Software and Data Preference Polls: Not Gauge
Bob Pelletier of CSI
It's that time of year again. Stocks & Commodities Magazine ran its annual "Reader's Choice" contest and the winners are trumpeting their accolades all over the investment rags. This brings up the annual controversy over user preference and just what "Reader's Choice Winner" really means.
For those of you who don't read S&C, let me explain the competition. The subscribers of S&C were sent ballots listing advertisers and potential advertisers of the magazine. They were asked to select their one choice in a number of categories.
Let me be clear on this: They did not compare the competing products or services as good, bad, worst, etc. . . . Nor were they asked to rate individual aspects of the contestants, such as quality, service, etc. The winner in each category was, quite simply, the one with the most votes.
The fact is, the so-called "Reader's Choice Award" in each category of software or data has absolutely nothing to do with the quality and performance of the product. Most readers may have known of only one product in each category. Regardless of the superiority of the other products about which nothing was known, the product familiar to the reader got the vote.
While this type of balloting shows the product most frequently used by S&C readers, it does not say on what basis (or under whose influence) the choice was made. None of us can know the private list of candidates each reader was familiar with when casting a vote. In this flawed study, a non-vote due to unfamiliarity with a product carried the same weight as a non-vote due to a bad experience.
The editors at S&C are the first to point out that quality has no bearing on the outcome, but this message is lost in the media circus created by the winners. MetaStock used their win to promote their software when compared to a competitor. Likewise, another winner showed their multiple awards in a recent magazine promotion.
Using S&C's "Reader's Choice Award" as evidence of progress in one's own accomplishments brings to mind George Santayama's quote, "Those who speak most of progress measure it by quantity and not by quality." There are more product longevity and satisfaction in quality than any other attribute of performance. Unfortunately, S&C left quality out of their questionnaire.
It is interesting to note how very laudable the study seems to the winners and how very biased it appears to the dozen or more losers in each category. As a "Finalist" in the data service category, we find ourselves in the crowd shouting "foul." When CSI lost out to competing data services, we felt compelled to advise S&C of the flaws in their study. Neither of the two letters we submitted to the editor, making several valid claims of bias, were accepted for printing.
Day Trading Insight - George Moldenhauer
It seems like there has been an incredible interest in day trading in recent issues. Frankly, I fail to see the attraction. As a full-time trader/advisor, I realize that day trading is time consuming and mentally taxing. I must think that for most of you, you have better things to do with your day.
I run into people that are constantly in awe of the fact that I'm living the life they dream about... as an off floor trader. I work out of my home and make a comfortable living. But that doesn't mean that it is easy. People think that trading stock index and bond futures is easy and it "beats working." If you want to be good at what you do, it takes a lot of hard work. I get out of bed before my neighbors do. I start my day before they have their first cup of coffee and often I'm working when they get home from work.
But dedicated individuals can make a living trading. And it doesn't necessarily take big money to be successful. In fact, as an experiment, I have (since the first of the year) been trading a very small account. In this account, I have been trading T-Bonds and TNotes and more recently Stock Index Futures. Most of the trades in this account have been day-trades (some have been held in the night session and only recently have I held Eurodollar positions overnight). I have done this to prove a point... that an average person of ordinary means can make it trading futures. In fact, I seem to remember reading that Richard Dennis was down to less than $1,000 before he turned the corner.
While I am only 3-months into my little project, I have yet to have a losing month. I'm constantly pulling profits out of the account and the account is profitable. The approach is simple. Each night after the close of Bonds and NYSE, I make a few simple calculations that will give me a directional reading for the next day. These calculations are simple to do and can be done by hand or on an inexpensive hand-held calculator. From that point, I have a good idea about how the markets will close for the next session. With that information, I know my trading approach for the next session.
The system works with notes, bonds and stock index futures. The best part about this approach is that you can have a trading plan for tomorrow, today . . . before you hear the news (or as I like to call it noise) from the markets overseas. With this information in-hand, I know exactly how I am going to approach the markets tomorrow. With my game plan in-hand, I can approach the market with a great deal of confidence . . . an important element to your successful trading.
I have seen several contributions recently from members that talk about their success. There is one common element that they talk about... discipline. My experience is that discipline comes from confidence. If you're confident, you have a winning approach, then it's easy to be disciplined. But if you don't have a winning approach, all the discipline in the world still won't make you any money, period. It's easy to have discipline when you know that the probability of a positive outcome is on your side.
Michael Jordan doesn't hit all of his shots. If he were on my team, and we were down by a point with only seconds on the clock, I would have the discipline to get him the ball . . . wouldn't you? Trading success is like that. Know the odds, trade the odds and over time you will make money.
Not Seeing the Forest for the Trees? - David Hutton from Australia
It's interesting as traders that we find ourselves on all mailing lists. We receive promises of riches beyond our wildest dreams that are just around the corner, if we are just prepared to shell out another $199 for the . . . "Greatest Discovery this Century!"
Don't get me wrong, I am the first to admit there are some good ideas out there, and you probably do to. I have a library of trading books, and some trading systems. After all, who was it that said, purchasing someone else's brain was the cheapest investment.
But by far, the most valuable knowledge that is available to you as a trader is what you learn about yourself over many years of trading. To be successful, these questions need to be answered:
- Are you a subjective or an objective (system based trader), or do you fall somewhere in between (if you are very careful?)
- What time frame are you comfortable trading? It's no good buying or designing a trading methodology that takes trades for periods of two weeks to a month, if you are worried about your profits every day. It's no use saying you are going to day- trade, if sitting in front of a screen all day is going to give you a nervous breakdown.
- How do you handle drawdown? What are you doing looking at systems where profits are large, but there are drawdowns of $15-$20,000 in any annual period? If you can't handle drawdowns of this magnitude (and there's nothing wrong with that) then don't go with these methodologies.
- Simplicity - If a methodology is not easily understood and clearly written, you're in trouble. Remember the average human can only take in a maximum of seven pieces of information at any one time. So if your screen is showing two time frame bar charts, two moving averages on each, channels, and a couple of indicators thrown in for good measure... and you are trying to trade, then you are kidding yourself. Your brain has told you to take a hike and just won't make any decisions, how could it?
A good test to see if a system is suited to your personality/psychology, is if you have the discipline to stick with it. Even if you've spent months designing what you think is the perfect system, you find yourself looking for excuses not to take trades or picking holes in it, chances are that besides other problems you may have, one of the major ones is the methodology not being suited to you. Take another look, and be on the lookout for this behavior.
If you are purchasing systems, make sure it has the ability to back test and walk forward the methodology to become comfortable with the results. You want to make these systems your own. You need to know what the drawdown patterns are. What the percentage of profitable trades are. How it performs in good and bad periods and how long it stays in trades.
Why on earth would anyone buy a black box on a promise? At the first sign of trouble, you will stop using the system because there's nothing to enable you to have confidence in its ongoing performance.
Many thanks to Dave Green for an excellent publication. It's great to have such a wide forum for views, ideas and inspiration available to traders. One common theme that I have noticed from the articles being written. I wonder if you have to? Those traders that are doing well have a relatively simple and clear explanation for their trading methodology, while others that seem to be struggling are lacking a clear direction and methodology.
From my own experience, I believe that while many traders would like to trade off the screen with some subjectivity, most need strict rules to trade by. This would include in its crudest form, a trade sheet which provides for ticking boxes when trade criteria are met (as some of mine are), with order levels and stops to be placed, to computer generated orders printed out by programs such as SystemWriter (also as some of mine are). My methodologies tend to be relatively short-term (1-3 days), typically have extremely low drawdowns by most system standards, and have a relatively high percentage of profitable trades. Longer term trades stem from short-term low risk entries, and would typically run for 3 to 10 days. Hopefully this has been of some assistance to those of you still struggling to find your trading identity.
How I Make Money by Using Scale Trading Techniques - S. F. From Europe
The reason for my writing is that I have become a convert to the idea of Scale Trading. Therefore I write in defense of Robert Wiest and his system, which was slated by one of your (somewhat ill-advised) readers/contributors.
I presume Robert Wiest is not a reader of your letter. Editor's Note: He is not a CTCN Member. However, I will send him a copy of this article and perhaps he will join. If he is, tell him he can write his own defense. I feel obliged to write something about his system, if only to put the record straight, and perhaps help one or two of your readers who can use these methods.
To state the system "only goes long when the price is perceived to be at historically low levels, and then holds it forever until profitable" is a gross over-simplification, since a decision to start a scale also takes into account much fundamental information.
In the example given in the Feb. issue of CTCN, where sugar fell from 6¢ to 3¢. I presume this move was in line with the fundamentals: I.e., there was gross oversupply. Scale trading would not have been started in this case. If the price of a physical commodity (scale traders are advised not to trade currencies or stock index futures) is near its historic lows and the fundamentals of supply and demand are quite bullish.
I can assure you and your readers that this form of trading is very low-risk. The law of supply and demand has governed prices for centuries, and will continue to do so as long as humans wish to trade and interact with one another.
Your previous contributor gave sugar as an example, and added that more extreme examples were available. I guess there are, but it is not likely he will be able to find anything anywhere near a $30,000 drawdown in a physical commodity from a point where it was ever suitable for scaling.
All trading has some risks. If it didn't, everyone would do it. Scale trading seeks to reduce risk. I agree wholeheartedly with Robert Wiest in his assertion that scale trading offers fair profit potential for low risk. Nobody is going to make 800 per year by these methods, and I presume that this is what stops most people trying it. I can also vouch for Mr. Wiest's assertion that one also needs much discipline, and above all, patience to trade this way.
A lot of patience, but anyone who sticks rigidly to the scale trading system will, in my view, never fail (or at least very rarely fail) to return a small percentage profit each year. Based on my historical testing, 20-40% seems a very reasonable average estimate.
Sure, you'll have drawdowns and paper losses. I have had them, and I have them now. They're part of the system. But overall, I'm profitable, and I sleep at night. If you started your system correctly, the drawdowns will never break you. The losses really will turn to profits later, and not usually years later.
Take corn as a present example. I'm not a farmer, so have no idea what it really costs to produce a bushel of corn. However, as I understand it, and this is also probably over-simplification, the U.S. Government has to step in to help farmers if the price drops below $1.94 F.O.B. the farm. I therefore presume that this is somewhere near their cost, assuming a good harvest with good weather throughout the season. Now, the low of the last ten years is about $1.45, although it has only been below $2.00 after four successive huge crops. Therefore, given the current stock levels, 1995 corn at anywhere below $2.50 looks very attractive to me for scaling.
If you read Robert Wiest's book, you'll see that scales can always be tailored to your own account size and profit goals. I scaled corn late last year and cashed a profit of $200 (less commission) every time the price moved up 4¢, safe in the knowledge that I wouldn't be in trouble until the price dropped to $1.50. At that point, I would have owned about 15 contracts. Sure, the price might have continued to fall from $1,50, which would have been very serious for me, although not catastrophic. But how likely do you think that is? If the price of corn is 30-40 cents below their cost of production, how much corn will farmers plant next year? Not a lot.
I would probably have been rolling a lot of contracts over from this year's to next year's crop, but eventually I would have made my $170 on each contract, plus $170 on each oscillation of 4¢ taken on the way back up. Of course, compared to $1,200 a day, $170 every now and then is not much. But they add up, especially when there are not large minus figures appearing on the statement from time to time as well. And I trade other things too, which also give the odd few hundred dollars from time to time, also without large minus sums.
At the moment, I am scaling soybean meal, soybeans, oats, and heating oil, whilst carefully watching corn and wheat. There are also opportunities in the meat markets. If the July soymeal price drops to 140.00, I shall have to stop accumulating contracts, but I feel that this is highly unlikely. If it drops to 120.00, I'll have given your subscribers a good laugh, but I'll still be in the game. My scale will not be closed until the price hits 185.00. Every time the price moves up $4.00, I make $400 less my commissions. So far, I've cashed several profits, and I only started this scale in December. My oats scales have given me profits, as have soybeans. So far, only heating oil has given me any serious problems, but I shall not be in trouble unless the price drops to 36.00. I'll be out at 51.50. Which heating oil price do you think is the most likely in the next few months? People might well-read this in twelve months' time when the price is at 20.00, and think "I wonder what became of him?", but I doubt it. And meantime, every time the price moves up a bit, I bring in a few more dollars to cushion the blow of any disaster looming down the road.
So for every successful trader, there are presumably nine losers. (If you survey your readers, they will probably deny this fact, but I think I'm right. Also, I think I'm right in saying that about 90% of people also consider themselves better than average drivers. As this is statistically impossible, I always prefer to rely on statistics coming from information given by bodies like the trading exchanges rather than from privately conducted surveys).
I suspect most of these nine losers-to-be will never try scale trading. I shall stick to my own methods. Regrettably, nine out of ten losers will also find out that they lack something, but presumably via the hard way.Incidentally, if he can't teach friends to do it, what makes you or your readers think he can teach them? Finally, as mentioned earlier, all trading has risks. Any one position trading index futures, bonds or currencies are always vulnerable to gap openings, and it might only need one to wipe them out entirely. Did you know that on Black Monday people got margin calls to produce $200,000 cash, per S&P contract, in one hour? Did you know the bid/offer spread at times that day was up to 100 points (not ticks)? I wasn't there, but have read both statistics in two places. Now to me, that is high risk! Just one day in my lifetime would have wiped out any trader who happened to have gone home long that weekend.
Am I taking risks with my scales? Sure. But what risks? If corn really goes 20% below cost, to say $1.50. How many readers seriously think it will drop much further? I think it is wholly inconceivable it could drop much further. Currencies can trend one way, more or less indefinitely, in a straight line if they like, but crops can't. Eventually farmers will stop planting, and unless demand simultaneously disappears (which has never happened yet), the price can only then go one way: back up, and probably up with a bang.
Dave, you are clearly a nice bloke. I wish you would read Robert Wiest's book before commenting further on the pros and/or cons of scale trading. If you have already read it, then I'll accept that your opinion about few traders being able or willing to use this methodology with success may be correct: hopefully I'm one of the few. Furthermore, since I dislike being made to look silly, I hope I remain one of the profitable few for the indefinite future.
I certainly have a confidence trading now, which I never had previously. You will not like what he has to say about trend following systems. I don't agree with a lot of what he says about chart-reading. I feel it's hard to argue with a law as powerful as supply and demand, and if nothing else, you might enjoy the book just for giving you a different perspective.
I'm sorry I've waffled so much. Scale trading gives me lots of free time to write page after page! (I've cashed four winners this week, but did go three weeks in January without making one trade). Thanks again for your work.
Shopping for Real-Time Data - Michael Maldonado
I've also taken up day-trading the S&P 500 recently. I'm sure most of the CTCN readers realize that the S&P 500 is one of the most liquid and very popular contracts to trade. Considering the daily volume involved and the ease in which real-time data can be obtained, it's no surprise that there are thousands of others trading in this manner.
I'd like to share my recent experience on the purchase of real-time data. My choice was easy to make. I hope to save other CTCN members some of the research time and headaches involved.
After receiving information from all available vendors; only two companies were really cost effective for small traders working through home computers. I came to the conclusion that Signal and BMI were the only realistic choices available. Both companies are very similar with the features they provide; but use very different sales techniques.
Upon comparison, I found BMI to be a better value than Signal for your dollar. BMI is a much smaller company, and is better suited for the commodity trader. A satellite dish is the recommended receiver of the data stream. BMI shipped a satellite dish via UPS directly to my front door. There was no charge for the dish, and I also received an installation video and all tools needed for assembly.
Both companies have start-up fees, but BMI offered to supply my second month of data at no charge, which more than covered those fees. They also will supply all commodities in a 20-minute delayed format at no extra charge. Most S&P traders need to view the S&P 500 contract tick by tick, but are still interested in what the other markets are doing. The ability to view the other markets at no extra charge is a definite plus! They also have one of the least expensive real-time charting programs on the market. They offer a service that fills in any gaps you may have in your five minute charts automatically every evening. Signal offers none of these features.
The most unbelievable aspect of my purchase was the attitude of the sales people involved. BMI's sale representative was anxious to do business with me. He filled my every request. He used a "no pressure" sales technique, negotiated on their monthly fees, and was a pleasure to deal with.
On the other hand; Signal's representative was the opposite. His attitude was that he believed Signal was the only vendor in town! He continually reminded me that his "sale price" was about to expire. The only way he would negotiate their fees is if I Faxed him a copy of BMI's best offer, or if I paid for a year's worth of data in advance. Of course, I informed him that I would take my business elsewhere.
I'm sure not all of Signal's representatives conduct business in this manner. Otherwise, they wouldn't be the largest vendor in the industry. In the five months that I've been subscribing to BMI's service, I've had no problems with data reception even though we've had an incredible winter this year in California! I'm also using TradeStation to handle my charting needs. I'm very impressed with both products and recommend them to CTCN members.
The representative that I dealt with at BMI was Adam Lawlor at 800-255-7374 ext 4421.
"The Making of a Trader"©-Installment #1
Dyslexia - Blessing or Curse - Joe Ross
I guess I'll have to bow to popular opinion and write some articles for you under my own name. I want you to know that I caught a little hell from readers of my own teaching letter who resented the fact that I published that last article on "First Notice Day" before they had a chance to read it. They said if I'm going to do things like that, they would drop their subscriptions to Traders Notebook and just read what I have to say in CTCN. So I guess I'll have to write things here that I don't write there. If you and your readers don't mind, I'd like to do something in CTCN that I've never had time to do elsewhere. Here's the background for my request:
Thanks to the prayers of family, friends, my students around the world, and those readers of CTCN who also helped. I lived to celebrate my 60th birthday on April 7. The malignancy is gone and I'm on the road to a full recovery.
In June of this year, I will have been involved with the markets for 38 years. Thirty-five of them as an active trader and seven years as an author, teacher, tutor, seminar giver and educator. Dave, I'm still learning. Believe me when I say I learn more from my students than you could ever imagine. I've learned a great many lessons in this life and it amazes me that I was able to trade profitably for so many years and not blowout somewhere along the way.
Here's my request: With your permission and the permission of your readers, I'd like to tell about those years with particular emphasis on the lessons learned along the way. I cannot promise to include something in every issue, but I will do my best to make the articles instructive. Also consider that this material is copyrighted and much (if not all of it) will appear in a book called "The Making of a Trader"©. If it's okay with you, what follows is the first installment. The final book version will contain a great deal more.
You may wonder what it's like to go through life with a severe case of Dyslexia. My earliest encounters with this physical challenge began at school. In those days the term Dyslexia probably hadn't been invented yet. My teachers thought I had an attitude problem. They told my mother I was smart enough to do the work, but I was lazy and careless.
The problem was particularly strong with regard to numbers. Because I sporadically reverse them. I could not and still cannot add a column of numbers. Even a calculator does not help, because I reverse some of the numbers as I enter them. In my books, I'm forced to have numerous people edit everything numerical. On the Series-3 Exam, I failed every single problem that involved calculation or numbers. I am unable to pass that test. In Trading Optures and Futions, without exception, every calculation was in error and had to be rewritten. At least I'm consistent. When I write, the problem is controllable. Most of my life, I have been able to read only 25 words a minute. However, after taking a speed reading course, I am now able to "dyslex" at the phenomenal rate of 100 words a minute. I've learned to overcome adversity.
Editor's Note: The remainder of Installment One, which deals with Joe's childhood and younger days, along with Joe's other contributions will be printed either in our next issues, or as a Special Report, depending on member feedback.
Misc. Thoughts of a Long Time Experienced Trader - Max Robinson
Keep up the good work! The Phasor System cost $3,000 and gave (the editor of a competing newsletter) the incentive to start his newsletter. It was published by Art B. Turman, J. Gresham Northcott and Lyn McIver. The copyright is 1981.
Personal computers were brand new then. At that time, most everyone in futures trading business just knew that computers would solve their problems.
I agree with people who write that we should keep our articles positive and full of helpful information. If you have a problem with a system, state the problem and move on. Criticizing people seldom helps anyone.
I haven't checked this idea with a computer, but it looks good. The open is important. After the opening in soybeans, watch for 2 to 4¢ move away from the opening, which seems to stop and reverse. Place an order to enter 2¢ on the opposite side of the open, from where the market had been trading earlier in the day. This seems to work better if the market is making a new high or low over yesterday's range.
In order for a market to continue to go up, it should be trading near its high when the clock is on the hour. The trend may be signaled by a Friday close that closes over the 13 previous closes.
A weak Friday close that closes below the weekly midpoint is something to watch! A Friday close that closes over last week's high is a possible signal of an uptrend. Friday's low closes are usually bought on Monday. Friday's high closes are usually sold on Monday. Monday's high or low will usually be near either the high or low for the week.
Markets go up by opening lower. Markets go down by opening higher. Sometimes you need a mechanical method to trade by, because you can't win by wishing/thinking what the market will probably do.
The best reason I have ever read on why you should be sure to put your stop in, was Brian Long's article about playing Russian Roulette (1/95 CTCN ). If you don't like stops - buy options.
Should They Be Able to Chew Our Food and Swallow
It for Us? - Joe Dinelli
I have read a couple of articles about "GET" by Tom Joseph and "Market Optimizer" by Jeff Rickerson. My observations are as follows:
I'm amazed that anyone could have any major negative comments on either one of these programs as far as context in helping trading decisions.
"Get" is probably one of the best thought out pieces of trading software written for the trading marketplace by far, unless someone is trying to compare it to a "black box" pipe dream. It is a piece of software in its purest form, not a trading machine. Its intent is to help one make intelligent decisions on trading, not eliminate our ability and absolute need to think, learn and make trading decisions.
Tom Joseph in my opinion is one of the most honest and knowledgeable people in the software business today and his software package shows this. The backup is tremendous and the tools are outstanding. I own this software and use it regularly to judge positions in the marketplace.
On the other hand "Market Optimizer" by Jeff Rickerson is by no means a slick piece of software, but the information it gives is invaluable. Over and over I have seen highs and lows of a marketland within a tic of the projections. The yearly, monthly and weekly projections are invaluable to a trader, and on its own can stand as a trading system let alone combining it with other tools. I agree that the programming could have been much better. Once again, the information is too valuable to criticize.
As far as the comment I had read concerning Mr. Rickerson's ability to trade, I find this ridiculous. I am not privy to his track record and frankly it's none of my business. Being a trader and having a good idea for trading the markets are two very different animals. As far as I know, he's not selling his track record, but rather a very accurate trading tool. I find it amazing that when a good trading package is present, so much negative and totally wrong information can be presented about it. Again, it shows that the majority wants easy answers to personal development.
It is great to have accurate information concerning trading programs. This information will save us a great deal of money, but to lump all programs as useless is damaging. If we want to air our "program frustration" we can stick to such programs in the "junk class" such as Bob Buran's.
I have included two charts (Charts in Print Copy) to show the correlation of these two systems as "Get" called for a market turn on Nov. 7, 1994 with a major divergence present with the oscillator and CCI studies. "GET" showed a 5th wave present at the exact monthly low from "Market Optimizer" and as they say, the rest is history.
I will make one last comment on a newsletter and trading course by Robert Miner. I feel this is truly a great value and a very good educational newsletter. Is it easy? No. Is he always correct? No. Is he the greatest trader? I don't really care! But is his material well organized, fairly priced, informative, educational and honest? Yes. Is it for everyone? No. Mr. Miner has developed a trading technique that he tries to teach through his newsletter, while calling trading signals. This is a very good piece of work. However, it will not in any way take the place of our own trading technique development. No one can totally copy someone else's sweat and tears, and I believe that is exactly what 99% want. This newsletter is for the serious trader only. Good trading, as it's the ultimate road to our understanding of our inner being.
Hooking up to Real-Time - Don McCullough
Well Dave, have you given any more consideration to the validity of picking tops and bottoms? By the way (I have not made a special search) Linda Bradford Raschke, who's in the 2nd Market Wizards book, is also a top and bottom picker. (Page 309 last paragraph) Expect this approach may be more common than most traders realize.
Dave, I like the fact that you don't do much editing of subscribers' submissions. I think you're right to give the writer "free reign" and thus let the personality of the writer come through 800. Communicating important ideas is the goal, and grammatical mistakes are the concern of rather impotent school teachers.
Also I'm sure if you edited too much, you'd alienate some writers and therefore lessen subscriber input. Quite often those who have the most to contribute are also a rather individualistic, do it my way type. Independent thinkers probably make up a high percentage of the successful traders group. They want things done their way.
Following trials and tribulations were experienced while getting connected to Signal's real-time data. It wasn't fun, but I view it as one of the many small prices you must pay in order to make it in the markets.
Problems, problems. What do I want to subscribe to Signal's real, real-time data or their delayed data? What method of data transmission do I want? What markets do I want to follow? Do I have to make a serial port available in order to connect the receiver to my computer? Will activation of the screen saver program screw up the incoming data? And so on......
The first thing I had to do was free up a serial port for the receiver. I had my mouse connected to the serial port and had to buy a buss mouse and install its card. Then I had to install and configure the mouse software. Same "mouse" each time and I love it. It is the Kensington trackball.
Next, I connected the receiver to the serial port and then installed the Signal software. Then my major problem started. At first all seemed O.K. Then it got to where, when starting the signal program, the receiver couldn't find the serial port (i.e., comport). Well, I fiddled at various times with the serial port settings and the autoexec.bat. files, etc.
This problem continued for about five-days and many phone calls to the Signal support people. Finally, they decided it was a TSR memory problem but we couldn't find the solution. (Signal support is good. They really work with you.) Since my Afterdark screen saver is a TSR program, I called MetaStock support and their head of support said I had to deactivate the screen saver program. Otherwise, it would conflict with the incoming real-time data. For this reason, along with my knowing it might be causing my memory problem, I deleted the screen saver completed from my hard disk. By the way, the MetaStock support guy said a screen saver really doesn't help save the newer screens anyway. Do any of you readers know differently? Please respond if so, because I have an expensive Nanao 17" monitor and want to protect it as much as possible.
The aforementioned problem continued for about five days and finally a Signal support person sent me a replacement receiver. It arrived the very next day after our phone conversation. That solved this major problem. The Signal people said receiver replacement was seldom necessary with their customers. I chose to go with their cable type of receiver and thus have the data transmitted through my cable TV outlet.
Next, I enabled and configured the real-time portion of my MetaStock charting program. No major problem here, but I did have to make several phone calls before I got everything as I wanted it with the MetaStock program. This has been a very dependable and satisfactory program. It remains so in real-time. Their support is tops.
Editor's Note: Next month we will print Part 2 of Don's article dealing with the data feed, etc.
You May Pay Lower Taxes as an Investor Rather
Than A Trader - Glenn Skirvin
In the March 1994 issue of CTCN, Ted Tesser talks about how to qualify for Trader status (versus Investor status) for tax purposes. He outlined some major advantages of the Trader status under current tax law. This is great information and I'm sure there are many traders who can take advantage of it and lower their tax bills. However, there is one major disadvantage to the Trader status that should be mentioned. For many of us up and coming traders, it will lead us to want to retain an Investor status. I am speaking, of course, of the dreaded self-employment tax that is reported on Schedule SE of Form 1040. Very often this tax will more than offset any benefits that can be derived from filing under Trader Status.
Let me illustrate this with an example. Suppose that Bill Trader is married with no children and files a joint return with his wife Susie. Bill is a fairly successful trader. He's still building his trading capital to the level where he can become an independent, full-time trader, must continue to work his unexciting day job. Bill and his wife's combined salaries are $40,000 per year and they earn $1,000 annually from money market interest income. They own a home, so they can deduct mortgage interest expense of $8,000. In addition, they have $4,000 of deductible taxes which they can also report as itemized deductions on Schedule A of their Form 1040.
Now let's talk about Bill's trading results. Last year in the futures markets, Bill achieved profits on trades (net of commissions and exchange fees) of $25,000. Not too bad considering that most other futures traders came out on the losing end. But Bill also had to incur some direct expenses to achieve those profits. Things like purchasing historical and current price data, subscriptions to newsletters and publications, depreciation on his computer and related equipment. Plus the regrettable purchase of an expensive trading system that turned out to be less effective than the methodology he had innovated and tested himself. This added up to $5,000 for the tax year. His "true" trading profit for the year was $20,000.
The following table compares Bill and Susie's tax liability under both Trader and Investor status. Notice the major impact of self-employment tax.
The following table compares Bill and Susie's tax liability under both Trader and Investor status. Notice the major impact of self-employment tax.
|Salaries & Wages||40,000||40,000|
|Business Income (Schedule C)||20,000||-|
|Capital Gain Income (Sch D)||-||25,000|
|½ of self-employment tax||(1,413)||-|
|Adjusted Gross income||59,587||66,000|
|Home Mortgage Interest||8,000||8,000|
|Less 2% of adjusted gross income||-||(1,320)|
|Total Itemized Deductions||12,000||15,680|
|Taxable income before exemptions||47,587||50,320|
The tax savings from filing as an Investor rather than a trader is $2,056, or 26.4%. Please keep in mind, however, which the illustration above ignores factors such as a home office deductions and deductions for investment seminars which Ted has rightly pointed out can confer a significant benefit on the Trader. When someone claims Trader status, I believe his chances for an IRS audit also increases. He must therefore, be fully prepared to defend his Trader status with the appropriate written documentation. It is important that the benefits to be derived justify this additional audit exposure.
I believe there's a threshold a trader crosses in terms of trading income and expenses where it becomes advantageous to claim Trader status rather than Investor status. For many of us small traders who haven't yet hit the big time, the wisest course of action may be to retain the status of Investor.
Response to Requests for Info about
Babcock's Systems - George Moldenhauer
In the mid 80's, I ran a futures and options brokerage firm that specialized in trading systems for clients. During that time, my firm spent a great deal of money on commercially available systems. We did purchase three systems released by Bruce Babcock. As a result, I have first hand experience with the Slinky system, Advanced Slinky system and the Almost Trade of the Month system.
I can't tell you how they are working now. We stopped following these systems years ago .... after losing what I would consider large amounts of money both in real-time trading and paper trading. I did have one member of my organization that spent a great deal of time researching systems. As a firm, we worked hard on reviewing systems for any merit. There were times that we could take an idea or portion of a system and apply it to the market successfully. Our experience at the time, was that the Slinky and Advanced Slinky systems could be traded profitably ... if you would simply fade the system. By fading, I mean buy when a sell signal was generated and sell when a buy signal was generated.
If I may offer a bit of advice from someone who has seen just about every system ... proceed with caution. There is an old saying in the business; Any system can make money ... if you sell enough copies. While there are some good systems out there, and some reputable promoters, many of these operators are less than reputable. I am not implying that Bruce Babcock falls into this category ... it is a general statement that I am making.
You have taken an important first stop by asking for the input of your peers and this publication is a great tool for all of us to share our experiences. Let's all take advantage of this opportunity.
If readers have experiences with trading systems, either good or bad, how about sharing?
My Experiences With Various Hotlines
& Advisories - Rich Kuyper
I've enjoyed CTCN and offer the following thoughts in the 'for-what-it's worth' category:
1994 was my first year trading futures (I have switched mutual funds for a couple of years) and hotlines were one way I spent my "tuition" money.
At various times over the past year, I subscribed to services by Ken Roberts, Larry Williams, Name Withheld, Nick Van Nice (of Commodity Trend Service), and Colin Alexander (Wellspring Hotline). I also tried several free trials, including a hotline by Tom Bierovic and a daily Fax by Linda Bradford Raschke. Here are some of my impressions, keep in mind these are only one person's opinions. Hotline formats and performances can change over time.
First, it's important to know what you want from a hotline (or any other service). That is, do you want to be educated, so you can eventually do your own thinking and trading? If so, then a hotline that primarily gives "black box signals" with little or no explanation of why you should buy here and place your stop there is not for you. On the other hand, if all you want are "expert" signals without having to understand "why" (and you intend to take every signal, i.e., follow the system), then a black box hotline may be what you're after.
Most of the above named vendors offer a free trial or a money-back guarantee. My advice is:
- to clarify your right to a refund if you are not satisfied after a trial period;
- to record and study (but not make) the trades during the trial period and
- then ask yourself if your criteria (from paragraph above) are being met.
Although I learned something from all the hotlines mentioned, I learned more from some than others. I'm still listening to Nick Van Nice and Colin Alexander.
Nick's company, Commodity Trend Service, puts out a weekly chart book and Nick guides you through a trade or a lesson each night using the chartbook. I actually quit taking the chart book when I began subscribing to end-of-day quotes for my PC, but I still subscribe to the hot line. It's very educational and "interactive." Furthermore, among hotlines I've tried, it's an 800 number -- once you subscribe, the call is free! (If your hotline is not an 800 number, add $240 or so per year to the subscription cost -- figuring a buck a night for twenty trading days a month).
Colin Alexander wrote a book (Capturing Full Trend Profits in the Commodity Futures Markets) which I found very useful. You will get more out of his hotline if you have read his book -- the trades tend to follow the material in the book, very educational.
I have no connection, other than as a subscriber, to anyone named above. I also have nothing in particular against those mentioned, but not discussed -- for one reason or another, I just moved on.
One final note on something I've found very helpful and enjoyable. I have a phone taping device and I record the hotlines every night. On Saturday morning, I sit down in front of my PC, click up the appropriate charts and replay the week's trading advice, stopping the tape at my leisure to study this or that concept, and to compare my logic, the guru's logic and the outcome, so far, of the advice given. I've learned a lot this way. Hey, maybe I'll start a hotline. For now, I enjoy exchanging useful information and I can be reached at phone or Fax 303-449-1074.
Fine-Tune Future Trades by Reviewing Past
Wins & Stops - Jim Burke
What I notice most of articles or from conversations with other traders, is they're more concerned with where to get in, how much money does it make and drawdown. Also, when they go back to study their trades, they only mention their losing trades. If I follow my written set of rules, I understand my losses, but I spend three times as much time analyzing profitable trades. I want to fine tune future trades by reviewing what went right on the winning trades.
What do I look for on these trades? I look to see how many tics were against me on the past 100 winning trades before they were profitable. Did I follow my written rules? Do I need to revamp my rules to reduce my protective stops and always trying to reduce my risk? I want to have my stop within one tic of being stopped out. One can enter the market with volatility stops, but that doesn't mean you need to exit with them, same goes with pivot points, retracements, channel bands, apex of triangles or darts.
I seldom risk more than $275 unless I'm trading coffee or cotton where it's just a little more. The trade is going to go my way or I want out quick and this isn't my intraday trading, it is my long-term trading! I put in my orders in the morning and check my answering machine at night. Trade only trendable markets, Eurodollar, bean oil, copper, cotton, hogs and Canadian $ to maintain low risk trading.
Trade every trade as if your life depended on it. If you want action go to Vegas. If you are on a hot streak of winning trades, reduce the number of contracts you are trading. Don't increase it, because when you do have a loss it will be when you are trading the highest number of contracts and possibly lose more than before your streak started. Don't take any trade, discover first in your testing if the risk is worth the reward of the trade.
From $200 to $1,500,00 Due to Leverage - Insider's
Profit Matrix - Wayne Roberts
I nominate Frank Richards "The Insider's Profit Matrix," (Coldwell Publishing, 12400 Ventura Blvd, Studio City, LA 91604) for the Trader's Hall of Fame Library. If you are the kind of person who collects books on trading, you'll want this one. If you're not the kind, forget it. This little book is basically about trading commodity options, but the terms "Beta" and "Time Value" never make an appearance. No computer is needed and monitoring a quote machine during trading hours is not necessary.
Over a five-month stretch in 1979, Silver went from $10 to $40, an increase of $30. Mr. Richards shows how a total investment of $200 could have been turned into $1,500,000 by the time prices reached $17 or a price gain of $7, if you know how to do this. If you are a master of parlay, I guess you don't need the book.
This book contains the most awesome display of leverage, also called compounding, parlaying or pyramiding I have ever seen. Not to say that this trade was actually taken, but it could have been.
In three trades, he went from a total out-of-pocket investment of $200 to a gross return of $1,500,000. Each of the three silver trades made a gain in price of $1.00, which equates to $5,000. In other words, if you had been long one contract silver on all three of these trades, you would have made $15,000.
Comments by C.J. Casebeer
Chester Keltner's Minor Trend system has been a good one for years. Good for Philip Toh! How do we buy Michel Arimoto's book?
Editor's Comment: Many other members have also asked about Arimoto's $39 Book. It's the Clermont Ad in Feb. issue (last ad on Pg-14).
ADX Experience - John Bowley
Thanks to Adam White and Giampaolo Bulleri for their ADX thoughts, which agree with my experience. The alternative VHF is more sensitive like DX. Either can be smoothed with a moving average of less than the 14 used by Welles Wilder for ADX. They can then be used to show the beginning of a trend when ADX is less than 20. I still like ADX to stay with a trend until ADX starts down, especially from above 40.
George Moldenhauer would like input from members that have firsthand experience with the Prime/Line system marketed by Jules Greenstein out of Marina del Rey, CA.
Phil Baker likes reading about how others trade and how to make a trading system and use it, etc. He would also like to read about how "if possible" to forecast future turning points. He would also like information on Investment Research Co., Richard Tolkeim and his Pork Belly Trading system and about Bradley F. Cowan and his books.
Jim Cook of England wants to know the address of Keltner Statistical Service so he can purchase the book, How to Make Money in Commodities by Keltner. Also, what software has the KeltnerBands in it?
Resource Guide & Editor Reviews
There was no room for editor reviews in this issue because of all our great articles. However, next month we are planning reviews of Dave Reiter's Trading Manual, The Foundation for the Study of Cycles Software Program, and other products.
Here's the Keltner Channel computer code, as requested by many members. It is believed to be in the Public Domain:
INPUTS : PRICE (CLOSE) ,
LENGTH (9) ,
CONST (2) ;
VARS : CENTER (0) ,
UPPER (0) ,
LOWER (0) ,
AVERANGE (0) ;
CENTER=(CENTER * (LENGTH - 1) + PRICE) / LENGTH;
AVERANGE=( AVERANGE * (LENGTH - 1 ) + HIGH-LOW) / LENGTH;
UPPER=CENTER + AVERANGE * CONST;
LOWER=CENTER - AVERANGE * CONST;
IF CURRENTBAR > 25 THEN BEGIN
PLOT 1 ( UPPER, "TOP" ) ;
PLOT 2 ( CENTER, "CENTER");
PLOT3 ( LOWER, "BOTTOM" );
Some additional comments relating to Bob Pelletier's fine article on Pg-3: Others, including your Editor, have also talked about how unfair and of little real value the S&C Magazine Reader's Choice Awards are. This is particularly true as a result of all the media hype and heavy advertising the "winners" do as a result of their high ranking.
These "awards" are little more than an indication of the highest sales volume products (and also not by coincidence, the heaviest advertised products). Many excellent products (perhaps superior products) who do not advertise (or advertise lightly) in S&C Magazine end up with few (if any) votes.
It's very unfortunate many traders buy products, services and systems based to a large degree (or even 800) on a high third party ranking, without realizing the truth about the ranking process. This is also true involving other concerns, such as the Futures Truth rankings, but for different reasons. An article in an upcoming future issue by a knowledgeable CTCN Member will discuss this subject in detail, with emphasis on the Futures Truth rankings. For more information on the S&C Awards, please refer to the Aug 1994 CTCN Pg-1 and Pg-8-9.
An Editor question for S.F. from Europe on Scale Trading, Pg-5: How does one define "historic low levels" and evaluate "bullish fundamentals?" Fortunately, S.F. has agreed to answer these important questions in next month's issue. Of course, many CTCN Members do not have those negatives, so they're more likely to be successful.
I don't know much about tax laws, but no doubt Glenn Skirvin's interesting article on Pg-10 raises some complex tax issues. However, you should know I have received letters and phone calls from CTCN Members who reported they saved considerable money thanks to Ted Tesser's article in the March issue. One trader in particular said he saved $3,000 by showing the article to his accountant as his 1995 income tax return was being prepared.
About George Moldenhauer's comments on Pg-11, Bruce Babcock is one of the most knowledgeable experts in the commodity business. He contributes a lot to the business. He has authored one of the finest books ever written on commodities titled The Dow-Jones Irwin Guide to Trading Systems. In addition, most of the systems he sells are priced low and many buyers find them beneficial by virtue of getting ideas from them, even if they prove to be unprofitable or not suitable for their trading.
Special Note: Thanks to everyone who has contributed knowledge to this issue of Commodity Traders Club News. Without you it would not be possible. P.S. - Remember, as a special reward for making just one contribution/submission per year, you'll receive an automatic 50% price reduction on your renewal. Submissions can be any length, long or short; typed, handwritten or submitted on a disk. Formal or informal. Please participate by sharing your information and knowledge with other traders. Please make a contribution about your experiences, both good & bad with systems, services, advisors, data vendors, and other trading related product.
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