Issue 29

Tom D'Angelo on New Money Management Method
To Improve Your Trading

In my first article (Vol 3-8), I described how traders can utilize the Profit Center technique of business organization in developing a personalized money management plan, specifically tailored to his style of trading. In this article, I will describe the reports I create and how I use those reports in developing my personalized money management plan.

In my final article, I will tie all the reports and calculations together into a Trading Plan which I develop for each Profit Center. The Trading Plan is my business plan of attack for each Profit Center and is designed for the trader who wants to attain a professional skill level in the discipline of money management.

I will be demonstrating The Manager software at the next Dow Jones-Telerate conference at the Riviera Hotel in Las Vegas in October. If you decide to attend, feel free to stop by and I will try to answer any questions you may have.

I created the following nine reports for each Profit Center. Each report displays an important money management concept and contributes to my decision as to: 1. if I will trade that Profit Center and; 2. how many contracts I will trade if I decide to trade that Center.

1. Drawdown Analysis - $ drawdown and % drawdown is calculated after each trade. Every trader (successful or unsuccessful) is in a drawdown mode at least 85% of the time. This creates psychological problems since a successful trader feels he is always losing money even though he is a long-term profitable trader. Real-time monitoring of the drawdown situation currently in effect for each Profit Center is a major factor in overcoming the psychological problems inherent in speculation.

2. Series of winning and losing trades - Calculate the consecutive series of winning trades and losing trades and the $ won or lost in the series. For example, a trader has the following 5 trades, +500, +700, +200, -100, -600. He has a series of 3 consecutive winning trades and a total of $1,400 won in the series followed by a series of 2 losing trades with a total of $700 lost in the series.

Having a history of consecutive winning and losing trades is the second most important piece of information in the trader's money management plan.

The trader must have some type of idea what to expect concerning the worst series of consecutive losers and best series of consecutive winners.

Having this information will assist the trader in preparing for the inevitable future series of consecutive losers, since he will know what occurred in the past and can be psychologically prepared for its recurrence in the future.

3. Optimum number of contracts to trade - Formula found in Ralph Vince's book "Portfolio Money Management Formulas."

Also, calculate % of bankroll required for margin and % of profits in that Center which will be lost if you are stopped out of the trade.

Trade close to the optimum in profitable Profit Centers with uptrending profitability ( you will also require graphs to determine the trend of the profitability - see my next article). Trade less than optimum in profitable Centers with downward trending profitability. Do not trade unprofitable Centers.

This subject requires deeper explanation which I will attempt to perform in my next article. Knowing when, where, why and how much to trade distinguishes the professional, confident, successful trader from the 95% foundering novices, who will inevitably go broke.

4. Pessimistic Return Ratio - Formula found in Vince's book mentioned above. Calculate after each trade for each trade for each Profit Center. Excellent measurement of profitability.

5. Centers comparison - I generate a report which instantly compares any 4 Profit Centers I select, displaying the following statistics:

Beginning Capital - Net profit or loss - Current capital - % winners - % losers - Average profitable trade - Average unprofitable trade - Ratio average profitable trade /Average losing trade - Largest winning trade - Largest losing trade - Standard deviation - Kelly percentage

Hint - If you establish different trading systems as Profit Centers, you have an excellent means of instantly comparing 4 trading systems.

6. Percentage analysis - Calculate total profits and losses in a Center and then determine the % each winner or loser was of the total profits or losses. For example, a Center has 2 winning trades, +500 and +300. Total profits are $800 in the Center. Trade #1 comprised 63% of profits in the Center (500/800) and trade #2 comprised 37% or profits in the Center (300/800).

Some Centers demand consistency in trading results, winning or losing the same amount on each trade. Percentage analysis reveals your success or failure in achieving consistency. If you are consistent, all percentages will be about equal.

Excellent measurement of trading performance for day traders who attempt to realize the same profit or loss on each trade.

Portfolio construction - Sorry, I can't explain this concept in a few words. I select commodities in various Centers in which I have a positive Sharpe Ratio and then create a new Profit Center composed of these commodities. Basically, I select the best of the best and put these commodities in a separate Center (portfolio) and then establish a bankroll for that Center and then trade the Center. This ensures I am taking trades in areas where I have been very profitable in the past. Great confidence builder.

7. Statistical Analysis - I calculate the following statistics after each trade for each Profit Center. The statistics are eventually incorporated into my Trading Plan.

Trading Efficiency: A. % Profitable Trades - B. % Unprofitable Trades - C. Average Profitable Trade - D. Average Unprofitable trade - E. Ratio Profitable Trade/Unprofitable Trade

Risk Management: A. Unprofitable trade as % of Capital - B. Profitable trade as % of Capital

Profitability: A. Profit Factor - B. Expected Next Trade - C. Pessimistic Return Ratio - mentioned above

Operating Efficiency: A. Trade Tracker - My simple invention. Divide last profitable trade by current average profitable trade. If last profitable trade was $500 and the average profitable trade at that time was $250, the Trade Tracker ratio=500/250=2.0. Perform the same calculation for losing trades. The ratio for profitable trades should ideally be above 1.0 and increasing. This means you are taking profits greater than your average profit. The Ratio for losing trades should ideally be below 1.0 and decreasing. This means you are taking losses lower than your average loss.

Great info when displayed in graph format with 1.0 marked off as the boundary line.

8. Sort trades - I sort my profitable trades from biggest to smallest and print out the report. I can instantly see the range of my biggest to smallest winners for each Profit Center. I do the same for losing trades. Very handy info to have.

Some of you may recognize the basic thrust of the Money Management plan is to: 1. distinguish a positive expectation game (Profit Center) from a negative expectation game (Profit Center); 2. Play only positive expectation games and; 3. structure bet size (number of contracts to trade) according to trend of profitability.

Final comments: Sorry if I couldn't go into depth regarding some of these concepts, but there obviously is a space limitation. Contact me and I will send you a free book with the reports. Next article, I will describe the money management statistics I graph and how I use the graphs to determine when, where, why and how much to trade. In my last article, I will attempt to tie everything together into the Trading Plan.

If the above methodology sounds like a lot of work, I felt the same way myself until I realized that without this type of analysis, the chances of achieving long-term success in speculation are close to zero.

If you would like to know the most important ingredient in achieving long-term success in speculation, read Marty Schwartz's answer to the question "Is there anything to add to that list" found on page 275 of "Market Wizards" by Jack Schwager.

More On Why Someone Sells Systems Rather
Than Trades It - John Piper

I was interested in the letter from George Bashar in the July 1995 issue. It makes a number of points to which I would like to add. Firstly, he comments that we all seem to fall into the trap of listening to others. But then haven't we been taught to do just that. At school are we not taught that the teacher is the font of all wisdom, and if not the teacher, what about the broker or that adviser, etc. This is a thought made by Dr. Tharp in one of his recent newsletters. But it is obvious why we behave as we do.

Now on the question of systems, I think it is easy to come up with a number of reasons why someone may want to sell a system rather than trade it themselves. There are two primary reasons, either because that individual likes the intellectual challenge of "beating" the market, but does not want to get involved with the emotional turmoil which it involves. I can see a lot of sense in selling a system rather than relying on the uncertain profits from the market.

There is also the question of personality to consider. I may devise a system that works, but it may just not suit me. In fact, I have devised a number of systems which I have sold. But I strictly limit the number sold, in one case to just five, another ten. Part of the deal is that I help the purchaser with any trading problems he may encounter. Also, part of the deal is I share in trading profits that result. I believe that this structure gives both parties the best of both worlds. Although it suits a trader who is nearer the beginning of his journey rather than near the end.

Finally, I think one point hasn't been made in the newsletter, that trading becomes a lot simpler if you just look to take the best opportunities. Certainly the market gives signals every day, but a lot of them are fairly mediocre. Less frequently, it gives a strong signal and I'm finding that just taking the strong signals has a lot going for it. Of course, with some techniques you cannot tell which is which. But using Market Profile, for example, it becomes fairly clear when that Minus Development means something a little bit extra!

More Comments on How To Use The
SuperCharts Editor - Tom Dyste

More comment on Shawn Halfpenny's solution to fooling the SuperCharts Quick Editor:

A. In my testing systems rewritten directly into EasyLanguage using Mr. Halfpenny's method run at least 2 times as fast as their predecessors did for equivalent functionality. So, more than twice as much back-testing can be done per hour of computer time.

B. It is now possible to implement many system concepts that are otherwise impossible in SuperCharts. Way more logic and conditionality can be incorporated. Pyramiding can now be done and various types of entry and exit order types and price levels are readily combined in a single system or indicator.

C. Users can print out all the B*.asc files in \sc2\prog\ to examine built-in functions as examples of the use of EasyLanguage like it can be used when programming a la Halfpenny. The SuperCharts documentation offers limited help in defeating the product's programming limitations, but these examples show many valid coding techniques.

This one tip from Mr. Halfpenny has tremendously increased the value of SuperCharts to those serious enough to explore its ramifications. One system of mine has nearly doubled its historical performance through an added rule that I could not program until now. Thank you CTCN for being the forum for this kind of sharing of information.

The Methodology Showdown and Greg Meadors - Experts Not Willing To
Trade With Real-Money & Put Their Money Where Their Mouth Is - Gary Smith

There's a need to address some of Greg Meadors' comments from the last issue of CTCN regarding the Methodology Showdown. True, I conceived the idea for this three year trading contest, but with the stipulation that it be with real money and with the participants all trading at the same firm. I even had a company lined up to handle this task and at reasonable commission rates of under $25. But alas, none of the so-called experts contacted were willing to trade with real money citing the fact that $50,000 was above their means. That alone should tell you something about these legends in their own minds. Making predictions via hotlines and newsletters are one thing, but never ask these guys to put their money where their mouth is. As a result, this contest then dissolved into a meaningless paper trading match at a simulated trading firm with the competitors trading like a bunch of crash test dummies.

The reason I resigned after three consecutive winning months, and I suppose the reason some other bona fide trading experts refused to participate in the first place, is that it is impossible to simultaneously trade a real money account at one firm and an imaginary account at another. Daytrading the S&P often requires split second trading decisions, and getting your order in to one firm even a minute or two late can result in an opportunity loss of $500 or more. Apparently this dilemma of which firm to call first wasn't a problem for Greg Meadors and most of the others who entered the Showdown competition, since they were not real money traders to begin with.

I'm reminded of Russell Sands and his observations on trading contests. Russell says that in a trading contest environment, the proper gaming strategy is to maximize your short-term results by going for broke, risking all to build an insurmountable lead over your opponents. But this type of strategy, Mr. Sands says is not prudent or proper for those of us whose goal is to grind out a long run living out of the market.

As Mr. Sands relates, there are sometimes talented traders who win these contests, but on the other hand says Russell, not everybody who does win these contests is a talented or prudent trader. And remember, Mr. Sands is speaking only of real money trading contests. The all important psychological aspects of trading aren't even a factor where no real money is on the line, such as the Methodology Showdown.

Greg Meadors really jumps on Alexander Elder's case for marketing a book about trading for a living. Mr. Meadors implies this is a bit hypocritical since Dr. Elder doesn't trade for a living, but supports himself by trading his books for dollars. That's pretty strong stuff from someone like Greg Meadors who himself has never traded for a living, yet sells a home study course on the very same topic.

Still, as annoying as Greg can sometimes be when boasting about his paper trading triumphs, it may surprise many to know I actually respect the guy. In phone conversations I've had with him, I have found him refreshingly honest about his lack of real money trading credentials. This is a change of pace from most prominent vendors I have encountered who have fabricated their trading experiences in order to sell their products. I have always suspected that Greg Meadors, just might be that one in a million vendor that actually does possess some true trading talent. Supposedly, many of his hotline recommendations have been very accurate over the past several years. As a result of Greg's imaginary trading performance in the Showdown, he has been funded with some real money to trade the S&P. I for one will be rooting for him to succeed in the real world. If he can just grind out a 30% to 35% return year after year with real money, then he'll be performing at a rate above 99.9% of all the other CTAs and money managers.

Greg Meadors Responds to Gary Smith
Re: Methodology Showdown Contest

Gary Smith states that the Methodology Showdown Trading Contest became "meaningless paper trading match . . . with the competitors trading like a bunch of crash-test dummies." In some cases, that is true. For example, Dr. Harry Schilder who had profited $300,000+, slipped into second place earlier this year, after holding a narrow lead for several months. When I took the lead in Feb., Dr. Schilder stated in his weekly KWHY-TV interview that he would soon be in the lead again. However, each of his losses was followed by a bigger trade which ended-up being a loss as he continued to short the S&P. He lost it all in two months trading against the main trend. Commendably he lasted 14-months while most didn't last even 6-months.

Gary states that he resigned after three months because it was impossible for him to simultaneously trade his real money account, and the simulated account, since the S&P can move 100 points ($500) in one or two minutes. He supposes that this is another reason why other "bona fide trading experts" refused to participate in the first place. However, the contest was not open to "bona fide trading experts", unless they were well-known vendors, newsletter writers, or were representing a particular indicator or methodology they had developed.

As the sponsor of the contest advertised, "Sure they can give Newsletter & Hotline advice, but can they trade?" The Methodology Showdown Trading contest was intended primarily for the vendors, with Gary Smith being the only exception.

In respect to Gary's difficulty making trades at two different firms simultaneously, this was apparently a singular problem of his methodology, i.e., daytrading breakouts. After making his real-money trade, the two-minute delay on the simulated account apparently had a significant impact on his performance, yet he was still profitable when he resigned after 3-months. Since the sponsor of the contest, TC&RG, provided free space for contestant commentary in the magazine. I would have preferred to have seen Gary stay in the contest, while commenting in TC&RG on the difference between his real-money results, and the Simulated Account. Remember, it was Gary's idea to show the world that the "vendors" were full of hype, and couldn't trade their way out of a wet paper bag. In most cases, he is correct, in fact, it's true with most people, not just vendors.

In respect to what Gary attributed to Russell Sands, I would agree, in that even real-money trading contests open to the public for prize money, etc., would have a gaming strategy of maximizing profits, risking all to win the big 1st place prize money. However, I disagree with Gary's assessment that the Methodology Showdown Contest did not have the "all important real-money" psychological aspects, i.e., fear of financial loss. On the contrary, for myself and the other vendors, the "fear of financial loss" was and still is considerable. Why, you may ask?

Each of the vendor's potential business income is at risk for at least 3-years or longer, since the monthly results are advertised periodically in the major financial media. Those who do not perform well are subject to losing clients to those who do perform well. For example, if you were seeking to purchase a $3,000 trading system or home study course, would you buy it from the vendors who lost money in the contest, or from someone who demonstrated superior returns over a sustained period of time?

Also, those who trade for a living have only to trade. Whereas, the vendors might be distracted from their trading in order to do their intraday hotline updates, send Faxes, publish their newsletters, and run their businesses. There is no prize money, and you have to pay a monthly fee to Auditrack to continue participating in the contest. Thus, for the vendors, the potential loss in a real-money trading account would be less than the potential loss of business income. Yes, the "all important real-money" psychological aspects are even more intense for the vendors.

In regards to my comments regarding Dr. Elder, Gary states that I implied that Dr. Elder was "a bit hypocritical", since Dr. Elder doesn't trade for a living, but supports himself by trading his books for dollars. He states my comments were "pretty strong stuff", since I don't trade for a living, yet sell a course on the same topic. Of course, I never said that Dr. Elder does not trade the markets for a living. I stated that Dr. Elder says that he does trade for a living, but that he is not willing to provide any proof that he is profitable, or for that matter that he even trades the markets.

Gary is correct about the fact that I don't trade the markets for a living. It is not yet my primary source of income. I still make more money providing market timing advice via my newsletter, and trading advice via my hotline, plus selling my home study course.

Editor's Note: Commodity traders are frequently highly suspicious as to why vendors sell their knowledge or their trading system, rather than use it themselves as their main source of income. The truth is, it's usually much more lucrative and easier selling knowledge and teaching others, compared to doing it yourself.

For example, I recently listened to a speech by Robert Allen, the well-known author of the popular book on how to buy real estate with no down payment titled "Nothing Down." Even though he is an expert on the subject and has successfully invested in 125 properties, he admits he makes much more money as a vendor of the "nothing down" knowledge versus doing it himself. He also says it is easier, less time consuming, less risky, and has far greater profit potential being a vendor of information on how to do it, rather than actually doing it.

If you can market and sell your own product, regardless of what it is, you can make much more money teaching others how to do it versus just doing it yourself. This is true in many diverse types of businesses, including trading and investing. If you think about it, it makes sense why this is true...because knowledge is power.

Remember the old Proverb "Knowledge is of more value than gold, receive my instructions and not silver, and knowledge rather than gold." In fact, due to the tremendous profit potential trading commodities successfully, commodity knowledge is probably more valuable than any other endeavor. This is why there's nothing at all wrong or suspicious about someone being a vendor rather than trading full-time for a living.

However, I do manage some private accounts, and they are profitable. Unlike Dr. Elder, I am willing to show the proof of profitability. In addition, my hotline advice has generated over $30,000+ per S&P contract over each of the last 5-years; thus I don't believe I was being hypocritical advertising my Course as the Professional Traders Home Study Course, with the promotional line -- Learn The Art of Market Timing and Trading For A Living.

Greg Meadors Should Teach Us How He Won The
Contest & Info On Gann - NY

Greg Meadors' recent article about Gann is very unfortunate, because by listing his name at the top of the Methodology Showdown Contest, one might be tricked into thinking that either he or his methodology is better than any other systems.

The "FACT" about his records and Greg Meadors' comments was published in Vol II,No 3 of the Traders Catalog & Resource Guide. According to Greg Meadors' words --- "Gann's most valuable information was sold in his $5,000 Master Course, the price of a house in his time."

Can you imagine charging $5,000 for a course in 1900's? Would you say one is a good trader if someone charges you the price of a house today, around $120,000 for a trading course? Dr. Elder might be 800 right by assuming "Gann may not have been a good trader." A good trader would not ask for other peoples' money.

Besides, Gann was charging too much (I think). Gann made the following statements (according to Greg Meadors) which could cast a shadow on his "ability to trade" - Gann said: "I discovered that Law of Vibration enabled me to accurately determine the exact points to which a Stock or Commodity would rise and fall with a given time."

Have you ever met anyone who can "accurately determine the exact points to which a Stock or Commodity would rise and fall." ???

Is Greg Meadors tooting Gann's Mystic to toot his name or services? As for Greg Meadors' records for 1/1994, he had 179 wins and 119 loses. It's not too bad, but is it the best system around, as one may get that impression from the way the published listing showed? Article failed to mention the starting amount.

As for Gann's methodology, the result for Gann's Methodology contestant was (-) $15,468 for the same period (see CTCN page 2 Vol 3-8). What happened to Gann's "accurately determine the Exact Points" system?

Dr. Elder's "Gann may not have been ---- etc." may be "correct assumptions." Greg Meadors may be tooting his name and service by using Gann's mystic numbers, but we are lucky that he is not saying that his course will cost us the price of a house nowadays.

Greg Meadors said that "Yes, I am leading the contest, daytrading the S&P." Since S&P has been going up, up and up for two years, anyone who bought at 10:15 a.m. and sold the S&P at 2 p.m. everyday could have said the same thing. Let us stop attacking someone's assumption unless Mr. Greg Meadors himself has a copy of Mr. Gann's monthly brokerage statements from 1909.

A better idea could be that Mr. Meadors could kindly tell CTC members how he won the contest rather than just showing us the amount. (Editor's Note: Amen!)

Forward Testing - How To Avoid the Dangers
of Curve-Fitting - Adam White

Forward or out of sample testing is one of the few tools we have when system testing to avoid the dangers of curve-fitting or optimization. For the purposes of illustration, say we are testing a new system over 10,000 bars of data. Typically we'd divide this data in half; call the first 5,000 bars segment A and the second 5,000 bars segment B. We'd test the system over segment A, tweaking the parameters and logic until we get acceptable results, then run it over segment B. If the results on segment B are not acceptable, it's back to the drawing board and a repeat of the process: designing on A and verifying on B.

One thought is how many times do we have to go through this very same process? If we're not having luck, would it make sense to reverse the procedure and design a B and verify on A? This way the seemingly more difficult data gets to speak first, and the odds of acceptable results on A is higher. By this thinking, we should always design on the more difficult data segment and verify on the easier data segment.

This main approach can be brought to the next level by breaking the data not into just two segments, but several segments. (Assuming each segment remains large enough to be statistically significant.) Say we've broken our data into 10 equal segments, then the above process involves designing on all ten, but verifying or judging on only the worst performing three (?) segments.

Here we are employing a "minimax" solution: we want the worst case results as strong as possible. But is this too strict? Perhaps there is some give and take involved. What weight we should put on the worst performing segments versus the overall performance? If the overall performance is very strong, can we look the other way on the few segments with less attractive performance? Anyway, hopefully these insights and questions represent constructive food for thought.

Comments on Last Issue - Don McCullough

First of all, I want to thank all who contribute articles to this newsletter. For the most part, I know the quality of your character through your articles and I want to say--I'm impressed.

Greg Meadors, you may be correct about Gann. There's a saying about reading books that goes: "Keep one eye on the author." I found Gann to be a rather caustic or bitter man and that's just one more reason why I think he was not nearly the trader he's generally thought to be. Probably the most famous trader of all was Jesse Livermore. Edwin Lefevre writes about Livermore's trading exploits in his all-time classic book: Reminiscences of a Stock Operator.

What most readers probably don't know about Jesse Livermore is, he lost everything more than once in the markets. (He traded commodities too.) And, he ended his life by shooting himself in the head with a revolver. The present day famous trader Richard Dennis said he didn't see how Livermore could be considered a great trader since he went bust so many times. I agree, and am certain that the average reader of most books about the markets would be very shocked to find that many, if not most, book authors are poor to mediocre traders and some don't even trade.

It's so easy for most of us, at one time or another in our lives, to fall into the expert trap. Most of the time it would be to our advantage to recognize that if the "expert" writing the book or speaking at a seminar knew enough and could be enough, he'd probably be making millions from trading and we'd probably never know he existed. Such traders do exist and I doubt that any of them will ever consider writing a book or speaking at a seminar.

"In the country of the blind, the one-eyed man is king." I submit that most traders are being "led" by one-eyed people and the two-eyed people are making fortunes in the market.

L. B. Favot wrote an interesting article in the last issue. I had to smile when he said he found that most breakouts he had his alarms set for proved false. Like Linda Raschke and other pros, I believe you've got to be quite a bit of a contrarian to succeed in the markets. What looks bad to the average trader will often be an entry point for the pro. What looks good to the average trader will often be an exit, and even a reversal point for the pro.

Dale Johnson had a nice article in the last issue. I have to disagree with him when he says a person trading daily bar charts will make as much as the intraday trader over a year's time. I haven't proven it, but I see much more potential profits from daytrading. I wonder how many top pros can trade most of the market turns that occur during the day? I think some of the best can do that and by doing so, they will double or triple what the long-term trader will make. I don't recommend this as a goal for the average person. I'm pretty sure a few top traders catch most of the tops and bottoms of each day. Consider, it probably took them 10-20 years to be able to do that.

Max Robinson, I have a lot of respect for the losses you admitted to in the last issue. I have a lot of respect for the general tone of the whole article. You say you're not asking for sympathy and you're still trying. I think that's just great! In your last paragraph you talk about not wanting to take a loss and how that may be one of the things keeping many people from succeeding. Take it from me, I fight the battle of not wanting to take a loss (several times a day!) with my daytrading of the S&P market. I'll bet I have plenty of company. I believe many of the main reasons traders have trouble trading their signals consistently would fall under the heading of Stress Avoidance.

In many ways trading the markets is like life in general. In everyday life you must learn to take the bad as well as the good. Likewise, in the markets you must take the losers as well as the winners. In both life and the markets you must take the negatives in a proper manner if ultimate success is to be achieved. In life, as in the markets, too much thinking before acting is counterproductive. Sometimes you simply have to jump into the thick of things and give it your very best effort. Nothings for sure, but sometimes that's all it takes.

Cycles are Perfect - But Misunderstood - K. Turkin

The concept of Market Cycles evoke strong feelings from anyone who has tried to deal with them. Some people swear by them, but most swear at them. Their notorious reputation comes from what we expect them to accomplish for us.

The word Cycle comes from the Greek "Cyklos" which means circle or ring. It represents a time period and time only. However long it takes to complete whatever it is manifesting is the length. Several repetitions is the rhythm or frequency. The extremes it measures is the amplitude. The relationship or starting point of this cycle to another is the phase.

Cycles are Natures way of doing business. Everything in our universe vibrates. Our senses and sensitive electronics pick up these oscillations. This spirit energy combines with other cycles to form all that we know. Therefore, everything is the same but of different scales or octaves. Cycles are perfect...almost. There is just enough of a deviation to cause change. If not, there would be no growth or evolution and devolution. The causal element of cycles is not being discussed here. That's like talking about religion or politics. What is important is their effect on us whether assumed or real.

Market cycles found on charts are first sensed or felt, then identified and quantified. A big problem for us is that they do not repeat every time to the Nth decimal point, nor do they turn on a dime. A day is a day, but how many are exactly 24-hours long sunrise to sunrise. Night doesn't turn into day in a second nor does spring immediately become summer on 6/21.

All markets are the sum total of the different groups of people attuned to different cycles and should be analyzed as to their various contributions. The same natural laws of attraction and repulsion cause us to act with compulsion to trade the way we do as individuals and yet leave our mark on a chart as part of some group. Just like trying to judge a book by its cover will not help identify the finer details inside, neither will analyzing a chart in its totality offer any insights relating to specific internal future moments. When looking at any chart (stock, commodity, etc.), the data available determines the largest cycle either by appearance or its effect. One consolation we get from Nature, is that the bigger cycles will tell you where the smaller ones must go and the smaller ones will tell you where the larger ones are going.

We live in a multi-dimensional world. Our perspective of the cycle or actually the effect it has on us is not flat. Imagine a spinning bicycle wheel going around and around. Walking in front of the wheel has not changed the time required to make one revolution. Our view of it has changed, now it is up and down. The same holds true for some effect it might have on us. Tilting it on an angle also changes the size or the appearance of the wheel's top and bottom.

The data which makes up our cyclic composite on charts or screens should be analyzed carefully. By the time we see it, its purity has already been tampered with through vendors, broadcasters, price reporters and other human conditions. How accurate is measuring the depth of bath water while standing in the bathtub? Exotic filtering and over manipulating the data removes and distorts the essence of what we're looking for in the first place.

The love-hate relationship we have with cycles is based on our assumptions. As convenient as we would like them to be, our expectations are unrealistic. Nature and her cycles are fine. Their effects can be counted on. When there is human intervention and analysis of the effects on people is being done with dollar oriented motivations, the correct solution becomes difficult. It seems ironic that the same understanding and respect mankind has shown for Nature shows up in the markets where people are quick to blame their losses on those damn cycles that don't work right.

Protection Is Needed for Both Buyers & Sellers & Feedback on
Bruce Gould's Money Machine - Robert Meaders

This problem may have been discussed before I became a CTCN members. We badly need some method of protecting the developer of a system, and the purchaser of the system. If the developer discloses the system, it is lost. If it is not disclosed, the buyer is buying a pig-in-a-poke.

The trouble with Futures Truth is that they also sell to traders. Someone completely independent would be of great value. I wish the CFTC would back-test systems that were submitted and publish the results, without comments. If a buyer wished to purchase a system that was not submitted for tests, it's his risk.

I purchased a system which contained material that I did not like. Without making a single trade I tried to return the system. I could not get the seller to agree. I finally received a letter from an attorney stating that I had never submitted the agreement. I had not even noticed the agreement which was imbedded in the manual and could only be removed by tearing it out. The buyer should have a right to see the agreement before he sees and buys the system. Any system costing more than a couple of hundred dollars should have an electronic lock. When he returned the lock he could not use the system.

New traders should understand that there are as many commodity fiction writers, as there are fiction writers in Hollywood. Even Larry Williams, who everyone knows is a most successful trader, misnamed his book: How I Made One Million. It is a book I would recommend to any novice, but it does not say that he bought one million bushels of totem pole nuts on Jan 1, why, where he placed the stop, why, and why he closed the position on July 4. If all his trades had been so listed, then the title would not be misleading.

I noticed inquiries about the Money Machine. Three of the first four signals that were triggered failed immediately, after I learned of the system. The commodity in the fourth had made approximately 70% of its move before the signal fired. Several months passed without a comfortable signal. Then a signal failed almost immediately. The system is based on a movement that was used by traders when Bruce was still in swaddling clothes. He does introduce a filter which is of value. There are a number of variations of the filter which may be better, or worse, depending on the circumstances.

Joe Severa on Greg Meadors and Others

I don't know Greg Meadors, but for such a successful trader, why does he lower himself by blasting a non-trader. Jack Schwager is a non-trader and states clearly that he likes research and creating new systems, and Mr. Meadors isn't all over his case. I don't recall Dr. Elder's claiming he is a successful trader, do you? Mr. Meadors first agrees with Robert Miner's logic and then asks about '94 performance. Let him get '95 or the summary of traders advice Mr. Miner gave subscribers to Commodity Trend Service until he was discreetly dropped, as was Kent Calhoun, from this service.

I loved their charts, but Messrs. Miner, Calhoun, VanNice, Robert Burg, etc. Interpretation of these fine charts drove me to my own satellite system. Their mechanical trend-setter program put them all to shame. But the system has no money management filter and gives back too much hard earned gains and has cumulative losses in corn, beans, coffee, bean oil, the entire meat complex, gold, platinum, heating oil, Br. Lb. Most of these contracts were profitable earlier, but who can own or portfolio 40 some odd contracts and get the return this system claims yearly?

A. C. Moore with his seasonal ag spreads did better than any of the other "experts" and isn't that odd? He uses many spread trades, which reduces his chances of making a killing on any given trade.

Too many people look up to the Soros', Roger's and even Jesse Livermore, who died broke and suffered other severe losses in his career. Everyone embellishes their wins and plays down their losses.

I believe Greg Meadors daytrades the S&P 500 only and that on the face of it, is risky. Soros made a killing in the British Pound, and now and again gold or some other singular market. When he lost over a billion dollars of clients' money, he had the nerve to tell members of Congress that he didn't understand derivatives either. Huh?

Did Congress explore that pronouncement further? That body is an embarrassment.

Sure trading for a living is possible, but how many of us have the skills, guts and ability to pull that trigger and take those losses? Less than 10%, some say 5%, but it surely isn't common.

Most plungers lose eventually and if Mr. Meadors only trades the S&P, he'll find that out when least he expects it.

An Easy to Calculate Oscillator - Joseph Stuermer

A lot of trading systems are usually making use of an oscillator of some kind, at least once in their system logic, mainly for detrending a price curve.

Just for the record, as most of the members will know, an oscillator curve will move forever between a positive value and a negative value, depending on the price volatility of the commodity being monitored.

There are really a great number of different ways to calculate an oscillator. I would even consider Welles Wilder's Average Directional Movement Indicator and also the RSI as types of oscillators.

The most common type of an oscillator is usually calculated as the price of a commodity minus the moving average of the Commodity.

Oscillator=Price - (Moving. Average of the Price)

Therefore, in order to obtain the above mentioned oscillator, one has to calculate the moving average of the price first and then deduct it from the price.

Calculating such an oscillator with a computer, is of course no problem at all, but 30-years ago when I started out in this game, there were no personal computers available, because they were still waiting to be invented.

Calculating a moving average oscillator then, was a time consuming affair. For me it was a problem in search of a solution.

After a lot of experimentation, I finally came up with my quick and dirty "JS Oscillator" I which was easy to calculate, had little lag and was very responsive to the changes in the price curve.

I have no idea, whether the JS Oscillator conforms to all the mathematical and scientific principles, but it has been very useful to me, for many years.

Having read a great number of books about futures trading in the past, I have never come across the methodology of the JS Oscillator before. If members have heard or seen it before, I would encourage them to share it with us in CTCN.

Here is how to calculate the JS Oscillator:

  1. Set the decaying factor ALPHA to .9=90%
  2. Set the first day's oscillator value to zero and start with the calculation on the second day.
  3. Add today's price change to ALPHA times yesterday's oscillator value.
  4. Repeat step 3 for every subsequent day. That's all.

Chart that follows is in Print Copy

The decaying factor ALPHA to be used, will depend on the commodity and the time interval being analyzed (5-minute, hourly or daily). It will usually range between 0.80 and 0.98 (80% - 98%).

Anyone with a computer can calculate the JS Oscillator with the very simple Basic program below:

160 ALPHA=.9
180 FOR I=2 TO 500
240 NEXT I

A Very Negative Opinion of DBC Signal by A 5-yr.
User - George Moldenhauer

I would imagine that there might be a few of you that are using real-time data to trade . . . as am I. In fact, I have had real-time quotes for more than 14-years. Wouldn't you agree that real-time data should stave to be as flawless as possible?

Currently I am with Signal which I have been with for over 5-years. Unfortunately, they don't seem to value that long term client relationship. I would have to say that their service was never the best, but of late it has become unbearable. As I write this letter, I am on hold with their self-proclaimed customer service department. I was on hold with them for more than 25-minutes while one of their skilled technicians attempted to find the answer to my question (I have a timer on my phone which I pay close attention to). Rather than answer my question, they simply hung up the phone! This after making me wait for more than 25-minutes.

Since there have been changes in the trading times of many markets, I have experienced nothing but trouble and frustration with this organization. As you probably know, many markets now have an after hours session. Some of these markets (bonds, metals and currencies) open for business before the close of business of some other markets (S&P). The problem arises when these markets reopen before my program has had the chance to up date the data for the day. My software updates the daily range once per day by capturing the data on the screen. Now, I can't get complete charts for all markets since there is never a time when all markets are closed for the day.

When I address this problem with the service reps, I am lead to believe that I am the only one experiencing problems. They are completely unreceptive to the needs of their clients. When I call the customer service line, I usually pack a lunch and prepare to wait for up to an hour just to get them to answer the phone. In addition, the service department opens at 5:30 a.m. Pacific time. . . .

10-minutes after the Bonds, currencies and Eurodollars. If there is a problem, it usually can't be resolved for quite sometime after the markets' trade.

I've had it with the poor service, unreliable data feed and the arrogant attitude that the entire organization has. If you, are considering a quote service, I urge you to look elsewhere as I am now. The Signal people also provide the QUOTREK handheld service. I would like to hear soon from other members that use real-time data. I want to make a change immediately, but would appreciate input from other members first. Please call me by phone or FAX at 801-647-9478 as well as sharing your experiences with other members via this publication.

The Psychology of Successful Trading
Part I - Kent Calhoun

At our 1995 KCI seminar, I asked attendees why they were attending the seminar. I stated if they thought the answer was to become a better trader, or to learn to make more money, to think again on a deeper level of understanding.

Most people attend seminars to pursue their goals and feel better about themselves. Many traders are dissatisfied with certain aspects of their lives, yet believe by obtaining valuable trading knowledge and taking action, they may improve the quality of their lives. Once traders become aware of why they are trading the markets, their attitudes become more positive as they increase their levels of acceptance to new ways of trading.

The Importance of Attitude - In the Webster's New World Dictionary the first definition of "attitude," does not mention "one's manner of acting, thinking, and feeling that shows one's disposition." The first definition is "the position or posture assumed by the body in connection with an action, feeling, or mood etc." Webster's implies that a person's actions and body posture expresses his attitude.

A person's attitude is the way he looks at life, and this is reflected in his actions and beliefs. People who believe life and people are basically good, have a positive attitude. The opposite applies to a negative attitude. How is your attitude? Your answers to two questions will define your attitude. How is the world treating you? If your answer was "good," then so is your attitude. If your answer was "okay," or you took a while to answer, then your attitude is about average.

If your answer was "badly," here is another attitude question. Do you expect good things to happen in your life? If the answer was "yes," then your attitude is good. If your answer was "no," then you should definitely not trade markets. There is a strong correlation between expectations and results. If you expect negative results, then that's exactly what you will get.

A person who expects negative things to happen in his life has a losing attitude, and is labeled a pessimist. Instead of dwelling on the future opportunities for success, the pessimist looks to his past failures as justifiable excuses for not making an effort to move forward with his life. The worst psychological aspect of being a pessimist is that the possibility of positive behavioral change has been eliminated.

To the pessimist, a glass of water is half empty, but to the person with a positive attitude, an optimist, the glass is always half filled. The optimist expects good things to happen in his life, because he is willing to take responsibility for the events that occur in his life. The assumption and acceptance of personal responsibility is the key difference between optimists and pessimists, and between successful and unsuccessful traders.

A positive attitude does not guarantee success, but little success in life would be achieved without a person believing in positive results from their efforts. A positive attitude finds opportunities in the midst of failure, and is considered to be the psychological foundation from which all success is possible.

Think about this for a moment. Do people attempt to achieve goals they absolutely know they can not achieve? Or do people attempt to achieve goals they believe are within their ability? A person's probability of success is directly proportional to the belief in his own abilities.

Expectations create attitudes. When the nation's 100 largest corporations had their CEO's list the psychological characteristic they felt most responsible for their success, 93 of them placed the word "attitudes," as their first selection. High levels of peak performance and positive attitudes elevate one another to even higher levels, but the positive attitude usually preceded the actions.

The Cosmic Law of the Universe- There is one immutable Cosmic Law of the Universe, that has many different applications, "for every effect in life, there is a cause." This is sometimes called Socratic Law, since it was observed by Socrates over 400 years before the birth of Christ. The Bible recognizes this law as the "Law of Sewing and Reaping." It is recognized in physics as Newton's Second Law of Motion, for every action there is a corresponding reaction. Ralph Waldo Emerson called this the "Law of Compensation," given in his essay with same title.

Cosmic Law states we live in an orderly universe, which has specific laws that lead to success. For every effect there is a cause or series of causes that preceded it. If a person wants to achieve a specific effect, the individual needs to institute the causes to achieve the desired effect.

The Law of the Cosmos applied to individual psychology and trading states, "thoughts are causes, and conditions are effects." Winning and losing, and success or lack of it, are direct causes preceded by actions, or inaction's, which were in turn preceded by thoughts.

Expectations define attitudes, and attitudes dictate actions for any given set of conditions. Success is basically knowing what trading actions should be taken in any set of technical circumstances, and developing the iron-willed self-discipline to take those actions.

By the way, Socrates believed an idea could change the world, and taught this to Plato, who was the teacher of Aristotle. (Fortunately, Plato wrote down the teaching of Socrates, who never recorded his lessons.) Aristotle was the teacher of Alexander the Great, who conquered the world.

The Four Steps to Trading Success - Only one person can give you success, and that is you. The most difficult step to success is the first one, which is total commitment to achievement of a specific goal. Commitment to achieving a specific goal is 51% of all trading success. It is very important for each person to decide what, and why and when a person wants to achieve any goal before making any commitment.

The second logical step to successful goal achievement is to acquire the education necessary to obtain the goal. Doctors go to medical school, attorneys go to law school to receive the education necessary to practice their trades. Successful traders must seek out educators, and try to learn from their instructional presentation of materials.

The third step is what Einstein labeled the most important step to achieve success - action! "All the knowledge in the world is useless without the ability to take action," as Einstein pointed out. Step three applies the knowledge obtained in step two to real world situations.

There are two kinds of trading education, learning obtained from books and seminars, and knowledge obtained from the experiences that life teaches. Formal education may or may not teach an individual how to trade, but allows the trader to learn from the mistakes of others. This is a good learning experience, since it would take the trader a long time to make all the same mistakes. Education from real life trading experiences teaches an individual survival instincts.

The final step to achieve success is to apply analytical evaluation to the actions taken in step three. This places emphasis on repeating actions that produce the desired results, and examines closely what does not work. Once the reasons are clearly understood why some technical actions do not produce desired results, they should be adjusted, improved, or discarded.

Summary of Part One - Traders have learned the value of a positive attitude, and how important it is to have a game plan to achieve trading success. This presentation on the basic psychology of successful trading may leave the reader with the false impression that achieving trading success is an easy process. Not so. Unfortunately, three powerful negative emotions stand in the way of successful trading; fear, anger and guilt. These deeply internalized and intertwined emotions undermine trader's development of self-discipline, a vital necessity for trading success.

General George Patton stated, "a warrior's greatest asset is self-confidence," this comes from self-discipline. Understanding how the three negative emotions relate to trading, and managing their negative effects, so self-discipline may be achieved is the subject of Part Two.

Should We Organize A Book - Exchange Library? - RWC

I have found a version of the Colver System, termed the "Modified Colver Method", in Charles Patel's out-of-print book "Technical Trading Systems for Commodities and Stocks," and I enclose a Xerox copy for you. I still have not found the Spike-35 System, and I don't have a catalog for Windsor Books.

In his book, Patel outlines in very brief terms the mechanics of 87 different systems. But unfortunately he does not evaluate them nor give the results of any test runs, probably because the book was printed in 1980, which was before personal computers began to be widely used for that purpose. My local public library obtained a copy of the book from the Orradre Library, University of Santa Clara, Santa Clara, California, fHG, 6046, P37, on interlibrary loan.

Do you by any chance happen to have a copy of the book "The Taurus Method" by Michael Chisholm? John Hill, in an early issue of "Futures Truth," mentioned that this work contains an excellent section on stops, which suggests ways in which various types of stops can be selectively used for best results under various market circumstances, and I would like to see what it says. The book is apparently available only by purchase from Mike Chisholm, and it costs $75.

How many $50, $75 and $150 books does one have to buy in order simply to browse them for new ideas? I read them once and then, except for a few standard reference books, they end-up on a shelf somewhere forever. We need a lending library for commodity traders. If you have this book in your own library, would you favor me with a call, please?

Editor's Note: On the surface, this sounds like a great idea. Members lend others their books rather than spending money buying them. However, some authors and trading book vendors would not be happy with that arrangement, as it may detract from their sales. Subsequently, they may be less likely to put in all the effort required writing and marketing new books. After spending a great amount of time and effort writing a book, the authors believe the book should be purchased so they receive some income from all their efforts. Commodity books are very specialized and different than most other library books. They are also sold to a limited size small niche market. That's one of the reasons you see very few of them in public libraries.

Daytrading - Week #1 - Don E. McCullough

Perhaps you're wondering what's with all these articles coming from me in the past few weeks. Easy. As I told you, I am now a free man daytrading for a living. Attempting to at least. Got more time on my hands than I've had since preschool. The freedom and extra time are wonderful while the daytrading is a struggle. I'm confident once I begin executing consistently all things will be wonderful!

I've just completed my first week of (serious) daytrading and have made a grand total of 7 trades. Had I taken all of my good signals, I might have averaged 7 trades per day-and I would have made a good deal of money for a week's work.

The S&P market is intimidating to the newcomer and I'm not ashamed to admit it. My last trade was my best one that I entered, took a small loss, and then reentered about 2-minutes later and that caught the top. By best, I mean most difficult psychologically. I mustered the courage and "got right back on the bucking horse!"

It was a week that reinforced the validity of my signals, but was riddled with my indecisiveness to trade them. I expect daytrading the S&P will take some adjusting to, to an extent I would not have previously believed. Being too hard on myself is not the thing to do, while facing all the facts most definitely is. Decisive action and/or consistent execution is really where it's at, providing your entry and exit signals are truly valid

Another thing that didn't help was the very slow reporting of my offset orders. Can you believe having to wait as long as 18-minutes to get an offsetting fill price from your broker? (Rather, order taker.) The S&P market can move $1,000 or more per contract in 10-minutes. I may have to search out another brokerage firm.

These order takers tell me that the more experienced traders use at-the-market orders for both entry and exit of their positions. By doing so, they say you then will get a "flash-fill" and will thus not have to hang-up the phone before getting your fill price. Well . . . already I've seen where they cannot supply these flash fills in a fast-moving market. Makes good advertising copy though.

I complained about slow reporting of my fills and got moved to another trading desk, but I'm not sure there's been any improvement. I found out if I did a lot of trading, I might be able to place my orders directly to the floor. There the order taker gives the trader in the pit your order with hand signals. Of course, if you buy a seat on the exchange, then I expect there's more angles to placing an order than you could shake a stick at! And, your commissions would drop to a very low (I forget exactly) 2-3 dollars per trade. I am sure this would vary from exchange to exchange?

Since trading and studying the markets, it has been said, to be a rather lonely business (for many) I believe newsletters such as this one affords the reclusive trader a means to "socialize at a distance."

Love Being a Full-Time Trader From Home - Paul Ryan

It is great to have a forum like yours, especially for one who is striving to be a successful trader whose life and well-being are really on the line trading everyday. I can't share any great easy secrets, but I'd like to share some thoughts and perhaps a path with the potential to introduce you through your desire and hard work to someone who can help you.

I'm approaching my 50th birthday. After 22-years working night and day in the fine dining restaurant business, which I loved, realized after a divorce and children I never knew or saw, that there was more to life. Having been an investor for many years, I began to think about becoming a full-time trader. I was fortunate to meet a wonderful woman who has encouraged me to become the best that I can be. We have beautiful twin girls now and two years ago after a lot of soul searching.

I took the plunge to working alone. No employees, no customers, very little contact during the working day with anyone. I love it as I'm sure you do. The decisions we make are totally our own whether we win or lose, we learn and hopefully grow. For years I have bought and read many books, magazines, etc. As you have, we all search for the so called "Holy Grail" and stay within our comfort zones, never realizing greatness because we don't step out.

Back in February, I spoke with Kent Calhoun of KCI Seminars. During our conversation there were many chords that rang a bell with me, both from a trading perspective and on a personal level. At the time I was trading the S&P on a one lot and scared from all the dues and tuition I have paid while trying to maintain my family, Kent has always been compassionate, understanding and sincere and immediately offered me a lot of personal insight.

I purchased his work and after these many months and still amazed that he shares his life's work and love for so little in terms of dollars. I could not produce so much truth and knowledge in two lives. It is overwhelming and I am ashamed that I can't honor him by being a supertrader yet. He has given me a sense of order to the market which my mind could never have imagined. I know that how I use his shared knowledge depends upon my own psychological strengths and weaknesses.

I encourage any and all of you who still struggle in darkness and can't see the proverbial "forest through the trees" to call Kent and find a mentor who both professionally and spiritually is a human being that lives a life based on truth that is absolute. He is truly the epitome of the qualities that life has implanted in all of us, but few have achieved. You will have the opportunity to uplift the life you love to levels that you never expected.

I would publicly like to say to Kent, thank you for sharing the results of a life that will long be remembered and that I will strive to put your effort to work in my own life, both professionally and on higher human plane. The best is yet to come for all of us.

Sometimes You Have To Give Back Part of Your
Profits - Dr. R. Bunshah

Bruce Kramer raises some interesting points in his article on "About Market Structure and Simple consistent trading & Five Vertical Bars." 5 VBTP is certainly an excellent technique. However, as is stated at Kent Calhoun's seminars by the professor himself, a lot of the profits are given back. Therefore, I would be very interested in hearing Kramer on money management, stop placement, psychology etc., but more importantly on methodology for profit taking. So, I await further writings from Mr. Kramer.

Candle Power Anyone? - George Campbell

Since subscribing to CTCN this year, I have found it most informative and enjoyable reading. Of course, not all of the submissions I can relate to directly. And some touch software or trading plans I am not familiar with. But on the whole, it is refreshing to hear from the "doers" instead of the "teachers."

I have been trading for about 5-years and have enjoyed a modicum of success. From my perspective, the most essential rule the new trader must learn, practice and never violate, is sound money management. For me, that means I never risk more then 5% of my trading account on any one trade. That one principle allowed me to make at least (if not more than) my share of mistakes early on and survive. And all those mistakes were great, ego deflating lessons that are long remembered.

Since I started reading CTCN, and judging from content, there seems to be a shortage of "option" traders making submissions. I know as my trading style has developed, I find that about 90% of my trading activity is in options. And that brings me to the subject that prompted me to write.

I use FutureLink, OptionVue IV and 6-months ago purchased Candle Power 4.5 (version 5.0 has just been released) from North Systems of Salon, Oregon. I have found it to be a very useful tool that is easy to use with a lot of potential. It can be used to trade any market, but I would very much like to hear from anyone using this to trade commodities.

Don McCullough wants the Following
Information from Bob McGovern

  1. Buffer that eliminates bad ticks
  2. His real-time data source. 28,800 baud?

I just found out the newest MetaStock real-time program and the international receiver provided by Signal can double my present real-time baud rate. From 9600 to 19200. The less the delay the better when you're daytrading the S&P.

I have ordered this latest MetaStock real-time version (4.52) and already have the international receiver. Also I had to switch from C-Span to CNBC. C-Span does not transmit the faster baud rate.

The data I receive appears on my screen about 30-seconds after the floor traders see it. This is not a well-tested number and I determined this by asking my order taker in Chicago to give me S&P quotes and waited for that number to appear on my screen. This was during a very slow S&P market on Sept. 7, when traders were rolling over to the Dec. contract. In a faster market, the delay might be as much as a minute or more.

Someone in a recent article mentioned that the delay might be as much as 2-minutes. That's terrible. I can tell you for sure that most of my signals must be taken within 1-3-minutes. Giving traders delayed data that's sold as real-time shows a lack of ethics on the part of the vendors. Especially so when you consider the high price of such data.

In fairness to the data vendors, I do think they are trying to narrow the time gap between when the quote is seen by the floor trader and the average trader sees it on his screen. I would like to see this gap narrowed to just a few seconds. Of course, I'd like no gap whatever, but we all know even the speed of light requires some time.

Information on Bruce Gould's Money-Machine - G. M. Sun

This money-machine costs $2,500. Mr. Gould said it was the one method which stood out above all the rest in his 28-years of commodity trading experience.

His basic method is 1-2-3 price patterns and breakout patterns. He is the author of the following books: 1. How to Make Money in Commodities: The Successful Method for Today's Markets 2. Dow Jones-Irwin Guide to Commodities Trading 3. The Greatest Money Book Ever Written.

Options & Spreads: the Business, the Profession,
the Sucker-Trap - Greg Donio

A cloudy afternoon in Manhattan. At Minerva's art studio the model Barbara arrives, a brown-haired Venus in blue jeans. She chats with us--artists, students, hobbyists such as myself--in a tiny accent that hints an Italian cathedral town. Then she doffs her clothing, strikes a pose, and becomes Aphrodite on the misty shores of Cyprus.

During a break, I stop trying to be the ink-sketch Botticelli momentarily while art studio owner Minerva Durham lets me use her business phone to call a broker's 1-800 line. I doubt if I would qualify as a Renaissance Man, but I try to give attention to both the fine arts and the gold florins.

"Your option spread order was executed," he says. "You sold 10 April 70 calls at 2-½ and bought 10 June 70 calls at four." He mentions the underlying stock, the option symbol, and the point-and-a-half debit that I required iron-clad when I phoned in the order earlier that day.

On the same day, I both bought and sold out-of-the-money call options on the same stock. The June's I bought being "richer in time" with more months until expiration than the April's I sold. Also more expensive due to time value. Buying $4,000 worth (four points times 10 calls) and selling $2,500 worth (2-½ points times 10). I paid only the point and a half debit or the $1,500 difference plus commissions.

This was a "horizontal spread" using call option contracts on the same stock at the same striking price (70), but different expiration dates, a couple of months apart. Whether or not I would enjoy a profit would not be known for at least two or three weeks. But the odds favored it by more than 90% because of that important "going in" bottom line: $2,500 of somebody else's money and only $1,500 of my own!

I live a do-what-I-want life, poring over musty volumes on the Kingdom of the Two Sicilys or the life of Verdi, then checking with the broker via the library phone booth. I take a college course in archaeology at the New School for Social Research and Finance & Investments at New York University.

After one class, NYU professor of finance and floor-trader Rich Bensignor remarked to me, "The way you make your living, you must spend your day glued to a computer screen." "Not really," I replied without elaborating. No need to mention the ink-sketch Dianas and exquisite brook-naiads from Deer Park or New Rochelle.

Almost as much as any Greek temple or Roman pantheon, the Mercantile library on Chestnut Street in Philadelphia stands brick-firm in my memory even though it was demolished years ago. In its business section, I first read about "spreads" and "spread strategies." I use them with stock options or equity options, but they can also be used with futures options and futures contracts themselves.

The substantial advantages of spread strategies include the following:

  1. The likelihood of a profit is over 90% as opposed to over 90% losses when options and futures are "played long."
  2. You "make out like a bookie" in that you use plenty of other peoples' money--amplitude that sweetens the pot.
  3. Other peoples' money cushions and shields your own investment capital when markets, portions of markets and individual stocks and futures contracts become tempest-tossed. Bob McGovern wrote in CTCN (2/95): "I don't have to figure how much my short October is making or losing, or calculate how much the long April contract is making or losing. All I have to check is the difference in price between the two contracts." Thus the spread strategist can be seen relaxing while financial cyclones wreck other traders' money and nerves.
  4. There are at least two ways to profit, one of them termed "time-decay." Being closer to the expiration date, what you sold (short-end) shrinks faster in value than what you bought. Your investment is in the gap between them, what McGovern called "the difference in price between the two contracts." The widening of that gap means your vein of gold becomes broader.

With time-decay, you use "the ravages of time" as a force to swell bank accounts.

The second way to gain is a switch to the long position. Let us say that an underlying stock or futures contract rises to the "striking price" level of your horizontal call option spread or descends to the level of your put spread. You buy back the short-end and let the long-end remain. According to trend theory, that underlying security has "broken through a barrier" and will probably continue in that direction. Such a continuation increases the long position's dollar-value.

Some spread strategists wait until the underlying security passes through the striking price and into the money before they buy back the short-end. I close out the short-end when the security "touches" the striking-price even though it is not yet "in the money." The continuation failed to occur only once and succeeded more times than I can count. Delaying the buy-back would have meant more cost and therefore less profit because the continuation--Bless it!--swells the short-end while beefing up and fattening the long.

Remember that American-style options can be exercised at any time, unlike the just-before-expiration European ones. Buy back, close out any in-the-money short positions fast! Also, when following trends, remember a statement by Nicholas Darvas: "There is no such thing as "can't" in the stock market. A stock can do anything!"

Due to space limitations, this article contains only bits and pieces of information on spread strategy. This form of trading offers plentiful profits with amazingly low risk, and the use of other people's money while they take the big risks. But read and learn you must, and in no small depth.

Several excellent books suitable for this purpose will be named shortly. Apply their instructions wisely and you will make a mental shrine of where you first read them, as I have with the Mercantile Library and earlier books on the subject.

One text earns mention right now -- Wasendorf & McCafferty's All About Options, because on page 149 it contains the following combination checkered flag/warning flag: A negative personality rarely earns profits consistently. They are usually attracted to options for the wrong reasons -- to make a lot of money fast without exerting much effort. Therefore, they don't spend the time required to learn some of the more complicated strategies that are more conservative by comparison.

Spreads stand prominently among the "more complicated strategies that are more conservative by comparison."

The minimum needed to become a trader in stocks, futures or options is low: A checkbook and enough mental competency to sign a few papers. Little more than the requirements for a racetrack sucker! People are "attracted to options for the wrong reasons--to make lots of money fast without exerting much effort. Therefore, they don't spend the time required to learn." Did you ever read a more concise description of an empty-pocketed horse-player?

It brings to mind a book not about investing: Magic in the Modern Manner by stage conjurer Cecil Lyle, in which he devoted a chapter to a stand-out card trick. He wrote, "Many will stop reading when I say you need four double-faced playing cards for this effect. Many others will continue reading, but will not bother to obtain the necessary items from a magic dealer. A few will take the trouble, and they will possess a gem of card magic."

What a lament! How fed up he must have been with would-be Houdinis who craved spotlight and applause, but got lost when it started requiring effort. Not restricted to conjuring, this ilk teems in the financial world, comprising the "sucker trade" at many an exchange and brokerage office. It's easier to write a check than to develop one's brain and know-how.

For those willing to devote professional-grade time and effort toward trading and options and strategies theme books possess locked vault value: Sure-Thing Options Trading makes the honor roll on both the basic and the sophisticated levels, authored by George Angell. Outstanding is the word for David L. Caplan's The New Options Advantage; it deals with futures options, but its techniques also apply excellently to equity ones.

All About Options by Russell R. Wasendorf & Thomas A. McCafferty has already been cited, but it deserves a second mention and a third. Allan S. Lyons' Winning in the Options Market and Harvey Conrad Friedentag's Investing Without Fear--Options, should both be required reading, gunpoint compulsory maybe. Too little has been written about the worthwhile long-term options, but thankfully there is the loaded-for-bear-and-bull LEAPS--Long-Term Equity AnticiPation Securities by Harrison Roth.

I have detoured around books that are calculus-heavy. Physicist-turned-Wall-Street-broker, Basil Venitis told his NYU finance class that information contained in obtuse mathematical formulae can be stated just as well in plain English.

Webster defines diligence as "persevering application; persistence; characterized by steady, earnest and energetic application and effort." The financial world is full of wrecks who do not fit this profile, who wrote a check and expected wealth to fall into their laps. It all comes down to this: Acting on your own, can you educate, train and discipline yourself as a West Point cadet or a medical student is educated, trained and disciplined?

Actually, you need not put in nearly as many hours as they do. But you must put in substantially more time, effort and perseverance than the "fast and easy money" crap-shooters, you must handle trading as a business or profession with the diligence due a business or profession.

Except for some dividends, nearly all my 1994 income was Form 1040 Schedule D--Capital Gains, thanks to covered calls and spread strategies. I have the time to peruse an archaeological text and to try creating a new Medici Venus on pearlcoat studio bond. Paradoxically, I have the time because I put in the time, and what Webster called "steady, earnest and energetic application and effort."

Technical analysis or chart analysis fits in well with spread strategies--the horizontal calls above the rising security, the horizontal puts below the falling one. Wall Street's and NYU's Rich Bensignor said of charting and trading, "Old support lines become new resistance lines and vice-versa. You will lose the bulk of the time unless you make it your passion or profession." The passion, the profession, the intricate know-how, sets apart the scientific trader from the racetrack sucker who uses a broker in place of a bookie.

Try to Realize it's All Within Yourself - No One Else Can
Make You Change - George Harrison

You are providing a wonderful forum for ordinary traders to share their experiences with others. Here are some thoughts that I wish to add to the melting pot from my own experience.

But, first some background. I had been racking my brains for 11-years trying to figure out a way to beat the markets. During this time I lost enough money to pay for my house. I became so frustrated and angry (with myself) that I lashed out at the world, almost losing my family and friends in the process.

In my attempt to discover the Holy Grail, I purchased numerous books and tapes, attended seminars, always hoping that the next one would provide the answers. Instead, what I discovered was that the books, tapes and seminars were for the most part a complete waste of time. For example, one famous teacher and his partner purported to reveal three mechanical systems that had been computer tested and proved to be over 80% accurate. I subsequently discovered that the sample size was so small as to be statistically invalid.

The same celebrity (hustler?) then sent me in the mail news of a startling new discovery he and his (new) partner unearthed. Do you recall the words of P. T. Barnum. Yes, you guessed it. I fell for the pitch hook, line and sinker. The state of the art software had proved to be over 68% profitable with profits exceeding $70,000 over 2-years.

Three weeks into real-time trading, it became apparent there were a number of bugs in the program. The software developer issued two (or was it three?) revisions in as many weeks. When I confronted the promoter he Indicated that his results - presumably after the bugs had been eliminated - were profitable. These individuals are still promoting the product through seminars and magazine advertising. Amazing!

About this time in my trading career a number of things became blindingly obvious. Firstly, I had to develop my own approach to the markets. Secondly, the simpler the methodology the better. Thirdly, and most important of all, the key to profits is knowing how to trade.

I have developed an approach that is based solely upon market action. No oscillators, no convoluted relationships between market internals, just a simple assessment of what is going on in front of my eyes.

I have settled upon trading the S&P 500. Although, I am a day trader, I do not trade everyday, perhaps, eight to ten times per month. Typically, I risk less than $200. In a recent conversation with a fellow subscriber to CTCN, he asked who was the best teacher I had met. In all honesty the answer to that question is I AM. As you are your best teacher. I firmly believe that you have to distill what makes sense to you and then make it a part of yourself.

There is so much to learn from real-time trading that cannot be learnt from books or simulated trading. Unfortunately, most of the material out there is written by theoreticians. Connors and Hayward in their book, Secrets of an Investment Fund Manager, discovered from their publisher that 80% of his clients do not trade. And still the public consumes the product as fast as it is produced. Forget all this nonsense. You already have the answers you need.

TradeStation Historical Data - Terry R. Davis

Anyone using TradeStation continuous data for testing or as a basis to buy an advertised system should be very careful. As a general rule, I am suspicious of anyone supplying me with historical results on continuous data. After my experience this week my suspicions have been confirmed. I was approached and asked to put one of my systems in the TradeStation format. No problem! I was to work one-on-one with an expert "Easy-Language" programmer. It didn't take long to get program coded, but when we ran the historicals they were horrible.

The TradeStation printout of historical results were saying that the system over 15-years was only about 22% accurate. I decided we should zero in on a smaller time-frame where I had the actual data - not continuous. We selected soybeans from 90 to 93. I always pick soybeans because it is such a dog to trade. If I can get something to work on beans it will work on anything. We ran the program first on continuous with poor results - a loss of $1,400 over the 3-year time-frame.

Since I had the real data for that same time-frame, I checked it trade by trade by hand. The differences were outstanding! Many trades in the continuous feed didn't even exist in real-time. There were also several winners in real-time that weren't printed out on the continuous sheet. The continuous data showed $1,400 worth of losses. When in actuality, there were over $5,000 in gains when applying the real data. Quite a difference wouldn't you say? Be careful what you believe in!

During the above scenario I met an excellent TradeStation Programmer named Jeff Panic. He is very conscientious, helpful and best of all he can get your program going in a hurry. I'm sure he will be able to help.

Miscellaneous Ramblings from a Neophyte Named Zas - Ron Zasadny

Could it be??? na.... but then again maybe... The Holy Grail might be found in the kingdom of K.I.S.S. (Keep It Simple Sweetie) I think I am on to something.

Re: G.Bashar comments on sales of trading systems (Vol 3-7) and an excellent response from "Anonymously" (Vol 3-8) add another slant. Most successful trading systems are of a trend following nature, consequently as more traders use the system, more volume is generated which has a tendency validate or confirm the trend and drive the trend further, thus becoming almost a self-fulfilling prophecy. As the markets are so large and traders so diverse, it would be impossible to sell or even give away enough programs to adversely effect the market. A good example would be to attend any market seminar and observe the many divergent opinions in attendance (the bigger the ego the more divergent the opinion seems to be).

On "Advanced G.E.T." - I recently attended a free seminar sponsored by Trading Techniques Inc. (216 645-0077) the producers of "Advanced G.E.T." I learned more from their presentation of Elliott, Gann, and the Fibonacci ratios then I have from many paid supposed "educational seminars" which end up being thinly disguised sales presentations. Apparently, Tom Joseph is a 18-year trading veteran. He hired some computer programmers to computerize some of his trading ideas using Elliott wave counts, Gann's concepts of squaring of price and time and Fibonacci ratios thus creating "Advanced GET" which he then preceded to market to recoup the costs of programming.

The seminar was conducted by Andy Bushak who actively trades, plus two other customer support members which are active traders. He is very easy to listen to, humorous and knowledgeable speaker. The agenda consisted of a simplified approach to Elliott wave counts, some statistical analysis of various wave probabilities, Fib. ratios, risk reward ratios and Gann counts. Again and again he stressed keeping it simple in regards to comments from the attendants. After a sumptuous free lunch (who said there ain't no such thing as a free lunch) he spent a couple of hours demonstrating the software, including using it on any current markets that the attendants were interested in. The total sales pitch was about a minute's worth of telling us how much and how to buy the software. He let the software do all the selling by actual real-time any market you want analysis. The software has a built-in trading simulator that can really teach you how to use the program and by gosh ... actually trade. I suppose one could write some of the oscillator and wave counting algorithms into existing toolbox type programs, but why reinvent the wheel. This baby really works! As usual all the customary disclaimers (no financial interest, all markets risky etc.) apply. I don't even own the program yet.

Money Management is 70% of the Game - James Vick

I'm a new member, and first I'd like to express my respect for this newsletter and its members/contributors. High quality of dialogue, interesting editor's comments, etc. Definitely a welcomed addition to the futures trading community!

Second, I must compliment Tom D'Angelo for his imaginative approach to money management as described in the Aug/Sept issue. Anyone who has the persistence and staying power to develop a product and bring it to market in this business deserves credit. I believe that Tom published his methodology in Technical Traders Bulletin in 1990. So although it is not new, it still is better than nothing, which is where most traders start out in money management. By the way, I consider money management to be the determination of what size positions to carry. In other words, your system or method tells you when to buy or sell and at what price, and the money management tells you how many contracts.

While the Profit Center concept may have served gamblers and sports bettors well as Tom says, futures traders should view it only as a first step. After all, many traders already have their trades grouped within systems if they use system testing software. If you trade systems without testing them or at least knowing the track record, then you can't or won't, use most methods of money management!

Ralph Vince has taken trading money management way beyond Profit Centers in his three books ― Portfolio Management Formulas, The Mathematics of Money Management and The New Money Management. Each of these short but intense volumes has built upon the previous, and at the end, Ralph has a quite sophisticated (albeit hard to understand) model which is mathematically rigorous, statistically correct and "State of the Art."

While readers may be able to glean from these books, the concepts of how money management should be implemented, as a practical matter most traders won't be able to actually put the methods to use until some software is available, which hopefully will be soon.

Tom has included the first of Ralph's concepts, optimal f, in his money management software. But members should be aware of both the downside and potential of optimal f as explained in Portfolio Management Formulas.

There were also two articles on money management using optimal f in Futures Magazine of September 1995, the second of which explains it in more general terms. In all of these materials, however, the focus is on money management for a single system or method. Ralph's two later books extend the theory to portfolios of systems or methods.

So what about the 70% proportion of trading that money management represents? As Ralph Vince points out from the start, a trader can't succeed with bad money management even if he has a great system, but good money management can make even a marginal system quite profitable. It's all a matter of odds, time and reinvesting profits ― but you have to trade the right size positions!

Market Psychology, is Vitally Important for
Success - Trevor Byatt - Part Two

13. Reverse the natural reactions initiated by hope and fear, i.e., you should hope that profits will increase and fear that losses will increase. The overwhelming majority wrongly do the reverse i.e., they take profits too quickly (fearing they will disappear) and keep losing trades (hoping they will decrease). They should keep winning trades (until stopped out by rising protective stops) and quickly close losing trades (however, much it may damage the ego - if you are rich enough to afford the ego you do not need to trade).

14. Never become complacent. This frequently happens after a string of good profits, which often are followed by unacceptably large losses. In such a situation, lighten up or stop trading and take a look at yourself. The unacceptable losses will inevitably be the result of complacency and consequent failure to follow the rules. Start trading again only after you have fully recognized your mistakes. If necessary, take a vacation or an extended period of not trading. "A great many smashes by brilliant men can be traced directly to a swelled head-an expensive disease everywhere to everybody, but particularly in Wall Street to a speculator" - Jesse Livermore.

15. Never think as a biased bull or a biased bear. Decide from your system whether the situation is bullish or bearish or neither and act accordingly. By all means "Have an opinion on what the market should do but don't decide what the market will do" - Baruch. "There is only one side of the market and it is not the bull side or the bear side, but the right side." Livermore

16. Never trade for the sake of trading. Only trade when your system indicates a high statistical probability of success. Exercise patience (often difficult) and wait. "It was never my thinking that made the big money for me. It was my sitting. Got that? My sitting tight ... Men who can both be right and sit tight are uncommon. I found this one of the hardest things to learn ... It is literally true that millions come easier to a trader after he knows how to trade than hundredsdid in the days of his ignorance." - Livermore.

"Knowing when not to trade - patiently standing aside until just the right moment to enter the market - is one of the toughest challenges facing the trader." - Kroll

When in doubt get out or do not get in." - Gann

17. Act promptly and decisively and do not procrastinate. When your system indicates a potentially profitable situation - ACT (also, of course placing a suitable stop).

18. Work hard. Always keep your charts and analyses up-to-date and your hard disk organized. You must be organized in order to conform with 17 above. Remember that successful trading is not easy any more than is success in business and/or a skilled profession. A 10- year period of study and experience is usually necessary prior to any spectacular success.

19. The human mind is more flexible than any computer. But it is subject to adverse behavioral patterns. Hence the best approach for most people is a good system - aided by a computer to save time - and then followed by analysis by the trader provided he or she exercises rigid self-control as indicated above. Maintain an open mind. Do what is right (which is frequently not what feels comfortable). Dogmatic and rigid personalities rarely if ever succeed in the markets.

20. Follow the rules of Neuro Linguistic programming (NLP). For further details, see "The New Market Wizards" (Faulkner) by Jack Schwager.

(i) Use both "toward" and "away from" motivation.

(ii) Break down potentially overwhelming goals into chunks with satisfaction geared from the completion of each individual step.

(iii) Have a goal of full capacity plus - anything less being unacceptable.

(iv) Fully concentrate on the present i.e., the single task at hand rather than the long-term.

(v) Personally involve yourself in achieving goals as opposed to depending on others.

(vi) Make self-to-self comparisons to measure progress based on past performances.

21. Never be loyal to a trade. Close it when the time is ripe. The market is utterly ruthless and it could not care less about you or your opinion.

22. Never get mad with the market if you make a loss. If the loss is small, it may well be consistent with your system. If it is large, it is almost certainly either your fault for not following the rules or the result of a surprise event beyond your control. Chalk it up to experience and move on, but never consider that particular stock or commodity owes you - it does not.

23. You can't win if you feel you have to win to survive. This is irrational gambling not logical speculating. Never turn to the market because you want money from it for a specific purpose (e.g., a new car, boat, house, etc.) - you will inevitably lose and be worse off.

24. The key to building wealth is 1. to preserve capital and 2. to wait patiently for the right opportunities. Then and only then will extraordinary net gains be made.

25. Remember price movements are largely, but not entirely random. They give statistically valid signals and stay trending long enough to make substantial profits in short-term, medium-term and long-term trading. Which time-span you choose will depend on your own individual psyche and lifestyle. However, under no circumstances will you make net profits unless you exercise strict self-discipline along the lines indicated above.

I hope the above will help you. It is the result of hundreds of hours of research and study of the opinions and rules of a large number of traders who have proved themselves to be highly successful over extended periods of time.

References (and Recommended Reading):

Market Psychology Books - Schwager, Jack - Market Wizards; Schwager, Jack - The New Market Wizards;

Letevre, Edwin - Reminiscences of a Stock Operator;Name Withheld, Jacob - The Investor's Quotient

Elder, Dr. Alexander - Trading for a Living (Market Psychology & Technical Trading Book); Krastins, Ivan - Listen to the Market (Tech analysis & trading book)

All books available from: Research Technology Corp. Proprietary Ltd of Sydney Australia.

How to Use Carrying Charge Spreads to Make
Money - Bob McGovern

Most traders know little and care less about carrying charge spreads. However, at times, these simple spreads offer good opportunities for profit.

What is a carrying charge? Normally, it is considered to be the amount charged for storing, insurance, handling and financing the cost for any storable commodity.

So, what is a carrying charge spread? It is a spread between two different futures delivery months of the same commodity. The distant month would be at a higher price than the nearby month. If the distant month's price is equal or greater than the near month's price, plus storage, interest and insurance for the period between, the spread is called a "full carry" spread. (The exception is in Frozen Pork Bellies, which I won't cover now).

To enter a carrying charge spread, the trader would buy the nearby month and sell the distant month. He knows that if he sells the distant contract at or near full carry to the nearby contract, the chances are slim that he will have much risk. Unless there is some unusual factor influencing the market, such as the possibility of rapidly rising interest rates.

Most of the time a full carrying charge does not occur. Sometimes the opposite happens, and the nearby month is higher than the distant month because of market conditions.

Usually, full carry spreads happen in a bear or down trending market which has been going on for some time. Of course, this is probably the time to enter such a spread, based on contrary opinion and low risk factors.

As the spread gets closer to full carry, it attracts more traders, causing upward pressure on the nearby contract (the buy side), and downward pressure on the distant contract (the sell side). This causes the spread to narrow and move away from full carry.

One risk in a full carry spread is that nothing at all will happen. The trader must get out before expiration of the nearby contract, thereby losing his commissions, or he rolls over to the next delivery month, with hopes that the spread will narrow sooner or later. In either case, commissions are paid.

Carrying charge spreads are thought to have less risk, yet they still have good profit potential compared to many other commodity trades. Sometimes a spread will go to 70%-80% of full carry, and in fact, very seldom in actual practice do they go much higher. This is because actual loan rates are less for commercial interests, causing full carry to be less for them than the trading public.

There are times when a spread will go beyond full carry, usually due to extremely bearish sentiment. Such an event provides the trader an opportunity to lock in a known profit, assuming interest rate stability.

Most traders don't understand spreads, and pay little attention to them. The commercials do. However, they may want to purchase the cash product and sell cash forwards, rather than trade the futures. They have many other reasons for such actions, and I'll talk about that in another letter.

Pay attention to the carrying charge spreads. They could be another avenue of profit for you in your trading activities.

To figure carrying charges on a few more popular commodities, I have compiled a table below which you may find useful. The table is in Print Copy.

Good Spreading to All!

On PocketCharts/PPS/6-Million$Man
Gann/Club 3000, etc. - C. J. Casebeer

For CaLey Wong and all readers, pocket charts are published by Russell R. Wasendorf, Box 849, 802 Main St., Cedar Falls, IA 50613, and the yearly cost is $52. They are also a broker and publish "Factor", futures newsletter. All I get and use are the charts.

Don McCullough sure gave us a good use for spreads to "play the corners."

DCH from Germany is brace! I think he should use his system for a few months at least, and then if successful, he should write how and what he did. Saying he is giving traders some advice before he has proved his methods, again brave. When he has proven his goal, I may be interested because he'll have more advice and will be more practical. Will 70 trades be a fair test? How many trades per day, etc.?

Curtis Arnold's PPS is simply a rehash of a certain classical patterns, but interesting reading. Michel Arminoto, " Six Million Dollar Man" is also rehash of years of publishing books and systems, but a lot of charts to study. It seems there is little really new.

There is so much written about W. D. Gann and his mysteries. I recently read that his son said his dad died with an estate under $100,000 and most of it and his living was made by selling his methods, books and course. Gann was a master of keeping everyone guessing his secret, if there really was one. So people bought it. All his lines and squares, etc. are too much for most traders. There are easier ways to trade, than by all his astrology and vibrations, etc. I tossed him out years ago, because I believe in KISS!

Larry William's stock & futures books of the late 60's and early 70's got me started. Ken Friske of Tread Master got me going on long-term charts, Bruce Gould helped in the late 70's, early 80's. Even Ted Warrens' futures charts were helpful back in the old days of the 70's. I did subscribe to Bo Thunman, Club 3000 for a few years, but too much on computer subjects for me. An old Onion trader named Kimball was helpful for a few years too.

Subjectivity in Determining Pivot Points - Jim Mann

Consider the following bar chart:

Charts in our printed version.

Is C a valid pivot? On the computer, A, C and E have pivot laws of strength 1. However to the eye, A, C is insignificant compared to A and E. So do you use C in your trading system, even if it only takes out the law of the previous bar by 1 tick?

There are ways to filter out C as a pivot using minimum price swings and/or detrending moving average techniques. These filters tend to optimize price swing determination by introducing more rules and parameters.

Jim Mann wants to know if anyone has developed a system for trading Merrill MW Waves on an intraday basis? I encourage everyone to read about this swing method by Scott W. Barrie in the August 1995 issue of S&C magazine. Feel free to answer via CTCN.

Advice from A Polish Trader on Real-Time
Data & TradeStation - Stefan Krajcir

If you want to be a good trader, you have to work hard all the time. You said you don't have enough money to trade comfortable with. My suggestion is, if you get enough capital for trading, you should run your software at least 3-months before you trade. Most software has too many features and problems. It takes 6-months to operate to feel comfortable using it. You should get software that is capable to chart intraday. You don't have to trade intraday, you can use intraday as a filter for entry and exit.

I have TradeStation 3.x and Bonneville satellite data feed on a 10-minute delay, it cost me $50 a month. If you have time you can watch 10-minute delay on your computer and practice with that. There is lots you can learn. There is nothing wrong if you have 10-minute delay and can't watch it. If you come home everything is in your computer and you can review specifically what has happened during that day with your orders. Fifty bucks is cheap tuition to pay every month for data and see what was happening all day, you never can get that much knowledge from end of the day data service.

My reason for purchasing TradeStation is if I rent their software it will be expensive, as 10-months=$1,800. By buying it, I don't have to pay any more.

You have to count on yourself to straighten out your problems, it takes time to learn that. I don't know which software is best. It costs lots of money to buy them all and a great deal of time to operate them. When you trade you should concentrate only on trading. If you trade and figure out how to use the software at the same time, then you won't know what you are doing. You need a clear head and specific rules on what you are going to do, not guess.

Also, very important is discipline and money management. You can trade well if you follow rules right. If you second guess, you go no where.

My suggestion is whoever writes in CTCN should indicate what software he is using and rate its quality, including his data source. He should include his system name and % return. That way we can see what the members are using and how they are doing.

Write c/o CTCN If fellow members would like to contact me to exchange information:

Only discipline succeeds - second guessing is like swimming with the sharks!

Does anyone have the formula for TradeStation 3.x, Elliott Oscillator 5/35 (difference between a 5- period moving avg. and the 35-period moving avg. Good luck with your trading.

Editor's Note: Stefan is from Poland and his English is not good. Therefore, per his request to do so, I made a number of word modifications and interpretations, so it was easier to understand.

Biggest Day for the S&P 500 - Don McCullough

On October 19, 1987 the DJI and the S&P 500 fell an all-time record amount for one day. I'll concern myself with only the S&P in this article.

From the close on Friday 10/16, to the close on Monday 10/19, the Dec S&P contract fell 79 points. In dollars per contract that amounts to $39,500. I wanted to see the worst case scenario and see if I'd be able to get out of such a mess without losing enormous amounts of money. (Actually, several locked limit days could hurt you more than this one day.)

See the 3-minute bar chart showing Oct 16 thru 20. Putting the 19th in context you might say. Also there is a daily bar chart of this contract.

A 3-4,000 dollar range for the day is a pretty big day for the S&P. Multiply that by 10 and you can see just how large a move occurred on Oct. 19, 1987. The day started by gaping down 19-pts or $9,500 per contract. One hell of a way for a bull to start his day--wouldn't you say? Now, there would have been several one-half hour suspensions of trading on such a day. Also, the first limit-up or down day is now limited to 30-pts.

When you look at 10-19-87 on a daily bar chart you see one super huge bar down for the day. Makes you wonder if it was possible to get out and save your can on such a day. I wanted to see this day as it appears on 3-5 minute, intraday, bar charts. There were several places during the day when a day trader could have cut his losses. They could have been substantial, but nothing like the full drop of this day.

Several days previous to the 19th were very bearish, so there really wasn't much excuse to be long at the close the day before. Fact is, on the 16th the market dropped more than 20-pts from its high to its low. That's $10,000 per contract. Why on earth would anybody want to be long that market at the close or for the next day?

If you'd like to buy the data pertaining to this super down day and related days you may do so by phoning Tick Data, Inc. at 1-800-822-8425. A couple of other wild S&P market days are: Oct. 22, 1987. On this date, the S&P gaped down 55 points at the opening. Also, Oct. 13, 1989 the Dec. 1989 S&P fell 30.60 points from its high to its close for that day. That equates to today's 30-pt limit for the first day.

As I mentioned, a day like this is not the worst possible thing that can happen to you in the S&P or other markets. The worst possible thing will be when something so terrible happens that nearly all markets will lock limit down for several days in a row. Then, I can imagine where the officials of the exchanges will stop trading for from one to several days. Then, I can imagine (I'm stretching now!) where the markets still continue to lock limit down. This may be stretching things too far, but you have to agree that atomic and germ warfare, (to name a couple of very negative happenings) although not probable, are possible.

Of course, the markets are about probabilities (never certainties) and "end of the world scenarios" are not the type of thing to be constantly pondering. However, sometimes something very close to that happens. For instance, have a talk with the guys who kept shorting the grain markets when the blight hit the fields in the 70's.

The right mind-set is: the markets can do anything at anytime. I don't mean you should be constantly worrying about this, but only to keep that in the back of your mind. Play the probabilities or good bets, but be ready for anything, and the market is never wrong. The market doesn't have to "get with you." You have to get with the market.

What I've just written reminds me that we have had one heck of a bull market in stocks (and the indices) for around 13-years. Check it out on some weekly or monthly charts. This could continue for several more years--who really knows? However, sooner or later, there will be a big drop. How big and when, I have no idea. And, because a lot of people have this in mind that just might help to extend the bull move! Tricky stuff these markets.

Editor's Note: Charts appear in our printed version but are not available in our free online edition of CTCN.

Don McCullough on Real-Time Data

At the start, I subscribed to Signal's delayed data and futures markets only. This cost me $60 a month and the Chicago markets arrived on my screen about 10-minutes delayed and the New York markets about 40-minutes delayed. Now that's delayed!

A few days ago, I changed to bonafied real-time and only the two Chicago futures exchanges. This is much more expensive than delayed time and now I pay $355 a month plus $31 a month for my cable TV service. I got the cable TV hookup mainly for the markets and receiver to connect to. That's a total of $386 per month for my real-time data. This means I'm serious about the markets or I sure as hell better be!

That delayed data was a real pain. I was constantly having to guess what the bond market was doing 10-minutes ahead of what I was seeing on my screen. I had a little help from Signal's free Dow Jones Industrial data which was real-time. When the DJI looked like it was strong and going to get stronger, I would sometimes buy. I also would call my broker's quote service for the latest price before making a trade. The New York markets being 40-minutes ahead of what I was looking at on my screen were totally out of the question!

I'll start trading seriously using real-time charts in a few weeks. I have to send more money to my broker, so I can afford one or two S&P contracts. It's a struggle finding out what markets you want to trade. To me, the S&P charts the best and offers the most potential, so my choice is rather easy. I have spent years going over charts of all the major markets as far back as the 60's, so my selection of the S&P market is for good reasons. By the way, and I won't tell you why, I think the best chartists are in the S&P market.

I nearly forgot to include an important problem I had. I don't think it's very serious now, but when it occurred, I was not happy. Seems about once or twice a year the cable TV companies do what they call a "cable sweep." That is, they check out the reception in various portions of their total area. One morning about 5:45 a.m., my MetaStock program told me my reception was poor. I immediately turned on my TV and had no reception on any channel. I then called the cable company and was told there was a "sweep" going on in my area. I lost about 14-minutes of bond market data because of that sweep.

There have been a couple of other 1-minute or so lapses in reception and some rather lengthy ones during non-market hours. I don't think this is reason for anyone to not use the cable TV hookup. I would prefer satellite reception and may eventually change over to it. Even then the Signal people tell me in cloudy, snowy and rainy areas satellite reception can fail at times. Here in California, I expect satellite would be the most dependable.

Hope this article will be of some help to you soon to be real-time enthusiasts. If I'm in error about anything, let me know. It'll be my gain.

I'm trying to find a book either titled or about Drummond Geometry. I read about it in one of my better market books and think it may be helpful with the markets. Can subscribers help me locate it?

Real-Time S&P Data from Signal's Delayed
Quote Service - Ernie Bacal

When I read about Tom Cruckshank contribution in Vol 3-5, May 1995 of CTCN, he asked if someone with the proper setup would test it since he did not have the proper setup. Since I have the proper setup I tried it. I placed side by side a real-time 1-minute S&P chart next to a formulated 1-minute S&P chart made with Signal's indices quotes. Signal includes real-time indices in both delayed and real-time broadcasts which would make the delayed data possible to do this with. This allowed me to place these charts as 2 separate windows in TradeStation. In the enclosed printout the top chart is formulated with Signal's indices, the bottom chart is real-time one minute S&P data. As you can see the charts are very close, but not exact as Tom said. The differences are only out-of-line when the premium or cash gets out-of-balance. But for the money this is as good as it gets and certainly good enough to make money from. Yes, Tom this setup does work.

On the funny side of this, traders who need to keep costs down would find this helpful, but may not be able to afford trading the S&P. And traders who trade the S&P can easily afford the real-time data. In any case, if you want to follow the S&P real-time and save $200 a month, this can do it.

CTCN has been very educational and useful.

Editor's Note: Charts appear in our printed version but are not available in our free online edition of CTCN.

Fathoming Larry Williams 1987 Robbins Trading
Contest - Tom Schlobohm

No, this is not a success story. I didn't figure out how Larry did it. However, I felt my approach would be of interest to others. So, here it is.

I was fortunate that some years ago I obtained a copy of Larry's 1987 Robbins Monthly Commodity Statement Activity and Open Positions reports detailing his contest results. Unfortunately, these reports had essential information blocked out whether Larry had bought or sold and the number of contracts traded. Lack of this data made everything else useless. All that was available was the liquidation date, the futures contract traded, and the results, i.e., the dollar debit or credit.

Anyway, I stumbled on a method of determining the number of contracts traded. Then, knowing the number of contracts traded, I could calculate the gross (before commissions) profit or loss. With this information and by making an assumption about whether the trade was liquidated at the close as a day trade or the following morning at the open (my reasoning to be discussed below), I would have a handle on the possible entry point. Sometimes, based on price action just prior to the probable time of entry, it was possible to assume whether the position taken was long or short. Other times no such assumption could be made.

How then do you determine the number of contracts traded? Simple, just use the formula total commissions=number of contracts traded times per contract commissions, or T=N * C. It follows that N=T / C. But, wait, all you have is one equation and there are three unknowns. As everyone knows, you can't solve an equation like this. The first thing to do is to determine the commission charge per contract (C). Then you have one equation with two unknowns. However, since these two unknowns can assume only certain values, the equation is therefore solvable (within limits). The number of contracts (N) must be a positive integer.

On any trade the total profit or loss (before commissions) can assume only certain values and must equal the product of the dollar value of one tick and the total number of ticks profit or loss. Therefore, total commissions (T) on a trade must equal the difference between the total tick value and the net profit or loss.

To determine the commission rate for T-Bonds or the S&P, for example, go to the early January trade results (when fewer contracts were traded, making calculation easier). Arbitrarily assume the minimum and maximum amounts charged for commissions, say $5 to $20. For example, on 1-07 Larry had a net profit of $453.60 trading T-Bonds. You know that the smallest gross profit he might have had was $468.75 (or 15 * $31.25). This means that the smallest amount of total commissions for the trade might have been $15.15 (or $468.75 - $453.60). If this were the case and if one contract had been traded, then per contract commissions would have been $15.15; with two contracts, $7.58; or $5.05 with three. But, maybe gross commissions were $46.40 ($15.15 + $31.25). Using the $5 to $20 limits and the above procedure, additional possible commissions per contract can be calculated. Anyway, you end-up with a dozen or so possible amounts with no idea which is in fact the actual one. Next, follow the same procedure for another trade. What you then have is another dozen or so possible values. You will find that in your two lists of possible commissions, there is one value in each list which is the same. This is the commission rate. Does the same procedure on two or three other trades, and you can confirm you have found the correct amount?

Having found the number of contracts traded on a particular day for a particular contract, how do you proceed? First, try to determine if Larry liquidated his position at close on a day-trade or next day's open. On Pg.-126 of his "The Definitive Guide to Futures Trading Volume II," Larry discusses his Overnight Formula. I won't repeat this formula here, but I did use the Overnight Formula to try to see if the trade might have been for one day only or could likely have been carried overnight for liquidation at the open. Then I checked one possible entry procedure Larry might have used. This procedure was the "Profitable Day Trade Patterns" shown on page 122 of the same book. Well, Larry doesn't seem to have used this entry procedure nor any of the others I hypothesized.

How did Larry clean up? I really haven't been able to figure it out. Maybe Larry will tell us at one of his seminars, if he hasn't already made it public.

The Elliott Wave and You - Terry R. Davis

Have you ever read that Elliott Wave is too subjective to trade with?

I have a friend, who shall remain nameless, who sought Elliott's knowledge. He searched for a chaotic mentor and finally found one who promised great knowledge for a great fraction of money. He flew to his house and was taught at the feet of the master for a weekend. One of the mentor's favorite sayings was "when in doubt about the wave count, you are in some type of wave four." This is closely akin to saying you speak all languages but Greek. When asked to speak Spanish you reply - "that's Greek to me."

My friend came home bubbling with his new found knowledge. He was so impressed with his psychological mentor, that he let him trade a $100,000 managed account. After a month's worth of following the markets, my friend came to a remarkable conclusion: Elliott Wave is too subjective to trade with. Unfortunately, this knowledge came with a price tag in the thousands. What about my friend's managed account? The mentor increased the account by $5,000 the first month. At the end of the second month, the account was back to even and the mentor had frozen ... couldn't pull the trigger anymore. So much for Elliott Wave, right? Not exactly!

You may think from this preceding paragraph that I think Elliott Wave has no value. After all wasn't it George Lane who said "any system is a success if it sells enough copies." Being in the "systems" business myself, I must say that I would have to agree with Mr. Lane's comments. There I go again ... rambling. I am a Christian and believe that the cyclical nature of all things (including the futures markets) has to be in harmony with nature.

Elliott Wave has been referred to as Nature's Law. I would rephrase it and say "Elliott Wave is one of nature's laws." I do not think of EW (Elliott Wave) so much as a system, but as an adjunct to determining which side of the market I should be on. For this it is excellent. Wave four is the hardest to identify, because of the many formations that take place there: double threes, a-b-c's, quadruple bypasses and the like. If this sounds like so much B. S. That's because it is. For us to identify wave four, we need to look outside of EW structure for another technical.

Editor's Note: This is Part One. Part Two will appear in our next issue. We originally wanted to publish this article in its entirety but were unable to due to its length and the fact we were limited to 14-pages at that time. Therefore, we made a Special Report out of it. However, Terry called to say he was disappointed and wanted the article published in the newsletter, not only a Special Report. Consequently, we are publishing his contribution in several segments. This problem caused by lengthy articles should be avoided in the future thanks to our new 28-page format.

Member Requests & Announcements

Daniel Fidlow has an answer for Don McCullough who asked for contact for "Drummond Geometry." As of 1991, his address is Charles Drummond, PO Box 209, Bridgewater, NS, 4V2 2W6, Canada.

Enjoyed last issue, keep up the good work.

Don Kasischke wants info on Gann Pivot System by Bruce Babcock, contact in writing via CTCN.

Tom Dunkerley wants info on David Wright's S&P Cherry Picker. Contact in writing via CTCN.

OEX option traders: Who has real-time trading experience with "CMI Index Options Trader" newsletter & hotline out of Florida? Anyone have real-time trading experience with an OEX advisory of some sort that is consistently profitable? Please contact Marc in writing via CTCN.

Stephen Sturgis is interested in meeting other traders in the San Francisco Bay area. Contact in writing via CTCN.

Joe Ferraris wants to have opinions on George Fontanills' Optionetics Trading System.

David Fent wants the following info: I noticed in the Aug/Sept issue that both Greg Meadors and Randall Brooks have good things to say about "harmonics or harmonic files." (Editor's Note: See our Website for Harmonic Data Files info). Can you advise me as to what literature I can buy that discusses this topic? Can you advise me where I can obtain the Joe Ross course "How to Place Trading Orders" as mentioned by Simon Campbell in the Nov '94 issue? Suppose my methodology says buy a futures contract based on a swing point or breakout. I want to participant in the anticipated price movement, but cannot tolerate the risk of being locked out while limit move nor trading days go against me. Are you aware of any information I might access that deals systematically with safer ways to speculate, i.e., using options or putting on a bull spread instead of being "naked" with a futures contract? Also, wanted to buy 50 to 100 S&P 500 5-minute tick charts, hard copies only (a non-computerized member).

Buzz Ross is looking for an issue of the Desk Set of out-of-date Fall 1993 Knight-Ridder's (Commodity Perspective?) "10-Year Weekly Range Charts." Contact in writing via CTCN.

Editor Comments & Reviews

We received a review copy of Gary Smith's new book " Live the Dream by Profitably Trading Stock Futures." Published by and available from Bruce Babcock.

Gary Smith is a CTCN member and contributor. He is one of only a few traders who has a documented real-time profitable track record. Over the years Gary has successfully traded the Stock Indices (mostly one-lots in the NYSE Composite Index). Bruce says Gary is "the only person in the world with a documented 10-year record of day trading success," and Gary "has been profitable 95 out of the 122 months from March 1985 thru May 1995, with a batting average of .779."

This book is a very-well done hardcover 250-pg. book. I read the entire book and found it very interesting and informative. Gary goes into great detail on the many methods he uses to trade successfully. Including, 69 large 5-minute bar charts used as examples, and 21 historical testing reports on variations of Gary's mechanical day trading systems.

It seems Gary has succeeded in identifying non-random, exploitable situations he uses to trade stock futures profitably and consistently. One of the most amazing things about Gary's trading success is the fact he has done it without using a computer, without intraday charting and without live quotes! The book is available from CTCR Products. Contact in writing via CTCN.

Adam White is now publishing his own newsletter titled " Investors Timing Service", It is geared toward longer term stock market investing. Adam is a very knowledgeable and well regarded technician. He has written many excellent articles dealing with market technicals, which have appeared in several publications and magazines. He has also written several articles for CTCN, including a few reprints from Technical Traders Bulletin, written by Adam.

Adam's Sept 1995 issue covers subjects such as Long-Term Buy & Sell Signals in the S&P 500 Index. The Present Position, and Advanced Dollar Cost Averaging Program. A free sample issue is available to CTCN members. Contact in writing via CTCN.

Effective with this issue we are changing to a semi-monthly publishing schedule. Don't worry about receiving less information than in the past. In fact, if anything you will get more information as we will be publishing 28 or more pages semi-monthly. That compares to our current 14-pages monthly. In addition, we plan to do occasional extra mailings and offer additional benefits.

We are making this switch for the following reasons, not necessarily in order of importance:

1. It will allow us to publish more in-depth articles. There have been several submissions lately that were far too long (multi-pages) to publish in one issue, and still have room for many other important contributions. Therefore, we were forced to split those unusually long contributions up in more than one issue, or else not publish them. Alternatively, we occasionally will make a Special Report out of them. Some of our contributors of those lengthy articles were disappointed due to our space limitations.

For example, due to extra space we are able to publish the long article from Tom D'Angelo, covering his excellent money management article, in one issue.

2. It will let us to be more in-sync with Futures Truth Ltd., whose rankings are looked forward to by many CTCN members. They also publish their reports semi-monthly. That way every issue will have up-to-date FT rankings. We will no longer have to publish a notice in alternating issues, about the reason there were no FT rankings in that month's issue.

3. Due to extra time available, we will be better able to cover both sides of important or controversial issues, in the same issue. You may not have to wait until the next issue arrives to hear about the opposite side to an article. For example, in this issue Gary Smith writes about some items he does not agree with involving Greg Meadors and the controversial trading contest. As a result of extra time in putting this issue together, we received an article from Greg Meadors with his side of the story. That was due to the fact Gary was nice enough to have Faxed a copy of his article directly to Greg.

4. Even though you will be getting the same (or more) pages of knowledge (28 vs. 14), we will still save some time. Putting 28-pages together takes about the same time as 14-pages times two. However, there are some other time savings involved. Our new schedule will allow us to devote more time (between issues) involving other benefits for you. Such as possible educational seminars, video tapes, trading manuals, special reports, software and other potential benefits for you. In the past, we have had little time to devote to other beneficial activities. For example, our series of Special Reports were delayed due to time constraints.

5. One reason this change does not detract from CTCN's value is the fact we are not an advisory service and do not give specific trading advice. We are an educational journal, so rarely is there a need for rapid transmission of news, and quick publishing schedules aren't necessary. If in fact fast information is needed, you can participate in our optional Knowledge Groups. They will allow you to get super fast information, if you need it. See below.

6. The fact we now have (optional) Knowledge Groups, also known as Special Interest Groups, is an important factor. This means if you are a Knowledge Group participant you can call other members for speedy information on products and services. You can now get fast and easy information directly from other Knowledge Group participants. You will not have to wait for the next issue of CTCN to arrive to receive written product information from others. You may still wait for a written response, especially if you do not want to join the Knowledge Groups, or not in a particular hurry to receive the information.

7. The extra space will allow for expanded editor comments. There have been many times I wanted to give additional insight into a subject under discussion but was unable due to space constraints.

Our new schedule results in the Oct/Nov issue (this issue) being mailed mid-October. Subsequently, the next issue will be the Dec/Jan issue, mailed out about mid-December, etc.

Thank you for your understanding about the need for our revised schedule. You can be assured this new publishing schedule will be of benefit to you.


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.

The reproduction, copying or publication of any part of this work beyond that permitted by Section 107 or 108 of the United States Copyright Act, and also World-Wide International Treaty Provisions, is unlawful. All Rights Reserved. Written permission from the Publisher/Editor is required for reproduction in any form (with proper credit to CTCN, including our address and phone number being required), and may be withdrawn at any time. Commodity Traders Club News (CTCN) is a 'Clearing House' or 'Information Exchange' for members only. We do not verify, (and we have not) verified the accuracy of the mathematics or numbers published herein, or accuracy of comments and remarks made by the authors. All information and remarks in the contributions are the opinions of the author or contributor, not the Editor or CTCN. You should be aware that P&L reports and advertisements are frequently based on hypothetical (not real-time/actual) trades. Article headlines or Sub-Headlines sometimes may be changed or written solely by the Editor, using verbiage the Editor believes highlights important points being made by the contributor. CTCN Membership, which includes our bi-monthly CTCN newsletter is "Your Guide To Profitable Trading and How To Save Money Along The Way." It's regularly priced at $100 (US) for 1-year. . . and includes free postage within USA & Canada (add $20 for Overseas Air Mail). Publisher:, D.B.A. Our E-mail address is: Our Website address is Editor is Dave Green. The opinions and recommendations are those of our writers and not those of, CTCN, or its editor. (Note: There is high risk of loss in futures trading and past results may be difficult to achieve in the future and also may be based on hypothetical trading, with benefit of hindsight, and not actual trades) Note: We operate open member forums and consequently reserve the right to publish e-mail and other communications received. Therefore, please indicate "confidential" or "not-for-publication" on any e-mail or other correspondence sent us which you want kept private. Please contact us if we publish your comments and you object. Thank you.