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Buy Both MetaStock & SuperCharts - Gregory L. Morris
I have noticed a number of requests for information about Omega's SuperCharts and Equis' MetaStock programs. Since I have been involved in this business since the late 1970s, I am quite familiar with most of the analysis programs and have even developed a few.
Here is what I tell people when I am asked, and I am frequently asked. In fact, I will be speaking at the AfTech'96 seminar in Dallas on this subject.
"Purchase either MetaStock or SuperCharts and then take advantage of the competitive upgrade to the other one. For about $400 - 500 you can have everything. Keep your data in MetaStock format so BOTH programs can read and use it.
You will find that each program offers special features that you will like and eventually you will use both of them to do your analysis. With both of these companies in hot competition, the upgrades will be inexpensive and exciting. You will actually look forward to receiving them.
Tax Regulations Are Unfair & Biased - RFK from Texas
Well, I finally completed reading all back issues. It was truly enlightening. In Vol. 4 -I, the Editor's Note requested information regarding "Futures Contracts Tax Regulations" and the year-end, "Marked to the Market Rules." The following should help clarify these unfair and biased tax regulations.
I referenced two publications: The first and most obvious is the IRS Publication #550 "Investment Income and Expenses; "the second is the "Professional Edition - J.K. Lasser's Your Income Tax 1996."
The following tax regulations concern Section 1256 Contracts which by definition include: Regulated Futures Contracts. (These tax regulations do not include Non-Regulated Futures Contracts which are treated in the same manner as other capital investments).
I quote directly from these referenced publications: "Marked to Market. Marked to market means that each section 1256 contract you hold at the close of the tax year will be treated as if you sold it for fair market value on the last business day of the tax year. This means that gain or loss is determined even though you continue to hold a position."
Determining Gain or Loss (Marked to Market). 60/40 rule. Under the marked-to-market system 60% of the gain or loss that you would have had on a sale on the last business day of the tax year will be treated as a long-term capital gain or loss, and 40% will be treated as a short-term capital gain or loss.
This is true regardless of the actual character and holding period of the property. When you later dispose of your section 1256 contracts, any gain or loss you have will be increased or decreased by the gain or loss that you had previously recognized. You can also elect to carry back losses from section 1256 contracts. (losses may be carried back for three years under special rules requiring that amended returns be filed) . . . Carryover limits.
If only a portion of the net section 1256 contracts loss is absorbed by carrying the loss back, then an amount equal to the unabsorbed portion can be carried forward. The character of the amount carried forward is determined by: (The 60/40 rule).
"The marked-to-market 60/40 rules, do not apply to certain hedging transactions."
Please reference IRS Publ. 550 for details concerning hedging transactions and the tax rules for straddles. These regulations in these areas can be complicated and are beyond the scope of this response. Seek professional tax assistance.
"Form 6781 is used to figure gains and losses on Section 1256 contracts that are open at the end of the year, or that were closed out during the year. These amounts are then transferred from Form 6781 to your Schedule D."
The absurdity of these tax regulations are more than obvious. However, they are not unique. Consider the tax laws concerning the "Phantom Taxable Income" that is generated when you own "Zero Coupon Bonds." How equally ridiculous to have to pay taxes on interest income that you have never received.
The United States is one of the few countries which so "aggressively" taxes capital gains and investment income. In most countries around the world, capital gains are not taxed at all. It is unfortunate that the well considered and forward thinking ideas of Steven Forbes are so misunderstood and denigrated by self-serving career politicians.
My Opinion On Trader Status Requirements - RFK from Texas
I am a new subscriber and look forward to receiving future issues. Your membership club is a very interesting forum, and in an effort To "get up to speed" I ordered and have been reading all your back-issues (with highlighter in hand).
I came across a significant error in the April'95 issue in an article by Glenn Skirvin. Mr. Skirvin references Mr. Ted Tesser's (CPA) article concerning the tax side of investing in the March '95 issue, Mr. Skirvin's tax analysis concerns the different IRS tax treatment between "Trader Status" vs. "Investor Status." Given the complexity, and lack of clear references in the tax code to "Trader Status," a misinterpretation in this area is very justifiable.
Mr. Skirvin's article specifically references "Self-Employment Taxes" being due on the "Net Trading Profits." His article highlights an example in which a "Trader" generates $25,000 of futures trading profits and deducts $5,000 in various direct expenses associated with generating those profits.
Mr. Skirvin indicates that the "Net Taxable Trading Profits" of $20,000 would be reported on a "Traders" Schedule C as "Business Income" subject to "Self-Employment Taxes" in a similar manner as any other type of net business income would be taxed that is reported on a Schedule C. This is an error.
Mr. Tesser's original article in the March'95 issue was completely accurate in all respects. However, limited space prevented him from fully describing the unique tax nature of the "Trading Profits" generated by a trader, hence the confusion, and basis for Mr. Skirvin's article.
To begin a little foundation is necessary. There are three distinct tax classifications for those involved in the investment markets: Investor, Broker-Dealer and Trader.
An "Investor" is what most of us are, we trade our own account and generate capital gains and losses, along with dividend and interest income throughout the year and report this income on the appropriate Tax Schedules B and D. We are considered "Investors" by the IRS.
A "Broker-Dealer" on the other hand, is defined as a securities merchant with an established place of business. A Broker-Dealer regularly engages in the purchase of securities and their resale to customers with the intent of making a profit. None of us are Broker-Dealers unless we own our own brokerage firm or act as market makers or market specialists.
A "Trader" is not specifically defined by the tax code, hence its controversial status, (Note: The IRS will not let you have "Trader Status" easily, for reasons that will become obvious with a better understanding of the tax advantages).
To qualify as a "Trader" there are no fixed requirements in the tax code. However, various tax court cases, tend to establish acceptable parameters. Your investment activities must be of a nature that raises your level of involvement to that of a trade or business.
There are certain indicators the IRS looks for when evaluating your "Trader Status", such as: Trading time frame: (Of all the qualifiers, this is probably one of the most important). All or a significant number of your trades and the resulting investment income must come from short-term trading as opposed to long-term trading.
Daily tracking of the markets: A trader must show that he spends a great deal of time managing the buying and selling of securities for his own account. The more intently you follow the markets throughout the day the more likely you will be to qualify for "Trader Status."
The use of "Technical Analysis" over "Fundamental Analysis" further supports "Trader Status" since fundamental analysis is more appropriately used with longer term position investing.
The extensive use of margin can also support "Trader Status:" Short-term trading tends to reduce the high costs and risks associated with heavily margined positions, which tends to lend further support of your "Trader Status."
Trading frequency: Although the number of trades is not an exclusive factor in determining "Trader Status," ideally the IRS would want to see a large number of short-term transactions consistent with someone who monitors the market on a daily basis. However, the primary determining factors are the length of the trades and the type of trading that you are doing, as opposed to the exact number of transactions.
Special Note: Given the complexity of the tax code and lack of clarity concerning "Trader Status," I think it would be interesting for fellow members, who maintain "Trader Status" under IRS regulations, and have weathered a "tax audit" to comment on their experiences and relate those key elements that the IRS Tax Examiner focused on which assured their allowability for maintaining "Trader Status."
Once establishing yourself as a "Trader" for tax purposes, the next question is how to handle the Profits and Expenses?
I would like to reference the following paragraphs directly from Mr. Tesser's fine book "The Trader's Tax Survival Guide" which specifically address this question:
"Once you have determined that you qualify as a trader . . . Expenses such as computer programs and equipment, on-line data retrieval services, investment advisory fees, and other such related expenses now are directly deductible from your trading income.
The question, however, becomes, How do I set this whole thing up? The way to do it is similar to the way in which any sole proprietor in business would do - on a Schedule C. It is obvious that expenses should be reported on the Schedule C; however, the question has been raised, Since the income for a trader still consists of capital transactions, shouldn't it be reported on a Schedule D?
The answer is yes. The transactions are basically transactions as defined in Section 1221 of the Code.
Another question usually asked goes something like this: Since the income generated is not really investment income, but rather is considered as active business income, shouldn't it be subject to self-employment tax? In this case, wouldn't it then be reported on Schedule C, as well as Schedule SE, the form for calculating self-employment tax.
The answer is no. The income is still considered to be capital gain income (or loss), and is not subject to self-employment tax. A loss would thereby still be limited to a net $3,000.
In addition, because the income is not earned, no retirement plan contribution should be made against it.
Because the income is of one type (capital) and the expenses are ordinary, you must use two forms to report it. The income should go through Schedule D and the expenses through Schedule C. If there are Section 1256 transactions (futures and certain kinds of options), you must use Form 6781 first, and then go to the Schedule D. It is as simple as that."
Thank you Mr. Tesser for a fine book. It is one of the only sources that I have ever found to directly deal with this complex and unique tax issue. I would personally recommend this book to anyone who actively trades securities.
As you can see having "Trader Status" is truly the best of all worlds. You get to deduct all expenses associated with operating a small business without the usual deduction limitations associated with investment expenses. Yet all income is treated as capital gains & losses without being subject to the high self-employment taxes.
I hope this information is helpful to members who may be considering "Trader Status."
I am very impressed with the open and frank forum created by CTCN, and once I complete the review of all past issues, I look forward to contributing some of my own experiences in hopes that, in some small way, it may help others.
A Positive Vendor Opinion Counteracts A
Prior Negative One - Frank Chin
The letter from R.E.H. describing his unhappiness with Mel Peddy's course is not at all like what I have experienced. I purchased Mr. Peddy's course in 2/96. It is a manual describing 10 trading systems (some are daytrading systems; some are longer term).
It came with a software diskette that contained indicators to put directly into either Tradestation or Supercharts. It also came with Mr. Peddy's telephone and Fax numbers. I have called Mr. Peddy several times with questions, and have always either spoken to him on the first call or been called back the same day.
He has patiently answered all my questions, and has even sent Faxes of daily charts to illustrate his points. There is an Internet users group dedicated to trading Mr. Peddy's systems, so additional help is there as well.
While I have not yet attended his seminar, that option is available at no additional cost to anyone who purchases his manual of systems.
So I would say that R.E.H.'s experience must surely be a typical, and unfairly denigrates a good man's name.
Trading Can't Be Taught Like Professions Can & On Buying
Systems, Seminars and Books - John P. Meehan
You may look at hundreds of systems, cheap or expensive, study with dozens of gurus, genuine and fake, or spend the money and time on reading hundreds of books on trading and investing.
All of these have, in my opinion, only one value for most people. They teach you that you cannot use them. And that is a great lesson, which you will never learn until you have learned it. What do I mean you cannot use them? Simply this.
Trading cannot be taught the way carpentry, flying jets or neurosurgery can. (Richard Dennis to the contrary--what he did was carefully pre-screen 1,000 candidates down to 10 and then trained those 10.
What this proves is that selected people can be taught a skill, and among those a few turn out to be really good it at. It's the same with carpentry, jets, law or surgery--one out of ten are truly first rate--the rest are mediocre to disasters. Trading is the same.
The oft cited numbers are that 90% of traders loss money. The other 10% take the money the losers lose.) After a while, the true value of looking at many systems, methods and philosophies, is the learner begins to find what it is that begins to fit his or her own personality.
You cannot buy success. You have to make it yourself. It comes from within. You cannot buy success in a trading system. What works well for the honest vendor (and there are some--they will give you copies of their brokerage statements) will not work for the average system or method buyer. The buyer will do one of two things. He (she) will not take all the trades, or will take them all until a bad spell hits, then give up. The buyer's personality is not the vendor's. What the vendor's record says, this system worked for this vendor during this period of time. That's completely all it says. It says nothing about how it will work for that buyer in that different time and place. There are as many trading methods as there are personalities trading in the markets.
In St. Paul's day, the Greeks used to walk around the agora and ask each other in the power language of the time, "Quid novi?"--what's new? It's so easy to discard an old system and try another new one instead (which promises your money-back in 30 days if you don't find success). I am afraid many traders do this their whole lifetimes.
The few who break out of the pattern finally stop walking around the agora trying everything new, withdraw into themselves and build their own, usually simple, trading approach which, eureka! works well enough to make them a living or a fortune. (They are the one out of ten persons mentioned above).
Another very important point, even if you join the limited group of successful traders, there come periods some of the time when what you do doesn't work at all well. For some traders what they do doesn't seem to work any of the time. For others, it comes and goes.
Coming and going suggests possibly a cycle or cycles in your own personality behavior or in the way in which from time to time you (probably) unconsciously change your inter-reaction with the markets. There are not only cycles in the market. There are cycles in the way you respond to the markets. I double that they can be stopped. The best thing you can do is step back and observe both of them, yours and the market's, as a third-party observer, and relax into keeping them in balance all the time.
I read an article by a student trader who started out in 1987 and made all the classic mistakes, spending and loosing a lot of money. In his relating his story, he went right by his biggest mistake of all. At one period, he simply withdrew, stopped trading, and simply studied the markets for a year, then recommenced trading and ran his stake up to four times what he started with that time around.
Then he made his mistake. He figured he needed more education. So he spent thousands of dollars with a series of individual gurus (the kind who invite you to spend a couple of trading days or a weekend with them personally, one on one) until all the money he had made was gone. That was his biggest mistake of all: not stopping when he found for himself a system that worked for him!
The "quid novi" syndrome had set in. He had to find something new and better. Now, he is still looking, like most, at the next new thing (for him, astronomy and planetary data--more on that in a minute). His saga is Everyman's. Looking, looking. Wise traders say there is no "Holy Grail. We don't believe them. Just keep looking. It's there. Someone has found it. And I will buy it from him. (Isn't it wonderful that he would sell it to me! What a guy!) Or I will find it myself.
We flew to the moon, didn't we. For thousands of years, everyone knew that couldn't be done. Then someone did it. The parallel stops cold right there. There are a number of limited, different ways to get to the moon. But all of them are buildups from the fixed, clear laws of physics and chemistry.
Like carpentry, neurosurgery or jet flight. There are only a limited number of ways you can do these things ... because they are in the physical realm. (Same with the profession of Law. It has a fixed, codified stricture within which its practitioners wield their skills, or lack of them.) But with trading, the only physical structure is the exchanges and the pits wherein each participant's unique personality offers his or her own unique expression. That's what can't be taught.
What's the value, then, of all the stuff beginners (and some veterans also) buy, and go to, and look at? They offer pieces of patterns which may eventually fit, transformed, into the trader's personality. They are sources for bits of ideas out of which a trader may create his own unique trading approach to the markets, an interior part of him that he is comfortable with, and that he makes money with.
Like everything else in the universe, the markets are constantly changing (evolving) and constantly remaining the same. Adapt or die, as they say. But the adaptation must be a consistent personality match of yourself with your chosen course of action. You can't buy that. You have to elicit it from within yourself.
As a footnote, planetary data is worth paying some attention to. This thesis may, or may not, fit your personality. No doubt it does work for some because it's a personality fit for them. Others think it's all investment quackery. It's not my place to debate that here. However, I offer a few comments.
One senior international portfolio manager I know has gotten excellent results using planetary correlations. But a big problem from my viewpoint is there has been very little rigorous literature on the subject. There are some short trading records (all hypothetical that I have seen) but they suffer from the same limitations I mentioned above--they are valid only for that one trader during a given specific period.
Most of the literature is just promotional ballyhoo without scientific statistical backup. One exception: I came across a book years ago--now out of print--by Clifford C. Matlock, titled Man and Cosmos. It is an excellent treatise on the whole subject of stock prices and planetary excursions, rigorously statistical and elegantly presented.
Don't let the title put you off. The essence of the book is what happens to the stock market when each planet makes certain aspects. Matlock was a career diplomat with the US State Department and served in various capitals around the world after graduating from Stanford and Harvard.
He found the time to develop an amazing body of factual research into the subject. The book is extraordinary. Well worth reading simply to broaden one's horizons even without any idea of attempting to apply its contents to the business of trading. He gave me several copies some years ago, and I still have a few left.
Unusual Events On My First Three Trades by
A Anonymous Farmer
I am a grain farmer and have hedged production on the CBOT for 15-years. Whenever prices would reach a price that gave me a modest profit, I would call, place a market order, be filled and that was that. Over the years, hedging futures has helped to average out my profits. I have invariably sold too quick in rallies (taking losses on the futures) and almost quick enough in falling markets (taking profits on the futures).
Very recently, I have become interested in speculation. I have quickly realized that speculating and hedging are two very different endeavors. So, I would label myself a neophyte speculator. On April 11, 1996, I placed my first speculative orders. This has been a somewhat humbling and frustrating experience. I am writing this on April 17, 1996.
My first day of live trading proceeded as follows with a Corn trade. I placed an entry limit order and a stop order. The market traded one tick beyond my entry and then reversed (as I had planned) and then went to my target. Great, except that I was not filled. I trade with Lind Waldock. They explained that it was a fast market and the brokers could not be held to fills.
My second day trading Corn proceeded as follows. I again placed an entry limit order and a stop order. At 11:10 CST, Lind Waldock notified me that my entry was filled. I checked the price movements and realized that the market had moved through my entry and within minutes to the exact tick of my stop and then reversed, establishing the day's low.
So, I called Lind Waldock to check if my stop was filled. I was told their was no confirmation, but that confirmations were very slow coming from the pits. I again, frustratedly watched the market move through my target but could do nothing because I was not sure if I was still in the trade. Finally, at 1:28 CST, after the markets closed, Lind Waldock called to confirm the stop fill. Seemed as if the brokers waited until the market closed and then allocate profitable fills to Hillary and unprofitable fills to whoever.
My third day trading Corn proceeded as follows. At 8:38am CST, I placed an entry limit order and a stop order. At 9:24 CST, six minutes before the open, I checked opening calls and realized the market was going to open beyond both my entry and stop order. I immediately canceled my orders, thinking that was over and done. At 12:15 CST, I was notified of confirms on both orders. Luckily, they were both filled immediately on the open at the same price and I was only out the commission. I complained to my order desk about the cancels. They replied the grain pits were doing huge volume and it might take as much as an hour for the runner to get my order to the broker. How do any of you trade?
On top of this, I receive my live quotes from Lind Waldock by phone. During this last week their grain quotes have been off as much as $1.00/bushel and have consistently been inaccurate this entire week.
I have called Lind-Waldock many times the past week about this. They replied that they knew they had a problem and were working to fix it. I was told their data for grains comes from S&P Comstock and they were the fault. Lind-Waldock told me they were trying to get S&P Comstock to fix their data and/or were looking into switching data vendors.
My final complaint is that this past week, at times, I have had to constantly re-speed dial my order desk for as long as 5-minutes before getting someone to pick up at Lind-Waldock.
I have dealt in futures for 15-years and with Lind-Waldock about 10-years and never had any of these problems.
Editor's Note: These odd occurrences are very unusual and only happen on fairly rare occasions. Some of it may be attributable to the recent great volume and volatility in the grain markets.
Also, it's unusual to have trouble getting thru to the broker and also get inaccurate quotes. Your editor has rarely heard complaints like this in the past about any of the brokerage firms. In the past we have also heard compliments made about good service by Lind-Waldock.
CTCN Hasn't Totally Wimped Out - Gary Antonacci
I'm glad to see that Dave Green still will publish readers' critical comments about systems and methods. Although I'm concerned that in the last issue, Dave twice referred to vendor's making a fuss about this, and he declined to name who they were. I for one, would like to know directly who they are, rather than have to look through back-issues to figure it out. I know we now live in a litigation's world, but I always thought one was on safe ground in telling the truth.
I'd like to encourage fellow readers to continue coming forth with their experiences - good and bad - and hope that Dave will continue printing them. Perhaps a standard of safety for all could be established if readers would limit their comments more to facts, and then let others draw their own conclusions regarding merit.
I remember when Club 3000 started in the early 1980's as a forum specifically for members to monitor and comment on trading systems. Now, alas, that publication won't even leave in the names of vendors when readers comment on them. What good is publishing information if no one knows who you're talking about? Much of Club 3000 nowadays is filled with vendors' pontificating about one thing or another in hopes of impressing someone enough to buy their products. Let's hope Commodity Traders Club News can avoid a similar fate.
Editor's Note: We don't want to "wimp out." However, we receive threats of lawsuits on a regular basis. Sometimes these threats come from otherwise respectable and well-known industry firms, sometimes from trading system vendors or competitors, and sometimes even from our own advertisers.
For example, there is a very well-known large discount brokerage firm Lind-Waldock, they are a very respectable and well regarded futures broker and industry leader. Their attorney recently said they would "see me in court" if we published a negative article about them. Our negative article writer and CTCN member, who lives in France, also sent a copy of his negative letter to the brokerage firm, which prompted this call from their lawyer.
The broker's attorney called us and in no uncertain terms said they will sue CTCN if the article gets published. I am sorry to tell you it worked because this attorney was specific and promised a lawsuit against CTC. Consequently, we were in fact forced (due to the economics involved) not to publish the negative article.
Perhaps our contributing member may have overblown the scenario of events and the facts, or possibly misstated (in error) some of the details, and even used some inappropriate language. However, I am sure much of what he had to say was in fact based on a valid complaint, at least in his view.
Even though CTCN would in all likelihood win a suit of this nature based on First Amendment Rights and Freedom of Speech issues, it's still something we wish to avoid. It would cost us large legal fees for an initial defense and legal consultation.
If we had a substantial Legal Defense Fund we would likely have published the letter rather than be intimidated. Members are invited to send contributions to CTC. Our goal is to achieve a balance of at least $12,500., which is the potential (minimum) amount needed to defend a lawsuit.
Editor's Note: Some vendors have also joined CTCN in an attempt to sell their products to our members or write articles as a "vendor in disguise." We try to dissuade this type of activity. You should also be careful when dealing with a vendor who is suddenly writing articles about his trading prowess or knowledge. Also, be cautious when dealing with a vendor who is an advertiser and relying on his name recognition or past fame to get you to buy his product.
As a general observation, I've noticed a strong negative correlation between the amount of hype expended by a vendor and the value of his or her product. After many years of such observation, I now won't even read any full page magazine ads or fancy multi-page brochures for high-priced systems or methods.
When you think about it, this negative correlation makes sense, since those with heavy hype are, first and foremost, promoters rather than traders. As soon as they find anything that looks superficially good, they want to rush out and market it. The few good items out there are usually offered by those too busy trading or researching to be caught up in high powered promotional activities.
Interestingly, I've also found a strong negative correlation between price and value. The few good systems or methods that I've incorporated (with appropriate modifications and /enhancements) into my trading arsenal have all been priced on the low side.
Another problem for purchasers is that it is very easy for vendors to play with some data and come up with something that may look good through curve-fitting, data-mining, etc. There is no way of knowing if a vendor has done proper out of sample validation.
Therefore, I never look at anything anymore that hasn't been released for at least a few years and built up a credible real-time type track record. This can be verified by examining the vendors' brokerage statements, by talking with a number of their customers, and/or by referring to the results since release date in Futures Truth.
I have found some problems in relying solely on Futures Truth. First, they allow vendors to "tweak" their systems after their release date by changing parameter values or otherwise modifying their methods. If systems are changed a number of times since their release, then it may be misleading to characterize their performance as occurring from any time other than their last modification.
Futures Truth should at least disclose when and to what extent they allow such modifications. Secondly, bogus systems may make their way into Futures Truth. I purchased the "deluxe version" of the Miracle System based on its good performance since release date.
Yet what I received from the vendor bore no relation to what was being tracked by Futures Truth.
Editor's Note: Your editor does not know why the above seems to occur so often. Unfortunately, I have heard this comment or similar comments numerous times. Many people call me and say they recently purchased a system based mostly (or even solely) on its high ranking with Futures Truth. However, once they get it and start trading it they allegedly frequently report large losses and (or) large drawdowns, and overall far worse performance than indicated in the Futures Truth Reports.
Your editor has received many calls of this nature over the past 3-years or so. Unfortunately, it seems like this scenario occurs most all the time and it's allegedly very rare that anyone achieves or duplicates trading performance even closely resembling the FT P&L Reports. This seems to be the case involving both real-time trading and hypothetical paper trading, or even back-tested performance figures
I have personally called and written the people at Futures Truth several times and asked them to please offer our CTCN readers an explanation on this seemingly strange phenomenon. However, they have chosen not to offer any reasoning behind this all too common occurrence involving the trading systems they have ranked highly.
See Editor Comments section of this issue for more on this troubling and serious subject.
The (Miracle System) vendor also refused to talk with me or return any of my phone calls. When I brought this to the attention of George at Futures Truth, I was told he was aware of this problem.
Yet they continued to report on this system, whatever it was. The point of all this is, like anything else, buyers beware. This is especially true in an industry such as this that appeals to human greed and seems to offer an "easy" way to riches. There are no free (or even cheap) lunches. All futures trading does involve substantial risks.
Big Market Drop Coming? - Don McCullough
Allow me to play "chicken little" here. You remember, he kept telling people the sky was falling. Are we now seeing distribution at a major top in the stock and stock market indices? I'm not saying we are for sure but here's some thoughts along that line.
The last days of Feb 96 were spectacular in the S&P 500 market. By that I mean extremely large, daily swings of 9 to 12 pts. (Normal would be around 4 pts.) While referring back to my S&P 500 daily chart of 10/87, I noticed daily ranges of a similar magnitude. This was the month and year when the stock market and stock market indices dropped by record setting amounts.
Another reason I think we could be seeing a major top is the extreme bullishness of the stock market over the past year or so. Much of this strength is coming from tremendous buying by the mutual funds. Of course, now we're talking about the average person coming very strongly into the market via these funds. As many of you know, historically this kind of rush into the market by the general public has often occurred during the last stage of a bull move; and too, at the very top itself.
The reason this great amount of speculation by the public so often leads to a bear market is this. The "big boys" find this to be the exact time they can unload huge amounts of stock on the public without driving the price down on themselves. Then, without the "smart money"--with their large funds, knowledge and courage to hold the market up by buying the sharp and scary dips--the market just keeps dipping! When many of the big boys see that the market is in "weak hands" they not only sell out, they also sell short. Down she goes in an even more meaningful way!
Another cause for downward pressure on the market is when the fund managers begin to protect their stock profits by hedging in the S&P 500 market. When they hedge, of course, they are selling the S&P market short. Thus, the S&P drops even harder and that in turn causes the stock market to drop harder. A vicious cycle thus begins and could cause a very large drop in the market before it's completed.
My most personal concern regarding a strong bear market is this: Are the odds now becoming great that I could lose a large amount of money daytrading the S&P market if it suddenly starts moving limit down for several days in a row? Is this the time to day trade the S&P from only the short side? It's for sure, for some time in the future you will not find me holding a long position in the S&P market overnight. That could be a real killer! Take heed!
I have an uncle who has a substantial position in the stock market. He told me he was at a meeting where an "expert" told the audience the market was going to 7000. Maybe so. The market does seem to "climb a wall of worry," as they say. I think that wall may be getting a bit slippery.
Robert Prechter, the famous Elliot Wave enthusiast, has a book that predicts an imminent and huge market drop. Who knows, it may make him more money than he's ever made in the markets. I'm not interested in this book, but some of you readers might want to check it out. If Prechter fails with this prediction, I think his goose will then be well-cooked for all time.
There are those who say negative talk like this is what causes markets to fall. I don't think so. I recall "experts" saying that 3000 would be the high for the DJI. I sure haven't seen much falling since they were saying that. I think markets finally fall in a big way once they've been overbought in a big way. That's about the time the "strong hands" or "smart money" is saying goodbye to their stocks and selling them to the highly enthusiastic public.
Euroyen Futures Contract in April 1996
Alice G. Sanders, CTA
Euroyen futures have been trading since 1989. This market has grown into the second largest short-term interest rate future; the largest being the Eurodollar futures contract traded on the Chicago Mercantile Exchange.
A short-term investment vehicle for hedging and trading alike, Euroyen futures may be used to hedge both deposits and loans by commercial banks. A commercial bank may buy the futures contract as a hedge against falling short-term interest rates that affect adversely their deposit portfolio.
On the other hand a commercial bank might sell the futures contract to protect against the risk of rising interest rates affecting their loans portfolio. About 40% of end users of yen-denominated interest rate swaps are located outside of Japan. About 60% of yen-denominated forward rate agreements are transacted as well as many of the medium term transactions occur in London.
Trading of TIFFE's Euroyen futures contract on LIFFE in London will provide institutions in Europe and the United States with a chance to manage yen-denominated interest rate exposure in a time zone that coincides either wholly or partly with their traditional business hours.
Specifications for Euroyen futures contracts:
Size of contract: 100,000,000 Yen
Price quotation: 100 minus the rate of interest
Minimum price movement: 0.01; tick value 2,500 Yen - Delivery months: March, June, Sept, Dec. in a three-year cycle.
The above specifications are identical with the TIFFE contracts.
LIFFE Euroyen trading hours: 10:00am to 4:00pm BST London, England
The last trading day for LIFFE Euroyen future is two LIFFE business days prior to the last trading day for the TIFFE contract (which is the second business day immediately preceding the third Wednesday of the contract month). Cash settlement will only occur in Tokyo.
The Link Agreement between TIFFE and LIFFE provides numerous strategic advantages and flexibility to all participants involved. Both TIFFE and LIFFE share 50 common member firms, and 20% of LIFFE members are Japanese institutions. The structure of the Link and Link Clearing Agreements as well indicate towards a carefully structured and well balanced establishment to start with.
Contingency report on this article is available, and it is prepared according to specified inquiries. This is not an offer to buy or sell commodities. Sources used here are believed to be reliable, however no responsibility is assumed for their accuracy. There is considerable risk in futures trading.
Options & Spreads: The Mental Kitchen
& Back Stairs - Greg Donio
Investor psychology is currently a hot topic but an embryonic one, not well-developed enough to spin off conflicting theories or doctrines. On Wall Street one does not hear of Freud versus Jung or gestaltist versus behaviorist. What prevails there is more like the pocket psychology of the pilot and the flight instructor who know the hazards of panic or confused judgment.
This can serve a practical purpose, like the barstool philosophy of one soldier telling another, "Don't let close calls shake you. As long as the bullet missed, an inch is as good as a mile." Yet saloons often foment misinformation and psychology may tend toward the intricate and confounding.
I make no claim to being the Sigmund Freud of independent traders, I have received several letters asking what I consider "the personality traits necessary for successful trading." I hereby make a humble effort to look behind the facade of speculators and speculation, to scrutinize the psychological kitchen and back stairs.
My favorite definition of "neurotic" is concise: Self-defeating. My favorite example a brief and humorous one: The psychiatrist asks the man on the couch, "What was it you said?" The patient replies, "I said nobody seems to like me. Now pay attention, you overpaid fat-head!"
Thus a neurotic is someone who routinely plants land mines in his own path or snatches defeat from the jaws of victory. He wants health but keeps drinking too much. He wants to achieve but abandons projects shortly after square one. Or he not only errs but persists in doing so.
Rule One: Do not be self-defeating.
How about a humorous example apropos to investment and profit? During a comedy-skit interview, Bill Dana as Jose Jimenez said that he used to own a ranch. "It was called the Rocking Chair, Circle-V, Twin Mountain, Bar 20, Double Diamond, Half-Moon, Tumbleweed Ranch."
'Was it a big spread?" the interviewer asked. "Very big!"
"Did it have a lot of cattle?" "No, not many survived the branding."
I used to laugh loudly at the preposterous notion of wranglers destroying a bellowing steer with a giant, red-hot iron, then doing likewise to the whole herd one at a time, with nobody ever saying, "Hey, maybe this ain't a good idea."
Surely nothing resembling this could ever happen in real life, I thought. How wrong I was! Traders in futures and options make the same mistakes not just once or twice, but with monotonous regularity. Bring on the next head of cattle.
Although I had mixed opinions about Bill Gallacher's book Winner Take All, I endorsed his advice, "Never add money to your trading account . . . Writing a second check to a broker is an admission of defeat." Many traders do take repeated beatings and respond by writing repeated checks to replenish their brokerage accounts.
A bad idea, Gallacher says. Good money management, i.e., the limiting of risk, is keystone-essential for successful trading. Adding capital increases risk instead of limiting it. I would go one step further and say that the trader who keeps on writing checks creates a "plan" or a 'program" for financial loss instead of gain!
Here we detour to throw some light. Automatic investment plans have gained popularity in recent years. The original or prototype-model "automatic investment plan" dates back many decades and was an accidental discovery. The managers of a trust received simple instructions: Invest the money half in stocks and half in bonds, then keep the two sides even value-wise.
So when the stocks increased in value, the trust managers sold some of the shares and used the money to purchase bonds, making the two ends of the portfolio equal again. When the stocks fell, some of the bonds were sold and the money used to buy shares. For several years the trust generated income as expected via both interest and dividends.
Then the people made a happy discovery. The total value of the portfolio had increased markedly, even though it had not been designed for growth. How in heaven's name? The trust managers had bought stocks low and sold high, again and again and again. Keep it even was motive, growth the side-effect.
The "automatic investment plans" published in book form in recent years do take-offs on this. (For example, using fluctuating mutual fund shares with fixed-at-a-dollar money-market shares; changing the proportions from half & half). Remember, though, that the original "unplanned plan" developed accidentally and can "spawn a mutant" in the hands of traders which methodically destroys capital.
Let's say a trader has a brokerage account, plus a bank or money-market account, plus employment income. Let us say that the trading account posts repeated losses. Well, at least that does not affect the cattle in his other money corrals. At least he is smart enough to limit the risk.
But wait. First he replenishes the depleted brokerage account with money from employment income. Then from the checking account. Then from both. Some go as far as the pawnshop and a mortgage. Worse than throwing good money after bad, the trader has created an "unplanned plan" structured and circuited to lose capital.
Repositories which preserve or increase money are systematically drained. That which destroys or devours capital is systematically fed, again and again and again. Losses become de facto "signals" to dish in more cash, a cannibalist counterpart to automatic investment plan "signals" for buying or selling stocks or bonds or fund shares. The supreme self-defeat.
Numerous other roads lead to self-defeat. Over-trading, for one. More than 10% of risk-capital per venture is too many cattle under one hazardous branding-iron. I use that for semi-armored spread strategies, less than 10% for anything riskier. Averaging down or averaging a loss: One log on the wrong-direction raft of going against the trend instead of with it. Buck not the trend. Don't be a money-losing fat-head!
Rule Two: Cultivate a sense of detail, including a sense of succinctness regarding material information. Key definitions to follow.
In Germany during the 1920s, young film director Fritz Lang had problems. His first wife caught him in the arms of another woman and subsequently committed suicide. The police suspected Lang of murdering her; grilled him at length. On dingy walls of interrogation rooms, he saw visions of prison gates, chaplain and executioner.
Fritz Lang was released without being charged but the experience left its imprint. He became very alibi-conscious. He kept written records of phone numbers he called, people with whom he had appointments or met unexpectedly, items on a menu where he dined. Taking a stroll, he wrote down the tag number of a parked car, the headline and the news-dealer's gold tooth. Attending a stage play, he made a jotting on the printed program about the actor who limped or the one whose wig was on wrong.
This carried over as the sense of detail for which Lang's films were noted. Also their moral chaos, with innocent people being arrested and guilty ones going free. A successful trader in futures or options or other securities needs a keen sense of detail. Plus an awareness of the markets' moral chaos. The exchanges do not always reward virtue or industriousness, or make a winner of the good guy in the white hat.
Let us clarify as to which details. Financial vocabulary and definition make a distinction between "material information" and "all information," the former defined as "that needed to make an informed investment decision," the latter meaning too much info, mostly superfluous.
A hack novelist spends several pages describing the view from the study; too much data, tedious and unnecessary. Contrarily, gag-writer Robert Orben penned a joke, "When I went to school, I was an honor student. Yes, your honor. No, your honor." This dialogue-detail tells us plenty briefly, sparing us a six-page description of the courtroom. It is succinct.
I never heard that word until my second year of college, and it deserves greater popularity. Related to "cinch"' and "cincture"--packed, enclosed, fastened--succinct" is the words and phrases equivalent of "condensed" or "compacted." While "terse" and "concise" emphasize brevity, "succinct" stresses the high content within that brevity--a lot in a small space.
I go through trading and investment books--and other books--armed with a red pen, underlining key sentences and phrases, bracketing paragraph portions, sometimes asterisking vital paragraphs, rarely blessing a page or passage with a pentacle. Always I seek the sections that tell more than might be expected from their size, the pivotal lines, the see-the-world-in-a-grain-of-sand details. Caravels tightly-packed.
As a trader and student thereof, can you develop a Fritz Lang sense of detail, including an eye for details that are succinctly significant? Now for a test of your ability to observe, evaluate and visualize. Italian Renaissance artist Correggio (1494-1534) was written about in 1877 by John Addington Symonds:
"The unity of his work is derived from the effect of light and atmosphere, the inbreathed soul of tremulous and throbbing life, which bathes and liquefies the whole. It was enough for him to produce a gleeful symphony by the play of light and color, by the animation of his figures, and by the intoxicating beauty of his forms."
"His angels are genie disimprisoned from the chalices of flowers, houris of an erotic Paradise, elemental sprites of nature wantoning in Eden in her prime. They belong to the generation of the fauns . . .
"Correggio's sensibility to light and color--that quality which makes him unique among painters--was on par with his feeling for form. Brightness and darkness are woven together on his figures like an impalpable veil, aerial and transparent, enhancing the palpitations of voluptuous movement which he loved."
"His coloring does not glow or burn; blithesome and delicate, it seems exactly such a beauty-bloom as sense requires for its satiety. That cord of jocund color which may fitly be combined with the smiles of daylight, the clear blues found in laughing eyes, the pinks that tinge the cheeks of early youth, and the warm yet silvery tones of healthy flesh, mingle, as in a pearl-shell, on his pictures."
"Within his own magic circle Correggio reigns supreme; no other artists having blent the witcheries of coloring, chiaroscuro, and wanton loveliness of form, into a harmony so perfect in its sensuous charm."
If you judge the above quotation a masterwork re. sense of detail and succinctness, give yourself 30 points. If you think that the book page containing the above bears a red pentacle from my hand, give yourself another 30 points for understanding the mind of at least one trader--me.
Most importantly, give yourself 40 points if the passage (quoted from Symonds' Renaissance in Italy--The Fine Arts) caused you to do much visualizing: Silver chalices containing orchids and grape hyacinths, Pleiades whose flesh-tints bathe in sunshine, backdrop brocades in ruby or mother-of-pearl.
Then sense-of-detail-wise you are able to hear the grace notes in the arabesque, taste the Loire River breeze in the burgundy, and observe the numbers forming floors of support and ceilings of resistance on the intangible Charles Dow chart or W.D. Gann chart inside your head. You will spot the significant smallness of a spear point penetrating as opposed to the smallness of inconsequential items.
In a past article I mentioned Dow Theory and Gann Theory, Elliott Waves, the Darvas Pyramid of Boxes, Wyckoff Point & Figure and Japanese Candlesticks. All require good sense of detail, whether already possessed or cultivated for the purpose. None are perfect, but all can help sift and assemble the cinched pack of material information from the vastness of total information. Use the Edenic beauty-bloom of your red ball-point.
Rule Three: Get a handle on the convolutions of time, also on the patterns of the past.
Time is a hack writer of formula stories, markedly more prone to repetition than to originality. However, this does not make it incapable of surprises. You will have a fair grasp on the convolutions of time if you regard it as often predictable but not always. A capable trader formulates a sound battle plan calculating what the enemy is likely to do, but to it attaches a worst case scenario.
Psychologically, much depends on people's visions or images of the past, which vary tremendously not just in finance and investments. This makes "getting a handle on" more difficult. After the 1968 assassinations of Reverend Martin Luther King, Jr. and Senator Bobby Kennedy, a sociologist was interviewed on TV.
He said, "Our society has become more violent and this is reflected in our entertainment. The film Bonnie & Clyde is a good example of this. We've fallen in love with a pair of murderers." Really? As compared to what? It sounds like that sociologist was using Lassie movies and Andy Hardy movies as a measuring stick.
Had his knowledge of dramaturgy extended farther back in time, he would have known that the classical Greek dramas and the British Restoration plays did not reflect any increase in murder, incest or other not-niceties.
Do movies, TV, books or magazines cause violence, immorality, or anti-social behavior? A person's answer depends largely on his or her image of the past. Those who say yes are usually the right-wing reactionaries and fundamentalists-people who call themselves "traditionalists" when their knowledge of tradition goes as far back as Shirley Temple.
They yearn for the "good old days" when movies and radio banned the words "bathroom," "pregnant" and "diaper"; when several film studios prohibited infant nudity and topless seven year-olds. Shakespeare devotees know that littering the stage with corpses did not boost the homicide rate in Elizabethan England.
Opera buffs realize that stagings of Verdi's Aida did not cause any young lovers to be buried alive. Art lovers are aware that the Delacroix nudes--conquered, chained, enslaved-did not compel impressionable children to go around hanging chains on undressed women.
Admittedly, I have an ethnic battle-ax to grind. As a proud Italian, I have a short fuse for so-called 'traditionalists" who think that Bernini and Botticelli were hit-men for the Capone mob. For mentality and personality traits, this ilk should trade on the financial firing-line when Rush Limbaugh and Rev. Pat Robertson start discussing Florentine art and grand opera. Or Fritz Lang and cinema with sub-titles.
Cultivating a sense of detail. Getting a handle on the convolutions of time. Having an image of the past that possesses complexity and kinship to reality. A rabbinical scholar dissecting the intricacies of Talmud can do it. As can an archaeology buff scrutinizing a Greek Linear B manuscript or a Brindisi bronze. Or an analyzer of Dutch and Flemish brush strokes. Or a musicologist knowing something more than Tin Pan Alley moon & June. Great for labyrinthine chart/calendar swirls.
But the person who "bought it" when Lawrence Welk palmed off ragtime as clean, decent music from golden yesteryear? (It was the "whore house piano" of the gaslight era, condemned from many an 1890s pulpit.) Or the person who applauds when Ann Landers denounces women's underwear commercials and feminine product commercials in the name of "old-time bedrock goodness"? Buy plenty of old-fashioned savings bonds or expect the worst.
Rule Four: Keep on learning and developing. These are life-long processes.
R&D (research & development) one hears mainly as a corporate departmental phrase. It applies crucially to the individual as well. The eminent physician sits up late reading medical journal articles, to develop himself and keep up in his field. He may complain that only half those articles contribute anything of value to medical science, but sift he must.
World-class opera singers still undergo training sessions with voice coaches. Scholars of all disciplines from computer science to literature to Egyptology take graduate courses and read prodigiously. With finance, however, the league record is spotty at best, especially under independent trader insignia.
Every broker and financial advisor can tell horror stories of people who spend years working and saving money, but do not spend five minutes researching how to invest it wisely. Reading and learning, Research & Development are even more important for the active trader than for the easy-does-it long-term investor.
While on in years, the late magician/author Burling Hull wrote in a how-to piece for conjurers, "Please understand that when I say 'teach' or 'learn,' I say it with no superior attitude. I am learning about magic every day."
Busy and productive in his mental kitchen and backstairs. In his R&D department, no stagnation and no self-defeat. Like a Correggio palette recording and telling much via "the-witcheries of coloring."
Recommended Reading: Lawrence G. McMillan's book Options as a Strategic Investment for its several fine chapters on spread strategy.
Enabling Execution - Don McCullough
In a previous article I said that "having to" can often make all the difference in the world when it comes to acting as one should. I still think there is much truth to this, but I have decided that wanting to is even better--as I think the following will prove.
Feeling I have to take signals--that is, I have to force myself to take signals--is negative. This indicates I fear the signals or am unwilling to trust the probabilities. Or a significant disbelief in my eventual success.
Feeling I want to take signals--no super human effort involved--is positive! This indicates a trust of the probabilities of the signals and a belief in their ability to make money. Or a strong belief in my eventual success.
Feelings That Disable Execution:
1. Feeling fear or distrust of signals.
2. Feeling need to be certain before executing.
3. Feeling you'll lose money if you execute.
4. Feeling you'll pass on this signal and take the next, or start trading tomorrow--always tomorrow!
5. Feeling you must force yourself to take the signal.
Feelings That Enable Execution:
1. Feeling trust in the good, well researched, probabilities of your signals.
2. Feeling only good to high probabilities--and not certainties--are required in order for one to execute willingly.
3. Feeling you'll probably (not certainly) make money if you execute.
4. Feeling this signal is as important as the next--and act!
5. Feeling you want to take the signal rather than you are forced or have to take the signal.
Much of what I've just said boils down to learning to think, and act in terms of probabilities. The problem I, and I think many people have with this is, it is a different mind-set than we are accustomed to. In our everyday existence we become accustomed to figuring out how to do things and then we do them successfully nearly 100% of the time. In essence, we become very "wedded" to acting with certainty!
I believe one of the most important things an aspiring trader or investor must learn to do is to learn to think in terms of probabilities. Once learned, (and I mean really learned!) this is what enables us to cut our losses and to take action without the need for, "for certain" results.
A "cock sure" (certainty) attitude toward market direction, and the consequent riding of losses is caused to a very significant degree by the average person's gotta be certain attitude or mind-set. With enough market experience we come to see that only good probabilities exist in the speculative markets and then become much less likely to be "cock sure" and ride our losses.
The final goal is not only to be able to think in terms of probabilities, but also to act in terms of probabilities--decisively and without hesitation, especially when it comes to daytrading. I have said you not only have to know enough, you have to be enough in order to trade successfully. No doubt this being enough depends very much on one's ability to act in terms of probabilities. To act best is when you can take your signals in a positive, want to frame of mind.
Feeling you have to, and must ruthlessly force yourself to trade your signals is a very second-rate, stressful way to trade. I believe the best pros are so sure of their signals they want to take them. Feeling they must force themselves to trade (most of the time, at least) is a feeling I'm sure they've relegated to the long-ago past.
Perhaps a person must go through three stages before becoming successful in the markets. The first stage is one in which we're cocky. We get a few books and find a no fault expert and we're on our way. The second stage is when we find out it's not so easy and either quit or dig-in for the long run and learn all we really need to know. (The know you know rather than the think you know stage.) The final stage is when we learn to overcome our psychologically self-defeating ways, and thus, become able to successfully and willingly act on our knowledge.
I want to thank Kent Calhoun for his Education of A Trader article in the Feb/Mar CTCN. Here is definitely a guy to listen to. This article addresses much of what I'm talking about. Kent's statements that all traders have fear, but winning traders manage their fear while losers are controlled by it--that winners trade in spite of their fear. Classy stuff, Kent. Hope to hear more from you.
Surely without question the degree of fear experienced by the professional would have to be (most of the time, at least) much less than that experienced by the average trader.
Although I have said that it's best not to force yourself to trade, I expect the newcomer must. Here I think is where courage comes in. Courage is not acting without fear, courage is acting in the presence of fear. Or, as Kent put it, "in spite of fear." Having the courage to take "steps into the unknown" is what makes it possible for most people to succeed in any field of endeavor. Sometimes it's not a matter of having the courage--it's a matter of summoning the courage--and even a battle to keep summoning it.
Better Charts and Charting - DMC
I'd like to share what I consider to be good charts and charting methods. It's true that such information alone won't make you a successful trader, but better charts do make the work of a trader more pleasant and efficient. After all, charts are "the tools of the trade" and better tools can add to the bottom line. Maybe not to a large degree, but some. I use the MetaStock program and I'm sure most popular programs will allow the following suggestions.
I prefer medium gray for the background and black for the bars. In my opinion no other color combination even comes close for these two things. I use 250 bars on all my charts whether they're 1- minute, 30-minute or daily. This number is about maximum, otherwise you have the bars running together and thus lose clarity. You also lose the ability to see gaps and reversal bars clearly. I expect many professionals use this number of bars or very close to it--depending on the size of their monitor and their method of trading. Perhaps the # 250 is a carryover from daily bar charts where this number equals just about exactly the number of trading days in a year.
I spend about 99% of my time watching the intraday movements of the S&P market. I use between 1 and 5-minute bars for this market. Believe it or not, a tick chart works well with some markets. For slower markets like live cattle and the grains you might try 15 and 30-minute bars. Bear in mind what I'm saying pertains to my method of trading and may not work as well with other methods. I like to use dark blue and bright red for lines. These colors, plus a couple of others, will glow when they touch the top or bottom of a black price bar. This helps much in terms of speeding up the drawing of lines--and also the very important accuracy of those lines.
There are certain things about my charts and charting I simply won't tell. The best of my knowledge required far too much time and effort for me to give it away. Too, I don't want to take the chance of having to fight other traders using my methods at my entry and exit numbers. This would surely mean more slippage and less profit for me. I know many pros feel the same way and for the same reasons. Larry Williams states in one of his books that the systems he's giving you (in that book) are not his best. Good, but not his best. This is more common than people realize and something to consider the next time you're thinking about buying books, systems and seminar tickets.
I really like my MetaStock program and think the TradeStation program is overrated and overpriced. It appears many people like lots of "bells and whistles" with their software. They feel the more extra features, indicators, etc., the program betters their chances of becoming a successful trader. I strongly believe it's the other way around. Keep it simple and do your own thinking--and use MetaStock and save a bundle.
For chart printouts I prefer medium yellow or medium gray paper. Easier on the eyes. However, for a 1-minute bar chart I use standard, white legal size paper which enables me to get the whole day on one sheet. I also include the horizontal grid lines which makes seeing the extent of a move and support and resistance much easier. On the screen I found dark gray to be the best color for grid lines and I use the dotted "style." This type of grid line gives the chart a less cluttered appearance.
The distractions, misinformation and dysfunctional psychology an aspiring trader has to get through and get rid of are truly something to behold! Not only with respect to charts but in general. Now I watch only the S&P and the meats and it's about time for the meats to go. I may soon be looking at only one chart of the S&P market throughout the whole day. It took me many hours of study to know which chart that will probably be. That and many other things is for other people to find out like I did. The hard way.
You Have To Pay The Price!
The Final Price by DMC
Several years ago the renowned trader-author (author-trader?) Larry Williams brought the matter of "price paying" to my attention via one of his books. I had always known you have to work for what you get, but I thought his way of expressing this was more meaningful.
Everything has a price. I'm not speaking here of the typical things you pay money for like shoes, food or clothing. What I'm referring to is: paying for your accomplishments. Whether you want to be a college graduate, doctor, farmer or succeed at anything you have to pay the price. The price is of 3-parts. Time, effort and determination. You have to be willing to spend the time, exert the effort and be mentally determined to succeed.
The final price, the title of this article is referring to and with regards to successful trading is: the price of being willing to accept the risk and stress of trading and begin trading in a consistent manner. After having spent thousands of hours studying the markets, this is the final price I now must pay. Famous trader Tony Saliba once said: "You have to be able to endure the stress of it. Chose to endure the stress."
I've heard it said that: "Knowledge without action is a disease." All the knowledge in the world won't do us any good unless we act on it. I have made poster printouts in large letters and of all kinds and taped them to my monitor. There have been many of them and all, in one dramatic way or another, are screaming at me to get my butt in gear and trade! Today I made my last such printout. There will be no more. This last one reads: "No more words! Words won't get it done. Only Action!"
I'm not talking about willy-nilly, off-and-on action or trading--I'm talking about consistent trading where I must be willing and able to take the losses and keep on trading. Now that's the rub, as they say. I finally decided it wasn't only the next trade I was avoiding, but also all of the other trades I knew that would have to follow. Have to! It's for sure, the best trading knowledge in the world won't do a trader any good unless it's acted upon in a largely consistent manner. Hit and miss just won't cut it!
My avoidance of daytrading the S&P market has not resulted in a total loss of time, effort and money. Not by a long shot! By setting here and watching this market for several months, I have gained additional valuable knowledge. I have fine-tuned and added to my original signals to a significant degree. Perhaps the most important thing this "real time studying" and added knowledge has given me is more confidence.
Now, not only do I have one reason for taking a signal, I will often have two or more reasons. I found out a major truth about signals. Very often the more psychologically difficult the signal is to take, the better or more profitable it will be. This is one of the main reasons why paying the final price can be so hard. You need self-trust to the max! It's possible that a really good sense of self-trust can come only later, after some real success with your trading. Perhaps, initially at least, you need something even more important. That is, courage and a fighting spirit tempered with reason and high probability signals. Or, positive aggression.
I am going to start trading--consistently. I'm going to "trade through" this damnable stress and risk avoidance baloney. There used to be a cartoonist who said something like: "I have met the enemy and it is us." In my case it is me. I will pay the final price. I know there will be many blunders, but I am sure the quality of my knowledge and the strength of my determination will see me through.
Misc Subjects & "Elliott Wave Is Crap"
Anonymous Swedish Trader
I read your editor's note at the end of the Terry Davis article. I presume you offered a simple apology, and can think of no reason why either a gentleman or normal polite human being would refuse it, anyone can make a mistake, especially when he is under stress and not working under normal circumstances, and anyone not accepting this is simply pathetic.
Especially when you are willing to admit your error, and offer to put it right at the first opportunity (i.e., next issue of CTCN). Again, he is not a bloke worth talking to, except that he too writes interesting articles from time to time. Dave, you have a tough job.
I presume this is the same Terry Davis that wrote a short article about CSI in the 5/95 issue? I dealt with CSI for two years, and had no problems whatsoever, except that their customer service department was perhaps a little slow, given that I was always calling from abroad. They were never rude, I had one billing problem, which was rectified after one simple Fax. I note that you have been using them for 13-years, presumably without serious problem.
They are clearly a good company. Now, of course, they too can make mistakes, and Terry Davis was perfectly entitled to complain if he received poor treatment. But I re-read the comments from Bob Pelletier, in the same issue, responding to these complaints. His letter is a masterpiece! I particularly like the line "I now find it easier to understand how, on a personal level, our staff may have been less than eager to help." What a beautifully succinct, and not impolite or vulgar, way to say "this guy is a dick-head."
On a personal level, I think Elliott Wave is the biggest load of crap ever invented, but I appreciate that there are many who disagree. I read somewhere that Robert Prechter, using Elliott Wave, was forecasting a Dow below 1,000 when the index stood around 3,500. I wonder, did he short the index futures or keep buying puts? Neither, I suspect, because he is still going. There was another Elliott Wave guy on CNBC's squawk box a few weeks ago. Mark Haines pointed out that they had been forecasting a crash since Dow 3,500, and yet now we were up at 5,500.
His answer? "We were a little premature!" Yeah, right, of course, when the next crash does occur, which we all know it will, one day, no doubt Mr. Prechter or his sidekick will be there, on CNBC the next day, saying "told you so." This is also pathetic. I am so happy to have found a successful (albeit mildly) fundamental trading system, that I can hardly contain myself sometimes.
I digress. If you draw enough lines on a chart, you can prove black is white. If your readers want more stuff on Elliott Wave, then keep hassling Mr. Davis to let you print his article. Personally, I think our time would be better spent elsewhere. I should add that I firmly believe that chart-reading is not something that should be ignored. Clearly, some people consistently read charts correctly, and therefore they are not a waste of space. But as for Elliott Wave? When something can be so wrong, is it worth considering? (Perhaps we should "fade" their signals?)
From his articles, Terry Davis appears to be a good and successful trader. However, I have grown to be suspicious of people who claim to be successful traders. Yet they keep selling different systems, and have clearly in recent years hopped around from one system to another. (One notable exception to this is Joe Ross, who apparently changes his styles frequently because he gets bored, which I can believe, but I would not put Davis in his class).
If Terry Davis' systems all work so well, good luck to him, and to anyone else using them. However, with the side of his character revealed through your pages, both from Bob Pelletier's letter and your latest editor's note, I am reminded of the quote "all systems make money, providing you sell enough of them."
"Problem Lies Between My Ears" Can A
Hypnotherapist Help? - George Moldenhauer
As a 14+ year veteran trader/broker/advisor, I have had my share of ups and downs. Early in my career most of the problems I had with trading came from lack of experience and the lack of a solid trading plan. Later, after years of experience and a great deal of work, I became armed with what I feel to be an excellent trading system. But there were still problems taking the profits that I feel I deserved from the markets.
Once I realized that the true problem lied somewhere between my ears, I took steps to resolve the situation. Personally, I have had positive experiences with two solutions to that age old problem of discipline and emotional control.
First, I enrolled in the home study course offered by Van Tharp called The Investment Psychology Guides. If you are struggling with the inner self and need help, I would recommend this program. It worked for me.
Second, I found the need for individual, specialized help. There are a few things in the Tharp course that just don't match my personality as a trader. And I firmly believe that you must develop a trading methodology that matches your personality. If you read Market Wizards (highly recommended to the serious student of the commodities markets) you'll learn about many success stories that are all different. Some trade technically, some fundamental. Some short- term, others long-term. Some systematic others discretionary.
Once I realized the need for a more focused approach, I started looking for someone who could help me do just that. And I found that person here in Utah. In late summer I called a Hypnotherapist, Teresa Nelson. After explaining my situation and how I needed help, she customized a program for me. And what a difference it has made in my trading and attitude about the markets. While Teresa may be far away from you, there probably is someone like her in your area. If you have ever had a challenge with discipline in your trading, I would highly recommend a similar approach. You can get in touch with Teresa at 801-647-0497.
Super Charts Q and A - Tom Dyste
CTCN member Ron Brooks asks, "When I use the Edit and Type commands to access the Ixxxx.asc, Fxxxx.asc, and Sxxxx.asc files, the commands do not show anything. In the Dec95/Jan96 issue you suggested studying these files to learn about EasyLanguage. Can you be more specific about accessing these files?"
No response, "Oops! The best files to study are Omega's built-in function files, not these others. In my SC 2.0 system the gold mine of EasyLanguage info is in the Bxxxx.asc files located in SuperCharts' bifuncs subdirectory. Sorry for misdirecting your attention to the other files. These .\bifunc\Bxxxx.asc files mostly seem to have been written as clear ASCII and carry little or no non-printing character problems. Welles Wilder's indicators and much other stuff of interest will be found in these. I have printed all of the Bxxxx.asc files out for my own study and found them very helpful. Hopefully this will assist you with your SC version 1.03 as well."
About Craig Stevens & Ken Roberts Courses
William Ward II
My, what a country. It's a good feeling to participate in a valuable forum such as this. For James Footer and Eddie Shaw, I'll comment on their Feb/Mar 96 issue request. Ken Roberts and Craig Stevens are similar in their approach to making money, in more than one way, take that as you may. Even so, Craig Stevens' background as a broker lends to a more detailed course as his experience shows through.
However, the principles taught in both courses do work. They do have their similarities, and for the money it's worth getting a feel for the style of trading each has. Especially at a beginning stage, trying to garner bits of information in order to develop your own method.
Please, keep in mind you have to be realistic about placing protective stops, considering your account size. Sometimes in taking a course we can be carried away by hopes of what this new knowledge can do for us. Only experience of trading real money can teach you the intricate details of a personal one-on-one encounter with the markets.
The Craig Stevens Option course is detailed and based on workable option theory. You can learn about loss of time value per day (theta) of an option. It's good to know how much money you may lose each day, if you're buying. Or how much someone else is losing, if you're selling. Also, whether an option would be more economical verses a futures contract using delta equivalent cost.
And there are some excellent, detailed option strategies for buying and writing, obviously written by an author with experience in the matter. As with any education, it must be applied and then move on. You can Fax me at 804-538-9318 and I'll be glad to share more info.
In closing, and agreement with an article in the Feb/Mar 96 issue by Mr. Calhoun, Don't look to the markets for success. A person is created with all ingredients for success, save one. A need for absolutes, something to believe in. The markets do not exist to fill any void you may have, yet they may be instrumental in revealing it.
Your willingness to the market should be to take it or leave it. You should learn from it, not be a servant of it, for you can only serve one. And if you're honest with your self, you are serving something or someone, each day. That's what makes America great, freedom to choose at any given moment.
Back to Basics - Bob McGovern
March is a busy "window of opportunity" month for many commodities. There are 13 "go long" windows, and 9 "go short" windows. My intention is to paper trade all 22 positions, and at the end of the month, do a grand tally on the winners and losers. It might be interesting to see how much the funds have skewed results, due to their mindless and massive infusions and withdrawals of money on the slightest whim in most futures contacts.
Over the past two years, seasonal open positions and spreads have displayed a disturbing contrariness when considered in the light of historical patterns. My opinion, unsubstantiated by research of any kind, indicates Seasonals once worked rather effortlessly in the spreads.
Seasonal trends seem replaced with what looks like random-walk patterns and volatility never before experienced. It is becoming more and more apparent to me that it might be far wiser to "fade" the historical patterns of both seasonal open and spread positions. Are Commodity Funds to blame?
I intuitively feel the primary objective of the average commodity fund is to get its ½% annual administrative fee off the $100 million to $5 billion they manage, with secondary goals of trying to get an incentive fee for any profit they might garner for their hopeful clients.
The black box mentality of computer-popping in and out of markets might leave something to be desired, but don't fret boys; ½% of that $500 million per annum is $2.5 million. Not bad for two or three telemarketers, a gullible clientele, and for status, a Harvard Business School grad who never saw a soybean or sow's ear.
Or am I way out in left field? Maybe the fact that places like Brazil weren't a factor in beans or OJ ten years ago has queered the deal. So maybe what I'm saying is to fade the whole shebang. It might work.
All about Stops - Donald Turnbull
Here are some thoughts that might prove useful to neophyte traders like me. They may duplicate many that you have already published, but I have not had the pleasure of reading.
1. I do not trade the S&P index because the margin requirements are so high it would take too big a proportion of my account to cover them. I would then have one position with, perhaps a 50% chance of success (and a 50% chance of failure).
Editor's Note: The S&P 500 margin is indeed very high for overnight position trades. The last time I checked it was $12,500 at my brokerage firm. This is one of the main reasons the S&P is not recommended for overnight trades. However, like most brokers, my broker reduces the margin sharply for daytraders, where he tells me it's only $3,500.
In fact, I have heard it said by some of our members that certain brokers do not require any margin providing no trades are carried overnight. I am not sure if that's correct information and have not verified it to be correct, but have heard it said many times.
For similar reasons, I do not trade Japanese Yen, where one full point is worth $1,250. The difference between the high and low in one day can be $6,000. This is too rich for my trading style.
Instead I trade low margin trades like pork bellies, live meats and beans, and have a number of trades going at one time.
Just suppose I have 5 trades going, each with a 50% chance of success (and a 50% chance of failure). The statistical probability of all five failing is .5 x.5 x .5 x .5 x .5 which in .03125 or only 3%.
Editor's Note: Are Don's figures correct? Is it true that five trades involving 50% odds results in only a 3% chance of having five straight losers? If so, why does your editor frequently hear about certain systems or trading advisors having far more than five consecutive losers. Many of those systems are in fact ranked much better than a 50% success ratio by either the developer or Futures Truth Ltd.
In fact, I have heard of some systems or trading advisors that claim perhaps a 60 or 70% (or even better) success rate yet sometimes will have say ten, or even 20 (or more) straight losing trades. How is this possible, if Don's failure possibility is only 3%, or even less than 3% based on profitable trade percentages considerably higher than 50%?
I recall some years ago I read in one of the major trading publications (I believe it was Barrons Newspaper) that Jake Bernstein had (if I remember correctly), 23 straight losing trades. I know Jake and he is perhaps the most respected and most knowledgeable commodity expert there is. Jake has also written 23 books on trading commodities and is incredibly knowledgeable on trading. Jake is also a psychiatrist (or a psychologist . . . I always get the two confused) and no doubt has great discipline and trading skill. I am sure Jake will normally have at least 50% winning trades. So how is it possible someone like Jake could have over 20 consecutive losers? I am not picking on Jake as many other famous traders and experts have also had 20 or more straight losing trades over the years.
What is the chance of this happening, if in fact the profitable trade percentage is 50%, or even higher? If the chance is extremely small, why has your editor heard about this happening numerous times over the years, involving a vast number of popular systems, methods, and well-known trading advisors or respected advisory services?
The probability of at least one or more successes is 1-(.5x.5x.5x.5) which is 93.755% . That's a lot better than the 50% mentioned above.
With tight stops, the losses are limited to an average of $300. With 4 losses, this amounts to $1,200. Profits are allowed to run and usually average $2,000. This results in small but virtually certain profits.
In actual practice, by limiting my trades to the recommendations of an advisory service, probability of success is much higher.
2. I have heard it is bad practice to order a position "at the market." Before placing an order, I phone my broker's quoteline and get the high, low and last figures. Then I place a limit order at the "last" figure. Is there a better way of doing it?
Editor's Note: I do not necessarily agree it's a "bad practice" to trade with market orders. In fact, our Real Success Methodology uses market orders more frequently than limit orders, especially when entering into a new position. We also use market orders extensively on exits involving targets and stops.
Market orders have several major advantages over limit orders. One major advantage is you occasionally have difficulty verifying you are actually in a trade or out of a trade due to uncertainty involving a limit order being filled. On the contrary, with a market order you always know you are filled and in the trade or out of the trade. Another advantage is a market order will normally have less slippage than a limit order. In fact, as witnessed in CTC's Real Success Videos, sometimes we actually have positive slippage with market orders, rather than the usual negative slippage involving limit orders.
3. When profits accumulate and my account grows above my target figure, I have my broker send me a check for the difference. That way, I am not tempted to get into larger and larger trades. This may not be the way to become a millionaire, but it suits my risk tolerance level.
4. Moore Research Center publishes a list of "optimum" stop values, beyond which a commodity rarely recovers, and within which it often recovers. Their "optimum" stops seem to me to be too high. They are all in the range of $1,200 to $1,500.
To go along with my philosophy of having a number of trades going at a time, I think that tight stops are appropriate. This may stop you out of some trades that eventually recover and make a huge profit. But even in these cases, if you have confidence that the market will eventually rise, and you watch the market closely, you can get back in again and lose only one round-turn commission. However, if the commodity doesn't recover, you've saved yourself a lot of money.
Wisdom & Knowledge Has Helped Achieve 11 of 12 Winners Since Last Wrote CTCN - Charles McDaniel
First of all and foremost in my trading life, I must say CTCN has been the most helpful thing to me as far as man is concerned.
I've been trading for over a year with a small account of $2,500. Since I last wrote, I have made 12 trades (11 profitable). Taking small $200-300 profits, allowed me to clear $1,800 not counting commissions. CTCN has been the difference in winning and losing. No doubt about it!
I have experienced some psychological growth and would like to express my thoughts and request a response from more experienced readers.
I must cast out of me the "feeling" I must make a profit and not lose on the trade. This feeling cost me a lot of profits by getting out too soon.
I should be satisfied with the profits the markets give me. Once a trade is made, be satisfied with your decision to enter the trade based on the wisdom given you by god (assuming you ask him for wisdom). Win-lose-or draw should not enter the mental processes. The decision to enter is what counts.
Once wisdom takes place then it's an automatic win situation. Wisdom should dictate how you play the trade to get the most out of it - not the fear of losing. The fear must be cast out. Wisdom should dictate the mechanics of the trade.
The emotions of a previous trade should not influence or govern the present trade. Each trade stands on its own.
CTCN gives wisdom and knowledge about the mechanics and psychology of the markets. God gives wisdom about the individual and his psychological makeup to the individual if he asks and keeps on asking for this wisdom.
3-Steps in the use of stops: 1. control losses; 2. cover commissions and any profits possible without knowingly getting too close to being taken out of a winning trade; 3. keep raising stops as trade goes your way to protect profits.
Max Robinson Has A Unique Way To Use Closing
Price To Mimic a Moving Average
Keep up the good work. Anyone that is trying to do something good will be criticized or disliked by someone. But remember, you are helping many, while only a few are unhappy.
I have the System 2000. It does help identify turning points and congestion areas in the market. But then one needs an entry method.
The secret of all financial success is money management. How much can you risk on this trade, and still be financially able to take some losses and still be able to trade when the profitable trade finally comes by. Study Vol. 4-1 of CTCN, articles are really enlightening (D'Angelo & ??). Can't read name?
I have two Ken Roberts courses. They have some good ideas in them and one of them convinced me to let go of some old anger.
Every one needs to understand that the constitution may guarantee equality under the law, but we are not born with the same abilities. Some of us just will never become a winning trader, but we might become a successful painter.
Larry Williams latest video had lots of information in it.
I have a mathematical way of using the close of today's market to compute an average that is similar to the 9-day and 40-day average.
My method is much easier and quicker to compute than most averages, since you only deal with today's close. This method picks turning points and acceleration points like any system that I have seen. But like all of the other systems, one has to apply his own entry and money management plan to it.
The big problem I believe we all have is fear and greed. Most of us are so greedy that we can't stand to be wrong 5 or 6 times out of every 10 trades. So we keep searching for the Holy Grail. In order to get over the fear of losing, one has to find a system and run it on old data until you realize that it may work okay! Call anytime 308-775-3140.
System Testing Observation - Adam White
Here is an interesting observation I made while system testing.
Say you run a system test over 10,000 bars of data, then print out a chart of the system's equity line. Then repeat the test, but start 100 bars later. Let's say two trades were included in those 100 bars, so they've been dropped. Now print the second equity line and compare it to the first. You'd get exactly the same equity line, but 100 bars shorter. Right? Wrong!
When I do this I get a radically different equity line on the second test, i.e., they are not near-mirror images of each other. My hunch is that a form of the chaotician's "butterfly-effect" has arisen: changing any given trade's market position (long, short, flat) will effect in a chain reaction all the subsequent trades in complex and unexpected ways. Here dropping the first two trades could very well change the system's market position when the third trade is calculated, and so on.
I believe this observation has profound and unfortunate implications for the robustness of system testing. It's a second and more subtle problem that lies behind the mere curve-fitting/optimization problem.
If dropping a couple of early trades will always effect later trades, then there's no truly "neutral" starting point with any test data. Where your test data starts determines the final test results just as much as your system does.
Editor's Note: Not too many CTCN members are aware of this but I have known about this for some time. The success or failure of many different mechanical systems is predicated to a surprising and varying degree on the sequence of events just prior to the first actual trade generated by the system.
The trade setup and timing of the first trade can have a profound effect on the subsequent trading results. The circumstances and timing of entry into the first trade can sometimes make a huge difference in the overall trading performance.
You Must Pay Taxes On Unrealized Profits! - Mervin Pearson
You are correct in that the IRS tries to take advantage of the system that they devised. If a trader has a $100,000 profit on 12/31/95, even though it is not realized, you must pay taxes on that gain even though you have not closed out your position. If you then let your $100,000 profit go away you will only be able to take off $3,000 per year. If you never trade again, it will take you 34-years to write it off.
The real bad part comes in because you have to pay taxes on the $100,000 gain for your 1995 tax return, even though it has not been realized on the trader's books.
Also most traders do not know that All Commodity Trading Income and Loss are to be reported on Form 6781 (Gains and Losses from Section 1256 contracts). This is the actual name of the form. 60% of the gains and losses are long-
term and 40% of the gains and losses are considered short-term. The numbers flow down on the form and are transferred to Schedule D.
Delayed Price Quotes Are Available On The Internet - Lanne Terry
Last week I got a flyer 'newspaper' from Knight-Ridder with some ads and articles concerning data. (Interesting historical stories!) One statement of interest hit my eye... that is, commodity futures and option quotes are available on the Internet on a 10-minute delayed basis (30 minutes on New York markets). I've been looking most of the weekend in my net program and am quite frustrated by not finding where this might be displayed.
I'm very dumb in using a computer and lower than that in the use of the Internet. Do you think some member of the CTC could assist me in the pursuit of proper direction to find and observe these quotes? I could barter something for repayment I'm sure (to provide adequate compensation) .... or they could submit an article to assist more that just me?
Opinion on Cherry Picker and Little Gapper Systems - Ed Young
I am a new member of CTCN and enjoyed reading the CTCN back issues. I was impressed with the opinions of club members who were trying to help each other avoid costly mistakes in purchasing systems in their attempt to find the Holy Grail. This letter is to provide some feedback and opinion to those members who are looking into David Wright's Cherry Picker and Little Gapper systems. I purchased both of these systems and used them in real-time trading for a number of months with mixed results. I no longer trade either system for the reasons stated below.
The Cherry Picker system runs in TradeStation on a 1-minute chart. The system is based on an overbought/oversold indicator of the ticks. It's an interesting concept to work with and may be of some value combined with some other systems, but by itself it's just like any other overbought/oversold indicator, in trending markets, it just doesn't work.
Another major flaw I found in attempting to trade the signals in real-time, is you could not get fills on about half of the profitable signals because the market moved too fast. Of course, you always got filled on the signals that lost money. With slippage and commission I could not make a profit even though the signals theoretically were profitable.
Editor's Note: Earlier, Ed mentioned his system uses a 1-minute chart. In all likelihood one of the main reasons it was difficult to get good fills on many of the profitable signals is a result of the system using 1-minute charts.
Some members will differ with me, but in your editor's opinion, one-minute charts are too fast and not significant enough (most bars with too few ticks) to use effectively in real-time trading.
It's a case of "not being able to see the forest thru the trees." This is one reason CTC's Real Success Methodology uses 5-minute charts rather than 1-minute charts.
This also comes into play with the system's guarantee, which if I remember correctly from the advertisement, only guarantees that if the "signals generated' do not result in a profit within 3- months, you can send in your records for a refund.
First of all, you can't get fills on a lot of the profitable signals and if you don't get good tick data for whatever reason the signals are not going to be accurate. Your signals may also disagree with the 'official' signals that Wright keeps to verify your claim that the system is not profitable.
I never tried to go back and get a refund because of my interpretation of the guarantee. It just wasn't worth my time to put together all the records and then have to argue over it. I just chalked it up as an expensive lesson.
With regard to the Little Gapper system, you don't even need a computer to trade this currency system; however, you'd be crazy not to have one with a real-time data feed to figure out a better way to trade it. Basically, the system trades the Swiss Franc and Japanese Yen in the overnight markets. If you've ever traded in currencies overnight, you know how difficult fills can be, not to mention lots of lost sleep.
If you're willing to trade the system the way it is, you can sleep at night but you have to sleep with your losses. I had a month or two where this system made over $10,000 based on the signals: however, in real-time you could not get the fills that showed up by paper trading it, and therefore you sacrificed profits.
I never duplicated in real-time the results that showed up in the advertisements. With some modifications, this could be a profitable system and holds some promise. It's definitely not for the faint hearted.
Overall, there are better S&P systems out there to spend your money on than the Cherry Picker. In real-time, it doesn't even come close to the advertised profits. The Little Gapper system can be adapted to become profitable, but it will probably never live up to the advertised results.
Editor's Note: If anyone wishes more info from Ed regarding his experiences with these systems you can get his phone number from CTCN and may call Ed after 4:15 pm EST.
Opinion On Kent Calhoun's 5-VBTP
Method - Chuck Milich
This is in response to information request about Kent Calhoun's 5-VBTP Method. Sorry it has taken me so long to write but making money in the markets these days, even when using Kent Calhoun's materials, can be very time consuming and difficult.
About performance information. Since Kent's materials contain information about numerous methods and computerized back-testing of approaches using those methods, it is difficult to provide performance information.
For example, if a trader were to take all the 5- VBTP entries on a daily S&P 500 chart, that trader would probably lose a considerable amount of money. However, if the same trader incorporated the results of selected approaches and only took 5-VBTP entries that had a high probability of success based on the computerized back-testing information provided by Kent, the trader would have a good chance of making money over the same time period.
Kent's manuals contain 2000 or more pages, most of which is tabular listings of computerized back-testing results using the 5 VBTP entries in different ways and in different time frames.
After analyzing these approaches and their test results, a trader can select one or more approaches that the trader might feel comfortable with and develop a trading plan based on those approaches.
Each trader who buys Kent's materials will probably develop a trading plan based on a different subset of approaches included in Kent's materials. This will make each trader's approach unique and thereby make each trader's performance unique. For this reason it is very difficult for me to provide performance information on Kent Calhoun's 5-VBTP method.
Additionally, of all the people with whom I have discussed Kent's 5-VBTP approach, I have yet to find one who uses only Kent's information provided in his manuals. Everyone I've spoken with has combined elements of Kent's various approaches with elements of other approaches they've learned from other vendors or other educational sources. Each person uses this combined pool of knowledge to develop their own unique trading plan.
Developing a successful trading plan is only the first major task a full-time trader needs to complete. Next comes the development of a money management approach (which can either make or break just about any trading plan) and developing the psychological mind-set to implement the plan without deviation.
Each of these three major tasks is very difficult and very time consuming. Once a trader lays the foundation in each of these three areas, he or she is constantly revisiting and revising each area. The markets continually change and trading those markets is an ongoing learning experience.
The above is just a long-winded way of saying that I can't provide performance information on Kent Calhoun's 5-VBTP Method. If Kent's materials provided a system of objective rules that would be executed the same by everyone who purchased them, then performance information would be available. However, since Kent provides methods and approaches rather than system(s), such performance information is not available.
I hope that your members get some benefit from the above information. If your members have any specific questions about Kent's methods, I'd be happy, to respond with the understanding, of course, that I can't divulge confidential information from Kent's materials.
Opinion On M.T.G. by S.K., Charles Lindsay's
Trident and Others By G.K. An Anonymous Trader
I purchased the M.T.G. (by S.K.) system about a year ago and could not recommend it. There was no manual per se. I received two sets of charts with handwritten calculations on them and a cassette tape.
The real instructions, however are given by Mr. S.K. via phone in two or three sessions which range from one-half hour to an hour with further instruction available as needed. There was no track record provided. It is not an optimized system. It would be difficult to program and there were no results from back-testing provided.
S.K. is (allegedly) not a full-time trader nor even a full-time vendor. I have bought a number of video tapes, books, systems and seminars and while I use very little of what I have been exposed to, I often felt that I learned something of the intangibles of trading even if I did not use the specific methods. I did not get that feeling from Mr. S.K. I think because this is a sideline business for him.
The system does not seem to be completely settled in Mr. S.K's mind yet. For instance, the timing component advertised. I was told what that was, but also told that Mr. S.K. no longer uses it because it caused him to "miss too many good trades." A number of other components taught via phone were different from those identified in the tape.
I think most of the advertised descriptions of the system (allegedly) are either misleading or outright foolish. The "Exact Mathematical Nature of the Markets?" "Based on Newton's 3rd Law of Motion?" I don't think so. Now, I don't bother to read further when I see things like that advertised.
Regarding the $200-$300 stops, the advertisements lead one to believe that you know in advance where to place your order with a corresponding stop - that you can forecast within $300. In fact, when the market reaches a preset point, within $200 - $300, then you place your order.
But the order (for a Buy) is at the high of the range of the day when the preset point was hit with a stop at the low of the day. Granted, this can be a tight stop, but only for some of the slower markets where just about any system would give you a tight stop.
The bottom line however, is that I followed the system faithfully for about three months. The analysis took much longer than advertised. I came up with about three or four trades, all of which lost money. Spend your money on something else.
I recently entered a trial subscription with the Tradebase Network. This is the product developed by Charles Lindsay of Trident: A Trading Strategy fame. I dialed in daily for about a month without ever accessing a trade. At first I was told that there were system problems, then data vendor problems.
One day, it appeared everything worked, however, I could not get a trade list. The next day, I was informed of a profitable wheat trade from the day before, but still no trades for the day. The next day, I was told that some of the previous day's trades made money, but some lost. Still no trades for me. After that and since then, I have been unable to reach the network or Mr. Lindsay (who, as far as I can tell, is the only one who works there). I am tying to get my deposit back now.
I have found a number of useful products. I highly recommend the Larry Williams books, video course and newsletter/hotline. A beginner could do a lot worse than to simply follow the Williams hotline for several years until developing his own system.
The Market Wizard books are on everyone's must read list, including mine. However, I have found Mr. Schwager's other books just as illuminating, if not quite as inspiring.
I have read Robert Weist's book, You Can't Lose Trading Commodities and have found it worthwhile. There have been a number of useful articles in CTCN on scale trading and these identify many of its strengths and weaknesses.
I might add that the ideal times to use this method are rather infrequent and that any trader using the method exclusively is likely to quit from boredom or try to apply the method under less than ideal conditions. Used judiciously, I think that scale trading is a useful tool in one's trading arsenal.
What's Wrong with Bob McGovern's Spread Of
The Month for December 1995 by PEP
Many professionals have got the NOB (Note-over Bond) spread wrong in the last 3-years. They have made a terrible mistake based on number analysis and have sorely ignored the fundamentals. These people need some background in bond investing. They have not thoroughly thought through this trade.
As a refresher, the NOB spread is the purchase of the 10-year US Treasury Note and the simultaneous sale of the 30-year US Treasury Bond. This can easily be accomplished on the CBOT where this spread is commonly traded.
Not to pick on Bob, since I am grateful that he contributed to CTCN, but nevertheless, I have seen so many get this wrong that I am compelled to address his comments.
He says, "historically, the March NOB has never been at current levels." Actually, Bob means in the last 13-years, where in reality bonds and interest rates have traded in the United States for 200-years. Raw interest rates do not need to be adjusted for inflation since they are what they are ... which is simply the cost of borrowed money and this cost always immediately factors in inflation. An interest rate of 5% in 1895 is the same as a 5% rate in 1995.
Bob is looking for a return to a "normal relationship between Notes and Bonds." His normal" expectation is based on the last 13-years which is not enough time to determine what is normal in this market. In the last 206-years, 65% of the years have had a long-term Treasury Bond yield below 5%. Please read that last line again. I would call that normal.
He also stated that the cash market, 10-yr. T-Notes "usually trade at a premium to the 30-yr. Bonds." This is not true if one looks at a longer period of time. His use of "usually" refers to the last 13-years only, again, not enough time. Furthermore, Bob asks "Why would anyone be interested in buying a longer-term instrument that paid less interest? Wow! Bob has not done his math and he obviously is not a bond investor.
The T-Note futures are based on a cash 10-year US Treasury Note with an 8% interest rate or coupon. (Actually, the CBOT acceptable delivery grades specify US Treasury notes maturing at least 6-½ years, but not more than 10-years, from the first day of the delivery month).
The Bond futures are based on a cash 30-year US Treasury Bond with an 8% interest rate. (The CBOT specifies US Treasury bonds, that if callable, are not callable for at least 15-years from the first day of the delivery month or, if not callable, have a maturity of at least 15-years from the first day of the delivery month.)
The only difference is the time to maturity. At maturity the bond and the note will each return (or repay) $1000 to the investor regardless of how long he has held that bond or what he paid for that bond. of course for every day the investor owns that note or bond, he will earn and be paid interest at the stated coupon rate.
Now here is where the fun begins! Bonds and Notes are priced on Yield To Maturity (YTM) and not on Current Yield (CY). CY is simply the amount of dollars you will be paid each year while you own that note or bond. YTM takes into consideration what you pay for that bond or note, what you will be repaid at maturity, and how long you will earn the CY if held to maturity.
If both instruments are trading at 100 ($1000.00 per bond) then the YTM=CY. The investor would have a simple choice of 10 or 30-years for the same rate. Now let's assume the note and the bond are both trading at 80 (80% of Par or $800.00). (I believe bonds in 1980/81 traded below 60). YTM will take into consideration that the investor will gain 20 points at maturity. The note holder will gain $2 a year (20 points/10-years=2 points per year). The Bond holder will gain only $.66 a year (20 points/30-years=.66 points per year).
So if both instruments are trading at 80 the CY may be the same, but the YTM is higher for the note. In the real world, market forces would correct this by bidding up the price of the note to trade at a premium over the bond price. Thus for discussion sake, the notes might be trading at 85 when the bond is at 80. The spread would be quoted at + 160 (5 points x 32=160 32nds).
Now let's assume that the notes and bonds are both trading at 120 (near current prices). YTM will in consideration that the Note holder is going to lose $2 per year up to the maturity of 100 in 10-years. The bond holder will lose only $.66 a year until maturity in 30-years. So if both instruments were trading at 120, the CY may be the same, but the YTM is higher for the bond.
In the real world, market forces would correct this by bidding up the price of the bond, thus the bond might be trading at a premium to the notes. As an example, the note might be trading at 114 and the bond might be at 120 and the spread would be quoted at -186 (-6 x 32=-186). (Near current levels).
At current interest rates if anybody thinks that the notes should trade at a premium to the bonds then they are being unrealistic. Not only that, if interest rates continue to decline (I believe they will) this spread will continue to get more negative (bonds an even greater premium to notes). The only way this spread (buy notes sell bonds) can work, is if interest rates trend higher and bond prices lower.
Except for relatively short periods of time, the interest rates have been on a decline for the last 13-years and will probably not stop declining until they reach normal levels. I mean normal for the last 200-years, not 13-years.
What affect do you think a balanced budget will have on interest rates? Most likely it will put interest rates at normal levels. What a thought! The NOB spread will most likely get much more negative and will continue its 13-year trend.
There will be times that the spread can work. But not based on whether the spread is at -180 or -190 or -222 or whatever. l believe a trader would be much better off analyzing the bond itself and if the trader determines that bonds are headed lower, the spread can be used as an inexpensive (margin wise) substitute for the bond itself. But if bonds are rallying, forget it, that spread will never work.
Third Of A Series On The Successful Use of Money
Management To Improve Your Trading Results - Tom D'Angelo
This is the third in a series of articles which describe how to construct a professional and disciplined money management plan, designed to allow the trade to manage his trading in the same manner as a successful business. Refer back to my previous articles in Vol. 4-1 and Vol. 3-8 for a detailed discussion of the Profit Center methodology and calculation of the required money management statistics.
In this article I will discuss the Performance Report. The Performance report is a summary of all the significant money management statistics for each individual Profit Center. Each Profit Center is a business and the Performance Report is a management report which reveals your success or failure in managing that business.
The Trading Plan is the trader's strategy for the next trade based on the information provided by the Performance Report. The Trade Journal is an "after the fact" critique of the Trading Plan after the trade is closed out with a profit or loss. I will discuss the Trading Plan and Trade Journal in my next article.
There appears to be lots of interest in the Real Success trading methodology. I have not purchased this course but I will try to describe a sample Performance Report for Real Success methodology traders.
First, if I was trading the Real Success method, I would set up the following Profit Centers:
RS(M)- All trades taken from the Real Success Methodology
RSDAY - All Real Success day trades. Overnight Real Success trades can be entered into a Center named RSONIT
RSSP500 - Real Success trades segregated by the future traded (RSSWISS, RSBEANS etc.)
RS3MIN - All Real Success trades taken off of 3-minute bars RS5MIN - All Real Success trades taken off of 5-minute bars RS3MINSP500 - All SP500 trades taken off of 3-minute bars (RS3MINSWISS for all Real Success trades taken off of 3-minute bars for Swiss Franc, etc.)
Substitute 5MIN for 3MIN to segregate trades taken off of 5-minute bars. Example, RS5MINSP50O for all SP500 trades taken off of 5-minute bars.
Helpful hint - If you are planning to paper trade the Real Success methodology first, simply add a P to the end of all the Profit Center names. The P signifies a paper trading Profit Center. For example, paper trading the Real Success method with 5-minute SP500 bars, you would enter the trades into a Center named RS5MINSP500P. After you have about 20 paper trades in each Center, calculate the statistics I described in Vol. 4-1 of CTCN and you will have excellent information as to your performance paper trading the Real Success methodology for each Profit Center.
Results of the paper trades can then be compared with real time results by using the Performance Report.
When you begin real-time trading, create The Profit Centers I have described above (without the P at the end of the name) and enter the real-time trades into those Centers.
After 20 real-time trades have been entered into a Profit Center, you will have a good data base of trading information and can complete your first Performance Report.
The following is a brief description of the items contained in the Performance Report.
Profit Center Name - Name of Profit Center analyzed.
Example, RS5MINSP500 for all trades taken from Real Success methodology trading 5-minute SP5OO bars.
Profit Center Type and Goals - Description of the Profit Center and the financial goals the trader is attempting to achieve. For Example, Profit Center RS5MINSP500 will contain only SP500 trades taken from the Real Success methodology based on 5-minute bar charts.
After 100 paper trades, the trader has achieved 60 profitable trades (6O%) and 40 unprofitable trades (40%). Average Profitable trade was $600, average unprofitable trade was $400 for a ratio of 1.50. The Profit Factor was calculated to be 1.23. Net profits after 100 hypothetical paper trades are $2000.
Worst drawdown was $1800. Best series of winners was 6 with $1600 in profits. Worst series of losers was 4 with $1550 in losses. The trader will try not to lose more than 3% of capital on any one trade. These statistics of hypothetical paper trades can then be used as goals to be achieved with real-time trades.
The remainder of the Performance Report lists statistics from real-time trading.
Initial Capital - $30,000. This serves as the funding requirement for the business to cover margin requirements and trading losses.
Drawdown - Current drawdown in progress=$1050. Largest actual real-time drawdown=$2300
Series - Worst series of consecutive losers=4 with a loss of $1300 in the series of 4 trades. Best series of winners=6 with a profit of $1700 in the series of 6 trades.
Current series in effect - 2 consecutive profitable trades with a profit of $600 in the series of 2 trades.
Largest profitable trade - $ 950 on 3/11/96
Largest unprofitable trade - $1020 on 2/ 5/96
Optimum number of contracts to trade=3, based on Ralph Vince's formula.
Trading efficiency - 57% winners and 43% losers.
Average profitable trade=$500. Average unprofitable trade=$300. Ratio of profitable to unprofitable=1.67.
Range of losing trade as % of capital=2.1% to 4.3%
Profitability - Profit Factor=1.14. Profit Center is profitable with profitability trending upwards. I use graphs to determine the trend of profitability with the Pro-images module of my MANAGER money management software. I will describe in my next article how I use the trend of profitability to determine how many contracts to trade.
Current net profit after 60 real-time trades $1100. Current Capital=$31,100 which equals $30,000 Initial Capital plus $1100 net profit.
Thus, the trader has established a business named RS5MINSP500 which is producing revenues (profitable trades) and expenses (losing trades + commissions). The Performance Report informs him of his trading performance in the RS5MINSP500 business as well as enabling him to compare actual real-time results with goals derived from hypothetical paper trades.
The Performance Report takes the trader out of the dark and into the light. He knows exactly his trading performance for each of his businesses and can instantly explain to anyone his profitability and efficiency as a speculator.
Most traders experience psychological problems due to the fact that they attempt to manage a business (i.e. trade) without any type of organizational structure which can provide them with the information necessary to execute disciplined, informed and educated trading decisions.
Nearly all traders manage their trading using monthly broker's statements which provide a "macro" view of their trading. These statements only inform you as to your overall profit or loss for all your trading. This type of data is totally inadequate for the professional trader who requires more detailed information such as provided by the Profit Center methodology.
Hopefully, the reader has begun to see why many aspiring traders experience the same psychological problems....fear, greed, anxiety, inability to "pull the trigger" etc. The average trader operates in a fog. He has no money management methodology to provide the structure for successfully managing his trading business. Since he operates in the dark, he inevitably becomes uncertain and anxious. Continually floundering around in the dark makes the situation worse and worse, like a snowball rolling downhill.
You cannot successfully manage any type of business without first organizing your trading performance into a meaningful structure which reveals trading strengths which can be exploited and weak areas which must be eliminated or reduced.
The Performance Report provides the basis for formulating the Trading Plan. The Trading Plan is the strategy for the next trade based on the trader's trading performance as revealed by the Performance Report. I will also explain how the Performance Report is used to formulate the Trading Plan as regards to how many contracts to trade.
After the Trading Plan has been executed and the trade closed out with a profit or loss, the trader completes the Trade Journal. The Trade Journal is the "after the fact" critique of the Trading Plan. These three reports are specifically designed to eliminate the psychological problems which plague most traders and create an environment conducive to executing rapid, informed and educated trading decisions.
The Trading Plan and Trade Journal will be described in my next article as well as how this type of methodology promotes psychological stability and significantly reduces stress.
I will also describe how to file all the reports so that the trader will now be operating in a professional, disciplined and informed trading environment . . . similar to a successful business and structured to engender confident trading decisions. This type of environment is specifically designed to advance the trader up the learning curves of the three disciplines necessary to achieve successful long-term successful speculation: 1. Trading methodology; 2. psychological discipline and; 3. Money management.
Insights for the "Novice" Trader and Other
Comments By Gale & Jo Paxton
Jo and I are new subscribers to CTCN. So far we have found the articles in the back-issues very interesting. Just how helpful they will be remains to be seen. We were somewhat disappointed in the content of the Income Tax articles in these back-issues since they did not really answer the questions we have on how we can write off our trading expenses, etc.
We are quite pleased with the newest issues and find them very informative. Thank you CTCN for providing this forum and all of the people who take their time to make very valuable contributions to CTCN subscribers.
First a little background on ourselves, our contribution toward the education of the new or novice traders, followed by some comments on a few of the articles contained in Vol. 4-1. By the way, we really like the new format. It has great continuity and allows you to flow right through it with great ease.
A little background. On July 31, 1992, I voluntarily left the aerospace industry after 37-years in the engineering side of that business. On January 2, 1992, I was transferred to my company's facility in Huntsville, AL to work on the Space Station program. After 4-months on that program I became extremely disenchanted with the excessive waste on the program caused by NASA mismanagement and their internal politics. My efforts to transfer back to Seattle failed so Jo and I made the very difficult decision to quit and return to Seattle with the hope of applying my skills to a more beneficial and productive career which did not happen. I was either too old or my computer skills learned while with my previous employer were far behind the times.
Jo, in our 42 years together, has been a great domestic engineer, mother and has worked when needed and when she felt she wanted to do more than the domestic engineer scene. Initially, Jo went back to work so that we didn't have to dip further into our savings to live while we worked on our trading. While Jo worked to provide our sustaining income, I made a very poor attempt at learning how to trade and traded with disastrous results.
After working for about a year we both took time off to trade, but still did not have any success so I went back to work in 3/95 as a temp doing light industrial work at $6/hr. For those of us in the over 55 age bracket, it us very difficult to get decent paying jobs since most companies want younger people who will work for lower wages.
In 6/95, 1 went to work for an auto parts supply company as a parts counterman and am now an assistant manger which still doesn't pay a living wage. Since 3/95, Jo has been the trader in the family since I have a very weird work schedule and don't seem to have the time or I'm too tired to do much chart analysis.
How did we get involved in trading Futures? It all started when out of the blue in 3/93, we received an ad for the Ken Roberts Commodity Futures Course. After we reviewed his material we decided this may be a way to make a pretty good living from a business that would allow us to work at home, so we sent for the course.
We weren't and aren't looking to make millions, just a comfortable $40K or $50K a year is very acceptable. Maybe this is not the right mental approach, maybe if we think millions we can more easily reach our first target.
The Ken Roberts course material as presented made trading futures appear to be very simple and very lucrative so, after completing the 90-day course, we opened an account with one of the three brokerage firms recommended by Roberts. These brokerage firms were supposed to be very supportive of the Ken Roberts students and offered them the guidance to become good traders. Wrong. In retrospect their assistance was geared more to their $90 to $100 round-turn fees rather than with providing knowledgeable trading guidance. More on this later.
During our trading career we have been with four different brokerage firms, two of them twice and we presently have one small account open. More on selecting a broker later.
Since we started trading it has been mostly downhill financially, but we have never been involved in anything that is more interesting, fascinating, educational, informative, challenging or more frustrating than futures trading. However, we continue to feel that one can make a very good living from futures trading and we are not ready to give up.
For some time we blamed our lack of success on our brokers. Why? Because we felt that we are ignorant beginners and our brokers had all of the answers, so we traded mostly on their advice and with their systems.
As we dug deeper and read more books on futures trading, we have finally realized that we have met the enemy and he is really us, not our brokers.
We did have a managed account and self-directed account with our second broker. After the managed account lost almost 50% in less than 3-months we felt that our broker wasn't doing any better than we were in our self-directed account so we closed that managed account and transferred the remaining funds into our self-directed account. This is the one time we will put some blame on the broker, but the losses, independent of the managed account are our responsibility.
Based on our experiences during these past 2-one-half plus years and the old saying, "If we knew then what we know now", we offer the following suggestions to those who are thinking of trading futures and to those who are new to trading.
1. First of all, if you cannot afford to loose, don't even start trading.
2. Do not spend a lot of money taking trading courses.
3. Before you start trading, read extensively, books written by successful traders, not to try to adopt any of their trading methods but to become more familiar with the world of futures.
4. Study the technical analysis books by John Murphy which is excellent, Dr. Alexander Elder, Jake Bernstein, Larry Williams, Mark Douglas (The Disciplined Trader) and George Angell.
Jack Schwager has two books on technical analysis that we haven't read yet, but plan to when time allows since they are highly recommended by John Murphy for whom we have great respect. Also, we've read condensed summaries from Steve Nisan's first book on candlesticks and plan to read both of his books, again when time permits. Martin Pring on Market Momentum is also excellent.
5. Study some books on fundamentals just to get some insight on how these can affect the markets. We have found that trying to trade with the fundamentals for those of us that trade at home and not at one of the exchanges is almost impossible because, by the time we get the fundamental news, the markets have already reacted to it.
6. Brokers; be aware that there are some real surprises between the services you actually get from the brokerage firm and what they advertise. Their ads are great and imply a big basket of free services, but once you get their info package you will find that all of these implied free services are not free.
The brokers also say that part of their services are up to the minute news about the markets which we have found to minimal or totally lacking. We get some early morning "commodity" market news from CNBC and Bloomberg News and have found that our brokers don't have a clue with regard to these news item when we call to discuss a possible trade.
Do not depend on your brokers for advice, they are usually looking at different time-frames than you are and their advice, based on their time-frame can either get you into trades that are losers or keep you out of trades that are winners.
Also, if you are not trading with their system or methodology, they may be of no help at all even when asked for an opinion. Trade from your own time prospective and not theirs. Many brokers have developed their own systems and more often than not, their system will be in conflict with your own trading strategies.
Because most of us are either consciously or subconsciously affected by the news we see or hear, by the views or our own broker and by other experts. We feel that traders like us would be much better off not listening to anyone.
When Jo and I first started trading we listened to everyone because we were new to the game and after all, these were experienced people and knew a lot more than we did.
Well they may be more experienced, but they are wrong more often than they are right. Breaking this habit has been very difficult for us, we haven't quite succeeded yet, but we are making progress. Old habits die hard.
Some of the best advice you will ever here from the "experts" is "Plan Your Trades and Trade Your Plan."
Those of us that live on the West Coast are also at a disadvantage when it comes to getting any information out of our brokers who are usually located in the Chicago area. The markets close at 2:15 CST which is 12:15 PST. Dependable end of day quotes don't come in until around 5:15pm here if you are with Dial Data (more later) or CSI.
If you are a west coast trader that gets up before the markets open, you're up by 5:00am PST and you usually don't finish with your chart analysis until 10:00 or 11:00pm PST, if you are looking at most of the markets which makes for a very long day.
It has been our experience that most account execs or "brokers" arrive at their desks just about the time the markets open and leave just after the markets close, so about the only discussion you have with them is to place orders.
So far we have been with Barons (Irvine, CA one of Ken Roberts recommended companies), COMPAK Trading (Costa Mesa, CA, twice), First American Discount Corp. (Chicago, twice, our present brokerage firm) and Lind-Waldock. Of these companies, 1st American has come the closest to living up to their ads in our opinion. We are presently evaluating Ira Epstein.
Back-Testing Systems: Unless one has an automated back-testing program, the results usually end up being subjective rather than objective. As an example, we do not have automated back-test capability so we usually print out a chart of the commodity we are going to back-test. As a result of having to use a full chart printout, we have some pre-knowledge of what has already occurred over the period of time covered by the printout.
While we start at a selected point several days after the charts beginning date and cover everything else to the right of the date we are presently working with, we still have a subconscious knowledge of the price activity that has occurred downstream of the specific date on the chart we are working on.
As a result of this subconscious price activity pre-knowledge, we have found it almost impossible to objectively back-test the systems we have tried. In our opinion, unless you have a charting program that provides you with automated system back-testing capability you will always end up with subjective results for a system that will probably result in mostly loosing trades. (more on charting software in a separate article)
1. Psychology: This probably should have been up at the top of the list because, if you don't have the right mental attitude or psychological makeup to take your loses in stride you will never be a successful trader.
You will always be putting your energies into blaming your broker for your loses or dwelling on your loosing trades which causes you to look at the markets from the wrong perspective. As a result you will keep making the same mistakes over and over.
Of course trading commodity futures can be very scary which also results in the fear of loosing and activates our fight or flight mechanism which reduces our capacity to think clearly.
It has been pointed out to us by several expert traders in our reading that you look back at your loosing and winning trades for the purpose of determining what there was in your analysis that caused you to make a wrong or right trading decision, and take note of what you saw so you don't make the same mistake again or so you will more readily recognize what made the trade a winner (more on mental attitude in a separate article).
Read the articles in Vol. 4-1 by Kent Calhoun, Education of A Trader and by J. T. Byatt, "Face Up To It, No One Twisted Your Arm." They are great articles and offer very much for both the novice and experienced traders.
2. Paper Trading: paper trading is too subjective and does not encounter the mental and psychological challenges encountered in real world trading. Therefore you can lull yourself into believing you have discovered a fantastic system which, when applied to real trades, will end up loosing.
One idea that we offer for determining your mental attitude or psychological make-up toward trading before you actually open a margin account and start trading for real is to:
1. set up two separate trading bank accounts with the funds you expect to commit to trading. (One account simulates the "Exchanges" (CBOT, CME, NYMEX, etc.) and the second account is your actual trading or margin account);
2. paper trade using these funds;
3. when you have a winning trade, transfer your net gain (net gain will be your gross gain minus $100 to cover brokers fees and slippage) from the "Exchange" account into your margin account;
4. when you have a loosing trade, donate your gross loss to your margin account plus $100 to your favorite charitable organization and;
5. to keep track of these accounts, set up two spread sheets, one to record all trading loses and gains and the other to track your "Exchange" account.
While this method is not exactly the same as "real world" trading, it will probably come the closest to simulating the real trading world. By donating your loses, your account actually goes down with real out of pocket money the same way that your real margin account would if you were actually trading.
Putting the money in a recoverable slush fund does not work because you have the same mental/psychological trading approach that you have when paper trading without out committing actual funds. It takes the experience of real loses to determine if you have the right mental and psychological make-up to trade futures.
6. Trading commodity futures can be very exciting and exhilarating. It can get the adrenaline pumping as you watch the markets move, it makes you feel that you just have to get in and lure you into some very bad trades. Stay calm, cool and objective or you can loose your shirt very quickly; this is experience speaking.
In wrapping up this rambling dissertation, we want you to know that we still haven't reached the successful trader's status as yet but, we have no thoughts of giving up.
It takes a long time for some of us to unlearn what was wrong with our thinking and reprogram ourselves to right thinking and mental attitude. We hope that what we have offered here will benefit all who read the article and that it will help you in your quest for successful trader status.
Charting SoftwareBy Gale Paxton - This is in response to James Mitchell's request for input on SuperCharts and MetaStock; Vol. 4-1. When Jo and I first started trading in 1993 we looked into several different software packages.
We selected SuperCharts on the advice of our then broker who uses TradeStation and ordered it on the 90-day trial basis. We were very impressed with SuperCharts capabilities for adding your own indicators, buy and sell signals and its technical tools menu. If memory serves, our version did not have the back-testing capability that later versions have.
Initially we were thrilled with SuperCharts but ran into some problems with their volume and open interest capture and its inability to import different formats from other sources as advertised.
We called their technical support line several times in an attempt to correct our problems. First of all, this is a toll call to Florida which gets very costly, especially when you are put on hold for long periods of time and second, they were unable to solve the problem with their software. We could have over looked the cost of the toll calls, but Omega's inability to resolve our problems was unacceptable.
As a result of these problems and since we were still within the 30-day trial period we requested a refund. It took several weeks, several letters and several phone calls to their marketing department and Omega's president to finally have them agree to our request for a refund.
We would recommend and use SuperCharts if their technical support had been efficient, knowledgeable and responsive, and had they not given us the run around on our refund.
With regard to MetaStock, we did not order this on a trial basis so we can't say much about it. We did get one of their demos at the same time we got the SuperCharts demo and felt that SuperCharts offered more.
There have been several improvements to both SuperCharts and MetaStock since our last review of them, so it is possible that MetaStock has expanded their capabilities to be more competitive with SuperCharts. One thing we have noted is the price difference. In our opinion you probably couldn't go too far wrong with SuperCharts for the price.
We have been using MegaTech charting software now for over two years. It is not as powerful or complex as SuperCharts or MetaStock, but it has most of the technical tools needed to do your analysis, and it is less expensive.
One of the major problems with MegaTech is a price inaccuracy when you are using the cursor to determine the price at a Fib line or trend crossover, etc. Otherwise it is a good basic program at a very good price.
Ken Roberts by Gale Paxton - This is in response to James Footer's request for input on the Ken Roberts course; Vol. 4-1. The Ken Roberts course is how Jo and l were introduced to the world of commodity futures trading. If memory serves me, it is a two or three part course and Roberts touts it as "The Worlds" greatest money making machine.
While Course No. 1 gives you a very basic introduction into trading futures, in our opinion it is written in such a manner as to imply, at best, that you can make a fortune with great ease, and at worst, that you can make a very comfortable living with great ease.
In fact, the course implied that it was so easy that all you had to do was look for M top and W bottom patterns which give you trading signals. Yes, he has several warnings and caveats that warn of the downside to trading futures, but it is poorly stressed and overridden by the course presentation to the point that one can get sucked in and get started on the wrong foot.
We cannot recommend this course to anyone. We feel that there are better and cheaper ways to learn about trading futures. Your local library is an excellent source of books by successful and knowledgeable people who can start you off with a much better perspective of trading without laying out any money on trading courses and attending costly seminars.
In closing we pose this question. If Roberts courses are so great, why is he spending his time selling the courses, inspirational tapes, etc. through British American Trading instead of trading the futures markets?
System 2000by Gale Paxton - Response to Julian Bond requesting input on System 2000, Vol. 4-1. Sometime in 1994, Jo and I were introduced to System 2000 by our then broker (account executive). Since he was familiar with the system's inventor, Arnie Gronfeld (deceased) through a financial program on TV in the Los Angeles area, the program was purchased on a cost shared basis.
Apparently the gentleman presently peddling this system bought the copyright from Mr. Gronfeld before his passing or from his estate.
There is quite a bit of instruction which gives you the basic methodology and concept, however, we feel than Mr. Gronfeld did not provide all of his complete methodology and signal interpretation in the manual.
Mr. Gronfeld states that the system is so simple that a 10-year old can trade it and be more successful than an adult, because they take all the signals on blind faith, we have our doubts. I will attempt to give a brief description of the system.
The system is based on the 3-day and 10-day closing averages. It uses the 3-day closing average to generate a set of numbers. If you will picture a spreadsheet with columns, one for the daily closing prices, one for the 3-day closing averages, one for the change between the previous 3-day average and the current 3-day average and one column that sums the current 3-day and the 2 previous 3-day averages called the net column.
The net column will show either positive (red) numbers or negative (black) numbers. Mr. Gronfeld did all of his calculations and paperwork by hand and used colored pencils to differentiate between the positive red numbers which are your buy indicators and black for the negative numbers which are your sell indicators. The buy signal is a change in color from black to red in an up trending market and the sell signal is a change from a red number to a black number in a down trending market. After receiving a signal, Mr. Gronfeld always went in market on open the next day, claiming that this usually gives you the best entry price. In addition to the color changes, when you have three equal or near equal net numbers indicate a trend change is eminent in the direction of the net number color.
Mr. Gronfeld did not clearly define the maximum percentage difference allowed between these numbers that would equate to "near equal." In our correspondence (through our broker/partner) about 18-months ago with the present marketer of the system, he defined near equal as a maximum difference of 15%. Changes from one color to another, red to black and black to red, are also supposed forewarn of possible short-term trend changes.
We set the system up on our spreadsheet which also includes the 0, H and L as well as the closing prices. The H, L and C to determine the projected high and low for the next day based on some formulas used by old time veteran traders. Since we don't have a way to download the daily closing prices automatically into the spreadsheet, it takes quite a bit of time to enter all of the market data by hand each night which either makes for a very long evening or takes away from the time you can spend on analysis.
We have spent considerable time back-testing the system by hand. Initially we were quite impressed with the results and started making trades based on the system which proved to be disastrous. We had all of these buy signals in the energies and took them, the markets were in a downtrend at the time. We did have some minor success with the bond market when it was in a big horizontal channel which is the type of market that the system seems to be at its best.
When trading the bonds with our then broker, the bonds were in a broad channel and we traded off of the peaks in the net numbers. If the nets were red we watched for a peak and fall off. We would go long the day after we had a lower number in the red net.
Since our broker, of course had the advantage of real-time quotes, he would watch for a bottoming pattern and enter the market based on a 10-minute price bottoming pattern. These trades were usually limited to one to three days. We used the same approach for short positions in the black nets and were therefore able to take advantage of the channel swings.
When the bonds started their major downtrend, the system started giving us bad signals or our interpretations were incorrect, so we lost the gains we had made when they were in the big sideways channel.
Of course our back-testing, being done by hand rather than with an automated test program probably resulted in very positive subjective results. Regardless of how careful one tries to be with back-testing in this manner, objective results cannot be obtained due the affects of the pre-knowledge in subconscious of what the farther out price patterns are.
Off and on we have abandoned the system and attempted to develop our own, but something keeps drawing us back to System 2000. We feel that the system has some very good points and that with a deeper understanding, we will either stumble onto Mr. Gronfeld's nuances that supposedly made the system work for him or become so frustrated with it that we will scrap it.
One thing that we have discovered when revisiting the system is that quite often, when you get a series of near equal red nets in a strong downtrend or black nets in a strong uptrend that these are not necessarily reversal signals but are probably signals to add to an already established position with the trend. We have also established the fact that the system reacts too slow to give you usable and timely signals in a volatile market such as Cocoa.
Jo has been back-testing the system over the past 4-months or so, has been attempting to determine if there are other technical tools that can be used as filters in conjunction with the system signals that will offer a high probability of success. She is still testing this approach and we will pass on any successes as they occur. We are presently using System 2000 signals to alert us to start watching the price activity and our technical indicators a lot closer for trades.
We hope we have been able to answer most of Julians' questions about System 2000. Is it a boondoggle or a legitimate system? Aren't most, if not all systems being touted a boondoggle to a greater or lessor degree. I know that if we had developed a highly successful system, we might be very reluctant to put it on the market for everyone to use.
With regard to trading systems in general, like most of you out there in CTCN Land we have received many ads for trading systems and read about trading systems in various magazines. After reading all of this literature anyone could probably develop and market a "trading system" for a brief period of time.
Just by establishing a few simple ground rules that prove the system and by selecting the proper chart formations that matches the "system" rules, one could show a "system" with a great hypothetical track record. With the proper small print caveats in the ads, one could successfully market the system for a time before people got wise.
Therefore, I have become quite a skeptic when it comes to trading systems. I'm not making any accusations against anyone, but it does make one wonder sometimes.
The Delta Phenomena by Gale Paxton - This article is in response to Ed Shaw's request for input on The Delta Phenomena; Vol. 4-1. Just like every trader, Jo and I are still subconsciously looking for "The Holy Grail For Traders" even though we know it doesn't exist, so about a year ago we succumbed and bought Wells Wilder's book on The Delta Phenomena.
The Delta Phenomena is not a trading system; it is quasi timing system that predicts short term, intermediate term, medium term and long term turnaround points based on the cycles of the full moon. We will describe the intermediate, medium and long term cycles here because the short term is for intraday trading which we did not work with.
Using the daily price charts for the intermediate term cycles, weekly price charts for the medium term cycles, and the weekly or monthly price charts for the long term, a series of red, blue, orange and green lines in that sequential order, 21-trading days apart for the intermediate term, 13-weeks for the medium term and 52-weeks for the long term. Each full moon period is assigned a color. This information was provided when we purchased the book. For our purpose here we will begin with a red line as the starting color.
A number of delta points are established for the four color cycle. In other words the number of delta points range from 8 to 12 depending on the commodity. The system always has the same number of delta points between starting points, except when one encounters a single or double inversion between the last delta point and the first delta point.
This inversion phenomena is explained in the book. Be aware that each Delta Point location has a plus or minus tolerance and is based on averages which are also explained in the book.
One critical problem we have encountered is with the 21-day cycle. Since your trading month is only 20-days, it becomes a problem of adding an extra day and where to add it. We assume that Wilder's software package automatically makes this correction.
These turning points in relation to the red, blue, green and orange lines do not always occur at exactly the same point in each cycle, so you must also build a table that defines where the turning points occur in relation to each line. This establishes your points with a plus or minus variable relative to each line. This table is described in the book also.
Since we didn't, and don't have the where-with-all to buy his associated software, Jo and I spent many hours building the necessary charts by hand and ultimately on the computer.
If either one of us were experienced programmers we probably could have come up with one that would have built our charts and put the lines on for us. However, we would still remain uncertain about their accuracy because of this 21-day issue. The book also gives you some classic price patterns. i.e., breakouts from pennants, flags and support/resistance lines to base entry on when expecting a delta point.
It is our belief that The Delta Phenomena has some validity and could prove to be very valuable in terms of alerting you that you are near a turning point. The book in our opinion, leaves several things unanswered with regard to establishing your starting and ending sequence of numbers for each commodity as well as a clear definition of how to identify first and/or last sequence number inversions. This may have been done purposely to make purchasing the associated software package a necessity.
We have found that unless you want to put out the big bucks for his software program that does all the work for you, you will spend a lot of valuable time keeping your charts up-to-date by hand and you still won't be sure that you have the sequence numbers in the right place. This makes it totally useless in our opinion.
Also, The Delta Phenomena's accuracy varies between commodities which makes one reluctant to use it as an indicator.
While The Delta Phenomena is very fascinating, and with the book and software it might prove to be a valuable tool, we would not recommend that anyone spend the bucks that Wilder is asking for it.
Dr. Van Tharp by Gale Paxton - Comments on John Piper's article on Dr. Van Tharp' Vol. 4-1. By and large we agree with John's article regarding Dr. Tharp. We made the initial investment in his course a few months ago and Jo has been studying it in what little spare time she has.
My work schedule has essentially taken me out of the trading scene to a great extent but from discussions with Jo regarding Dr. Tharp's course, it is NLP (Neuro-Linguistic Programming) but geared specifically to traders.
It appears that, if one has the discipline, one could study NLP with the same goals in mind at a more reasonable price. His seminars sound wonderful but the price is a little rich for us.
Some of the advantages we see in taking Dr. Tharp's course are: 1. the psychological profile test that is geared to strictly toward traders; 2. He really makes you think long and hard on the reasons you want to trade and the reasons you are a looser; 3. He points out ways to determine how you are sabotaging yourself; 4. His tapes and meditations are very useful.
Quote Services by Gale Paxton - Can anyone out there in CTCN Land provide information on reasonably priced, timely and ACCURATE end-of-day quote services. Jo and I have been using Dial Data for about two years now and are very disgusted with their inaccuracies. It seems like at least once a week they transmit some really off the wall prices, particularly in the energy complex. If it wasn't for our broker's phone quote line we would not be able to even look at our charts in the evening for those commodities.
I have written to them regarding this problem and Jo has called their customer service people several times to get the problem corrected without success. Since they don't correct their inaccuracies until the next morning it requires us to make another toll call the next morning to download the corrected data.
We've looked into CSI but it would cost us over twice as much as Dial Data to down load from them for the number of contracts the we collect. HELP. We are presently checking out Don Twist's recommendation of Traders Access.
Also, is there an informal futures trading group(s) in the Seattle, Bellevue, Kent, WA area? If so, contact us via CTCN.
About Experts and Old Newspaper Clippings - Don McCullough
I've just finished rereading some clippings I saved from the Investors Business Daily newspaper. As you will see, some well-known people were very wrong with their forecasting. Sure, we'd all like the experts to drop success in our laps but reality usually doesn't work that way. For most people big money usually comes the hard way.
Larry Williams has a full page ad in the 5/2/94 issue of Investor's Business Daily newspaper. He's advertising a $595.00 per person seminar about how to sell stocks short. He says Wall Street is in the midst of a blood bath. Check out a chart of the averages and you'll see he was quite wrong. I wonder how well those who attended that seminar made out?
The Dow Industrials had just recently finished making a steep 400 pt drop. Very good timing for such an ad, that's for sure! Larry knows a lot about the markets--and, no one "calls-em perfect."
Author-trader Victor Sperandeo says in the 4/27/93 issue of this paper: "The stock market has put in one huge top." He sees the current decline as the start of a bear market. Over the next few years, the article says, he expects the Dow to be down 30-40%--to the low 2000's. Once again we have a very wrong forecast by an expert.
The famous Fidelity Fund manager, Peter Lynch, says in a 6/93 issue of this paper that "it's a mathematical given that the market in the 1990's will not match the pace of the 1980's." As we now know, the 1990's have surpassed just about everyone's expectations. Let me add, we may have a huge drop before the 90's are over. Note, I said may and not will!
In the 2/28/94 issue of this paper author-newsletter writer Stan Weinstein says, "We have a stock market that is topping out." He further states, "It's only a question of when it will break." Now ain't that the truth! Anyway, he was half right--sort of. The market did make a steep approx. 400 pt drop and then continued on up to the present time.
George Soros is one of the speculator giants in the eyes of many investors. An article in this paper dated 4/27/93 states that Soros recently bought a 10% stake in Newmont Mining Corp. for 400 million. Gold did go up nicely for about 4-months and then dropped as much and faster.
Then it went up about two-thirds of the previous rise and then went sideways for over a year until recently. Not exactly perfect timing and I expect the run-up was caused primarily because a lot of traders heard about Soros's interest in gold. Now may be the time to be in gold. Again I say may.
In the 12/22/92 issue of Investors Business Daily there's an article about the leading market-timers. Jim Schmidt, editor of Timer Magazine, asked some 100 writers of stock market newsletters what they saw coming for 1992. 60% were bearish and 40% were bullish. The market moved primarily sideways, within about a 300 pt range, during 1992. Nobody was right, you might say.
Robert Prechter, today's leading advocate of the Elliott Wave Theory was in this group of market-timers. Prechter was bearish in 1991 and also bearish for 1992. The Dow Industrials went up as much as approx. 800 pts during those 2-years. A significant bull move in anyone's eyes. Rather funny, the article says that Prechter was forecasting 1991 for the DJI for the year of 1991. The DJI made it to 3100 by the end of 1991.
The 9/3/93 issue of Investor's Business Daily had an article about Norman Fosback. Fosback is a noted newsletter editor (can you believe 8 newsletters?) and book author. In this article, and just previous to the above date, Fosback is telling a seminar audience he's more bearish on the stock market than he's been in 15-years. The DJI went up about 400 pts after this seminar.
Here's a fact that would have surprised just about all newsletter writers of that or any era. I don't have the exact date of this clipping but it was written sometime in 1992. The article states that the biggest bull market move, in terms of percentages, was between 1932 and 1934. The gain was 175%. (Have we broken that record with our current bull market?)
If you would listen to the old-timers like my dad, you'd swear that such a thing could never have happened. I've heard my dad talk about corn selling for 10¢ a bushel during those years. Some farmers killed their livestock because the price was so low they weren't worth the effort and expense of taking them to town to sell. Those were very difficult years for most city folks too. What a world of difference between the wealthy traders of 1932-34 and my rural ancestors!
There are several lessons to be learned from all of the above. First, try to do your own thinking. Forecasting is a pretty difficult thing to do--even for the best of the experts. Another is, if you're a long-term investor, following the trend is probably better than trying to forecast it. Last but not least, it is probably much easier to forecast newsletter, book and seminar profits than profits from the markets!
A Trader's Choice - Duane B.
Macintosh was a logical selection for this trader. As an A-4 pilot I enjoyed state of the art navigation, weapons & autopilot systems. Mac systems match the integrated, pilot oriented combat performance of a US Navy Skyhawk.
By contrast IBM DOS & Windows systems are cumbersome. IBM systems do not provide seamless integration or ease of use as Mac systems do in simultaneously running several programs. Tests confirm Windows '95 is no match for comparable Mac systems. See PC Week, PC/Computing & MacUser 12/95 issues.
Why, then, do most trading systems remain exclusively for IBM computers? Have traders remained silent too long? Have decisions regarding hardware selection been left by default in the hands of computer system developers?
The best trading systems evolve from a trader's needs. Not from the minds of computer programmers. Granted, we need the expertise of a professional computer programmer to execute the bits & bytes. However, effective testing & evaluation must be done by traders. Not technicians. Testing should be completed prior to sale. Yet traders are compelled to trouble shoot new trading systems pressed into service before tests are completed or documentation corrected.
The objective here is not to invite every trading system vendor to write Mac programs. Only the best will make the cut. Mac users are savvy. Not easy targets for fraud or superficial PR. Mac users find or develop their own robust trading systems. They can set aside a year to evaluate new systems under consideration.
One vendor recently failed the smell test. Slick promotions included a phantom "Engineer" who reportedly shifted from Mac to P.C. to run Omni Trader. No response was given to confirm his identity. What other problems have Nirvana clients encountered? If fraud is proven, a judge can award three times damages.
Technical reasons for not porting trading systems to Mac have essentially been overtaken by computer developments. The main reason vendors favor DOS is their perception of the market. Traders can influence that perception by assertively identifying their preference. Remember. You are the market.
Do you make your own decisions regarding hardware & trading systems? You are not alone if those decisions were dictated years ago by software selection. Now you are entitled to assert your options be returned. Vendors have limited knowledge regarding a trader's work, methods or strategy. Don't leave key decisions regarding these & related issues to a vendor. Let him know his days with you are numbered if he does not meet all your needs, including your hardware & operating system preferences.
Why should you bother? Good question. Several years ago a former IBM sales manager for Alaska confided that independent research revealed Mac users held a 3/1 advantage over IBM users in productivity. Maybe only 2/1 now. Is it yours?
Without a strong trader input, vendors will continue to make the unfounded assumption that IBM systems fulfill traders' requirements. Why should you be strapped to a system designed by technicians for the multitude? By contrast Mac systems are tailor made for ease of use, computers eliminated, learning curves flattened. Let your voice be heard. Call or Fax your vendor & CTCN today.
Traders may not be effective individually, but as a group we will be heard.
For example: Ralph Cruz is considering porting TradeStation to Mac later this year as reported recently by an Omega spokeswoman. Why has it taken 8-years for enough traders to speak out? Or did Cruz just have his head up & locked?
Cruz would be well advised to offer a free upgrade to Macintosh for all Omega clients. If not free, then at cost. He would be rewarded with keen insight regarding the direction informed traders are headed. Porting to Mac would expand his client base to include new entry level traders that need help leaping beyond the computers' barrier.
Flawed assumptions will be costly. Vendors probably make the right choice initially. Their first pitch to IBM systems is an effort to achieve profits with limited resources. Once there a vendor may need help recognizing real success is just over the horizon. Time to port a proven trading system to Mac.
Mac traders acknowledge two facts: 1. Success as an IBM system assures a rigorous test by traders was completed. 2. Porting to Macintosh, a vendor asserts his program is top of the line. Mac users know only the best make it. Recognition as a top trading program will resonate among traders. The system will become a bench mark from which other software & support will be measured.
An ideal trading system would run on a portable Mac; link via Internet to market data worldwide; provide direct links to exchange floors for trade execution; cross deck info to a workstation with ease. When offered, it will become the system of choice for thousands of traders currently tied to one site.
The first trading system that meets this criteria will have a powerful leg up in the market. If Cruz does not act swiftly, he will forfeit whatever lead he may enjoy. Others will take the initiative. Roberts-Slade, Inc. is already there with a proven Mac system. A few data handling & communications improvements would enable Enhanced Chartist to meet minimal requirements for an ideal trading system. Having passed the Mac test, Chartist should be ported to IBM systems for those compelled to remain. New systems will evolve with this concept in mind.
Trading a range of markets, I have migrated from daytrading indexes, currencies & bonds to grain, fiber & metal markets long- term. Enhanced Chartist, DBC data & Macintosh provide excellent images & portfolio service. Currently tracking all major futures, indexes & options in the background, Chartist enables focusing on movers with a click. Although dated, Chartist is as comfortable as an old shoe. The mind is free to concentrate on trade selection & strategy.
Several traders gathered nearby last year to share common interests. Lively discussion centered on computer systems & trading strategy. The merits of new systems were expressed with enthusiasm. When I asked how others were doing as traders, the silence was deafening. -- Not one was actively trading! -- Recently? -Not since blown out! Little interest was expressed for six trades I entered that day. Those trades went on to capture a 180% return on capital in '95. Meanwhile, my colleagues remain on the sideline. Preoccupied with systems & computers? Too shell shocked by past losses to reenter? A bit of both?
Am I forfeiting too much by remaining with Macintosh? Perhaps. I think not. Whatever the consequences they remain acceptable. Confidence remains. The best trading software will emerge as a Mac system. I will be there.
P.S.: Just received my first CTCN issue with all back-issues.
It is refreshing to learn that others, have weathered the gales of those initial trading years & emerged with winning techniques. We have much in common. Especially the outlook that winning comes from within. It may help others to learn the odds are not favorable. But if you look beyond the first three to five years, keep your powder dry and bolster your self confidence & optimism, you can reasonably expect a favorable return on your investment.
Entry level traders are fortunate to have this forum to hear it like it really is. Keep a healthy skepticism regarding offers that sound too good to be true. They are. You will sweat more blood & lose more than you intend before you find the right technique for you. Take that in stride. It is worth it. But do not be mistaken. It is neither easy in the beginning nor a sure thing. Remember, you will be among the 5 or 10% few that break through.
Having found modest success in long-term trading, I look forward to viewing the videos of the methods & applying the strategy of limited losses. I theorized using a low risk strategy eight years ago. I had neither the discipline nor experience then to effectively use stops. Successful trading requires both. The test now will be to apply that skill to fast moving, volatile S&P markets.
My initial experience, would not be encouraging for prospective new traders. I do not encourage friends or colleagues to trade. I would not impose on them the impact the first few years had on me. It is easy to look back & see those formative years as inevitable.
But no one was out there then, like CTCN is now, to tell it like it is. To focus upon a longer term reasonable goal. Winning is possible. Yes, even easy for those who break through. But most new traders will expend more time, effort & funds than anticipated before breaking through that barrier.
Several members mentioned problems initiating a trade. Fear of failure? Fear of loosing money? During eight years trading I have never met a margin call. By limiting risk to 50% of capital I have never exposed myself to a margin call. One broker sent a margin call but was embarrassed to learn his system was in error.
Relieve yourself of any fear of failure or margin call by simply committing less than a third or half of your capital at any one time. Do not leave that task to your broker. Keep your own portfolio up to date/minute. Then, when you have a strong buy/sell signal, you will not be preoccupied with questions regarding risk. You will have resolved that issue before considering your next trade.
A time consuming or difficult task? No. Make sure your trading software has an integrated portfolio that constantly updates your capital, active (open) trade balance, margin at risk and total balance.
If your trade system does not provide a reliable, real time portfolio running seamlessly in the background, then look for a system that does. Until that feature was added to Chartist I refused to consider it. As a result, a portfolio was added within a year. You are entitled to the same service by your trade system vendor.
In Defense of Joe Ross &Critical Of Bruce Babcock
Dr. Howard Marks
I have great concerns about Special Report #10, The Joe Ross Report. I have been contemplating taking a Joe Ross seminar and thought it would be a good idea to check out the Joe Ross Special Report (Editor's Note: It was originally written by Bruce Babcock of CTCR and is no longer available thru CTCN).
I was totally shocked by what I read. First, let me explain that I recently took a $5000 seminar. I tried to daytrade the methods taught and in 2-days lost $6000. I had previously read some of Joe Ross' books, but never the one on daytrading. So I ordered it and read it.
In the first section of the book he explained all of the problems you can have trading the 5-minute S&P and how it can cost you big bucks if you do not know how to deal with those problems.
I was angry that I did not learn these things at my $5000 seminar and it made me question whether the person who gave that seminar actually trades what he taught. I was so impressed by what Joe Ross said that I even told my wife. "This guy knows what he is talking about. The only way to know the things he talks about is by actually doing it."
Then I got the Special Report where Bruce Babcock states that Joe Ross doesn't trade and that he made up all the stories about his trading history. I was shocked! How can people be so dishonest. Then l began to critically review Mr. Babcock's report. I realized that there is a powerful conflict of interest here.
Mr. Babcock also sells trading systems, some of which I recently purchased and consider worthless). How can this self-appointed Ralph Nader of the futures industry, review other peoples work and compete with them for business at the same time - It is very unethical.
Imagine Ralph Nader opposing petroleum powered cars while owning a company that sells electric cars. It's no different. But there is much more. The crux of what Babcock says is based on the words of a "secret informant." He will not even tell us the source of his information. Babcock makes a conclusion based on a rumor from an unaccountable source. This is totally outrageous - I can go on for pages about this Not-So-Special Report, but I would rather end this with a series of questions for Mr. Babcock.
1. How can you say that Joe Ross' books are over priced when you sold me a trading system for $95 that basically said buy towards the end of the month and sell at the beginning of the next month? A $150 Ross book is about 350 pages full of ideas.
2. You state the Ross doesn't hold positions for the long haul. Did you actually read his books? He repeatedly says that is where the money is.
3. You say that Ross proves himself to be an amateur by selling part of his position at a profit. He gives his reasons for doing that. He likes the psychological boost he gets from small profits and covering costs. It gives him encouragement to trade. This sounds like a man that knows himself and what he needs to be successful. Why did you ignore Ross' explanations?
4. You state that Ross can't know what he is doing because he might spread a position rather than liquidate. T have read his explanation for this in his books, have you? It seems like a fairly sophisticated technique, hardly proof of inexperience.
5. You consider the fact that he did not show you his account statement proof that he doesn't trade. That disturbed me too. So l called his Boston office and spoke to some one there. He explained to me why Joe Ross will not show his account statements. l consider that information private and will not repeat it here, but it satisfied me. So, Mr. Babcock, where are your account statements? You sell systems (one that cost $1000) you say you trade. Don't show me a simulated track record. Show me yours.
Options Are Not Too Difficult As Many Believe
I would like to see more articles regarding the use of options, the software, the strategies and the books. Most investors believe option strategies are too difficult to comprehend and too risky. That is not true. Options, when they are available, can be configured from the most simple to the most complex strategy.
Options can be purchased or sold individually or as part of the same strategy. Profits can be attained even when the duration of the market or the price of the underlying asset is not known. These strategies are called "Delta Neutral" and many investors use this method of trading to make substantial monies.
Options allow for the maximum use of leverage and therefore are ideal for those who are prepared to take some additional risk to escalate the profits.
I believe that if properly planned, an entire issue can be dedicated to the use of options, their strategies and systems.
Trading like a Professional - How Much Can You
Expect Financially? Dr. Claus Hallmann - Germany
Reading a lot of books about trading you will find plenty of methods but you don't know if you are working for "fun", for "nothing" or for money. Seldom you know how much you can expect, financially, but sometimes you will get some ideas about the money you can make, if you have the right systems for success.
Let's look at four traders and their money made by trading
1. A friend of Larry Williams having a $500,000 account made 4.5 Million $ in less than one year (see book mentioned under No. 5). That means he made 4.5% week after week (on an average).
2. Joe Ross traded successfully one method he presented in his book "Trading is a Business," pg.244. And he ran a $5,000 account up to $28,000 in 5-months. That means he made 8.2% per week.
3. Larry Williams made in his 1987 Trading Championship Account 9.5% week after week. Although he turned $10,000 into 1.1 Million $ in one year, there are better examples.
4. If you would play the option game: Mark Weinstein opened a $100,000 account in an option trading contest and took out of the market $800,000 in just three months (see: J. Schwager: "Market Wizards," p.333 and 336). Not only he multiplied his money nine-fold, but he had 100% winning trades. On an average: 18.4% per week and this without any pyramiding.
5. And again L. Williams: He ran a $2,000 account up to $37,900 in just three months - 25% per week (see: L. W. "The Definitive Guide to Futures Trading" Vol. 11, p. 121)
Now ask yourself, Do you have the right methods, the right mind set and the right psychological issues to trade like a professional?
Are you able to take out $500 out of the Bond-market or $1,500 out of the S&P-market? To take out of the Bond-market 16 to 20 tics in five trading days is not a great goal! You could trade one or two times or five to ten times per week, having only winning trades like Mark Weinstein or a lot of losing trades like L. Williams; that's your turn. But after all you should have a profit of around $400 in the Bond-trading per week or $1,200 in the S&P-market.
Suppose you have a $4,000 account and you are able to make $400 per week trading Bonds - there are 10% - you will run your account up to over $47,000 in just 6-months. And after 10-months you will have an over $260,000 account; so you can take 2-mos. of the year for recreation and holidays. All you have to do is to take one more contract every time you made another $2,700 to $4,000 (margin in Bonds is $2,700).
A Very Positive Article About PPS Which Is Contrary
To Prior Negative PPS Articles - Wade Geary
A couple of years ago I submitted an article inquiring of your readers as to whether I could consistently make money with a small account (15 to 20K) and whether there were any systems that would enable me to do this. I was about to take an early retirement and wondered whether I could consistently supplement my retirement income. Well I didn't get any useful suggestions, but I answered my own question.
I have been using Curtis Arnold's PPS system for the past two years and have averaged over 100% returns each year with his system. His book is the most interesting, comprehensive book I have ever read on futures. I probably bought about 30 books over the past 3 years and checked several out of the library.
I use CSI and your Trendx system to download my charts each day. I basically use Curtis's system to find my own entry chart patterns. I have low drawdowns and I thoroughly enjoy looking at the charts each night. I spend about 30-minutes each day reviewing charts and placing orders with Lind Waldock.
Before I settled on PPS as my system, I started off with Ken Roberts. His system is a good entree to trading, but I could not consistently make any money because of his system of setting stops. Also those 123 formations bored me to death. Larry William's system is probably good for a seasoned trader, but I think he enters too many trades for a novice. I was in about 4 European currencies at the same time under his hotline and a one-day drop wiped me out. At the time, I didn't have any ideas about money management and really shouldn't have been using his system. I have never had any desire to daytrade.
I like to fish and travel too much to be tied down each day in my office in front of a computer. Besides it sounds too much like working. These are just a few of my thoughts that might be helpful to novice traders. I have been trading futures for about 5-years and stocks for about 10-years. I have been more successful in the stock market and consider futures as a profitable hobby.
Duane B. writes: "If CTCN has an e-mail address, I would prefer to post future material to you on that channel. It would enable use of it without having to scan or type in material received.
Recommend commenting on this for all of your subscribers, I believe you will see the entire trading industry migrate to the Internet and E-mail for communications, services and even trading in the future."
I have a Signal Plus Box which I wish to trade for a Signal Enhanced (black) Box. Contactl George Skelly via CTCN.
Buzz Ross (contact via CTYCN) would like to acquire a Desk Set of out-dated Fall 1993 Knight-Ridder's Commodity Perspective - 10-Year Weekly Range Charts.
Arthur Anstiss has info for member requests. I did purchase System 2000 and was never able to make it work in paper trading, never mind the real thing. I have gotten six or seven Ken Roberts courses and I have never been able to make them work either in paper or real-time trading.
Member Request answer to Julian Braun from Don Thompson - I bought the System 2000. I wouldn't buy the thing, since it really is a very short-term momentum indicator was modeled on the computer. My guess is the 60's. The only significance is the interpretation of turning points. I don't think it is worth the $400. To trade it successfully one would have to know which way the trend is. I rate the thing a waste of money.
David Ovadia is a new subscriber and would like assistance in locating reasonably priced and proven good quality products: 1. real-time commodity futures and options data services; 2. a technical analysis program, similar to Compu-trac, SNAP, that uses real-time data. Please reply via CTCN.
I'm writing a book on successful at home non-professional traders. If you're not registered in any capacity with the CFTC, NFA or NASD and you actually make a living trading for your own account and would like to be considered for inclusion in this new book, I would like to hear from you. Track records will be verified. Please contact George Moldenhauer (via CTCN).
C. Hooper is looking for software specifically designed to test and trade volatility breakout. Reply via CTCN.
Wanted: "trading buddy" interested in day trading the S&P. Are there any women traders out there? Contact Evelyn Mooney via CTCN.
Mike Maldonado writes: "In the last issue, a reader asked for information on George Angell, Fontallis and Insight Trading. His name was Ron Kuchmek. You may give Ron my phone and Fax number. I have done business with all the above."
Also, I've had a real disturbing experience with a software vendor. He has threatened to sue me and take me to court, if I submit an article to your newsletter. Does he have any authority to do so?"
Editor's Note: Unfortunately, they may be able to sue but if you are giving your honest opinion, based on facts, they in all likelihood will lose the suit and will in fact not sue in the first place because of their potential legal expenses.
Perhaps threats like those are the reasons many articles come to us with the author not wanting their name used. Sometimes they only want their initials used. For example, this issue has several anonymous articles. Even just using initials will sometimes cause the author alarm.
For example, one member was disturbed because we used his first name (but not the full first name or last name) and said he was from Sweden. He claimed people could figure out who he was based just on (part) of his first name appearing in print and his country!
I am not sure why so many members are so concerned about their identity. However, if this trend toward anonymity continues it will result in CTCN eventually being less valuable and less believable. Therefore, please identify yourself!
In addition, I am sorry to say we may eventually give up publishing CTCN if many more of our members refuse to publicly identify themselves and CTC continues to get threats of lawsuits by vendors and third parties.
Charles Cochran would like to correspond with any trader or reader who follows Larry Williams' Trading Headline. Write via CTCN.
John Resen interested in purchasing old stock market tick data. Contact him via CTCN.
Charles Meyer would like to communicate with subscribers to "Formula Research" for the purpose of exchanging research ideas. Contact via CTCN.
Rick Chehovin is looking for an equity curve analysis program. Reply via CTCN.
In regards to Duane B's. letter, we now have an e-mail address. You are invited to transmit articles via e-mail. Our e-mail address is email@example.com
Many of you have asked for additional information in this issue on CTC's Real Success Video Trading Course. To avoid perceptions of a conflict of interest we have avoided as much as possible discussing it or talking about the methodology in this issue. I can tell you we are almost (but not completely) sold out of the original release and most all the feedback received on our video tapes has been positive.
However, this bi-monthly issue of CTCN is a record-setting 40-pages long, jam packed with knowledge and information for you. This is our largest issue ever published.
On another subject, I must inform you the Futures Truth Top-10 rankings (printed below) will in all likelihood be the last FT listings you will see in CTCN. This has been a very difficult and a painful decision. We have been agonizing over this matter for a long time.
On one hand we feel like the folks at Futures Truth, namely John Hill and George Pruitt are honest, capable and try to do a good job and offer a seemingly valuable and unique public service with their comprehensive computerized rankings of hundred of publicly offered commodity systems. However, the other side of the coin, and one we must not overlook, is the fact so many of our members have allegedly lost money both buying and trading the FT top-ranked systems.
Your editor has received numerous phone calls over the past 3-years or so from members who somehow feel misled because of the FT Reports. They purchased a trading system based on its high FT ranking and allegedly the system turned out to be quite inferior to its performance figures published by Futures Truth.
One reason for our decision to discontinue re-printing the FT Top-10 rankings is we are getting very weary and feel quite bad over our members frequently allegedly feeling they wasted their money on a system purchase due to Futures Truth's Performance Reports published in CTCN. Those performance reports allegedly are most all the time contrary to what members experience with the system.
We receive many phone calls from our members complaining about the same thing. Namely, they purchased a trading system based in part, or even totally, on the systems high performance ranking with Futures Truth Ltd.
They paper trade it or trade it in real-time and claim to get very negative and contrary performance statistics. In fact, many members say even back-tested results they achieve are far inferior to the trading performance reported in Futures Truth using the same time period.
As mentioned during an earlier article, several times your editor has requested a public response from FT and John Hill. However, for unknown reasons John has failed to respond.
There have been a number of member and editor comments and opinions in CTCN over the past 3-years over this issue. However, the real and concise reasons for this contrary performance mystery remain elusive to this day. As a result of the FT P&L Reports seemingly bearing little resemblance to what our members are allegedly experiencing, we feel it's better if we no longer promote FT by virtue of publishing their Top-10 systems performance reports. I would greatly appreciate member feedback on this difficult issue, supportive or perhaps negative, on this disturbing and upsetting (from a personal standpoint . . . as a friend of the folks at Futures Truth) decision to discontinue publishing their FT data.
If you wish to continue getting the Futures Truth Master Performance Tables you can order a subscription directly from FT by calling them in North Carolina at 1-704-697-0273.
A special thanks to Gale and Jo Paxton for their amazingly comprehensive, well-done and detailed reviews of many diverse products and services in this issue. All their time is greatly appreciated and will be useful to our members.
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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: 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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