, if your timing is not that precise, you may find that long-term views of the market can make you richer. Even short-term traders, like myself, know the value of catching a long-term move.
Do you miss some good long-term moves because you focus too closely on the short-term gyrations? I know I have many times. And the funny thing is that the long-term move many times turns out exactly as I imagined it would, except I had imagined that I'd be in it when in reality it got away from me.
Consider that you time a weekly turn to perfection, then you go to the daily charts and time the very day to enter this new weekly move. Now, you get in the trade, and soon come upon a daily reversal. As a short-term trader, you might exit and wait for the retracement to end, once again affording you opportunity to get in at a better price.
Maybe you do this with precision once or twice, but on the third reversal, the market changes its mind and takes off in its original position instead of providing that pullback entry you wanted. Now you are missing the big move you knew was going to happen because you wanted to shave a few points off the top. This is what I call "Losing sight of the long for the short!"
Longer-term moves provide you with a higher probability of profitability. If you know that a certain market is likely to move up for a few weeks, why not just enter and hold for a few weeks? Well, the mentality of the short-term trader is to extract more from that move by not allowing it to move against his position then reenter. Of course, there is that risk of missing the rest of the move.
Don't lose sight of the Long for the Short. If you are a short-term trader, and want to take advantage of the more profitable long-term trades, you simply need to use a good strategy.
Enter your trade with multiple contracts if your account can margin it, and when you come to a retracement forming, merely exit part of the position while letting the rest ride the counter move. Once you suspect the move will resume into profitability, you can add those contracts back on. In the event it gets away from you, you at least are making money anyway.
Starting with multiple contracts is usually safer if you are properly margined, rather than pyramiding on each retracement. The latter can make your position top heavy and one bad counter move can wipe the whole cupboard clean. Start off with x-number of contracts first, then remove a percentage after profits during a retracement, and finally getting back in with the same number you started with allows you to play BOTH games, the short and long of it.
Learning Trading the Hard Way & about Ken Roberts, Curtis Arnold, Turtle Method, Elliott Waves, Robert Miner, etc. - Albert Castro
It seems that all successful traders go through a phase of learning the trade business usually within 3-5 years. We all seem to learn the hard way by losing money in the market. Some of us do quit trading after losing money. But some of us persevere and try to learn what we did wrong especially when we initially made money, but end up losing most or all of it later. Let me tell you what happened to me in the past 3-years and see if any thing I say may have or relates to you in any way.
I got interested in trading commodities back in December 1995. I kept receiving a brochure in the mail from Ken Roberts over and over again for about two-years prior to 1995. I finally became interested after being convinced about all the advantages of owning a business with no employees, no payroll, no inventory, short hours, small investment, and opportunity to make money. I used to own a business that had all of the above except short hours and making money. So you can see why I became attracted to this and it was only $200 to buy his course. I did not know too much about commodities at that time other than it was a risky type of investment and many people had lost money.
I received Ken Robert's package called "The World's Most Powerful Money Manual." I read his book and viewed the video and heard his audio tapes. One month had past by and I still did not understand his method. I started to use his alert line over the phone which alerted to the formations which had been described in his course. However, I could not get this information from the phone fast enough, so I bought a tape machine to record what was being said.
This still took too long and was costing me a large telephone bill, so I paid Ken Roberts $95 to receive a lifetime fax printout of this information. This was much easier, although it took me about an additional 2-months to understand what he was talking about. Well, of course, the fee of $200 was only for a 3-month trial so I had to extend the subscription for another 3-months. That's right you guessed it, this extension was for an additional fee. There is just no way that you can learn his method in less than 3-months. Unless of course, if you do not have a regular job, a wife, no kids, no friends, no other interest, and are willing to devote all of your time learning this. At this point, I was about to quit being frustrated in not understanding his method of trading. But I am not a quitter, although I could see why many people would quit at about this time. I would guess that over 95% of students quit by this time. Ken Roberts does offer seminars, workshops, and additional videos to help you understand. But this is for an additional charge and much more than the initial $200 investment.
After about 5-6 months had past viewing his videotape again and again, paper trading, and following his method, I finally got a grasp of what his method was. It is simply a bottom and top formation strategy. There was a problem with this method in that there weren't too many trading opportunities. I was paper trading everyday looking for opportunities which were far and few between. Also, when you entered a trade, the protective stops were wide with the possibility of losing $3,000-$5,000 on each trade.
Well, I decided to put real money in the market. I started with $5,000 and had a open long position to buy one German Mark and one short position to sell one US Dollar Index contract. I waited about 3-weeks before the DM rallied and the US Dollar fell quickly. I made S3,000 in one day. That was easy money and it felt really good. I became excited and decided to purchase his Option Manual, which I read and studied for about 2-months. I now took action to buy options. In addition, I purchased another book called -"Capturing Full Trend Profits In The Commodities Futures Market" by Collin Alexander, even taking it on my vacation to read. Before I left on vacation, I decided to have open trades using his methods and one with Ken Roberts method. When I returned from vacation in one week, I had lost $5,000. Ken Roberts discussed protective stops but as mentioned, his stops were too wide and you can lose $3,000 easily on each trade if the market goes against you. I did not get a chance to read about protective stops in Collin Alexander's book before I took the trades. Also, later I lost about S2,000 trading options which expired worthless. Now I was feeling depressed and now realized that I needed to know more about the markets before I traded again.
I often wonder why Ken Roberts' counselors were working for him since they could have easily made so much money using his method. It wasn't too long that I realized that trading was a business that required knowledge, skill, and money to make money. It was no different than any other business other than you don't have the same headaches that I previously mentioned.
Using his method is fairly simple and if you had his money and enough patience, you could probably make money. You should trade with an account of $25,000 or more and this money should be money that if you lost it would not change your lifestyle. I feel that I am generally a patient person, but waiting for his formations to develop does take a lot of patience. I required just a little more action.
Well, by this time I became very interested in trading and I wanted to learn as much as I could. I purchased an excellent book called Curtis Arnold's PPS Trading Systems. This was an easy book to understand, it was fun to read, and he showed you a real proven system. However, you also have to show a lot of patience to use his system which is conservative and does not take in the big moves. You generally enter in the middle of a trend.
I also read Schwager Technical Analysis on Futures. This was a very difficult book to understand and had so much information about many things.
I also read the Turtle Method which is nothing more than trying to catch the breakaway of a trend. This is a very simple method to apply, but you will have many more losses than winners. However, you will always be able to get into the beginning of a big trend which you hope will eventually make up for the many losses. Trends don't occur as often as you would like. In fact, trends only occur about 15% of the time.
I read about technical indicators and Oscillators such as the Moving Averages, Divergence, and others. I learned about Elliott Waves by attending a seminar provided free by AdvanceGet who is selling an Elliott Wave software program. Elliott Wave is by far the most difficult concept I have ever come across. It has taken me about one year to learn and apply this method.
Editor's Note: It's surprising and also curious, why so many traders try to use Elliott Waves in their trading, when they appear so difficult to use successfully. It seems counting market waves is far from an exact science! It's believed if you show a number of traders the same chart and ask how many waves they see, you probably would get almost as many answers as there were traders. This is due to the definition of a wave being highly subjective.
Now where am I, now after losing already $7,500. By the way, you can write off this as a loss in your tax return at $3,000/year, but you can also write off all of your expenses if you use Schedule C. I suggest you read The Traders Tax Survival Guide by Ted Tesser, to learn more about this. As you can see, I read many books, attended seminars, and paper traded. I also have a software program called MetaStock and I receive data from Reuters for all my commodities. This is an excellent program for the price.
I tried using Omega TradeStation software for a month trial, but it was too difficult to understand and apply so I had to return it. I also tried the Elliott wave software Win Wave, but it was just too expensive for what it gives you in return.
What am I doing Now? Well, 8-months ago, I purchased a book by Robert Miner, called Dynamic Trading. This is an excellent book, but has taken me about that long to understand and apply. This method is uncanny and accurate and allows you to look at the market from an overall perspective. He provides free Internet information on how to trade his method and he sells a software program to make your trading easily. He also sells a weekly newsletter to show you what trades he has taken and why. He uses the Elliott Wave, Time and Price Projections which is amazing to me how it really works. However, it will take you 6-12 months to learn and apply his method.
I believe that this will be the last stop for me. I will be using Robert Miners Method, but will keep my eye out for breakaways from the Turtle method, and patterns from the PPS system. I am working on the trading plans and rules on when to enter and exit a trade.
It is very important that you understand what your trading philosophy is (are you a short-term trader, day trader, position trader, etc.) and develop a trading plan and rules to achieve positive results.
I have learn the hard way to trade so far, but I have persevered and now I feel I am about to take off. This has been a long and expensive education for me but I know it will pay dividends from now on. I have a lot more confidence today than ever before and I have developed a "feel" for the market which can only be received by studying, learning and practicing the markets.
I realize you must look at trading as a long-term journey and picture what kind of money you will make in the next 5-10 years, not within 30-days. Look at where you would be now if 10-years ago you successfully traded for that time period. It won't be long when I will be in a position to trade with $25,000 capital (money I can afford to lose without changing my life style), but will already have the knowledge, skill and confidence to trade the futures market.
"What Goes Around Comes Around"
J. L. from Wimauma
I've always observed that we come into this world on 4- wheels on the trip from the hospital, get our first tricycle, then a bicycle, then in retirement a tricycle, and yup, the hearse has 4 wheels. Reminds me of my trading when my first trade 15-years ago (a day-trade) made me $1,800 -- like hitting the jackpot on the first pull. So naturally I tried options, scale trading, swing trading, back to options two months ago and now back to day-trading 2-days ago. As I've said before, it's awful to know how to make money and not be willing to. When I make money for my friends, I tell them "Don't worry, I'll trade your account the same way I do mine." They should worry. I should trade mine like I do theirs!
Examples: A ten-year-old could learn how to buy a cheap commodity with enough capital behind him, and make a pile by just rolling over and eventually taking the profit! A twelve-year-old could learn scale trading and, properly done, make more than Dad in the stock market! I'll say it again. Commodities are at the same time the greatest investment in the world and the riskiest trading instrument there is.
Talk about the ultimate "Know thyself!" I couldn't have guessed that I am really a hopeless "researcher" (from "search again"). Finding something that works forces me to find something else that works! A trader friend says, "Don't bother me with details. Teach me to press a button and the money rolls in." I've got to know the whys and wherefores and "It ain't the money." My Catholic upbringing probably had one thing right. "Money (per se) never made anybody happy" (so why not just give it all to us).
My decision to go "back to my roots" wasn't a whim. When copper twice and now the Canadian clobbered me overnight, I say enough. (Tip -- If someone had told me I could place an overnight stop in the EFP (Exchange for Physical) market, I'd be $1,000 richer today!) Ignorance is so expensive!
When a market must do one of two -- two-bar patterns in order to reverse, I'm seeing that intra-day bars work the same as dailies. We've all heard of Buy-Sell price envelopes, but what about TIME envelopes? The intra-day bar stuffs the daily bar stuffs the weekly bar stuffs the monthly. Can someone out there do something with that? Like for instance, signals within signals? (Tip -- My "3-strikes and out" means that if within 3-consecutive bars that you're trading, prices don't go your way, hit the Exit button -- if you haven't already been stopped!) No more hoping and praying allowed!
Well enough rambling. I tend to put down computer "nerds" who get too involved with their programs, but I'm no different if I'm also in it for the "entertainment." It seems to me that the guy with enough "surplus" money can afford this "hobby," and the guy who really needs the money can't afford to trade! Is that crazy or what?
I think I've got it! If making money at something is called a "job" and hobbies usually cost us money, still many of us would prefer a hobby! "Fun" is rarely free. (Would you give up your boat or your golf?) If Larry Williams could teach us his incredible WILLINGNESS TO PROFIT, he'd really have something. Get to work on that, Larry! I leave you with: "Your next trade is the first trade of the rest of your life and your account." Therefore, don't base it on your last trade. I know I ask the impossible. Healthy trading to all!
Plan the Trade, Trade the Plan - Rick J. Ratchford
Working with as many traders as I do you tend to spot many different attitudes toward trading the markets. Those who seem to remain in the game for more than a brief visit have a certain "type" of attitude, while those who are here today and gone tomorrow have yet another "type" of attitude.
Although all traders are unique in personality and how they address/view the markets, after some time of reading messages sent to me or the membership forum, it becomes somewhat apparent what 'group' a trader likely falls under. This article is not meant to deal with the varying groups as it were. Rather, to point out some observations I've made over the years of working with many different kind of traders.
For example, there is a group of traders that fall under the heading of "No Time/Effort." These are ones who want to trade their own accounts, rather than letting someone else do it for them, yet do not have or want to take the time to do the necessary homework to plan their trades. Instead these traders want someone to tell them what to trade, when and how, every step of the way. In other words, they want to trade someone else's plan without letting that individual do it for them. It is this trader's opinion that these traders are confused, for they want to initiate the trades which are not theirs to begin with, but someone else's, and feel it is their own. Futures trading is not likely the best forum for these traders to dabble in.
One person trying out our membership for the first time, after just two weeks, wrote and said that he had no time for following the markets and dismissed himself. It became clear in his message what group he fell into, and you can only wonder why he would pick futures trading and all its volatility to put his money into if he wasn't going to put in any time at all to plan his trades.
It appears from much evidence that those who continue to trade beyond their first year or two are traders serious about learning how to make their own trading decisions, so they can plan their trades and trade their plans. They know that some homework is required prior to each trade, and that there has to be a reason for putting on a particular trade (plan). These ones soon learn that when they jump into a trade without proper planning, that they end up getting their account chewed up some.
In our membership we have different types of traders. There are those who have been with us several months to nearly 2-years, and there are those who come and go, and come back again, trying out different methods here and there. Also, we have the quick here today, gone tomorrow trader, who can't keep focused, but is looking for a get rich quick scheme. Yes, we see all kinds here.
The focused trader needs only to identify a good methodology that fits their personality and time frame (i.e., short/medium/long-term trading.) Then, when such a methodology proves to be effective, to work hard at it, give it proper amount of attention and time, and become good at it.
What it comes down to is that the trader needs to learn how to plan the trade, then trade the plan. Must stick to a strict method of approaching the market. What does the methodology require? Figure out support/resistance maybe? Note two or three indicators possibly? Some of each?
Whatever it is, if you do it consistently when evaluating the markets prior to putting on the trade, you are then "planning the trade." If you then put on the trade based on your consistent use of your current methodology, then you are "trading the plan." This is the formula for a successful venture in futures trading. If you do not have the time to do this, find a good money manager for a mutual fund or stock portfolio and forget about futures trading.
Having someone trade your futures account is a frightening thing to consider. You could see your capital vaporize before the ink of your signed contract even dried. Want to trade futures, then prepare to learn how to trade first and develop an approach. That approach then becomes your means of developing a plan for each trade. From there, after you plan the trade you wish to make using the methodology template of your choice, stick to it! Trade your plan exactly as you had earlier decided you would. Don't deviate on the fly! Don't modify! If you are for some reason not sure of what you are doing, then get out of the trade. Once you do that, you can think with a clear head on whether your planning needs tweaking.
If you feel you are currently in the group of traders who do not want to take time to do the homework, the planning, but would rather have someone else tell exactly what to trade, sits back and re-think this desire. What are you trying to achieve? Long-term capital growth? Short term speculation? Just maybe you are looking in the wrong arena for what you are trying to do. Get rich quick? Forget it. You will need to make your own decisions and trade them yourself if you want to get rich, and not so quick at that in futures trading.
Reality sinks in rather quickly when your account is cut in half. No plan means no money. Therefore, for those who have decided that trading futures is the way to their personal goals, then here is what must be done.
üLearn a method of approach -- Sometimes this requires that you contact others who have been using the method and see how they are coming along with it. Regardless of the method, no two traders will have the same results. Some fail with a winning method, so it will take homework on your part to separate the methods from the traders themselves to get a good idea of whether you are willing to try it out. In any event, find and learn an approach to the markets.
üFocus on that method until you build confidence in it. -- Once you find that the method itself is good, you still need to learn it. There are simple methods, and more complicated methods. Simple is not necessarily good, nor is complicated necessarily bad. Enough time and effort is needed to test a method and build confidence in it. Especially when the method is different than that which is used by the majority, it takes time to get past the doubts by seeing it in action a few times. Test the idea without investing your money, such as in paper trading. Of course things change when you start using real money, but you will at least see if the method works or not, and you just have to work on you when it comes to real money. Stay focused on the method and don't let your eyes keep wondering from one method to another.
üPre-plan your position trades, or your approach during day trading, so there is no confusion when it comes time to trade. -- Trading on a whim is bad form. Gut feeling may be good for some, sometimes, but it hardly is effective for the majority. If you are a day trader, or are working towards this, you want to get it fixed in your mind what it will take to initiate a trade. This requires having decided how you will make the decision to buy, sell or exit, in advance. If you are going to position trade, then you need to plan the trade before the market opens, and then look for the situation to enter based on your pre-planning. Then, when the time comes, there will be no confusion how you should act.
üTrade the Plan -- Believe it or not, but even after a well-thought out plan, some still abandon it right at the time of decision because of fear, greed or both. Self-sabotage starts here. The purpose of the plan is to remove the emotional factor that has ended many a trading career. Stick to your pre-planned strategy or stay out of the trade! When you wrote out the plan, your head was clear, you were calm and comfortable. Now that the markets are opened and you are watching the prices move, you may start to second guess what you planned, or forget the details of your plan, and other emotional bombardments going off in your head. Trade the Plan! If you have a good methodology, the plan will call for an escape move in the event the plan was wrong, and the loss should be small. Don't rewrite the plan on the fly! Your whole trading career could rest on your ability to follow this one simple suggestion.
Do not be in a hurry to learn. If you are impatient, you will not fare well. Take your time and learn to do the planning right. If you are involved in learning a new method and don't understand something, make sure you can get answers to your questions. If you cannot, then you better find a different method. There should be no questions how to approach the market when you are forming your trading plans.
Some new traders feel that they will be different from those before them, and that they don't feel it is important to "plan the trade and trade the plan." Maybe some can get away with it. But just remember this if you are still trying to get a grip on trading and have yet to do so. Remember when your parents would try to teach you something and you felt you knew better. Now you are likely a parent, or at least older now, and can see how foolish your thinking was back then. Experience dictates that you need to take time to learn, to build confidence, to plan the trades, and then to follow through. Don't make that same mistake again.
Chicago Board of Trade Floor Traders Know Where the Stops Are
The activities of the Chicago Board of Trade (in a recent 2-week period) have negated any rational thought processes regarding the fundamental and technical aspects in Soybeans, Wheat, and Corn. What is occurring seems to be this: The "heavy" interests start the chaos by initiating a large, perhaps 5 to 20 million bushel sell-short-at-the-market order, which in turn, causes the bids to be lower, triggering commodity fund stop-loss selling. The floor locals know where the stops are, so they also sell short to drive the price even lower. The locals can short tremendous amounts of a particular contract, as they aren't required to have any margin, just as long as they are out by the close each day.
The commercials, who always scale buy on the way down, and scale sell on the way up, normally take the buy side of this activity. By this time, the market is in full retreat.
The small traders' stop-losses are hit by now, with the originators of the rout and the commercials taking the buy side on the scale down. Finally, the market, after losing 8 or 10-cents in a few minutes, stabilizes. Locals have cleaned out all stop-losses in the immediate vicinity, and they cover their short sales by buying from the last of the stop-loss sellers.
The heavy-duty interests, who started the debacle, have covered their short sales on the scale down, and are net long by now. To add to the fun, they buy 5-20 million bushels at-the-market! And up the market goes! This is seen by the jackals (Oops!), locals, who once more smell the blood of stops above the market this time, and they load up now on the long side.
That does it for the Harvard boys at the commodity funds! Their black box stop-buys trigger in, causing the market to go further up, with the commercials selling on a scale up, all the positions they bought originally on the scale down. CNBC, FNN and DBC get on the TV and Internet, spoon-feeding listeners something about El Nino, or cold weather. By now the Account Executive with the commission house has finally gotten around to call poor Joe Doe to inform him that he was stopped out of the market to the downside, but the market looks good again, and he better go long again because it looks like it's going to the moon!
Joe Doe takes the hook again, buys just as the last sell orders are executed by the heavies, commercials, and locals. At this point the market is back to unchanged for the day! The heavies have made a bundle on both the downside and upside. So have the commercials and locals. Let's see. Did I leave anyone out?
Barriers to Learning - Chris Majer
Many people miss opportunities to learn something worthwhile due to various mental barriers. They may fall under one or more of these categories:
- Characterizing oneself as unable to learn.
- Attitude that you already know the information.
- Lack of Self-Confidence/Resignation
- Isolation from Others
Trading is a very broad field in terms of the amount of things you can learn. So many different theories, methods, techniques and directions one can go in learning how to analyze, trade or forecast price action. Different major fields, such as Technical Analysis or Fundamental Analysis, or a combination of the two. Indicators or systems, real-time or delayed, long-term or short. Fibonacci or Gann (or both). Fixed or dynamic cycles (Fdates), astronomy or chaos theory, and so-forth.
Say you like to use indicators and chart formations. There is a big following in that type of analysis. However, by close examination you will find that the majority who use this type of analysis are also not succeeding. Actually, the majority in just about any method is not succeeding. Some methods are esoteric, not of the mainstream. Do you find yourself, as an indicator type analyst, having a negative view of methods that are so different then the one you find yourself currently comfortable with? Do you think that wise if you are not succeeding with your comfortable way of analyzing?
Here are several reasons why many people miss opportunities to learn something that may improve their trading.
Characterization of Ourselves or Others
Many of us perceive our incompetence as a permanent feature of who we are. We fall into stories such as:
- I don't have the aptitude
- I don't have the talent
- I don't have the knack
- I'm not smart enough
In these stories, there is no Possibility for learning.
The biggest barrier to learning is knowing. When we live in a story of already knowing, we cannot see that which is new as new.
I already know this, this is just another way of saying/doing______.
This is the same as ______.
There is nothing new for me here.
This is a form of arrogance and blindness. We assume that the world can only be the way we see it. This stance precludes you from being on the lookout for opportunities to learn.
There are thousands of examples of how business opportunities were lost because people saw what was new as more of the old. IBM offers us two classic examples. They did not see anything new or special when they were presented with the first photocopier. This missed opportunity became Xerox.
Similarly, 20-years ago, IBM saw that the future of the computer world was in hardware. They saw software as being an ancillary consideration, so they decided to contract out for this service. The contract went to a little company called Microsoft.
Lack of Self Confidence/Resignation
We also close ourselves to learning because, even though we see the new as new, we fall into:
- I could never learn this
- I'm not smart enough to know this
- I'm not good enough to know this
- This is too complicated for me
- This is too hard
I could carry on with an endless list of reasons behind which we hide when learning opportunities occur. The main theme for each of them is "There is something wrong with me." This is a common, yet tragic, interpretation that is universally ungrounded and inhibits people from creating the lives they want or to be able to trade successfully.
Isolation From Others
A classic mistake is to think that we can learn on our own. One of the unfortunate realities of our business world is there are two conversations that are unofficially forbidden -- or at least we act as if they were. The first is "I don't know," and second is "I made a mistake." In the absence of permission to have these conversations, we find ourselves hiding our lack of competence and attempting to attend to it on our own. This shows up as:
- I don't need a coach, I can get this from a book.
- I don't want anyone to know that I don't know, I'll do this on my own.
Learning is a social phenomenon and is best accomplished with others.
How To Be An Effective Beginner
The first step in the process of learning is to acknowledge that we don't know.
- To learn is to be introduced into the unknown; we accept we do not know.
- When the instructions don't make sense to us, they don't make sense because we don't know. We don't know because we are beginners.
The second step is to authorize a coach, to find someone from whom we can learn, someone who can teach us.
- The only way to move when we don't know is to trust the coach and to follow his or her guidance.
- We grant this person authority and trust.
- When we grant authority, we are saying that we are willing to submit ourselves to this person's guidance and accept instruction.
The third step is to accept and be at peace with being a beginner.
- This is stage in which we will be awkward, make mistakes, appear foolish, etc.
- There is nothing graceful about being a beginner.
When considering to learn any methodology, you want to make sure that someone will be available to assist you every step of the way to facilitate your learning. Learning from a book is fine to get the basis and terms down, but nothing beats experience, and that is where a coach comes in. You wouldn't try to learn Karate from a book alone, would you?
Establishing Supportive Learning Community
Isolation is a barrier to learning, so it's important to find or build a community of people with whom you can learn, speculate and think.
- Creativity rarely happens in a vacuum.
- Understanding can occur in private. Learning is a social process.
Practice, Patience and Perseverance
Practice, patience and perseverance are the three hallmarks of a committed beginner.
- Practice - The way to embody a new competence is through DOING again and again and again.
- Patience - Being at peace with the fact that learning takes time.
- Perseverance - Continuing to practice in the face of doubts, bad moods, other people's assessments, being willing to endure through our own negative assessments.
Moods and Postures of Learning
Success in learning depends in part on how open we are in our mood and posture.
Arrogance -- "I already know. I don't need to learn. There is nothing you can teach me." -- Closed posture
Confusion -- "I don't understand this, and I don't like it, so please give me the answer." -- Rigid or paralyzed posture
Perplexity -- "I don't know what's going on, and I don't know if I like it or not, so tell me more." -- off-center posture
Wonder -- "I don't have the foggiest idea what this is, but I like it, and I want to learn." -- Open and centered posture
Ours is a world where learning is no longer a luxury. It is now a necessity, but also an opportunity to explore new possibilities and the rich and tremendous rewards that the learning process has to offer -- as well as the results we can create along the way. Anyone can learn a method new or different to them, if their learning posture is open and centered.
Extra Stuff About Internet Based Futures Trading, Data & Trading Books
George Famy from France
Here are a few things I'm working on or thinking about. Maybe some CTCN readers can help me.
1. Internet based Futures trading -- I'm familiar with most of the companies offering the service. But until you actually try to put real orders into the pit (S&P 500 in my case) you can't know the effectiveness of the system. I say it because most of the Internet trading platforms offer "practice" sessions where you can enter hypothetical orders, etc. Although this is worthwhile to understand the order entry process, it doesn't answer my biggest fear. I understand orders passed via the TOPs routing get executed by brokers standing next to the (order producing) machine in the middle of the pit.
The big problem is when it's busy these TOPs routed orders build up in the machine and your "market order" may be behind a long queue. This is called "queuing up" and I'm wondering how bad can it get. Has anyone traded using ZAP Futures, or any other of the Internet based platforms during BUSY PERIODS when the market was "moving?" What is your impression of the "latency" of your orders arriving in the pit? I daytrade the S&P 500 and obviously this is of utmost importance.
2. Anyone trading the Mini S&P? How are the bid-offer spreads when you go to trade and how are the fills?
3. Forex Data -- I'm looking for 20-years of daily Forex data, i.e., major currency pairs and crosses. I'm referring to 24-hour cash Forex data with London opening. Does anyone knows where to go for this?
4. Let's stop talking about it and JUST DO IT! I'm all for the library (book) exchange. These damn books are just getting more expensive by the day. There are many books over $150 now. I know because I have a few of them! A book exchange would be good because you can always buy the books you read and liked or those "must have" books that you don't want to wait to borrow. Otherwise the book exchange lets you read everything and spend your money on data, software and hardware.
By the way, two modestly priced books I've recently read and found above average were Perry Kaufman's "Smarter Trading" & Cynthia Kase's "Trading with the Odds." Both are written by "street smart" traders, but also have some interesting mathematics applicable to trading & managing risk.
"Pitbull" by Marty Schwartz is really a fun book to read although I wasn't able to "decipher" more than just the general concept (approach) of his trading method.
Anyone read Advanced Trading Strategies by Connors? Is it worth the fancy price tag?
5. I've seen two interesting Internet based Forex trading platforms from CMC and GNI both in London. You receive real time data and have a few seconds to "deal" (trade) on the quotes given to you by the dealer. It doesn't get any better (more fair ) than this. My problem is that I trade futures also. How many platforms does a trader need? I'm in the process of upgrading my equipment and it's too darn complicated to figure out my software and hardware needs for the next couple of years. Isn't possible to have one software (trading platform) that has a real time data feed and where you can execute Forex and futures?
6. I'm being told that the fastest and most dependable connection to Internet is a '"T3" connection directly to the "backbone" of the Internet. Which Internet service providers (ISP) give this type of connection in the U.S.? Anyone tried a cable hookup to Internet using a cable modem? How well does it work and who offers it?
I'd appreciate any helpful comments from CTCN readers. Contact me at azurGT@aol.com
"Bad Data": About Glen Larson & Genesis Financial Data Service Issues - "Limited Recall" - Tom Beno
As many of you know (and for others who don't), I've been "negotiating" (arguing) with Genesis Financial Data of Colorado Springs since April regarding Genesis' continued sales of Pricing Data known to contain numerous errors. During the process, I've been lied to, put off, re-directed, challenged, threatened and ignored by Genesis' president and owner, Glen Larson.
In May, Larson threatened me with legal action, as he tried to buffalo his way past my discovery and exposure of his Bad Data. When I showed him proof of my claims, the threats suddenly disappeared and an email parade (80+) began.
I documented the errors to Larson and met with wall after wall of denials, finger-pointing, excuse after excuse, before he twice - in writing - finally admitted them. It turns out that Larson had know about the errors for up to a year prior to my talks with him. Therefore, he's been scamming the public for about 18-months, possibly longer.
I requested that Larson notify the marketplace that the product he's selling is faulty. (Note that I have no financial stake in this issue. I returned the bum data long ago and got my refund. I'm on record that if any financial benefits are derived from this situation, every penny will go to a non-involved charity). I'm insistent that Genesis responsibly admit the errors and stand behind their product. Larson has refused. His position is effectively "Customers are on their own. It's not my problem."
I don't agree. I've repeatedly requested to Larson he answer my claims openly - on the forums and newsgroups where I've posted my complaints, where Genesis customers, potential customers, and interested but unbiased observers can decide, and I would abide by the majority opinion. We could both openly state our positions and let the public determine if he's scamming and covering up or if I'm wrong in exposing him. Larson refuses.
I began occasionally posting my unpleasant and on-going experiences with Genesis to several chat forums as we continued discussions. Larson didn't like the negative Internet exposure, asked me several times to cease, yet he still refused to provide admissions and corrections to those who rely on his data for trading analysis.
On June 9, I offered that if Larson would agree to make a contribution to a federally-recognized, fully tax-deductible charity in a neutral state, I would stop exposing him on the Internet. He led me to believe that we'd struck an agreement. I should have known better.
Larson reneged on the contribution to the charity, and instead on June 26, he tried to buy my silence with another tactic. His ploy: "Since you are very good at finding data errors, I would like to offer perhaps a proposal that will benefit both of us. I would like to offer you free updating as long you need. All you need to do is let us know immediately of any errors that you may find."
Such a deal. I (politely) told him where to stick it. On July 9, the offer was this: "I would like you to have the data ... I hate to admit it, but the most critical people of data are just those we need using or looking over our data... "I told him no way, I didn't want any more of his Bad Data, and I wouldn't use it under any circumstances. (Would you?)
He shipped it to me anyway, trying to "close out our problem." It's still sitting here, unopened. Larson danced, dodged, and delayed his way thru yet another month of BS with me, resolving nothing. On 8/5, he again offered: "I would request if there isn't someway that we could compensate you, using our data services and products." I again refused. (Would any readers of this ridiculous saga be comfortable in dealing with this company?)
I began increasing the number of Internet postings, and copied Larson on them. It hasn't been enough to force him into an ethical, responsible solution to the problem, but it served to raise public awareness of it and to advise people to watch out.
In September - as I promised Larson - I started to seriously attack this scam in public, actively posting my experiences with Larson and my opinions about it to a variety of newsgroups and financial forums. This one is also being copied to Futures Magazine, Stocks & Commodities, Investors Business Daily and the Wall Street Journal. Whether it gets printed or not, I don't know. But the dishonesty is blatant, and I'd like for others not to be taken in by it. In my opinion, this deliberate deceiving of the public by selling a product with known defects is fraud, and Glen Larson is the owner and perpetrator. When the smoke clears and I've exposed him sufficiently on the Internet and in trade publications, I'll turn my findings and documented discussions over to federal and Colorado State authorities. Maybe they can ask him some questions and explain to him what the terms "ethical" and "responsible" mean.
Larson has refused to respond to my messages since Sept.12, but I continue to send him copies of my Internet postings anyway (including this one). I offered to withdraw or make adjustments to my claims if he could disprove any of them. He's declined (even though I sent him notification of my intent by Certified Mail).
Behold -- early last week I get a meek little form letter in the mail from Genesis. Larson is still pointing fingers elsewhere - anywhere - everywhere this time at Omega Research, and only for certain products - even though (on May 11) he said "I didn't think we have a relationship with Omega for several years." Right, Mr. Larson - so then how exactly are they responsible for you selling Bad Data?
But at least he's finally and publicly acknowledged that there's a problem with his data. He won't refund your money, of course - he's only offering to "replace" the Bad Data with - what else? More of his Bad Data.
The "scam" continues. Call Mr. Larson, if you'd like, but expect whines, denials, complaints, dances, finger-pointing, and other excuses not to give you a refund. He's a sweet-talker, but, the "facts" are as you've read them (above). Perhaps Larson can explain why its taken 80 emails, 6-months and relentless Internet pressure for him to make right on his own product and he still won't give customers their money back.
His form letter is undated. It finishes with "If you have any questions about this offer, please call us (800-808-3282)." If you email him directly (GLarson@GFDS.com), bring your hip-waders.
A Hard Look at Daytrading
Technical Traders Bulletin
We receive more requests for articles and advice on day trading than on any other topic. Beginning traders are especially interested, particularly those that have been attracted by the glamour and intensity of the pit traders who seem to be constantly jumping in and out of the markets and reaping enormous profits.
It seems like almost all traders have tried day trading at one time or another. After all, it is very tempting to try and slug it out with the pit traders. Every tick is exciting. Every rumor or news item that affects the market either creates euphoria or is another nail in the coffin. When you have a position on, you can't stand the pressure, but if you're not in the market you tear your hair out every time prices act the way you predicted. Your heart pumps fast, your adrenaline surges, and you feel like you've finally arrived in the wild and woolly world of fast-paced futures trading.
All of this sounds like fun, but as you might imagine, there are many, many pitfalls along the way. We've come to realize, after talking to numerous traders who have attempted or are about to begin day trading, that most traders who start are not fully aware of the scope of the problems they face. To some readers the following discussion may be redundant, but we suspect that many of our subscribers may be embarking on a venture with only a limited grasp of the basics.
Cost of Doing Business is High
The day trader enters and exits trades during the same market session, normally a period of only four to six hours from opening to close. The very short term nature of day trading presents both advantages and disadvantages. The major advantages are the lower margin requirements and the absence of overnight risk. The disadvantages are the bad odds, time and effort required, the limited profit potential, and the burdensome costs of frequent transactions.
The transaction costs consist of both commissions and slippage. The commissions are a large and obvious cost of doing business. However the slippage is much more difficult to quantify. The trader might have a mental image of trading at the prices shown on a computer screen, but in reality he must continuously buy at the offered price and sell at the bid price. The spread between the bid and offer becomes a very substantial but hidden cost of doing business. In addition, as most of us have learned many times over, it is unrealistic to expect stop orders to be filled at our stop prices.
In the meantime, to offset these unavoidable costs, the day trader is limited to very small profits when he is correct in his analysis and completes a winning trade. Under even the most optimistic scenario, the day trader's potential profits are limited to a portion of the price range that is likely to occur within a few hours of trading.
Let us assume that our day trader has negotiated a discounted rate on his day trades and is paying twenty dollars per trade. Next let's be optimistic and assume that the spread between the bid and offer amounts to ten dollars buying and ten dollars selling. In order for the trader to complete a trade that nets $100 he must be smart enough to identify a move of $140 according to the prices on the screen he watches.
On the other hand, when his timing is wrong by only $140 he is going to lose $180. It doesn't take a Ph.D. in mathematics or an M.B.A. from Harvard to figure out that this is far from an ideal business environment. In fact, even the professionals on the floors of the exchanges must be intelligent, highly disciplined traders just to survive.
The public doesn't realize how many of these professionals fail in spite of the advantage of being on the floor and paying only minimal costs per trade. Imagine how small the odds for success must be for an off-the-floor trader faced with the costs we have described.
To have any hope of success, the day trader must strive to maximize the profits on the winning trades so that he can overcome the tremendous disadvantage of both the obvious and the hidden transaction costs. Unfortunately, the day trader has very little control of the potential profit to be obtained because the extent of the price range during the day absolutely limits the maximum profit that can be realized.
No trader can reasonably expect to buy at exact bottoms or sell at exact tops. A very good trader might hope to be able to capture the middle third of an infra-day price swing. That means that to make $180, the total price swing must be three times this amount or $540. How many futures markets have a daily price range of $540 or more? Very few. How many futures markets can produce a $180 net loss? Almost any of them.
Don't forget, the trader that is smart enough to find markets with $540 price swings and then smart enough to trade them correctly so that he nets $180 is only going to break even unless he has more winners than losers. To make money in the long run, the day trader must have a percentage of winning trades that is far better than 50% or he must somehow figure out how to make more than $180 on a $540 price swing. (or best of all, do both) This also assumes that the trader is smart and disciplined enough to harness his instincts and emotions and carefully limit the size of the losses.
Beating Tough Odds
As you can see, the day trader is faced with an almost impossible task. We would venture a very educated guess that less than one out of a thousand day traders make money over any sustained period of time. Our best advice is to not even attempt it unless you are one of the many traders who is actually trading for the recreation and mental stimulation rather than the money.
If you are serious about making money, your time and energy will be much better spent perfecting your longer term trading skills. Even if you should succeed at day trading, it is difficult to reinvest the profits and continue to compound them. Day traders can only operate efficiently in very small size so don't expect to make your fortune at it, it's only a very enjoyable but hard earned living at best.
In spite of our sincere warning, we know many of our readers will attempt to beat the odds and become day traders for a while. Fortunately, the lessons learned while day trading can be applied to more serious and productive trading later on. In the meantime, we will do our best to explain as much as we can about day trading and hopefully make the learning process less costly.
Obviously, we don't have all the answers ourselves or we wouldn't have such a negative outlook on the probability of success. We certainly have learned a great deal about this subject over many years of trading and the fact that we have elected to no longer play this game simply demonstrates our personal preferences in the allocation of our productive time. We hope whatever hard-earned information we can pass along proves helpful.
Selecting Best Markets For Day Trading
As we pointed out earlier, there are very few markets that have wide enough infra-day price swings to make them suitable candidates for day trading. Because they must monitor the prices so closely, day traders generally prefer to concentrate their efforts on only one or two markets. In addition to the fact that the prices must be watched continuously, there are very few markets that are suitable even if we had the capacity to follow more of them. Presently, day traders seem to have given up on pork bellies and tend to favor the stock indexes, bonds, currencies, and energy markets. From time to time other markets may become candidates for day trading because of temporary periods of high volatility.
We ran a test (several years ago) to see what percentage of the time various markets had a total daily range of $500 or more between the high of the day and the low. There were only five markets that had a $500 range at least two days a week or 40% of the time.
In addition to looking for a wide daily range, liquidity and the size of the minimum spread should also be factors to consider when selecting suitable markets for day trading. Our previous example of costs included paying a spread of only $10 on each side of a trade.
In the S&P market a minimum spread would be $25 each side while in the bond market a 1/32 spread is $31.25. If you are day trading bonds with $20 commissions, you must overcome total costs of $82.50 added to losses and subtracted from gains. Your average winning trade must run $165 farther than your average loss just to break even. This assumes a 1-tick spread which is the best case possible.
The element of liquidity comes in to play in determining the number of ticks in the spread between bid and offer. A one tick spread is the best you can hope for and most markets have a wider spread than that.
You can usually assume that the higher the average daily volume, the tighter the spread. For that reason, you will want to concentrate your day trading in only those markets with very high volume. Otherwise, you can be making good timing decisions and still be assured of losing money.
Part 1 - Why Are Futures Traders So Grim? A Collection of Satire and Stuff
about the Futures World (and you might even learn a thing or two) - Ted Nash
Futures trading can be a grim affair
with fear and greed flying everywhere.
Of course I realize to a certain degree,
as a noble pursuit, it has to be.
This constant whirl of emotion in motion
needs some relief, so I took up the notion
to apply some humor that might provide
a satirical look at the lighter side.
There's also some straight advice to explore
that can help if you're still a sophomore.
And even you wizards might appreciate
some of these attempts to infuriate.
If you're ready to begin this poetic journey,
come by yourself without an attorney.
But the party you don't want to leave behind
is your good companion - an open mind.
CHARTING FOR THRILLS
You study your charts and you work out trades
that conform to your technical analysis.
Then your anguish flares and your courage fades
as you freeze in your tracks with paralysis.
When this comes about, review your findings
so that nothing is left undone.
Then shake out your goggles, check your bindings
and push off for a breathtaking run.
With your thighs burning at the bottom of hill,
your face aglow with pleasure -
you'll look back on your course and relive the thrill
that your memory will always treasure.
If you don't take risks, forget your schemes,
for they'll never come to pass.
Just carve your course in the race to your dreams
and then listen to the anthem of brass.
What's a nice, sweet, little market like you
doing in a place like this?
With all these unsavory characters -
it's hardly a state of bliss.
There are all those mines with their squalid digs.
The oil fields with their grimy rigs.
The cattle carcasses hanging on their hooks.
The copper crowd with their manipulating crooks.
The lumber ravagers with their sawing and hauling.
The greasy pork bellies with products appalling.
So, my sweet sugar - you're just too refined
for these blue collar clods, so subpar.
Hang out with your coffee and cocoa kind
and stay as sweet as you are.
The price dropped a lot
and from this you thought
that it looked like a buy
so you gave it a try,
but you had good cause for concern.
For bottom fishing
will have you wishing
that you'd held off a bit
before making your hit
as it's better to wait for the turn.
For instead of reversing
it was only rehearsing.
The momentum hadn't died -
your oscillator lied
and your stomach started to churn.
You thought you caught'em
right at the bottom,
but after a pause,
it's another lost cause -
from this may you finally learn.
A VOTE OF THANKS
You've read all about those market wizards
with their powerful systems and high profit scores. But more important are the market lizards
scurrying and shouting on the trading floors.
They're never invited to appear on TV
and those "How to Trade" books they won't write,
but they maintain the markets to a fine degree
that allows our trading to expedite.
With their dramatic song and dance routine,
these traders set the tempo for the whole orchestration.
For their featured roles in this resounding scene,
these lizards deserve a standing ovation.
The United States of America & The U.S. Commodity Futures Trading Commission
In the Matter of CFTC Docket No. 97-12
Curtis McNair Arnold & London Financial, Inc., Order...
The attorney first retained by respondents in the above-captioned case has filed an application for interlocutory review of an order by the Administrative Law Judge ("ALJ") debarring him and his firm from further representation of Curtis M. Arnold and London Financial, Inc. in this matter. The attorney, William Sumner Scott, who heads The Scott Law Firm, P.A., also asks that proceedings before the ALJ be stayed pending Commission review of his application. Scott's clients, the respondents, have joined his application.
1. The Division of Enforcement ("Division") has filed a response opposing the requested stay, but taking no position on the sanction imposed by the Administrative Law Judge (ALJ).
2. The ALJ, acting sua sponte, debarred Scott and his firm upon finding that Scott willfully made false and misleading statements in a motion filed on behalf of respondents seeking leave to submit their answers to the complaint out of time. The ALJ determined after a hearing that Scott falsely represented: 1. that he did not learn when the complaint was served on respondents until after the deadline for filing an answer had passed and; 2. that the Division of Enforcement ("Division") did not advise him in a timely fashion that it would consent to an extension of time for answering the complaint.
The complaint was issued by the Commission on July 30, 1997. The ALJ held that Scott knew on August 1, 1997, that the complaint had been received by respondents and knew on August 4, 1997, that the Division would consent to an extension. (ALJ Bench Order of 9/10/97). The record in this matter supports these findings.
The ALJ debarred Scott pursuant to Commission Rule 10.11(b), 17 C.F.R. § 10. 11(b) (1997), which authorizes this sanction against an attorney or other representative for contemptuous conduct. Scott promptly sought interlocutory review pursuant to Rule 10.101(a)(2), 17 C.F.R. § 10. 101(a)(2) (1997).
The ALJ's action did not constitute an abuse of discretion. A presiding officer enjoys wide latitude in the conduct of proceedings before him. See Rule 10.8(a), 17 C.F.R. § 10.8(a) (1997). Scott submitted a written document to the ALJ that contained misleading statements. His misconduct was not mitigated simply because his misrepresentations concerned procedural matters that did not necessarily bear on outcome of case.
Scott acted improperly by seeking to mislead the court as to the reason for seeking an extension of time to answer the complaint. Any prejudice to respondents from the order is slight since Scott was dismissed from the proceeding at an early stage. In light of the foregoing, the petition for interlocutory review is granted and the action of the ALJ is affirmed. The motion to stay is denied as moot.
IT IS SO ORDERED. By the Commission (Chairperson BORN and Commissioners DIAL, TULL, HOLUM and SPEARS).
Catherine D. Dixon - Assistant Secretary of the Commission - Commodity Futures Trading Commission - Dated: October 17, 1997
1. The application for interlocutory review, styled "Notice of Appeal and Motion for Stay," states that it was filed on behalf of Scott, his firm and respondents "by their attorneys, Donald F. Mintmire, Esquire, and Mintmire & Associates. . . . "Notice of Appeal and Motion for Stay at 1 (Sept. 16, 1997). Though it describes Scott and his firm as "Former Legal Counsel," passim, the application was signed by both Scott and Mintmire. Id. at 14.
2. Scott and respondents subsequently filed a motion for leave to reply to the Division's response, and submitted the proffered response. The Division filed an opposition to the motion. The motion is granted.
3. See generally In re Ferragamo, [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) 24,982 at 37,597-98 (CFTC Jan. 14, 1991) (discussing the ALJ's broad discretion in the conduct of enforcement proceedings).
Editor's Comment: Mr. Scott is the Florida Attorney CTCN once hired (and fired) partly due to his failure to notify us about his prior disbarment involving the CFTC. Of course, if we would have known about his earlier disbarment for "willfully making false and misleading statements," we would have never hired him in the first place!
"The CFTC Wants You Offline"
By Scott Bullock - Institute for Justice
The ability to speak and publish freely is the birthright of all Americans. But not if Commodity Futures Trading Commission (CFTC) gets its way.
The CFTC wants to license individuals who publish about trading commodities. Anyone who for compensation offers opinions, analysis, or even general information about this subject must register with the CFTC as a "commodity trading advisor (CTA). Registration involves fingerprinting, submitting to a background check, paying fees, filing reports with the CFTC, turning over subscriber lists, and being subject to on-demand audits. CFTC officials have the awesome force of law behind them -- anyone not registered who publishes on commodities violates federal law, and faces $500,000 in fines and up to five years in jail.
On July 30, the Institute filed a First Amendment lawsuit on behalf of five commodity newsletter publishers, software developers and Internet users, and five of their subscribers, seeking to end government-compelled registration of those who offer impersonal analysis and advice about commodities. The suit, filed in the US. District Court for the District of Columbia, aims to preserve both the right of individuals to communicate truthful information and the ability of willing listeners to receive important information to guide their economic decision making.
CFTC is federal agency charged with regulating the commodity & futures markets in United States. Unfortunately, rather than assume a discrete role for government regulation to protect individuals from fraud in the marketplace, the CFTC seeks to maximize its power at every turn. Not content to simply police individuals and firms actively managing investor accounts, in 1995 the CFTC asserted power over everyone who publishes about commodities for a fee, demanding that they register as CTAs. The agency extended its broad reach even to persons who neither offer personalized investment advice nor invest customer funds.
In the 1980s the Securities and Exchange Commission (SEC) attempted to do the exact same thing to individuals who provide information on stock trading. But in 1985 the U.S. Supreme Court unanimously held that so long as individuals merely publish about securities, rather than trade them, they cannot be required to register with the SEC. As a result of that decision, the SEC returned to its authorized mission of rooting out fraud rather than harassing publishers. Importantly, this precedent did not hamper the ability of the SEC to go after the "bad guys" in the financial business, but instead led to a proliferation of new sources of information for people interested in stock trading.
Now CFTC has expanded beyond traditional publications to regulate computer software and information online. The CFTC has filed lawsuits to stop unregistered developers of computer software from offering their products. Moreover, while national attention focused on the Communications Decency Act and government's attempt to regulate indecency on the Internet, CFTC last year quietly attempted to regulate the Internet with potentially damaging consequences for all of society.
The CFTC's proposed Internet rule could mark the beginning of a new chapter of government regulation online. While the Communications Decency Act sought to regulate the Content of speech online, the CFTC wants to regulate who may provide information. The proposal spares virtually nothing on the Internet from agency oversight and regulation -- websites, user groups, and hyperlinks come under the CFTC's assertion of jurisdiction. Anyone who establishes one of these tools must register as a CTA, complete with all the ramifications that entails. Although currently the CFTC has suspended enforcement of the rule pending further review, the proposal heralds the intrusion of the heavy hand of government into this vital emerging technology.
At its heart, the CFTC's policy is a policy of ignorance. The agency seems to believe that the less information people have about commodities, the better. Yet First Amendment and the tradition of open inquiry in this country are premised on the exact opposite principle. More information, more robust debate, and more speech create a marketplace of ideas where listeners, not government officials, choose which information is valuable and which speakers are worthy of listening to. Through its campaign, the CFTC stifles this marketplace and keeps consumers in the dark about valuable economic information. With hope, the lawsuit filed by publishers and readers of commodity publications will close another sordid chapter in government's continuing campaign against free speech.
Scott Bullock is an Institute for Justice staff attorney. Check out https://free.ij.org
OPTIONS & SPREADS: Spanish Treasure, Swamp Gas & Phone Monsters - Greg Donio
A bit of Yiddish folklore from the Old World: A neighbor knocked on the door and asked to borrow a tin spoon. The next day he returned two tin spoons. "Why two?" the lender asked. "The one that you loaned me was pregnant and gave birth during the night. So I am returning both parent and offspring."
A madman or a fool, the lender thought. Nevertheless, he accepted both. The next day, the borrower showed up again and asked for the loan of two expensive silver candlesticks. The way this man's mind works, pondered the candlesticks' owner, tomorrow he will bring me four of these expensive silver pieces. So he gladly loaned them.
The next day, the borrower did not bring back the items, nor the next day or next. Angrily the owner went to his neighbor's house and demanded their return. "They died during the night," the borrower explained. "Ridiculous, fool! How is it possible for candlesticks to die?" "Simple," replied the borrower. "If you believed that spoons can birth and you accepted them, then it is also possible for candlesticks to die. May they rest undisturbed."
Another old story from the Philadelphia men's wear trade: A man enters a shop and asks to buy a suit. The haberdasher responds, "You shall have the finest custom-tailored suit. First we bring in an entourage and they take your measurements, then your measurements are flown to England. Then we phone Turkey and order them to shear fine fur from the Angora goats. The wool is flown to a French weaving mill where it is woven into the best mohair. Then the cloth is flown to England where it is custom-tailored into a masterpiece of a suit based on your measurements. Then that gem of a suit is flown here."
"But you don't understand!" the customer protests. "I need this suit by tomorrow evening."
The men's wear-dealer replies, "Don't worry. You'll get it."
An old Irish joke: At the end of the work-week, Clancy opens his pay envelope and finds it $10 short. He complains to the foreman who says, "Your pay envelope last week was $10 over, but you didn't complain about that." Clancy retorts, "Well, anybody can make one mistake, but two in a row is intolerable."
A slice of New England history: Author and philosopher Henry David Thoreau was also a surveyor. He would explain to a client about there being more than one method of surveying. Inevitably the first question was not, "Which is most accurate?" but "Which will get me the most land?"
Incident in a barber shop: Angelo put down his scissors for a moment and said, "Hey, Mike. Look at this thing I bought." He held up a hardback volume entitled Winning Big in the Casinos. The customer in the chair reacted, "Angelo, you know why the guy wrote that book? To get back the money he lost."
From the newspapers: Dear Abby in her advice column quoted some story or explanation she did not believe, then added her own remark, "If you can buy that, I have some swampland in Louisiana to sell you." She was deluged with letters from readers wanting to invest in the Louisiana swampland. Even though it existed only in her wisecrack.
The desire and effort to cadge profits may be less universal than breathing, but only slightly. With the variety of forms that these take come the variety of risks and unknown factors, and always there are risks and unknown factors. So if one's taxi is to stop at the bank and not the bankruptcy court, the questions must be addressed: Do you know the risks and unknown factors in your particular hunting copse? Can you spot and deal with them?
Everybody says yes, and yet! One need not know quantum physics and differential calculus to trade successfully. Yet one must grasp the intricacies relevant to the hunt. The fact that each speculator is in effect a one-person business carries a hazard: It is nice to be your own boss but dangerous to mark your own test papers and keep giving yourself a hundred. That is precisely what many traders do on the matter of "grasping the intricacies," of gauging the risks and unknowns.
Nobody thinks himself a moron or a borderline-incompetent, but the high casualty rate in the financial trenches casts ample doubt on all those "I can't lose!" self-evaluators. The roulette-player with the "can't miss" system never seems to ponder why the world does not swarm with people who got rich doing what "can't miss." He knows that a casino has millions of dollars in expenses and yet he feels certain that it will not come out of his pocket. Clancy could believe in a magic pay envelope that would add a sawbuck to his wage but not in accountants who would have to make things balance out. Many traders on the stock exchanges and futures exchanges and options exchanges similarly "believe in magic" and appear just plain blind to the realities of the accounting ledger.
Those farther up the mental ladder can also stumble. The Yiddishman was a thinker and had tin-spoon evidence to support his theory. Yet he trusted his valuables to a man whom he labeled either a madman or a fool (the possibility of "cunning swindler" apparently did not occur to him). He expected this odd-ball to deliver repeated profits of 100% overnight with the dependability of the Bank of England.
It is possible to profit off of a madman, but not as a steady income. A psychotic may think himself John D. Rockefeller and pay you a philanthropic donation, then think himself Jack the Ripper tomorrow. Then again, there may be a method to the supposed madness. A fox guards your tool shed without pay "just to be nice," then volunteers to guard your henhouse. Did you see the scam coming when the borrower sacrificed a tin spoon and then asked for a loan of expensive silver? Too many traders win some tin and then expect the market to pour silver into their laps, quickly and effortlessly and repeatedly -- yes, very repeatedly. There just ain't enough sterlingware for everybody who wants or expects this.
What was your take on the haberdashery store episode? It is the kind of gag in which much of the audience does not "get the joke" or "gets it" in a way entirely different from the next person. A person of theoretical or fanciful thought may assume that the joke takes place in a surrealistic world where super speed is a humorous hypothetical. Someone more alert to the seamy side of the real world would say, "The suit's coming off the rack. That men's wear merchant is palming off the hard-to-get-rid-of stuff from the back room." The latter would make a more capable trader.
Speculation -- anything involving financial risk -- is a poker game in which one of your opponents plays honestly, another plays honestly and smartly, another cheats and still another tries to pick your pocket. However, it works to your advantage that the rogue's repertoire is usually not lengthy. Did you ever read the "Business Opportunities" classified in any newspaper? So why does the seller want to get rid of the business if it is the Fort Knox that he alleges? "Selling due to illness" or "'Owner retiring" or "Partners disagree" or "Owner has other interests." As repetitious as "The dog at my homework."
Yet plenty of adults believe it as though it were the government's guarantee of bank interest and principle. To add a teardrop, the gullibility extends to stocks, futures and options. You can make steady profits if you are well-versed regarding both the natural hazards and the banditry. Counterfeit gilt-edge stock certificates sold door-to-door a century ago have disappeared but the de Mille-sized crowd scenes in the bankruptcy courts have not. According to the Wall Street Journal (8/8/98):
"Securities regulators from four states have acted to shut down what they called a nationwide network of "boiler room" sales offices promising investors big returns from the currency turmoil caused by the Asia crisis.
". . . Nine employees of Options Trading Group Inc. were arrested July 30 based on warrants issued in Idaho, where some of the steepest investor losses occurred, according to state regulators in Texas and Ohio.
"Options Trading and its employees stand accused of cheating roughly 1,000 investors out of many millions of dollars. State officials allege that the company used high-pressure sales techniques and high transaction fees to exploit headlines about currency turmoil in Asia, and convinced these investors that there was money to be made on futures options for Yen, Marks and Swiss francs."
Boiler rooms. High-pressure telephone sales. With many firms the patsy answering the phone is a retiree or other person on a limited income. How many even heard of futures or options before the hawker mentions them? How many of that small percentage have a relevant book or two on the shelf? Talk about infinitesimal numbers! Obligatorily under law they hear that risk exists and losses occur. But does anybody inform them that the financial survival rate is somewhere between gladiators and Alamo defenders? "I need those profits by early next month." "Don't worry. You'll get 'em."
As an option spread strategist, I suppose my laments could be compared to those of an undertaker trying to look sad at a spare-no-expense funeral. The "fat" that gets "burned off" in a spread is other people's hard-earned capital. The "armor" that gets "shot up" protecting my capital is other folks' money. A spreader's profits are those of a bookmaker, a bankruptcy lawyer, a coffin-maker. A boiler room huckster is a recruiter who says to Grandpa Gus, "Here's a submachine gun. Tomorrow's the battle. Win medals. That there is the trigger. It's real easy." Although I pocket a dead man's gold, I still prefer to keep grandpops and picnickers out of the Verdun trenches. A well-trained gun hand has a chance. A "Fortune awaits you!" phone-call-receiving Vanderbilt does not.
Let us not blame everything on the novice. Few activities other than trading are so crowded with financially-scarred veterans who get caught in the same ambushes again and again. One relative of mine -- now a retired professional musician--was wiped out completely three times in his life. The cause? Heavy use of margin in buying of stocks. Everybody knows on day one that margin can double the bad news as well as the good, but it took three massacres to make him "feel the significance" way down deep. Like speculators in many categories he lived on the hope of a turn-around until the pealing of the monetary funeral bells.
It happened to him with stock shares over a period of about two decades. The teardrops would have come in quicker succession had his "thing" been options or futures. In what other pastime does the dollar-amount of the bait so often exceed that of the trout? Even with anglers who have been at it for years. "Pastime"? An old adage states "When a habit starts to cost money, it is called a hobby." Is your trading a habit, a hobby, a gamble, a business?
Everybody likes to think of his speculations as a "business" because nobody likes to think of himself as a player of government-approved three shell games or an on-the-charts model plane flyer going over budget. At the fantasy-level, trading confuses too easily with the conquest of Everest, the capture of Geronimo, the discovery of the Star of India Sapphire. It needs more business kinship with a furniture dealer, a camera shop, an actual jewelry enterprise. If you know your small gems and carats and financial details, you may get a chance to bid on the Hope Diamond. If you expect to swell $1,000 into $1,000,000 rapidly via some marked-deck techniques applied to the Exchanges, such is the barstool angler at it for years; a string of emptied bank accounts.
Regarding the financial details: Let us assume that you have a 50-50-chance of doubling your money, whether poker or roulette, stocks or options or futures. This means you have one chance in four of doing it twice in a row, one chance in eight of three consecutive bull's eyes, one in 16 of four, and so on. $1,000 has to double only 10 times to become $1,000,000. So how come the world does not swarm with millionaires who began with a grand? The odds against 10 such hits in a row are one in 1,000. Half of those who began won once, half the winners got eliminated when they tried to repeat it, half the surviving quarter got chopped on the third attempt, and so it goes. Needed is more business, less repeat coin-toss, especially for those who expect to be at it for any length of time.
Regarding the mental approach: The basic purpose -- being in business for a profit -- is too easily consigned to a back burner if not the wastebasket in the thinking of many speculators. In recent issues of CTCN, J. L. from Wimauma wrote, "It ain't the money" and he stressed the feeling of "Accomplishment" with a capital "A" as "the source of all human pleasure." Although I read J. L. as avidly as theater-goers used to go see John Barrymore, on that particular point I wish to take a diametrically opposing stand. Traders should be "in it for the money."
Traders should be "in it for the money" because the most widespread alternative is so dangerous: Being in it for the entertainment -- the thrill, the suspense, the fascination. Those relishing fascination or thrill simply tolerate too greatly the holes that speculation shoots in their wallets, month after month and year after year. The example worth repeating: The horse-player who has been losing for years but who cherishes the excitement of post time. Had he banked those chunks of gambling money he could hire a limousine on the interest. But the gradual accumulation of interest does not electrify and jazz up his nervous system like the horses rounding the far turn. Myriads of his counterparts react likewise to the buzz of the Exchanges. This is business?
Years ago in pre-casino Atlantic City, my parents had as neighbors a retired cab driver and his wife. The fellow whom I shall call Sam was continually rah-rah about the stock market. If an acquaintance approached him on the street and asked him about stocks, Sam would pull papers from his shirt pocket and read off data. He reveled in armchair gabs about shares and their performances. Once as he talked in my parents' parlor about his buys and sells, my father asked him, "Sam, what's your over-all outcome been in recent years? With so many thousand here and so many there, what's the over-all tally? Gain or loss, a ballpark figure."
Sam replied, "Broke even." Breaking even is a kind of loss, my father thought, since certificates of deposit or a money market would have brought several percent gain. Another time, Sam's wife walked in from the kitchen where she had been chatting with my mother and said to him, "When I hear you talk about the market, it makes me sick!" Subsequently she said during a private conversation that, far from breaking even, he took beating after beating. Hearing him gab on about investments griped her because a hefty part of what he lost was her money.
Yet I had to admit that Sam was happy and entertained, as much as any sports fisherman rhapsodizing about sunrise over the lake or the large-mouth bass that put up a fight. The trouble is, securities investing costs far more than bait and tackle. Dictionaries define a "fish story" as "a lie or exaggerated tale." Claiming that he "broke even" may be the trader's perennial fish story. Sam and his wife would have suffered far less financially had his enthusiasm been about chess or backyard telescope astronomy or Indian arrowheads or Joe Miller's Jests or lighthouse lithographs or Damon Runyon Era sports legend. Speculation can be a sound business but use it as a win-the-prize funhouse and you can lose the United States Mint.
Again we arrive at the hazards of self-evaluation, the tendency to mark one's own test papers and declare oneself a Rhodes Scholar. Everybody says, "I'm a scientific trader but he's a crap-shooter. I'm the Andrew Mellon of my specialty but he's Charley Horseplayer." You mark more accurately if you remember the past. Keep in mind: If it were possible to make money consistently that way, somebody would have done it. People made money consistently mining for nuggets and sailing a Spanish galleon to the Spice Islands, wholesaling or retailing sporting goods or plumbing fixtures. But the slot machine or keno player or Exchange coin-tosser on a big budget?
A Grand Canyon of a gap lies between taking a profit and taking it consistently, and what winner does not cherish another go at it? You know the racial slur that means temporary prosperity accompanied by big spending. The terminology would be fairer if "nigger rich" were "honky in a horse-parlor rich" or "necktie whitey with a broker dares it all rich." Temporary prosperity. A 50-50 chance of gaining once, one chance in four of twice, one in eight of three times, with a Russian roulette exposure of capital on each venture and 15 of 16 chambers loaded on the fourth try. Would it be unfair to the red man to call this a tomahawks-&-scalps mathematical progression? "I broke even" conceals a multitude of tears.
This does not appear to register in the thinking of the trader who expects to multiply his capital again and again, and with seven-game series rapidity. Knowing that it has been tried plenty of times before, he does not pause to wonder why similar thoughts and attempts in the past did not spill forth plethoras of millionaires, why the files of high-turnover brokers are crammed with no-longer-actives instead of Andrew Carnegies.
Psychologically, we all have a certain satisfaction with and even a fondness for the way our minds work. When you are out driving, anybody who drives faster than you is a "speed demon" and anybody slower is "overly cautious." What is an over-sexed person? Anybody who wants it one time more than you do. What is a glutton? Anybody who wants another dinner helping after you feel full. Just about everybody admits he is less than perfect but that does not prevent just about everybody from using Nice Guy Me as a measuring stick for the world. Practically everybody from the real Einstein to his alleged "reincarnation" in the psychiatric hospital thinks
that way. Often this is harmless but in the realm of speculation, many shot-up bank accounts are what sledge-hammer the way to a trader's second thoughts about how his mind works.
Years ago, I made a beginner's luck bundle buying and selling call options during the boom in Atlantic City casino stocks. Calls with gambling shares underlying yielded profit upon profit. Trouble came when I tried to repeat my success with other underlying stocks. I thought that "playing long" or buying put & call options to re-sell would be my life's occupation. Fortunately, it took just a couple of quick gunshot wounds to make me realize that I was pursuing profits contra mathematical "odds against" that took no prisoners. I detoured into (a) "writing covered calls" or selling call options on good stocks that I owned, and (b) horizontal calendar spreads. Since then my trading life has been not one of pure gains but one of a bookmaker favored by the odds. That solid, practical "plus" showed itself plenty over the long haul.
The time of this writing -- September 1998 -- stands as a gloomy one for Dow watchers and investors, with the stock market having lost most of its past year's record gains. My most recent option spread position closed with a minus, yet my crying towel remains dry thanks to the success of prior trades. Also the recent losing trade served to test a couple of strong points of my methodology and they tested well. Less philosophical than some, I prefer a profit rather than "a loss with lessons attached," but a minus that can instruct serves at least some purpose. I shall not tell that white lie worn to dingy gray about "breaking even."
The much-publicized Viagra potency drug had me looking at the Pfizer Company's shares and options. In early July, there was too much price gap between Pfizer's August and September options. My attention turned to another pharmaceutical company, Bergen Brunswig, which had a near-conservative P/E and received some publicity due to Cardinal Healthways' intention of buying it. The latter also placed some upward nudges on the stock price which fluctuated near 50. The August 55 call options and the September 55s gaped at only about 7/8 of a point from each other, 3½ to 43/8.
I entered an order with the broker to buy 10 September 55s and sell 10 August 55s at a 7/8 point difference or spread. Nothing done. The next day I phoned in the same order but with a full one-point difference. I bought 10 Septembers for $4,500 and sold 10 Augusts at $3,500, a spread of a point or $1,000 plus commissions out of my capital. One item that makes spreading perennially attractive is the sorcery of other people's money, with the August buyer paying 3½ times more than I, financing most of my Septembers, and the non-spreading September buyers paying 4½ times more than I for comparable options. Another item has to be other people absorbing most of the risk, a crucial sea wall in this case.
News that the federal courts might permit the Cardinal Healthways/Bergen Brunswig merger boosted the latter's stock to above 60 points, placing my short-end August options more than 5-points into the money, bad news for a short position. However, I anticipated that this was just a temporary spurt and such news could not come every day. The next day, the share price fell to the low 50s, putting my Augusts a few comfortable points out of the money.
In August the worst happened. A federal judge nixed the merger on anti-trust grounds. Bergen Brunswig shares fell to the low 40s and then the high 30s, shrinking the call options with 55 strike prices and shrinking the accompanying price gap between months. To make a weeks-long story short, I lost over half my $1,000-plus-commissions investment. Is there an instructional bright side? A couple. Those who paid $3,500 for the Augusts lost between $3,000 and $3,500 depending on whether they sold right after the court decision or waited until expiration hoping turn-around. The non-spreaders who paid $4,500 for the Septembers lost varying amounts over $3,500 depending on when after the judgment they sold. Thankfully the spreader -- the brigade in the middle -- suffers the lightest casualties while the long players on the left and right flanks catch the most gunfire.
A second bright side: This happened at a point in my evolution when I was demanding narrower and narrower opening spreads. I am, ashamed to admit that a couple of years ago I would have tolerated a two-point gap at the start, jeopardizing two grand plus commissions of my own capital instead of just one. Losing over half of $1,000 is certainly not as bad as losing over two-thirds of $1,500 or more than three-quarters of $2,000. Half-price at the entrance gate is half the battle. Less cargo on a ship reduces the risk, as does letting surrounding ships catch the torpedoes. You would like to see everybody reach prosperity port but everybody will not. Brokers' statistics say most of the fleet will sink.
Since I am not too philosophical about "bright sides" on losing trades, I would not mention a third such side unless it were really vital. An Iron-Clad Rule: Limit your loss or your exposure to loss. In my particular strategy this translates as: Risk one but do not risk a second until the first starts bearing fruit. In the previous issue of CTCN, I described a spread in call options of Mellon Bank. Once that moved into plus territory and a closing out of that position was in sight, then and only then did I launch the Bergen Brunswig position.
My plan was to consider launching another spread if and only if the Bergen Brunswig one moved solidly and markedly into plus territory. Twas not to be. That proved an effective warning sign. The sight of Bergen B taking on water signaled me not to send another ship into the channel. After I closed that one out, the end of that trading day found me with no other spread positions. As typhoon and tidal wave of the collapsing market raged upon the water, I had no crafts vulnerable. Brunswig proved a bad investment but a good warning light, especially for a one-at-a-time, limit-your-risk trader.
I recently began communicating by phone and fax with people who write to me. The biggest difficulty I find is in persuading traders or soon-to-be ones to limit their risk or their exposure to loss. A happy medium is possible between the I-can-never-win pessimist and the boxer so optimistic he thinks his opponent will throw no punches. While too many speculators bunch up around the latter, good business locates itself attitudinally in between. A fine business rule: Hope for the best and prepare for the worst. An alert clothier buys wear popular with teenagers but limits his purchase because he knows the fad may die suddenly. Most of an option spreader's ships cross safely and deliver a profit but this one may sink or partially lose cargo.
Each trader likes to think himself the businessperson, the inner office that walks, and regard others as the chips-on-green-felt players. Everyone likes to think of his wallet as "the smart money" and others' as "the sucker money." Remember that smart cash is limit-the-risk cash. It could grow diamonds or it could vanish in the swamp gas. The check-writer needs to figure this and keep the amount as small as is practical.
A Wall Street Journal article (September 22, 1998) bore the title 'In the Field of Investing, Self-Confidence Can Sometimes Come Back to Haunt You." Writer Jonathan Clemens quoted finance professor Steven Thorley of the Marriott School of Management at Brigham Young University in Utah: "A positive mental attitude, optimism and self-confidence are good attributes. But in the financial world, they just don't work. You're not interacting with people. You're interacting with prices. They don't care how you feel that day. In general, over-confidence is a negative." Such over-confidence could describe the player, whether sugarfoot or gladiatorial, who envisions dollar-multiplications and vast fortunes, soon too, ere the bonded bottle of shots needs replacing.
He is not ignorant of the 10-mile financial graveyard haunted by vast numbers of souls who used to hold similar visions. Still he anticipates that the next shovel-full of earth will uncover Captain Kidd's treasure. Viewing trading as a business means thinking in terms of a wholesale shipment of Samsonite luggage and not long-lost Spanish doubloons; rum & molasses merchanting rather than free-booting or treasure-hunting. Boy pirates of the Exchanges expect quick fortunes, get quick spankings.
One does not write about finance for any length of time without entering the sphere of psychology, of "why people do" this or that. In high school, I did amateur magic in the student variety show. During school hours, one or another fellow student would see me reading a non-curriculum booklet or catch a glimpse of one in my loose-leaf notebook--a "magician's methods' pamphlet or a "humor for stage" patter piece--and would insistently want to look at it. I learned something: After a minute and a half of riding a bus, standing in line, or sitting in a cafeteria or study hall, people crave entertainment. Anything that can amuse is psychological sparks & tinder, even trivially or momentarily.
On important matters, if trading or investing is the most interesting thing in people's lives, it often becomes a stage show and profits get secondary status. "Secondary" usually means tossed in the wastebasket. For example, everybody is against cheating, everybody from athletes to gamblers. Nobody writes a doctrine or makes a speech in favor of cheating. Yet many athletes and gamblers have an even stronger dislike of losing. They cheat because in their mental hierarchies, dislike for cheating ranks second to dislike for losing. Among mind priorities, with desires competing against each other and numerous aversions jockeying for first place, second place means out-of-the-money and off the edge of the earth.
When trading is the most interesting thing in a person's life, it strains under triple duty, serving as a liven-things-up variety show and a sports event that you root for from the stands and a novel with a Byzantine plot difficult to put down. Business and profits can become second stringers where only the first string gets on the playing field. Let "Ain't We Got Fun?" Sam in Atlantic City serve as an object lesson. It is the psychological lock on the strongbox that the trader have other interests, and not just mild ones.
Contrarily, I believe that those with at least some claim to being Renaissance Men and Women make the best traders as well as the best critics. Mention has already been made of using the stock market as a fascination-fixating, get-wrapped-up-in substitute for chess or sports fishing or astronomy et cetera. It would help if the active-as-a-checker-player investor were fascinated by a few other things. Also, the accomplished pianist who studies Egyptology could add a percent to his already fine grasp of intricacies. Judging from speculator loss reports, plenty of traders have far more need of that percent. To those who claim that Italian Renaissance art has no relevance to modern finance, I still insist that people who appreciate the brush-strokes and the use of light and color by Correggio or Giordano are less likely to handle trading like sports betting. Let the spill-over be off the canvas and not Rose Bowl point-spread sheet.
Editor's Note: Due to space limitations we were forced to shorten the article.
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