Issue 56
Spotlighted Article - Perhaps the most amazing
one
you will ever read! - Dave Green
In this CTCN/Traders Ezine we offer several very interesting articles, including some selections written by the famous W. D. Gann almost a half century ago. It goes to prove sound trading advice and principles have basically timeless value, even after 48-years!
GANN COMMODITIES COURSE EXCERPT:
SPECULATION, A PROFITABLE PROFESSION - W. D. Gann
In 1911, after I made a great success trading in stocks and commodities, there was a public demand for a traders book with my rules for trading successfully. This demand was answered by my first small book, Speculation: A Profession. As the years went by, I learned more about the markets and realized other traders needed the help I could give them and I wrote more books to help others who were also trying to help themselves.
It is now May 1954, I am nearing my 76th birthday and am writing this new trading course of instructions, not to make money (for I have more income than I can spend) but realizing the demand and the need for more knowledge about futures trading by so many people. I now give the benefit of my 52-years experience to help those who need it. The price of my trading course is made reasonable in order for men and women with a small amount of money to be able to get a market education, and start with small capital and make a success, provided they follow the rules after they learn them.
My experience has proved that it is more profitable to trade in commodities than stocks, and you can make larger profits on the same amount of capital with a smaller risk. When you trade in commodities, you are trading in the necessities of life. Commodity prices obey the law of supply and demand and follow a seasonal trend most of the time.
When you learn the rules and follow them, you eliminate trading on Hope, Fear, and Guesswork -- which is nothing but gamble, and you cannot afford to risk your money gambling. You must follow mathematical rules, which I have proved to be a realistic guide in trading. You must prove to yourself that the rules have always worked in the past and they will work in the future. When you have the proof, follow the rules and you will make speculation a profitable profession.
How To Make Speculation A Profitable Profession
Speculation or investment is the best business in the world if you make a business of it. But in order to make a success of it you must study and be prepared and not guess, follow inside information, or depend on hope or fear. If you do, you will fail. Your success depends on knowing the right kind of rules and following them.
Fundamental Rules
Keep this well in mind. For commodities to show up trend and continue to advance, they must make higher bottoms and higher tops. When the trend is down, they must make lower tops and lower bottoms and continue on down to lower levels. But remember prices can move in a narrow trading range for weeks or months or even years and not make a new high or a new low. But after a long period of time when commodities break into new lows they indicate lower prices and after a long period of time when they advance above old highs or old tops they are in a stronger position and indicate higher prices. This is the reason why you must have a chart a long ways back in order to see just what position a commodity is in and at what stage it is between extreme high and extreme low.
The Kind Of Charts To Keep Up
Remember the old Chinese proverb, "One good picture is worth 10,000 words." You should make up charts and study the picture of a commodity before you make a trade. You should have a weekly high, low chart, a monthly high and low chart and a yearly high and low chart. A yearly high and low chart should run back 5, 10 or 20 years if you can get records that far. Monthly high and low chart should go back for at least 10 years and the weekly high and low chart should go back for 2 or 3 years. When commodities are very active you should have a daily high and low chart. This need not go back more than a few months. Start the daily chart after the commodity breaks into great activity.
Follow The Main Trend
You will always make money by following the trend of commodities up or down. Remember that commodities are never too high to buy as long as the trend is up and they are never too low to sell as long as the trend is down. Never sell short just because the commodity is high or because you think it is too high. Never sell out and take profits just because the price is high. Buy and sell according to definite rules and not on hope, fear or guesswork. Never buy a commodity just because the commodity is low. There is usually a good reason why it is low and it can go lower.
Rules For Buying And Selling
The first thing to remember before you start to apply any rules is that you must always use a STOP-LOSS order to protect your capital. When making a trade remember that you can be wrong or that the market may change its trend and the STOP-LOSS order will protect you and limit your loss. A small loss or several small losses can easily be made back with one large profit, but when you let large losses run against you it is hard to make them back.
Prove All Things And Hold Fast To That Which Is Good
The Bible tells us this and it is well worth remembering. Many people believe that its wrong to buy at new high levels or to sell at new low levels but it is most profitable and you must prove this to yourself. Because when you do buy at new high levels or sell at new low levels you are going with the trend of the market and your chances for making profits are much better than guesswork or buying or selling on hope or fear.
Prolonged Advances
After commodities have had a prolonged advance and wind up with a fast, active, runaway market, in most cases they come down very quickly and much faster or in a shorter period of time than when they go up. This is why you must keep up some daily charts at the end of a fast move and keep up the weekly charts to determine the first change in trend and be able to go with it.
Sharp Decline In A Short Period Of Time
This usually follows a rapid advance and the first sharp decline, which may last from one month to as much as seven weeks, usually corrects an overbought position and leaves the market in position for a secondary advance.
When you are able to catch the extremes at the end of any great time cycle, you can make a large amount of money in one year's time trading in fast, active markets. In extreme low or extreme high the opportunities are great for making money, providing you select the commodity that will lead.
Large Profits On Small Risks
You can make large profits on small risks provided you use a STOP-LOSS order, apply all the rules and wait for a definite indication of a change in trend up or down before you make a trade.
Fixed Ideas And Fixed Prices
Never get a fixed idea of just how high any price is going to go or just how low they are going. Never buy or sell on a price that you fix because you may be trading on hope or fear and not following the trend of the market and applying rules, which will determine when the trend is changing.
How To Protect Profits
After you have accumulated profits, it is just as important to protect them with STOP-LOSS orders, as it is to protect your original capital because once you have made profits it is your capital and STOP-LOSS orders must be used to protect it. The most dangerous thing that you can do is to let a trade start going against you and lose back your profits. A STOP-LOSS order will protect the profits and you can always get in again when you are out, with capital. Remember when you are out of the market the only thing you can lose or miss is an opportunity.
My 52-years experience has taught me that thousands of people have gone broke trying to hold on until the trend turned. Avoid getting out of the market too soon after move starts when you have a small profit. This can be a great mistake. Get out of the market quickly as soon as you see that you have a mistake. If you place a STOP-LOSS order, this will put you out of the market automatically.
Too Late Or Too Soon
You can lose money or miss opportunity by getting into the market too soon or getting out too late. That is not waiting until a definite change in trend is indicated, or failing to act in time when you see a definite change in trend. Wait until you have a well-defined indication that the trend has changed, then buy or sell. Follow all the rules in my book, How to Make Profits on Commodities. There are many rules in my book, How to Make Profits Trading in Commodities which are not in this course of instruction and by using all the rules you will make a greater success.
Hope And Fear
I repeat this because I have seen so many people go broke trading on hope and fear. You will never succeed buying or selling when you hope the market is going up or down. You will never succeed by making a trade because you fear the market is going up or down. Hope will ruin you, because its nothing more than wishful thinking and provides no basis for action. Fear will often save you if you act quickly when you see that you are wrong. "The fear of the market is the beginning of wisdom." Knowledge, which you can only obtain by deep study, will help you to make a success. The more you study past price records, the surer you are capable of detecting the future trend.
Make The Market Move Your Way
You must learn to realize that you cannot make the market go your way, you must go the market's way and must follow the trend. Many successful businessmen who are accustomed to giving orders to others and have them carried out will often when they get into the market, especially for the first time, expect the market to follow their orders or move their way. They must learn that they cannot make the market trend go their way. They must follow the market trend as is indicated by fixed rules and protect their capital and profits by the use of STOP-LOSS orders. There is no harm in making a few mistakes and a few small losses because small losses are the expense of a successful speculator. If you intend to make speculation a Profitable Profession, you must learn all the rules and apply all of them to determine the trend Professional men, such as lawyers, doctors, accountants and engineers, spend years in training and a large amount of money to learn how to succeed in their chosen profession. You must spend time and money to learn the profession and become a successful speculator or investor.
How To Make The Most Money In The Shortest Period Of Time
Most people want to get rich too quick; that is why they lose their money. They start speculating or investing without first preparing themselves or getting a commodity education. They do not have the knowledge to start with and the result is they make serious mistakes, which cost them money. When you do have knowledge and are prepared, you can make the most money in the shortest period of time. You must learn to follow the rules which I have laid down and proved to you by examples that you can make a large amount of money in a short period of time when the market is at the right stage for fast advances and fast declines occur.
Do not try to lead the market or make the market. Follow the trend which is made by big men who make big money and you will make money. Buy when the big market makers are ready for prices to move up fast, sell when they are ready for prices to move down fast and you will make large profits in a short period of time. Trade only when the market shows a definite trend and trade according to definite rules.
Study the chart on Soy Beans for 1953 and 1954 and the examples, which I have given and you cannot fail to make profits, provided you use STOP-LOSS orders as advised.
From March 8, 1954 to April 27, 1954, May Soy Beans advanced from 343 to 422, a gain of 78 per bushel in 50-calendar days and 35 actual market days. This would give a profit of $7,800 on 10,000 bushels and you were buying after the price was up $1.05 per bushel from the low in August 1953, which proves that you can buy at new highs in the last stage of a bull market and make large profits in a short period of time. This is without guessing but following rules and buying when the big people buy and of course you are with the trend made by the big traders.
Refer to the trading examples on May Rye and you will see how large profits could be made in a short period of time by selling short after prices were down to comparatively low levels against the extreme high levels.
Why People Do Not Make Money Buying And Selling Commodities
I have stated in my books many times the market does not beat you, it is your own human weakness that causes you to defeat yourself. The average man or woman nearly always wants to buy low and sell high. The farmer always wants to sell at high prices whatever he produces but he wants to buy what he needs at low prices. The laboring man wants high wages all the time but wants low prices for what he buys to eat and wear. This is a violation of a fundamental economic law and it just will not work. To make a success in speculation, you cannot expect to buy low and sell high.
You will make money when you do exactly the opposite of what the average man or woman wants to do or tries to do and makes a failure and loses as a result of what they are trying to do. You will make profits when you learn to BUY HIGH AND SELL LOW. You must learn to follow the trend of prices and realize that they are never too high to buy as long as the trend is up and never too low to sell as long as the trend is down.
Comment? Click-Here to send comment
Editors P.S.: We offer two different Gann Trading Courses, a large one written by Mr. Gann and a smaller one written by Dave. The links are near the bottom of this issue.
HOW TO OBTAIN "HOUSE ADVANTAGE" COMPARING COMMODITY TRADING TO CASINOS - Dave Reiter
I am part-time commodity trader. When I'm not trading commodities, I'm helping my father on the family dairy-farm (located in Gainesville, TX - 60 miles north of Dallas). The purpose of this letter is to share my thoughts and experiences as it relates to commodity trading. However, I would first like to provide you with a small amount of background information.
During my first 3-years (of real-time trading), I made a grand total of $145,357.93: (Year 1 - $37,135.10 ; Year-2 - $43,745.35 ; and Year-3 - 64,477.48 ). These results do not include interest earned on U.S. Government Securities. Including earned interest, my net profit for those 3 years is $155,533.96 (account statements are available).
In my opinion, if I can make this kind of money trading commodities, anyone can. The key to being successful is to maintain "consistency." My trading methodologies have provided me with fairly consistent profits during those 36-months. Don't get me wrong; I do have my share of losing months. But I always seem to "bounce back."
My trading approach is very conservative. I only trade one contract per signal and I never pyramid my trading positions. Also, I have a tremendous amount of respect for the markets. As you know, commodity markets can be extremely volatile at times. Therefore, I have developed a healthy "fear" of the markets. If you want to be a successful trader, you must be conservative and cautious.
Before I began real-time trading, I did a tremendous amount of paper trading and research during the prior 4-years.
During that time, I also watched a few of my friends do some real-time trading. Not even one of them managed to show a profit during a single 12-month period. Occasionally, they would "catch" a couple of big moves but they always gave it back over time.
The one "common thread" that each of my friends possessed was the fact that they never developed any type of trading plan or method. Their trading was very erratic and lacked any type of systematic approach. In the meantime, I observed their trading patterns and tried to learn from their mistakes. I also continued to do a tremendous amount of research and "test" various trading methods and ideas.
I spent a great deal of my time reading books about the laws of probability and "gaming theories." One of my favorite books dealt with the subject of casino gambling. The author of the book explained how casinos were making billions of dollars each year while only having a 2% to 5% advantage over the players. I was absolutely amazed by this fact.
After reading the book several times, I came to the realization this was the best way to make money in the commodity markets on a consistent basis. All I had to do was to get the "odds" in my favor by just a very small amount. After that, the rest would be easy!
My goal was to locate various trading patterns that were fairly predictable over a long period of time. To my surprise, this task wasn't as difficult as I thought it was going to be.
Using my historical database, I made two very important discoveries:
- During various times of the year, certain commodities will move in a very predictable pattern. Some people will classify this phenomenon, as "seasonal tendencies" while others will say that it is based upon "natural cycles." Frankly, I don't care what you call it. All I know is that some (not all) commodities exhibit very predictable price movements throughout certain times of the year.
- If a commodity closes higher for the day, there is a greater chance that it will go up the next trading day (versus going down). Vice versa; If a commodity closes lower for the day, there is a greater chance the commodity will go down the next trading day (versus going up).
The next logical step was to develop a systematic approach to "exploit" these predictable trading patterns. I knew that the "odds" would be on my side for each trade that I took. To use casino terminology, I had the "House Advantage."
I developed a trading system, which would generate about 8 to 10 trades per month. The trades were fairly long-term (3 to 12-weeks) and the stop-loss levels were reasonable ($1,000 to $3,000).
During the next 36-months, the system produced fairly consistent results. Don't get me wrong; I do experience some "painful" drawdowns from time-to-time. But the system always seems to "bounce back" very quickly.
I began searching for a method which would allow me to capture short-term (1 to 2 days) price swings in the various markets. Based on my past research, I knew that if the market closed higher (or lower) for the day, then the "odds" were greater than 50% that the market would go up (or down) the next day. My goal was to develop a trading plan, which would allow me to "exploit" this phenomenon.
My first idea was very simple. I decided to "buy the market long" if it closed higher than the previous trading day. For example, if the market closed higher on Wednesday, I would simply buy 1-contract on Thursday's opening and sell on Thursday's close. On down days, I would do the exact opposite.
Based on my historical testing, this idea did not work very well. Why? Because the markets have a tendency to "gap open" in the direction of the previous day's closing trend. For instance, let's assume the Coffee market has closed at 173.50 on Thursday (up 230 points from Wednesday's close). According to my rules, I will buy 1-contract on Friday's opening. The Coffee market does indeed "gap open" on Friday morning. It opens at 176.50 (up 300 points from Thursday's close). Therefore, my order is filled at 176.50. The market closes at 174.00 and I liquidate my position on the close.
What's the outcome? I actually lost money on the trade ($937.50) even though the market "obeyed the rules" and closed higher for the day. However (as is usually the case), the coffee market "gapped open" in the same direction of the previous day's closing trend (which was up). My "system" lost money because I did not profit from the "gap opening." I was buying after the "gap opening." By that time, most of the "easy money" had already been made. I had to find a way to position myself in the market before the "gap openings" took place.
The logical solution would be to enter the market on the close instead of waiting to enter on the following day's opening. That idea seemed to work out fairly well. It did make money. However, I found a better solution.
During my research, I discovered very often the markets would close at (or very near) their extreme highs or lows for the day. For example, if the Cotton market was having an "up" day (i.e., higher prices), it would (more often than not) close near its high of the day. Therefore, I wanted to find a way which would allow me to "get on board" somewhere in the middle of the move. I determined that I could generate greater profits if I entered the market during the middle of the move instead of waiting until the close of trading.
I tested a couple of parameters in order to find the best place to enter and exit the market. After a few weeks of testing, I settled on one parameter, which seemed to work quite well on all of the commodities that I tested.
On March 17, I began trading the system on a real-time basis. My intentions were to trade it for a few months on a "trial basis." My "experiment" lasted from March 17 through July 1. My real-time results confirmed the results I had achieved from my historical testing. The system worked great!
During 15 weeks of real-time trading (03/17 - 07/01), the system generated a net profit of $19,673.73. I traded 8-commodities (1-contract per signal). Of the 8-commodities, 6 were profitable. The drawdowns were negligible.
This type of trading system works because it "exploits" short-term price swings occurring in various markets on a regular basis. It doesn't capture the entire move. Instead, it simply takes a "chunk" out of the middle and gets out with a nice profit.
All markets have a tendency to move in the same direction for a day or two before reversing course. This system simply gets in during the middle of the move and usually takes profits the following morning when the market gaps open in the direction of the previous day's closing trend. The "secret" to this system is being on the right side of the "gap opening." That's where the money is.
I am thoroughly convinced the best way to make money in the commodity markets on a consistent basis is to use a system to "tilt the odds" in your favor on a daily basis. It doesn't take much of an advantage to the "beat the markets" on a regular basis. Remember the casinos; they enjoy an advantage of only 2% to 5% over the players and they're making billions of dollars on an annual basis. In my opinion, it works the same way in the commodity markets. And I have my account statements to prove it!
I'm always searching for new trading patterns that will give me an advantage over the markets. There are many profitable patterns that do exist. For instance, I discovered a pattern that worked perfectly on every trade that I took that year. In other words, every trade made money (based on real-time trading). I tested the "system" back. During the 3-years, it lost money on only 3-trades. The worst drawdown was (a very small) $292.
The trading methodologies I use are not perfect. I "suffer" through drawdowns just like everyone else. However, my "systems" have made money over the long-term. Hopefully, it will continue.
Editor's Note: In Dave's earlier article he said It is possible to make money trading commodities on a consistent basis. I've been doing it for nine years. The key to making money is to develop a game good plan and remain patient.
MY PERSONAL TRADING SYSTEM FEEDBACK WANTED
- Mark Crisp
Over the past four years, or so, have been developing my own trading system. For years I have played around with parameters. Thinking and re-thinking what may or may not work best. I seem to be almost there.
My system uses price and price alone. But in a way I have never come across before. I do not believe in using oscillators, moving averages and a whole host of other useless technical analysis. I was very careful not to curve fit my system. I came across one method to ensure this and applied it across many futures and stock markets.
Here comes my problem. I am not a programmer and do not wish to hand over my four years of hard work for another set of eyes to see. I have back-tested on hundreds of charts and it does seem very profitable. But what I would really like to do is use a software program to back test the system. Any idea how I can get around this problem?
I do not have $50,000 risk capital to "try it out" on the ultimate testing phase: "The Markets." But, I will start using it on the stock market soon. My guess is, if it does turn out a profit in the large cap, liquid stocks then it will make a profit in the futures markets.
Once the system does prove to be successful, and I have every confidence it will, how can I benefit from my work. Obviously, I mean in addition to making money from the markets with it.
I also do not believe in packaging the system as a black box and selling it. It doesn't work and I run the risk of exposing my system. Something I am not willing to happen. But if one has a profitable trading system what avenues are open?
Advisory service? Managing money? etc... Thanks for everyone's time. Any thoughts?
MEMBER REQUESTS
Futures Truth - Nathan
What is your opinion on Futures Truth Co.? I am broadening out from trading only equities to other markets. Even if I obtained your trading method, I would still include some other system/method to diversify.
Editor Comments
Several years ago CTCN regularly published the well-known Futures Truth Top-10 Reports. However, as a result of members usually experiencing vastly inferior bottom-line trading results or large drawdowns (compared to the statistics coming from FT), we stopped doing so, as we felt their reports were no longer beneficial to our club members. In fact, by CTCN reprinting the Futures Truth Top-10 Reports it was in all likelihood a disservice to some members who may end up losing money by buying a trading system based on its high Futures Truth ranking.
It seems like virtually no one experienced the extremely good overall trading results Futures Truth reported in its published reports. Based on our feedback the results were almost always vastly inferior. A number of times in past years we asked Futures Truth officials Mr. George Pruitt and owner Mr. John Hill to respond with an article covering their explanation for such strong inconsistency. Unfortunately, they have always ignored our requests for feedback. Their non-responsiveness to such significant issues seem very odd.
Questions regarding Real Success Video Tape Trading Course -
Brendan (with Editor Comments below Brendan's questions).
We have talked several times on the phone and I am very interested in The Traders Club RS2 Course. In order to gather the proper capital (do you recommend starting with a certain amount of capital)?
Editor: Normally, we suggest a broker account of $7,500 (minimum) to $15,000 plus.
Brendan: I was wondering if your RS Course recommends trading 2 mini contracts per trade?
Editor: That's up to you. Most start with 1 mini per trade, some trade 2 or more.
Brendan: And is there a point-range profit target, i.e. what is the possible profit per trade using your trading methods)?
Editor: We try to make profits of from $100 to $200 per trade on average.
Brendan: I was considering buying Tradestation via EBay, if I am able to find it should I be looking for a certain version?
Editor: Either Version 4.0 or 2000i should work well.
Brendan: I am considering buying it, because it seems like your software will make it easier to apply you methods. In the event I can't get Tradestation (I am not interested in changing brokerages to Tradestation in order to use it), will there be a lot of time consuming manual charting that needs to be done to utilize your methods (that the software does), or is it possible to be effective manipulating charts from qcharts or realtick, using keltner bands or bollinger bands?
Editor: You do not necessarily need our Tradestation add-on software. You may effectively substitute many other charting programs. You may also use either Keltner Bands or Bollinger Bands. These two indicators look and act very similar, either one being the only real indicator we use. Once again, many charting programs would work well, our (optional) software is only for existing Tradestation users, but is not mandatory for anyone, tradestation owners or users of other software.
Brendan: I appreciate you taking time to answer my questions. I hope to be able to purchase and profit from your methods (I would be more than willing to endorse your product to fellow traders if it is as good as it seems).
Editor: Of course, we do not and can not guarantee trading profits but you should have a good chance of mastering it and there is always a high risk of loss in futures trading.
Brendan: I believe I found Omega ProSuite 2000i for $250 (is that the right version, and is a good price)?
Editor: Yes, TS-2000i ProSuite is believed to be the best version, and that seems like a great price. Most traders have paid a lot more, several thousand dollars for it.
Simplicity in Trading - J. Bentecourt
I have read your success story in trading and like the simplicity of it. Am also trying to develop my own easy trading system and testing it by paper-trading. Burnt my fingers last year by going live without fully developing a trading plan and that was the result.
Would appreciate, if possible, some more feedback on the simplicity in trading approach. I fully realize now that the problem is more internal (within one self) than external (say, a sophisticated system), i.e. discipline in sticking to ones plan, etc.
CHARLES DRUMMOND - System Junkie
Looking for information or feedback on Charles Drummond and Market Geometry.
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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