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Comparing Commodity Trading to Casino Gambling - How To Obtain The 'House Advantage' - Dave Reiter
I'm a 29-year old 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 trading. However, I first would like to provide you with some background information.
I took my first real-time trade on January 2, 1992. During the past 3-years, I have made a grand total of $145,357.93 ($37,135.10 in 1992; $43,745.35 in 1993; and $64,477.48 in 1994). These results do not include interest earned on U.S. Government Securities. Including earned interest, my net profit for the past 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 the past 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.
Since I did not begin real-time trading until 1992, I did a tremendous amount of paper trading and research from 1987 to 1991. During this time period, I watched a few of my friends do some real-time trading. Not 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 my friends possessed, was the fact they never developed any type of trading plan or method. Their trading was very erratic and lacked any type of systematic approach. They would all rush out to purchase the "hottest" new system on the market. After trying it for a few weeks (or months), they came to the conclusion that it wasn't as good as the vendor had advertised (sound familiar?). Therefore, they quickly moved on to something else. This "cycle" continued until they all became frustrated or lost interest.
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 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 book explained how the 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 that this was the best way to make money in the commodity markets on a consistent basis. All I had to do was get the "odds" in my favor by just a 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:
1) 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's 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.
2) 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 that 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."
During the last 6-months of 1991, I developed a 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 past 36-months, the system has 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.
In 1993, 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 one 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 that the Coffee market has closed at 173.50 on Thursday (up 230 points from Wednesday's close). According to my rules, I will buy one 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 "gaped 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 fairly well. It did make money. However, I found a better solution.
During my research, I discovered that 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 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 that I had achieved from my historical testing. The system worked great!
During 15 weeks of real-time trading (3/17 - 7/1), 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.
During the remainder of Summer and throughout Fall, I was very busy helping my father on the dairy-farm. Therefore, I simply did not have time to trade the system on a real-time basis.
However, I did follow the system on "paper" to the best of my ability. It continued to generate substantial profits, especially during the months of October and November, 1994. This type of system works, because it "exploits" the short-term price swings that occur in the 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'm thoroughly convinced that the best way to make money in the commodity markets on a consistent basis, is to use a system that will "tilt the odds" in your favor on a daily basis. It doesn't take much of an advantage to "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. 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 last year that worked perfectly on every trade I took in 1994. In other words, every trade made money (based on real-time trading). I tested the "system" back to 1992. During the past 3-years it has lost money on only 3 trades. The worst drawdown was $292.
The trading methodologies used are not perfect. I "suffer" through drawdowns just like everyone else. However, my "systems" have made money over the long-term. Hopefully, that will continue.
My systems are not for everyone. I tried to start a daily Fax service in 1994. However, it didn't work because my systems went through a drawdown during the first 2-months of 1994. Consequently, all of my subscribers quit using the Fax service during the drawdown. For the remainder of the year, I made a great deal of money. Unfortunately, I was the only one who participated in the profits.
In my opinion, most traders (including myself) simply do not have the discipline to follow another trader's system for any length of time; especially if the system is in the middle of a "painful" drawdown. That's why it is vitally important to find a system that you're comfortable with.
I would like to publish real-time results in CTCN on a monthly basis, to prove to traders it's possible to make money in the commodity markets on a consistent basis using simple trading techniques.
Editor's Note: I have contacted Dave Reiter and asked if he would like me to test his systems and methodology on behalf of all my members. If he is willing to do that, I will report to all members on his systems. Presuming they do in fact perform well, I am sure many members would then want to learn how they could actually trade his systems or perhaps form some type of "joint partnership" with Mr. Reiter.
How I Successfully Day Trade the S&P500 - Anonymous Trader
In trading, I would recommend trading with the trend. I know it sounds cliché, but I have found it is the most rewarding (I found this out - like everything else - the hard way).
Selling tops and buying bottoms is like being a salmon. You are always swimming upstream against the trend. You may get a good trade now and then, but a market will wear you out in the process. I have always found these trades looked great going back on a chart. In trading real-time from the hard right side of the chart without the benefit of hindsight make these trades difficult to not only see, but see through to the profitable end.
So trade the trend. Enter on pullbacks, use reversal bars that make pivot lows/highs and close back in the direction of trend. Move stops quickly. Take reasonable profits from the markets trading that day. If market is slow and in a trading range mode, go for less. How do you know what to go for? Your experience will tell you. There are no hard and fast rules, sometimes I get out way too soon. Sometimes I stay in too long, but in general I do OK and get my share.
I hate to say it, but good trading is not 100% mechanical. I wish sometimes it was, but that's what your there for. I find that good trading will be 80% mechanical or/so and 20% will give you the flexibility. To use your experience and feel for the market to enhance your method and make it comfortable. I'm not saying you can't be 100%mechanical. I believe your most profitable trading will be a system that allows you some input on entries and exits.
I use a 3 and 5-minute chart, side by side and take the first signal. I get in the direction I want to trade. Sometimes a 3 will get me in and a 5 won't give me the reversal bar, and vice versa. This way I don't have many moves pass me by. One of these usually will get me in.
I have been told that many people have called Dave Green wanting to share my system. So I will, but I told Dave it's ridiculous. I know these people are thinking, If I can find out what and how this guy is trading, I'll use it and I will start making money. I'll be rich. All I need is a good system. It sounds like this guy has something really hot! If he will just divulge it.
Well, if you really look at what I'm doing, it's waiting for a trend to begin and getting in on pullbacks that usually come into a 38 - 50 - 62% retracement of the last swing and reverse out of there back in the direction of the trend. Very simple. This was probably being done before 1900 - you can do this. So why are most people losing money daily - read on. (By the way, this simple method is the best way I've ever seen to trade. I just put my own little wrinkle in it with common sense money-management). I'm not doing anything new or secret.
My method is very simple and easy to trade. I hope this gives readers some ideas. However, I want to make some caveats and warnings for all the wanna-be-traders who want to trade for a living and/or think they can. I'm no market wizard. I still trade mostly one and two lots and I don't live in a $500,000 home or drive a rolls royce. My trading has become very consistent and profitable and continues to get a little better every month. My method is my tool. It's an excellent tool and works extremely well when I use it the way it should be.
If more money is lost than normal, if stupid or random trades are taken, it's not my system or method that has failed, it's me, myself, and I. (Yes I take stupid trades now and then) I'm human. I just try to keep them at a minimum and allow for them. My first 8-years of trading results would probably make you throw-up. Lord knows my wife did!
The point I'm trying to make is that learning how to trade profitably is very difficult. Once learned, it becomes simple and fun, like I mentioned in the 12/94 CTCN article.
I feel sorry for the people who write to these newsletters or forums. Most of you are missing the boat (just like I did my first 8-years). I see you squabbling over data vendors, system vendors, methods, hotlines, new and old systems. People who made false statements about their product.
You are too concerned with continuous data or the other kind of data (I forgot what it's called). Optimization, back-testing, % wins, max drawdowns, broker problems, new software programs, books, articles, seminars. (Oh, I just remembered the other data is called perpetual, I think) etc., etc.
All this is crap. It will not make you money and is a complete waste of time. Believe me, I know. This stuff is all secondary in nature to success. People need to work on what's inside them. Your psychological makeup, how you interact with the market and how you deal with fear, greed, anxiety, etc.
It's you against you everyday. Not you against the market. Not you against another trader.
The market is going to do what it's going to do everyday. Whether your in or not. The only thing that determines if you make money or not, is how you react to market action. Only you can give yourself money or lose money trading. Not the market, not the system, not the data, not the software package you use, not the hotline, book or seminar you purchased. Just you!
Do you would-be or aspiring traders finally get it! Most of you are looking in all the wrong places as the song goes. A perfect example, is in last month's CTCN article, page 2 by Robert Edwards. He wants to improve his trading and I'm sure he is trying very hard. But as I read his article, Robert has missed the boat and will never truly succeed until he works on his psychological flaws. For example, he continues to let fear and greed ruin his trading. He's afraid to let a profit run, for fear of giving back a small profit (greed).
These are serious problems and deep rotted in his psyche. However, he's not seriously dealing with it. How do I know? Robert made the statement "I may lose next year. If I do, it must be, it will be, because a better team beat me. It will not be because I beat myself." Now Robert, what kind of stupid statement is that. Editor's Note: Anonymous Trader's methodology is depicted on the chart below: Chart in Print Copy
It shows you take no responsibility for your losing, some other team or guys beat you! Robert, if you lose next year, it will be because you traded poorly. You didn't react well to market action. Nobody or no market is out to get you. They don't even know or care that you exist.
Your assumptions are not quite right on what it will take to turn your trading around. You say you must change your patterns - get some guts - you believe as you stated "If you trade you will error" and "Trading is like throwing a knife in the air and catching it in one's hand and getting bloodied pretty good." That's a real positive view of trading, isn't it! It is no wonder your having trouble. You truly view trading as a very negative thing. You really do! You must work on changing your views into a positive attitude. Can you be honest to yourself to do it? You must, if you are to succeed.
I trade 2-5 times a day. If I felt as you do, I'd probably blow my brains out in a week. I look forward to each new trade. I can't wait for the next signal. I'm confident enough to know I'll make money 6 to 7 out of 10 times. That's the attitude to have - positive with confidence.
I don't mean to pick on you, but your case is typical (I was there once). I hope you will take this in a constructive way. It will change you. It will take sometime, but you can do it. I'm writing this letter for therapy to keep my concept in the front of my mind, as well as helping others. I speak from real feelings and experience.
I started writing a short letter, which has turned into a lengthy dissertation. I hope I have awaken some of you. It makes me sick to look back at my horrendous years. I went to all the seminars, bought systems, books, tapes, software. None of them made me money, because I had some real psychological issues to resolve that only manifested themselves in trading. If you have any personality flaws, trading will bring them out.
Do you really want to trade for a living and enjoy the kind of lifestyle it affords? One of freedom and money. Then you better be prepared to deal with your dark side and confront your psychological weaknesses and be honest with yourself (painfully so) be willing to change. It is not easy - but can be done. I have come far enough to turn my trading around - but I work on it everyday.
Do you have problems with placing stops and taking a loss? Do you get mad at the broker or the market when you lose. The market doesn't do what you thought it would do. Do you get mad at that stupid system you bought? The system went into its largest drawdown the day you started trading it.
The list of questions goes on and on and yes I've done all this and more.
Resolve to turn your quest for trading excellence and profits inward - yourself. Learn to expose all your weaknesses and then work on them. Be very honest with yourself and humble. Get rid of your ego. You want to be right on a trade attitude. Risk 2% or less of your equity on any one trade.
Do this and you'll make money with any system. You will be in control, not the markets or the Holy Grail Gizmo's associated with it. I wish everyone the best and hope you don't have to go through what I did to succeed. Cheer up, because it can be done and it's worth the price when you have success.
P.S. - I've said my piece - got it off my back and hopefully helped some. I'm not one for much interaction and have made myself somewhat of a hermit with trading (It helps to not talk with traders) to be successful. Too much B.S. gets in the way. So I will leave you all to ponder my thoughts. I don't care if people don't believe I'm right, because I know I am. I speak with experience, conviction and compassion for those on this journey. I will not be writing again and will now disappear into trading obscurity to enjoy trading for a living!
Always Use Stops - Brian Long
When I share my trading experiences and knowledge, not only do I feel good about helping others, but (and very selfishly) trade better, because it causes me to practice what I preach. So lets get to it. For those of you who have trouble taking a loss, let me give you something to think about.
I have traded professionally (stocks & commodities) for over 10-years. I have seen many good traders blow their financial brains out, because once they refused to take a loss. They would say they couldn't believe how unlucky they were, which was true on that individual trade. What they failed to realize was, even though there was a small chance of this occurring on that trade, by trading long enough this small chance becomes a certainty.
So how do we protect ourselves. I use the analogy of Russian Roulette as this tends to have more of a lasting impact. Picture yourself holding a Magnum 45 with one bullet in the chamber pointed directly at your head. Now start pulling the trigger (trading). Eventually, if you play long enough with no protection, your going to blow your financial brains out. Were you unlucky? Yes, on that one pull of the trigger (trade) you were, but statistically because you have played so long this was to be expected.
So, how do we avoid blowing our financial brains out? USE STOPS. Next time you trade without a stop loss in the market, picture yourself pulling that trigger with the gun at your head. Remember, you and you alone are responsible for controlling your losses. Do it and you have a chance for success. Don't do it and....well they're happy to pick up some of your financial brains.
Major Problems With Tick Data Co & Glad I
Am Now With CSI - Randy Stuckey
There seems to be a proliferation of new price data vendors the last few years. How good are the various sources? Here's one person's experience.
I originally subscribed to Genesis end-of-day price service. They seemed OK with a couple of odd exceptions. Several times they just stopped sending several commodities in my nightly download. A phone call always got the commodities re-instituted to my portfolio. Irritating, but not catastrophic.
Then came disaster. I concluded I needed tick- by-tick data. Well Tick Data Inc was having this super, colossal, astounding sale of tick data. I took the bait. The next year was a myriad of phone calls and letters. The data sent was so defective, their own software refused to correctly process the data. 41 phone calls, several letters and the threat of a horse's head on their bed failed miserably. They make Scrooge look like a rank amateur. These guys were tough-not a penny would they refund.
The good news is they did send "corrected" data. The bad news unfortunately, it too was defective.
The following is really hard to believe, but it did happen on one of my phone calls complaining about the "corrected" data being defective. A Tickdata employee explained that I was being unfair--"There were just too many errors in the data for us to fix all of them."
Well they won the battle--hopefully they'll lose the war or change for the better. To help the rest of you, they sent me defective data on Euro $, Coffee, Gold, Soybeans, T Notes, T Bonds and Silver. The only good to come from this experience, was when I regained a lot of hard drive space, as I erased the Tickdata directories and files. I currently download end-of-day data from CSI. No problems. How refreshing.
Fibonacci/Gann/Numerology Value? - A Past(a)
Life Experience - Randy Stuckey
During the last two years, I've been conducting research into many of the common technical analysis methodologies as part of a larger system development project. One part of technical analysis that often comes up, is the use of "astounding" numbers and number series. My internal "Radar" turns on every time I hear clichés like "amazing", "astounding", "uncanny" "greatest discovery ever made" and so on.
My numerology study first looked into the construction of Gann Lines, but soon gave up. "They're everywhere! " Is there anything that isn't a Gann Line? But Fibonacci. Now there's a real number series. The sound just rolls off of your tongue. As you know, this number series is formed by summing the last 2 numbers in the series to get the next number in the sequence, numbers like 1, 2, 3, 5, 8, 13, 21, etc.
As these numbers increase in size an "amazing" thing happens. The ratio obtained by dividing a preceding number by a succeeding number in the sequence approaches .618 (it's actually .618034 but who's counting). More importantly, there are "astounding" examples of this .618 ratio in nature-and many would say in also predicting stock and commodity prices. The magical ratio even has its own name, "the Golden Mean." Further more, the .618 "Golden Mean" is peculiar ONLY to this specific time series. WOW!
Much to my dismay, when I tried numerous objective tests of this magical number series and its "Golden Mean," it just wouldn't do any meaningful projecting. Why was it being so stubborn? Was it me? What if it didn't like me?
There was only one way out, I had to try. Maybe I could develop my own astounding number series-one that would behave like good little number series should. My computer whizzed. I sweated and toiled. My teeth gnashed, and finally -Eureka! I invented the amazing Spaghetti number series. This is similar to the Fibonacci series but "astoundingly" takes it to the next natural level. The Spaghetti series is formed by summing the last 3 numbers together. Well no wonder Fibonacci didn't work. He wasn't using the "uncanny" powers of the number 3. This gives a number series 1, 2, 3, 6, 11, 20, 37, 68, 125, 230, 423 and so on.
Naturally(?), I immediately tested it on my December Coffee contract data. Clearly Coffee was muddling along in the 80's until 4/26 ("amazingly" close to 423-a Spaghetti number). Then it started to take off. Exactly 20 days later, it formed a clear cut price peak around 125. Whoa! 20 is a Spaghetti number. Whoa! So is 125!. I don't think I can take any more, but get ready to be further "amazed." 37 (Oh dear, yet another Spaghetti Number) days later it hits its all-time peak at -you guessed it, around 230 (I just don't believe it, another Spaghetti number!).
But wait a minute. Let's not forget the Fibonacci Golden Mean ratio. I wonder? The Spaghetti series also has a magical ratio. As the numbers become larger, just like the Golden Mean, dividing a preceding number by a succeeding number -amazingly always gives you the same ratio-.544 (actually .543689 but who's counting). In the future, this astounding ratio will come to be known as the Primavera ratio. This, of course, gives us Spaghetti Primavera. And it is unique. No other number series in the universe gives you Spaghetti Primavera.
Seriously, I have yet to see any objective evidence of a special number or number series with predictive powers. On the other hand, it is easy to subjectively make a case for almost anything, as I just intentionally did in a silly way with the above nonsense. I don't mean to offend the Gann and Fibonacci followers, but we should all seek a different perspective from time to time. Just remember that one can always find tons of co-incidental relationships for any number. Not amazing, uncanny, or astounding, just coincidental.
Lessons Learned in 10-Yrs of Trading
Bjorn Rump from Switzerland
I received my first CTCN, and as you encourage contributions, here is mine.
With the availability of small computers, I started to realize a dormant project to systematically analyze markets. Fortunately in 1985, I didn't realize how long it would take to do something productive.
With an APPLE II, I naively bought the Kroll-Wilder System and CompuTrac and thought to become rich fast. After some serious paper trading, two friends and I opened an account at Cargill and started trading rigorously with all the discipline possible with the Kroll-Wilder System. They publicity advertised a maximum drawdown of 5%. Well after some 32% drawdown, we stopped trading it. The commission at that time was $74.
Easy, do-it-yourself, I thought and started to optimize systems with CompuTrac. After a while, I found highly profitable formulas, but at the same time the "curve fitting syndrome" started to haunt me. Why? I was able to duplicate one of the formulas given at a CompuTrac seminar, and found that what was profitable in the past was not so in the future.
As the PARAGON system allowed to test it without being in the market, our group bought it and tested it, luckily on paper. It was another sobering experience. The best of it was the HP-41CV calculator which served me for many years to come to convert price quotations. In addition, I realized the value of computer simulation.
Back to CompuTrac. Studies (self-written strategies) were the next fad. The limited memory of the APPLE 36 Kbytes did not allow fancy exercises and Basic Code was hard to edit and debug and had to be interpreted. To find out more on the reliability of trading models, I let the existing "optimized" models run to do some paper trading, a tedious and slow way of "forward-testing."
Few people living in America realize the comfort of the European 6-hour time shift. At 8 am, you can download the data, CSI Perpetuals in my case, let your routine run (45 min) while you eat breakfast to have the trading instructions printed out well before the market opens at 2 pm local time. Well that means, when you got your data and when your system is all right.
I didn't know much about risk or money management. I traded, but not good nor bad, it was not yet right. The PC changed several things: CompuTrac completely changed format, and the trading and charting software available at that time did not allow me to do what I intended. At the same time, I came across George Appel's MACD system. I modified it so that it produced fabulous results on simulation. I traded it and made about 100% profit annually during two consecutive years, just to give back the profits the following 2-years. It was sobering. I had learned to program a quite complex trading and accounting system, including images in Power Basic, but the nagging feeling that I was chasing the rainbow did not disappear.
In 1992, I attended a seminar in New Orleans on psychology, discipline and risk management that answered many of my questions. I included rigorous risk management according to the formula of Tom Basso in my program. Still haunted by the "optimizing syndrome", I made a quantum leap. I programmed the system so that it would self optimize, and then trade forward according to the latest parameters. The method could be called "forward testing" as the simulation tells you how well the system performs in the "future."
The result was a revelation, an answer to my optimization worries: The worries were completely justified for the strategy I used, optimization was worthless! The old system was thrown out, but not without regrets. Based on that long experience, I found a strategy that does well. I can not yet quantify it, but it stands up in actual trading.
Well where do I stand now? I know that trading systems are doomed to fail as soon as they are published, even in very large markets there are enough piranha around to sink it. Examples, the Kroll-Wilder, PARAGON, Great Combo, and the PPS. Publishing or selling a good system is like telling people how to make gold, either it doesn't work, or if it works, gold soon looses its value. This may explain that a publication like Stocks and Commodities Magazine almost never gives real-time results of the methods presented in its articles.
However, I learned that meaningful (that is statistically relevant) "forward-testing" by simulation is able to evaluate the merit of a trading strategy. Perhaps the most important lesson is to realize, that if countless claims the industry advertises would be true, we would all make mountains of money.
For me a publication like CTCN is of great interest, as it warns of piranhas, teaches testing and outlines principles. However, I would be extremely suspicious of any system explained specifically in detail; after too many traders know how to make gold, gold looses its value.
On another subject, referring to Fred Montgomery's remarks, CTCN Oct 94, p.7. Testing the Great Combo with perpetual CSI data yields consistently less profit then using actual data.
Re: Max Robinson's 12/94 Article & My 30+ yrs Trading Experience & Trouble With IRS - Eugene Sherman
The letter from Max Robinson in the 12/94 issue could have been written by me. I've also been trading for 30+years and agree with virtually everything he said. In the 60's and 70's, I was a pretty steady loser. Having a good income, I chalked it up to recreational expenses and apprenticeship experience.
By the mid-70's, I was convinced that precious metals were going to explode in price and was a buyer of futures and options for years, all of which expired worthless. By the time gold exploded in 80-81, I was tapped out and missed it completely. Since then, I have traded in a more subdued mode, making a few thousand some years and losing a few thousands other years.
In 1985, I had an exceptionally good year, clearing well over $50,000. I showed it on my tax return, but offset it by a $100,000 loss carryover from my early follies. The IRS called for an audit. I only had tax records and brokerage statements going back to 1978. It was my misconception that tax records needed to be kept for 5-years. I was told that capital gains/losses had to be kept forever.
For 6-months, I was in close personal contact with my own special agent. In many interviews, I was grilled about secret overseas bank accounts, hidden assets, etc. There was a steady stream of correspondence, as they demanded more and more information and documentation. I could only explain why I was unable to supply most of it in my replies. I had used the same broker in all those early years. I was told that if he could be produced to corroborate my claims, it would be most helpful. I spent over a month tracking him down and finally found a telephone listing in Greenwich, CT, only to be told by his widow he had died the previous year.
Ultimately, the IRS allowed the deduction and I owed them nothing. I knew they were investigating me thoroughly all that times. I now save all my records, no matter how many boxes fill up the attic.
I also have a 20-year collection of trading systems. There must be 60 or 70 of them. Some of them have merit. If I had the patience and perseverance to stick with them a while, some could have proved quite profitable. I still get a rush of adrenalin when I pull out an old system that I had forgotten and reexamine it. I must explore the legality of lending or renting my collection to computer buffs for optimization.
I surrendered to computer trading about 2-years ago. I bought TradeStation and a bunch of software, but like Mr. Robinson have found Swing Highs-Swing Lows to be the most profitable. I have a very simply swing system that averages over $1,000 a day in my back-testing of the S&P500. I would like to refine it to reduce the slippage more before I trade it.
I would welcome any comments on my rambling and can be reached evenings at 1-518-674-5491.
They Can Do The Talk, But They Sure Can't
Do The Walk - Gary Smith
Nearly every trader that I've spoken to over the years has expressed a burning desire lo quit their day job and become a full-time S&P day trader. They have been spurred on by a greedy and manipulative vendoring establishment, whereby means of hindsight and retrospection, successful day trading is presented as being an easily attainablegoal. Several prominent vendors offer mega priced seminars, one-on-one trading tutorials, or software systems and trading manuals to aid a naive public in their quest for financial independence as S&P day traders. Yet, other than one CME floor trader turned vendor, absolutely none of these dream merchants has ever been able to back-up their outrageous hypothetical rhetoric by providing multi-year real money brokerage statements.
Instead, what you will get are 1001 lame excuses on why they are unable to produce real money, real-time documentation. What you will receive are numerous glowing endorsements from satisfied purchasers of the vendor's products.
These testimonials usually are totally bogus. They are either close personal friends of the promoter, or former customers who have been offered discounts on future offerings. Again, as with the vendor himself, these references will talk a good talk, but furnish nothing as verification to support their babble. (Editor's Note: That is Gary's opinion. Over the past several years, I have personally spoken to a large number of testimonial authors...and never spoke to anyone who I thought had been bribed, offered discounts, or personal friends, etc). The only way to eliminate the crooks, con-men, and charlatans that infest this business is by demanding that they either put up or shut-up.
I fully anticipate that some of the targets of my wrath will appeal in future issues of CTCN with very persuasive arguments on why they won't show their statements. I've heard their whining and complaining many times before. Comments like their attorney advises against it, or that real-time statements can either be altered or may not reflect other active trading accounts at the same firm. What these vendors really are doing is camouflaging the fact that they either don't trade or can't trade.
Don't misunderstand my point here. I am only suggesting that real-time statements should be presented to ascertain the credentials of the vendor. It's foolish for anyone to believe that they will be able to emulate the results of another winning trader. Successful trading involves much more than blindly following a system or methodology of someone else. Instead, it consists of independently developing your own disciplined trading approach by means of integrating your knowledge of various trading techniques into your years of real-time trading experiences.
In other words, learn what works for you and how you are comfortable trading. Unfortunately, the average trader seems unwilling to devote the time and effort necessary to become successful. For this reason, they fall prey to the seduction of some fraudulent vendors promising success on a disk.
Trend Intensity Indicators - Adam White
I agree with Giampaolo Bulleri's summary of how to interpret ADX. (CTCN November 1994.) I would like to contribute a few of my own thoughts on the general topic of trend intensity indicators.
First, I like to think of trend intensity indicators not as measuring trends but as measuring trading ranges. The reason is since all indicators lag, by the time the indicator starts to rise the trend is well on its
way. On the diagram below, section AB of price is both the end of the trading range and the start of the trend AC. But we don't know that until B extends towards C. Note that ADX will not rise until B, even though an ideal "crystal ball" ADX would start to rise back at A. So from the standpoint of nomenclature, I think it's more accurate to say that the upturn in ADX shows the end of the trading range rather than the start of the trend. Chart in Print Copy
Secondly, it is somewhat difficult to objectively define a "climbing ADX" (or for that matter falling or flat ADX). Our eyeballs can do it easily enough, but how do we define it logically? Is a climbing ADX when the last reading is greater than the previous reading, or greater than the reading X bars ago? I have run tests that suggest comparing the latest ADX reading to the reading four bars ago is better than comparing it to the previous reading. Or, might an ADX breakout be the proper definition of a climbing ADX? Clearly, if the present reading is the highest reading of the last N bars, ADX can be considered climbing. Again, tests can be run to suggest situations where this interpretation is either better or worse than other interpretations.
Another observation follows from the fact that DX is essentially an unsmoothed ADX. This can be important because ADX represents quite a lag from price action itself. Using the quicker DX might eliminate some lag, but at the price of greater volatility and the uncertainty that it brings. This second chart illustrates the natural "jaggedness" of a raw DX.
Here is one way that I've used DX that tries to address the difficulty of defining its direction of movement. The last chart shows an oscillator that represents the difference between a 16-bar DX and its value 8 bars ago. (I favor basing the "look-back" on half the DX's period. A 20-bar DX would use a 10-bar look-back, and so on.) This calculation generates an indicator that oscillates between extreme levels and above and below a zero line. I have set the extreme levels on this chart to plus and minus 20.
Two ways to read this trendiness oscillator. When it is above zero, we can assume the market is generally trending, and when it is below zero we can assume the market is generally in a trading range or congestion. And because the reading is relative to zero, some jaggedness and volatility become irrelevant. Secondly, extreme high readings often correlate to the termination points of strong trends, and extreme low readings sometimes pinpoint areas where trends begin.
Tidbits on Financial Astrology -Carol Murphy
On 2-20-95, we have an important signature (Saturn 45° to Uranus). This same signature occurred on 5-16 and 9-23-94. Check your daily charts for the past dates and let's see if the same cycle repeats.
For the past 6-years, I have ordered Ray Merrimau's Forecasts for the Year. He covers cycles and signatures related to the economy, interest rates, the Dow, silver, gold, grains and weather. Cost is about $22...well worth it. Seek It Public'n (Forecast 1995), PO Box 250012, West Bloomfield, MI 48325. 810-6263034, Fax 810-6265674.
CSI Data Rollovers to Keep Continuous How to Keep Both Historical & 18-mo CSI Data Files Current - Tom Dyste
Using Quicktrieve Manager's data file copy command, I can copy new contract months that start on CSI rollover days into both short-term and my long-term historical data directories. I do this first, then use my new trading system's rollover process on files in each directory. Now, my long-term history includes current market action at all times. As a SuperCharts user it is good to have continuous historical data right up to the current day.
Though I consider the close-open rollover method inferior to close-close adjustment, this ease of keeping continuous historical data completely up-to-date is a boon. Perhaps others would like to do the same thing. Since this is not directly related to your system and could be of use to others, pass this idea along. If anyone has tips on doing similar things using the Quicktrieve 4.06 rollover tools, or even successful experience using QT to do rollovers, I'd like to hear.
Recommended Reading, New High-Tech Product, &
Delta Neutral Trading - Tom Boyett
In my ongoing search for trading knowledge, I have read two books that I would highly recommend. Their relevance to any trader is without dispute. Jack D. Schwager's Market Wizards and The New Market Wizards (published in 1989 and 1992, respectively) touch upon a variety of trading subjects in his conversations with some of the best traders of our time.
Futures, currencies, stocks, floor traders, trading psychology, program trading, neuron-linguistic Programming, the Turtles, fund managers, fundamentalists, quants - it's all there and much more. Most significant to me have been the consistent tenants of what makes a successful trader as seen by those who have been the most successful of all in the endeavor of trading. I have a new appreciation for the role that a trader's psyche plays in his overall success to trading the markets.
The books are available in soft cover. I think the books are highly entertaining and extremely educational for the average retail trader (and probably most professionals too).
I have also come across an interesting new product from USEMCO Technologies, the Mobile Trader. It is basically a computer hardware/software solution. Mobile Trader's software utilizes a wireless modem with your personal computer to get real-time quotes, execute and confirm orders, receive market commentaries, and send Faxes and E-mail. The system links the PC to a mobile wireless communications network with over 7,500 locations covered in the US. Pricing for limited, but real-time quotes starts at $295 per month. For additional information, call USEMCO at (212) 432-7000.
Finally, I would like to solicit feedback from those of you who have experience trading delta neutral - the combination of futures and options to form a risk neutral position. I can be reached at (713) 496-9400 during the business day or (713) 395-4408 after that.
Opinion on John Jeffries Precision Day Trading Method - Harold Fowler
My compliments on an excellent forum for the honest exchange of ideas and information. Keep up the good work! This letter is in response to your subscribers who desired feedback on the Precision Day Trading Method.
I purchased the Precision Day Trading Method in 6/93. Prior to the purchase of the system, I discussed my personal needs at length, regarding a day trading system with the designer, John Jeffries. The most stringent requirement being due to my inability to follow the market all day due to my job. I was assured that only two to three phone calls per day to my broker would typically be required. Right from the outset of trading, the system failed to make money. It was also apparent, that in some cases, as many as eight phone calls were necessary in a day to move up (or down) a trailing stop.
After three months of using the system and losses well in excess of the cost of the program, I returned it to Mr. Jeffries for a refund. I also included my brokerage statements and a trade-by-trade listing of all my closed out trades. He never bothered to open my package, but instead had his programmer send me an official track record based on exchange tick data. Close examination of the official trade-by-trade listing was a real shocker! No deductions were made for slippage/commission. I couldn't believe my eyes! Notwithstanding this oversight, several signals I received (all losses) were not shown on the official track record.
Mr. Jeffries returned the program to me and called to discuss the problem. In an attempt to reconcile the disparity in trading signals, he indicated that I should try loading both combined-session (Gloebex + Day Session) and Day-Session only data and trade only signals germane to both data sets (give me a break!)
I paper traded the system for another nine months and the losses continued to mount. In the 7/94 issue of CTCN, a subscriber, M. Kuhn, indicated that he had difficulty receiving a refund from Mr. Jeffries. In the end, however, he relented and refunded the money. You can well imagine my anger. I immediately called Mr. Jeffries and you guessed it, he had his programmer send me another official track record covering the entire period that I had owned the program. Adding my own deductions for slippage/commission, the markets that proved profitable were the S&P 500 and the NYFE. The profits in these two markets were less than half of the amount indicated by the official track record.
On a subsequent phone call, Mr. Jeffries informed me that I was the only purchaser of the system that was dissatisfied with its performance. However, he refused to divulge the names of any of the satisfied customers nor was he receptive to testing of the system by an independent party (Futures Truth, CTCR, etc.).
Since his omission of slippage/commission costs in the sales brochure is clearly deceptive advertising, I am contemplating a lawsuit for mail-fraud to recoup my purchase price. I'm quite sure even the CFTC required disclaimer would not protect against such a misrepresentation. I feel strongly that fellow subscribers would be well advised to avoid purchase of this system. If anyone would like to contact me for a copy of the official track record or to discuss the system, you can write to me c/o CTCN.
W.D. Gann - A Great Trader?- Don McCullough
In the book, "Trading For A Living" Dr. Alexander Elder states that he interviewed Gann's son and found out the following about this one-time super market guru.
Gann's son told Elder his father could not make a living for the family from his trading and supported them mainly with money derived from his books and selling instructional courses. When his father died in the 50's, his estate was worth about $100,000. Not a small sum, particularly in those days, but hardly what one would expect of a man reputed to be one of the greatest commodity traders of all time. So who's your guru(s)? Do you really know that they really, really know what they're talking about?
Dr. Elder's book, "Trading For A Living" is one of the best. Out of the 120 or so market books I have, this book ranks in the top 6 and maybe at the top!
Accurate Data A Must - Don McCullough
Have you checked your data against other data sources for accuracy? I have, and found some differences. Not a lot, but some.
Data accuracy has to be one of the major concerns of the serious trader. There is no way to get accurate tests from inaccurate data! When you find differences, how do you know which data is correct? At this time, I don't have a good answer to that question.
Thus far, I checked my Dial Data, data against a couple of the popular paper chart vendors. Happily, I can say there were few differences. However, those few differences do make me wonder how accurate nearly everyone's data is. To put it in a more vivid way, are we looking at the "same" charts the top market pros are looking at? It's a sure bet that if the difference is substantial, our bank accounts will never equal theirs.
A Simple Way To Predict Market Turning Points (and impress your friends) - Bob Pelletier (President of CSI)
This brief report is designed to advise those who may have an interest in systems, methods, or services which predict market turning points far into the future. If you have been solicited by any firm that does this, you may gain some important insight into this area by reading on. Whether you plan to purchase such a service, system or secret is your personal choice. CSI has no preference for one commercially available procedure over another. We simply wish to point out facts that may be helpful.
If I were to tell you to "Pick any date in the future, for any commodity, and I will show you the next turning point that will occur relative to that date." You might think I'm crazy, or strongly doubt my claim. The truth is, that anyone can do this within an accuracy of, say, three days about 70% of the time, or within four days 80 to 90 per cent of the time.
The secret depends upon how one defines "turning points". Suppose we define intermediate market swings or turning points to occur about 25 times per year, or twice per month. Since there are about 250 trading days per year, this allows for one turning point per 10 days. With a dart and a calendar into the future, the dart will hit some seven day time interval (the day hit plus or minus three days) each time it is thrown. If turning points occur, on the average, once every 10 days, then there is a 70% chance my dart will include a turning point within three days.
Additionally, if I knew that last week there was a definite low, my next turning point will be a peak. I'm not interested in 1997; I may not live that long. I can only make money if I can bet on the next immediate turning point for various cycle lengths.
There is not enough room in this Newsletter to show how market turning points can be predicted with more reliability, but it is possible to provide an unbiased estimate of the next peak and the next trough for each given predominate cycle period. Using a method which treats peaks independent of troughs can produce a non-regular period between peaks and troughs (a more realistic behavior) for future market cycles.
Before spending your hard-earned funds on any system, be careful to discover what you can do under purely chance conditions without it.
Reply to Wade Geary - J. R. Stevenson
When you retire, your risk adversely goes way up as you must protect your retirement funds - unless you are a very strong disciplined person, I doubt that you can make a needed supplemental income on a $25,000 account.
A good day trading system for S&P or Bonds might take some of the over-night risk out of your mind, but I assure you, your approach will be different when you retire. I have been retired several years (I'm 72) still trade, but I don't have to! It makes a difference. If you wish to talk, call me at 901-751-0605.
George Bashar, 1-407-624-5057 seeks information on Bruce Gould's Money Machine, Mike Chalek's Squeeze and Steve Cox's Natural Order. Also, Jim Muhlstein wants info on Money Machine.
Russ Norwood would like to speak with anyone who has had experience with the "Vibra System" Trading Program from Burnett Nordine at B & B Educators in Early, IA. You can call evenings collect at 314-436-2187.
As you may recall, if you have been a CTCN Member for a while, our number of pages has been growing considerably. We printed 8-pages from 1983 thru May 1994. We then expanded to 10-pages and last month's CTCN was 12-pages. This month it's a full 14-pages, to make room for all the educational articles I want you to read.
Our printing, postage and miscellaneous costs have increased rapidly due to the larger editions. In fact, the cost of a 14-page issue is almost 100% greater than our earlier size, without even counting the recent postal increase. In addition, Commodity Traders Club average revenue per new member has decreased over the same time span, due to our reduced cost special offers. However, I do not mind the increased expenses, as you getting this money-making and money-saving unique information is far more important than CTCN's expenses.
The articles Dave Reiter are excellent and of great benefit to Members and should be read carefully. Thanks to everyone who shared their knowledge by contributing to this issue. All members are urged to make contributions to our next issue. That way we can all benefit.
You should become a member of Commodity Traders Club to get our knowledge-packed issues mailed to you by first-class mail as soon as they are printed. Click-Here to join our group NOW!
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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. Commodity Traders Club News. Our E-mail address is: firstname.lastname@example.org Our Website address is www.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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