New Trader - Learning With Every Trade, Loser or Winner - Tom McCullen
I thought I'd drop you a note saying how much I appreciate this newsletter. I'd been paper trading for a couple years, having gotten a start from the ideas of the Ken Roberts and the Larry Williams courses. I'd trade hypothetical 5K accounts because I knew that is what my initial stake would be. I didn't paper trade the KR style, 1-2-3 tops and bottoms, because it just seemed too simplistic to me. I liked the ideas that Larry Williams had about premiums, commitment of traders, and overbought/oversold indicators. Also, I subscribed to Commodity Price Charts which LW recommended which is full of various indicators such as RSI, 20-day stochastics, Williams and others.
I eventually evolved my paper trading into a "model" where I would only buy/sell depending upon if all of those indicators agreed. I really wasn't ever sure when exactly to enter a trade. The usual procedure would be to enter Monday since I received the Commodity Price Charts on Saturday. I really never felt comfortable trading that way, although on paper I had some success. Then I found your Website on www.ino.com and sent for info. I ended up ordering all of the back issues, which have been invaluable to me. Really, if you haven't ordered them then you should.
I know that this is just repeating what others have said but the D'Angelo Profit Center series as well as articles too numerous to mention really shot me up the learning curve tremendously. I was so excited that I decided to trade with real money (I had already set up a $5,000 account months ago with a broker). This was April 2. I looked for swing lows/highs on daily (not intraday) charts in trending markets and traded those signals.
The grain markets appeared to be trending the best to me so that's where I traded. My first trade was long one contract July Wheat. I placed a buy stop order above the close, had $300 slippage but did get filled. I was up $300 more in very little time and thought I'll move my stop to a level $50 less because I was happy with a $250 profit. A stupid mistake. The price bounced right down to my stop and then shot up about 40¢ ($2,000) since then. So I learned a valuable lesson right off the bat about being more careful about letting profits run. The next couple trades I again followed my plan exactly, but was stopped out at losses of $250 each.
I then read the Market Wizard books by Jack Schwager which has been mentioned several times in this forum. Definitely must read in terms of realizing the importance of risk management and acceptance of losing as part of the process of learning the "game." And I also looked back at Larry Williams Batting .800 manual, which when I first read it 2-years ago I could not understand half of what he was talking about. However, after having read CTCN, I really had a much better grasp of things. I found his zero balance formula which is quite interesting and has helped me figure out when to expect certain big trends.
I applied it to all my old charts and whenever a zero balance situation occurred, a trend could be predicted. I know that applying a system to historical data doesn't necessarily help in the future, but nonetheless it is very interesting. And, looking back at my July Wheat buy, this method picked the very day that I entered as a day when the market would start shooting up.
Although at the time I had no idea that was the day since I hadn't even heard of zero balance. Just coincidence. Moreover, in real time it's not so easy to know that you are in that particular situation but you can come close. I'm sure there are many interpretations that you can make off the zero balance charts and I'm referring to one situation. That's all I am comfortable with now and it doesn't give a whole lot of signals.
To summarize; After my first two weeks of real trading I am down $700 of my initial stake. (If I hadn't read all of the above noted sources, I probably would have thought about quitting out of frustration). I don't like losing one bit. But knowing that I'm learning with every trade, loser or winner, helps a lot. It gives you a little perspective. Two weeks ago I was afraid to trade for real. I'm not sure if it was because I thought I would lose money or not. Now I look forward to it, though I know losing is going to happen. My concerns are how to deal with slippage and deal with locking in profits so as not to avoid a big move.
My initial stop will probably stay at a $250 level, which is about 5-7% of my stake. As far as slippage goes I'm wondering if other traders will recognize that a possible pivot bar is occurring and will Buy/Sell near the close of the day, anticipating a gap or fast-moving market the next day. Or is that too risky if it turns out that it wasn't a pivot day and you got in but the price went against your position? I will trade based on the trend I think is going to happen and I will enter based on pivot points and we shall see.
If anyone has ideas along any of the lines that I mentioned, e-mail me, or to make it more of a learning experience write to CTCN with your comments.
Once Thought To Be Master Of The Universe - An Amazing Beginning - Henry Mandel
I'd learned that most lose their money trading. I was determined to be profitable. I opened a $20,000 account with Robbins Trading Co. I'd learned trading from Larry Williams video Tape course. I signed up for his hotline and traded only the signals I liked, based a little on what Larry teaches but mostly on intuition. In December '96, I made $2,000. In January I made $8,000 (after commission and slippage). In February I thought I was a master of the universe: I made another $8,000. Believe it or not, by the first week of March, I was up another $8,000!
I decided to change from end-of-day quotes to real-time and got set by the tenth of March. In about four days, I lost $8,000 day trading the S&P. Even though I went short or long in the correct direction! Fear and greed had asserted themselves. My timing and stops were wrong.
I called Larry and before I told my tale, as soon as I said I'd got equipment for real-time quotes, he shouted: "Throw it away; it will get you in trouble." I sent it back. I was shaken and went down $5,000 for March and then made the mistake of adding up all Larry's P&L for the four months involved (as reported in his newsletter). He actually lost a little money, averaging approximately $1,000 (roughly figured) for each month if you add $50 per trade commission cost. A double whammy of major proportions.
I wasn't a master of the universe and my guru whose signals I'd depended on, lost money in the 4-months while I made a lot. How did I do it? Could I do it again? So far no, I am down $10,000 to April 20. With G-d's help, better record keeping and much study and work, I believe I can continue to be profitable over time. I completely enjoy CTCN. I got all back-issues and am savoring them.
About Brokers, Data and Member Albert Orozco's Dislike of Editor's "Attitude"
I would like the name of a broker that will give me fast fills and minimum time on call. Does CSI data have intraday quotes?
I would also like info on your trading system. I don't like your attitude on letters about your system. People have a right to know what others are saying about it. We would like to believe we all are capable of weeding out things we don't agree with. I don't like others doing it for me and don't understand how others would?
Editor's Note: We are still researching the quality of fills and service at Advantage Trading Group and are not quite ready to issue a report on them. As far as CSI is concerned, the last time we checked they did not offer intraday data, only end-of-day data.
By the way, we highly recommend CSI as your primary daily data source. CTCN has its own daily downloading portfolio setup on CSI's computer. It's known as the Trendx/CTCN Portfolio. It consists of up to 100 contracts, including our fixed 35-Market Trendx/CTCN Automatic Rollover Portfolio. The cost is $26 per month on a yearly prepaid basis. CSI's phone number is 800-274-4727 or 561-392-8663.
Editor's Note and Information Update, July 1997: We did not complete our research based on the actual trading of our account at Advantage Trading Group. This is because we closed our account at Advantage Trading Group due to other reasons. We won't be discussing this issue right now. All we can say at this time, is the fact we had extremely serious problems in our dealings with Mr. R.S., ATG's Pres. & CEO. At this time we can only say we no longer recommend them, more on this later.
About my "attitude," I always try to give both sides of an issue and be subjective and unbiased. We also publish most all contributions received without any editing. However, I must reserve the right to print occasional Editor Comments, especially to clarify or correct any known inaccuracies on points made by a contributor.
25 Vitally Important Points on Market Psychology
Trevor Byatt from Australia
I read the following quotation in an article on the current Prime Minister of Australia, Mr. John Howard, in a copy of The Weekend Australian recently and thought how appropriate it is and how completely it defines a successful trader:
"Howard personifies Bismarck's principle
that a fool learns by experience, a wise man by the experience of others. The
difference, of course, is that he (Howard) has also learnt from his own
How true this is of a trader. Utterly invaluable lessons can be learnt by reading the advice of experienced traders. For example, by reading the now classic Market Wizards and The New Market Wizards by Jack Schwager and Reminiscences of a Stock Operator by Lefevre in conjunction with clearly written books on technical trading such as Trading for a Living by Elder, and I suspect not such a well-known, but superbly written and readable book Listen to the Market by Ivan Krastins.
Of course, a trader will still make mistakes, but he or she can then keep losses from mistakes to a financially acceptable level during an admittedly long apprenticeship of actual (as opposed to paper) trading. Paper trading may have its place as initial practice, but the real final learning can only be experienced when your own money is actually on the line.
I drew up a list of what I considered vitally important points on the psychology of medium-term trading and which you published in Volume 3 No. 8 and No. 9.
1. Understanding and acting in accordance with market psychology is vitally important. It is no good being a good technician if you are a bad tactician.
2. Market psychology is very different from the psychology necessary for normal business and/or academic success. Many highly successful businessmen and academics have been abysmal failures as market operators.
3. Develop your own system, test it, then stick with it. Other people's systems may work well for them, but probably will not be compatible with your psychological makeup.
4. Accept total responsibility for the results of your trading results. Even if you authorized someone else to trade on your behalf, it was you who made this decision - nobody forced you. Remember losers always look for somebody else to blame. Winners look to themselves, particularly if they have to take a loss on some trades - as is inevitable for all traders and all systems.
5. Do not take the advice of others. They could well be thinking in a totally different time frame from you.
6. Always place a pre-calculated stop whenever you open a trade and decide how you are going to move this stop for all possible movements of price during the trade. Stick to your plan during the trade.
7. Do not keep ringing your broker during trading sessions to inquire about market prices. (The exception of course is the day trader who would be crazy not to have his own quote system.) Your stop will protect the decision you should already have made. Ringing your broker will adversely influence your decision and may cause you to act irrationally and hence almost inevitably wrongly.
8. Never worry that you could have done better had you second-guessed your system. Concern yourself only that you followed your system and predetermined stops. No system is perfect. The best systems can only give you an edge - never 800 of profitable trades.
9. Do not trade for excitement. Avoid elation over fast profits and depression over losses. If you have a good system it does not matter whether any particular trade makes a profit or a loss. Remember all systems will generate losses. Only chide yourself if you broke the rules of your system (this applies to profitable as well as losing trades).
10. Always trade with a view to protecting capital and limiting the value (not the number) of losses and never with a view to making large profits. Net profits will follow automatically if you execute a good system well.
11. Never worry about the ratio of the number of profitable to losing trades. A good system may generate a relatively large number of small losses (and small profits) and relatively few large profits. Sticking rigidly to a good system will however produce a good net profit over time.
12. Cut your losses quickly and let your profits run (with a predetermined stop). You should have read this advice so many times that it almost sounds trite - it is not - it is the best summary of all these rules that you could have.
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 raising 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" - 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 hundreds did
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 anymore 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
- Use both 'toward' and 'away from' motivation.
- Break down potentially overwhelming goals into chunks with satisfaction garnered from the completion of each individual step.
- Have a goal of full capacity plus - anything less being unacceptable.
- Fully concentrate on the present, i.e., the single task at hand rather than the long-term.
- Personally involve yourself in achieving goals as opposed to depending on others.
- 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 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 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 to preserve capital and to wait patiently for the right opportunities. Then and then only 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.
References and Recommended Reading
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
Krastins, Ivan - Listen to the Market
Exactly What Support/Resistance Numbers Does the Successful Floor Trader
re: Jim Molinaro's Letter In Vol. 4-#5 - Jim Shaw
Love the newsletter, hope to see Real Success bulletins return soon.
Editor's Note: Unfortunately, we must wait for authorization from for the CFTC/NFA informing us we are not giving trading advise in the Bulletin before we may resume its publication.
Also, in Vol. 4-#5, Jim Molinaro wrote about a floor trader who did very well using a simple plan. "Buy breaks and sell rallies at the support and resistance numbers. If prices broke through these levels he would take his one or two tick loss and reverse his position."
My question is what did this trader use as the support and resistance numbers? Did he use the highs and lows of the current day or the previous day's trading range, or did he have a different formula to determine these levels?
Maybe there are other readers of this newsletter who might share their favorite methods to derive these numbers.
Jim also states he has been trading since 1982, that's a long time and I'm sure he has many valuable experiences to share. I hope he can be coaxed into telling us more so complete novices like myself can gain some insight.
Volatile Market Conditions & Elevated Prices Make Using
Small Stops Difficult - Jack Zahl
I just signed up for Juno E-mail since I am not on the Internet. This is my first use of it. I saw one of your subscribers announced it in CTCN. I Heard about it from a relative.
After reading the latest copy of CTCN, I thought I would drop you a line with a few comments and queries. I have a 480-80? (Editor's Note: Is there such a computer) computer with Windows 3.1 and 8-MBytes Ram, nothing fancy here. My TradeStation shows none of the problems you seem to have. My "days back" seems to be very stable, it defaults to 8-days after each shutdown of the program no matter what it was set on during the previous session. The time at the bottom of the chart seems to read and be correct at all times.
I am concerned about a couple of items. The Robert Gross article indicates a 10-14 second max. delay in displaying data. I have sent a Fax to Omega for a clarification on this. No answer yet.
I follow the S&P every day. I have noticed that much of the huge moves are made the last 30-45 minutes of the session. I can't trade these moves with this system and my resources. Too scary. I have basically been on the long side of the market since the market has been mostly going up, and down moves did not seem to follow through, but after seeing the market action, I will start looking at the short side.
I have reviewed the Real Success Methodology tapes many times. I feel that I know the basics, as presented, pretty well. I do not feel confident about taking trades for two reasons: The markets are so volatile that they do not follow through much of the time. Many trends now seem to start from a point that does not lend itself to an entry with this method. Also, execution is very difficult in these markets.
My broker is Jack Carl. They have flash fills, so I know where I entered the trade, which is good. However, I have noticed that many traders must be doing something similar to what we are doing. It seems that on an entry signal by the time my order has been placed, the market shoots way past the two tick entry points, indicating much activity coming into the market.
Many times the entry is 30-40 points past where it should be. Then the market will drop back. I have had more than one trade where the market would shoot up. I would get in 30 to 40 points past the two tic entry points then the market would back off and head the other way fast. Going past the entry point in the opposite direction and hit the 60 point stop. It would sometimes do this all within 2-3 minutes. Sometimes it would keep on moving so fast in the losing direction that by the time I put in a call to the broker and the stop trade was executed, I would be down over 100 points from entry, so I started to place a stop with the broker at 60 points below the entry price at the time of entry. At least this has kept my losses small on each trade.
I have not traded since December, right after talking to you on the phone. I had seven losers in a row then. I will paper trade for a while and compare the 85 point stop with the 60 point stop.
Editor's Note: Here is a perfect example of how one trader (above) is unhappy and losing while at the same time frame (December) another trader (below) iss happy and making money, using the same basic methodology! See Donnie's comment appearing after this article by Jack.
Since you are selling more Real Success method packages, I hope you are right about it not affecting the potential trading results of the method for all of us. I don't know anything about floor traders, but it surely seems like they are laying in wait for traders utilizing this type of trading.
Editor's Note: The S&P 500 market is far too big and too liquid for a comparatively small number of our traders to effect it. Keep in mind, in all likelihood the vast majority of our clients are not even trading this method at any given time. Also, remember since the method is not 800 mechanical there are a number of different ways to trade it, including taking different trades than others are taking, and using varied target prices and other variable techniques involving a degree of subjectivity. This degree of judgment means very few traders are acting on the same entry signals and exiting their trades at the same time.
I still feel that I will be able to master this method. I'm counting on it. I look forward to getting, as soon as possible, the new tapes you are preparing.
Doing Well Trading The Real Success Method
I have also been having E-mail trouble! Have been doing fairly well at trading with the new broker, my last seven trades have made right at $2,000, December was a good month.
About Buying A Seat On The MidAm Exchange
I e-mailed the Mid-America Commodity Exchange to see about buying a seat ($8,500) and how much a MidAm member would pay in commissions versus a regular retail rate. When I get the stuff, I'll forward you a copy. A few bucks probably doesn't matter to short-term or to position traders, but for daytraders like me it is a consideration. If I do five trades a week at two contracts per trade I'll have paid for the exchange seat in about a year.
Reply from MidAm: "You might be able to lower your rates to about $4-$6 a round turn. We are sending you a list of firms that you call and find out how low commissions will be. Also, several firms have you call directly to the trading floor to place your orders.
We have members all over the country that are trading at membership rates. These rates vary from firm to firm but can be dramatically lower.
Thanks for your interest in the MidAm."
How Do You Allocate Funds To Different Systems And Markets - George Famy - France
I've enjoyed the articles on money management written by Tom D'Angelo with whom I had a chance to speak by telephone. Maybe Tom or someone else can help me with the following questions that I have.
Does anyone know what "fixed ratio" (a la Rumery & Lehman) trading is and why it is supposedly better than fixed fractional trading (i.e., what most pros use now)?
How do you determine how to allocate resources to different systems and markets to get the smoothest equity line?
I trade three S&P 500 Systems (one active, the other two infrequent special situations) and two systems on a basket of markets (intermediate term). All these systems have various profit factors, total profits, profit per trade, etc., but how do you allocate to them. Do you give the most money to the "best" system and less money to the others? Or do you give the most money to the system with the highest profit factor, highest net profits, etc.? Or do you allocate the same amount of money to each system whether it trades twice per day or once per month?
Thanks and good trading to everyone in 1997$$$
Terry Davis's Unabomber- 1 Minute Trading System
I just finished reading the above article. The methodology resembles somewhat John Stenberg's publication some 3 or 4-years ago. Of course, John also used another half a dozen indicators, many of which he abandoned in a matter of months. However, I would not be surprised that if John knows about this, he would write you a nasty letter.
Editor's Note: How could John Stenberg justify writing a nasty letter? This is because there is no way CTCN could possibly know prior to publication about a similarity or the degree of similarity between a method written about in CTCN and a vendor's methodology. In fact, you say it "somewhat resembles Stenberg's." However, this is not verified or proven. Even you use the term "somewhat resembles," which seems to say even you are not sure about a resemblance even though you are apparently familiar with his method.
In addition, we do not normally attempt to analyze and study the various methods written about in CTCN. Of course, if we had any prior information a contribution was infringing on someone's work we would certainly look into the matter before publication.
We are not familiar with the mechanics and algorithms of the many trading systems and methods out there. So it would be very difficult for CTCN to make comparisons, even if we tried to.
In addition, since technical analysis and indicators are limited in number and scope, there are no doubt similarities between many trading systems/methods. There are very few truly unique trading methods. There's probably a resemblance, to varying degrees, involving most of the trading systems and methods developed.
I don't think that the use of combinations of indicators can be proprietary or can be trademarked. For example, the use of Welles Wilder's volatility stop, Bollinger Band, Lane's stochastic and RSI, etc. in some combinations can be trademarked. It would be different if one went to a trading course and repackaged the material and sold it to the public.
I guess my question is the legality of disclosing the contents of a trading system, trading course, etc. Can you shed some light on this in your next publication if you deem appropriate?
Editor's Note: Of course, CTCN would never knowingly allow the publication of any information which discloses details on any copyrighted trading system or course. The keyword is "knowingly," in that we first must be aware it may be violating someone else's copyrighted and (or) proprietary method to avoid publishing it.
My Experience with the Advantage Trading Group
Based on the first article on Advantage Trading Group in CTCN, my partner and I opened an account with them. The account was opened under my partner's name. Our experience with them was quite negative.
The trading desk can execute market orders. But for "STOP" orders, they would not arb it in. They have to write the order or paper and have the runner hand it to the broker at the S&P pit. It may take some time to know if our order was executed because the runner has to take the executed order back to the desk. In a fast market, we may get 'killed' because the filled order maybe one or two hundred basis points from where the stop was. It would be at least several minutes or more before we know the fill. This is not acceptable for daytrading S&P.
The trading desk gave us a hard time doing cancel and replace orders. We stayed with Advantage Trading Group for a few days and then pulled out our account. We have more than 10-years of daytrading experience. The Advantage Trading Group is not the worst, but far from the best. My suggestion for the CTCN readers is that one has to be skeptical of the "owner's" promotion. It is not as rosy as one may think.
A Reply to Mr. Yee from Mr. R.S.
of Advantage Trading Group
As many of you have probably found out, when the market is extremely volatile all stop orders will go in to the pit on paper. When the market is ticking 40-60 points and the volume is high, brokers will not take stops "on the arb."
Beginners sometimes do not realize what really happens in pits like the S&P. The first priority is always market orders. When the market is moving fast, brokers will not take the time it takes to get a stop arb'd into them and then have to arb back to the clerk that the market is already through the stop and find out what the client wants to do with the order (go market or cancel). Needless to say, the market can move quite a bit in this time and the broker may miss other orders.
We clear through the biggest floor operation on the CME in terms of presence and volume. You can rest assured that if they are not arbing stops, no one is. The fact of the matter is that very few retail traders know how the pits operate and that's a shame because it could really help them trade.
NASDAQ 100, Check It Out - Don McCullough
The NASDAQ 100 is a relatively new futures market worth looking into. Trading began in this market April 10, 1996. The per contract margin is only about 1/4 the margin needed for the S&P 500. When the S&P makes a $2,500 move per contract, the NASDAQ will often make a $1,000 move. Multiply that $1,000 by 4 contracts and you have a $4,000 move vs. the S&P's $2,500 move. These figures are far from exact and the differences in the size of moves between these two markets can vary considerably.
My main reason for writing about this market is to, hopefully, persuade a lot of traders to start trading it and thus improve the liquidity--and chartability--for everyone. The much lower margin of this market and the 1/2--1/3 risk factor makes it much more appealing to the average daytrader than the S&P market. The only thing this market needs is more traders to increase the liquidity. In time, I think the NASDAQ 100 futures market may become as popular as the S&P 500.
The Signal symbol is ND and the trading months are the same as the S&P. (H,M,U,Z) Remember, this is a relatively new market, with typical growing pains. It's well worth looking into.
Editor's Note: I recall a NASDAQ futures contract was offered by one of the major Chicago commodity exchanges a number of years ago. At the time it was very heavily promoted and publicized but ended up being a complete flop. The commodity exchange lost a lot of money developing, advertising and promoting the new contract.
The contract was a total failure and I heard it was eventually de-listed as a result of very poor volume and resulting poor liquidity. At the time the problem was due to competition from the well established and highly liquid S&P 500 market. Traders were afraid to trade the new contract due to its very small volume and consequent poor fills or difficulty getting out of a position in a fast market. Unfortunately, this may happen again with this new NASDAQ contract.
"Street Smarts" - High Probability
Short-Term Trading Strategies
(A Book Review) - Raymond F. Kohn
I just finished reading Street Smarts (237 pg. $175) by Laurence Conners and Linda Bradford Rashke. (Published 1995, by M. Gordon Publishing Group, Malibu, California).
For many years Ms. Linda Rashke has been highlighted in various financial and investment publications, including articles for "Stocks & Commodities Magazine" She and her co-author, Mr. Larry Conners, are well respected in the industry and collectively have over 34-years of trading experience. They have seen it all, ranging from: Being floor traders, running an institutional desk, hedge fund managers, and being CTA's, while trading their own accounts the entire time.
The focus of their book is "short-term swing trading" of both the futures and the equity markets. The book is written for "active traders." The trading time frames for most of their trading strategies range from intraday to short-term (1 to 4 days). On very rare occasion they might hold an equity position longer.
Their trading strategies would be described as "well structured," but not strictly mechanical, combined with a heavy dose of "pattern recognition." Each trading strategy makes generous use of stops to limit losses and protect profits. The authors wait for specific and well-defined chart "setups" or "entry patterns" to emerge, either intra-day, or over several days, and then take the appropriate position. Their position exits are less formalized, and appear to be more discretionary and subjective in nature, with the use of trailing stops being a key element in protecting short-term profits.
The strategies they use are simple and easy to implement. Naturally a real-time data feed is necessary for trading these strategies intra-day or short-term. They describe their book as: "a manual of precise setups that have you in the market for only a limited amount of time. Consider it to be a collection of 'surgical strikes' with a distinct methodology for managing each one!" They further say that: "Most of the setups can be traded on any market and on any time frame."
This last sentence is very insightful. I am sure that we have all noticed the similarity between the chart patterns which exist between intra-day, daily, weekly, or even monthly charts. Markets tend to "move" in a similar fashion regardless of the time frame that we are looking at. Therefore, the investment techniques you learn in one time frame can be easily translated for use in another time frame. As a result, the value of this book is not strictly for those electing to trade intra-day because the strategies and concepts can be easily adapted to generate entry points for position traders as well.
The authors offer us 15 different "setups" or "patterns" which, in their own words, are designed to: "minimize risk and put the odds of success in your favor." In their preface they state: "even though we present many different patterns, you only need ONE strategy to be prosperous. Some of the best traders are successful because they trade only one strategy."
The 15 different "patterns" are divided into three general groups: "Tests," "Retracements" and "Climax Patterns." Five different trading strategies, or "patterns" are provided under the section titled "Tests." Three trading strategies are provided under the "Retracements" heading. And, seven trading strategies are provided under "Climax Patterns."
Each trading pattern is given its own chapter. Each chapter is well organized with a brief introduction of the trading pattern being discussed, followed by an easy to follow list of very specific "entry rules." Additionally, several sample charts are provided which highlight that particular trading pattern. Each significant bar on the chart is numbered, and a correspondingly numbered brief descriptive analysis is provided which details the action taken at that point in the chart pattern. Each chapter ends with a scripted conversation between Larry and Linda which is designed to give you an added "personal insight" about trading the pattern just discussed. It was a very nice and creative way of ending each chapter.
If I were to characterize a common denominator which seems to exist within each of their trading strategies, it would be that classic old-fashioned talent, (which is pretty much a lost art), of "reading the tape." And, more specifically, locating support and resistance levels and looking for price extremes, which have a high probability of being corrected with a price move in the opposite direction. Linda and Larry have developed and used these trading strategies over the past 15 years and have found them to be effective and profitable.
A shortcoming worth mentioning is the natural tradeoff which inherently exists in "short-term" trading. That being -- It would not be uncommon for a short term trader to exit a position, achieving a short term profit as originally intended, only to see the market momentarily pause before continuing onward, thus missing out on additional profits as the original trend resumes. However, it should be noted that any trading strategy you choose requires that you establish a trading "time frame," which then becomes the frame work of the selected trading strategy. As a result, you naturally sacrifice the potential profits that developed if you were trading in a "different time frame." But, as we all know, you can't live in two worlds at the same time.
Prior to reading this book, I had developed a number of trading techniques on my own that I have successfully used for many years, and coincidentally a couple of these entry methods are described in "Street Smarts." I know they work. Additionally, I am so impressed with a number of other trading strategies that were described in this book, that I will be evaluating them for possible addition to my trading arsenal.
The last chapter entitled, "The Secrets of Successful Trading," is a real eye-opener and is worth the price of the book all by itself. It was written by Mr. Fernando Diz, who is an assistant professor of finance at Syracuse University School of Management. Professor Diz completed a 20-year study between 1974 and 1995 of 925 CTA programs in order to discover what made one CTA program successful, while another failed. During the study period 435 CTA's or programs went out of business while the remaining 490 were still in business at the end of the study period. This chapter, and his research, have definitively answered that age old question, "What is the secret of successful trading?"
It would serve no useful purpose for me to paraphrase his results. You've already heard it a hundred times before. This chapter just seems to penetrate the "old gray matter" a little better when you get a chance to actually see the research techniques he used, the supporting data, and begin to understand the consequences and implications of his research. It literally is the difference between success and failure. This chapter is worth reading every so often just to keep yourself on track.
The book's Appendix contains research statistics concerning specific market activities that are only "generally related" to the trading strategies presented in the book. The authors describe these statistical studies as follows: "We wish to be perfectly clear that we are not testing mechanical systems. Rather, we are examining a variable to see if there is a tendency that might be useful as part of an entry or exit methodology. We use this statistical testing for its comparative value only. It is not meant to represent a mechanical system. Thus, no statistics such as commissions or slippage are factored in, nor are data on total profitability or maximum drawdown provided."
It is unfortunate and disappointing that the authors did not attempt to make a few minor (and fully disclosed) stop-loss and exit assumptions for the purpose of creating "mechanical trading models" for at least those trading strategies which lend themselves to such modeling. And then, back-tested and evaluated those trading models in a SystemWriter or TradeStation like fashion.
Providing back-testing results would not have been difficult, since they have already written the code and offer this code as an extra cost software package ($150.00) as an add-on module for Omega's "TradeStation," or "SuperCharts" for automatically identifying entry points and setups throughout the day.
The authors tried to present their trading strategies as not being "strictly technical or mechanical in nature." In other words, they're telling us that there are subjective and discretionary elements to their trading strategies. (This is a powerful caveat that shouldn't be ignored).
It has been my experience that technical trading systems can be generally divided into two general groups. The first is the "strictly mechanical" systems whereby entries and exists follow specific and inflexible rules, therefore, similar results can be achieved by different traders using the same fully disclosed mechanical trading system. The second type of system is "well structured" to the point of "appearing" almost mechanical in nature. But in reality, the system's effectiveness and profitability are based as much on the experience and subjective trading ability of the developer, as it is on the proposed "trading rules" that they provide you.
Anytime a proposed trading method includes ANY "discretionary" or "subjective" elements, Beware . . . It is these seemingly minor variations in applying the discretionary elements of a trading method that will kill you.
The lack of back-testing with reasonable assumptions for commissions, slippage and stop placements is a significant shortcoming of this book.
Editor's Note: Don makes a major point here, in particular with regards to the significance of mechanical stops not being included as part of this methodology. See the Editor Comments section for more on this.
If you purchased and read Joe Krutzinger's book, "The Trading System Tool Kit" (which was the subject of my last book review), you can appreciate the significant "void" that exists in Street Smarts that could have easily been filled with quick run on SystemWriter, or TradeStation. (Especially since they have already written the software code.)
If you decide to add this book to your library and implement some of the trading strategies, I would suggest that you fill in that unfortunate "void" that I mentioned above, and create an appropriate mechanical trading model. Editor's Note: Much easier said than done! (which reflects how you plan to use the selected trading strategy), and then back-test that model over your historical database.
This book is priced at the high end of the scale. And, at those price levels, Linda and Larry have provided an eloquent, but unfinished symphony of trading ideas. The book is well done and worthwhile, and I recommend it to anyone looking to expand their understanding of short term trading and entry point identification techniques. It is a tribute to the concept that successful trading strategies cannot only be simple, but very effective.
Help For Sam Fuqua In Portland &
(A Book Review) - Raymond F. Kohn
Sam Fuqua requested some assistance in locating a local tax preparer (CPA) in the Portland, Oregon area who would be familiar with Ted Tesser's book Trader's Tax Survival Guide. I hope this information can be of help.
It has been my experience that "tax preparers" often are not familiar with unusual areas of the tax laws. CPA's are sometimes better equipped, but they too, can also have blind spots when it comes to unique, "less defined" areas of the tax code.
The US Tax Code has become so complex that the IRS itself, has a difficult time administering the code, (let alone us poor taxpayers' trying to comply with it). It has often been said that the tax laws have become more of an art form than a science. To further emphasis that point I recall "Money Magazine's" annual tax test, in which they send out a fictitious family's tax life to about 50+ perjurer's around the country. Each preparer completes a sample tax return and the results are published in the magazine. Needless to say, no two tax preparers' get the same answer. And, the difference in the calculated tax owed can be two to five times greater from the lowest to the highest results.
I have been a student of the tax laws for over 30 years, and I have always prepared my own returns and would never dream of using an outside practitioner. (Given the Money Magazine results of these so-called professionals, how much worse could I do?) Therefore, I hope that the following information might be of help to you and others facing a similar dilemma:
Unfortunately, declaring "Professional Trader Status" is one of those unusual, and "less defined" areas of the tax code. In fact, the US tax code does not specifically identify "Professional Trader Status" as a taxpayer classification, and therefore does not describe how income and expenses are to be handled if someone were to be a "Professional Trader."
As a result, I have no doubt that most "tax preparers" and many "CPA's" would be very reluctant and extremely uncomfortable using any mass-marketed consumer oriented book like "The Trader's Tax Survival Guide" as their foundation or justification for preparing your returns. How do they know this guy isn't just another crackpot trying to sell books.
Mr. Tesser's book has a lot of fill to plump up the volume between the covers. It makes for interesting reading and helps make the point, but may also tend to overly complicate and mystify a very basic and simple area of the tax code.
Additionally, it's a serious misnomer to refer to his tax advice as "his philosophy in preparing taxes." Taxes are not "philosophical." It's a matter of what law, and accepted practice dictates and allows.
The tax code currently distinguishes between two classifications of market participants: One is "Investor" status, which includes all individual investors/traders who invest for their own account. As "Investors" we report our gains and losses on Schedule 'D'. And, only those investment related expenses which exceed 2% of our Adjusted Gross Income can be deducted as a "Miscellaneous" expense on Schedule 'A' form 1040. Also, you "Must Itemize" your deductions in order to take advantage of this "Miscellaneous" investment expense deduction.
The second classification is "Dealer" status. These are brokerage firms, and other institutions, etc. who actually hold securities in "inventory for sale to the public." Needless to say, this classification does not apply.
"Professional Trader" status, as a distinct classification, does not exist in the tax code.
I researched "Professional Trader" status last year by contacting the IRS help line at 1-800-829-1040 for information. (If you decide to call, be sure to ask for the "Technical Division - Section 7"). I was fortunate enough to talk with an individual who had done some recent research in this area and was actually familiar with this part of the tax code. She confirmed that a taxpayer would use Schedule 'C' in reporting all expenses related to his trading activities and all trading profits would retain their "capital" nature and be reported on Schedule 'D'. Therefore, Schedule 'C' would theoretically show "No Income," and only "Expenses" which would be fully deductible on Line 12 Form 1040 ("Business income or (loss). Attach Schedule C or C-EZ").
It should be noted that the 2% of Adjusted Gross Income limitation does not apply to Schedule C losses. And, you DO NOT have to itemize your deductions on Schedule A in order to realize these investment related trading expenses.
She also confirmed that IRS documents DO NOT identify or acknowledge a "Professional Trader" taxpayer classification, and IRS documents do not provide example scenarios of such a situation in their publications. She recommended that I purchase a copy of the "1997 Master Tax Guide" published by Commerce Clearing House (CCH) as a reference guide. (She confided that the IRS uses this publication themselves when they give advice to callers since it is more clearly and accurately written in a "plain-English easy to understand style" than their own documents). This CCH publication does reference "Active or Professional Traders" whose trading activities are such that it becomes classified as a business activity.
Any "tax preparer" or "CPA" in your area will comfortably work with a CCH tax publication as opposed to Mr. Tesser's consumer oriented book.
When you interview "tax preparers" you can ask them one basic question as an initial screening technique: "If my market trading activities are such that they are considered a business activity for tax purposes, how are my trading related business expenses reported, and how are my trading profits and losses reported on my tax returns?"
If they answer in any other way than the way I have described above, call another preparer. If they need time to do research on the subject, let them complete their research and get back to you. There really is only "One Right Answer."
Trading Is A Great Hobby But Can't Give Up My Job
Ernest B. Goldstein
Having been a member for quite a few years now, I still enjoy the book (CTCN) when it arrives. In fact, I can't wait for the evening so that I can open it up and start reading it. One thing that strikes me now is the dissertations that many of our members go on when they write their articles. I wonder if they are trying to give us helpful information or just attempting to push their own vested interests. I feel that more useful info is gotten from our neophyte traders who have just come on board than from the old timers.
I assume that most of us who are not professional traders rely on a mechanical system to do our trades. I know that I do not have the time to watch a screen all day. My income still comes from my 8:00 - 4:00 job. Trading is a great hobby, but I certainly can never give up my job and make the same kind of money that I am now earning. I am still waiting for one of those philanthropic traders who are making that $60,000 a year to come forth and teach me his system.
Editor's Note: The above comment by Ernest inspired your editor to address the issue of all the many trading seminars (and the credentials of the trading expert who gives the seminar) which you have seen advertised or heard about. For more on this, see Editor Comment section re: Trading Seminars
Meanwhile, I am still looking for that Holy Grail to give me true happiness money will buy. What I have learned is that I do not believe any one system will give me constant winners on just one commodity. There have to be loses; therefore, if anyone has what he believes to be a good system than he must apply that system to a portfolio. So that when the inevitable breakdown of his system hits one commodity the other commodities will carry on.
Knowing How Is One Thing, Actually Doing It Is Another
J. L. - Wimauma
Just read the last issue and my article in it. It's unique to see your own thoughts in a neat publication like this. And do you think I'm writing these articles to myself too? You bet I am! Y'all should try it! We write - 01' Dave takes the flak! Such a deal!
There are commodities, futures and then there are both! I fail to see how financials, currencies and yes, S & P's are commodities at all - futures yes, but commodities? A commodity to me has intrinsic value, otherwise known as the cost of production. If it ain't planted, fed or dragged out of the ground at great expense, it surely could become worthless (and surely will someday). Will soybeans or silver ever be free? Of course not! That same cost of production MUST always stop the fall. I know I should ask if people might never want beans or silver again. What do you think?
So why is this important? My pieces are about Commodities. What one of us isn't touched by contributors, especially younger ones "with mouths to feed," stuck in dead-end jobs, wanting to make a living at home with their family? I'm here to say yes, it can be done!
In my humble opinion, you can first take that giant step from trader to investor. And, you have enough money to buy the cheapest commodity at the time, and if it falls, to buy more. Yes I'm talking scale buying. If it's good enough for the commercials, it's good enough for me. (I believe they call that a market "under accumulation"). I think that anyone doing commodities who hasn't at least read Robert Wiest's book, just isn't trading with a full deck. Every purchase level and the amount of money necessary (plus reserves) is preplanned before you ever make that first call. How's this for a win-win situation? If prices go up you are profiting from the contracts you already own - if they go down, you get to buy another one! And incidentally, as a bonus, all orders are limit orders. Kiss slippage goodbye forever with the market paying your commissions to boot!
Now no one ever said you could make money without money. No pro would argue with the fact that for every dollar you have available, your odds of eventual success just increased proportionately. Of course, they generally mean that after all those "small" losses, you may be still around to win one. That's not what a scale buyer has in mind. It means he can buy more contracts for the inevitable recovery!
So after locating the cheapest commodity (how about the fewest dollars to the 13-year low?), you prefigure your scale leaving around 30% for reserves and making sure it's wide enough. (Thank you, Robert). And nice to have a 14-month slow scraping bottom with good seasonals, too. Do you think you could afford to buy one measly contract and begin a scale? I'm not going to take all the fun away and tell you how to take profits (we all should have such a problem), but I'll say I never liked being "scaled out" completely just as some huge move begins! Don't shoot me, Robert! After all, if prices have recovered that much, even if they fell back again, it sounds at worst as though you've got a bottom building, so I'll scale trade the heck out of it! (How about exiting on the first solid sell signal after another commodity gets cheaper?) But I will tell you what I will do if all Hell breaks loose and prices slam right thru those long-term lows. Is there any law against selling an equal amount of near-bys on a close or signal of choice below said lows and removing them on your favorite reversal signal of choice above those lows or lower if it can be done safely? (Remember, you're scaling 6-months out so they are not disturbed). Didn't you also just cut your margin requirements almost in half too?
So as the saying goes, "If I'm so smart, why am I not a millionaire?" Which brings me back to the title of this piece. Why do I still sooner or later think that I can predict where and when prices will go, and as Robert puts it, "take a flier?" Sure we all have traded other methods with some notable successes, but if I had "mouths to feed" (besides my own) this approach would probably be my first choice. I'm convinced that I'll someday be that millionaire if someone will please pass the humility!
System Testing With WAVE W1$E Program - Glenn Skirvin
For those of you that would like to do some serious testing of indicators and trading systems, but can't afford the steep price tag of TradeStation or other higher-priced system testing software, I'd like to suggest that you take a look at the WAVE WI$E market spreadsheet program offered by Jerome Technology, Inc. The cost for the basic spreadsheet program is $150, but there is a data server add-on that can be purchased for an additional $100. The data server allows you to easily transfer data and other computations (e.g., system testing results) from WAVE WI$E to another spreadsheet (e.g., Excel, Lotus, Quattro Pro) and to manipulate spreadsheet data in WAVE WI$E from your other spreadsheet (e.g., using an Excel macro or Visual Basic module). I recommend the data server be purchased along with the basic WAVE WI$E spreadsheet program.
The difference between WAVE Wl$E (WW) and a traditional system testing program like TradeStation or System Writer Plus is that WW presents all data and computations in spreadsheet rows and columns format and requires that you enter numeric constants or formulas in each column to accomplish your testing or study goals. The nice thing about a spreadsheet format is that you can see all the computed values of your indicators, logical flags, etc. for any data point. This makes reviewing a system's performance and correcting its problems easier because the details at any point in time are readily available. WW also provides charting capabilities, allowing you to chart any data or computed value in your spreadsheet and even to use dynamic coloring of price bars (similar to a PaintBar study in TradeStation or SuperCharts). WW differs from traditional spreadsheets in the following ways:
1. WW uses one formula (or formula group) per column and the data items are loaded from your stock, commodity or time series database. This allows you to build general "studies," using various formulas, and apply those formulas (within a study) to any number of data files.
2. WW does not embed your data directly within the spreadsheet. Instead, your data remains in separate data files (e.g., CSI, Computrac, Excel, MetaStock, Symphony, TC 2000) while your custom formulas link your study to the data files you wish to analyze. After your data files have been updated, the new data will be accessed and used by your WW study files. You need maintain only one set of data, and you are assured that the same exact data will be used by all WW studies.
3. If you wish to maintain your data within WW, you may enter your data into the spreadsheet and then save the data into a WW data file (."TXT").
WAVE WI$E offers a plentiful array of built-in functions that are useful to the trader and system builder, including some that you don't traditionally find in general trading analysis packages (e.g., astronomical calculations for a given date). But here's the good part: If you need a custom function or indicator that isn't offered with the standard WW package, you need only present your request to the program's developer, Mr. Pete DiGirolamo, and he will write it for you at a cost of only $20. Or, you can use WW's built-in formula procedure capability and write your own detailed function or computation.
I have found Pete to be consistently responsive to any question, suggestion for program improvement, or programming change that I have presented to him. For example, I was not totally satisfied with the built-in @SIGNAL function that allows you to generate a buy or sell signal for a trading system based on user-defined criteria because it required that the buy and sell price component be the same (i.e., both would need to be the closing price, or opening price, or whatever). In real life trading systems, it is common to have an entry and/or exit based on stops set at certain breakout levels. At my request and at a cost of only $20, Pete wrote a @SIGNAL2 function which allows the added entry/exit signal complexity that I requested. I believe this is now a part of the standard WW program. On another occasion, when I was writing a somewhat complex formula procedure for determining pivot points on a chart, I ran into a built-in program limitation that prevented me from successfully completing my procedure (only 127 numeric constants were allowed in a single procedure). When I presented the problem to Pete, he had his programmer revise the program just for me, upping the number of allowable numeric constants to 255. This was done at no cost to me. Try getting this kind of service with Omega Research or Equis International.
If you would like to see some examples of WW programming, check out the "Traders' Tips" section in Stocks & Commodities magazine. Pete does an illustrative example every month based on one of the magazine's articles for that month. I've learned a few things about how to use the program just from studying these illustrations.
Do I have any complaints about WAVE WI$E? There are a few, as it's not a perfect program, but they are minor. One of things I don't like about the program is that the charting capabilities are not as complete as I would like them to be. As I mentioned above, you can chart any data item or computation column in your spreadsheet. The limitations occur when you try to combine charts. Let's say you want to display your basic OHLC bar chart for a commodity or stock and below it in subcharts you want to display Wilder's ADX, an oscillator of some sort, and the phases of the moon. The current version of the program allows you to combine charts in a split format, but you can only include one subchart below the main price chart, and the subchart automatically occupies half of the available chart space. It would be nice to have multiple split charts and be able to size them in a manner that's pleasing to my eye. One of the things you can do, though, is "normalize" each line to a scale between 0 and 1, and then you can see up to 7 lines in that one split screen chart with each turning point nice and big and visible.
Another potential program limitation, particularly if you have created a computationally complex system, is that the number of total spreadsheet columns available is only 127 - half as many as most standard spreadsheet programs. However, those 127 WW columns can contain multiple formulas and they allow easy and fast manipulation of entire streams of data. In this respect, Excel is far behind WW. WW calculates large, complex spreadsheets amazingly fast. In SuperCharts, MetaStock or Windows on Wall Street you can only manipulate one or two data series in their formulas.
I would also like to see more programming conventions built into the formula procedure capabilities; in particular, I'd like to be able to use WHILE . . . DO loops rather than just FOR . . . NEXT loops, since WHILE . . . DO loops allow you to effectively scan your database, forward or backward, to see if certain conditions are met.
Lastly, for futures traders WAVE WI$E requires you to do some extra work to compute the amount of money gained or lost with a trading system. This is because you must manually change the tick value and dollar value per point for each commodity that you test (also commission/slippage if different). It would be nice if a user could set up a database within the program that would identify certain data files with certain commodities and then build a table with the tick value and dollar value per point for each commodity. The other way to work around this problem when testing a system over many commodities is to use the data server capabilities described at the start of this article and control the tick value and dollar value per point columns in WW form, say an Excel spreadsheet which does have a table set up containing all pertinent information for each commodity. This is what I'm planning to do. It involves some extra work, but once you've set up the tables and written the necessary macros you can really roll with your system testing, including generating sophisticated system results reports out of Excel (or other spreadsheet).
Most of the limitations I've just mentioned are being addressed by Pete DiGirolamo in a new, 32-bit version of WAVE WI$E which I believe will be released sometime in 1997. This 32-bit version will apparently no longer run in Windows 3.1, but only in Windows 95 or Windows NT. The developer has indicated to me that the charting capabilities will be improved, the spreadsheet will expand to a maximum of 255 columns, and there will be some other improvements as well.
I hope this information is helpful to some of you. If you're inclined to do your own work and don't mind setting up your own spreadsheet formulas and the like, you might want to give this program a serious look. The great thing about WAVE WI$E is that, compared to SuperCharts, MetaStock and Windows on Wall Street, it has no computational limits. Just about anything you can dream up is potentially programmable and testable in this program.
I am not affiliated with Jerome Technology, Inc. or Pete DiGirolamo in any way. My only relationship is that of customer.
Stops Are Not Just for Roads! - Rick J. Ratchford
When the discussion turns to the use of Stop Loss orders, you can be confident that a division will occur between all the participants of the discussion. As they are first divided on whether to use stops, and then those who say we should, are therefore divided again on how to use them in everyday trading.
It is with this understanding that you read this article with an open mind. And if you are of the opinion that stops are not useful in your trading, rest assured that the author of this article respects that opinion, and merely addresses the subject for those who do use or should use stops.
The bottom line is on how we can limit our losses. Stops are one-vehicle in achieving a good risk management plan. Properly placed and allowed to work, your trading losses can be limited, while you let those winners reach your objective.
The argument for using stops is really basic and simple. If you speculate that the market is going to move in one direction, and it goes the opposite way, the stop is meant to get you out before your losses grow any larger. If you did your homework, and I stress that you should do so first, and it is of your opinion that the market is to perform in a certain way, and it does not, at what point would you finally admit to yourself that your initial analysis was incorrect and you should get out and reevaluate? If you don't use stops, are you leaving this up to how you feel when the market moves against you?
I personally have experienced the aching feeling of seeing the market move against me, and then when it reaches the price that would have been my stop had I placed one, where I had previously calculated is the price that means I was wrong, I hesitate because I don't want to call in and take a deliberate loss. Then, in my despair, I watch it go against me more, and more, and more, and . . . Stop!
Well, that is one way to place a stop, but I would not recommend it!
Many will argue that had they placed a stop, they would not have made the profit they did, when the market finally turned around and went the way they had originally calculated. Yes, this has happened to me, and I walked away happy that I did not have a stop in. But this happiness is fleeting, and is dangerous to experience, especially if your trading experience is limited. It can turn you into a gambler, one who takes unnecessary risks. I submit, if a trader does not use a stop, he is in essence admitting that he has no clue as to what price against his anticipated move constitutes an error. If he had such a clue, he would place a stop in that area of manifested error. Yet, I must add that this does not apply to all types of trading.
For example, a scalper would not use stops. Why, the time to place and reverse them and so-forth would murder such a trader. He is one that is watching and actively trading the market at such speeds that he isn't going for long pre-calculated moves. He knows his support and resistance areas and is trading off of those, as well as what he sees the action doing.
Another may be a day trader who is merely taking out chunks from a daily range. The action is usually too quick to calculate those stop areas. And just like the scalper, speed is of the essence.
However, as a former daytrader turned short term trader, I found myself getting chewed up on several occasions where I should have exited when my anticipated move did not materialize, yet to just watch the market continue to move against me for great losses. All I can say is, daytraders beware!
Now we come down to the problem of placing stops. Where should we place them now that we are convinced that we should use them?
This problem of placing stops seems to stem all the way down to the Municipal level. In the city where I live, they seem to have stops all over my neighborhood. It seems that they don't have a clue as to where to place their stops either. I imagine that if they were traders, they would over use stops to the point of many losses over time.
There are volumes of books on the subject of trading. But have you ever noticed that when it comes to the subject of stops, they may seem to fall short of stating exactly how they should be placed? Reason may be that there is no exact way to place a stop. Yet, this will not stop the trader in trouble from continually asking the next guru in line, "Where should I place my stop?"
I'm going to share with you the technique that I use to limit my losses. I find this technique works really well. However, it uses a method that is core to my way of trading. My method of trading involves several elements, which by themselves are quite basic, yet together are quite powerful.
First, to limit my risk, I trade only on time days. Now, if you don't understand time days, feel free to read about them at my Website (https://FSoftPublishing.com). I wish not to get into that subject here. The reason I trade only on time days is because the odds are greatly in my favor that the market has made its extreme move around this time, and gives me a basis for placing my stop.
Next, I need to figure out my support and resistance prices for my time day period. You can do this using a basic calculator, trend lines, or many other software programs. I use TTC as most of you know to find these prices. Now that I have my time day, and my support resistance levels, I have a very good idea where to place my stop once the trade is on. Let me now illustrate.
Take June 97 Live Cattle for our example. I had a time day for 3/20 and 3/26. As well, I had calculated my support levels and found the market confirmed by making the low at 6342. The following day, when the market did not penetrate my time day low, I went long at 6370.
Now, I expected the market to go up to the next time day, and could have warmly felt that I did not need a stop. And as you can see, this market could have allowed me to do without one, although it could as well have killed me. Resolute to place stops just in case, I now must decide where. If I had placed my stop just below my time day low, on the next time day, I would have been knocked out and missed out on the run up. Yet I was not knocked out. Here is what I did.
Take the last short term range that lead down to your support price, in this case the high of 3/28 (6582) and the time day low on 3/20 (6342). The range value is 240. Now, multiply this by 15% or .15. You come up with 36 points. So my stop would be placed at 6307 (rounded), which is about 36 points below my support time day low. On my next time day, instead of making a high, it made another time day low at 6332, well above my stop. I was safe, and exited the market when it reached my pre-calculated resistance level.
When finding ranges in channels, this is easy. On a powerful trending market, it is not. Remember one big rule I believe in, don't trade against the trend! So, with the trend, you use the range of the rally or pullback. Your time day and support/resistance confirmation should not be violated by move than 10%, otherwise admit your wrong and let the market take you out. Based on my example above, my risk was limited to $252 per contract plus commission. I try to avoid risking more than $300 a contract, and very rarely find that I need to.
Now note that this article only addresses your 'initial' stop placement. As the market moves in your favor, you will need to adjust your stop accordingly to capture your paper profits. One way to do this is when your going up, once the market reaches the next resistance area, you move your stop a few points above your entry price for a free trade. Then, once it penetrates the resistance area, you move your stop below the new support which was your resistance level before it was penetrated by the same number of points you used originally under your time day support (36 pts).
We dealt with a market going up, but just reverse for a market going down. Simple. Now if I only can get the city to remove many of their stops, I'd be a happy camper!
Reprinted with permission of Barron's
Article by Michael Santoli - "Farewell, CFTC?
Sure Looks That Way"
If several powerful Congressmen and Alan Greenspan have their way, the Commodity Futures Trading Commission could soon disappear. A bill speeding through the Senate threatens to yank most of the futures business out from under the CFTC's regulatory oversight. The bill's most provocative provision would let futures exchanges set up unregulated markets for "professional" traders in nonagricultural commodities under term that would remove 90% of trading from the commission's purview. The idea is that professionals - defined as entities with-net worth of at least $1 million don't need the CFTC's hand-holding. Says Patrick Arbor, chairman of the Chicago Board of Trade, "George Soros doesn't need the same protection as Aunt Mildred."
The bill was introduced just three weeks ago but gained momentum a few days later after some frank comments by Fed Chairman Greenspan, who suggested the CFTC is over-regulating the futures markets. One CFTC official said Greenspan's remarks sounded like "nails in the coffin" of the commission.
The heat got intense enough that CFTC Chairman Brooksley Born felt the need to declare the commission's relevance in a press briefing Thursday, in which she suggested Greenspan is a free-market zealot who would send US futures markets back to the "19th century." Born has gotten nowhere trying to negotiate a compromise with the exchanges, which would love to see the CFTC clipped.
So, what's the upshot for the average commodities trader? To hear officials at the futures exchanges tell it, the plan is nice and neat. An unfettered "professional" trading pit would stand alongside a retail pit, which would be run with current levels of regulatory oversight. It's not tough to guess which pit would have the greater liquidity, better pricing and sharper trading opportunities.
While few people believe the regulatory blanket on the industry needs to be as thick as it is today, even fewer believe the exchanges' lament that they are losing loads of futures business to overseas markets and the over-the-counter arena because of excessive regulation.
As one commodities executive put it, "The individual with the $10,000 commodities account is disappearing." Maybe so, but the; little guy isn't extinct yet.
Plans To Stick With Aberration System &About Trading Futures With An
I purchased the trading program Aberattion from Keith Fitchen. I will use this program until I am totally wiped out; , I become too old to play this game, or; if a better system comes along.
There is one item of interest I would like to pass along. I have not seen anything written about this. I am talking about trading within an IRA. I felt that a trading account of $12,000 would be sufficient for me to get started. Imagine my surprise when the Account Trustee told me that 30% of all IRA rollovers, transfers and contributions are withheld from trading. I was told that this was a "disaster" fund. I guess, given the constraints on IRA contributions, holding a portion of the account aside does make sense. I would like to have known this going in. My $12,000 wound up being $8,330 after all fees were deducted. My broker said he told me about this beforehand. If he did, I forgot him doing it.
I will have to liquidate other funds to make up this difference. I do not feel that trading Aberration with less than $10,000 is smart. The risks increase substantially. This is not a big deal for me at this time, but I think it could have been. I would like to make other potential traders aware of this restriction.
Prove It - Steven Astley
Years ago, having tired of reading all the marketing rhetoric, promising astronomical financial gains and a relaxed lifestyle, while my trading results were a disaster, I decided to start over and "prove" the validity of each and every step in trading. The first question I asked was: "how much money does the Market make available, per week?
I built a spreadsheet of all commodities (and optionable indices-e.g.: OEX, XAU, XOI) that I trade/follow.
Editor's Note: For some odd reason the e-mailed spreadsheet did not copy on our end. If Steve will mail us (by US Mail) another spreadsheet we will make it available to members upon request.
I simply take the commodity's weekly high and subtract the weekly low from it and multiply that quantity times its dollar value. Obviously, this calculated amount is the absolute, maximum, gross dollar amount available for that commodity during that particular week. I then total, at the bottom, the column for the week, and under that, I get a weekly average.
The second column is an average of each commodities' (row) values. NB: Do not expect to get identical results - it depends on the timing of contract rollovers, etc.
What this confirmed was that there was, indeed money to be made and lost in the markets. And the markets, directly told me so, not some over-inflated guru or software vendor. The market, period! Also, I know which markets are most volatile, and those are the ones I trade, if and when my proven methodology gives me a signal.
Finally, don't expect to make the specific dollar amounts shown, that's unimportant (they are absolute maximums). But, paraphrasing the legendary Bernard Baruch: "Be happy with a percentage of the move."
Success is: consistently implementing, your proven, trading strategy! But you've got to take the time and make the effort yourself, to prove it!
Admonitions And Vendor Tales about $50,000 of Trading Products Compiled Going Back To The 1960's Which Actually Cost $200,000 - James M. Allen
This started out as an E-Mail to Joe Ross, but I got carried away. It didn't seem fair to mention Joe Ross in the final result, names being changed to protect the innocent, etc. I have no bone to pick with Joe. I'm about to buy his books! Maybe even his seminar!
I enjoyed the day I spent writing this article, even though I missed a $10,000 move in the S&P. Some people may complain that the views implied in these stories are harsh, and maybe not true. Just remind them of Dollie Parton's answer when she was asked if she was offended by dumb blond jokes: "No because I'm not dumb, and I'm not blond!"
"I read of your seminar on your Website this morning. I was investigating your books and methods after reading favorable comments about your ******** trading system in ***** magazine. I would like to have full information, where, when, how long, what is covered, etc.
I am a veteran trader, and have even more experience studying, joining secret societies, swearing never to reveal guru's secret methods, and going to seminars of the one or two day variety. I have an impressive collection of books, videos, computerized systems and trading methods going back well into the 60's which I have compiled at a cost of over $50,000. Actually trading these methods has cost at least another $200,000 more.
The first computerized trading system I bought was the most widely advertised I had ever seen, full color, full page ads, never a losing year, fantastic returns on account equity, even fancier brochures. I bought the whole thing, plus computer and end-of-day data feed, got it all set up and running, and spent not quite $20,000 in the process, mostly on the system. I put a very considerable sum of money in an account with the broker recommended by the gurus and began trading.
Things sort of went OK for a few months, some up, some down. One morning I came in to discover that I had lost about $50,000 - in one day. Fortunately, I had not followed the recommendations of the guru about account size and number of contracts to trade, but I later heard about someone who did. He bought the system, and put it on the computer the week before the "drawdown" (don't you just love that word). The morning I had the $50,000 loss, this kid had $1 left in his account. From $25,000, he lost it all! In less than one week! Using a system that had never had a losing year, and was averaging about 130% per year return on the minimum account size (measured at the brochure)! I guess he was lucky, he could have gone debit. They've never mentioned him in their ads.
The guru selling this wondrous product refuses to register with the CFTC, the NFA or anybody. I heard why he objected to it so vociferously. Somebody said he has been convicted of a felony in the past. I have no idea what felony, but even if its felony spitting on the sidewalk, he would have to answer "Yes" to that supremely awkward question on the form, which is public info, or lie under oath. Maybe the CFTC won't let felons be registered. I wonder how many others have the same "problem?"
Most recently, I dropped about $10,000 to a fellow named*****who was characterized as the greatest living technical analyst or something like that (according to the ads, anyway) for books, manual, Faxes and seminars. Trading the *****Method last summer costs about $120,000 at a time when the Faxes were showing minimal weekly drawdowns. I was horrified to learn during the postmortem that apparently the only people actually trading the ***** Method last summer with real money were me, and the guru. I imagine his results were different from the Faxes, too.
In the past, I have gotten involved with various gurus' because of ads, without much checking. The guru referred to above, for example, was highly recommended by an IB who was handing out his literature. Having now read all the back issues of CTCN, I see that a good many of the "gurus" whose names and faces adorn the ads seem to have more detractors, and less success, than they let on. Every lawyer knows that an eyewitness always ruins a good story. These "eyewitnesses" who have parted with real money paint a very different picture than those "testimonials" in the brochures.
Has anybody ever actually met a real honest-to-Pete, verified full time professional trader? You know the type, a guy (or gal) goes in and trades every day full-time, who pays his bills, and raises his kids, and earns his living from trading, not living off a fat inheritance, who does not sell books, or systems or Faxed recommendations, or manage money, not a "local" or exchange member. We read about them here and there, like the "successful traders," but who knows whether these are mere figments of the con-man's fertile imagination.
I want to be one (a full time trader, that is), and it just dawned on me this minute that I have never known one. When I wanted to be a Navy officer, I knew many who were, and the same when I wanted to be a stockbroker, and a lawyer and . . . Say, wait a minute . . . ! You don't suppose that there aren't any, do you?
This reminds me of when I was a stockbroker back in 1969-70 BC (before computers). We had a character in the office every day, a "customer," who brought in his briefcase great mounds of futures charts, which he laboriously updated by hand throughout the day. He was the local "guru" of commodity trading, and quite a colorful chap, with lots of aphorisms, stories, anecdotes, fables and market savvy, and not the least bit loathe to share his wisdom with anyone who appeared deserving of it. He was there when the market opened, he seldom left for lunch, and was there when the markets closed. I thought he was a trading genius.
Well, one day, during a meeting with the office manager, who handled this fellow's account, I remarked what a great thing it must be to have an account that's active, who could be depended upon to generate trades (more importantly, commissions) on a daily basis. I was shocked, I mean shocked to learn that "Jones" was not active, in fact, seldom traded. He was a "gentleman rancher" who enjoyed the camaraderie, and the excitement of the office environment, but rarely traded and almost always lost when he did. He took up a bit of space in the back of the peanut gallery, but he entertained the other customers, helped keep the coffee pot full, and was careful not to be too much of a nuisance. Later, I think be got kicked out and gravitated to Merrill Lynch's office, when our manager retired. He is as close to a professional trader as I ever recall actually meeting.
Wouldn't it be funny if all these system sellers, all these brokers, all these magazine editors and writers and advertising agencies types, the entire "industry," all unknowingly existed only for the purpose of rounding up a steady supply of fresh "investors" whose money could then be deftly moved from their pocket to others, lured by the hope and not-so-thinly-disguised promise, of fabulous wealth without working, and protected by the oft-heard, and oft-ignored admonitions that "there is a risk of loss in futures trading" and "past performance does not necessarily guarantee future results?" After all, somebody has to be the losers for the big locals to prosper as, it is claimed, they do.
On the subject of admonitions, I suppose it is only right to tell you in advance before coming to your seminar that the most fabulously lucrative systems, contrived by geniuses who have unlocked the timeless secrets of the universe, and having revealed these mysteries of the ages to me, one of the chosen and very limited few (having remitted the requested stipend) turn to absolute crap soon after I initiate trading with these secret methods. Anomalies unknown for hundreds of years suddenly happen, one after the other, to the astonishment of the genius involved and all his devotees, and to my loss, usually in amounts of $10,000 or more. This has happened not once but several times, actually. I am beginning to have an idea.
Perhaps the more mutually beneficial and rewarding arrangement would be for me to sell you a covenant not to trade your methods for a certain period of time, renewable upon payment of a further fee. I would promise for the duration of our agreement never to attend your seminars, read your books or trade your method even if such methods should be inadvertently revealed to me through no fault of my own, or yours, all spelled out in writing, for say, $150,000 per year.
For a significant additional fee, I will further agree to purchase and faithfully trade, for as long as your "account" is not in arrears, up to five specified competing systems. This is the chance of a lifetime! What would it be worth to have those five nasty competitors' systems thoroughly rubbish, and all perfectly legal? Those guys are all undeserving ***holes, anyway. Think of the things they've said about you behind your back, at THEIR seminars! Their customers would begin losing their butts, and come running to buy your stuff! The computer programs, books, tapes, seminars, T-shirts, think of it! Maybe even an autobiography. Movie rights! A bargain at twice the price!
Your business will quadruple or more, and I will finally be getting paid for doing what I do best, (or at least have the most experience doing) losing my butt trading over-optimized, curve-fitted garbage systems. Although past performance is no guarantee of future results, I can offer a solid track record of very satisfactory results over a long period in this peculiar and unique "service."
I've come up with the wording for a brochure (printed below) to send out offering this "service" to a very select few system vendors. What do you think? Happy trading!"
Here is the Proposed Sample Brochure - James Allen
"Dear System Vendor: Have You ever noticed how the performance of your competitors' systems are rolling along, seemingly incredible, making money hand over fist for their customers, when all of a sudden, everything goes into a spin? Maybe it has even happened to one of your systems!
It's discouraging to have your system all back-tested, and curve fit, and having spent a fortune on marketing and advertising to get the word out on how fantastic the system results have been in the past (not necessarily indicative of future results, to be sure), only suddenly, without warning, the bottom drops out and all those new users lose their butts, and blame you!
Now, there is an answer, and a defense, to this too-common phenomenon.
For years, I have been a prosperous real estate lawyer, but before law school, I was a broker at a then major Wall Street brokerage for a time after graduating with a degree in finance. All the books I read, all the theories I studied, all the "gurus" I followed, were sure-fire winners. It would be too easy to spend 15-minutes a day, maybe half-hour tops, to coast to a sure fortune. Why spend full time at it? I could make my fortune and enjoy the enticements of a dignified professional calling!
I've mastered the money making, stock-picking theories of all the legendary trading masters, such as Gerald Loeb, mysterious Gann, enigmatic Elliott, glamorous Jesse Livermore, even Lord Rothschild ("I always sold too soon"), Warren Buffet ("I never sell at all") and most of the new ones.
Methods that had produced solid, dependable profits for years, miraculously had me buying just as everyone else was selling--or buying what nobody else wanted! None of these guys cared--hell, they don't sell systems and most of them are dead!
Even though I lost a lot of money, I am nothing if not tenacious. Thanks to the miracle of the personal computer, I could still search for, discover and acquire a system that would easily fulfill all my lifelong trading dreams, not to mention make back all I had lost!
In the early days, l tried them all, but now there are so many, it is just impossible to keep up. All totaled, I must have spent more than $200,000 over the years on computerized systems, books, seminars, data services, Fax services, personal one-on-one consulting, memberships in secret societies, any one of which would be just the ticket to trading success. Actually, that's the cheap part, since my trading losses using these have been many times that amount.
I bought a system once that advertised that it had returned over 250% per year or something like that for more than 5-years, without a single losing year, not even a margin call. Soon after implementing the system, and carefully following its directions, under the watchful eyes of the system inventor and the broker especially selected by the system inventor, I lost more than $50,000 in ONE DAY! Actually I was very lucky, because on that same day, many of this guru's customers were completely wiped out!
Think of how unhappy they were! The irate phone calls, the offensive and even insulting letters from their lawyers, the expense of defending the suits and complaints to CFTC, must have been unbearable!
I'm telling you all this only to demonstrate that nobody is better qualified than me to make the extremely valuable proposal I'm about to make to a select few system vendors, including you.
I don't know exactly how to describe what I am offering in technical market terms, maybe an inverse call - no matter. Here it is: For a specified fee, I will agree in writing, backed up by my personal five way guarantee, that I will not buy, otherwise acquire, or in any way use any of your designated trading systems for a period of one year. That's right--I won't buy your book, your system, or your video, nor will I show up at your seminars, or trade your system even if it should be inadvertently or deliberately revealed to me through no fault of mine--or yours! How's that for fair? You are covered, no matter what!
And, as a new customer special, for those who can pay over the specified fee within the next thirty days, I will also include any person or entity related to, controlled or advised by me!
Think of it! For the next year, you will have my personal assurance, independently verifiable and backed by my written five way personal guarantee, that there is no way I can use your specified system. This should give you clear sailing to compile a wonderful track record, unsullied by those awful, dreaded "drawdowns." (Don't you just love that word?)
Nothing could be easier. All you have to do is send money, and each month spend one-half hour or even less to review the special report prepared just for you verifying that I have not used your system in my trading. For the first ten vendors who respond to this offer, and for a significant additional fee, I'll begin trading up to five competing systems of your choice. You will know whose systems will soon be showing crappy results, with plenty of lead time for your ad campaign! You can use this advance, inside information to trash your competitors' systems, and who deserves it more than those lying, swindling, whining a-holes who overblow their own pathetic system, and demean and slander yours. I'll bet you can think of three or four systems you'd like me to begin using immediately, and I will, as soon as your check clears, provided you act quickly!
Your sales will skyrocket, seminars, computer systems, videos, books, T-shirts, maybe even an autobiography of the world's greatest money making analyst of all time! Those greedy, sleazy, incompetent bastards offering competing systems will never know what hit them, and it's all perfectly legal!
I am only going to offer this special program to a very select few, so don't delay. You'll want to be among the first to sign up. After all, what if one of these competitors signs up first and pays me to thrash your best system? You had better act now!"
Human Nature, Psychology And Trading - C. J. Chin
Many people, if offered the choice between, _ a 10% chance of winning one million dollars (and a 90% chance of winning zero); or , $10,000 cash -- would choose the "sure" $10,000 cash. This is true -- despite the fact that the expected value of choice is worth $100,000, or 10 times the value of the $10,000 "sure thing." This is a simple "model" of human nature and people's preferences.
Investing/trading is one of the most interesting and challenging endeavors available. However, as we've read before, "if investing were that easy, everyone would be financially independent." The combination of human nature and society make investment decisions difficult for most traders.
Shopping Analogy -- For instance, when most people go shopping, they look for a sale or some sort of bargain. "How much did you pay for the orange juice?" "Did you negotiate when you bought your car?" In society, most people like to get bargains. In trading, however, this mentality frequently leads to poor results. How often have we heard that the worst "fills" lead to our best trades? Or worse, that the trader never entered the trade, "hoping for a better price." This brings us to the "ego" -- or trying to outsmart the market.
The Ego, or "I'm Smarter Than The Trading System" -- In school, and later in society, we are taught to "get ahead." You should try to do well in school -- and later in your career, show that you are full of good ideas. When applied to trading, this philosophy often backfires! The person who tries to outsmart the market - or even his or her trading system -- frequently gets "outsmarted" and falls behind.
For example, the "ego" might cause the "outsmarted trader" to "wait for the market to come back to a more reasonable price." However, the market often "doesn't cooperate" and the hesitant trader misses a good opportunity. Some of the best trades are missed because the market never comes back to that "bargain price."
Greed & Fear -- Although "greed and fear" are the most-talked-about personality traits of investors, they should never be forgotten or underestimated. Greed and fear often drive markets to extremes and cause investors to buy or sell at the wrong time.
This is particularly true during this tremendous bull run in the stock market. Today, it seems like everyone expects stock mutual funds to earn 20%-30% forever. People seem to have forgotten that stocks have earned a more moderate 12% over the long-run. Indeed, all of this talk -- and seeing 401(k) savings plan money pour into stocks -- seems to be a signal that the "greed" in today's stock market is excessive.
Moral? -- If there is a moral to these tidbits about human nature and investing, it is that a systematic approach helps to avoid the pitfalls of emotion when it comes to dollars and cents. There are numerous ways to capture excess returns in the market. However, the tough part is doing your homework when developing a system -- and having the discipline to stick with the chosen strategy.
A computerized, systematic approach helps the trader to avoid the pitfalls of greed and fear -- or the negative impact of ego and human nature. If you have any questions, please feel free to (contact me via CTCN).
OPTIONS & SPREADS: The Pyramid And The Palace
In The Sketch Book published in 1820, Washington Irving wrote of his visit to London's centuries-old Westminster Abbey: "I entered from the inner court of Westminster School, through a long, low, vaulted passage that had an almost subterranean look, being dimly lighted in one part by circular perforations in the massive walls.
"Through this dark avenue I had a distant view of the cloisters, with the figure of an old verger, in his black gown, moving along their shadowy vaults, and seeming like a specter from one of the neighboring tombs." The approach to the abbey through these gloomy monastic remains prepares the mind for its solemn contemplation. "The sharp touches of the chisel are gone from the rich tracery of the arches; the roses which adorn the keystones have lost their leafy beauty; everything bears the marks of the gradual dilapidation's of time, which yet has something touching and pleasing in its very decay." (From the essay Westminster Abbey)
I too have seen dilapidation and decay but could not call them either touching or pleasing. Not in London but Atlantic City. Certainly, the casinos have crystal chandeliers and thick carpets and art deco and huge windows showing night descending upon the ocean, but Pacific Avenue runs the length of the elongated city, one block from beach and boardwalk, passing the street entrances of most of the hotel/casinos. In great profusion, shops along the avenue exhibit three-feet-high yellow signs bearing big red letters, "Cash For Gold." Their loose definition of "gold" includes jewels, watches, cameras and numerous other valuables.
Standing at one point along Pacific Avenue, and glancing a couple of blocks in either direction, I could see seven of those red & yellow signs without walking a step. One little shop was the ultimate multi-purpose outfit: Cash For Gold, Western Union, Checks-Cashed, Chelsea Bail Bonds.
That storefront is practically a curbside sermon for financial traders. Count yourself some kind of a success if you do not pawn anything, stay out of trouble with the law, do not wire family or relatives for desperation-money, and you cash your checks at a respectable bank.
The short walk in Atlantic City from ritziness to decay contains other lessons for traders, including my fellow option specialists and spread specialists. The most popular types of gaming at the casinos has come to be the slot machines. They easily outdraw all others. The developmental years of the Jersey shore gambling houses saw repeated increases in both the number of slots and the amounts of floor space allotted them.
It "just so happens" that of all forms of casino gaming, the one-armed bandit requires the least knowledge or intelligence. Just drop in the coin and pull the lever. People baffled by dice, roulette, blackjack or baccarat swarm in vast numbers to the slots. Isn't it sad how humans keep falling into pyramid hierarchies, with the least brainy forming the biggest layer at the bottom?
I have written in the past and quoted other financial writers about the "sucker trade" in securities investing and speculating. Many people want big money in a hurry, too impatient to await profits from 10-year bonds or slow-growth stocks, quarterly dividends or semi-annual interest. That is not necessarily fatal. However, many of them are also impatient to learn about stocks or futures or options in any real depth. People who pore over the engineering textbooks or the restaurant management manuals are too profit-grabbing anxious to be bothered studying investments or strategies. Anxious to plunge.
Spend months studying options? Hell, no. They want to multiply their money again and again during those months. Otherwise they might as well settle for a passbook. Such an attitude is fatal. Like casino lover-pullers who feed a machine mathematically rigged against them, they routinely transform their bank balances into other people's grosses and profits. No matter what education availability, warning labels or legislation, the pyramid's bottom layer will always be its biggest layer.
This carries not one but two extremely important messages for the intelligent trader. One is to stay the hell off that bottom layer. That is not as easy as it sounds. When just about anybody speaks of "the average person" he means someone else. "I'm better than average because I know what's what." When he speaks of "the sucker trade" he emphatically means someone else. Consequently, bottom layers are full of people who think they are farther up the incline.
Every art contest or song-writing contest brings an avalanche of dross from people who think themselves gifted. The man who thinks he is Napoleon judges himself an expert in military science. Thus they do not award Rhodes Scholarships to people who mark their own test papers. Of course, you should have confidence and should believe in yourself. But self-evaluation can be more tricky in the financial realm than elsewhere, and more dangerous.
The sharpshooter either hits the target or fails. The trader often adds a dose of "I'm a nice guy" or "I deserve rewards" to his self-scoring. The armchair explorer who thinks he knows how to deal with cannibals or wild elephants is at least protected by the lack of these in Appleton, WI. The stock, futures and options markets routinely devour self-proclaimed financial geniuses.
You can be a smart and capable trader with something less than an Olympic athlete's preparation, also something less than a cattle breeder's or diamond merchant's time and effort. But your study and preparation, time and effort, must be professional grade. Also, judge yourself with the clear-eyed objectivity that goes into judging a gemstone or a prize Hereford. The "sucker trade" and the base of the pyramid teem with Self-evaluators who casually gave themselves the medal.
I know a phoning bill collector who occasionally gets told by one or another delinquent debtor, "If it weren't for me, you wouldn't have a job." So those deadbeats bottom-fished for a reason to praise themselves. If they took up trading, they would declare themselves financial geniuses Monday and be bankrupt by Thursday. To stay above this level, remember the advice of the Executive Speechwriter Newsletter: "Go the extra mile. It's never crowded." Unlike the territory of the one-armed bandit.
In stating that a pyramid's bottom layer is always its biggest, I added that this carried two key messages for the smart trader. What is the Second? You will enjoy a hefty financial plus if you are on the receiving side of the cash quantities that the base layer routinely spills forth. The gambling house always wins via dollar slots and other games. The pawnbroker always wins when wagers hock valuables at a fraction of their worth. How can you gain continually? There are bottom layers at securities exchanges and in casinos.
Washington Irving wrote that his mind prepared "for its solemn contemplation" where "a coat of hoary moss - obscured the death's heads and other funereal emblems" at Westminster Abbey. Occasionally I feel solemn among the ghosts and headstones of options that expired worthless--after fattening my bank account. Just as deadbeats tell bill collectors, "If it weren't for me, you wouldn't have a job," losers in options trading could say to me, "If it weren't for us, you wouldn't have those profits," such is the cashing-in-at-the-morgue aspect of spread strategies.
Let us get a more positive handle on it. Petroleum tycoon J. Paul Getty said he had three rules for success: (1) Begin work early in the morning; (2) work until late at night and; (3) find oil. You may regard that startling third as the Star of India sapphire and consider the other two dispensable. Anyway, my variation on those three rules does not leave much of the original.
As mentioned, the multitudes of losers in the options game include many who failed to devote the time and effort to in-depth study and preparation; who wanted better than diamond dealer profits without at least studying a few crystals or learning some business intricacies? Time and effort, yes. Yet here I am pounding my home typewriter at noon and planning an afternoon stroll in the park under blue April skies.
I did not and do not duplicate J. Paul Getty's 14-hour work days. Nor do I laze like the horse-player who dreams of fabulous wealth. In reading the stack of books, past and present, and in handling transactions through the discount broker, and in doing ballpoint calculations with blank paper and the financial page, I put in the time and effort necessary for the business of options. Do things right and you will have leisure time.
Long hours of hard work are often necessary but are no-guarantee of fortune. Spend 12-hours a day writing an Elizabethan-style verse-play in iambic pentameter for Broadway. See if the backers or the ticket-buyers pour forth the cash. Good business is less a matter of clock-time than of gearing oneself to the financial realities of the marketplace: What will people pay money for? Thus Getty's Third Rule--"Find oil"--can be taken symbolically as, "Have something to sell."
The word "proletariat" literally means "those having no property except their sons." In actual usage, of course, it means those having nothing to sell except their labor. The industrialist has manufactured goods to sell. The farmer, crops. The shop-owner, retail wares. The broker, stocks, bonds, futures, options. Thanks to spread strategies, options are among the few items in the strongbox that can spin off near-duplicates of themselves.
I favor option spreads because of this generating power in the "something to sell" department. Can a barrel of Getty oil create or beget another barrel of oil? If you buy an antique car, you may be able to resell it later for a nice profit. But can it spin off another antique car that you can sell on the day of your original purchase? Likewise a parcel of land, Swiss francs, gold Krugerrands--No can do.
In launching an option spread-known in brokerage terminology as "opening a position"-- I have a flagship rule: Do not go into business unless somebody else pays for more than half. Soon after the start of March 1997, I noticed something interesting about the NASD stock Vivus (stock symbol VVUS; option symbol VVQ). Although the near-in-the-money options for March expired in less than three weeks, their price was more than half that of the equivalent April's.
In opening a spread with call options, I look for a stock that is trending upwards with strong earnings and a good price/earnings ratio. With put options, the stock should be trending downward and the lousier the earnings the better. According to Barron's and the Wall Street Journal, Vivus hovered in the high 50's and low 60's from a 52-week high of 811/4 with no earnings for the previous 52-weeks and no price/earnings ratio. Stock-holder hell is put option heaven.
The gap between Vivus March 55 and April 55 puts was about a point and a half with the March trading for a little more than that. I phoned the discount broker and said I wanted to open a spread position, Vivus put options. Buy 10 with an expiration date of April and a strike price of 55. Sell 10 with an expiration date of March and a 55 strike price. With a point and a half debit. Therefore, the amount at which I would buy was open, as was the amount at which I would sell, but the differ-between them was fixed at a point and a half.
What I phoned in was a "day order" as opposed to a "good till canceled" one. Near the end of that March 5 trading day I called in and received the results. Bought 10 Vivus April 55 puts for 3-1/4 points. Sold 10 Vivus March 55 Puts for 1-3/4 points. Notice the difference or "spread" between them: The "point and a half debit" fixed when the order was entered. In dollars and cents, I bought 10 option contracts for $3,250 and sold 10 for $1,750, paying only the point and a half "spread" or $1,500 difference plus commissions.
Paying for the April 55s I bought: $1,750 from the sale of the Marches and $1,500 (plus commissions) of my own capital: More than half somebody else's money! Call it lift-the-phone capitalization. Call it a silent partner. Call it sucker money from the slot machines. What is it not? No beating the backwoods for customers. No advertising for clients or business partners or financial backers. No Initial Public Offering shares lying unsold in the desk drawer. Owning options gives you the right to create and sell options. The biggest molten gold nuggets ever to come out of the dirt could not claim as much. No 14-carat spreads.
When the 1965 New York World's Fair was in the planning stage, many feared that pickpockets would swarm to the fair ground. Instead, the fair had very little trouble with pickpockets. Police figured out why. Pickpockets would not pay the two-dollar admission fee. Too big an investment! However, one can be "stingy with capital" lawfully and smartly, like the spread strategist who routinely pays less than half the total.
With spreading, profit is usually made via time-decay. On my Vivus venture, for example, at the end of the first full trading day after the day I opened the position, the March options lost one 12th of their time value (one slice off the 12 trading days until expiration) while the April's lost only one 32nd of time value thanks to the expiration 32 trading days later. The point and a half gap or spread between the market prices of the March and April options grew to a fraction over two in a few days.
The performance was cut short when the market value of Vivus shares descended below the 55 strike price of the puts. I had to pull out to prevent an exercise of the March 55s, the "short end" or obligation end of the spread. Since in-the-money options are "assigned overnight," there would have been no problem if Vivus shares had temporarily fallen below 55 then climbed to "at or above" that figure before the end of the trading day. But as the March 13 trading day neared its close, the stock was bedding down below that line.
I phoned the broker and said, "I want to close out the position at the market." I never say "at the market" when opening a position. As already indicated, I give a specific debit amount or what-I'll-pay amount or in-the-gap amount. The way option prices fluctuate, saying "at the market" when you apply to open a position could result in your spending or investing 50 percent or more than you intended, e.g., two and a quarter or more instead of a point and a half, stacking the numerical deck against a profit. When closing out a position, however, "at the market" is fine for a quick bail-out. I netted $784.71 after commissions, just over 50% profit in six trading days.
Mention deserves to be made of the availability of both puts and calls, enabling the option trader to play a stock's rise or fall with equal ease. It has always been possible to profit from the decline of share prices by selling short. Yet this has perennial disadvantages, both financial and psychological. For the long-player of stocks, the potential loss is limited since share prices cannot fall below zero, but for the short-seller no barrier exists on the upside. With Vivus I could have lost the optioned $1,500, but no more than that. The play-the-downside ghosts still wail in vast numbers over Resorts International's shooting star, also called the short-seller Alamo.
The psychological drawback may be viewed either seriously or lightheartedly, with me preferring the latter. Short-selling has long been regarded as the investment ghetto, if not the villainous cabal, the 5 percent who bet on stocks to go down while everybody else roots for them to rise. One investment book contains a chapter entitled, "It's Not Immoral To Sell Short." The author actually felt it necessary to explain that the practice is not exactly like mugging a grandmother.
A smattering of the stigma has spilled into put option trading, less than a lot but more than zero. In a July share-slide I took profit on an IBM put spread just before the stock rebounded. (I had relaxed my rule against spreading puts under a company strong in earnings and fundamentals. The result was a profitable close shave.) A young woman stockbroker said to me only half teasingly, "You played IBM to go down? You had better pull down your shade before you break out the champagne and celebrate."
I have amply used both calls and puts, with both delivering mostly profits but the latter delivering the irony. Around New Year 1996, the commentator on the financial cable channel lamented that 1995 had been a dismal year for investors. I had done well thanks to put spreads under Latin American shares and other stocks. Ah, the forbidden zest of hearing a joyful song in your head while they play mournful music.
In recent weeks, a female financial analyst on TV practically wept over NASD tech stocks. My Ascend Communications put strategy could have dried a few tears. In trading and finance, every sorrow is a joy to somebody else, and vice versa. The pursuit of joy includes switching sides occasionally. When a stock price decays and the right options are there to meet it, I can understand Washington Irving writing about "something pleasant and touching in its very decay."
Why are we treading the worn stones beneath the chiseled traceries of Westminster Abbey? Because I still insist on traders and investors being Renaissance men and women. You have a better chance of staying out of those Cash For Gold shops if your heart strolls the colonnades and courtyards of Europe in the 1500s. Notwithstanding his fondness for British places including abbeys, novelist Henry James (1843-1916) made 14 trips to Italy during his lifetime and made some noteworthy observations.
What he saw included Venice of the late 1800's as described by John Addington Symonds in Sketches and Studies in Italy and Greece: "We carry away with us the memory of sunsets emblazoned in gold and crimson upon cloud and water; of violet domes and bell-towers etched against the orange of a western sky; of moonlight slivering breeze-rippled breadths of liquid blue; of distant islands shimmering in sun-lighten haze; of music and black gliding boats; of labyrinthine darkness made for mysteries of love and crime; of statue-fretted palace fronts; of brazen clangour and a moving crowd; of pictures by earth's proudest painters cased in gold on walls of council chambers where Venice sat enthroned a queen."
Yea, Venice has always brought out authors' penchants for descriptive writing. With artists, a key vision of more than one was to personify the city as an enthroned sea-queen receiving offerings of pearls from Neptune and the Tritons. Tintoretto and Veronese both painted huge ceiling art on this theme surrounded by gold ovals in the Ducal Palace. In Italian Hours, Henry James wrote of the Ducal Palace, "The reflected sunshine plays up through the great windows from the glittering lagoon and shimmers and twinkles over gilded walls and ceilings. All the history of Venice, all its splendid stately past, glows around you in a strong sea-light.
"Every artist here is magnificent, but the great Veronese is the most magnificent of all. He swims before you in a silver cloud; he thrones in an eternal morning. The deep blue sky burns behind him, streaked across with milky bars; the white colonnades sustain the richest canopies, under which the first gentlemen and ladies of the world both render homage and receive it. Their glorious garments rustle in the air of the sea and their sun-lighted faces are the very complexion of Venice . . . "Veronese revels in the gold-framed ovals of the ceilings, multiplies himself there with the fluttering movement of an embroidered banner that tosses itself into the blue . . . The mixture of flowers and gems and brocade, of blooming flesh and shining sea and waving groves, of youth, health, movement, desire--all this is the brightest vision that ever descended upon the soul of a painter."
Florentine Renaissance artists were stand-outs in form, Venetians in color. Influencing the latter, earlier Byzantine art and Gothic art counts as two factors, a third the visual splendor of the city and surroundings, celebrated by Symonds as "that melodrama of flame and gold and rose and orange and azure, which the skies and lagoons of Venice yield almost daily to the eyes."
Yet rich colors and shimmering sea-light could sometimes be omitted. In the Church of San Giorgia Maggiore, Tintoretto painted a dusky "Last Supper" which John Ruskin described "We are reminded that the subject is a sacred one, not only by the strong light shining from the head of Christ, but because the smoke of the lamp which hangs over the table turns, as it rises, into a multitude of angels, all painted in gray, the color of the smoke; and so writhed and twisted together that the eye hardly at first distinguishes them from the vapor out of which they are formed.
"The picture has been grievously injured, but still shows the miracle of skill in the expression of candlelight mixed with twilight; variously reflected rays, and halftones of the dimly lighted chamber, mingled with the beams of the lantern and those from the head of Christ, flashing upon the metal and glass upon the table, and under it along the floor, and dying away into the recesses of the room." (From The Stones of Venice)
The eye that can appreciate such detail is markedly less likely to overlook the details inherent in stocks, futures, or options. Henry James wrote of Venetian "masters, who form part of your life while you are there, who illuminate your view of the universe." Your view of the universe includes investments and speculations. These are tough enough without the disadvantage of Norman Arial as "illumination," a light at the pyramid base!
So when you send a wire, do not wire for emergency money but for Venetian lace, glassware or gems. Also, if you should need a pawnbroker or a bail bondsman, be sure to find one capable of discussing paintings of "violet domes and bell-towers etched against the orange of a western sky" and "blooming flesh and shining sea and waving groves."
A Couple Of Good Books - Buzz Ross
I am currently reading two very interesting books that pertain to trading and general markets. I strongly recommend the first one, very germane to trading behavior, be thoroughly read, absorbed, and used frequently as a reference -especially, when agonizing about liquidating a position? It is all about transacting the second half of the trading (or investing) commitment -- the very reason for even bothering with the markets in the first place (assuming you're engaged in this endeavor to make money)?
This jewel is the newly revised edition of It's When You Sell That Counts by Donald L. Cassidy. What a dynamite book? For the trader that masters (and applies) the content of this work, the rewards must pay off handsomely. There is much of value also for those of us who invent, evaluate, and develop trading strategies. The book's tone is directed more to stock and mutual fund investors, but the psychological and technical considerations are every bit as important and useful to futures traders. Needless to say, I cannot recommend it highly enough!
The second book, more general but highly fascinating nonetheless, concerns arenas of inherent risk and decision making. Recently published, Against the Gods: the remarkable story of risk by Peter L.Name Withheld, describes how we humans have interpreted our environment throughout our evolution, how measures of risk evolved and developed, how we have dealt with inherently uncertain situations encountered in life, and biographically sketches many prominent people who have made significant contributions to understanding the nature of risk, including their ideas for dealing with uncertain endeavors.
A good deal of attention is directed toward speculative markets throughout the book, and includes various misperceptions we indulge in. It's unlikely that this book will help you on a specific trade, but absorbing the essence of the material might improve your overall approach to trading and the strategies that could work. Even though I've barely read a third of the book, I'm enjoying it so much that I thought that those of you who are unaware of it might want to read it also. Enjoy!
On page-10 of the July '96 Real Success Bulletin, in your answer to Henry Amann's question, you indicate that "the Keltner Band formula, the basis for all the other resistance/support indicators" are available upon written request. Since I do my own programming, I'd appreciate your sending the formula(s) and indicator info to my address above."
Disappointingly, I never received a response and thought you might have been too busy at the time. By now, the request has probably been lost in the abyss of other paperwork. However, I'm still interested in obtaining this info. Thanks again. I enjoy CTCN and appreciate the work you put into making it all happen?
Editor's Note: Sorry about the non-response, which may have been due to our relocating twice since last summer and (or) our Fax/telephone number changes and all our E-mail problems. Anyway, here is our Keltner Band formula which we wrote using Omega EasyLanguage code:
Input: CoK (200) , LnBand (7) , Price (C) ;
Vars: KeltUp (0) , KeltLow (0), KeltMid (0) ;
((CoK/100)*Average (TrueRange, LnBand)) ;
KeltLow=Average(Price,LnBand)- ((CoK/100)*Average(TrueRange,LnBand)) ;
The above source code is Copyrighted©1997-2000 , D.B.A. Commodity Traders Club News, , Sedona, AZ 86339. Phone: 623-551-5096 Fax: 623-551-5096 e-mail: email@example.com
This seems like an appropriate time to address some recent requests from CTCN members for information and (or) our recommendations on their possibly attending various seminars they heard about or saw advertised or promoted in other publications.
Our members are also quite interested in the credentials of the trading experts who give the seminar.
There are perhaps a dozen or so vendors who are now giving or have recently offered trading seminars. At these (usually high priced) seminars the promoter claims he will teach you how to trade successfully. These seminars are usually held for 3-days or so and may involve classroom type instructions and lecture over the weekend, occasionally combined with some real-time trading, normally on the following Monday.
Sometimes after the seminar is completed, you will also receive additional assistance such as limited free consultation with the "trading expert" or with an assistant, Fax services, software, etc. Also, after the seminar is over you may be solicited by the seminar promoter to purchase additional products at extra cost, such as a more comprehensive trading course or manual, additional consultation and advice, video tapes, Fax advisory service, more software or software add-ons, etc.
Daytrading the S&P 500 market seems to be the main subject taught at these seminars, but sometimes they will also cover other markets and (or) position trades rather than only daytrades.
You should be aware of the fact its been alleged some of these seminar vendors either do not trade at all for their own account or else do not trade successfully. Therefore, you should always ask the seminar vendor to see his personal P&L broker statements. You should insist on reviewing a series of continuous monthly broker statements from the seminar vendor, with no gaps involving missing months.
Some vendors will allegedly try to give you a number of daily statements in lieu of monthly statements. Daily statements are of little value in determining if the vendor himself is really a successful trader. This is because the vendor may be hand-picking which group of daily statements to show you. He may bypass many losing days and stop the consecutive daily statements about the time they start to show some losing periods. He may commence the daily statements about the same time a profitable run occurred. There in all likelihood will be gaps rather than continuous statements for a long time frame.
If asked why there are gaps in the daily statements or they are not consecutive, or there are not many statements provided, the vendor may say he did not trade at those times for various reasons. He may also say he was trading a different or unrelated system, so certain days were not shown as they were not relevant to the particular method he wants to sell you. Don't be fooled.
You might even consider telling the seminar vendor you will only attend his seminar providing you see consecutive monthly statements from his broker, or at least an explanation for his non-trading. Make sure any broker statements supplied clearly identify both vendor and broker name and address. Also, make sure the statements do not seem to be altered or have erasures or cover-ups.
If it turns out the trading expert giving, the seminar admits he does not trade at all, ask him why. He may have a satisfactory answer. Sometimes a non-trading vendor may have great knowledge and his services are very valuable. You should also know you still may get good value in the form of educational instructions from a seminar, even if the expert himself is not an active trader or a successful trader.
However, if the expert admits he does not trade it should at a minimum raise some red flags. Perhaps his method is too non-mechanical and involves too much judgment, or is too subjective to trade successfully. Perhaps the drawdowns are far too high. Perhaps his method has too much risk. Perhaps his method does not disclose a workable stop-loss or exit method, etc.
Other things to look for are items like does the vendor appear to be successful himself. Does he live in a nice house and live in a good neighborhood? Does he drive a nice automobile? I recall a few years ago the story of two vendors who were widely promoted and referred to often in the pages of a competing newsletter. It was alleged by traders who met these two well-known vendors that one drove an old rusty car, and the other one drove a car with a cracked windshield because he did not have the money or insurance coverage to get it repaired. It also was alleged by a trader who visited, one of them lived in a small old rundown house located in a poor neighborhood.
Other things to look for are minor things such as does he have a separate dedicated Fax line or does he only have one telephone line, perhaps using a Fax switch box, to save money by not getting a second line installed. Does he use an old obsolete computer or not even use a computer himself? Does the vendor not have a data feed or not use TradeStation, because he says it's too expensive? Is the vendor easy to reach during the day or is he rarely there and utilizes an answering machine or secretarial service?
Does the vendor have another unrelated job besides doing seminars or selling systems? If so, why does he need the other job, why can't his trading activity or seminar/system sales produce sufficient income for him.
I have heard of or known a number of trading product/system vendors and system computer programmers who at the same time they were selling trading systems or programming them, they also had other jobs. Such as being a salesman selling unrelated products, accountant, doctor, engineer, computer programmer employee of an unrelated (to trading) company, even one I knew personally who worked as a Los Angeles city bus driver while he was programming trading systems!
Is the vendor willing to provide a number of testimonial letters from clients? Be cautious of letters that were retyped by the vendor to allegedly make them more readable. Insist on a photocopy of the original testimonial letter in the clients own handwriting or done on his own word processor.
Also, be wary of testimonial letters coming from well-known people in the industry, such as an editor of a trade magazine, another system or trading product vendor, etc. Some of these people will frequently give glowing testimonials without actually using, analyzing, reviewing, or even knowing much about the specific product. It's alleging testimonials from people in the industry are of questionable or dubious value in evaluating products. Testimonials from individual private traders seem far more valuable.
Highly complimentary testimonials are sometimes given by well-known industry figures (more often than you would imagine), in exchange for getting their name published, or as a personal favor, or sometimes as a swap in exchange for getting their own product recommended by the vendor, or for receiving a testimonial letter covering their own product/service from the same vendor.
Of course, most vendor testimonials are truthful and legitimate. However, some testimonials are plain fraudulent, fabricated, or exaggerated. At one time we spoke with a trader who was the author of a very well versed and widely used testimonial letter. It was being used heavily as a powerful sales tool by a vendor who sold trader psychology type of tapes and manuals. This trader, who was a former client of the vendor, told CTCN the testimonial was partially fabricated, exaggerated or misstated, and many words used were not his own.
After looking into the circumstances and some admissions by the parties involved, it was determined this well-known product vendor had an advertising/public relations type of agency compose and type this testimonial, using the client's name and address and some actual words of the client. However, they allegedly twisted, exaggerated, or misstated what he really said, or the true meaning of his words. This way it all sounded much more positive, more powerful and stronger than the client really intended his original words to be.
This misleading testimonial was mailed by this particular vendor to tens of thousands of unsuspecting traders whose names were on a mailing list, many of whom purchased the vendors products based in a large degree to the twisted and exaggerated testimonial letter.
This is a continuation of the Editor's Note about the Book Review by Don McCullough. Both a mechanical (or at least a partially mechanical) stop-loss and exit method at a target price are vital to the success or failure of any trading system. Even a stop-loss and target price placement technique which is not 800 mechanical and allows for some flexibility and judgment is better than no exit method at all.
Sometimes a trading method or system, be it offered via a book, seminar, trading course or manual, or software, will not include specific stop-loss and (or) profit target exit prices. Unfortunately, it has been alleged the reason this important matter seems to be avoided by some vendors is the fact the vendor was unable to calculate a mechanical stop and target level which "works" successfully with his method.
Perhaps the best stop/target level the vendor was able to come if with really does not work well with his system. By revealing his recommended stop/target it would be easy for the trader to program the system into TradeStation or another testing type of program and back-test it and also follow it in real-time. Then the vendors' client would find out the method he purchased really does not "work," at least with decent profits combined with low risk and low drawdowns.
By omitting a stop-loss/ and target price methodology the trader would have great difficulty verifying whether the methodology "really works." If he had a way to test it and found out it did not "work," he then may possibly return it for a refund, which of course the vendor understandably wants to avoid!
We are not saying any particular vendor has done this. In fact, we have heard or read a number of good things involving Linda Rashke and Mr. Conners over the years and they have done some valuable work and received excellent testimonials.
The deliberate non-disclosure of a sound stop-loss and target price exit method is a fairly common practice with many other trading system vendors. However, in the event a methodology or system does not include mechanical stop-loss and exit instructions it still may be worth your acquiring it. This is because it could be quite valuable in other ways, such as entry and timing methods, discipline, money management, etc.
Another reason this goes on is the fact a surprising number of traders do not realize how critically important both stop-loss and exit orders are to any trading method or system. We have seen a number of systems where a very small and seemingly unimportant difference in a stop-loss or exit price method made a dramatic difference in the systems overall P&L. Your editor has personally made many trades over the years where a one or two-tick difference in his stop or target level made a difference of many thousands of dollars on a specific trade.
Unfortunately, many conversations with a number of traders over the years have led me to believe a significant percentage of traders (including many experienced ones) fail to fully realize just how huge a difference accurate stops and targets are to their methods trading success or lack thereof. It seems most traders wrongly believe the technical algorithm itself which signals the trade entry is much more important than anything else. In our opinion this is not correct.
It is our opinion the poorest technical entry indicators will outperform the best indicators if the poor approach has sound stop-loss and target price methods compared to poor stop/target methods of the better technical approach.
In fact, I would go as far as saying tossing a coin combined with excellent stop-loss and exit methods will easily and consistently outperform almost any well-known technical indicator or set of indicators which are using poor or nonexistent stops and target price methods. To be a successful trader you must know where to get out of a trade and take your profits on winning trades and conversely must know when to exit a losing trade.
On a different subject, some of you may be saying why don't we (or some of our article contributors) always reveal the names of people, about who negative things have been said or alleged about in CTCN. The reason is very simple. Namely lawsuits! A few years ago we asked members to contribute to a so called CTCN Legal Defense Fund. This idea was supported with lots of positive comments but little real money.
A frivolous or groundless lawsuit involving CTCN could easily cost a minimum of $10,000 to initially answer the lawsuit. Much more than $10,000, perhaps $50,000 to $100,000 or so later if it goes to actual depositions and trial.
Keep in mind, in addition to paying our local law firm, we will probably be forced to also hire an out-of-state attorney to handle the suit, as no doubt our local attorney will not be licensed to practice in another state. If the court venue stays in another state we would not only have to hire a law firm licensed there (who no doubt would overcharge us), we also would eventually have to go there ourselves for the trial, etc.
Unfortunately, we have also in the past been forced (due to lawsuit threats) to not publish some articles. This has only occurred a few times but that's a few times too many! For example, CTCN member George Famy (who lives in France) once wrote an article for publication in which he was critical of a very large Chicago discount brokerage firm. Before our publication George sent a copy of his article to the brokerage firm.
A few days later we received a phone call from their attorney. This lawyer told us if we in fact publish the article he will file suit against CTC for slander, etc. He said this was "not a threat but was a promise, and promised he will be filing the suit instantly upon publication." As a result, we were forced (due to the potential legal costs) to forego publishing the article.
Unfortunately, there is no way we can pay out tens of thousands of dollars in legal expenses, what with our limited income resulting in your paying less than $100 per year to get our publication.
You may not know this, but CTC was involved in a costly lawsuit last year which cost us tens of thousands of dollars in attorney fees, expenses, lost revenues and untold amounts of time before it was finally settled out of court.
As a result, we are very cautious in mentioning specific names in our newsletter. Also the word "allegedly" is frequently used. This means any negatives construed from the article are allegations, rather than proven or verified correct information.
Recently, it seems there have been a number of advertisements in trade magazines and mass mailings done by vendor's who mention their high Futures Truth ranking. These vendors use the fact their system was rated highly by Futures Truth Ltd., apparently as their primary sales tool.
In several past-issues we have warned our members of the alleged fact there seems to be little, if any, correlation between the results shown by Futures Truth and actual trading results the system user normally experiences after buying the system.
In the past we informed our members about this apparent oddity. We also told you we do not recall speaking to anyone who managed to achieve the same results Futures Truth had reported. Several times we asked John Hill of FT to write an article about this matter but unfortunately John decided to not respond.
As a result of our members allegedly losing lots of money trading many highly rated by FT systems, we decided some time ago to no longer list FT's Master Performance Tables in CTCN.
We also made this decision due to Futures Truth's non-response in addressing this important issue, after repeated attempts to get a written response to this significant matter from them.
Again, we are obligated to warn you not to purchase a system based mainly on the vendors advertising the fact they are ranked highly by Futures Truth.
Please remember it has been alleged numerous times our members do not achieve good results with their highly ranked systems. In fact, it's alleged most members lose money trading these top-ranked systems, contrary to what they are led to believe by virtue of the glowing FT rankings and the vendors advertising.
Unfortunately, it has been alleged the ranking service offered by FT is of very dubious value. You should also be warned a competing newsletter routinely recommends FT. When asked by its readers, they are told to contact Futures Truth if in the market for a highly rated trading system.
As an additional co-mingling of these supposedly independent businesses, Futures Truth Ltd. and our main newsletter competitor share web space on the same web mall and maintain links to each others site. This way visitors to one site will normally end up visiting the other Website.
Of course, traders not only may buy both products, they also sometimes end up acquiring an alleged poor performing trading system and allegedly end-up losing lots of money attributable to the high rankings given the system in the "Futures Truth Master Performance Tables."
This issue marks the end of our 4th year of continuous publication. The premier issue of CTCN was published during May 1993. We have managed to endure the constant threats of lawsuits from vendors (including one actual suit) and continuing government involvement in the business of commodity firms like ours. Including, the apparent requirement we must register as a CTA and forbidding our giving any form of so called "trading advice," it may be difficult to continue publishing CTCN for another four years. However, we will try hard to continue our publication for as many years as possible.
We have basically eliminated our classified ads which are printed within CTCN (rather than as a separate flyer), except for a small advertisement by Greg Donio, perhaps our most prolific article writer and by far the most articulate and interesting contributor.
A couple times In the past we have been forced to spend considerable time and expense answering legal papers served on us by the CFTC. This was the result of an investigation involving a direct advertiser and the CFTC wanted lots of information, which we had to send them. The CFTC must assume we have detailed information on an advertiser (which we don't) who they are looking into because their ad was printed in CTCN, rather than on a seperate flyer.
Thus, in the future we are only offering separate and segregated individual 8 1/2 x 11 flyer inserts and also a new Classified Advertising Flyer insert page. This way we will avoid any conflict of interests or co-mingling thoughts, even though this was never a real problem.
By the way, accepting advertising helps defray our postage expense thus enabling us to keep your membership cost low.
As you know, our e-mail address has been c/o The Microsoft Network. Like America OnLine, they also have had serious problems. In fact, their E-mail facility was inoperable for a number of consecutive days of late. This prevented us from receiving or sending any e-mail for an extended period.
MSN was our 4th e-mail address in 7-months and was "OK" for a while but now seems to have deteriorated due to their recent "upgrade" and continuing serious E-mail problems. The upgrade is more glittery and much more graphical than previous versions. Consequently it seems to run much slower, likely due to all the glitter, very time consuming (in loading) graphics, and extra options and functions they have added. It also includes automatic playing of music thru my computer speakers while trying to collect E-mail, which I find annoying and distracting.
It seems MSN is mostly interested in chat channels, entertainment channels, on-line games, music, graphics, etc., rather than fast and efficient on-line time and E-mail. For example, a recent 2-page letter from MSN talked at length about all their glitzy and advanced new features but not one word was mentioned in that letter about their E-mail facility. It seems like E-mail has taken a back-seat at MSN and also at some other Internet providers like AOL and others.
Due to these concerns we have again been forced to switch e-mail providers. Our new e-mail address is firstname.lastname@example.org which is our 5th e-mail address in 9-months! Unfortunately, the new local access provider seems to also be having problems, what with more than occasional busy signals. However, overall E-mail and Internet access is still much better than MSN. The new provider also says they are adding more phone lines for improved access. Therefore, we will stay with them and see if we are satisfied.
Member Comments & Requests
Member Gerry Barrington wants to know if Internet access problems are caused by AOL or are the addresses wrong.
I am reading an (old issue) of CTCN . . . having just fired off an e-mail to Ganntrader re: Delta Solution. Hot to trot, I tried to reach the other two mentions www.elder.com and www.trading.com. Both of these attempts failed to yield Websites going through AOL.
Are the addresses in the current issue full and complete? Could it be that these people have turned off their web servers during a holiday week? AOL suggests traffic on the i-net. Can you get through? Please advise.
Editor's Note: The addresses listed were typed correctly in that issue according to the way we received them. Try https://www. and then the rest of address. Our members should know we do not normally check or verify the validity or accuracy of Website or mailing addresses and phone numbers given by members. The access problems may also be due to trouble at AOL. As you probably know, users of America On-line had great difficulties lately getting connected due to heavy usage resulting from their switch to a flat monthly rate combined with alleged inadequate computers on their end. We also had serious problems with Microsoft Network. See Editor Comments section for more on this.
Member Tom Cruckshank would like to know if any one of the readership knows about the Tide System by Gil Castillo. Please respond through Dave. Thank you.
From Rod Bonvicino: Are there any sites on the Internet where I can view current futures charts - short-term - long term and/or daytrading charts?
From Edward Chin: Does anyone know about a company called The Ken Roberts Company which offers a course for about $200 on Commodity Trading? If so, any good or bad thoughts.
From Vernon Tyler Re: The InfoSeek Internet Search Engine took some time this weekend to do some Net Surfing. InfoSeek (which PC-Computing, this issue, states is substantially improved) has worked nicely. Also, found that (Jake)Name Withheld, Name Withheld, has a large presence. Search on "Name Withheld" via InfoSeek returns an large number of hits; refers to numerous MBH publications and etc. So ignore the ring on that one.
Is Oldcastle Laboratory Greg Donio's Business Name? - Vern -- I suppose this is obvious, but I trust "The New Donio Formula" (Oldcastle Laboratory) advertisement in CTCN is a work about Greg Donio's methods?
Editor's Note: Yes, Oldcastle Laboratory is Greg Donio's business name and offers an option trading manual based on his work. Greg prefers not to publish his telephone number. The New Donio Formula (option methodology). Never before available, the locked-drawer blueprint for independent trading as a limited-risk business, not a dice-roll is available on web.trading.
Thanks to everyone who has contributed knowledge to this issue of Commodity Traders Club News. Without you it would not be possible. P.S. - Remember, as a special reward for making just one contribution/submission per year, you'll receive an automatic 50% price reduction on your renewal. Submissions can be any length, long or short; typed, handwritten or submitted on a disk. Formal or informal. Please participate by sharing your information and knowledge with other traders. Please make a contribution about your experiences, both good & bad with systems, services, advisors, data vendors, and other trading related product.
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