Commodity Traders Club NewsÔ
"The Commodity Futures Trading Knowledge Network"
Copyright© 1993-2015 by Commodity Traders
Club News & Webtrading.com
Issue 03
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I'm a money manager and private trading advisor (non-registered) who had about a dozen accounts under management during November 1991.
At the time, I was trading these managed accounts using a combination of several indicators and chart analysis. Plus a degree of subjectivity and judgement. My trading was in a number of markets, including TBonds, S&P, Live Hogs and Currencies.
Everyone talks about the importance of winning trade percentages. Many traders think if they can achieve even 55% wins they will make good money. The idea of someone having 90% wins seems inconceivable.
Most traders would think 90% wins was an impossibility. No one could imagine that if 90% wins was possible, the brilliant trader could possibly lose money in the process of 50 out of 55 winning trades!
During the 30-day period, I made a total of 55 trades and had 50 winning trades. In spite of that amazing feat, I still was a net loser for the month. How is that possible? First in importance is that I did not have adequate discipline and did not follow my trading plan.
My many winning trades were mostly very small winners. Most of the winning trades were between $50.00 and $300.00. In addition they were all one- lots. However, I had too much confidence in the 5 eventual losing trades and doubled up on those positions...resulting in double exposure.
I compounded matters by not actually placing my stops but using so called "mental stops." I then lacked the discipline to get out of the eventual big losers when my small mental stops were hit.
I held the contracts in the hope they would eventually go my way. For example, my methodology called for a stop equalling say $300.00 but because it was a mental stop and not actually placed with the broker, I let the small loss become much worse (to $1500.00) before finally getting out.
In addition, the fact I decided to trade two contracts (due to over-confidence) on 4 out of the 5 losing trades, but one contract on most all the winners, resulted in much larger losses on the losing trades.
For example, a loss of $3,000.00 on one position ($1,500.00 times two contracts). However, if I was following my plan, I would only have had one contract and only a $300.00 loss on that position, or ten times less!
That occurred to the same or somewhat lesser degree on all 5 losing positions, so that my losers (mostly two-lot trades) added up to about $10,000.00 negative. However my 50 winning trades were mostly small winners (one-lot trades) that added up to about $9,000.00 positive, including commissions. Thus, even with 50 of 55 winners during a one month period, I still ended up losing about $1,000.00 for the 30-day period! If you factor in the cost of my expensive on-line Bonneville Quote Machine and some other expenses, I actually lost close to $2,000.00.
I know this is all hard to believe, but it really happened to me and can easily happen to anyone who doesn't follow a consistent trading plan and does not have sufficient discipline.
The 50 of 55 winners will be very difficult for me to ever duplicate again. I have been trading with about the same frequency and similar techniques from time that occurred Nov 1991 to now (1 2/3-yrs). But I have never even come close again to that amazing winning percentage.
In addition, from what I hear and read, it appears that it's next to impossible for other traders to achieve 90% wins out of 55 trades.
I'm still not sure how I did it and I likely could never repeat the achievement again, even if I continue trading for the next zillion or so years.
I don't know what is more amazing, either my percentage of wins or my losing money in spite of it. Probably the fact it was possible to lose money after achieving 90% wins is the more amazing thing!
Catch a Trending Market - George Hallmey
This one comes from the KISS school of trading systems - designed for the part-time trader who hasn't time or inclination to constantly monitor the markets and probably is still computer illiterate!
All systems are trend following - it's just that the length of trend may be long or short. My intention was to find a system that catches the long swings, filters out as many go nowhere whipsaws as possible and can be monitored without the use of a computer and with the minimum of time spent studying chart moves.
W.D. Gann inspired the use of swing charts as a filter for indicating trending movements. He used a combination of time frames, the most well known being 3 days, 7 days and his quarterly swing chart. Gann taught that the longer the time frame used, the more reliable the signal given.
My analysis uses a 14-day trend reversal. How do you plot it? Simply mark on some chart paper a vertical line when today's price is higher than it was 14-days ago and keep drawing on up until today's price is below that 14 days ago when you show the line coming down again. What could be simpler? (see chart) Chart in Print Copy
How then is a swing chart used? First, it gives a broad indication that the trend could continue in the direction of the current swing. Support and resistance areas are clearly shown and once the swing passes previous swing highs or lows greater weight is given, Gann teaching that new highs should be bought and new lows sold.
However, as with all long term trend following systems - first pick a market with prolonged trending action. The British Pound is my current favorite - frequently embarking on long term trends with a minimum of whipsaws.
Using the swing chart to place trades, the system is always in the market. Over three years prior to the 1992 bull, then spectacular bear run, the system has produced 48 trades with an impressive 2:1 win loose ratio. This producing a profit of 29.5 cents or $18,437.5 per contract. However the maximum drawdown was 19.5 cents - more than most would stomach.
By adding a simple rule of setting a maximum stop loss of 2 cents, the maximum drawdown became 8 cents with profitability boosted to 49.5 cents or $30,937.5 per contract. After deducting $100 slippage and commission per trade, this easy to monitor trade system shows how a simple technique can produce impressive profits.
The Importance of Doing What's Right - Mike James from New Zealand
Like most people, when starting out trading, I focused on the selection/prediction aspect of trading.
Most traders spend their time analyzing the market to predict where it is going instead of developing low risk ideas in which the potential loss is small. Spend time developing low risk ideas, instead of trying to study every aspect of the market. Although a system of some sort is important, it is by far the least important aspect of being a profitable trader.
Profitability is solely dependent on money management and discipline. Center yourself calmly through exercise, diet, meditation and generally leading a balanced lifestyle. Let go of your attachments to the outcome of the trade and look at the trade as an objective event.
Concentrate on sticking to your entry and exit rules for each system and the profits will take care of themselves. Your management of the emotions of greed and fear are vital.
Markets move due to fear, greed and ignorance as much as any other reason. You have to realize that as a trader, during rough times, as much as 70% of your trades will be losers. Profit will generally come from a relatively small number of trades.
True winners make a point not to let their ego (don't dwell on large profits of open or closed trades), emotions, tips or gossip get in the way of what their system tells them to do.
To beat the market go about your business in a disciplined way. DO NOT start to think that "I am smart and can easily make a million." It will cause you to forget to use the wise, patient and conservative RULES you need to follow to make a profit.
Your loss of confidence is the greatest loss you can suffer, so don't overtrade or step in front of a freight trains. Stalk the market as deadly game or else you will become its prey.
Mark Douglas in his excellent book 'The Disciplined Trader' insists that you trade with the goal of doing the right thing (sticking to rules!!), not making money.
Paul Tudor Jones sees his strengths as a "trader who is able to take loses quickly and thinking defensively."
Make time to study and organize a trading plan for each and every trading day. The markets you hold a position in are the ones to concentrate on.
In Jim Slomans book 'The Adam theory of Markets' he says, "To succeed in the markets we must surrender. Never ever let any opinion about the market get in the way of trading."..."Analysis is great, but when analysis and reality diverge, we must always go with reality."
"Knowledge is great, but when knowledge and reality diverge, we must always go with reality."..."We must allow ourselves to mirror the market, follow it surrender to it. We must be willing to let go of what we think we know about it so that we can see it directly."..."Price is reality. Price reflects everything. Price is all we want to look at because price is what the market is doing."
Professional traders know that money is important, but unlike hobbyist, they focus on the market. Don't get greedy and count dollars, ignoring what the market is telling you. To make it you have to level your emotional peaks and valleys. That requires dedication.
Patience is the key word. My experience is that the fewer the number of trades, the more profitable the method. It goes without saying that you must not second guess your system. Take every trade according to the rules.
Now comes the important part - how to handle the inevitable drawdowns. Back testing has told you what kind of a maximum drawdown you can expect. If you can't emotionally or financially handle at least this much drawdown, don't trade the system in the first place. And don't be greedy and overtrade, buying or selling too many contracts (you should have rules for the precise amount of contracts to trade) in an effort to make a lot of money in a hurry. Under capitalization is one reason so many are losers.
Once you have a system that works, don't change it. If you have other ideas, develop another system!
If your goals are not met or if you feel tired or stressed -- STOP and reevaluate the situation. Either close out all positions or let those in profit run their course without adding to them
Richard Wyckoff gave the following advice, "There are several clear signals to pull out of the market and take a break. The first is a technical warning - the situation in which your analysis gives unclear, confused signals. The other two are emotional - relying on 'instinct' rather than research and a growing or chronic indecisiveness about executing trades."
And don't forget the importance of exercise, of the mind and body. The importance of friendship and making time for these friends. The importance of balance, taking time out to watch the flowers grow, not just working/trading. That only achieves a goal in a very narrow focus and achieves nothing but leads to unproductively and unhappiness.
Be good to yourself; don't be too hard on yourself. Areas you can improve on simply provide you with valuable feedback.
Anything you do gives you experience. As a result, you can look at your decisions and resolve to change them in the future, using them as a learning experience, rather than accepting the failure judgmentally, by thinking 'I have failed.'
Victories, I pat myself on the back, often. I dwell on them as they are the building blocks of my future accomplishments.
Proper Mental Attitude - Walter Mandl from Canada
I've been a futures trader for 15 years and although that's a short period of time relative to other fields, in the futures industry that's a long time.
The message I wanted to relate to the readers is the importance of the proper mental attitude when it relates to futures trading. I found out by reading and through my personal trading account that a good mental attitude reflects a good trading account and visa versa.
Futures trading extremely highlights the best and worst in people. When a trader wins a certain amount, he goes on a natural high, far in excess than normal producing behavior.
This can cause the trader to make large purchases or go on vacations, not realizing that at the next trade they might not be able to afford that purchase or vacation. It will eventually send the trader in such a depression that their ability to trade in a proper positive way is all but lost.
The point I wanted to make is that to lessen destructive behavior you must have a plan. The plan must include when to enter and exist markets, whether it be for profits or losses, but also have a plan to conservatively spend profits.
This must be done so you don't produce ever increasingly natural highs to defend bad behavior which eventually will lead to losses in the trading account.
Incredibly Demanding, Detailed and Complex Requirements to purchase "adequate" Trading System Software - B. Fitzsimmons
I am searching for some adequate software. Here is list of requirements. If your system cannot perform the following, don't bother sending me a demo disk, for my records, just send a letter saying your system cannot perform as needed.
If your software can meet these specifications, send me a brochure, demo disk if necessary, a salesperson's name and how I can get in touch with him. Plus, your system's or statistical guru's name and how I can get in touch with him.
This is no joke. I have an MBA in Management Science, been a stockbroker, studied the futures market and technical techniques for the last year, designed but not built my own system for futures, want to start investing in futures or options ASAP.
Criteria in order of importance:
1. Stat tests or procedures included:
a. J. Welles Wilder's
1. DMI - ADX
2. RSI, KST or like double-smoothed Stochastic
3. if possible Reaction Trend System, or some other tracking, not trending system
4. if possible Swing System, Volatility System
b. MACD
c. Commodity Channel Index or MII Price Channel, and std. dev. capability
d. Rudimentary Charting Methods
e. K%D Stochastic
f. Some type of Momentum statistic, also Rate of Change statistic
g. Statistical Methods, including Exponential Smoothing, linear and non-regression, if possible ARIMA, multiple decomposition and XII (now using SPSS for Windows)
h. independent modules to test degree of:
1. Volatility
2. Open interest (seasonally adjusted, if possible)
3. Volume (seasonally adjusted, if possible)
2. Some type of feed from Lotus and/or CompuServe or like data utility to translate data files to your System
3. Some type of historical investigation, evaluation or profitability system to test different decision rules against history to be included with evaluation system:
a. system to handle multiple, complex decision rules
b. if possible, capability to manually or batch change parameters for statistical techniques, e.g. DMI has 14 day moving avg., change to 12, 9 or 5 and price channel width, RSI overbought, Oversold Parameters, by Batch Commands
c. if possible, comprehensive Command Language with batch capabilities, I hope I can build feeds from/to other programs
4. good graphical capabilities (have a SVGA monitor)
5. good DBMS, ability to store multiple commodities by daily, high, low close or weekly, close time periods, for several years
6. if possible, some capability to on command evaluate data files searching for option opportunities, or arbitrage opportunities
7. if possible, package works with Microsoft Windows
We'll I think that's it, the if possibles amount to a wish list. Good luck, I don't want to be writing spreadsheet macros for the next year.
I have a 486/33 Mhz Computer, Hard Disk, Color Monitor, floppy drives 3.5 or 5.25.
Sorry, I will not pay for demo disks or manuals. If you are unable to tell me what your system does, or how it matches my specifications, it's your problem --not mine!
Product Review on PowerBasic 3.0, Much Faster Market Research
is Now Possible - Clifford MurphyI would like to comment on computer performance improvement resulting from a system upgrade.
An IBM-XT operating at 4.77 Mhz, was replaced with a 386DX-40 with a math coprocessor. This hardware upgrade resulted in a 18.2 fold speed improvement on math intensive BASIC programs.
Microsoft GWBasic was replaced by me with PowerBasic 3.0, a BASIC compiler. This software upgrade resulted in a 11.5 fold speed improvement on the same math intensive programs.
To eliminate any misunderstanding, the combined hardware and software upgrades resulted in an over 200 fold speed increase. Needless to say, this has opened up new vistas for market research.
My 386 system is a standard system with a math coprocessor added.
PowerBasic 3.0 is a BASIC compiler that performs like an extremely fast GWBasic with enhanced features. Features that should satisfy the most demanding programmers. I am speaking here, in particular, of the advanced debugging features.
An additional benefit of PowerBasic 3.0 is that the limit of 61K that GWBASIC places on the maximum amount of program and data that can be loaded into memory at one time in PowerBasic is increased to 162K.
PowerBasic 3.0 documentation is good and the program has performed well during 2-months of heavy use. PowerBasic 3.0 can be obtained from the publisher, Spectra Publishing, 1030D East Duane Ave, Sunnyvale, CA 94086 (813) 625-1172, or purchased at a substantial discount from a mail order company.
COMMENTS FROM THE EDITOR
Jim Ford's hard to believe, but true contribution will be truly amazing to many traders. However, many professional or experienced traders probably find it less amazing than you would think.
That's because very experienced and knowledgeable traders have likely had the same type of occurrence happen to them, though likely to a much lesser degree. They have had periods of good success as far as percentage of wins is concerned, but still lost money due to the reasons referred to in Jim's contribution.
However, as mentioned by Jim, it is extremely rare for any trader to have anywhere near 90% wins for a lengthy period covering over 50 trades. That truly amazing feat makes the fact Jim still lost money seem ever harder to comprehend!
I have talked to Jim and a trading associate of his who I know very well, about how Jim accomplished his 90% wins and they can not actually explain it. That's because a lot of the trades involved a certain degree of judgement or subjectivity. Unfortunately, subjectivity can not be used successfully by others or used with a mechanical trading system.
This reveals how poor money management and lack of discipline can bankrupt even the best traders in the world. If this can happen to excellent traders like Jim, can you imagine how easily poor money management can ruin less skilled or mediocre predictors of the markets!
George Hallmey's article reveals how simple techniques using Swing Charts can be highly profitable. It is correct that W. D. Gann did in fact use Swing Charts quite extensively in his trading.
As referred to by George, one of the problems with Swing Charts is that stops are frequently too large for most small or medium size traders. However, as alluded to by George, assigning a somewhat arbitrary stop-loss to make the risk less has very good potential.
Gann refers to Swing Charts a number of times in his Trading Course, and in his valuable book "How to Make Profits in Commodities."
The book is very likely Gann's best book and many traders (myself included) say it's the best book ever written about commodity trading...the 412-page hard-cover book is available from: Trading Tools Co., Box 1, Altoona, WI 54720 for $35.00 (+ $3.00 US S&H, + $15.00 Foreign S&H).
How to Make Profits in Commodities book not only covers Swing Chart methodology, but also goes into great and highly valuable detail on cycles, seasonals, resistance and support methodology, money management and discipline.
This excellent book places great emphasis on discipline and the importance of always using stop-loss orders to keep losses small, so you can recover your equity thru eventual winning trades.
The book was written in two parts, in the 1940's and 1950's by Mr. Gann. The type of markets traded then and commodity prices have changed greatly since then. However, the principles and lessons taught by Gann are timeless and are as applicable in the 1990's and they were in the 1950's.
The interesting submission by Mike James about the importance of money management, discipline and emotions and other mental aspects of trading, really hits home.
I recall many trades I made myself or that were referred to by clients, where we either lost money or made less than we should have, due to discipline, etc.
The importance of the proper mental attitude and having a trading plan, as referred to by Walter Mandl, is very significant.
Mental attitude can often make the difference between being a winner or loser. That is true not just with commodity trading, but also true with other areas of life.
The letter written by Mr. Fitzsimmons about his specifications and requirements for Trading System Software is as mentioned by him, "not a joke." He sincerely believes he must have and also use all those complex and specific capabilities and technical indicators. If not, he will not buy the system, and apparently doesn't think he can be successful trading unless all his demanding, specific and complex requirements are met.
The problem is his requirements are far too specific and involved. The software package (if it in fact exists), and the subsequent analysis and usage requirements, would be far too complex and involved to easily operate or trade with. Due to the complexity of his requirements, I doubt if anyone could possibly trade successfully using it.
It is also interesting to note that most trading experts and experienced traders will tell you the many technical indicators on his wish-list simply do not work consistently in real-time trading. They are referred to as "canned" indicators and have been studied extensively over the years. Lots of computer runs have been done on them by many well known commodity experts.
Unfortunately, all the results of the testing I have reviewed using the indicators Mr. Fitzsimmons refers to, including magazine articles and trading books, and including my own research of "canned" indicators, has been very disappointing. The many "canned" indicators for the most part correlate highly with each other and all tend to go positive or negative usually at about the same time, and usually with the same dismal results.
The results are inconsistent, have lengthy losing periods, and drawdowns are usually far too large for the average trader to withstand.
There's one rather humorous observation about the demanding expectations. He refers to software that meets his stringent and complex requirements as merely "adequate!"
He is not a CTCN Member, but I have published it because I believe Members may find his letter and the subject matter interesting.
The Product Review by Mr. Murphy shows how fast the latest Basic Compilers are compared to old programs like GWBasic.
PowerBasic is no doubt a good product. However, QuickBasic by Microsoft is still likely the leading Basic Compiler and is used by many traders who have the need and occasion to use a Basic Programming Language.
To use these Compilers, a certain degree of computer and programming skill is required. I personally have been using QuickBasic for many years and find it easy-to-use and more than adequate as far as features and speed are concerned.
I am still using the old version 3.0 because it seems to be faster and have more memory capacity than the more recent upgrades. There have been a number of upgrades since 3.0, but I still prefer the old 3.0.
The last page has a message about the importance of having a trading plan. I took the exact same wordage to a local Awards/Trophy type of store and had it etched into brushed aluminum and attached to a hard-wood backing. It's hanging in my office as a reminder. The Page 8 message is a photocopy of my actual wall plaque. In Print Copy - The plaque reads "If You Fail to Plan . . . You're Planning to Fail"
Thanks to all who made contributions to this July 1993 issue of Commodity Traders Club News.
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Thanks to everyone who has contributed knowledge to this issue of Commodity Traders Club News. Without you it would not be possible. P.S. - Remember, as a special reward for making just one contribution/submission per year, you'll receive an automatic 50% price reduction on your renewal. Submissions can be any length, long or short; typed, handwritten or submitted on a disk. Formal or informal. Please participate by sharing your information and knowledge with other traders. Please make a contribution about your experiences, both good & bad with systems, services, advisors, data vendors, and other trading related product.
The reproduction, copying or publication of any part of this work beyond that permitted by Section 107 or 108 of the United States Copyright Act, and also World-Wide International Treaty Provisions, is unlawful. ALL RIGHTS RESERVED. Written permission from the Publisher/Editor is required for reproduction in any form (with proper credit to CTCN, including our address and phone number being required), and may be withdrawn at any time. Commodity Traders Club News (CTCN) is a 'Clearing House' or 'Information Exchange' for members only. We do not verify, (and we have not) verified the accuracy of the mathematics or numbers published herein, or accuracy of comments and remarks made by the authors. All information and remarks in the contributions are the opinions of the author or contributor, not the Editor or CTCN. You should be aware that P&L reports and advertisements are frequently based on hypothetical (not real-time/actual) trades. Article headlines or Sub-Headlines sometimes may be changed or written solely by the Editor, using verbiage the Editor believes highlights important points being made by the contributor. CTCN Membership, which includes our bi-monthly CTCN newsletter is "Your Guide To Profitable Trading and How To Save Money Along The Way." It's regularly priced at $97 (US) for 1-year. . . and includes free postage within USA & Canada (add $20 for Overseas Air Mail). Publisher: Webtrading.com, D.B.A. Our E-mail address is: ctcn@webtrading.com Our Website address is webtrading.com Editor is Dave Green. The opinions and recommendations are those of our writers and not those of Webtrading.com, CTCN, or its editor. (Note: There is high risk of loss in futures trading and past results may be difficult to achieve in the future and also may be based on hypothetical trading, with benefit of hindsight, and not actual trades) Note: We operate open member forums and consequently reserve the right to publish e-mail and other communications received. Therefore, please indicate "confidential" or "not-for-publication" on any e-mail or other correspondence sent us which you want kept private. Please contact us if we publish your comments and you object. Thank you.
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