Issue 38
All About Vendors & Seminar Types - They Are Not All
"Low-Lifes,
Preying Off The Public" - Larry Williams
Enjoyed your March/April issue and would like to add some comments about system vendors/seminar types and the like. I clearly include myself in this category, but I also trade and have actively done so since 1965.
It appears many of your readers think people like myself are low life's, preying off the public. Certainly, this does go on in this business, just as it does in all business. Yes, I have seen it go on over the years. But, when I was on the Board of Directors of the NFA I saw a multi-million dollar scam take place in the brokerage firm of one of the other directors, who to my knowledge was never reprimanded.
Let's look at some of the shots aimed at us. The most common is "If it's so good why are you teaching it?" So, what should I do, teach bad stuff instead? I think not, what, if any reputation I hope to develop will come directly from what I choose to show people and to what extent I am responsible for my actions. Good system developers, seminar leaders and letter writers stay the course and have a habit of outliving their competition as well as their critics. We are known for our products, not our personalities.
Does this mean we should just listen to the elder statesmen, the tried and proven? I think not. That would have us listening to George Lane who claims: 1. He's a Doctor, he's not a real one; and 2. That he developed Stochastics, he did not, Ralph Dysant did.
New brains coming into this business of speculation have just as much opportunity to crack some of the markets' code--and right to talk about it --- as us old guys. Truth, like oil, is where you find it, and there are always dry holes. Young ones and old ones . . . so I'm all for giving new blood a chance to find what I could not. The lack of experience may allow them to see what I have passed up.
Two men who taught me about the markets, Gill Haller and Bill Meehan, did not live in fancy houses, drive fast cars or even have much money. But, boy oh boy, those guys were brilliant when it came to the markets! They were true mental giants. I'm sure glad I did not use the rule of "check them out" or I'd still be floundering. What I did do was listen to them and what they said was logical and backed by plenty of examples.
Neither Bill nor Gil was registered with the Feds, nor am I. And why should I? Then they could ask for and get the names of all my subscribers, regulate what I say and write about. Does my unwillingness to deal with these bureaucratic, myopic socialists make me any less qualified or does it show I walk my talk, that I do stand up for my rights and my subscribers? You'll have to decide that, and my life is a pretty open book.
You ask that we provide testimonials and copies of our trades . . . I think I was the first one to ever do that. But, all it may prove is you have lots of admirers and caught a hot streak. Then again, it may not! It may prove I've got a bunch of ringers set up to snooker the public.
Or, the lack of such documentation may show that my "followers" really don't want to open up their lives (and books) to tire kicking traders. Plus, I really do not have time to "introduce" traders to each other. I probably get 10 requests a week to refer someone who can vouch for my work. When times are slow, I do. But all one has to do is check out the CTCR listings of our actual reports, if a newsletter writer, or read our books and see for yourself.
Here's a confession for you. When I was much younger and "smarter" I reviled in devising systems and sold my fair share of them. I'm now inclined to think that despite the continued success of most of these systems, I probably did a disservice to myself and these people.
Why? Because things do change, markets, our insights, our understanding. So the idea of a system --- a total immovable object --- flies in the face of ample evidence that there is in fact no Holy Grail or be all-end-all (I used to really think there was, and that certainly lead me astray).
There's a good analogy between learning one of the martial arts and trading. In the do-jo (workout room) the student learns the system of Karate, Tai Kwando, Judo, etc. The "master" teaches the system and it works perfectly . . . in the do-jo. But, take it out in the street and you'll usually get your nose bloodied.
I think I can help my fellow trader more by teaching them how the markets work, how to think about the markets and how to react . . . all piled on top of the trading approaches, systems and techniques that I use. Still all this is not trading or fighting in the streets.
Finally, let me set the record straight on the real-time trading seminars that are now popular. Name Withheld was the originator of this concept. I have traded with Name Withheld at almost 30 of these "affairs" and we've made money 28 times, and unlike an accusation in your commentary, I have never sold anything at these seminars. No Fax service, no additional "whiz-bangs" that you "must have."
This is getting long so let me sum it up. Trading takes skills, these skills can be learned and I've found teachers all over the world who have helped me. Some I paid substantial amounts to and I've paid my dues discovering what I have learned. It's public record that, in turn, many of my students have gone on to make fortunes, quit their jobs for trading, etc. But, some lost all they started with too! How can I explain this contradiction? My dad was a great carpenter, he gave me his tools and I literally could not build a dog house. I tried, it was a disaster.
Some people pick these skills up rapidly and can go way beyond their teachers. Others could be given the mythical Holy Grail and; a) not understand it and; b) lose money trading.
Speculating takes thinking, hard work and the ability to deal with risk, day in and day out. Some people have the ability and desire to show others how they do it. Please don't confuse the generous act of teaching with the validity of what is taught. And keep in mind that market "stuff" is priceless or not worth the paper it's printed on.
When it comes to systems, hot lines etc., caveat emptor is the best thing I have ever learned.
Editor's Note: The editor comments in our last issue were about trading seminar vendors in general and also referenced a couple seminar vendors who are believed to be doing (or not doing) the things outlined therein. In fact, we believe most trading product and service vendors are honest and try to provide a good product and do a good job. It no way did it refer to Larry Williams (or Name Withheld). More traders have learned successful trading techniques and methods from Larry and Jake than probably anyone else over the years. Larry is to be commended for contributing so much to the futures knowledge base.
Is It Really One Indicator to Profits? H.M. - Australia
Well I sit here reading the newsletter and thinking, "How the hell do these guys do it?" The ones who write in and say they are an expert of many years, who don't disclose their indicators/systems and say they managed to stumble on to this very simple indicator that worked and now the struggle is over and they just trade away. After 9-years of testing and trading, I find I need 10 or more indicators to make a decent assessment of the market. I call a daily, a weekly and a monthly each an indicator even if it is the same length moving average for all. That means I've looked at three indicators already, so how do these winners manage with only one indicator? What irks me is that they call it not only simple, but robust. Irksome in the sense that I find it so bloody hard and they find it easy. Supposedly.
Rather like those tests they use at management seminars. Put eight matches into one triangle without touching another match twice or some such mind twister. And of course, there is someone at my table who instantly sees the answer without any effort and I'm still waiting until the tea break to see how it's done.
Yes I know the better systems are simple, but how do you do it with only one indicator? Or are there also some things they look at, e.g., different time frames which are noted but not counted as separate indicators?
To me hearing someone is profitable using only one indicator is like winning a chess game in one move. Maybe there are just many different approaches. I see myself rather like a net fisherman where it takes a long time to build a net and prepare for its use, but it's fairly reliable as opposed to the bird in the sky that can make it look easy with its quick plunge, but it only has one shot at catching the fish. Obviously I would rather take one shot, but from past experience the one shot dive has cost me a lot because mostly my picture was incomplete. I tended to peck into a lot of plastic fish.
Boy, in those early days it seemed so easy. Just soar overhead and dive on unsuspecting suckers. Sweet and simple was my decision (analysis) sour and nasty was the taste (result) so much so that I was forced to pass on the quick and "simple." I would prefer the quick and "simple," I just couldn't make it pay in real-time.
So hats off to you experts with your superbly profitable single "simple" indicators.
Factors Involved in Trading Success - Keith Carr
From reading the March/April copy of CTCN, it seems many traders have experienced a lot of the same obstacles in achieving success in trading the markets that I have. There has been at least a couple of times that I decided that trading commodity futures was just an impossible task, especially for the small trader who is unable to monitor the markets intraday. I really struggled with the idea of defining which time frame I could realistically trade.
The weekly charts are obviously the desirable charts to trade, but then the monetary risks associated with the weekly time frame are beyond the scope of my small account size. So if the small trader cannot afford to deal on the longer time frame, then entry and more importantly exits must of necessity occur on shorter time frames. But if one cannot trade intraday, what can you do to protect against adverse moves?
Well, I thought, there must be some way to tie price action to time to be able to gain something of an edge on the markets. After a heck of much study and research, I am not sure there is a way to effectively do this on a statistically verifiable basis. There is much value to be placed on historical studies and forming statistical databases to glean as much information as possible. But when you get right down to the nut-cutting, we must trade the hard right side of the chart.
I have found the most effective approach for me is to observe what the market is telling me it wants to do by analyzing on all different time frames, from monthly to 5-tick charts. It has really been helpful to have delayed intraday data from BMI, even though I am not looking at it real-time. There are times just looking at the daily charts just does not really identify how the price action formed during the day. Now I can really quantify volatility to fine tune entries and exits; in this way I try to take intraday risks for weekly profit objectives.
Of course, the methodology I am using enables this, but what is interesting is that through the interpretation of the price action, the market also seems to say what it's not going to do. This information is just as valuable, as this leads to a way for the small trader to be insulated from moves against your position. That is option usage. An example of this might be to sell a call at a higher strike price than where you are entering a long futures contract. This can help finance your stop-loss, and it is a statistical aberration for price to move more than two standard deviations as a rule. So you are really not limiting your profits that much, while gaining some extra income if price moves your way, and getting some protection if price moves to the downside. It really pays to get at least a basic knowledge of options usage. There are strategies that can enable profitability in different market conditions, such as trading-range markets that are just basically going sideways. Neutral option positions and calendar spreads are some of the ways that the small trader can steadily try to build up the trading account. This is not to say that timing is not important. Timing is, but observing volatility can really help to define the right time to take action as well as the right action to take in light of the present market conditions.
Some Other Thoughts on Vendors in the Industry
I for one have spent much more money than I should have on trying to become educated enough to try to survive in the markets. Of course, when one is trying to learn about trading, it is not apparent until too late that one may have been scammed. That is what is really irritating about intervention in the efforts of CTCN to be a forum where traders can interact and find out about what works and what doesn't work, different vendors, etc. Vendors should be willing to undergo the scrutiny that is due when they are trying to market a product. That is a necessary part of a free-market economy. I have been extremely fortunate to have been able to study the work of a for-real market technician and teacher.
The use of fraudulent lawsuits to prevent traders from finding out about others' experiences prior to a possible purchase is absolutely appalling. I suppose we all keep on trying to succeed in trading, in spite of all the obstacles. Because of the fact that trading is one of the last bastions of true free-enterprise available to the average person, if you can pay the price of admittance to join that small minority of consistently profitable traders. I hope to someday be able to day-trade professionally (S&P 500) as well as position trade and actively trade options.
Does Murphy's Law Apply to Your Trading Methods? - Duane
Murphy's Law has implications for traders we ignore at our peril. Dismissed as unfounded popular wisdom by some, the author of a recent article reveals scientific evidence which supports the existence of Murphy's Law. Salted down with humor the article is informative, readable and applicable to traders. Chuckles emerge as readers relate to examples given.
Few CTCN readers are likely to read "Scientific American," however all traders are encouraged to read "The Science of Murphy's Law," by R.A.J. Matthews in the April '97 issue. Share your observations regarding applications of Murphy's Law in your trading. This may help others recognize the odds which favor the use of stops. More revealing, may be insight into unlimited risks one is exposed to when stops are not consistently used.
I will encourage the author, Robert A.J, Matthews to apply his analysis to our field of commodities trading. While in London in June, I will invite him to join me for lunch and a visit to the London Stock Exchange. I will share with him my trading experience and need for objective analysis.
Hopefully, Matthews will address Murphy's Second Law, which asserts when Murphy's First Law occurs, it does so at the worst possible time. In other words, if you normally use stops, but fail to do so 10-percent of the time, what are the odds for having a limit down day? Or a series of them?
Similar studies may have been done in the past. If CTCN readers are aware of prior work in this area you are encouraged to share them here.
A keen interest in the effective use of stops has been whetted by my current trading experience. My two best (of ten) years trading have generated significant profits without the use of stops. Reliable sources reveal that consistent profits are more likely, using larger stops. This strategy is limited to traders who can afford to take significant losses. It is neither recommended nor applicable to S&P trading.
My grain trades generated 372% profits by 21 April. However, by holding to fundamental analysis and not effectively applying stops, profits dropped to 192%. Both technical analysis and fundamentals favor the long side as I continue to hold and prepare to add to those positions. But clearly, stops are needed for consistent performance on both sides of a trade. Informed experienced traders are obviously using stops above their long positions to take profits as well as below for protection. The reverse is true for short positions.
If you have an input for discussions with R.A.J. Matthews, you may post them to my e-mail address, duane@lava.net - Good trading
Looking Forward To Becoming A Confident Trader & Achieving Real Success In The Market - Roy Kaylor
Thank you Dave for CTCN and all the good writers sharing from their hearts.
I have been helped in my trading of the S&P, "day trading" one contract. Readers have helped me solve problems. I look forward to becoming the confident trader I can be. (After several whipsaw losses and/or violation of my trading rules, I have been known to just look at the screen and not trade). To get out of it, I find I can if I paper trade for a while to build back confidence. I am not where I want to be, but look forward to the real success that is in the market. I am not where I used to be.
Also, thanks Dave for CTCN's Real Success tapes and manual. I agree with Thomas Mylotte in his article (Dec 96) on the tapes. They do need to be upgraded. Thanks for getting that underway. Your Real Success software is very helpful. My VCR did not let me read any numbers on the tapes and only when you expanded the price bars could I watch your moves. Of course, the comments were vital and I learned more each run. Most of all, I covet your confidence in order entry.
Further, it's so great that you have no apparent emotion if it is a loss. I agree the stops are too low at 60 points. I am using 80 and I actually place the stop order after the fill. I know the floor guys can pick them off, but I believe I need the protection in event of reversals and stop slippage.
I use TradeStation 4.0, Real Success Software, ASC Trend (Prof Wang) on top of Real Success (Method)-(same charts), TradeStation Trend Lines, 5-min bars are basic, but also separate charts using 3-min & MACD, and 15-min, 30-min, 60-min and daily for trend reference. Usually ASC Trend is the lead signal with Real Success swings to confirm. I am sometimes 20 seconds behind the broker and want suggestions to help this. I plan to upgrade above 8mb ram for one thing. I use signal cable-plus to receive. Having real-time stops come on each tic helps a lot. (ASC Trend 3)
I have sent you a printout showing Real Success Software, ASC trend, with trendlines and trailing stops. It looks so simple. Just buy the blue bars (up), then sell the red. And Real Success gives confirmation. Keep on Dave, you are a blessing.
My Advice - Your Decision Your Trading Will Improve Dramatically By Using Knowledge of Others As Tool But Own Perspective - R. J. Ratchford
Trading is a business. Not only on the side of putting on actual trades, but the commercial aspect of trading is definitely there as well, as I well know.
You can find myriads of books, videos, systems, trading software, audio tapes, seminars, and of course, advisory services.
Advisory services are abundant. There are so many who offer their knowledge in the form of tips, techniques, trade recommendations, and other various trading words of wisdom. You don't have to look far for this kind of ware, for it will most likely find you. We truly live in an information age where it is not difficult to sell ones expertise on paper, via e-mail or Fax. What is my opinion of all this? Frankly, it's great, if put in proper perspective.
There are many who really know how to analyze the markets. Over time, they have come across some really good techniques. They have been able to isolate certain telltale signs of market action, or designed indicators that in some fashion can prove quite useful. Why limit yourself, when there is so much out there we don't know about?
From my previous articles, a point was made to not put too much stock in market gurus or market advisory services. This is still my stand on the subject. Too many traders take what they read or hear, and then trade on it. Soon, their accounts twiddle to nothing and they are out of the game.
I submit that there are no professional, profitable traders out there that have not read various books, seen several videos, listen too many tapes, or considered a newsletter or two on the subject of trading. Why? Because no one knows everything, but as a whole, you can get pretty close. Someone has information that will fill a piece of your puzzle.
The thing is, these profitable traders do not make their trading decisions based on what someone else has said, but on their own analysis. In other words, they may consider the analysis of another, but the decision is theirs and theirs alone.
For example: Each week, Don Fisher of DGL fame sends out his market analysis to anyone who owns his method. I have a copy of it myself. Because there are so many markets, I'll notice when he uses a phrase like "this market looks like a good shorting opportunity" or something indicating a possible trade coming up, and then do my own analysis on the market of question. If we don't agree, I will go with my analysis, not his or anyone else. Not that there is anything wrong with his analysis, because frankly I think he does a pretty good job, but the point is it is his analysis, not mine.
It is advisable to treat advice as that, advice. When you subscribe to an advisory service, and I think that you can find some very good ones, make sure that the final decision is yours, and no one else. This is not the same as saying "the decision to follow someone else's trade recommendation is mine." No, if you follow someone else's recommendation, without doing some of the analysis work yourself, your results will usually be worse than his. Often, the analysis is done by someone who doesn't even trade! So figure out what that means to do worse than he does. Funny thing though, I've read some great analysis from these non-traders!
My advice is to put advice into proper perspective. Use the vast knowledge of others as a tool to either get you to pay attention to a particular market, or to provide you with ideas in which to form your own decision. But from there, make sure you put a great deal of effort in coming up with your own perspective of what the market is and will be doing. Your trading will improve drastically, this I also know from personal experience. Of course, the decision to follow this advice is yours alone!
Swing Catcher Has A High Percentage of Predicting Market Direction & Made Money Using It - Lanne Terry
I was amazed to find you are not currently using your Swing Catcher (S/C) for futures signals.
Editor's Note: We were not using it as we were concentrating our efforts on the Real Success Methodology for both daytrading and position trades. In addition, we had problems getting it operational again due to problems the program suddenly developed reading our CSI data. Barring any problem, as Lanne suggests, we have "dusted off" our Swing Catcher disks and will be using it once again in the near future.
Over the past six months I have watched the T-Bond signals daily and the Harmonic signal every 3rd-day. The signals have a high percentage in predicting direction of the market, suggesting an entry at the next morning's open. (There was approximately 30 regular signals and 12 Harmonic signals during this period). The bad kicker is the stop-loss recommendation! The regular S/C signal asks to put a stop six ticks behind the entry and the Harmonic asks for 66 ticks behind.
The number of ticks I've been using lately for a stop is 1/3 of the number of the ticks from entry price to the target price (which S/C gives). Each day I move the stop to that number of ticks, but only if it reduces risk. (Move only to lock profit).
I don't take signals in front of the FOMC or Employment reports at the opening. I do place an entry stop order (in the direction of S/C signal) of 20-24 ticks to jump on the volatility around those reports. (Got two fills this way!)
After commissions, I have made money using Swing Catcher in the foregoing manner the past few months. My problem remains with trying to find the 'holy grail' which would give me a 800 correct system with 1% effort and time instead of honing what I already have. Somehow I don't believe I'm alone in this pursuit or there would not be so many schemes on the market tempting us!
Some CTCN readers may wish to "dust off" their Swing Catcher Trading System disk and use the entry suggestions therein. Other goodies in Swing Catcher include as example; with any futures contract in the harmonic chart mode, it is very easy to see the trend without drawing a line. Many more such helpers exist!
Helpful Hints on Using SuperCharts - J. B. from Texas
It's my hope this contribution to the newsletter will be of some help if you are a SuperCharts user, or if you are thinking about buying SuperCharts.
First off let's establish the fact SuperCharts (by Omega Research) is definitely on the cutting edge of technology for technical analysis. For this reason alone we must expect that it will be exciting, but not without some problems.
One can easily see the genius running throughout SuperCharts as you work with it. Bill Cruz deserves all the success he is achieving through it. However, as you use it and are enjoying all its marvelous features, you are going to find times when the genius went out to lunch. Therefore, we can only guess who programmed the rest of it.
I encountered many problems and you will too if you buy it. However, that doesn't mean it's not worth getting. It all depends on how badly you want your own ideas computerized, and how willing you are to hang in there as each problem arises.
Here are just a few of the problems I encountered and how I dealt with them. The first was when I talked with the sales lady about the product. I explained to her what my basic idea was that I wanted to program. She assured me SuperCharts could handle it. But to my dismay, after many correspondences with the EasyLanguage department, they determined SuperCharts could not handle it. So, I would either have to go to TradeStation (much more money) or hire a Solutions Provider to program it for me.
Since what I wanted to do was actually very simple, I opted for the Solutions Provider and he accomplished it with relatively little additional expense. The only problem with going that route is that you are going to have to share your private research with someone else. This sort of undoes the whole concept of buying the software, so you can do it yourself and keeping your research and ideas private.
My suggestion to you is that if you are contemplating buying this product, that you get the video on how to use it first, and also the video on EasyLanguage. If your custom programming is going to be anything more difficult than what Bill shows in the videos, your options are to hire a Solutions Provider to do it for you, pay more money for TradeStation, or try the software from another company.
I found the two men in the EasyLanguage department very courteous and knowledgeable. The only problem was that it took a very long time to get anything back from them. The irony here is being a novice in this area. Many of my questions were so simple that they could have been easily answered if Omega had provided better documentation with the product or a more comprehensive OnLine manual. My guess is they could easily cut down on probably at least half of the inquiries to technical support if they included better instruction and more examples.
I understand that with SuperCharts 4.0 they have included a bigger written manual. However, I have no idea how adequate it is. By the way, I experienced the same problems with quality control that others have noted in this newsletter. However, in each instance they made good on paying the additional FedEx charges as well.
I will not discuss all the problems I encountered in using SuperCharts. But will zero in on two of them that are particularly annoying, and how I have dealt with them.
Omega has a whole bunch of really good drawing tools. Some tools you will find extremely useful and others you will enjoy experimenting with. The problem lies in the fact there is no place to use them except over past data. That's right, I'm not making this up! There is no way to extend the drawing out into the future, which cuts down greatly on the drawing tool's usefulness.
What needs to be done here is for Omega to make it possible to move prices from the last bar, backwards to somewhere in the middle of the screen. This will leave a blank space on the right side of the screen where the lines created from the drawing can extend. I found only one way to effectively deal with this situation. The solution is to go into the Downloader and edit the data base. You need to create 20 or 30 more days of data entries into the future. Naturally, there will not be any prices there yet, but it will allow a blank area to appear on the screen.
But this is only part of the solution. You will find that even after doing this, the lines you have drawn will still not go over into the blank side of the page, nor will your pointer or anything else. Go to Tools and click options. Then click Securities where you will find a box saying "show daily holidays," activate that box. Now SuperCharts will think every blank day in your data base is a holiday including the ones you recently added that belong to the future.
But you must do one more thing to make this work. Go to the last day in your data base and place a fictitious price there in the box for the close. It's probably best to keep it near something to the actual close of the last trading day in your data base. Only when you do this, will SuperCharts think the other blank places are holidays. Now you can place your drawing tools on the charts and their lines will extend into the future.
The only additional problem is that lines will also extend from every other indicator you have placed on the chart. This creates sort of a cluttered appearance, but actually no worse than what is over the rest of your chart. If that's a problem you might want to create a separate work space for using your drawing tools only.
The other problem I'd like to discuss involves entering your end-of-day data by hand. If you follow only a few stocks or commodities, you will probably want to enter the data by hand instead of paying a quote service.
This should be a routine procedure, but I encountered a particularly troublesome error. At least once every day I would get a message saying OR_ DMAN. . . . has caused an error. . . . which would take you completely out of the program. Not only would you have to start SuperCharts all over again, but you'd have to figure out which was the last stock where the data was successfully entered.
I found the solution to this problem was essentially the same as the above, that is, to create 20 or 30 more data places into the future. Then at the end of the day you go into the Downloader and click EDIT. You can load all the charts in your directory and simply start filling in prices for today's date.
I have no idea why this works, but now the OR DMAN error appears only about once every three weeks or so.
As fast as computer technology is moving, it is my guess that in only three or four more years the competition will be as intense in this area of "program your own thing" as it now is in canned trading packages that you can buy for under $100, and did cost two or three thousand dollars just a few years ago.
It is my hope that Omega Research will meet the challenge by first streaming and correcting the simple performance errors in their product, as well as continue to create more and more of these amazing innovations, which they are so good at. And also to realize that eventually as new competitors enter the market, Omega will initiate a more realistic pricing policy.
Good trading to you all, and please, it you have any information about SuperCharts or their competitors, let us all know about it.
Place Your Stop-Order After A Gap Opening Trading Tactic - Bill Raworth
Just wanted to share a trading tactic I've learned in 23-years of fairly intensive trading.
Let's say your system - or your good judgment tells you to enter an order to sell your long July Soybeans tomorrow at 807 stop. Let's further suppose the beans close at 815 today, and the call from the pit tomorrow morning is for beans to open 7 to 10 lower. Do not enter your stop, but wait 2 to 15-minutes after the open and then place your stop at or just below the low of the day (if lower than 807).
You'll find remarkably often your revised stop is not far from the best price you could have hoped to get, and you'll be exiting your position later in the day at a much better price.
Three cautions: Don't try this if the morning call puts the price dangerously near a limit move; ‚ Don't try this if you're so undisciplined that you might find yourself saying 10-minutes after the open something like "I believe I'll give it 3 more cents room on the downside" and; ƒ Do exit the trade the day your stop is hit.
So Why Ever Take a Loss? - J. L. from Wimauma
Think about it. Given a reasonable amount of capital (as in any business), one need never take an actual loss (in spite of the dogma, "Cut your losses, etc."). That rule was written by some broker somewhere in cahoots with every floor trader who's ever run a stop.
I had best define "actual loss." One may take FIFO (first in, first out) "losses," rollover "losses," and under the most extreme conditions (like breaking a 13-year high or low) may elect to risk an actual hedge loss. That's it. And yes, that means that every trade is profitable. That's for the wag (like me) who says he can avoid losses by never taking a trade.
So does one indiscriminately buy a contract and wait for it to be profitable? Well, yes - except for that indiscriminate part. Do you think you should buy cheap, be able to afford it, and at least start out with enough time left on the contract? Not to mention, it's sure nice to be able to scale buy some more if you're early (not wrong, early). All this is surely advisable unless you happen to have an "indiscriminate" amount of capital.
Case in point - "The Sleeping Giant" - what else but OJ. Have you guys been watching OJ for the last 5-months? Naturally when you read this, this will all be history, but look back to May 12. Contract low is a measly $1133 from the 13-yr low and prices started out the day almost there. Since I had been scale buying July since March 10, and was therefore on about contract #15, my day looked like +$14,200. Did I have to wait for it? Of course, but while waiting, my personal (here I go bragging again) method of taking some profit and later repurchasing the same contract produced this bottom line: Max drawdown about $16,000, closed out profits almost $5000, and about $2000 of those plowed back into the repurchasing process. Did I bail out when I was probably slightly ahead over-all after this one day? Am I crazy? That's debatable, but by design, I only actually pocketed $150. Will prices probably drop again (up too far, too fast)? Probably. Otherwise how can I repurchase those last two contracts I sold!
Now that you pros have noticed those huge 5-mo descending triangles on the weekly and monthly charts, (and all the 9-period fast-K divergences), I know those triangles were supposed to break downward, but already low prices and the seasonals (thank you, Moore Research) argued differently. May looks cool, and June might give me just enough trouble to put the final low in. By the way, isn't it great when a pattern does the opposite of what it's supposed to do? Everybody "leaning the wrong way" sure lit a fire under this markets you know what!
So by my numbers, a $5000 return on $8000 (half the max DD or roughly the daily average of the money at risk so far) in two months=375% annualized in a market trending against me! O.K., you sharpies, I know I left out the margin money (because it's not at risk, making in 1-yr T-Bills what many people think is pretty good for "safe" money). And I've got a few more of those too in case all Hell breaks loose and 13-yr lows beckon. That would be soon enough to consider that hedge loss I talked about earlier. The question becomes should I accept a lot of money sooner or (if prices drop again) a lot more money later?
And please don't think I'm giving trading "advice." I wouldn't think of upsetting some G-man's tea somewhere. If this publication is truly a pile of traders' experiences, then throw this one on the heap. You know how to end the year with a $1,000,000 balance, start year with $2,000,000.
A Fraudulent Advertising Alert to CTCN Readers from Larry Williams
A Mr. Jay Sames is advertising and using a totally fraudulent and misleading quotation. I have repeatedly asked Mr. Sames to delete the following verbiage from his promotions:
Direct Quotes from Actual Letters I've Received! $1,147,607 in less than a Year.
"Yes, it is possible to become a millionaire in a single year. I know because I did it when I won the World Cup Championship of Futures Trading by turning a small account into $1,147,607 in less than a year." L. Williams-Iowa
THE TRUTH IS in a mailing Futures Magazine did, sent from Iowa, the above quotation, from myself, is presented. BUT, the implication from Mr. Sames is that I wrote this, personally, to him regarding his approach to trading commodities. Nothing could be further from the truth.
I do not recommend his course, do not know him, and am bitter over the fact he continues to use this statement, misleading traders, after my many pleasant requests to him to stop. That should tell you about the man, but also consider this:
He is also claiming his system has made over $18,000,000 in the last year or so. This is totally hypothetical and speaks for itself. I encourage fellow traders to avoid all dealings with Mr. Sames until this problem has been resolved.
(Here is his ad): "Read what others have to say about the profitable world of commodities...Direct Quotes from Actual Letters I've Received!
$1,147,607 in Less than a Year.
"Yes, it is possible to become a millionaire in a single year. I know because I did it when I won the World Cup Championship of Futures Trading by turning a small account Into $1,1 47,607 in less than a year." L. Williams - Iowa
Huge Moneymakers - "The World's Greatest Investment" and "The Mother of Wall Street" arrived yesterday. Thank you for writing and publishing them and making them available to the average person such as myself. You did a great job of keeping them to the point. They will prove to be huge moneymakers. S. Almond - Canada
The Next Success Letter I Quote Could Very Well Be Yours! $2,136,000 in 6-months - Free $295 Offer. Call free for 24-hr Recorded Details..."
Question on Cash/Futures Diversion & "This Club Has Really Helped Me" - Charles McDaniel
What are all the ramifications of cash prices on a commodity? If the futures price is below the low of the cash price or the spot market, what's going to happen and when? What of the reverse is true? How important is the cash price?
Now on a side note. This trading club has really helped me on my trading. This publication has really helped me. I know it sounds corny, but I love the guys and gals who write. I wish every beginner, like myself had this material before we started trading. I'm making some good trades now. I'm developing a simple, but good trading plan and most of it is from (information given by) these writers. When my plan is fully complete, I will share it with everyone.
The Downside of Investing Money - "I'm A Fighter, I Will Win It All Back, Plus More in the Long Run" - John Penterman
I've been trading on my own since 1980. I've given my money to a broker who churned an account down to nothing. I have given the money to a fund which had a specular return record and saw my $25,000 go down to $2,000 in 6-weeks and the fund collapsed also at this time.
I gave $8,000 to Dan Falk of the Analyst Fund who falsified the fund values for 2-years, then ran when people got onto his game. He was caught and then served no time because the government didn't want to spend the money on a trail and after all, he was going to pay us back (per his lawyer). So far, in 8-years I haven't received dollar one.
On 12-19-96, I was short a Dec96 S&P-500 740 call, which I did not get out of before the close. The contract expired at a value of 6.65 or $3,225. The CME has a way of settling these contracts based on the average opening prices next day. I got out at a price of $10,585, or an added cost of $7,360. I feel I was legally robbed by the exchange.
I'm a fighter. I am coming back. I will win it all back, plus much more in the long run with position trading based on fundamental information, scaling in positions and avoiding "panic situations" as much as possible. The market has tough-ended me. I've paid my dues and now positive I can, with time, get my money back. P.S.: To add to my woes - I'm 61-years ancient!
"Street Smarts" Stop Signs, and Safety - Barrie W. Blase
Let me state my bias right up front - I think that "Street Smarts" by Connors and Raschke is one of the best books on the market today for commodities traders. It's simple, clear, and the methods actually work. This is quite different from most of the stuff out there which is waste of your money twice - once when you buy it, and again if you trade it.
I'm puzzled by Raymond Kohn's conclusion and Dave's comment that this book doesn't provide clear-cut or mechanical tops.
Editor's Note: I have never read this book but was using Raymond's (assumed to be accurate, like all contributions) assertion in his article as a lead-in to my editor comments. This was about the great importance of trading systems in general having a workable stop-loss method for them to be successful.
It emphatically does! Each method gives a protective stop-loss for the time of entry and many include the advice to then trail this stop as profits accrue. Even Kohn's review states, "Each trading strategy makes generous use of stops to limit losses and protect profits." What's the problem?
Dave also discusses at length the need for "target price exit methods." Is there any evidence that these are superior to trailing stops for exit? It seems to me that short of having an incredibly good crystal ball, there's no way to accurately predict the price where you should exit. You can see support and resistance areas, but you have no assurance the market will stop here. Often the best part of the move is the punch through old highs or lows. I think it's better to simply liquidate part of your position as you approach these areas (or at break even) and then let the market stop you out of the rest. Comments?
I enjoy CTCN- keep up the good work.
Editor's Note: When I referred to a target price exit method, I was not excluding trailing stops as a valid exit technique. Trailing stops are indeed a workable exit approach. However, I prefer a target price as this way you are getting out with the market moving your way. With a trailing stop you are exiting as the market goes against you. A distinct disadvantage. However, Barrie is right in that it's difficult to predict the price where you should exit. It's also difficult to decide on what trailing stop to use but is probably easier to do than a target method.
"Hit and Run Trading" - The Short-Term Stock Traders' Bible (A Book Review) Plus: Commentary On Exit Strategies - Raymond F. Kohn
I just finished reading "Hit and Run Trading" (152 pages - $100) by Jeff Cooper (Published 1996, by M. Gordon Publishing Group, Malibu, CA)
Jeff Cooper is a full-time professional equities trader. He makes his living trading equities.
The focus of his book is "short-term swing trading" of equities (stocks). The book is written for "active day traders." The trading time frames for most of his trading strategies range from intra-day to short-term (1 to 4 days). On occasion he might hold a position longer as the merits of the trade warrant.
This book is very similar to my previous Book Review on "Street Smarts." The trading methodology is similar and the structure of the book is almost identical.
However, the primary focus of "Hit and Run Trading" is stocks, and not futures.
Everything that I had said in my previous book review of "Street Smarts," also applies to this book, "Hit and Run Trading." Given that Jeff Cooper is good friends with Larry Conners, and they are using the same publishing firm, it seems to be a logical assumption that Jeff used "Street Smarts" as a template for his own book.
Just as in "Street Smarts," the trading strategies provided in "Hit and Run Trading" are "well structured," combined with a heavy dose of "pattern recognition."
Each trading strategy requires the use of stops to limit losses and protect profits. The author waits for specific and well-defined chart "setups" or "entry patterns" to emerge during the day, (or over several days) and then takes the appropriate position. His position exits are not formalized, and are more discretionary and subjective in nature. Trailing stops are mentioned as a key element in protecting short-term profits.
In his book he says: "You will note that I am a discretionary exit trader. This means I often get out of my profitable positions based on my instincts. I have found that experience, and experience alone, is the best teacher when it comes to exiting a trade."
(Mr. Cooper's above quotation regarding exiting a trade could just as easily apply to the exit approach used in "Street Smarts." This discretionary attitude regarding "trade exists and stops" represents the key down-fall of both books. I will discuss this subject in more detail at the end of this review).
His strategies are simple and easy to implement. Naturally, a real-time data feed is necessary for trading his strategies intra-day or short-term. He states: "I recommend you get the best data feed, hardware, trading software program, etc. you can afford. Remember you are competing against hundreds of brokerage houses and thousands of traders who have state-of-the-art equipment."
Jeff typically follows "high-priced" stocks where a modest move of 5 to 10% can mean picking up several points of profit. He trades between 1,000 and 2,000 shares per trade and says: "I am usually right approximately 60% of the time. If I can minimize my losses when I am wrong I am assured of remaining a profitable trader."
I am sure we have all learned from investment experience that each investment vehicle, whether it is a particular futures contract or a stock, has its own unique characteristics or qualities in the way it moves throughout the day and over a period of time. Therefore, selecting the right" futures contract or selecting the "right" stock can be more important than the trading system you use. Jeff acknowledges this, and puts a great deal of emphasis on selecting the "right stock" to trade. He indicates that the ideal stocks for his trading strategies are those which are higher priced, trending strongly, and are fairly illiquid (but not so illiquid that his purchase of 1,000 to 2,000 shares would have an impact on the price of the stock), and are under accumulation or distribution. (Note: An illiquid stock creates higher volatility and in turn greater price changes when buying and selling pressure comes into the market.)
His strategies can be easily applied to other time frames such as daily, weekly or even monthly charts. Markets generally tend to "move" in a similar fashion regardless of the time frame selected. 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 author organizes his trading strategies into two basic groups. The first set of strategies is located in Part One entitled "Main Strategies" which consist of five different "setups" or "entry patterns" which in his own words are described as: "My main strategies reflect my five best strategies. If you told me I could only trade two or three of my strategies, I would choose them from this list. These are my bread-and-butter setups and allow me the luxury of being a professional trader."
The second group of trading strategies is located in Part Two entitled "Ancillary Strategies" which consist of seven different "setups" or "entry patterns" which in his own words are described as: "The next seven strategies are my back-up strategies. Most are just as profitable as the main strategies, but they tend to occur less often."
Each trading "pattern," or "setup," is given its own chapter. Each chapter begins with a classic inspirational quotation -- which added a nice touch. Each chapter is well organized with a brief introduction of the trading pattern being discussed, followed by an easy to understand list of very specific "entry rules." Each chapter also includes several sample charts 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 summary which is designed to give you an added personal insight and increased clarity about trading the pattern just discussed.
(A Personal Note: I personally trade equities using the technical trading techniques which were initially developed for short-term trading in the futures markets. I modify the various mathematical parameters for use with stocks, and utilize a longer time frame. Given the different trading economics between futures and stocks such as: The lack of high leverage for stock traders, bid/ask spreads, short-selling limitations, and commission costs, I was never really sure how effective short-term technical trading tools would be when trading stocks on an intra-day basis. Jeff Cooper's book not only demonstrates that it is possible, but that it can be quite effective. However, he does make mention that commission costs are an important factor that must be controlled for his strategies to have merit).
One of the last chapters in Jeff's book is titled "Walking the Talk: A Week of Hit-And-Run Trading." His introduction to this chapter describes its purpose: "I thought it would be informative and fun to keep a diary of a week of actual trading. I hope to show the good as well as the bad and I will let the chips fall where they may."
Jeff's diary begins Sunday, June 9, 1996 as he plans for the week ahead. For each subsequent trading day during the week, the date and the exact time are clearly identified as he records his thoughts, comments and the actions taken at that moment. As each hour passes you can see how the various trades materialize, and how he implements his trading strategies. This Chapter was a terrific addition. It clearly demonstrates the practical application of his methods in a manner that might not have been as effectively done in any other way. Jeff deserves kudos for providing us with this revealing and insightful peek over his shoulder while he trades each day.
It is unfortunate and disappointing that Jeff did not provide the supporting historical testing for his various trading strategies. With a few minor (and fully disclosed) assumptions concerning stop-losses and exit strategies, he could have easily created a "mechanical trading model" of each of his strategies. And then back-tested and evaluated those trading models in a SystemWriter or TradeStation like fashion.
At the back of the book, he offers an additional cost ($175) software package, which is an add-on module for Omega's "TradeStation" or Omega's "SuperCharts," which when loaded will automatically identify the various "entry points" and "setups" mentioned in his book. (Note: No mention is made about this software package providing any "trade exits")
The lack of back-testing with reasonable assumptions for commissions, bid/ask spreads, and stop placements, is a significant short-coming of this book, as it also was for "Street Smarts." If you purchased and read Joe Krutzinger's book, "The Trading System Tool Kit" (which was the subject of a prior book review), you can appreciate the significance of this "void" which could have easily been filled with a quick run on SystemWriter or TradeStation. (Especially since they have already written the software code).
I did some experimenting on my own. It was a simple exercise for me to write the necessary code to create a SystemWriter simulation of one of his primary strategies. I used five years of daily price history for a stock that Jeff had selected himself, and used as an example in his book. (Therefore, variances in selecting the "Right Stock" would be eliminated). I tested to see if the stock showed a profit at the close of each subsequent trading day, ranging from day 1 thru day 5. My assumption was that if the entry signal was correct, the trade would show a profit by the close of at least one of the 5 days following the trade.
The test results were not encouraging. However, this is not unexpected. Negative results are very typical when converting a "well structured," but "somewhat subjective" system to the strict rigors of a mechanical trading model. So this negative result, in of itself, should not discourage you from considering his techniques. However, this negative result would indicate that Mr. Cooper's strategies (used alone), is not a complete trading system. Each trader will have to discover and add all the missing elements which Mr. Cooper failed to include, before his techniques become really usable as a trading system.
It has been my experience that technical trading systems can be divided into two general groups. The first is the "strictly mechanical" systems whereby entries and exists follow specific and inflexible rules, whereby, any trader following the rules could have achieved similar results. 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 he provides you.
Anytime a proposed trading system includes any "discretionary" or "subjective" elements, not unlike Mr. Cooper's own words, when he says: "You will note that I am a discretionary exit trader. This means I often get out of my profitable positions based on my instincts. I have found that experience, and experience alone, is the best teacher when it comes to exiting a trade." Anytime you read a qualifying comment like this one, or any other undefined amorphous qualifier, Beware . . . it is these seemingly subtle comments regarding the application of the various discretionary elements in a trading method that will kill you.
For the experienced trader, who has acquired the knowledge of being able to read the market well, this book can provide added helpful insights. But, as a pure trading system which can be used as described, it leaves a bit to be desired.
Personally, I am a firm believer in the development of trading systems which prove themselves via the rigors of "back testing." It is imperative for any trader to have absolute confidence in the trading systems, methods and strategies he is using. And there is no better way of achieving that level of confidence in the trading system you want to use than actually seeing the historical test results. Given the availability and simplicity of today's back-testing programs, there is no excuse for not providing the historical test results as part of any proposed trading system which is presented to the public.
If "historical back-testing information" isn't provided by an author, it behooves each of us to fill in that unfortunate "void," and do the research ourselves, before committing time and money to the trading system.
That being said, I do not wish my comments to take anything away from Jeff Cooper's fine book. As I reviewed my personal library, "Hit and Run Trading" represents a first-of-its-kind, (that I am aware of), whereby a trader has applied the intraday short-term trading techniques, more typically used in the futures market, to stock trading. The book is well done and worthwhile, and I recommend it to anyone looking to expand their understanding of short-term trading systems, and entry point identification techniques.
His book, and personal trading abilities are a tribute to the concept that successful trading strategies cannot only be simple, but very effective.
Personal Commentary on Exit Strategies & Stops
In closing I'd like to make the following observations regarding "exit strategies" and "stops." These observations would apply to "Hit and Run Trading" and "Street Smarts," and most other trading system books available today.
To begin, once you cut through all the verbiage, the bottom line is that a trader has to make two basic decisions; First, when to enter a position and second, when to exit the position. It has been my experience that most traders are focused on achieving success by finding that elusive "Holy Grail" of an entry system. Most traders mistakenly assume that once you "correctly" enter a trade, the profits will just keep rolling in. Given this "one-sided" view of successful trading, it is no wonder that self-proclaimed gurus, seminar instructors, and the multitude of authors, focus their energies on providing would-be traders with the next "secret of the universe" entry system.
I don't mean to be harsh, but for most system sellers, it's a simple matter of telling these poor uninformed souls out there, what they want to hear, and packaging it in such a way that they'll pay good money for it.
Do you really think that the "long lost secrets of the universe" are being offered to you via a Bulk Mail advertising piece? Gimme a break!
The last issue of CTCN had a great article by James Allen. His humorous sarcasm, and marvelous wit, was not only fun to read, but more importantly, his article accurately portrayed the dirty truth about system sellers. Mr. Allen has shared some hard lessons with us that we should all take very seriously.
Most information published today presents itself as being the next "killer trading system" that will make you rich beyond your wildest dreams. These glamorous, high profile, entry systems are exciting, fun and make fascinating reading. While, on the other hand, money management techniques, exit methods and stop placement techniques aren't nearly as exciting, and are in fact rather dull and boring. For most of us, money management is what you worry about after you've made some money.
The truth of the matter is that any entry method is only 50% of the equation for a successful trading system. The other 50% of that equation is the exit method. And, despite popular biases towards searching for the next great "entry system" with profits being protected with "trailing stops," there is significant antidotal and research evidence that the chosen "exit method" is far more important in generating trading profits than the entry signal.
"Futures" magazine just published a "Special Issue" titled "The Art of Day Trading." It is absolutely terrific, and if you have not read it, you must make every effort to get a copy and read it cover to cover. This "Special Issue" will give you more solid information on day-trading than a dozen seminars or books on trading.
One of the articles in this "Special Issue" is titled "S&P Day Trading Systems: What works and what doesn't" written by George Pruitt, who is director of research at an independent systems' testing firm. In this article he rigorously tests the impact of various "trading exit strategies" and their impact on Profits, Drawdowns, and Percentage Wins. Some of the "exit strategies" tested include "Protective Stops," "Profit Targets," and "Trailing Stops." Each exit strategy was historically tested using various incremental dollar amounts. The test results are both astounding and revealing.
In a nut-shell, Mr. Pruitt developed two very simple and basic "entry systems" which remained constant throughout his testing of the various stop placement methods and exit strategies. Both "entry systems" were identical with only a modest alteration to one of the systems in order to create a greater number of trades over the 11-year test period.
His research results are mind-boggling. He clearly demonstrated how an identical "entry system" had generated as much as $63,000 in losses over a given test period, and by just altering the "dollar amount" of the protective stop, that same "entry system" was able to generate $58,000 in profits over the exact same test period. And the only difference between the two test results was the dollar amount of the protective stop.
In another test that Mr. George Pruitt ran, a protective stop of $750 was used. With this protective stop the basic system generated $29,000 in profits over the 11-year test period. By adjusting the protective stop level to $500 the same system generated $58,000 in profits over the same test period.
Mr. Pruitt's research clearly shows that the "exit strategy" you select for a given trading system, can make the difference between generating excellent profits or horrendous losses.
By the time you finish this brief article and review his test results, you are provided with the inspirational knowledge that knowing how to exit a trade can literally be more important than knowing when to enter the trade. Mr. Pruitt ends his article by saying: "I've been told that 40% of research should be spent on the system, and 60% should be spent on money management. In day-trading, your exit is your money management."
Once you grasp the implications of Mr. Pruitt's research work, it becomes easy to understand why "system-buyers," who diligently apply trading systems proposed by various authors and seminar leaders, tend to lose money with astonishing regularity, (while the system developers may have actually made money using their own systems).
The failure to provide specific "trade exit strategies" within "Hit and Run Trading," "Street Smarts," and other books of their kind is a major short-coming that every reader should be aware of. A well-structured entry is useless, without a well-structured exit.
Trusting Your Method - Rick Ratchford
Mcagle wrote: "Well, here is what I did today -- learning another lesson on how to trust the TTC. Canadian Dollar closed yesterday at 73.45, with a low of 73.40 and a high of 73.62. After doing these calculations below, I decided to go Long at 73.33 -- a few ticks above L1 -- when the market opened. When I checked the early bids, they were running between 73.42 - 73.37. They joggled in that range for the first hour this morning, and later in the hour was starting to settle in the upper end. Since I didn't want to miss getting in, I went Long at 73.40 with a 73.20 stop. Mistake!! L1 said "73.3l," and that is what it meant! The market closed today at 73.29!! -- two ticks lower and right on the number with the Fib. Range Levels Calculator!!" (Info on TTC is available at https://fsoftpublishing.com)
I wanted to comment on this fine post by Mark because it teaches us a very valuable lesson that I have come up against on many occasions. As with most of us, I've paid dearly to learn the lessons I have, and continue to pay when I disregard them.
Mark talked about trusting TTC. Yes, it really does come down to trust, whether it is TTC or some other approach to trading. So many times I'd be holding in my hand the support or resistance price I expect the market to reach on any given day (usually a time day). Yet, the market will bounce all day up and down on the other end of where I am expecting it, and I soon lose patience, thinking that I'm going to miss a good move.
More times than not, it does come down to where I expected it, yet I already moved the order up, and I end up with a less favorable entry price than I would have. It is almost as if the market is 'toying' with you, trying to get you to stop trusting yourself or your techniques. It is trying to convince you that you are in error, and that you better jump on now or 'see ya!'
Many times I will just place my order in where I expect it to go, and if it doesn't hit me, I'll just write it off and move on. Do I feel regret? Yes, I do. I kinda feel that I knew direction, but was off 30 or 40 points because I did not figure it to react to a level I was unaware of. Sometimes we just don't know all the support or resistance levels, because to get them, you must enter the correct variables of the past. However, sticking with my pre-calculated order, I find I can get the win ratio higher than the loss ratio. The other possibility is chasing the market, and this has its perils, needless to say.
So, the bottom line is this, trust your method, regardless of what it is. If you are going to use it, you must have proven to yourself beforehand that it works, or why are you putting on big trades with it? When testing, use single contract orders and even trade the MidAm until you're in the driver's seat in technical confidence.
Then, once you've given your technique the green light, don't swerve from what it is telling you unless your intuition is telling you something is wrong. Then at that point, just don't enter the trade. For once that trade is laid down, stick with it. I know there are many day traders that think this is not good, and maybe for that kind of trading they are right. But I know for a fact that for any other kind of trading, you best trust your judgment before you go in, or in my humble opinion, your just gambling anyway.
Build up that confidence in the technique you've chosen as your market tool, and make your decisions with the knowledge of knowing all the previous times it was right in telling you where to enter and wait. You trusted it, and it repaid you many times over. Only when you stop trusting your method is when you start taking on those annoying losses, your confidence starts to wane, and you start to look around for other tools that can combat this problem, only to miss where the problem really lies. . . . with you!
The tools are plenty. Do you have what it takes to trust them?
"Woulda, Coulda, Shoulda"- Peyton Morgan
Just when it seems that all that coulda gone wrong had, the worst thing happened. I woulda called in my stop, but didn't want to exit too early. I didn't want to sacrifice all those profits which I knew were to be made on this trade. When I told my wife, she said I shoulda listened to her and never taken the trade.
Sound familiar? If it doesn't, we're not listening. If it does, read on. The woulda, coulda, shoulda's are the next most dangerous disease to the might-as-wells. That's when we've decided to remodel the kitchen. The budget calls for carpet but, you say, might as well have Spanish tile. All the reasons follow.
Things can get out of hand quickly without a well conceived plan. A trading plan (notice I didn't say system) is an organized approach to running your trading business. We don't plan to fail, we fail to plan. This is anathema to our trading.
A trading plan includes many elements. We'll talk about each of them over the next several sessions. It is important to realize that trading, like any other worthwhile endeavor, deserves and commands your respect. If it were easy, everyone would be doing it successfully. But, they're not.
Actually, trading is one of the least dynamic businesses we know. You can only be long, short or flat. The markets only go up or down. You can close your business for the rest of the day, week or month at your pleasure. Limited overhead, no employees, great hours, relatively low capital requirements are just a few of the benefits of the trading business.
Many think that entry techniques are the beginning. Actually they arrive much later. The beginning is really knowing how to trade and being ready to trade. Here are some of the topics we'll attempt to cover.
So you want to trade? Getting ready, psychology, myths, records, margin, account size, testing, systems, market, selection, setups, trade selection, entry, orders, trade management, money management, stops and alternatives, exits, mistakes, and holidays.
Each of these could be the subject of a chapter or even a book. But without giving each their proper respect, you'll likely be just another victim of the woulda, coulda , shoulda's.
Did I say this was easy? No, not at all. It's a business. Treat it like one for best results. Peyton Morgan, editor@tradersdigest.com https://www.tradersdigest.com
Winner by a Nose! - Rick Ratchford
One of the greatest values of keeping a log of your trading activities is you can go back and note what you did when you made money, and what you did not do that caused you to lose money.
Another fascinating thing such notes might show you, that if you are a short-term trader, had you just plain exited your trade at the close of the same day you entered it, you may find that many of those losses would have actually been winners!
Granted we are not talking a killing here. But then again, isn't it better to make even a small amount of money than nothing at all? I bring this up because going over my notes, I noticed that in the last few months, most of the losses I happened to run into started out as winners!
In fact, last November I had a Cocoa trade up $900 a contract and 'knew' that it was to go up until three more weeks elapsed. Yes, I was correct, and it did go higher up to around the 1400 area, but not until it went back down for a quick trip, taking me into minus land and causing me to exit with a loss. Needless to say, I was pretty bummed about being right and not getting paid for my efforts.
Now, of course, I know what I did wrong, but that is another subject. What I want to point out though, that from my analysis, it seems that I get moves against me usually within two to three days from entry. Why risk it? Thus, I decided to take a wide view of what has transpired these last few months and contemplate an approach that may prove worthwhile. I share my findings with you.
About one quarter of my trades were losers. Of that one quarter, 3/4 of those were winners for two days until taking me out with a loss. At least half of those ended up going my way after all. However, I do not gamble, and therefore take my losses up front and move on rather than 'hope' it would go my way.
What I found though is that if I had exited each trade by the close of the second day, only one tenth of my trades would be losers, or one out of every 10! When I added this up, I found that I would also have made more money, since I would not have given so much back as has been the case many times with the winners. Winning 4 to 1 isn't that bad, but 10 to 1 is much better for your psyche. Since my losses are usually no more than $200 a contract, this is good ratio even if wins will average about $150-$200 per contract.
So, going over the data, this is what I submit, leaving open the fact that real life testing is what I will be doing for the next few months.
1. If you enter a trade and it goes your way, stay in till the next day. Only on Friday, exit the very same day.
2. If the day looks like it will close with a small loss, exit at the close. Don't go overnight with a loss, only a win.
3. Place an order to exit close to the next sup/res price level depending which way you are heading (res if long, sup if short), and come near the end of trading if it looks as if you won't get hit, cancel and replace the order to exit at the close.
With this strategy, I feel that many losses will turn to wins or break-evens. Of course, if your ability to enter a trade in the bottom end of a move for a long or the top end for a short is not up to par, I would work on that first. This suggestion is for those who seem to find and enter really early, start making money, only to give it back more times than you care to. If you fit this bill, try this out yourself.
Trading Questions - No Name
I have two questions that CTCN readers might answer for me:
1. I recently read that it is a good idea to trade in the direction of the major trend; look for corrections in the major trend that stall at key Retracement levels and time your trades with Candlestick indicators. Does anyone with five years or more of active trading use Candlestick indicators in this fashion?
2. Does anyone use the "Trader's Commitment Report " on an active basis to help with trading trends?
Please reply via CTCN for everyone to benefit from the answers to these questions.
Editor's Note: The Commitment of Trader's Report is now available as a link via our new Website, along with a number of other informative links. This is our second Website. You will find it vastly superior to our old site. It just went on-line on the Internet World Wide Web a few days ago. The address is www.web.trading
A Level Playing Field - Rick Ratchford
As mentioned in previous articles from this author, as well as many greats such as W.D. Gann, one of whom I actually learned the concept from, Time is an important element in making profits in the Futures or Equities market. It is the deep belief and opinion of this author/trader that this element should be available first before even considering anything else. The second element, and one which completes all the requirements of market information needed, is of course price.
The markets are moved by perceptions of a large mass of people, and they tend to divide into many camps. Yet, the remarkable thing about this is that no matter how aligned or divided their individual perceptions are, once it has been placed into action, the market tends to make turns in areas that are in complete agreement with natural laws. Yes, you can use mathematics to find all the areas of which the masses will stop moving a market and go the other way.
To uncover these areas would provide the astute trader with the second half of the Time/Price equation. Once this marriage is complete, there is no more that needs to be known about the market itself, other than how to get in and out. Knowing 'when' and 'where' the market is likely to turn makes other devices unnecessary.
There are many techniques that have become part of the public domain in relation to finding Price, and some of these are really good. One such technique was published by W. D. Gann, of which I will share with you here in this article.
Gann's observation of markets brought him to the conclusion that the markets moved to and fro within the confines of natural mathematical laws. I agree completely, knowing that 'all things' are connected by natural laws that exceed the current ability for man to understand. Yet, as Gann was able to discover, some of this information is available and within our grasp, that can help a trader discover Price with a minimum of risk.
Gann noted that the halfway point in a market range from a Major Bottom and a Major Top was a significant support/resistance area. Once reached, it may in turn create Minor ranges, where the market has turned between a Major Top and a Major Bottom to create a Minor Top and a Minor Bottom, or a Sub Top and Bottom if you will. Halfway between this range again provides another Level of support or resistance.
For example: Say you take the Lowest price and the Highest price the market has ever made. You then take the price difference of this Major Top and Bottom and divide by two. The result becomes one of this markets support/resistance Level. Now, suppose after this Major Top is made, the market then comes down to our halfway Level price and makes a bottom.
We can now take the range (difference) of the last Major Top and this new Minor Bottom, divide it by two as well to get another support/resistance area for this market. Each time these support or resistance areas form another Top or Bottom, you then have another range of which to find the mid-range point for support and resistance.
Now, there are other things to consider here. Although the halfway point many times provides support/resistance to prices, there obviously are going to be times it will fail to do so. What Gann had discovered was there are other areas as well that provide such opposition to advancing prices.
Here is another simple function one can do to discover these Price Levels.
Take the range from a market Bottom to a market Top. The best to use are those with some width to them, that is, some time has elapsed from one extreme to the other. A few weeks or more is best. Now, divide this range by 8, providing you with 12.5% of the total range. Now, add this value to the Bottom price for your first Price Level. As well, until you reach the market Top you used for the range, keep adding this value to the last Price Level you completed, effectively dividing the range into eight equal parts. You may first notice that the halfway price is included as well. What you have done is uncovered other areas of support or resistance that most likely resist market prices once the halfway point gives out.
Take your charts out and try to for yourself. You will find it quite fascinating on how the market moves within these divisions. So, if you have already solved for Time by whatever means is available to you, you can now determine with a high degree of confidence the Price to which you can enter a trade.
Can't Imagine How Futures Truth Can Devise a Test Which Tells Anything Worth Knowing About Future System Performance - Jim Allen
I am reading your comments about Futures Truth in the latest CTCN, how there seems to be little correlation between what Futures Truth reports and "actual results a system user normally experiences."
I have read the diatribes against Futures Truth in these pages. These are mostly from vendors who have some beef with the way the people at Futures Truth run things. Some are from people who have purchased a trading system after reading glowing statistics in FT.
I would bet that each and every system is delivered with the admonition that "past performance is no guarantee of future performance." This has become so commonplace that I am surprised that people are still fooled. By the way, I am neither a fan nor foe of Futures Truth. I would like to see something done about bogus system vendors.
As I understand it, Futures Truth obtains a version of the offered software (there has been some controversy about how it is sometimes obtained) and runs the software, or the algorithm, through a testing program, to determine what the results would have been if the system had been traded during the test period, and reports results. Some systems are mechanical and can be exposed to past price series to give the same results. Those which require operator input, judgment or decision making cannot be evaluated in this way. Usually, the future is different than the past. The goal of this is to provide some basis for saying: whether the software vendors claims are even close to being factual, and/or; ‚ whether the system produces satisfactory profits.
FT probably can do a reasonably dependable job of reporting whether or not the software performed during the period of the test the way the vendor claims. I cannot imagine that FT can devise a test which tells anything worth knowing about what will happen with a system in the future. As pointed out in my article last edition, the most remarkably profitable systems seem to go to hell as soon as I start trading them, and other people seem to have the same experience. Is this the fault of Futures Truth? I don't think so. Is it the fault of the vendor? Well, strictly speaking, no, but vendors are going to have to learn that they must make objectively supportable claims for their products, specifically with respect to the inference that the user of the system will enjoy profits anything like what has been achieved in the past.
Editor's Note: Futures Truth Ltd., is a popular subject at this time. This is mostly due to publicity attributable to a couple vendors who advertise heavily their systems are ranked highly by FT.
As discussed in our last issue. There seems to be little, if any, correlation between the performance results published by FT and the real-time trading results of the traders who purchased these highly ranked systems. As a result of this, it is alleged the Futures Truth performance results are of very dubious value to our members.
Our new Website will have OnLine information on Futures Truth Ltd. titled "Allegations and the Truth About Futures Truth." This is free and very interesting details on their operation, including a number of accusations made about them. It will all be a mouse-click away shortly. The Website is now operational but the Futures Truth Special Report is not yet on the site, but will be there soon.
The CFTC has been running around putting the clamp on some system vendors, claiming that they should register with the CFTC as CTA's. System vendors howl like hell at that idea. But, so many claims made over the years have been so bogus, so blatantly unsupported, so statistically misleading, and so many dollars have traded hands on the strength of these inflated claims, that some regulation is probably inevitable. I dislike crooks, and wouldn't mind seeing a regulatory scheme like FTC regulation of medicines, which basically forbids the sale or offering of medicines until the manufacturer has demonstrated to the FTC that the substances have some value in treating whatever it is for, poses no chance of serious harm, and the use can be supervised by a licensed professional (i.e., Doctors).
Under this idea, before offering for sale any trading system, etc., the vendor would have to obtain a permit from the CFTC upon a showing that this system was based on sound trading principles, had some basis for a claim that use of the system would add some value to a trading operation, and testing of its past performance was accurately and legitimately done, etc., etc.
This would go quite a ways towards eliminating the crooks, charlatans and con-men from the ranks of system vendors, and give the legitimate operator a competitive boost, since he would no longer have to "beat the cheat" to receive attention from the marketplace.
Losing Money? --- Maybe It's Not Your Fault - John Bond
There is a dirty little secret in trading that no one talks about. In Chicago they call it "cuffing." Cuffing is a term originally used by card sharks who hid aces up their sleeves. In trading, cuffing is the act of a phone clerk taking your order, getting a fill and then sitting on the fill until the market has moved. If the market moves in the right direction the clerk will wait as long as he dares, perhaps 100 points or so, and then announce the new close as your fill, as he exits the first fill. If you complain you're told it is just normal slippage. When the market moves in the wrong direction to your order, you get the original fill which is usually very close to what was displayed on your screen when you placed the order.
Talk about "low risk" trading, a clerk that is involved in cuffing has absolutely nothing invested and can never lose a dime. For example, when the S&P market is moving he can skim 100 points or more in seconds. That's 100 points or so when your getting in a trade and 100 points or so when your exiting. If he is truly ruthless he can keep you in a losing trade until he has acquired whatever number of points he is after. However, getting an occasional bad fill is not necessarily a sign someone is cheating you.
The way the system is set up there are many reasons why a trader can get an occasional bad fill without being involved with a dishonest clerk. On the other hand, if there is a consistent pattern where you are losing a large amount of points getting in trades and a bunch more getting out, you should be concerned. Just the possibility that you might be trading with someone who is less than honest is worrisome. There should be no room for that possibility to exist.
Phone clerks control large sums of money. Traders are expected to accept their fills and whatever else, based on a clerk's word alone. Nothing else. What is missing here is a system of electronic checks and balances. That is the heart of most problems in trading. The exchanges are using a system which depends far too much on word of mouth. Times have changed and there is too much money at stake for this to be practical. Banks and other institutions have eliminated similar problems with upgrades in computers and systems that place less reliance on the human factor. Certainly the technology is available.
Using a system that relies on word of mouth is deliberately unfair to a trader. From the time an order is given to a clerk and until it returns as a fill, a trader has no knowledge of what is happening to that order. And yet the trader is held responsible for the fill. Let me put this another way. The current system refuses to allow a trader to know who or what distractions may be slowing down his order, yet the trader is obligated to pay for the results based on someone's word alone. Anyone from the phone clerk to the trading pit can be careless or make mistakes and the only person who is going to pay for it is the trader.
This system is not only archaic, it is despicably stupid. If a trader is to be held responsible for a fill he is entitled to irrefutable electronic confirmation of the entire path of each and every order. Having a computer date, number and time stamp an order as it comes in, and then continue to track and time stamp the order until it becomes a fill is nothing new.
It is technology that has been around for a long time. So why aren't brokers and the exchanges using it? It certainly could eliminate errors or theft. As things stand now, trading is sharply tilted in favor of the brokers and exchanges. I think traders deserve an even playing field.
All too often, even in a normal market, fills can come back as much as 150 points more/less than the close at the time the order was given. For anyone using market orders this is a disaster. It is no wonder 90% of all traders have problems. They not only must pay for their mistakes, but they must also pay for everyone else's mistakes.
Change to protect traders is needed, but change will not come until enough traders demand fairer treatments. Until then, if you want faster fills there are a few things you can do.
Take your trades direct to the floor- The floor answers the phone giving current bid and offer prices. If you trade these prices you will get instant fills and equally important instant confirmations. Electronic trading offers promise, but as it is currently available there seems to be problems getting instant confirmations.
1. If your broker will not let you go direct to the floor, ask about "conference calls." No matter how fast you give an order to a phone clerk, your order cannot be placed until the clerk reaches the floor. By having the clerk call the floor first, you get to hear the bid and offer prices. Then give the clerk your order based on what you hear from the floor.
2. If your broker will not let you go direct to the floor, and refuses to offer you conference calls, and you are not happy with your fills, perhaps it is time to talk to another broker. However, before you quit there is one thing you can try. In fact, it is a good idea to try this any time you have a string of bad fills. Call the broker. I don't mean the phone clerk, get a hold of one of the principals of the firm. Never accuse any one of stealing! Wait until you are calm and collected and then make your call and explain your problem. Have all the details of the trades in question available in case the broker requests them.
The broker does not want to lose you because of possible problems with a phone clerk. Politely remind him you opened the account because his firm advertises "flash fills in seconds." Ask him if there is anything he can do to help you get better fills. This should make a difference.
3. Always trade using a work-sheet. It may not help you get better fills, but it will help you be a better trader. A work sheet can prevent you from entering a trade accidentally in the wrong direction. You can also use it to check your broker's statement. Keep the time of each trade on it to the nearest second. It will help you if you want to dispute a fill.
Most traders are people who have been very successful in life. But how long can anyone remain successful bogged down with other peoples' mistakes and relying on the word of strangers? Think about it, just exactly what is "slippage?" Certainly the trader hasn't done anything to cause it, so why are traders willing to write off large amounts of points because someone they don't know uses that word? I hope other traders, brokers and even the exchanges will take the time to share their thoughts on this in CTCN. Wishing everyone all the best.
OPTIONS and SPREADS: Gemstones in the Blueprint Room or, Growing Apart Profitably - Greg Donio
At a cemetery, a man stood weeping before a grave. "Why did you die?" he sobbed over and over. "Why did you die?"
Another man passing by noticed and tried to give some consolation. "Gee, this must be a loved one. A dear member of your family."
"No, no relation," the weeper replied. "I never even met him." Then he began sobbing again. "Why did you die? Why did you die?"
The puzzled passer-by asked who this was who would cause such carrying on. The mourner moaned, "It's my wife's first husband."
The lamentation was not without some scientific validity. Surely one must be a thinker of sorts to weep over a link in the complex chain of causality. A person active with speculative securities should be similarly cause-and-effect conscious. However, said trader can do without the widespread human tendency to blame everyone but himself, including the dead. He can also make better use of that ubiquitous tool known as the word "Why?" which 99.9% of humanity misuses as: a griper and; ‚a too late utterance.
Scientifically, everything is causality. It has been said that every man is the architect of his own fortune. Some variations say "fate" or "future." Anyway, he who does not ask "Why?" until the building collapses is not much of an architect. If such a collapse is to be prevented, you must address causes and effects at the blueprint stage. As a trader in stocks, futures or options, can you handle the hows and whys, the details and causalities at an early stage rather than saying "What went wrong?" at a late stage?
Most people cannot. Remember that humanity never packed the blueprint room the way it packed Yankee Stadium. Many financial writers have criticized many speculators for going into action without a definite plan. Actually it is worse than the lack of a battle plan. It is bare-faced disregard for the simple fact that the enemy might not co-operate.
The trader's enemy is whatever can go wrong. Many a venturer's expectation of winning is also the expectation that the enemy will cause no difficulty on the battlefield. What reality! This is not the approach of a smart strategist mapping a breakthrough.
At the blueprint session or battalion map session, understand what you are up against by pondering the basic arithmetic. A thousand dollars must double only 10 times to become a million, 10 more times to become a billion, 10 more to become a trillion. The stock, futures and options exchanges, the casinos and racetracks all teem with vast numbers of people, each expecting to double his or her money not once but countless times.
You know, of course, that not one in those vast multitudes has purchased the U.S. Mint. Immense hordes end up without ham and eggs money. It cannot be stated too often that futures and options are both zero-sum games: Somebody must lose a dollar for every person who gains a dollar; worse than zero-sum when you factor in brokerage office expenses and exchange expenses.
In such a milieu, you cannot hope to pile up an impressive bank account unless you have an "edge" over those other fortune seekers. I have found from experience that spread strategies with equity options or stock options provide an excellent edge, although I acknowledge that spreading is also possible with futures contracts and futures options. More about equity option spreads shortly.
For now, please accept this advice: Concentrate on good profits, not on allegedly fast and easy astronomical wealth. What constitutes "good profits" will also be dealt with in more detail subsequently. W.D. Gann wrote, "Handle speculation as a business, not a gamble." The AST program teaches, "Trade for a living, not to get rich overnight." I would say, "Be less of the crap-shooter, more of the gem merchant." The diamond dealer does not expect to keep doubling his money into infinity but he does keep taking his profits to the bank.
It is the crap-shooter and the horse-player, and their anxious counterparts on the exchanges, who anticipate doubling, squaring and cubing their cash into a mansion on Easy Street a month from now. They emerge empty-pocketed and sorry they spurned a passbook or C.D. An effective financial strategy is gear-fitted to reality and flexible enough to change with the shifts that reality brings. A noted surgeon told a group of people, "I could teach any one of you how to remove an appendix in just 10-minutes. But to teach you what to do if something went wrong would take four years."
Becoming a successful trader need not take four years, but you must learn the details and causalities, the trouble-shooting and troubler-preventing. Let us proceed to make a blueprint. During my senior year at Cherry Hill High School West in subur-south Jersey, history teacher Gregory Egner explained the advantages and disadvantages of different types of business: Sole proprietorship, partnership and corporation. What he said has importance for you and me because a trader is a kind of one-person business.
One of the advantages of sole-proprietorship was, "You're your own boss. If you want to close it up and go fishing, you close it up and go fishing."
With options, I need not close up anything yet I can let the kettle simmer for a couple of hours, then check it by phone from wherever I am. My office is in my pockets and my business phone is the public touch-tone. Lunch at the Boat House Restaurant on Central Park Lake, then call the broker's 1-800 number for a quote. The stock price crosses over the strike-price of the options unexpectedly? Close out the position and take profit while at the Hudson River ferryboat terminal.
No, it is not all vacation. The study and research, the planning and maneuvering, must be of professional magnitude. But handle it capably and you can divide an afternoon between a well-placed trade and an exhibit of ancient Roman coins or Chinese jade or Cromwell muskets or Milanese tapestries.
Another advantage of sole-proprietorship: "Limited paperwork." Every broker complains that his business is the worst in the world for enormous paperwork, but only a small portion of this falls to the individual investor. Attaching to my Form 1040 Schedule D (Capital Gains and Losses) is the breakdown of option "buys" and "sells" which totals only 10 to 12 pages. Yet this is the mother-lode of my income. A one-man cigar store keeps records far more voluminous.
One of the disadvantages: "Unlimited liability." If an unincorporated shop or office goes into debt or insolvency, the proprietor's home and savings face jeopardy. With options, liability can be either limited or unlimited depending on the type of position. Sell naked calls and you risk infinity. Sell naked puts and the risk is limited but can be substantial. If you sell 10 puts with a strike-price of 100 and the stock drops to zero, your loss is "limited to" $100,000. How comforting!
With "horizontal debit spreads" also called "calendar spreads," there is no nakedness because the long-end of the spread covers the short-end. If the short-end is exercised, the long-end produces the stock which covers the short-end obligation. And, liability? Alas, the spreader loses the "in between" money he put up and is required to pay commissions on the buy of shares at the long-end and the sale of them at the short- end. This is with call options. With put options, you receive shares from the short-end and dispose of them on the long-end, also alas.
Very, very fortunately, avoiding an exercise is quite easy. That is why the able spread strategist holds the title "the bookie who never pays off." If a move in the price of the underlying stock places short-end options "in the money," the spreader can buy back the short-end and hold the long, or he can close out the spread completely by buying the short-end/selling the long-end. As I mentioned in previous writings, in-the-money options are "assigned overnight"--matched up with exercise orders after the close of the trading day. You are safe from exercise during the trading day, also if the options go out-of-the-money before the close of trading.
Remember always the gold core of the well-planned spread: Most of the money in it is other people's which helps to cushion and shield your own capital. This does not guarantee either profit or total protection against loss, but it is a substantial deck-stacker in favor of the spread strategist. In contrast to what the straight long-player of options usually experiences, this "other people's money" factor makes wins more frequent, and losses fewer and less severe. Therefore, thankfully, the spread strategist is one sole-proprietor who enjoys "limited liability."
A mournful disadvantage for the sole-proprietor: "Death ends the business."
In the high school class, one fellow asked, "How is that different from any other type of business?" Mr. Egner explained that with a partnership or a corporation, the business can continue. "Yeh," the student said, "but what good does that do you."
No, the focus was on what happens business-wise and financially after the last rites. The question is more complicated for the option trading account than for the barber shop or the one-person realty office because options, like futures contracts, are "wasting assets"--losing value with the passage of time and becoming worthless after expiration. The money in the bank account of the deceased pharmacist or music store owner keeps accumulating interest while the estate drags through settlement but the assets of the departed option trader face danger of disintegration.
Of course, everyone should have a last will and testament. You state in your will, let us say, that in the event of your death, all your holdings be turned into cash and used to fund a rest home for worn-out Republicans. Beards can grow in probate court or surrogate court before the carrying out of that simple "turned into cash" step. Months pass, with slew after slew of options and futures reaching their expiration dates.
I phoned a full-service brokerage house and asked a young broker straight-out: What happens or what should be done if an investor dies and he has options in his account? The gentleman asked me to wait while he checked with someone. He returned and said that the beneficiary in the will would receive the options and would decide whether to sell them or not. Bad advice! That broker simply added options to the standard estate procedure for stocks, bonds and CDs. He completely ignored the fact that these have longevity while options can disappear while waiting to audition.
Then I phoned a brokerage house specializing in options and, incredibly enough, received an even worse answer! The broker said, "You're dead, so what's the big deal?"
Hallelujah. A woman stock broker at the York Securities discount house proved to be the voice of sanity. She enunciated the procedures: "When an options investor passes away, his attorney should immediately Fax me (a) a copy of the death certificate, and (b) the names of the executors of the estate. Then the executors should immediately notify me and grant me permission to liquidate the option positions and turn them into cash."
She told of a past experience in which one of the firm's investors passed away and had a fair-sized number of options as well as other holdings in his account. She explained the above procedure to his family and asked that the lawyer handling the estate and the executors act right away. Months passed with no notification from any of them. The options dwindled in value then expired worthless. Apparently many knowledgeable people who understand stocks and bonds do not comprehend an acronym known as "wasting assets."
Make certain that your attorney and executors understand at least the basics of: securities with expiration dates; and ‚the woman broker's 48-word "what to do" quoted above. Death ends the business for us all eventually, but not everyone is caught unprepared.
Mr. Egner also explained the advantages and disadvantages of a corporation -- theoretically limited liability on the plus side (but no protection against going broke), more paperwork on the minus side. Nothing very persuasive for the individual trader. I know a couple of people who went the "one-man corporation" route: A medical doctor who scrapped it after a year, a private-practice attorney who chucked it after 3-months.
The Gann maxim, "Handle speculation as a business, not a gamble," can be rendered as a locational blueprint. Many if not most financial venturers can be divided into two groups: Grandmothers and crap-shooters. The latter are, of course, the high risk speculators perpetually pursuing astronomical profits and taking ghastly chances. Their "strategies" are so many frontal assaults on machine guns. They stop when they run out of money and are replaced by others who run out of money. Hence the "high turn-over rate" reported by futures brokers, and more than a few stock and option brokers.
The grandmothers -- whether young or old, male or female -- aim for safety and might or might not find their targets. They are fond of "blue chip" stocks which often fail to produce a profit owing to meager dividends or anemic share-price performance. Grannies will hold such dead weight in their portfolios for years and even decades, always feeling that they are "investing in quality and the solid stuff." Many clutch passbooks, with principal and interest guaranteed by Uncle Sam. The bites taken by inflation are an abstraction the old girl refuses to ponder.
There exists a middle ground -- a Golden Mean: Investment and speculation as a business, based on sound business and financial principles. Here, the intelligent trader compares to the gem dealer: More careful and conservative than the crap-shooters, more venturesome and more skilled with the calculated risk than the granny. Bankable profits; no going broke trying to be an overnight millionaire, no paltry sums in the sewing basket. At the center of my locational blueprint lie option spreads.
Near mid-May of 1997, I noticed that IBM common shares appeared to be on a gradual up-slope. This plus solid earnings, P/E and fundamentals made it a viable candidate for a spread with call options. In the low 170s, the stock was close enough to 180 to plump up the calls having 180 strike-prices but far enough under that a slight fluctuation or "muscle spasm" would probably not lift the stock over that line right away.
The IBM 180 calls with June expiration dates traded for a small fraction over 3 points, the July 180s for a slightly larger fraction over 5. My standard strategy is that the nearer-in-time short-end of the spread pay for more than half of the farther-in-time long-end. I phoned the broker to "open a position" and gave specifications for a debit spread of the horizontal or calendar variety.
Typically I buy 10 and sell 10. I told the broker to buy 10 IBM July 180 calls and sell 10 June 180s with a debit of two. When long (bought) options cover short (sold) ones, you must buy before you are entitled to sell. When you enter them simultaneously in one order, you customarily state the "buy" first even though it is more distant in time than the "sell."
The "debit of two" means a two-point difference between the cost of the buy and the proceeds from the sale. One point is $100. When 10 options are bought and 10 sold, it means $1,000. Thus the amount for which I sold the Junes and the amount for which I bought the Julys could have been anything, but the two-point debit fixed the difference between them at no more than $2,000 plus brokerage commission. A "spread" is so-called because of that difference or "gap" which the trader fills in with his cash.
Anyway, that order was not executed. At the end of the trading day, I was notified of a "nothing done." The next day I entered the same order but "sweetened the pot" fractionally by adding a quarter of a point to the debit. On May 16, 1997, I sold 10 Junes for $3,250 and bought 10 Julys for $5,500. Points-wise this translates to a 3-¼ sale, a 5-½ buy, and a 2-¼ debit or $2,250 of my own capital plus two $65 commissions for the two transactions or "ends" of the spread. Multiple commissions are why the phrase "discount broker" is the Scout Oath of the spread strategist.
When I buy 10 puts or calls and sell 10, the two commissions equal about an eighth of a point. Opening a spread position and later closing it total about a quarter point. So figure the amount of capital invested "in the gap" plus approximately a quarter point (roundly $250) as the 'break even' amount or the "figure to beat" if you want to make a profit. Compared to what many businesses pay in overheads this is not a lot. Yet frugality prompts a wise trader to shop among brokers and compare rates.
Within two weeks after opening the position in IBM calls, I was between $300 and $400 ahead after commissions if I wished to pull out. How good is this? Many speculators and investors do not bother "annualizing" because it produces figures they cannot spend. Yet you must annualize to gauge accurately your financial success. Five percent gain in a year? A bank can achieve that for you without risk. Five percent in one week? You did 50 times better than mighty Chase Manhattan or U.S. Treasury Bills!
Many who fluff off this fact are crap-shooters and traders in the throes of speculation fever. Astronomical returns fast or the hell with it! So out of touch with economic reality, these multitudes go broke or continue via MasterCard. They do not resemble the diamond merchant or other sensible and realistic businessman who gets a firm handle on profits. No, they resemble the people who search out the "make a fortune" ads in the back pages of the check-out line weeklies. "Make $100,000 in Four Weeks!" You know how many of them ever became wealthy!
With the IBM options, a $300 gain on a $2,500 (with commissions) investment in two weeks -- annualized on the basis of a 50-week year: 300%. This certainly beats 7% per year federal bonds and is anchored in "time is money" economic reality. So in assessing your gains, remember to annualize.
I deferred profit-taking and a couple of things happened. After the gap between the Junes and the Julys began to widen gratifyingly, IBM common split on May 28, 1997. The time-worn phrase "twice as many worth half as much"applied, but with a bit more intricacy, Where I had been long 10 options and short 10, I was now long 20 and short 20. Also, their strike-price was now 90 instead of 180. Furthermore, where the break-even figure within the spread had been 2- ½ points (counting future "pull out" commission) it was now 1-¼.
Companies split their stock to encourage new investors. Potential stock-buyers tend to favor lower-priced shares. Shares in a company often rise after splitting but sometimes not and sometimes only temporarily. In IBM's recent case the effect has been questionable so far. Having closed at 178 on May 27 and just under 90 on May 28 (briefly in-the-money option-wise that day but closing at-the-money or slightly out-of-the-money on a 90 strike-price) IBM has since bobbed up and down in the low and middle 80s.
That bobbing-within-boundaries is good news for the spreader thanks to the effects of time-decay. Nearer-in-time and farther-in-time options both lose value with the passing of trading days and weeks, but with a gradual ramp for the latter and a steeper decline for the former. Since the spreader's vein of gold is between the two, their "growing apart" enlarges his mining stake. What an irony that words which sadden the rest of humanity are "Eureka!" to the spread strategist: Growing apart and time-decay.
The price of IBM's split shares seemed comfortable around 86 and 87. The gap between my 20 short options and 20 long grew to a fluctuation between 1-½ and 1-5/8 points ($500 ahead and $612.50 ahead). Then some trouble. A preliminary announcement on Wall Street stated that Intel's quarterly earnings report due out shortly would be disappointing. That stock's dip pulled other technology shares down along with it. IBM fell to 81-¾ on June 4 and 82-1/8 on June 5.
My reasons for choosing IBM for a call option strategy included solid earnings and fundamentals plus a conservative price/earnings ratio indicating share price was not vastly inflated over basic value. My theory held these would probably create a firm floor or base of support under the stock's price. So I stood pat and waited. The shares' decline had shrunk the worth of both the June and July calls and had narrowed the point spread between to just a $100 or so above break-even.
Also, anticipation of Friday's upcoming federal unemployment statistics was stalling most of the market price-wise and volume-wise. I theorized that both this and Intel were only temporary "downers." However, theories can be wrong. After the federal report, though, IBM climbed late in Friday's June 6 trading to 85-5/8. Excellent date for a victory, a bloodless one better yet.
A stock price floor or base of support had materialized, and soon a couple of up-steps formed: June 9 to 11: 86 and a fraction, 87 and a fraction, back to 85 and a frac, then up a bit. And the spread: 1-5/8, 1-¾, 1-7/8, back to 1-¾. Also, the changing prices of the options tell a story laudatory to spread: June 1, July 2-¾; June 13/16, July 2-11/16. Remember that those who bought the Junes I sold paid out 1-5/8 (adjusted for split) and those who bought the same Julys I did and same time I did but without spreading paid 2-¾ (adjusted for split). The holders of the June options are markedly in the red and the holders of Julys barely break even.
A gap between the Junes and Julys of 1-¾ points translates to $1,000 in the black, a gap of 1-7/8 means $1,250 for the plus column. Recall that at the start I bought $5,500 worth of options, sold $3,250 worth, and paid the difference. Ergo, the total amount of capital in that spread position was about 60% other people's money. That is "how come" the spreader can win even with the identical-twin securities with which other participants lose. It does not guarantee a profit just as a race horse starting 60% closer to the finish line than other horses does not guarantee a win but . . . .
Yet Seabiscuit with a 60% head start against milk wagon nags might stumble on the track. Do not wager everything on one race or even a fifth of everything. With the spread now being analyzed, a deeper and longer-lasting fall in the IBM common shares could have shot most of the meat off of the call options. Risking only a limited part of capital per venture is one Jewelers Row tactic which deserves far more popularity on the stock, futures and options exchanges.
The day of this writing -- Friday the 13th -- is far from unlucky. IBM stock peaked at 89-¾ and closed at 89, up¾ from yesterday. The spread between June 90 calls and their July equivalents ticked during the closing hour between 2-¼ points and slightly higher. That $2,500 venture (which counted entering and anticipated exiting commissions) has climbed to $4,500, or 80%.
I have not yet closed out the position so as of this evening the profits are still on paper. I adhere to the rule of Nicholas Darvas: As long as the speculation moves in the right direction, stay with it. Then when it starts to turn, grab the money and run like a thief. Item: 80% profit has occurred during four weeks. Penalize yourself three demerits if you forgot to annualize! The 80% times 12-months annualizes to 960%.
Of course I am one joyful prospector with nuggets in the knapsack. Yet how much is a good profit? Remember that a gain of 8.5% per month doubles your money in a year with some coin silver left over. On the cable financial channel today, Ron Insana announced as "big news" that the Dow Jones Industrial Average had climbed 21% in six months. If you do a spread and find yourself 20 or 30% ahead after commissions in two or three weeks, you have blessings to count. The corporate bond investor will settle for less than that in a year. The dice-shooter and the fevered speculator will try for vastly more before wipe-out. You are the able peer of the gems-in-the-satchel businessman.
What about Monday? If the stock climbs over the 90 mark, my short-end calls will be in-the-money with a theoretical hazard of an exercise after the close of Monday's trading. Fortunately there is safeguard in comparative figures. If an option is ¾ of a point into the money and sells for 2-½ points, then the option-holder or long-player can gain ¾ of a point by exercising it but can gain more than triple that by selling it instead. This weighs against an exercise.
It is a protection I never use more than one night at a time. If my short-end options go out-of-the-money the next trading day, I let the spread stand pat. If they persist in staying in-the money even fractionally, I close out the position and turn everything into cash. That is because there is the danger of their going farther into the money, narrowing the golden gap dear to the spread strategist. Also, the danger of an exercise increases as a put's or call's expiration date nears. The week before expiration begins Monday.
What if IBM stock goes down instead of up on Monday? I make a mental "stop loss." 88-1/8 was the share's low for today, so if it goes anywhere below 88, I close out the spread position. Why not just close out the position automatically Monday and take profit? My short-end June options (trading at about a point or just under late today) have only five trading days until expiration and will lose value rapidly during those days. Since they represent an obligation to me, their time-decay is gravy.
At this late date, however, time-decay must be declared secondary. The hazards of a rise in the stock triggering an exercise of the Junes or its fall shrinking the meat-laden Julys take precedence. So I shall stand still on Monday if the stock hovers in the 88 and a fraction/89 and a fraction range. Otherwise, my broker will receive a "Close out the position" call to buy back June and sell July. As a trend-follower, I think that IBM will probably keep rising. If it extends anything more than a small, quick toe over the 90 line, I think I shall tell it good-bye without an overnight stay. Tis getting late.
Having studied the detail-lines of an "option spread" blueprint, let us now repair to the drawing room and the art works on exhibit there. In the past, I have advocated high culture for financial traders because it entails the sense of detail and the grasp of time which they require. I do not presume to be prophetic, but you will note that the word "Byzantine" (meaning intricate and labyrinthine and sometimes devious) is being applied to everything from the court system to plots in novels to computer cyberspace and Websites to Wall Street financial circuitry and circuitousness. Why not a look at the original or something akin?
Also, in the past, I have lambasted Right Wingers, reactionaries and fundamentalists owing to their pretensions as Lords of the Temple of Tradition. They are as alien to anything worthy of the name tradition as astrologers with their dime store charts are alien to the intricacies of the Mount Palomar Observatory. With few exceptions, expecting cultural depth, sense of detail or grasp of time in their ranks is like expecting a 200-inch reflector telescope in a Lassie movie or a revival hall. Admittedly, however, I previously underrated their perennial "Make it compulsory under law!" game-plan.
H.L. Mencken made the observation that the ghosts of primitive peoples have short life-spans. A primitive tribesman would report seeing the ghosts of his father, sometimes his grandfather. Then the spirit population hit a vanishing point and dropped off precipitously. No sightings of spooks from, say, five or six generations back.
Two reasons: As new ghosts are added to the folklore, old ones are forgotten. Primitive folklore continually "loses cargo at the far end." Secondly, primitive peoples lacked history books and portraits to extend their imaginations farther back in time. This "loss of cargo" from the past and this "farther back in time" weakness afflict the Right Wing like a chronic epidemic. One could call it a "qualifying disease."
Today, most music encyclopedias state that the Ragtime Era ended in 1917, but prissily avoid mentioning specifically what happened that year to bring about that conclusion. It was the closing down by police of Storyville, the red light district of New Orleans, silencing the fleet of "genuine article" ragtime pianos that were emblem and imprimatur of the bawdy house parlors.
Though on in years, the white-haired folks who enjoyed rag-time on The Lawrence Welk Show were too young to remember the pul-pit sermons preached against "brothel music," too young to remember what used to be the "dirty tunes" of pre-1917. Thus music's harlot yielded up a virginal ghost, thanks to people's forgetfulness and the fiction, "Everything was so decent way back then." Such thinking bloats perniciously when it reached the judicial bench and the halls of congress.
Judge Robert H. Bork wrote a recently published book entitled Slouching Towards Gomorrah which will surely receive the embrace from every lover of "boy and his horse" movies and "country doctor" fiction. In the chapter "The Collapse of Popular Culture" Judge Bork wrote:
"The difference between the music produced by Tin Pan Alley and rap is so stark that it is misleading to call them both music. Rock and rap are utterly impoverished by comparison with swing or jazz or any pre-World War II music, impoverished emotionally, aesthetically and intellectually. Rap is simply unable to express tenderness, gentleness or love. Neither rock nor rap can begin to approach the complicated melodies of George Gershwin, Irving Berlin or Cole Porter. Nor do their lyrics display any of the wit of Ira Gershwin, Porter, Fats Waller or Johnny Mercer. The bands that play this music lack even a trace of the musicianship of the bands led by Benny Goodman, Duke Ellington, and many others of that era."
The 'Tin Pan Alley' angle typifies the "olden days" reactionaries who cannot pronounce the title of a grand opera. You must expect them to detour around any creative form so far removed from The Disney Channel. Still, grand opera staged plenty of murders, seductions and suicides without causing the same in the audiences. Judge Bork also neglected mentioning ragtime with its scarlet beginnings or barber shop quartets and the nearby copy of the pink Police Gazette, with minister disapproved pictures of ladies in tights.
The passing of time has moved these beyond Judge Bork's mental ken, like old jungle ghosts disappearing from the memories of the village elders. This Right Wing "tribal village" vision of the past blacks out approximately the earlier half of Irving Berlin's career. Before "Easter Parade" or "The Girl That I Marry," Berlin had his start as a piano-player in "dives" on Manhattan's Lower East Side.
In 1911, Irving Berlin wrote and published the song "How Do You Do It, Mabel, On 20 Dollars A Week?" (still available in sheet music). According to the lyrics, Mabel moved to Now York City and took a job dancing in a Broadway chorus. Weeks later, her hometown boyfriend visits her and finds her living in a luxury apartment. He sings, "A fancy flat and a diamond bar, 20 hats and a motor car. How do you do it, Mabel, on 20 Dollars a week?"
He ends his visit impressed with her thrift and careful spending. Less naive than he, audiences in 1911 laughed raucously, surmising that behind closed doors she used jam as a substitute for caviar. All right, so old songs left more to your imagination than today's hard rock with four-letter words. Nevertheless, old-time popular music was not all the "Silvery Moon" and "Your Old Wedding Ring" that good-old-days conservatives keep hearing.
The Cole Porter song "Love For Sale" was banned by many radio stations in the 1930s and since. The Cole Porter song "I Get A Kick Out Of You" ("I get no kick from champagne. . . .") began its second verse, "Some, they may go for cocaine." This turns up in various recordings and sheet music as "perfumes from Spain" and "a boppy refrain." The Fats Waller songs were dismissed by many as "colored music" from the "juke joints." The word "juke" derives from the West African Bambara tribal word "dzugu" meaning "wicked."
Numerous newspaper articles in the 1940s warned that big-band swing was morally hazardous, springing from African jungle drums and lust-arousing dances around tribal fire. That any pre-rock music was ever controversial or was ever denounced as a "moral menace" seems to have escaped Judge Bork completely. Such things did not happen in the reactionary's Wonderland known as Yesterday. Owing to his all-those-pieces-missing notion of time and past, Bork praised Cole Porter but failed to credit the revisers who pondered the question, "What rhymes with cocaine?" In the Slouching Toward Gomorrah chapter ominously entitled "The Case For Censorship," Robert Bork wrote:
"Is censorship really as unthinkable as we all seem to assume? That it is unthinkable is a very recent conceit. From the earliest colonies on this continent over 300-years ago, and for about 175-years of our existence as a nation, we endorsed and lived with censorship. We do not have to imagine what censorship might be like; we know from experience. Some of it was formal, written in statutes or city ordinances; some of it was informal, as in the movie producers' agreement to abide by the rulings of the Hayes office. . . . The period of Hayes office censorship was also, perhaps not coincidentally, the golden age of the movies." Back to censorial yesteryear, the learned judge advocates.
Here I must vent my Italian spleen. Under the Motion Picture Production Code (unofficially dubbed the Hayes Office Code), several studios banned nude statues and paintings from on-screen and several others permitted them only ever-so-briefly and limited to the background. They could not be displayed prominently. Consequently, a film could not show Benvenuto Cellini casting the bronze Perseus, but could show Al Capone piling up the corpses. No, I do not blame everything on the non-Italian world. Sadly, there are plenty of Italian-Americans to whom "tradition" is Walt Disney instead of Lorenzo de Medici.
Censorship would make such standards and such thinking "compulsory under law," and they are bad enough when not compulsory. If a barfly believes a dozen different fallacies, that is not necessarily harmful, but eventually he starts putting his money where his mindset is, and that causes damage aplenty. He pours his bank account into playing numbers he dreamed, or buys real estate sight-unseeing or purchases worthless "collectibles," or invests in securities from cold-calling brokers in boiler rooms.
The mind that goes deeper than Tin Pan Alley or the Hayes Office has something extra in the lens and reflector, an edge and a plus factor. The sense of detail, the grasp of time, the ability to cope with whatever may be called Byzantine. An intelligent trader or investor needs edges and plus factors. Regarding an edge at grasping intricacies, let us turn back the centuries for some mental exercise. Henry James was not the only author to declare that fine art affects your vision of the universe...
Editor's Note: Due to space constraints we had to delete approximately one-page of this article at this point.
One of the great "mixed message" artists was Fra Angelico (Guido Giovanni da Fiesole, 1387-1455). He was a life-long devout monk of the Dominican order who painted only religious subjects. Do not, however, let this conjure up any drabness in your mind. He became a giant in art history as a colorist. Mrs. Ady wrote of the picture "Annunciation" at Cortona that "the angel's wings are gold tipped with ruby lights, and his robe is a marvel of decorative beauty, studded all over with little tongues of flame and embroidered in mystic patterns."
Fra Angelico painted celestial paradise which H.A. Taine almost turned into a prose-poem: "Glittering staircases of jasper and amethyst rise above each other up to the throne on which sit celestial beings. Golden aureoles gleam around their brows; red, azure and green robes, fringed, bordered and striped with gold, flash like glories. Gold . . . radiates like stars on tunics and gleams from tiaras, while topazes, rubies and diamonds sparkle in flaming constellations on jewelled diadems."
Wasn't it nice that the good brother entered the monastic life, shunning splendor and opulence? For rich sensuality, an Oriental palace could not match the retinas of his eyes! The financial trader who catches such intricacies and such ironies has to be something better than an exchange dice-roller. Also something better than a Christian Coalition member whose "time-honored tradition" falls short by about seven centuries. He is the sole-proprietor with an edge and something extra.
Slight Differences in Keltner Channel Appearance - Craig Carlson
I purchased CTCN's Real Success trading tool software a number of months ago because I needed the Keltner channel on Omega Tradestation. Since then I have been trying to reproduce parameters that I have been using for years in an old Ensign I program. At the same time I was trying to reproduce the same Keltner parameters in Ensign for Windows.
So far I have been successful in creating an identical channel in Ensign for Windows using LNBAND=41, PRICE=(High + Low + Close) /3, and COK=250., but when I use the same parameters in the Real Success Keltner, it produces a channel that is "almost" the same. Do you have any idea why that would happen?
Is there something unique about your formula that would prevent me from reproducing the Ensign I/ Ensign for Windows Keltner exactly?
Editor's Note: I don't believe there is anything unique. However, a few others have also said they observed a difference in the appearance of the Keltner. By the way, the Keltner Formula used in the Real Success software was republished in the last issue of CTCN.
I know this is a long shot, but if you have any idea what would help me solve this, I would greatly appreciate it. The formulas used in Ensign I and Ensign for Windows is listed below.
Keltner Channel - Ensign 1
Comment: Press K to place the Keltner channel on a chart. The Keltner channel is based on volatility expressed as a bar's range. A channel is created on both sides of a moving average equal to the moving average of the range multiplied by a constant.
Formulas
Center Line: AVE + (AVE* (N-1) + Price)/N
Average Range: Range=(Range * (N-1) + HIGH - LOW) / N
Boundaries: UPPER=AVE + RANGE * C
LOWER=AVE - RANGE * C
Parameters
1st parameter is the number of bars (I use 21) in the exp. averages. 2nd parameter is the multiplier constant. (I use 2.5). The moving average variations of H, L, M, A, and F may be used with the 1st parameter entry.
Keltner Channel - Ensign for Windows
To place the Keltner study on a chart, click the Studies button and then select Keltner Channel. The Keltner Channel is another useful trading band. The band distance is calculated based on the volatility of a bar's true range (H-L). The average true range of each bar is multiplied by a number to adjust the band distance from the average line. In sideways markets the band distance will narrow, in rapidly expanding markets the band distance increases.
Formula
Average=PreviousAverage + (SF* (PRICE - PreviousAverage))
Range=PreviousRange + (SF * ((HIGH-LOW - PreviousRange))
Channels UPPER=Average + (Range Multiplier)
LOWER=Average (Range Multiplier)
SF Smoothing Factor=2 / (N + 1) where N=periods in average
Parameters: Average: N Number of periods In the average (ex. 7) (I use 41)
Multiplier: Used to expand the bands (ex. 1 or 2) (I use 2.5)
Control Your Emotions Before It Controls You - Control It First! - Rick
There are many factors that play into trading, and it is true that many new traders concentrate on the 'game' aspect of trading while leaving the most important component relatively unpolished. That component is mental. Mental, psychological, emotional, it all comes down to the same thing, the ole' grey matter. How do you react when you win? How do you react when you lose? Are your trades causing you to swing the emotional pendulum? Hey, get control of yourself!
Great you made some money, I'm happy for you. Oh, sorry for that loss though that took it all back with interest. How did you take it? I sure hope the answer is "indifference."
This is a business, not a game of cat and mouse, the excitement of the chase, the thrill of the victory, the agony of defeat. It is a bottom line, count the costs, approach with caution yet with a subtle hint of confidence. Take that bull by the horns and then go home and forget about it , there comes another day you know. What, you're going to go out and celebrate tonight? Is it your anniversary, get a promotion, friends have a child? It isn't because you made a really good winning trade today, you know better, right? Lose control of your emotions in relation to trading and it will control you and not the other way around.
Hey look, there are many things to get all pumped up about. How about the new method you learned? Yeah, works good, don't it? Be happy and let's move on, there are trades to be made here. Look at it as if each day you just opened the doors to your store. Do you see the merchant jumping up and down every time someone comes in and buys something? He starts doing that and his jumping up and down days are numbered.
Make sure not to get emotionally tied up with any aspect of this business, such as your account, your trades, etc. If you want to get emotionally tied into something, make that designing and perfecting your methods, this is a good thing. Why? Because passion has a positive affect on creativity and drive to make something work, and work better as well. But as soon as you are ready to test drive it, make sure to expect any outcome with control. Lose that, and your method testing will be affected by your butting in and messing it up out of fear, greed, etc.
So, keep the passion, but under control. Be the master chess player looking upon a challenge, using your intuition to design and solve, making a move with pure mechanical address. Control it first, before it controls you.
Recommended Books Which Could Have Reduced Learning Curve Significantly - Terry Smith
In my opinion any trader starting out should consider reading the following books in the order they are presented before opening an account. I could have reduced the learning curve significantly had I only known about these books.
1. The Disciplined Trader by Mark Douglas - The best psychology book out there on trading the markets. Traders will learn that "Emotion kills successful trading." The book will show you how to become a disciplined trader. I have read and reread this book so many times it is literally falling apart.
2. Mindtraps Unlocking the Key to Investment Success by Roland Barach - A fantastic book on traders psychology. The book lists 88 mindtraps we as traders easily fall into. After reading this book, I now understand why the hardest trades to take turn out to be the most profitable. Learning to think in reverse of conventional logic is one of the hardest things I have learned to do.
3. Market Wizards books I and Il by Jack Schwager - One on one interviews with some of the best commodity traders of our time. Full of great advice on money management. Full of great ideas on how to stay safe trading the market.
4. Investment Secrets of a Hedge Fund Manager by Linda Bradford Raschke and Larry Conners - Consist of 10 great strategies for trading commodities. Specific trading setups with entry and exit rules. You could pick out I or 2 of these setups, commit to trading them and earn a nice living. In my opinion, if you are considering purchasing any of Ken Roberts courses you will get nine more setups for less money in this book. One of the best books to come out in a long time.
5. The Traders Edge by Grant Noble - A great addition to the investment secrets of a hedge fund book. Unique insights into what it takes to be a profitable trader. Many secrets of the business not found in any other books I have read. My favorite and most profitable parts are the Fib Times, Routine of the market and Analogous years.
So there you have it, five of the best books I have read in the last 10-years. Anyone else have any favorite books they liked? Why not share them with the rest of us?
An Opinion: The Advertising Section is Due For A Comeback - Anonymous
My advice may be uncalled for, but I think your advertising section is due for a comeback. A couple of years ago, I advertised my trading technique monographs in CTCN, Club 3000 News and Futures Magazine. The differences in response surprised me. You won not by a nose, but by the whole horse.
For the record, I prefer to remain anonymous. Trading is a small world and I do not want any Chicago financial editors mad at me. By the way, I invested in a no-load mutual fund solely with the proceeds from my ad in your publication.
Editor's Note: We have always preferred vendor advertising not be placed directly within the pages of CTCN but still permitted it. In the past we also offered little in the way of advertising via this media to vendors and did little to promote it. Starting with this issue we are again offering trading product and services ads in our newsletter. There is be no need for us to try to alleviate conflict of interest or co-mingling concerns expressed by others, even though this was never a real problem. One reason we allow, and in fact now welcome vendor ads, is because the income helps defray postage costs to keep your membership costs low. In addition, there is a possibility you may learn about a product or service which may help you in your trading.
A Way to Make The Elliott Wave Theory Less Subjective - Elliott Wave and You - Terry R. Davis
Have you ever read that Elliott Wave is too subjective to trade with? I have a friend, who shall remain nameless, who sought Elliott knowledge. He searched for a chaotic mentor and finally found one who promised great knowledge for a great amount of money. He flew to his house and was taught at the feet of the master for a weekend.
One of the mentor's favorite sayings was "when in doubt about the wave count you are in some type of wave four." This is closely akin to saying you speak all languages but Greek. When asked to speak Spanish you reply - "that's Greek to me." My friend came home bubbling with his new found knowledge.
He was so impressed with his psychological mentor that he let him trade a $100,000 managed account. After a month's worth of following the markets, my friend came to a remarkable conclusion. Elliott wave is too subjective to trade with. Unfortunately, this knowledge came with a price tag in the thousands.
What about my friend's managed account? The mentor increased the account by $5,000 the first month. Excellent! At the end of the second month the account was back to even and the mentor had frozen-he couldn't pull the trigger anymore. So much for Elliott wave, right? Not exactly! You may think from this proceeding paragraph that I think Elliott Wave has no value. After all, wasn't it George Lane who said "any system is a success if it sells enough copies." Being in the "systems" business myself, I must that I would have to agree with Mr. George Lane's comments. I am a Christian and believe that the cyclical nature of all things (including the futures markets) has to be in harmony with nature. Elliott wave has been referred to as nature's law. I would rephrase it and say "Elliott Wave is one of nature's laws." I do not think of EW (Elliott Wave) so much as a system, but as an adjunct to determine which side of the market I should be on. For this it's excellent. Wave four is the hardest to identify because of the many formations that take place there: double threes, a-b-c's, quadruple bypasses and the like. If this sound like so much B.S. . . . That's because it is. For us to identify wave four we need to look outside of EW structure for another technical.
Welcome to the world of displaced moving averages. This concept (to the best of my knowledge) came from Jim Hurst's excellent cycle work on half-cycle differencing in the stock market. Hurst was (is) a genius in his own right. Again, that is another story. The displaced moving average is sometimes called a phase shifted moving average. For the rest of the article I will call it DMA (displaced moving average).
This concept has been around since the late seventies. I present this concept in my one-on-one teaching of beginning traders, and I am always surprised how few people have seen it before. We are going to use a 3-period exponential average and displace it 13-periods in the future. This is very easy concept to understand (especially after 15 years) but it always seems to cause problems in being able to be understood easily.
Let's look at Figure 1. On this chart we have two different moving average lines. The first is a 3-period exponential average (TradeStation calls the average a 5-period exp.). The second line is identical but has been "shifted" into the future by 13 time frames. Tough so far! Do you see it? Don't go any further in this article until you understand this subject. I say time frames as opposed to days because this 3FL3 dma (<3> period <F>orward <13>) can be applied to many time frames with remarkable results.
Now let's turn our attention back to EW. Wave four catches more people off guard than any other place in wave structure. It's been said when the market is moving up (in a down market) but something just doesn't "feel right" you are probably in wave four. In a down market this is where the public comes in as buyers. Do lambs to the slaughter ring any bells? What I'm going to show you is more of a way not to trade than a way to enter the market. If we don't lose isn't that very close to winning?
If you realize that being successful in trading is very near 800 psychological you will realize how important it is for you to fool your "humanity." To me not being wrong is very important. You must remember if you are right on your trading around 50% of the time you will make a fortune (do I need to put in a disclaimer here?) What are we taught as we grow up? If you got a 50% on that math paper in school what was your grade? A big fat "F." In commodity trading that same score rates a "B" (at least).
Your humanity will constantly forget in your way throughout your trading life. Hasn't it already? You can't escape being, so you must outsmart it. This is accomplished by doing all the right things at the right times. I have been trading for 15-years now and like to think l don't make beginners' mistakes anymore. This is more or less true What about experienced traders' mistakes. Sadly to say they still haunt me.
To be an overnight success in the futures markets has taken me 15-years. What a journey! Sorry for these asides, but they are very important in how things relate to trading and I wouldn't put ramblings in if I didn't think they were important.
Do you understand Figure 1? Now turn to Figure 2. The first time a sustained move crosses back over (from below to above in this case) the 3FL3 DMA you are in wave 4 and should be looking for a place to 'fade' (resell) this short term reversal.
Turn to Figure 3 for the exact opposite. When a sustained move crosses below the 3FL3, you should be looking for a place to re-buy the market. Since this is the end of wave four, what does that us? I'm waiting . . . ! It is the beginning of wave five. The last impulse wave.
The primary characteristic of wave five that I have noticed in actual trading is the speed and direction it has. For this reason you need a very close trailing stop if you are lucky enough to get in at this bottom. A one day trail is not out of line. I hope you will not take everything I am telling you at face value (if you are I have some land for sale).
I want you to get out your own charts and see if what I am telling you is true. I always hesitate to write articles like this, because people think that anything for free is not worth much. I have even had people call me on the phone and argue with me about free information. Smart huh? If you will study this information you will have more Elliott savvy than most of the people making a living selling it.
Is there a way to determine where price will stop when you are in wave four? Why I thought you would never ask. I have found that everything in the markets is related by a power of 2 (I even wrote a book with that same title). This means that all Technicals can be doubled or halved. Any technical that you are now using should have validity in the marketplace when it is doubled or halved. If someone tells me something they are using to make money, this is the first thing I check. If I still see validity then I will do more research to see how it can fit into my own trading.
I am constantly being asked to manage money and I have been doing more and more lately (since I am not a CTA the maximum number of accounts I can manage is 15). I am constantly looking for something better than what I now have. The pro fisherman on the bassmaster circuit will try to quickly catch a limit of fish (normally around 8) that are legal. Then they will keep fishing in the hope that they can cull some of the smaller fish they have already caught. If they catch a bigger one than the smallest one that they already have, they throw back the smaller one and replace it with the one they just caught. As an active researcher, I am always doing this.
At times I have culled all of my own systems and have been trading with other people's systems entirely while still looking for one that is better.
On that same vein, I am always trying to reduce the parameters that a trading methodology has (a coin toss only has two parameters). You see the pattern developing, don't you? You might even say cosmic! (I wouldn't say that but you might). I think you are getting the drift.
There have been many things detrimental written about moving averages. For the life of me I don't know why, because they provide a wealth of information to those of us that incorporate them in our trading. As in everything else there seems to be some certain sequences (not Fibonacci) or individual starting points that work better than others. Originally, I taught new students using exponential numbers.
There are as many ways to calculate EMA's as there are charting packages, so I have completely switched to simple moving averages. There is only one way to calculate them and every package does it the same way. Voila! Commonality (I just had to get that word in this article)!
The two values I use are 39 and 78. They extend both waves. In other words there also exists a 19 or a 156. Do you see the relationship of 2 involved in these values? Price will stair-step up and down these three values in every directional move. See Figure 4. They are not a trading system by themselves, but knowing how to use them in conjunction with EW provides great insight in to where the market will hesitate. This is where you get on board the trade for a quick fast ride.
When I trade on dailies, I never risk more than $500 per contract. I do not trade the stock indexes on position methods, because the risk needs to be $1,200 on S&P or $700 on NYFE. This is outside my Comfort Zone, so I don't have any inclination to enter. If you feel this risk factor presents no problem to you then be my guest. If you are trading something like corn or bean oil there is no reason to ever risk much more than $250.
There are already some of you thinking, I don't mind risking a little more than that on corn. Let me be more direct. Don't be stupid. Chances are very great I know a lot more about trading than you do. My claim to fame (if that is what you call it) in this industry is risking very little to position trade.
Okay, I've insulted 1/3 of you . . . Let me take a shot at the rest of you. You know who you are. The ones who don't use stops for any number of perceived reasons. You know the ones . . . The floor brokers are always picking off my stops and then the market turns right round and goes my way or the ever faithful - I can stand a little heat - it'll give it all back to me tomorrow or if not then, tomorrow or the day after that. How much can you lose trading one contract without a stop. Pick a number...and add one hell-of-a-lot of zeros to it.
When I first started trading in 1980, I met a likeable fellow at the local gambling (brokerage) house who only traded hogs without stops. He was a very successful businessman in his own right. Instead of merely taking his losses, he locked them in by spreading the next contract month against them. Brokers love this practice (twice the commissions). In a period of four months, I watched this man lose a paid business, his house and his wife and family because he traded without stops or refused to take a loss and get on with other things . . . All of this in the non-volatile hog market.
When I place a trade, I want something to happen now! Obviously, I want the market to go my way. If It doesn't, I want to be stopped out right away so I can go on to the next trade. There is nothing more demoralizing than going on day after day with a loss on the tally sheet. Your whole world revolves around what hurts. In this case your psyche. Well, I think I am finally at the end of another tangent.
Back to our values that were presented earlier - 39 or 78. When price penetrates the 3FL3 and is into wave 4 we are looking for a stopping point. The stopping point will be one of these two numbers. There will only be one nearby. Stay in the spot (or most active) contract month. The most likely number will be the 39.
See Figures 5&6! The rule being: if you are in wave four, the most likely place for a turn is on the 39 period simple moving average. The second most likely place is the 78. The 78 will be used rarely in down sequences because price can rarely retrace back to the 78 in the free-falls that occur in the markets.
If you have read and studied this article and have done a little of your own research to see if I am indeed sharing true knowledge with you then you will be rewarded many times over. Mr. Davis is a full-time trader, he can be reached 217-347-5101 or Fax 217-347-5122. Charts in Print Copy
Member Comments & Requests
Hiroyuki Narita is looking for one minute historical data for cash currencies such as d-mark, chf, gbp and jpy. The hourly and daily data also helps. Any member who knows how to get those, e-mail to hande@swiftech.com.sg or send me a Fax. The Fax number is Singapore 011 (65) 4441153. Also, I would like to contact Australian members, especially private traders in Sydney. I'm going to move down there within a few years.
Henry Mandel says the Traders Logbook, a format to write it down is an excellent tool with 25-pages of instruction and examples of exactly how to place and record different type orders and space to record thousands of orders.
Also, Larry Williams' hot line has done much better in the months following my last comment, especially in S&P which is his favorite market.
Ken Lindauer is interested in members' experience with the following trading systems/vendors: Alpha Trading System by Luiz Alvim (S&P day trading system); ‚ Trader Wins by Benny Wong (S&P day trading system); ƒ Swing Trader by MX Capital Trading (end of day stock trading system).
Also, write in your comments on the above systems to CTCN for other members to read.
From Allen Katzoff katzoff@world.std.com. I am moving to Israel later this summer and would like to make contact with any traders working there to discuss logistics, i.e., data sources, local resources, etc. Is anyone there?
Responses to Member Requests from Lin Hall To Ron Bonvicino - Commodity Trend Services offers its charts (I think the best available) either in hard copy mailed weekly or on the Internet. Cheaper on the net and all the same info with one enhancement. They're updated daily if you check daily. They are at https:// cts.dearborn.com
To Edward Chin - edchi@uno.com - Ken Roberts gets bashed a lot, but I have five of his courses and they all work, if you follow the rules. It's simple, basic stuff, but if you've never traded before it's a great start. I started with him in 1987. If you are interested I have five different courses all for sale since I have graduated. If interested, call my voice mail 714-967-0504 and leave your number and I'll call you back. Sorry, I'm not on the Net and have no e-mail either. I like it that way.
Editor Comments
High volatility continues in many futures markets. For example, as I write this the Dow Jones Average closed today down 192-points! This high volatility combined with elevated prices result in the small stops of 60 to 85 points, we prefer to use for low-risk daytrading, no longer "working", at least as far as reasonable risk is concerned.
As a result, we have (at least for now) temporarily stopped S&P-500 daytrading. We are now concentrating on overnight position trades in other markets. By the way, our daytrading methodology is also applicable to position trades using longer term charts. The time frame makes little difference to the basic methodology.
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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