Why Most Futures Traders Lose Money - a Review
of 50 Very Basic,
Often Violated Rules for Trading Futures 50-Rules For Success
A survey of more than 500 experienced futures brokers asked what, in their experience, caused most futures traders to lose money. These account executives represent the trading experience of more than 10,000 futures traders. In addition, most of these Account Executives (AEs) have also traded or are currently trading for themselves. Their answers are not summarized because different traders make (and lose) money for different reasons. Perhaps you may recognize some of your strengths and weaknesses. Yet many of the reasons given are very similar from broker to broker. The repetitions stand to demonstrate that alas, many futures traders lose money for many of the same reasons. Perhaps these statements from experienced brokers can make a contribution to you, and make this sometimes fickle, often intricate, always interesting marketplace of futures trading possible.
Here is what they said:
1. Many futures traders trade without a plan. They do not define specific risk and profit objectives before trading. Even if they establish a plan, they "second guess" it and don't stick to it, particularly if the trade is a loss. Consequently, they overtrade and use their equity to the limit (are undercapitalized), which puts them in a squeeze and forces them to liquidate positions.
Usually, they liquidate the good trades and keep the bad ones.
2. Many traders dont realize the news they hear and read has, in many cases, already been discounted by the market.
3. After several profitable trades, many speculators become wild and un-conservative. They base their trades on hunches and long shots, rather than sound fundamental and technical reasoning, or put their money into one deal that cant fail."
4. Traders often try to carry too big a position with too little capital, and trade too frequently for the size of the account.
5. Some traders try to "beat the market" by day trading, nervous scalping, and getting greedy.
6. They fail to pre-define risk, add to a losing position, and fail to use stops.
7. They frequently have a directional bias; for example, always wanting to be long.
8. Lack of experience in the market causes many traders to become emotionally and/or financially committed to one trade, and unwilling or unable to take a loss. They may be unable to admit they have made a mistake, or they look at the market on too short a time frame.
9. They overtrade.
10. Many traders cant (or dont) take the small losses. They often stick with a loser until it really hurts, then take the loss. This is an undisciplined approach . . . a trader needs to develop and stick with a system.
11. Many traders get a fundamental case and hang onto it, even after the market technically turns. Only believe fundamentals as long as the technical signals follow. Both must agree.
12. Many traders break a cardinal rule: "Cut losses short. Let profits run."
13. Many people trade with their hearts instead of their heads. For some traders, adversity (or success) distorts judgment. Thats why they should have a plan first, and stick to it.
14. Often traders have bad timing, and not enough capital to survive the shake out.
15. Too many traders perceive futures markets as an intuitive arena. The inability to distinguish between price fluctuations which reflect a fundamental change and those which represent an interim change often causes losses.
16. Not following a disciplined trading program leads to accepting large losses and small profits. Many traders do not define offensive and defensive plans when an initial position is taken.
17. Emotion makes many traders hold a loser too long. Many traders dont discipline themselves to take small losses and big gains.
18. Too many traders are underfinanced, and get washed out at the extremes.
19. Greed causes some traders to allow profits to dwindle into losses while hoping for larger profits.
This is really a lack of discipline. Also, having too many trades on at one time and overtrading for amount of capital involved can stem from greed.
20. Trying to trade inactive markets is dangerous.
21. Taking too big a risk with too little profit potential is a sure road to losses.
22. Many traders lose by not taking losses in proportion to the size of their accounts.
23. Often, traders do not recognize the difference between trading markets and trending markets.
Lack of discipline is a major shortcoming.
24. Lack of discipline includes several lesser items; i.e., impatience, need for action, etc. Also, many traders are unable to take a loss and do it quickly.
25. Trading against the trend, especially without reasonable stops, and insufficient capital to trade with and/or improper money management are major causes of large losses in the futures markets; however, a large capital base alone does not guarantee success.
26. Overtrading is dangerous, and often stems from lack of planning.
27. Trading very speculative commodities is a frequent mistake.
28. There is a striking inability to stay with winners. Most traders are too willing to take small profits and, therefore, miss out on big profits. Another problem is under capitalization; small accounts cant diversify, and cant use valid stops.
29. Some traders are on an ego trip and wont take advice from another person; any trades must be their ideas.
30. Many traders have the habit of not cutting losses fast, and getting out of winners too soon. It sounds simple, but it takes discipline to trade correctly. This is hard whether youre losing or winning.
Many traders overtrade their accounts.
31. Futures traders tend to have no discipline, no plan & no patience. They overtrade and cant wait for right opportunity. Instead, they seem compelled to trade every rumor.
32. Staying with a losing position because a traders information (or worse yet, intuition) indicates the deteriorating market is only a temporary situation can lead to large losses.
33. Lack of risk capital in the market means inadequate capital for diversification and staying power in the market.
34. Some speculators dont have the temperament to accept small losses in a trade, or the patience to let winners ride.
35. Greed, as evidenced by trying to pick tops or bottoms, is a frequent error.
36. Not having a trading plan results in a lack of money management. Then, when too much ego gets involved, the result is emotional trading.
37. Frequently, traders judge markets on the local situation only, rather than taking the worldwide situation into account.
38. Speculators allow emotions to overcome intelligence when markets are going for them or against them. They do not have a plan and follow it. A good plan must include defense points (stops).
39. Some traders are not willing to believe price action, and thus trade contrary to the trend.
40. Many speculators trade only one commodity.
41. Getting out of a rallying commodity too quickly, or holding losers too long results in losses.
42. Trading against the trend is a common mistake. This may result from overtrading, too many day trades, and under capitalization, accentuated by failure to use a money management approach to trading futures.
43. Often, traders jump into a market based on a story in the morning paper; the market many times has already discounted the information.
44. Lack of self-discipline on the part of the trader and/or broker creates losses.
Futures traders tend to do inadequate research.
45. Traders dont clearly identify and then adhere to risk parameters; i.e., stops.
46. Most traders overtrade without doing enough research. They take too many positions with too little information. They do a lot of day trading for which they are under-margined; thus, they are unable to accept small losses.
47. Many speculators use "conventional wisdom" which is either local, or "old news" to the market. They take small profits, not riding gains as they should, and tend to stay with losing positions. Most traders do not spend enough time and effort analyzing the market, and/or analyzing their own emotional make-ups.
48. Too many traders do not apply money management techniques. They have no discipline, no plan. Many also overstay when the market goes against them, and wont limit their losses.
49. Many traders are undercapitalized. They trade positions too large, relative to their available capital. They are not flexible enough to change their minds or opinions when the trend is clearly against their positions. They dont have a good battle plan and the courage to stick to it.
50. Dont make trading decisions based on inside information. Its illegal, and besides, its usually wrong.
Despite statements above, it should be noted there is a risk of loss in all commodity investments which are highly speculative in nature. Only risk capital should be used for such investments.
Computed Contracts: Their Meaning, Purpose and Application
It is an unending study of an ever-changing subject. It is a quest that takes commodity traders and technicians deep into the history of the markets, brings them rushing back to the present and hurls them pensively into the future. Technical analysis is indeed an exciting, sometimes grueling business; one which leads its practitioners to tackle large quantities of historical data for individual commodities. Speculators demand a workable way to view the markets that simulate the perils, profits and pitfalls of actual trading. Those in the know are finding that the most meaningful results can be found in the study of "computed" contracts, which are derived from, but do not exactly mirror actual market activity. This is a discussion of various types of computed contracts available to CSI data resource subscribers.
Computed contracts offer the advantage of providing long uninterrupted periods of continuous data to the market technician for extensive study and analysis. Where a given futures contract has a finite life of perhaps one to ten years, a computed contract can offer an extended life of upwards from 50-years or more. The idea of exploring more data than less means that the analyst can observe more and more patterns of repetitive market behavior that tend to certify a markets tendency to repeat its inherent cyclic behavior. The computed contract may appear to help foster the virtues of history student with the strengths of math student both at the same time.
The history student examines the past to provide relevance for the future; whereas the math student applies his knowledge of rates of change and trend following to gather a short-term directional perspective. Unlike the history student who is advised to take note of the faction who wrote the historical account to discount potential biases, a historical market data series is less likely to reflect biases because the historical record was written by both the long and the short market forces in place at the time.
In the development of a particular computed series, lets start with the basic fact that the futures contracts from which a computed series is derived are relatively short lived. They are created on some date by traders on some exchange floor and eventually die when their delivery dates are reached. This birth-death process for commodity and futures contracts is an inherent characteristic that cannot be ignored. Some commodity contracts have longer lives than others. Grain contracts, for example, trade for a year or two, while financial markets may be traded six to ten-years into the future. In all markets, nearby contracts (those about to expire) enjoy much heavier volume and open interest than contracts with later expiration dates. Technical traders are wary of entering illiquid markets, where order-execution slippage can take a significant toll on both actual profits and efficient order execution. Liquidity factors relating to open interest and volume, life span and distance from expiration are all important considerations.
Nearest Future Contracts
Traders of the 1950s and before were comfortable viewing a concatenation of contracts of the same commodity over time. These were created by manually splicing together the nearest portion of successive delivery months into a series covering ten, 20 or even 50-years. They could then simulate the practice of trading and viewing the more active (and most liquid) period of each successive contract to obtain a feel for trends, volatility and opportunity for profit. Many traders still prefer viewing the markets from a nearest-contract perspective. An advantage to this approach is that the most heavily traded portion of every contract viewed in the concatenated series is a representation of the actual market prices. A major disadvantage is that significant price jumps or drops (discontinuities) occur from one contract to the next which help to discredit, distort and diminish results.
CSIs new Unfair Advantage® (UA) product accommodates this type of analysis through the Nearest Future Contract choice in its Portfolio Manager. When selecting the Nearest-Future contract option, users may select the calendar delivery months to include. Most users wish to analyze the first nearest future, but the 2nd, 3rd, etc. nearest future may be selected instead, to add distance and time from delivery risk. There is also a prompt allowing users to select the day and relative month of roll-forward. This option also adds distance from delivery risk and clarifies when to expect one contract to roll to the next.
While viewing a chart drawn from this or any other computed series, UA users can display the name, price, volume and open interest of the actual underlying contract in a movable window. This is done by positioning UAs cross-hair cursor on selected day and pressing right mouse button.
W.D. Gann enthusiasts represent another trading group that is interested in simulating markets over a wider spectrum of contract history. This group views the markets similarly to the nearest future proponents, with the exception that like contracts (those with the same delivery month classification) of a commodity are concatenated. For example, a Gann time series might hold the final year of the June 1987 contract, followed by the final year of the June 1988 contract, followed by successive June contracts up to and including the most current June contract that lies within 12-months of its expiration date.
Unfair Advantage accommodates this type of analysis through the Gann Contract choice in its Portfolio Manager. First the single delivery month to be used for this Gann series is chosen. Then comes the roll date, which can be selected as any day relative to month start. This allows for rolling on, say, the 1st or 10th day of month, or any date user selects. The ability to gain more distance from delivery is available for these series by opting to roll in the calendar month prior to expiration. UA users can simply enter a 0 to roll during delivery month, 1 to roll one month prior to the delivery month, or even higher numbers to roll earlier.
The W.D. Gann approach may be better than the nearest-future variety because there are fewer discontinuities. On the other hand, the one-year segments of a "Gann file" may be too long to yield meaningful information. What may have been learned from the distant (early) portion of each one-year segment of the time series may not readily apply to the more volatile later portion of each successive one-year series. As a contract approaches maturity, its characteristics such as volatility and trading volume gradually increase until a maximum level is reached near the end of each delivery months contribution to the overall series. Unfortunately, the later period of each contract is likely, in a statistical sense, to show no resemblance to the relatively tame earlier period. This phenomenon suggests a lack of stationarity, a statistical property explained in the Perpetual Contract® data discussion below.
Perpetual Contract Data
In 1970, when the computer became more popular for analysis, CSI unveiled its trademarked Perpetual Contract data. This computed contract, very popular among CSI subscribers, represented a time-weighted average price of the two active contracts that lie earlier and later than a fixed number of days and months ahead of the then current date. This method of calculation remains popular because it provides an accurate view of the markets characteristic wave form over time that is "perpetual" in nature. It is similar to the forward contracts offered by the London Metals Exchange (LME). The major drawback of the Perpetual Contract data approach is that the contracts cannot be traded directly, and can only be used as a guide for overall market direction. They are used to assist in examining long-term analysis alternatives. They should not be heavily relied upon in examining agricultural markets where different supply-and-demand conditions may affect the distinct old and new crops. An alternative to the standard Perpetual Contract data is the open interest-weighted Perpetual Contract which has a near-contract view that results from all contract prices being weighted by their respective open interest.
Advocates of Perpetual Contract data series point out that these series are more likely to exhibit statistical stationarity than, say, a Gann contract. This is particularly true when there is a long enough period from birth to death to change the contracts volatility over time. The concept of "stationarity" is simple to understand. For a serially correlated time series to be stationary (and most time series are serially correlated), the mean and variance of the series must remain statistically constant. Another significant advantage of Perpetual Contract data is that it offers flexibility to focus on near or far contracts as single independent series for analysis purposes. For example, an analyst could pair off far-forward future hogs against nearby corn (the raw material needed to produce hogs) to study the dependent impact of these two commodities on each other.
Unfair Advantage accommodates this type of analysis through the Perpetual Contract choice in its Portfolio Manager, where many options give the user flexibility to fine-tune the study. Any or all contract months may be included in a Perpetual Contract series, but generally all active trading months (the default response) are represented over time. The Perpetual Contract data user must choose how many months ahead to view the market. Three months is the usual distance, but a two-month forward series may be appropriate for commodities that expire every month or two such as the energy products and perhaps some precious metals. Farther-out studies can also be useful as in the above example of near corn and far-off hogs. Perpetual Contract users have the same roll-forward options as nearest future and Gann traders. The Perpetual Contract choice in the Portfolio Manager is also used to affect open interest weighing on the data, whereby no rolling is involved and weighing is based solely on speculative and trader interest.
Back- and Forward-Adjusted Contracts
More recently, traders have shown an interest in back- and forward-adjusted contracts. Back-adjusted contracts use the actual prices of the most recent contract with a backward correction of price discontinuities for successive earlier active delivery months. In a forward-adjusted contract, the prices of the current contract are changed to eliminate the gap between the current and recently expired contract. An important aspect to remember about forward-adjusted contracts is that current prices do not represent actual values for todays markets. Because of the removal of contract-to-contract price jumps and drops in both back- and forward-adjusted contracts, they appear as smooth, blended, homogeneous price histories representing a sorted and concatenated compilation of successive contracts over time.
This method of joining contracts in a series over a period of years or decades permits the analyst to focus on the period when one might prefer to trade the markets in actual practice. Traders often wish to communicate their own rolling preferences so that they will not be simulating trading situations when there is either a risk of delivery or an exposure to highly volatile markets. To accommodate these preferences, UA lets users choose their desired delivery months and a roll-forward date. The roll-forward date may be relative to the start or end of the month for rolling. The option of picking a roll date relative to the month-end is useful for traders who want to avoid risking delivery of their commodities by rolling out of a contract on or before the first notice day, which is often calibrated relative to the end of the month. Back- and forward-adjusted files can also roll when heaviest volume or open interest shifts from one contract to the next. The switching of contracts based on volume or open interest is always based on the previous days data because these values are released one day late by the commodity exchanges. For example, a rollover based on a change in volume or open interest on Monday would not be reflected in the data file until Tuesday. If heavy volume or open interest switches back to an earlier contract, the current delivery month will not change, as it is locked in to avoid confusing oscillations. Although the menu choice of these adjusted files is called "Back-adjusted" the software can forward-adjust the data just as easily by reversing the operation by checking appropriate box in the Portfolio Manager.
The delta is another user-defined option which heavily impacts the adjusted files. The delta refers to the data points used to calculate the back or forward adjustment value. It closes the gap between adjacent contracts by focusing upon the close-to-open, close-to-close or the open-to-open price differential of successive pairs of contracts to be joined. The option of comparing the open price of the new lead contract with the previous days close price of the former lead contract may produce a little more distortion than the other two because overnight price fluctuations may inappropriately increase or decrease the adjustment value.
Negative Values in Back and Forward-Adjusted Series
An advantage of back-adjusted approach to long-term market synthesis and simulation is that the data observed is precisely the same as the exchanges representation of the final contract in the concatenated series. A flaw in back adjusting is the strong chance that an inflation-sensitive market could produce negative price quantities into the past. The same logic allows forward-adjusted contracts in a deflationary environment to produce negative current prices for today. The suggestion prices can be negative in actuality is clearly flawed and could discredit accuracy of such a methodology for longer term analysis. No one would really pay you to take 50 bars of gold away or pay you to take thousands of pounds of cotton. This flaw demonstrates a bias through the removal of contract-to-contract price discontinuities.
When early contract prices in a concatenated set are significantly less than their real contract counterparts, they tend to produce a bias that in simulated trading would heavily favor the act of buying over selling. In addition, even if the early contract prices are not significantly different from their current-contract counterparts, inflation could play a role in influencing buying over selling when such a long series is introduced as representative of current pricing norms. This phenomenon should tell you that your results may be invalid and that applying in the present what you have learned by simulating the past can distort your trading algorithm. Fortunately, there's a way this bias can be removed without compromising the validity of your simulation.
Detrending to Remove a Long-Side Bias
Users of back- or forward-adjusted series and all of the other series including cash series can, through a simple time series analysis transformation, remove the upward or downward trend tendencies by detrending the portion of the series that connects the final current contract with the earlier balance of the series. This approach, which is found in the back-adjustment logic of the UA data warehousing system, removes any evidence of long-term trend for any length series so that trading can be simulated without danger of favoring long trades over short trades.
Two alternatives for detrending are offered. One allows detrending up to the very end of the contract that lies before the current contract; the other detrends up to one day short of the period end. This series includes all of the current contract up to, but not including the very last day on file. The latter approach may be most suitable for use with UAs Seasonal Index study.
The idea of detrending is meant to apply only to longest possible time period. This would be the period of time that incorporates all or virtually all available history for the market to be studied. It wouldnt be practical to detrend the short-to-intermediate oscillatory period. This more fruitful period should be left in the data for the technician to study.
Little or no penalty stems from the detrending process because all data is viewed from todays perspective, with todays prices (when the entire series is detrended). Before detrending, each price in a historical data file is assumed to be measured by todays dollars. Given the effects of inflation over the years, this is clearly a faulty assumption. Consider that a six-cent price move in 1966 may have represented a limit-up or limit-down situation, whereas, the same six-cent move today might be considered insignificant. When data is not detrended, that very significant six-cent move of 1966 is rendered as insignificant as a six-cent move today. Detrending, on the other hand, returns integrity to data from the distant past by putting it back into proper perspective. The importance of detrending is that it increases the chance that analytical results derived from yesteryear will be relevant and comparable to trading conditions in todays market.
Dont be fooled by analysis results which suggest that the simulated performance of a non-detrended series produces greater hindsight profits than the same series in detrended form. Remember that this process removes a bias that may give the false impression that buying is always better than selling. Such results are not achievable in future trading practice. You also cannot easily trade across contract boundaries without paying a heavy slippage and commission tax, even if you have carefully spliced together successive independent series.
Deciding Which Computed Approach to Follow
There are many considerations in choosing computed contracts for analysis and, eventually, for impacting investment decisions. Each category has some unique value. Both the nearest future contract and Perpetual Contract data can view the markets from early and distant delivery perspectives by focusing upon contracts that expire either early or late with respect to any given current date. The Perpetual Contract is the only viable approach that can focus upon a fixed period forward in time and therefore achieve a substantial level of statistical stationarity.
From an astrological perspective, perhaps only the Gann computation is valid. It seems to have the advantage of offering a predictably long period of time to view a market on an annualized basis and may have some longevity benefits not possible with nearest future contracts. Nearest future contracts have the advantage of focusing upon the most liquid period of a contracts life, but the disadvantage of offering very brief periods of individual contract data.
Perpetual Contract data, nearest future contracts and Gann contracts could also benefit from a detrending option which is in the works for Unfair Advantage. The overlooked idea of detrending of computed data is especially useful because, without loss of substance, one can get data into a form where profits and losses are not subject to extremes, portions of an entire time series can receive equal weight treatment, and the early portions of a detrended inflationary series are progressively amplified so that they appear in as volatile a form as the most current data. Given the situation where any form of computed data is not to be detrended, the Perpetual Contract is a reasonably safe alternative.
The back-adjusted contract offers the most flexibility for the user. Current data can be supplied as it was actually traded in exchange-released form and past data can be expressed in adjusted and detrended form. The mechanical effects of back adjusting and price inflation can be removed, making the detrended series an excellent source of information for seasonal analysis. A minor disadvantage to the back- or forward-adjusted contract is the heavy computing requirements necessary to produce the resulting series. Total computing time is measured in seconds rather than microseconds, making it necessary for one to wait for results.
Perpetual Contract data is also a very good choice because of the statistical stationarity issue, but many users dislike using non tradeable price representations. As an analytical guide or tool for overall market direction and as an auxiliary independent supporting input, it is an excellent choice when analyzing non-seasonal, non-agricultural markets.
This message is presented to guide you in your study of the commodity markets and to help you understand the ever-changing subject at hand. It is not only for those who are contemplating building trading systems based on computed contract series, but also for those whose trading systems have been derived from such approaches. Each type of computed contract discussed here can add some visibility to market analysis. It is important to consider both the strengths and possible weaknesses inherent in these methods to maximize profits and preserve capital in actual trading.
CSI Phone: 800-CSI-4727 or 561-392-8663 Website: www.csidata.com or Information: email@example.com
Bend With the Flow - Rick J. Ratchford
Picture yourself as a branch on a tree. The wind is blowing with the fury of a stampede of cattle. You are being blown back to limits of your flexibility. Will you snap, or bend with the flow? What kind of a branch are you? Are you rigid or are you flexible? If you are rigid, you will snap under the pressure of the wind. However, if you are flexible, you will continue to give way to the wind thus not allowing it to break you.
What kind of a trader are you? When the market is not going as planned, do you stubbornly refuse to acknowledge it or are you flexible enough to realize that you are wrong? The rigid trader is one who refuses to acknowledge that the trade has gone sour, and that it is time for a simple retreat or reversal. The result of this rigidness or stubbornness is that the market will eventually break this one, destroying the account and possibly the trader beyond repair. The flexible trader, will let the market move him in and out. This type of trader will bend back after a hard move against him, thus around another day.
A flexible trader bends with the flow. This type of trader not only allows the market to pull him in or take him out, but this type of trader is flexible enough to know that his original understanding of the power of the market (wind) is going the other way and bends with it in that direction, completely going with the market.
A good example of this is when using the Time and Price squaring methodology that I enjoy using. Say that based on Price and Time, you discern that T-Bonds will make a bottom today and start up. So, prepared for the inevitable, you fade into this trade and go long near the low.
Now lets say that it does indeed go up the next day. Good, your analysis looks good so far. However, you notice that on the next day of making a higher high, it touches known resistance and then closes near the low of its daily range.
Now, here is where the kind of trader you are comes in. Are you rigid in that you will not consider the possibility this trade may be turning sour, or are you flexible enough to accept this possibility? If trade does turn south and breaks below your Price and Time low, will you just hang in there hoping that it will go back in the direction you originally thought it would, or will you exit the trade once it violated your low, even being flexible enough to reverse your position the other way if it closes below that Price/Time low? What you do will determine whether you are rigid or flexible.
Usually, whenever the market closes below known support, it usually signals more times than not a continuation in that direction of the trend. If you are flexible as a trader and bend with the flow, you can usually turn what would have been a losing trade into a winning one. Of course there are several factors you must take into consideration, such as direction of the main trend and so-forth, but all aside this kind of action is telling you that the wind wishes to blow the other way. If we are to keep from breaking, we need to bend with the flow of the wind, the market.
The error of the rigid trader is that he refuses to accept error on his part. "How can I possibly be wrong when I had both Time and Price squared?" Easy. Here is a good example using the T-Bonds illustration above.
Note how I mentioned that the next day after the Price and Time low the market made a high that touched resistance? Isnt this also considered Price and Time? Who says that the Time part of your equation was not one day off? Why couldnt this actually be a Time and Price high instead? It most certainly can be, and in this case it was! No man can forecast to the Day each and every time. Even the best in the business with Time may be off a day from time to time. They are human, and the flexible trader realizes that he is human as well! Therefore, realizing the possibility of entering too early and the wrong direction, the flexible trader takes whatever steps is necessary to bend with the flow, and to allow the market to direct him.
So then, what kind of trader are you? Are you flexible as the branch that bends with the wind, or are you rigid like the branch that tries to fight the power of the wind and ends up breaking in half? Which one would you rather be?
Internet Forms For CTCN Members - Rodney Marcantel
Thanks for the work you are doing in this area. CTCN is a great newsletter. I especially like Greg Donios columns. Keep it up!
Your new Website is pretty good too. Any thought into having a forum much like INO has for people to discuss the markets as they unfold? You could limit it to CTCN members. What about making your newsletter an on-line Adobe Acrobat download in PDF format? You would save a lot of postage and printing costs and could make it a security access only web page. A good example of this is INOs Futures and Option Letter by Bob Ecob: www.ino.com/advisory/foletter/report/. No reason to stop web page development with your newly created Website.
Editor's Note: Thanks for your comments. We are looking into putting the current and prior issues on-line, (in addition to the many back-issues already online) accessed by a password. However, we are not sure if members would rather access it online or have the printed copy mailed. Personally, I would rather get information as printed hard-copy so I'm not always tied to my computer. Such as reading it while laying in bed, watching TV on the couch or floor, or at the kitchen table, etc. Plus, keep it in my 3-ring binder for easy future reading or reference. Of course, this may also be done by printing the online version. However, it seems whenever I print-out something on the Internet it almost always does not look anywhere near as good as the original for some odd reason, or parts of it are screwed-up. It seems things like the headers, footers, margins, indents, line returns, etc. seem to get screwed-up during the process of sending the document to my HP Laser Jet printer. Does anyone know if using the Adobe Acrobat reader solves these common printing problems? If it does, I certainly will look into getting it. We ask for feedback on this. Please send us e-mail or write and let us know your preference. We will publish the survey results next issue.
Options and Debit Spreads - A Trader
Option purchases and option spreads are two very different yet similar strategies. Basically, if volatility in underlying futures contract is high and it appears the market will move relatively quickly, either by strong technical or fundamental indicators, then purchase of an at-the-money (or very close to-the-money) option along with selling the farther out option is a great conservative way to position yourself in the market with very little risk and a defined profit objective. That way you dont over pay for the at-the-money option.
In other words, let someone else pay for the extreme volatility. This is called a vertical debit spread because you pay the difference in premium. Only buy call or put options outright when the market is relatively quiet and likely to make a move after forming a relatively long base. This way any spike in volatility insures a profit even with a small move in the underlying contract. Purchasing these options at 2 to 3 strikes out-of-the-money and with at least 3-months of time value will insure enough time for a move without a great deal of risk. With spreads, I prefer to sell the option that is about 2 to 3 strikes out-of-the-money and about 2 to 3-months until expiration. Any time longer than that will likely take longer to profit. There is no need to put up margin on the option sold because it is hedged against the option purchased, providing the underlying contract is the same. Remember, a debit spread strategy does not approach maximum profitability until you get very close to expiration and the option sold is either at-the-money or in-the-money. Very few options achieve this status.
Take December Corn for instance. I purchased a 270-call option for 10.5 and sold a 290 for 6.5 to pay for more than half the 270 option. Hence a 4-point debit. The spread today is worth 2.3 points (6/27). Now if I had just purchased the 270 call option at 10.5 before the market dropped further, my option would only be worth about 5 points today. A loss of $275 to date versus the spread with a loss of only ($85). Thats three times less for the same move in the underlying contract.
Another example is Sept. Cocoa. Cocoa had formed an impressive 7-year base looking at the weekly chart. The market then bounced up and paused for 3-months. Then the second week of June hit and prices rose rapidly from 1400 to 1700. This marked the start of a major bull market.
Now with an outright call option purchased in May, the market could have discounted the technical indications and tanked rendering my option all but worthless. That is pretty risky depending on the price paid for the option and if stops were strategically placed. But once the price moved higher, that confirmed the technical pattern and fundamental news. By then, an option purchase would be expensive due to volatility. But by using a call option spread strategy,
I let someone else pay for the extreme volatility. I was able to position myself in the market with limited losses (the difference in premium) and set a specific profit objective (the difference in strike prices). I expect when this article is published, I will have profited nicely from cocoa as long as it's at or above 1800. Remember, youve got to limit losses and set profit objectives. Spreads are a sure fire way to do it.
Wants To Be Known As A Successful Trader
It has been just about a month now since I joined Commodity Traders Club News, and at long last I have finished going through the back-issues. I wish that I could say that it was an enjoyable experience - but it wasnt. Many of the articles made me uncomfortable, for all too often I saw myself in them.
About a year ago, I could take it no more. The losses, the humiliation, and all that goes with one defeat after another. I am not a dummy. I am a successful man. One who has achieved financial and professional success well beyond most. Granted, when I first became interested in the markets, I dreamed of fabulous, instant wealth, but that was a long time ago. My goals and dreams had long since turned much more realistic. All I wanted was a good return from a pursuit I truly enjoyed. All I received was failure. So I stopped trading, reassessed and reevaluated my entire approach. I put everything I thought that I knew aside. I started from scratch.
It really was not all that difficult to abandon all the years of study and effort, because none of it had ever paid off. I had proven to my satisfaction that there was no foolproof system, no indicator, no oscillator, no angel, no ratio, no nothing that would give me what I so desperately wanted. I knew that the answer was not in Gann, nor astro-harmonics, nor Fibanacci, nor any market guru, nor any newsletter, nor any Fax. Yet I knew that somewhere there had to be an answer . . . because there was always someone on the other side of my losing trades!
Day and night I studied and read. I was fortunate to have stumbled on some words of wisdom relatively early in my reeducation that went something like: Dont try to figure out the market, because theres nothing wrong with it. If there is something wrong, its with you.
All the books, all the courses, all the seminars were all aimed at trying to figure out the market! They were all aimed at trying to predict turning points, tops, bottoms, trends, reversals, whatever. And than there were the experts I subsidized. Expert opinion on fundamentals, fair market value, supply and demand, cycles, and more. I spent so much time and effort trying to master them all, I almost never really looked at the market itself - nor did it ever dawn on me that I was really the biggest obstacle I faced. I had lost touch with reality when it came to my market approach.
For a number of years I had been intrigued with a series of books by Joe Ross. I had seen ads, and read reviews, but had never bought any of them because they seemed rather pricey - if you know what I mean. Now I am a man who has taken numerous hits in excess of ten thousand dollars. I have purchased software packages to chart the stars for more than $2,500, but I was reluctant to pop a buck and a half for a book.
Well, I finally did. I bought Trading The Ross Hook, and then another, and another, and now I have all of them. All totaled, I spent about a grand. What he had to say, and the way he went about saying it changed everything. I am still in the process of reading them. I suspect that I will do so until they fall apart. Those of you who have read Ross know what I am about to say is true. There is nothing but common sense contained in his books. There are no new and exciting discoveries, and in fact, if you have been at it as long as I have, theres nothing that youve not heard before.
I have made money five of the last six months. In fact, I dont ever expect to have a losing month again - unless I mess up, unless I do something stupid. I think. I hope. I pray.
You see, thats the other thing I am envious about when it comes to "SAT" - I lost for so long, I hurt so bad that I dont know how many winning months, or even years, it will take before I know for sure that its all behind me.
By the way, I decided to basically go with the approach of selling options. Its what seemed best suited for me, at this stage, and at this time in my development. I am fortunate enough to be well capitalized, so I can trade in lots large enough to make meaningful profits without taking undue risk.
Of course, I have no way of knowing just where you are along the road to success. Obviously some of you are well beyond me, and just as obvious, some of you are still far behind. The point of this article is to report that it's possible, it can be done, and is far less complicated then I ever imagined.
Seven Trading Secrets of the Professionals - George Kleinman
I have been a member since the beginning and you will be receiving my renewal again shortly. To date, I have not made a submission, but would like to now. My book, Mastering Commodity Futures and Options will be out this fall, published by the Financial Times of London.
Ive titled Chapter 12 "25 Trading Secrets of the Professionals" and think the readers will find these of value. Below are the first seven. If there's good response, I would be pleased to submit the remaining 18 for future issues.
At the times Ive done well in the markets, it usually was because I did certain things in a certain way. When Ive done poorly, it usually was because I didnt do these things. The secrets presented below are from experience and the school of hard knocks, but were also originally gleaned from reading the masters. Two masters stand out, both long gone (their heyday was during the twenties), but still living through their writings. You can still find the works of Jesse Livermore and W.D. Gann in libraries, and if you search hard enough through specialty houses. Actually, I learned more from their failures than their triumphs. The same mistakes made 50 and 100 years ago continue to be made every day. Technology may change, but human nature never does. So, I thank these two men since I know many of the secrets which are discussed in this chapter while in my own words originated from them. There have been others who have had a profound effect on my trading education throughout the years, and I have tried to thank some of them in the acknowledgments.
Ultimately, the markets are the best teachers. There is a world of wisdom presented below. You personally may not use all these secrets, but if you can absorb just a portion, there is no doubt in my mind you will become a success. If you disregard whats presented below, you become lost in the financial desert and die of thirst. (Perhaps thats a bit strong, but trust me this is good stuff!)
The trend is your friend: So, dont buck it. The way to make the big money is to determine the major trend and then follow it. If the market will not go your way, you must go its way.
When you're in a bear market, and major trend is down, the plan should be to wait for rallies and sell short; not try to pick bottom. In a major bear market, you can miss the bottom several times on the way down and end up losing all your money.
The same applies (in reverse) in a major bull market. Always go with the tide, never buck it. Let me repeat, because this is important: the big money is made by going with the trend, not against it. Livermore told us, in a major bear market it is safer to sell when the market is down 50 points from the top, than when it is down just 10. The reason is, at down 50, all support is gone, and those who bought the breaks have lost all hope, are demoralized, and in a leveraged market are at the point where they all must try to exit the same small door at the same time.
The result at times can be an avalanche. I can give you many examples of markets that have trended long and far, made some people rich and wiped others out. You hear about the poor soul who lost his farm. I can almost guarantee that guy was bull headed and fought the trend until he ran out of money.
In the twenties, New Haven, the premier blue chip railroad stock of the day, sold as high as 279. Remember, in those days you could trade stocks on 5% margin, like we trade futures today. When New Haven sold 50 points from top, it must have looked cheap at the time. How many would have the guts to sell it short when it crossed below 179, 100 points from the top? Better yet, who would have had the guts, or the vision, to sell it short at 79, or 200 points from the top?
It must have looked extremely cheap. Remember, this was the General Electric of its day. Yet, the trend was down, and after the crash, it traded as low as 12. So, how do you do this, stick with the trend and not fight it? Well, it isnt easy. Thats why most people dont make money in futures. You need to have a strong will power. Once you can see the trend of the market, dont change your mind until the tape shows the change.
In any major move, there will, of course, be corrective moves against the trend at times. Some news will develop which will cause a sharp correction, but it will be followed by a move right back in the direction of the major trend. If you listen to this news you will be tempted to liquidate prematurely. Avoid the temptation and listen to no one but the market.
One way to do this, is never set a fixed price in your mind as a profit objective. The majority of people do this, and theres no good reason for it its a bad habit based on hope. Do not set a fixed time to liquidate either. This is the way the amateurs do it. They buy silver at $5, because their broker told them its going to six. Well, it gets to $5.97, turns and heads south again, and theyre still holding looking for six, watching and waiting as their unrealized profits melt.
Ive seen it, and this is just plain bullheadedness. Ive seen the opposite as well. The market closes at $5.95, it looks strong and is fundamentally and technically sound. The amateur has his order sitting to sell at $6, because this is his price. The market gaps up on the open the next day at $6.05 and his broker is pleased to report he sold five cents better at this price.
However, this is a form of top picking, and who is smarter than the market? The market probably gaped up above $6 because the buying interest was able to overwhelm the sellers. Ive seen cases like this one, where the open was sharply higher, but was the low of the day. The market never looked back until it hit eight dollars.
This is all a version of bucking the trend, which is something I do not recommend. Conditions do change, and you must learn to change you mind when they do. A wise man changes his mind, a fool never. Just be sure if you change your position it is based on sound reasoning.
When you place a trade, your objective is obviously to profit. There is no way you can possibly know in advance how much profit to expect. The market determines that. Your mission is to determine the trend, hop on for the ride, and stay on until your indicators suggest the trend has changed, and not before.
When a market is cheap or expensive there probably is a reason. This one goes hand-in-hand with dont buck the trend. Livermore would tell us, he always made money selling short low-priced markets which are the publics favorite and in which a large long interest had developed. Alternatively, he cashed in on expensive markets when everyone was bailing out because the public thought market was high enough for a healthy reaction. The public was selling beans short at $6/bushel in 1974, because this was an all time high and into resistance. Who could have guessed they werent even half way to what would be record highs over thirteen? Always remember, it's not the price thats important, its market action.
The best trades are the hardest to do. You need to have guts. You will need to be aggressive on entry. You will need to quickly cut losses when the market is not acting right. The news will always sound the most bullish at the top, and appear to be the most hopeless at the bottom. This is why the technical tone of the market is so important. If the news is good, but the market has stopped going up, ask yourself why, and then heed the call. Bottoms can be the most confusing.
The accumulation phase, where the smart money is accumulating a position, can be marked by reactions, cross-currents, shake-outs and false reversals. After bottom is in place, many traders will be looking for the next break to be a buyer. After all, the market has been so weak so long, the odds favor at least one more break, right? But it never comes. The smart money wont let it.
The objective after the bottom is in place is to move the market up to the next level, and the best time to buy may actually feel quite uncomfortable. However, the train has already left the station and you need to have the courage to hop on.
Have a plan before you trade, and then work it! If you have a plan and follow it, you avoid the emotionalism which is the major enemy of the trader. You must try to stay calm during the heat of the session, and remain focused. To do this, you have to be totally organized prior to the opening bell.
Your daily mission, should you decide to accept it, is to make money each day, or barring this, at least not lose much. In normal markets, you should take normal profits. In those unusual markets which occur rarely, you need to go for abnormal profits. This is one of the keys to success. You must always limit losses on trades which are not going according to plan.
This takes will power and is as essential a quality as having plenty of money. In fact, it is more important than having plenty of money. Money is not to hold on with, this is for the sheep and you dont want to be sheared. If big risks are required, dont take that trade. Wait for an opportunity where you place a tighter stop.
The way Livermore used to trade was to look for opportunities where he could enter very close to his risk point. In this way his risk per trade was small in relation to the profit potential.
If you do not have the will power to take the loss when your risk point is hit during the trading session, then you must use stop loss orders. Place the stop at the same time you place the trade. You probably heard stories about the floor traders running the stops, but I assure you, in the good trades, the majority of the time you will not be stopped out. This happens with the bad ones.
Personally, I have a trading plan laid out the night before. I generally know what I will do if the market acts the way I anticipate it should, and just as important what Ill do if it doesnt. It is a guide, not written in stone, and somewhat flexible. However, if a market is not acting right according to my plan, I know it is time to take action, either to take the profit if available, or cut the loss if not. Generally, Ive found when I try to fudge the plan I get my head handed to me. Not always, (and this why its hard to follow plans many times) but enough to know the plan is smarter than I am in the heat of the battle.
When its not going right, when in doubt get out. If you have a compass in the middle of the desert, and the oasis is north, dont get fooled into following the mirage to the west. There is nothing better than getting out quickly when youre wrong!
Be aggressive when taking profits and/or cutting losses if there is a good reason to do so. A good trader will act without hesitation. When something is not right, he will liquidate early to save cash and worry. Never think too much. Just do it! And, dont limit your price go at the market! Many times a market will give you one optimal opportunity to act and thats it go with it. As Gann would say, the way to benefit through tuition is to act immediately!
No regrets. When you liquidate a trade based on sound reasoning, never regret your decision. Go on, and if it was a mistake to get out, just learn from it. We all make them. Dont beat yourself up! You will lose your perspective and become too cautious in the future. How do you do this unemotionally? Try not to think about the price you entered. This is irrelevant. If the market isnt acting right, dont try to get out at break even after commissions. This can get very expensive.
Money management is the key. Think about this daily. You do not necessarily need a high win to loss ratio, but your average win must be higher than your average loss if you want to succeed. To do this, there must be (at least some) big hits. Some trades you will need to maximize. You need these big wins to offset the inevitable numerous (and hopefully small) losses which are going to happen.
Ive found by being able to just cut losses early, by even a small incremental amount per trade, say $100, this can make a major difference to the bottom line. This takes decisiveness, so be decisive if trade is not acting right. Waiting a few more ticks is generally not a recipe for success.
One more point; it is bad practice to cancel or extend a stop loss order. You should never do this. My experience has been that 99 times out of 100 canceling a stop is the wrong thing to do. Its OK to cancel a profit taking order at times, but the sooner a loss is stopped the better.
When you get out of a bad position quickly, and with a minimum of trauma, not only is your capital base maintained, but your judgment will improve. Without a well-defined risk point, theres no judgment, what its called is hope. George Kleinman can be reached at firstname.lastname@example.org or 1-800-233-4445
Regarding Barrie Blases Comments on The "Street
Book Review - Raymond F. Kohn
The CTCN forum is a marvelous format which allows for a wonderful exchange of ideas and opinions from which all can benefit. In the last issue of CTCN, Barrie Blase was kind enough to comment on my prior book review of "Street Smarts" by Connors and Rashke.
Thanks Barrie for reading the article, I appreciate your interest and comments. You are very correct in saying "Street Smarts" is an excellent book, I think so too! And the fact it has contributed to your success, as a trader, speaks doubly well for the contribution it has made.
Successful investing, with consistent profits, is probably one of the most difficult avocations to master. I am always thrilled to hear about the success that others have been able to achieve, in what is a very difficult undertaking. You are to be congratulated for your trading success.
In order that all of CTCN readers understand the basis for my prior comments, and your response to my opinions regarding the stop-loss and money management techniques that were recommended in "Street Smarts," I will quote the relevant passages directly from the book:
In Chapter 3, titled "Money Management," Page 12: the book reads as follows: "All of the patterns in book follow the same method of money management. The following principles will ensure your success in any type of short-term trading!
Enter the entire position! ... Do not add to winning positions.
Place an initial protective stop on the entire position one or two ticks below the most recent high or low. (The market should not come back to this defined support resistance level, or risk point!) The exact timing to exit a trade is a subjective matter. What is not subjective is the initial protective stop.
Immediately look to scale out of your trade as the market moves in your direction. By taking some of the trade off, you are decreasing your risk and locking in profits. If you are trading on a one-contract basis, as you should if you are a beginner, move your resting stop to protect any gains.
Important, if market moves parabolically or a range expansion move, take profits on entire position. This is very likely a climax!
To exemplify the above instructions, I will further quote the relevant money management and stop-loss instructions provided by the authors in one of the trading methods given in the book:
If the buy stop is filled, immediately place an initial good-till-canceled sell stop-loss one tick under todays low.
As the position becomes profitable, use a trailing stop to prevent giving back profits."
And, thats it. The above quotations pretty much cover the authors idea of an exit strategy.
Now, for many of you out there in "investment land" the above money management and stop-loss information may be all that is needed for you to apply the entry systems discussed in the book. More power to you. I applaud you for your intuitive personal trading skills, which you are obviously taking for granted and unconsciously applying in an almost transparent fashion in deciding upon a specific exit strategy or the exact level of a trailing stop-loss.
It has been my experience that the intuitive skills that one trader may have (and often times takes for granted), another trader may not have. Yet It is these intuitive skills which a trader applies seamlessly and transparently to the decision making process that are the keys to successful trading when subjective elements exist in a trading system. Barrie You obviously have those intuitive trading skills.
However, many of us dont have those skills, and therefore, a more precise trading method is required. Additionally, if someone wanted to "historically back-test" a particular trading method, to prove its viability before using it, the computer will not understand nor tolerate a subjective undefined term like: "Use a trailing stop-loss."
I have done a lot of historical back-testing and systems testing and development over the years, and in doing so, I write a lot of system testing code on a regular basis. Its an interesting exercise, and it causes you to really think long and hard about what you are trying to do.
I find that when I am back-testing a particular idea or trading system, I am forced to delineate every aspect of the trading process in a very precise manner. As a result, it causes me to have to think about all of the various issues such as: "what is my exit strategy, what kind of trailing stop-loss do I want to use, and just how far away do I want it to be?" A computer testing model just doesnt understand, nor will it respond to, a vague command like: "Protect profits with a trailing stop." Thats just not good enough. An exact and precise definition covering every aspect of the trading system is absolutely necessary if that trading system or methodology is to be properly evaluated and eventually used.
If you had an opportunity to read my last book review on "Hit and Run Trading" the last section of that review was titled "Personal Commentary on Exit Strategies and Stops", in that section I provided numerous examples of various stop-loss techniques, and the resulting profits or losses that were generated when subtle changes were made in the exact level of a given trailing stop-loss.
I believe that the examples given in that "Personal Commentary" made the point very clearly That a subtle shift in the exact level of a trailing stop can have a "dramatic effect" on the overall performance of a system. Therefore, subtle variations in setting trailing stops can turn a winning system, into a losing one, and visa versa.
This combined with the fact that even Connors and Rashke describe their own exit strategy as "subjective," and the contents of their book totally omits any "precise" or even "suggested" trailing stop-loss methodology, is the reason why I believe my criticism of their fine book is valid.
Regarding the value of "historical back-testing:" You are very right in saying that no one has a crystal ball. But, you do need a semblance of an idea of what may have actually worked in the past, and what has never worked. (Full well realizing that what may have once worked in the past may or may not work in the future). But, if your idea has consistently failed miserably in the past, what makes you think it will start working now? And, who is going to have the confidence necessary to trade a system which historically has consistently lost money? Therein lies the concept and the power of "historical back-testing" your trading ideas before putting money on the line.
The major problem with the "historical back-testing" concept, is that you cant "back-test" the viability of a trading system or method when even one portion of that method is "subjective" or "discretionary." This is a very important point, because it is impossible to duplicate and replicate a subjective and discretionary trading decision.
So, the next time you read the next "Holy Grail" of trading systems that comes down the pike, and it requires you to define even "one" of the various trading elements contained within that system Remember, it is you alone, who is defining and providing the missing "subjective" trading elements, and not the author. And, in some cases, that undefined "subjective" element can represent as much as 50% or more of the trading systems effectiveness.
So, if you have been able to make money with a trading method which required you to develop and define the missing "subjective" elements contained in that method You are the one who made the system viable, and not the author.
Happy with The Newsletter & Some Vendors But Not Others - Greg Wood
Im a new subscriber and delighted with the newsletter. Im impressed with your editorial control the discipline youve imposed on your contributors. Reading the back issues has been very instructional for me.
Ive been a happy/satisfied client of John Stenbergs over the years. Id be happy to write an article describing my experience with him. The same applies to Joe Ross.
Ive had some sour, unhappy and/or money-losing experiences with other vendors (including Kent Calhoun, Essex Trading, TBSP, Larry Williams et al). Im reluctant to put these comments in writing because of the inevitable nasty responses. Whats your take on this?
Editor's Note: At least two of these vendors you have referred to have also had a number of positive comments made about them, namely Kent Calhoun and Larry Williams. In fact, there have been more positive comments on them than negatives ones over the years.
The same is true about CTCN's Real Success Trader Educational Video Tape Course. We have received numerous positive remarks (many more positives than negatives) about it, but also some negative remarks. This just proves it's difficult to please everyone.
By the way, how many product vendors are there who give a six-month or full one-year guaranty of satisfaction, as CTCN has done? Very few! In fact, there are several Seminar and Product Vendors who sell their methods for thousands of dollars and give no reasonable guaranty at all or a one-day money back guaranty! Some traders complain about their failure to back-up their seminar or product with a reasonable time period guaranty of satisfaction!
Look in the current edition of Futures Magazine for example advertising from some vendors who fail to back-up their products or seminars with a realistic and reasonable money-back guaranty.
It would be a great idea if they at least offered a Credit Certificate, in lieu of cash. This way the client may acquire additional products from the same vendor which may help him in learning the methodology he is unhappy with or did not grasp. At the same time the vendor would not have to did into his pockets for cash but could still offer a reasonable guaranty to the client.
Getting back to CTCN's Real Success method, amazingly (several different times) we have received feedback from two traders at the same time (sometimes the same day) where one trader says he is making money and happy with CTCN's Real Success and another trader says the opposite! This seemingly strange happening also occurs involving other trading systems and methods.
By the way, Im about to leave for a Linda Rashke seminar this weekend, followed by a week at Commodity Boot Camp. If I write an article, what kind of approach would be useful?
Editor's Note: Point out things about it you saw as positive and also any negatives. I would also concentrate on how mechanical and teachable these two trading methods are. What percentage is subjective and requires your judgment come into play? If the approach is too subjective, in particular involving mechanical entry, stop-loss and target techniques, the trading methods actual value would be reduced greatly.
Comments from A Real Success Trader - Cal Boicourt
I had a good Monday and Tuesday with profits of 250 points. Today should have been terrific, but I kept trading in the afternoon and let my profits slip away. It really gripes me that I cant recognize a trading range without spending a lot of money getting stopped out. Ive read Mark Douglass book once and am going through it again. I think it's helping me some.
About Ira Epstein's Site & Others - Gerry Barrington
First, I want to call to your attention that Ira Epstein is offering a free demo disk and computer chart capabilities on a remote basis.
As I am new to the computer game this seems like a good way to get my feet wet without high expense. I just sent for the demo disk so I have no experience as yet to relate. I will follow up.
I have no connections to Ira Epstein and am not a customer. I would be interested in learning of other peoples application of their data. Maybe it is just too new. I just saw their ad. Their web address is https://www.iepstein.com
This brings me to point #2; Dave, you mention other web sites in your editorial comments starting on page 30 such as Avid Trading Co., and inSight inFormation, and Investment News OnLine. What are the web addresses for these sites? I couldnt seem to flush them out. Please advise of any other interesting commodity sites for charts, technical analysis, etc. We need a commodity bulletin board.
Editor's Note: We also could not flush-out the URL's of Avid Trading or Insight. We will post their addressees on our www.web-trading Website once we find their Internet addresses. Investment News Online's is at www.ino.com P.S.: We have a number of interesting and helpful futures related sites on our new Website www.web-trading look at the left side frame on our home page and click-on "Related Sites." By the way, we are planning to add many additional links so if you have a favorite link you would like added, please let us know its URL.
A letter like mine could be posted on it. You in turn could print some of the more interesting questions and answers as part of the letter on the assumption that not everyone is going to read every posting.
"Futures Truth's Top-10 Systems Exposed" - Kent Calhoun Comments on FT's Top-10 Systems Of All-Time
In 1979 I incorporated Calhoun Commodity Research Company, for computer research of profitable methods. In 1981, I designed and sold my first trading system, the first volatility breakout system ever sold to the public, for $10,000 to a trader Mark Adrian, who became president of Stellans Brokerage Company. After eight years of selling trading systems from $10,000 to $35,000, to Chicago floor traders, I sold Ultimate II for $120,000 to the worlds largest crude oil trader. It returned 165% over the next 12 months.
The July 1997 issue of Futures Magazine rates Futures Truth Top Ten, (a.k.a. "FTTT"), All-Time Most Profitable Trading Systems. How many of FTTT systems would you really want to trade? If you look carefully, probably none.
There are aspects of system evaluation I developed which would benefit all trading system purchasers. In 1993, my Ultimate-II was rated the most profitable system ever sold to the public. Every FTTT System after a maximum equity drawdown beginning trading would have an annualized negative return except one. Ultimate II returned 102% after a maximum equity drawdown. Flat-time is the amount of time waiting for a system regain a new equity high, often a year or longer.
Basic Rules for Trading System Evaluation - Never buy a losing trading system for commodities you like to trade - 50% of the "Top Ten of All Time" portfolios tested had one or more losing commodities within their portfolios, which should have been eliminated. Never trade a system for individual commodities that lose money! Donate the money to your favorite charity first!
Never trade a system for any individual commodity where the maximum equity drawdown is greater then the total cumulative profits - Any system that has more maximum equity drawdown greater than cumulative profits is producing more negative equity traded exactly opposite its design structure. Universals LT made $1475 for copper after a drawdown of $10,300, $7 of negative equity for each $1 of positive equity. This aspect is worse then a losing system, since it may be a loser but this fact is unknown.
Never trade a system where profits are twice the commodity portfolio weighing - A three commodity portfolio should produce total profits equally. A skewered profit for one commodity equal to 200% the portfolio weighing means 66.67% of profits are from one commodity of a 3-commodity portfolio. What happens to the portfolio when that commodity begins to lose money. The entire portfolio normally crashes with it.
Trade a system to suit your personality - The average waiting period for a system to make new highs for these 10 systems is 320.7 trading days, or over 10-months. How many traders can wait for 10-months for a system to produce profits above a previous high? One system had a 1.5-year flat period. Like watching tectonic plates move?
You must know the maximum equity drawdown before funding an account to trade any system - The most important of all system figures was omitted by Futures Truth!
How many of the Top Ten systems would have been profitable one-year after a maximum equity drawdown? Only one, and that one had a waiting period of 244 days before a new equity high was reached. Very few traders will want to wait that long. The best systems have only 10% losing months, and regain peak equity figures within three months.
Expect an immediate equity drawdown - The last time this article was published, 1993, combined systems had a $150,000 equity drawdown. How much of a negative drawdown will be experienced now, these systems have been published?
Analyze the Profits - The Yen and S&Ps have been very strong trending markets for the last three years. When profits from these markets are removed from the combined system portfolios what happens to the ten systems combined total profits?
They dropped from $919,761 to $401,434, a decline of $518,327, a decline in excess of 56%!
Sharpe Ratios should be over 2.0 to 3.0 for a good trading system. While Sharpe ratios have no absolute value, they measure the relationship of risk of volatility to reward. The lower the Sharp Ratio the more volatile the equity swings, since it measures the system return in units of standard deviations. The best FTTT Sharpe Ratio was 0.05!
The Futures Truth Top Ten All-Time? You Decide!
Time Trend lll - trades S&P futures - 7-parameters-A maximum equity drawdown of $25,075 at the beginning of trading would have made no money by years end. The average yearly profit is $19,593, almost $5482 less than its maximum equity drawdown. Flat time - 529 days (zzzzz). Want to wait 1.5 years for a new equity high? Sharpe.25.
Culler Currency System - contact Futures Truth, Swiss & Yen, 4 parameters - Would you like to watch your account lose $19,313 to make $9,613 like this system did in Swiss Franc? Would you like to assume overnight currency risk 45 trades per year to make a whopping profit of $7,529 per year? For 396 days, you would have remained below previous equity levels. Yen produces 85% of profits! Sharpe-crapshooters. 14!
DCS II- sold PWA Futures - 5 commodities tracked with 4 parameters - Two of the five commodities lost money and should have been replaced by any of the many that are profitable for this system. The three profitable commodities of yen, franc, and coffee had equity drawdowns of $16,375, $21,163, and $35,494, which are pretty hefty risk for some traders to assume. This may be the best of all the systems, because other commodities not listed have lower drawdowns. Peter Aan, "Americas #1 CTA", has attended more KCI Seminars than any other KCI trader, and has much better work. Sharpe.27.
DollarTrader-9 parameters - too many! Curve fitting optimization? The maximum equity drawdown is more than 14O% of the average annual profits, this accounted for a l-year plus 9O days flat time. Anyone for watching plate tectonics? Sharpe-.18. (Try Vegas slots; they have a higher Sharpe).
Grand Cayman - 8 parameters (yuck) tracking 7 commodities. More than half the commodities, 4 of 7, when tracked together produced a loss! The other three have equity drawdowns totaling over $80K to produce profits of $103K. Do you want to trade risk that high? Bring lots of money for little return. Not for me. Sharpe.32.
R-Breaker-Richard Saidenberg - the only system with a positive annual return after a maximum equity drawdown. I taught Richards programmer my parameter stabilization method. This system requires a lot of trading, over 125 trades per year. Slippage and commissions were calculated at $75 per trade. Deserves consideration. Sharpe.48.
Universal LT - Stafford Trading, a.k.a. Futures Truth - After you eliminate Copper (drawdown $10.3K profit $1.4K,)Crude Oil (drawdown $9.4K profit $4.9K,) British Pound (DD $8.7K profit $4.5,) & T-bonds (DD - $22.2K profits $25.5K,) only 2 commodities remain. More than 53% of total profits are from the Yen! Forget this! Sharpe.50.
Aberration - only one parameter (impressive,) 403 flat time days - snooze. An equity drawdown in coffee of $39K for profits of $47.9K, you have got to really love coffee, (except for a losing British Pound, and Swiss Franc -DD at $16.6 for $12.6, three commodities are acceptable with 60% winning trades for mark, franc, and crude. Consideration this system for these markets after examining drawdowns. Sharpe.36.
Catscan - 5 parameters, 7 commodities, 4 combined lose money. This is the only system listed that lost money for the Japanese Yen. T-notes lost $9.3K before making $860, Muni Bonds & Cotton - just as bad. (Their ads always shows #1 rankings. How?) A flat time of 453 days. Why waste over a year waiting for your money to return? Sharpe - blunt.24.
ComboAdvantAge-Black Box with undisclosed rules selling for $4,995 - requires a special type of sucker (idiot) as a prospective client. Naturally 80% of this turkeys profits come from the Yen, with horrendous results for the D-Mark and Pound which combined together lose money. Why not just give this guy your trading account! Sharpe a dull.14.
In my humble opinion, anyone who buys a black box trading system shows blatant disrespect for their money. With a black box system any line of code could be entered, like "do not trade S&Ps on October 19, the day of a systems largest possible loss." The system purchaser, just like Futures Truth, would never know the difference! Any company that rates a black box system should never be seriously regarded as a respectable member of the professional financial community.
Anyone who rates trading systems, has no business rating their own systems. Stafford Trading is owned by Lundy Hill, son of Futures Truth owner John Hill, and a partner with his father in Hill Financial. By rating a black box system, by omitting the maximum equity drawdown figures, by rating their own trading systems, Futures Truth is contributing to the most detestable and unethical predatory vendors who avariciously prey on the public. Futures Truth has betrayed any ethical standards they once advocated for other vendors, by clearly demonstrating a lack of their own.
Editor's Note: The August issue of Futures Magazine just arrived and contains a number of advertisements from these "Top-10" vendors proclaiming their listing in the Top-10. As we warned you in the past and before Kent wrote this article, the Futures Truth rankings and service is of very dubious value. We strongly recommend all CTCN readers ignore the Futures Truth rankings. Also, as Kent so well points out, most of the top-10 systems have huge drawdowns and flat time periods between new equity highs. Do not buy these systems mainly because of their FT ranking. Remember, the Futures Truth ranking service is of extremely dubious value. In addition, we have been told by the owner of Futures Truth their rankings really are subjective.
Important Editor's Note: As an interesting side note, at one time CTCN (Trend Index Co.) had a trading system which was highly ranked by Futures Truth but was dropped at the last minute from the Top-10. This was because John Hill admitted he wanted to include his friends Welles Wilder's system in the Top-10 report in Futures Magazine's report on his Top-10. Therefore, he took our system out of the Futures Magazine report and replaced it with Mr. Wilder's system. When we asked why this was done, his comment was "today's top-10 may not be tomorrow's top-10" and indicated the listing was basically very subjective.
Commodity Traders Club News is in the process of putting a Special Report on our new (www.web-trading) Website titled "The Truth & Allegations About Futures Truth." Not only will this expose on their highly dubious value Top-10 List be on the Website but lots of other insider type of critical information.
Important Editor's Note: Your editor will also include on our Internet Site (www.web-trading) his own shocking and amazing past first-hand experiences with Futures Truth. No punches will be pulled or facts hidden. We will tell you everything about our past dealings with Futures Truth.
This will include all the details on how they published heavily curve-fitted and optimized output from one of our trading systems. This was done every month for a very long time by their asking us to send them a new trading system disk each month with freshly optimized parameters and our own price data (which also could have been easily curve-fitted - but the data wasn't).
How they then listed it in their Master Performance Tables and ranked it highly, all based on those heavily curve-fitted parameters that were curve-fitted on a regular basis.
Of course, the un-optimized and non-curve fitted actual trading results would have been vastly different and likely inferior to performance results they told the public about. CTCN members should all be aware by now that performance of an optimized or curve-fitted system will in all likelihood fall apart or deteriorate when you start trading it.
We wonder how many other systems are heavily optimized with their blessing. It's very interesting to note John Hill admits in a past CTCN article that he does in fact allow the vendors to modify the systems themselves, but FT does "not allow any "tweaking" of the numbers." Isn't this the same thing but a different way of doing it?
Trading Using A Common Indicator An Adventure In
Computer Simulation - Stephen Goldfarb
One of the more familiar indicators is called a Pivot-Point. The pivot point one can project the next days high (resistance) and low (support). Some formulas include a second level of resistance and support beyond the primary ones. Pivot points are frequently referred to in books on trading and in magazine articles.
I recall an early article in a magazine devoted to Radio Shack computers. The author claimed he inherited a successful system from an old curmudgeon. Sure. Traders often wish to trade during the day. The appeal is that a trade is closed out by the end of the day. Ones risks, and sleepless nights, are lessened. So, too, are profits.
I thought I would test by computer simulation how the pivot points might be used for a day trading system. As you will see, the challenges for successful day trading are not readily met. The formula to calculate a pivot point and projected high and low for tomorrow is as follows:
Pivot point=(High + Low + Close)/3
Projected high=(2 X Pivot) - Low
Projected low=(2 X Pivot) - High
I also used a filter to determine in which direction to trade. I used an oscillator consisting of the three-day simple moving average of the close minus the ten-day simple moving average. If the average moved up from one day to the next, I considered that a "Buy" mode. If the average moved down from one day to the next, I looked to enter short.
I used an additional filter to trigger entry into a trade. This came from William Greenspans article in Technical Analysis of Stocks and Commodities (July 1996). If I were in a Buy mode based on the moving average oscillator, I entered long if the days price opened below the pivot point and moved up through it. If I were in Sell mode, I sold if the days price opened above the pivot and moved down through it. One is entering in the direction of the short-term trend. Entering from below the pivot suggests at least a partial reaction in price against the trend.
The targets were the days projected high or low. If the price did not reach the target, I exited on the close. I placed no stops for this test. If todays prices were an inside day, I used the previous days prices to calculate the pivot point and support/resistance levels.
Computer simulation is different from real time trading in a number of respects. In this case, the pivot point calculations use the raw computer generated figures. They are not converted to actual tic values. Because one is using daily Open, High, Low, Close, it is impossible to tell what price excursions occurred during the day. In real time, a trade could have been entered, and the price might then move in the opposite direction before ending at its final destination. Slippage and commissions are not factored in.
I used continuous T-Bond data starting July 1982 and ending 1-1994. That's about 10-½- yrs.
The results were as follows:
Cumulative profit: 15 points (approx.)
Wins long: 223 - Losses long: 132
Wins short: 202 - Losses short: 181
Total trades: 738 - Percent long wins: 63%
Percent short wins: 53%
Percent total wins: 58% Trades about once every 5-days
I also tried a simulation in which the profit potential had to be at least .20 points. I measured the profit potential as the amount between the pivot point and the target.
The results for the latter test were as follows:
Cumulative profit: 19 points (approx.)
Wins long: 185 - Losses long: 114
Wins short: 161 - Losses short: 146
Total trades: 606 - Percent long wins: 62%
Percent short wins: 52%
Percent total wins: 57%
Trades about once every 4-days
A point in T-Bonds is $1000
Well . . . what can one say about such testing and results? The profits are negligible for 10-½ years of trading. Even deep discount commissions would make major incursions into already meager results.
Traders who learn of an esoteric technique and trade it without testing, do so at their peril. Trading a method that sounds intuitively correct (i.e., trading in the direction of the trend, entering on a move in the chosen direction) does not guarantee success. Even with some validity to the methodology (eg., 62-63% long wins) minimal day trading profits cancel out the advantage. There is more to trading than the siren songs of high-speed computers and magic indicators suggest. Perhaps a little tweaking would improve the results.
"To Good To Sell" - Dale
I received your publication and decided to give you a look. (Although as a professional CTA, broker, system developer) I took great occasion to a few of the articles). It is no wonder that most people lose money. The main attitude of many of the letters was that everyone was responsible for the people losing money except themselves.
They took great efforts to blame professionals and system sellers. Ive spent tens of thousands on worthless systems as well - I look at it as tuition cost. Also, I have bought many good systems that I couldnt make money with because they did not fit my personality.
My experience as a systems leaser made me decide to get out of the business of leasing and keep my system proprietary. I can make a lot more money that way anyway. I did think it would be nice to feel like I helped many people learn how to make $$. But, In my 10-years experience, I have found that only about 1-5% of people have any integrity and usually want to blame everyone else for their problems. However, when I meet that 1% it does make the rest worth it. Thank God that I have a good system and dont have to lease it to anybody and can be very selective about who I do business with and associate with.
Editor's Note: This is odd. The reason Dale sent this to CTCN is because he received e-mail we sent him asking why he's sending us unsolicited e-mails containing an attached file with his trading recommendations. If Dale isn't selling anything why did Dale send these unsolicited e-mails to us?
Commodity Options - W. D. Vincent
I really enjoy reading CTCN and think that its really helpful. Due to this publication I, being a green commodity trader, have decided to get back into trading after being less than successful futures trader back in 1990-91. I started with the Ken Roberts course and am very thankful of the skills, terms and trading that I learned and would recommend the course to anyone who is new to the "game." When I was paper trading I made a ton of money. Then I started actual trading, and the economy change and my money slowly and I mean slowly started to dwindle.
One trade forward and two trades back. If you ever been hustled, then you know what Im talking about. Not that I was, it just seemed like it looking back. Beginners lack of a money management plan was really my previous down fall along with the failure to have a "what if this happens" plan and got hit constantly with stops to close.
Therefore, this time Im investing time in commodity options. Im leaning on the selling side of the picture due to the nature of mostly winning in four out of five neutral spreads. The beauty of these spreads is you dont have to predict market direction, just the range that they will stay in less than 45 to 60 days.
I just look for the biggest rise or fall in the last six months, add that to todays price for the strike I put on the call and do the opposite for the put. I also only pick commodities that are slowly trending and are not close to their season high or lows and stay clear of volatile markets(coffee etc). Like I said, so far it works on paper after 40 or 50 trades. Ill have a pretty good data base to refer to, to give me a better direction on what to do. Also does anyone trust Kaplin?
He seems to be the only one talking about himself. So if you are an options trader, Id appreciate to hear from you. I like talking options. You can e-mail me at email@example.com. I look forward to a long relationship with yall through CTCN. I hope this will be of some use to somebody out there!
Review & Opinion of R&W Technical Systems - Jim Allen
There have been inquiries about R&W Technicals Master Suite trading program. It is comprised of separate systems trading S&P, Bonds, Euros, plus DM, SF, JY and BP. You can buy the Master Suite, or each individual system, Euro, S&P, Treasury or Currency. It is designed to run under SuperCharts or TradeStation on end-of-day data. I think R&W also has similar modules for other markets, grains, meats, softs, etc., but I have no experience with these.
I have owned the Master Suite for a couple of years. It is fairly easy to operate. Every night you download your prices and run the system. It gives you the new orders on the system tracking page. The trades tend to be longer term. At each quarterly roll-over each system must be set up anew, but this takes only a few minutes once you get the hang of it.
Depending on when you start, your results can and do vary. The entire Master Suite costs about $15,000, cheap if it makes you big money, expensive if you dont use it, or use it properly. R&W claims you can use an initial account size of $26,000, but in my judgment, that would be extremely courageous. Count on at least $100,000, to be a bit safer.
Be prepared for some heart stopping drawdowns sooner or later. I think that this is an unavoidable consequence of a longer-term system. If your account is big enough and you take every signal, and I mean every signal, and you live long enough (in the trading sense), it appears to show a profit every year on the whole system. I dont know if that can be said for each individual component. Although it is claimed to be profitable in the long run, the drawdowns in the short run can be ruinous. The system sets some mighty big stops, too.
My experience was that I was usually able to enter and exit fairly close to the system signal. They always enter on the open, and always have a stop in the market after the day of entry. I did a brief examination of slippage and found that it was about even, sometimes we got worse fills and sometimes better.
There are cheaper systems out there, and there are a lot of worse systems. I quit trading Master Suite because it seemed we were leaving too much money on the table, and I was concerned about large drawdowns, even though I was very comfortably margined at all times. I found that I was very uncomfortable blindly following each trade, especially when the trades went the wrong way.
You sit there with a loss on the trade, not knowing, or having any way to know whether or not youre about to drive off the cliff! Then you have an overwhelming urge to step in and . . . second guess. At that point you might as well just call the trades yourself and not bother with the system. As the ads say, there is a risk of loss . . . and past performance is not necessarily indicative of future results! I have tracked it since I have had it, and following the system would have been nicely profitable overall.
You should look at what happens to someone starting at various times during the period for which results are claimed. For example, the results claimed show what happened if you started on January 1, 1987, I think it is, and those results are impressive. But what happens to people who start at different times. Maybe the results are not always so good. My trading was profitable, but the traders who started three months before had much better results due to a couple of wildly profitable currency trades.
Editor's Note: Jim's comment about the starting date of trading being important is something not obvious to most traders. The sequence of events which set-up the first signal and first trade can sometimes have profound effects on the following sequence of trades. Another reason for the timing of the first trade being sometimes critical involves optimized or curve-fitted systems who's optimized parameters were based on the markets signature on a specific date or time period just prior to the first trade. As a result the first few trades may be successful but the results will deteriorate as time goes by. Or if a different starting date is used (even just a one or two-day difference in start dates) the results will be different, sometimes by an amazing degree. We want to thank Jim for this review as he did it as a result of our asking him for it in response to a number of inquiries we have had about R&W.
There have been only a handful of S&P trades in the last few years, but some of those were eye-poppers, and made up for quite a few losing T-Bond and British Pound trades. I suppose that may be a strength of the system, that it is a little diversified, so that the odds favor one system being good while another might be struggling.
Maybe someone can run the results starting every quarter from Jan. 1987 to date, to see how many starting points would produce disaster, and how many would produce satisfactory results. Call up R&W and ask if anyone has ever done that! Im not so sure what that would prove, since past performance is not necessarily indicative of future results . . . but many people feel better knowing.
R&W got whacked by the CFTC over its claims. I believe that the big issue is the claim by CFTC that nobody actually made the trades shown in the performance tables. But I dont recall R&W claiming that anyone had, only if you had been following the system, these signals popped up and you would have gotten these results if you had traded them. I have run the system on the prices for past years, and am satisfied the system pops up the signals, and sets the stops, as claimed.
After all this, plus my experience with other systems, I think that blindly following a mechanical system, no matter how sophisticated, is crap-shooting. It is better to spend $15,000 learning how to trade, and even better to learn how to trade without spending $15,000.
A Lesson In Time (or How To Trade Time Days)
Rick J. Ratchford
This is a general lesson on how to trade time days, and the author will allow you to fill in the blanks as to what time days you use. For most of these following techniques to work, however, the time days you choose to use should do better than 70% in isolating a turn in the markets within one day. When you start to go below 65%, you run the risk of losing confidence in your time days and their source. Without a confident source of time days, it will be difficult to trade with the expectation that every time day will work, and that can ruin a good trading plan using them.
Once you've found a good source of time days to work with, you must then proceed with the assumption that all turns in the market that falls on a time day or within one day of the date that was forecasted will not be breached for at least a few days minimum. You must assume this if you are going to develop necessary skills in dealing with results of a time day, good or bad. Time day tops or bottoms are the tops or bottoms for the short term, no exception. From here we may proceed.
All examples in this lesson are based on a short-term down trending market. We know it to be a down trending market based on these rules. A top is a top if it is higher in price to the tops of the previous 2-days and 2-days afterwards. A bottom is a bottom if it is lower than the low of the previous 2-days and 2-days afterwards. This is for defining trends, not time day tops or bottoms which can be formed in one day alone. So, our downtrend is when the short-term market is making lower bottoms and lower tops.
For uptrends, which are higher bottoms and higher tops than the previous bottoms and tops, you need to reverse what is explained in this lesson. We will assume a downtrending market only for simplicity. Again, all rules will be assuming just a down trending market. Reverse for up trending markets.
Consider that we have a time day due today, and the previous days have been going lower and lower up until now. Now it again makes a lower low on our time day. Here are some rules to consider in this situation: We only trade in the direction of the short term trend; We must assume that we have a time day bottom; If we are already short, we should either tighten stops or exit now; and We must prepare for an opportunity to enter this market in the direction of the trend within the next few days.
A time day turn is a very important turn. It marks a significant price level. When the trend is down and we have a time day bottom, we cannot enter to go long because this would be against the trend. There exists the possibility that our time day is actually a time day top instead, just one day late.
In other words, the next day after the assumed time day bottom the market makes a higher bottom and top. Then the following day after that it resumes the downward move, possibly even taking out the assumed time day bottom. What we have here is actually a time day top just one day late, even though it was made only in one day.
Now here is how this time day would have been properly handled based on simple rules. Rule #1 is that we only trade in the direction of the trend. Therefore, we would not have tried to go long on this time day low and then get knocked out the next day with a loss. The trend dictates the type of trades that we take using time days.
We only short to enter the market. So when you have a time day bottom at the end of a down trend, we first assume it is a time day bottom and then we prepare in case it is a one day top instead by watching what it does the next day. If it happens to make a top at 23, 38 or 50% of the previous range, this is a tip-off that we may be reading to head back down in the direction of the trend. We then can either enter the next day after the open if the top is not violated by going short or we can place our order in below our time day bottom to get picked up. Either way, our stop is placed above the top by a couple of points.
What we are now doing is assuming we have a time day top as well. The stop should be just above the top to exit if we are wrong, and just below the time day bottom in case it is broken through. You see, if our time day turns are violated, this is significant in the direction of the trend, and a low risk exit when in the opposite direction of the trend. One way we want to be in, that is short in this down market, but out of the trade if our top is really not a top after all. Cheap. Once you go past one day after the time day, you should no longer assume a rally top unless you happen to have another time day which may mark it. Otherwise, you have a time day bottom only to work with. Wait for the market to pick you up below the time day bottom if it breaks through and you will usually go down for a few days before the next correction.
Exit stops should be placed just above the 24% price of the previous range from the time day bottom once the entry is hit. The market closes below the time day low, the next day the exit stop can be placed above the high of the day that broke below the time day bottom. Breaking a time day bottom is significant if you are using good time days. They arent time days for nothing.
That was an example on how to deal with time days that fall opposing the trend. Now lets consider how we treat time days that fall in line with the trend. Our market is down trending and we are coming upon a time day. Yet, a few days prior to the time day a bottom is formed and the market then heads up. It's correcting, making a retracement of the last run down. We then are expecting our time day to be a top. We're also looking for price to meet with the time day. The key is price and time. One way to get price is just to do simple ratio math and find 23, 38 and 50% of previous range. If on your time day you fall near one of these values, you may have time and price. Some programs can help you find support and resistance prices on a retracement. Be prepared. Now on our time day we have also price that we calculated using a reliable program. We can then enter the trade aggressively during the time day high and hope it isnt going to make even a higher top to the next resistance levels, or we can wait and verify by waiting the next day and noting that the high does not seem to be threatened.
We must assume that on the time day it is the top and place our exit stops just above it. Reason is that if you are stopped out, our time day top was invalid and we dont want to trade this market. If you use reliable time days, you should be confident in putting your stops just above that high since your time days have come through for you on a regular basis.
The trade is short in the direction of the trend, and you want to look to tighten stops or exit when you come back down to the last bottom prior to the rally youre currently shorting if much resistance is being offered at the level of the last bottom. We need to break cleanly through this bottom to continue down. As long as lower bottoms and tops are made, we look to short only, and we do so on retracement tops (or like our earlier example, below time day bottoms). Again, just the reverse in the event of an up trending market.
Now at times you may have a time day bottom and another time day is due soon. You expect that the next time day to be a top, yet after a rally and a top is formed, the market falls and soon comes upon the next time day as a bottom as well. The top was not a time day and so we dont trade it. Only trade on time days in the direction of the trend. We had no time day for the top so we couldnt short it. Now we are back to another time day bottom again. This time however, the assumed bottom is higher than the last bottom.
We may be seeing the trend change. If the bottom is formed on the time day at 23, 38 or 50% of the rally range up, you can enter to go long with a stop below the time day bottom for a low risk trade. The key is that we must cleanly break through the last rally top on our way back up to have a good opportunity to win.
Once price reaches that price level prior to breaking through, move your stop up to even plus commissions. It is now a free trade in case the market is not changing trends. Absolutely no shorts should now be considered unless not only does it fail going thru the rally top, it must now make a lower low than your last time day bottom.
The key is learning to discipher the trend and to trade only time day turns in direction of trend.
Now lets say we only have one time day and it is a bottom during a down trend. Well, we cant go long since it is a down trending market. After one day and it doesnt hit 23, 38 or 50% of the previous range down, we pretty much eliminate a time day top one day off. Without another time day due in a few days, we can place our short entry stop below the time day bottom in the event that a break will move to the next level.
Breaking true time day turns are powerful. Another event that occurs during time days, just not as frequently as turns, is an acceleration day. Acceleration days are days with a bigger than average move in the market for that day. By applying our trend rule, we would not be on the wrong side of this move. Our trend is down and we have a time day today. On this, instead of making a bottom, it makes a very big drop.
The following day instead of making a higher low thus verifying our time day bottom, it makes a bottom also and the next and the next. We had an acceleration day. Since we would not be looking to go long, we are safely watching. If we were already short, we just made a windfall profit if we only tighten stops and did not exit.
We look to only trade pullbacks and rallies which are moves against the trend when they end on a time day, thus entering only in the direction of the short-term trend and placing our stops above the time day top.
These techniques will allow you to trade and profit with time days in the direction of the trend as well as those opposing the trend. With just a bit of practice, youll be able to see this quite easily. I completely enjoy trading with time days and will not do so without. My time days of choice are Fdates (https://FSoftpublishing.com). Using these techniques provide low risk with very high profitability.
Just make sure you get good time days and prices to work off of. The 23, 38 and 50% prices are rough guidelines. There are even better techniques for finding price. But either way, the time days are the real work horses, with these techniques.
Talkin to Myself Again - J. L. from Wimauma
So Im gettin my "come-uppance." So I didnt subscribe to Robert Wiests Scale Trader newsletter. So I didnt know about Brazils forthcoming bumper OJ crop until I talked to the "master" himself. Can I help it if I hate relying on fundamentals? (Maybe Id better?)
So I bought OJ (see my last issues article) a little too aggressively (even if I did my repurchases with the "markets money"). The rollover to Sep. changes the picture. Sep. was so expensive that my profit targets ($1.00 per contract) are really up there now in a market still drifting downwards. If it may take a freeze or hurricane to cash me out, what to do in the meantime? Not to worry. (Dont forget that I determined that I could afford OJ before I opened the "campaign," i.e., even if OJ went straight down to 13-yr lows never bouncing. I could buy a contract every dollar down and still have 30-50% reserves for those nasty rollovers, etc.! Is that focus or what?)
So this is what Plan Bs are for. Since Im adhering to the original scale, my new purchase levels are quite a bit lower resulting in an automatic temporary suspension of buys. So with a chunk of money tied up in drawdown, what to do? Like any other investor, I want to be paid for making my money inaccessible to me - its called a return. So a page from any farmer or cattle-ranchers book tells me to hedge my longs.
Simple enough. Scale Shorting Nov. on bounces works wonders. In this bear, I short at the previous days hi instead of the $1.00 level. Im aware I could be "locking in" losses instead of winnings if prices go tearing upwards, so I always stay Net Long even after I would take a few long profits if offered. It now becomes imperative to have enough "inventory." Hows that for turning a large DD (16 contracts) into a plus? If the name of this game is eliminating over-all risk, then . . .
So while waiting patiently, selectively taking profits on my "hedges" earns me the $500-600+ a week that I was making on my long bounces! And my "coup de grace" will come when my next T-Bill matures. Then by re-activating my other account I can hedge the same delivery month to eliminate those aggravating spread fluctuations and then have a Pure hedge.
Now that Ive lost half of you and proved to the rest of you that Im indeed wacko, the least I can do is to try to end on a "warm-fuzzy" (if I could think of one). Oh yes. "A person allows change into his or her life when the pleasure derived from bitching about situations (considerable to be sure) is surpassed by the actual discomfort of said situations." (I made that up.) Good Investing
Psychology of Trading - Lin Hall
Have you ever thought about what it means when something is at risk? It means that there is the chance that something could be lost. Even if a system will have 50 winners out of 100 trades, you still do not know in which sequence the winners and losers will appear. Therefore, each trade is a risk. When the outcome of a trade is not known, there is fear of a loss.
Most people associate trading with fear of financial loss, but that is only the tip of the iceberg. The bigger issues are in the emotions and beliefs that lay beneath the surface, much like an iceberg whose mass is hidden beneath the surf. Besides potential for self-esteem loss. All kinds of factors make up our self-esteem and all of these are at risk with each trade. Loss of money and loss of self-esteem also have pain attached to them, as does the feeling of being wrong.
Since every single trade you make has a non-guaranteed outcome, and since each loss carries with it emotional attachments, a tremendous amount of potential pain is associated with each trade. All our lives we have been conditioned to avoid pain and fear, so most traders are risk-avoiders rather than risk takers. This means that the very nature of being human, which is to avoid pain and risk, is in direct conflict with having to take a risk and face potential pain as is life within the markets.
The mind and ego are very complex and tricky animals. Though a part of you may feel confident in your choice of system and trading strategy, another part which has experienced pain and loss in the past - in an effort to protect you from the same pain in the future - may have a louder voice when risk of loss appears again, thus causing you to see-saw and second-guess.
Meanwhile, each time you do experience a loss in the present, your mind drags up every similar experience of loss from your past thus magnifying your experience of pain and suffering many-fold. Other hidden agendas may involve feelings of unworthiness or lack of confidence which manifest as losing trades or haphazard decisions. This all makes for a very confusing and complex situation when one is attempting to trade the markets without wishing to be controlled by past-conditioning or the tricky wiring of the mind.
As a result, your trading must become a function of your attitude. Either you attach your self-esteem to losses and wins or you do not. People who associate self-esteem and pain or pleasure to trading see each trade as a "do or die" situation. Winners see markets factually or from a practical perspective.
The closer you are able to get to the state that where you do not feel emotional discomfort each time you execute a trade, the greater constant success you will have in trading. This emotional detachment must be true and real rather than merely an ability to suppress the emotions. Lets take a closer look at the differences between successful and unsuccessful traders.
The Unsuccessful Trader, whether consciously or unconsciously, unsuccessful traders, in their attempts to avoid the pain of financial loss and feeling wrong, tend to second-guess, mistrust their own systems and execute many haphazard trades. Rather than trading factually and consistently, losing traders tend to allow their fears of loss and pain to dictate (at some level) how each trade will be executed.
In one case scenario, that same trader may avoid executing a trade system gives, but for fear of pain, allows over-analyzation, rationalization and second guessing to interfere with original intentions to follow a particular system.
In each of these cases, the trader is attempting to avoid the pain of a potential loss rather than accepting each trade, whether a to-be winner or a to-be loser, as part of a larger and more complex picture.
To this type of trader, a loss or two or three in a series carries with it much more weight than it would to a trader with larger perspective. Unable to see far enough out into the future and trust his/her system as originally intended, this type of trader judges loss as negative, frightening or something to be avoided at all costs rather than simply an aspect of something larger, a natural rhythm to any system.
To this type of trader, it is often more comforting to lose a trade that is taken randomly rather than one that is chosen by his/her system. In this situation, then, the trader can chalk up this loss to a "haphazard" choice rather than worry about the validity and strength of his/her chosen system. Again we see how this type of trader has attached self-worth and fear to his/her trading and choice of system rather than taking a more objective and detached view.
For the unsuccessful trader, the risks carry much weight and meaning as the mind reeks havoc with issues of self-worth and attempts to avoid fear/pain. Until he/she becomes detached from an emotional and fear-based place, trader is doomed to a never-ending search for the "perfect system" with many setbacks along the way.
The Successful Trader - Successful traders, on the other hand, are natural risk-takers who carry no fear of loss. Unlike unsuccessful traders, they do not associate pain or self-esteem issues with any trade. Rather they accept the inevitability of losses occurring in any trading program and do not attempt to avoid them for fear of pain or temporary setback.
Their trading is consistent objective and based on fact. They have researched their trading strategy and the money-management rules that go with it. They have done their homework and trust their own judgment and powers of discernment. They are able to see and trust in the larger picture that, for instance, out of 100 trades, there will be many wins and losses, but what matters is the end result. They are able to play the odds, while allowing their emotions to take a back seat.
To this type of trader, a string of losses here and there is to be expected as he/she moves toward net profit through the ups and downs of trading the markets. A loss here does not mean failure. A win does not mean success. The focus here is long-term from a birds-eye view. Long-term winning is expected and anticipated.
To sum things up: Winners have a sense of humor; losers do not. Winners have trading and money-management rules; losers have neither. Winners stick to a particular trading system and to trading a small range of markets. Losers constantly change systems, markets or both. Winners feel fine about taking vacations from trading when they don't have positions in markets. Losers feel as though they will be missing out if they are not constantly engaged in trading. Winners trust themselves and their systems whole-heartedly. Losers are constantly second-guessing themselves and their systems. Winners are secure and satisfied with a trading system that is not perfect. Losers are constantly on the search for the "perfect" trading system.
The Solution - As we have mentioned, when there is a risk, there is fear and we are wired to respond a fight or flight conditioning. The flight response is to not take any more trades after a string of losses, to switch trading systems or to switch markets. The fight response is to be stubborn and to not use stops or to keep repeating the same mistakes over and over again until a bully market changes. Markets do not have emotions. You have emotions. What is the solution? The solution is in consistency. Have stood money management and, for each trade, calculate the risk you are taking. Have a good trading system and each day calculate your entry, exit and protective stops and use them consistently. Develop a factual trading attitude, and then repeat this attitude with each trade. When analyzing the markets, a trader tends to be factual, but when it comes to executing a trade, he/she becomes emotional Trading in the same manner that you analyze could be a helpful factor. Trust that the trading program you have set for yourself will be successful. Why are successful traders consistent? Because, they do not associate risk with fear or loss with the pain of any sort. To be consistently successful, you cannot rely on hope. You must get to the state that you can execute each step of a trading program consistently and without any part of you being in conflict with the other parts. You move from the conflict stage to the creative stage.
To get to the creative stage, you must monitor how your emotions and thinking are working and heal the conflicts within you. There are many conflicts within each trader and if you are unable to be a consistent trader, the solution is not in another trading system, but rather in self-analysis. Trusting oneself and loving oneself go a long way to healing the emotional conflicts that silently rage within each person.
Ask yourself these questions: Do your trust yourself? Are you afraid of yourself? If a trade is wrong, will you judge yourself? If a trade is wrong, will the parental tape of judgment be playing? Do you believe money is good or evil? Do you believe you deserve to be successful? Are you worthy of having millions? Do you believe it is good to be more successful than your father or mother? Do you believe success comes from consistency? What is the risk of taking the next trade? Caution: After you have understood the above facts, worked on yourself and still cannot succeed, please understand it is not yet your time. Some people hardly work and, with one idea, become millionaires and others, no matter how hard they work, are unable to become financially independent. There is destiny involved.
It's Hard To Please Everyone - A Rebuttal to Earl McHugh
A fair number of people write to me for trading guideline materials, most of whom add that they "enjoy" my articles in CTCN. The frequentness of this word comes as no small surprise because-lets face itso many folks regard financial writing as castor oil journalism. When readers say they enjoy CTCN, Dave, you achieve the kind of praise that most financial editors never dare to expect.
The reason Earl McHugh gives for disliking my articles"totally useless meandering"is patently spurious. No periodical publisher expects every subscriber to like every page or find it useful. Most S&P traders do not care about pork bellies. Most equity option players are indifferent toward interest rates and foreign currencies. Do they all write and complain about "useless" pages?
No, I stung Mr. McHugh for reasons other than what he said. My articles criticized Right Wing reactionaries who call themselves "traditionalists" when their knowledge of tradition covers little territory before the Laurel & Hardy era. As a proud Italian I exhibited a short fuse toward "golden yesteryear" Lawrence Welk fans who cannot pronounce the title of a grand opera. Could it be that Mr. McHugh fits this description? Be interesting to hear him try to pronoun Cavalleria Rusticana.
Everybody knows that speculating is a pound-of-flesh, play-for-keeps business. One person appreciates some of the czarist art collection in the Hermitage, while another believes the Elvis-in-a-flying-saucer stories in the supermarket tabloids. Earl McHugh would call this fact "useless" and "irrelevant to trading." Yet which of the two has any kind of a chance as a trader? And which will buy advertised land sight-unseen in Cactus Paradise Acres?
Something similar could be said about the fellow who leans toward the milky wholesomeness of Pat Boone movies instead of toward the plays of Sean OCasey. I use this example in deference to Mr. McHughs presumed Irish heritage. Anyone who cannot digest a good Renaissance of Irish Drama stage play is a lamp or two short in the mental attic, and the trading world lacks mercy toward vacancies atop the stairs. Earl McHughs chance of success as a trader is boosted if he has read some John Millington Synge. I shall bet a piece of my Grover Cleveland currency for his chance of success if he has anything on his bookshelf by George Bernard Shaw. Then Earl wont be so loose with the word "useless."
Editor's Note: Greg's rebuttal was in response to a negative letter about his past articles by former CTCN member who complained about Greg's "meandering." It's interesting to note while some complain, many others enjoy Greg's long articles and find them informative, educational and very importantly, quite entertaining. In fact, by an odd coincidence, in this issue one of our members comments on how he enjoys Greg's articles.
Excerpted Details on How Advantage Trading Group Has "Screwed" CTCN
A certified mail letter dated July 7, 1997 addressed to Mr. R.S., Pres. & CEO of Advantage Trading Group, 4040 E. McDowell Rd., # P.H.West, Phoenix, AZ 85008
Dear Mr. R.S.: As you know, last year you promised to pay Commodity Traders Club News (or myself) $100.00 cash for each commodity trader we referred to you who opened an account with your firm.
We only wanted these relatively minor funds as a way to compensate us for all the time it takes in recommending and referring people. My secretary also lost considerable time with all these referrals what with first talking to them, looking up your address and phone number on her computer, and coding their name so our data base reflects the fact they were an ATG referral.
Believe me, what with all the time it takes, this is not a moneymaking arrangement, even if we would have been paid. The fact you reneged on the referral fee payments makes this entire matter even more injurious and insulting, what with all out time involved in talking people into going with ATG and answering their numerous questions about ATG and your fill quality and speed, etc. As you know, we did not want these agreed to fees to make a profit but to cover our time and expenses.
After a few months went by we received nothing for a number of referrals. You than said the reason for non-payment was because you arbitrarily changed the rules (after the game had already started and was well under way). Your new after-the-fact rule was they had to be trading for 30-days.
A few more months went by and still no money. You then seemingly dodged us for some time by rarely returning phone calls about the promised payments. In the meantime, even though we weren't getting the promised compensation, we kept on spending lots of time answering many questions about your service and sending you more and more referrals.
When we did manage to talk you avoided the issue of all the missing $100 payments and kept on saying the clients must be with you for 30-days. You ignored the fact that most of the referrals were in fact with you for more than your arbitrary 30-day time period. You also later on offered to send us your 8000 name mailing list as an additional form of compensation. That was 8-weeks ago and you never sent the diskette after a number of promises to send it. Since then you have basically ignored our attempts to reach you about this. We have sent you several e-mails and many phone call messages but you have ignored almost all the messages, except for a few........
.....During our phone call of today, you said there is "no way" you will pay us the funds due. You then said some nasty things, said I should close my trading account today (which I have asked you to in fact do), and hung-up the phone. Unless you pay we may be contacting some of our mutual clients and asking them for depositions about how long they had an account at ATG and if they opened it based on CTCNs recommendation.
We may put this in next months (July/August issue) CTCN which will be mailed to 2000 traders, asking for more depositions from clients we may not have identified on our computer. Of course, to explain the background on the deposition request we will also have to give the facts on how ATG promised to pay the $100 referral fees and then reneged on the oral contract.
As witnesses, we will ask joint clients if they were aware of the fact you promised to pay us the referral fee. Its our understanding from talking to a few of them earlier, the referral fee matter had somehow come-up in their conversations with you.
Putting past CTCN articles written by Club Members about ATG, and the facts on this referral fee matter on our Internet Website under the heading Advantage Trading Group Special Report.
Notifying the CFTC and/or NFA about your failure to pay the referral fees. And filing suit. Sincerely, Dave Green, Pres. Commodity Traders Club Inc.
Legal Notice to Mr. R.S., Pres. & CEO of Advantage Trading Group
You have failed to pay or respond. Therefore, effective immediately CTCN must commence actions to collect this debt. Starting today we will begin taking the steps outlined in our letter. Some of the first things we are doing is contacting known referrals and other CTCN clients to determine how many there are and to get their legal depositions form court use. Filing complaints with the NFA/CFTC will also be done. This is your choice. You are the one who defaulted and screwed us out of this money. Do you think myself and our staff worked hard for all these months referring people to ATG for nothing. It took lots of time and effort and was actually worth more than the $100.
We dont appreciate getting cheated like this! Like I told you when we first talked about referral fees Oct., 1996, we have been screwed several other times by brokers and data vendors. You promised to pay us and said "Dont worry Dave, that wont happen with me." It sure did happen. Its really amazing how you think our many past and lots of FUTURE referrals is worth less than the small referral fee payments involved!
Final Notice to Advantage Trading Group July 16, 1997
Dear Mr. R.S.: You will not get away with not paying this just debt and revealing confidential account information to outside third parties as you have done. The principal of this is far more important than the money involved. We really are hurt by you cheating us after all our hard work on your behalf. Not only have you defaulted on the referral fees and made up a lie by saying we are "extorting money" from you but you have also now slandered CTC.
You have also blatantly violated our signed Non-Disclosure Agreement (do you recall signing it last year) by allegedly giving confidential information on our account at ATG to several people, including Joe Bristor and Bo Thunman of Club 3000.
It seems your new friend Joe sent a letter to Jack Hutson the Editor of Technical Analysis of Stocks & Commodities Magazine ( a copy of which we have, sent to us by S&C Magazine) in which Joe states Bo told him all about my commodity trading account at ATG, including the statement from you "my managed accounts are all losing". You also told them the accounts were losing "big". First, this is not correct information. As of the date of our falling out on July 7, 1997 my accounts now under management were very close to break-even, after only being negative 2% (as of June 1, 1997) or so in total, since opened many months earlier. Second, even if it was correct (which it was not), what about the Non-Disclosure Letter in which you promised in writing to never disclose any information at all, personal or business information.
I had you sign that letter last October to safeguard against you doing exactly what I was afraid of at the time. In addition, is this correct information, no! Secondly, even if it was you have no business violating the confidence of clients by doing this even if you did not sign a non-disclosure letter. In fact, I bet its against NFA/CFTC rules for you to do this in the first place. As a registered broker you surely are not allowed to tell third parties (competitors or possible litigants in particular) info on an account.
Why did we spend lots of time talking to people and recommending they open an account at ATG, all for nothing? It certainly wasnt because you gave us a better rate because we knew all along we were simply paying your "standard low rate" which many others (even your small or inactive accounts) were also paying.
The one-hundred dollars per client you offered us first in Oct., 1996 and during many, many phone conversations after that date only would have covered our time and expenses and is far from a money-maker, even if you paid us.
Do you recall all our conversations about your delay in paying? Do you recall all your excuses and delaying tactics? Do you recall the Non-Disclosure? Do you recall the two Faxes you sent telling us things like your Feb Fax we have in your file: "Dear Dave, A note of thanks for the overwhelming response". Did you perhaps get even more accounts than the 25 to 60-plus accounts we earlier estimated? We shall find out. Tonight I had a surprisingly friendly long chat with Joe Bristor. He tells me (among other confidential things you discussed, which I wont go into at this exact time) you admitted to him the referral fee arrangement with us. He also tells me you said you only had a record of seven accounts thru my efforts. If so, why not remit that $700 right now to stop this. We will then investigate to see if there are a lot more than seven, as we suspect.
Here is a proposal for you. Mail the $700 you admit to NOW. We will then cease all other action, such as our NFA/CFTC planned complaints and the planned law suit, and putting this affair on the Internet. All we will do is continue to call and write clients to find out how many there are and arrange for possible depositions. Do you agree to this?
Editor's Note: Mr. R.S. did not agree to this and failed to send us a penny and has been for the most part almost totally unresponsive to these letters and seemingly uncaring about this matter. Therefore, we respectfully ask all CTCN members and readers do CTCN a big favor by writing us or send e-mail if in fact Commodity Traders Club was helpful or somehow involved in your contacting Advantage and eventually opening a trading account at Advantage. We realize this is a bit of a imposition and may be somewhat troublesome for you to do. Therefore, to reward you and thank you for your getting involved we will extend your Commodity Traders Club News subscription for 2-years at no cost to you. If you are no longer a subscriber or it has lapsed we will give you a free two-year membership to thank you for your trouble. Since a 2-year subscription is worth more than the $100 lost referral fees you will realize the principal of this matter is far more important than the money involved!
Good Returns From Over-Valued Out-of-the-Money Options - William Raworth
Im convinced a good return can be made by a trading plan of consistently selling a varied portfolio of out-of-the-money options that are appreciably over-valued and have a reasonably liquid market. These short option positions would be closed out if they either became significantly under-valued or expired. Of course, stops (necessarily mental) would be used to help prevent disaster.
My tentative thoughts are to aim for the over-valued options where there is a 70-90% chance that the option will expire worthless (the thought being that the odds better than 90% automatically translate into commission and slippage being too high in relation to premium).
Would appreciate very much any and all thoughts about feasibility and best software or option valuation service available. Please reply via CTCN for all readers to gain knowledge on above.
Whether you have any thoughts or info regarding my plan or not, Id be happy to help any trader with the problem of unreported fills in those cases where you simply have to know whether youve got a position on or not (as in case of day-traders where youve entered a limit order thats been touched or minimally exceeded). It took me 20-years to come up with this ploy, but it works.
One Indicator to Profits? - Dr. Claus Hallmann - Germany
Regarding the trader H. M. from Australia (CTCN, Vol 5-3, pg.2-3) asking "Is it really one indicator to profits?" I have to say: Yes.
Its possible to make a lot of money in the markets if you develop your own very simple indicator. All you have to do is trust your method/system and trade it.
After a lot of negative experiences, I developed a very easy indicator and system for the Deutsche Mark & Swiss Franc. I will stay in the markets only for 1 to 3 days. And if my system says "get out and reverse" I will do it. What happened the last two months: I made more than 120% (in 2-months, not as per year basis).
If you are more interested in my thinking about the markets, money-making and money management, reading the articles in CTCN, VOL4-2, pg. 36-37; Vol 3-6, pg. 9. Regarding the last mentioned article, I didnt do what I wanted to do, because I couldnt develop the right method for my trading style.
Using Neutral Option Positions Without Having to Predict Market Directions - David L. Caplan
Traders that have been trying to predict the direction of the T-Bond market have had a difficult time as bonds and interest rates have remained relatively stable for well over a year. After the 1996 decline to lows near 106, bonds reached highs above 116 late in the year.
Bonds then reacted to fears of emerging inflationary pressures and speculation about tighter monetary policy from the Fed, and again retreated to the 106 level, which proved to be very good support; the "value" of U.S. Treasury bonds at this level (relative to inflation and other international rates) quickly brought out eager buyers.
Also, with equity markets at lofty and risky levels, some assets naturally shift to the guaranteed yield of high-grade bonds. After bonds had defined their trading range, new economic data continued to provide a "neutral" outlook regarding the long-term direction of interest rates. With both the fundamental and longer-term technical picture pointing to a sideways market, bonds have been unable to start a significant move in either direction. Several respected analysts have projected stable interest rates for the months ahead.
The European currency markets have also exhibited this type of sideways action for several months, as the British Pound has moved sideways after retreating from highs in late 1996, and the Swiss Franc and German Mark have stabilized for four months in what may be a long-term bottoming pattern after their steep declines. Chart in Print Copy
This type of sustained sideways market action is ideally suited to our Neutral Option Position Strategy. In the bond market, with option premium at attractive levels when compared with the actual volatility of the underlying market, we have been using these strategies to collect premium from speculators on both sides of the market.
For many months, these strategies have provided good income, while most adjustments were made to collect more premium from one side of the market. The result is that we have profited in a sideways, choppy market (which is normally very difficult to trade), while most directional speculators have had a difficult time.
Our latest strategy involved selling the December bond 118 call and 104 put, with bonds currently near 111. This position collects generous premium and has an 81% probability of profit (computer-generated statistical probability of futures being between 104 and 118 at expiration).
In the currencies, the British Pound and Swiss Franc have provided similar opportunities. Chart in Print Copy
The Neutral Option Position is a trading strategy that provides the trader with many benefits over a long or short futures or options position. While option purchases and futures trades are only successful if the market moves in the direction predicted (without the trader being "stopped out" first).
A Neutral Option Position can be successful in a non-trending or choppy market, (studies have shown that markets are in a non-trending or sideways pattern over two-thirds of the time), or if the market moves slowly lower or higher.
In addition to allowing the trader to be successful without having to predict the direction of the market, the Neutral Option Position incorporates the advantages of probability, and option time decay.
The out-of-the-money put and call we are selling contains only "time value." The "time value premium" decays every day for both the puts and calls, and this decay accelerates as the options approach expiration.
This may be best looked at by considering ourselves as "bookies." We are, in effect, taking bets from traders on both sides of the market who are attempting to pick the direction of the underlying futures market. Some feel that the market is going to go up, while others are betting that the market will head lower. The traders who feel that the market is going to go up can purchase calls, while those negative on the market purchase puts. We become "bookies" by taking their bets on both sides of the market. ("laying off our bets" by staying evenly balanced). However, we have several advantages that are not available to the house ("bookie"), even in Las Vegas.
For example, if a "bookie" takes bets on a prize fight and "balances" his book properly, half the people betting will win and half will lose. He must pay off half these bets. The "bookie" derives his profit by establishing odds for the two fighters. (assuming that the fighters are evenly matched, the "bookie" may quote 6 to 5 odds "pick em."
This means that you can pick either fighter and receive a five-dollar profit for each six dollars you bet). Therefore, if a "bookie" is able to obtain bets of $600,000 on each participant in the fight for a total bet of $1,200,000 no matter which fighter wins he is obligated to pay off $1,100,000 or a profit of $100,000.
However, the Neutral Option Position can allow us to do even better by allowing us to "win" on both sides of the "bet" (if the market stays within our predicted or "adjusted" trading range).
For example, with treasury bonds trading near 111, we have taken the view that the market is going to remain within a range between 104-118, and sell the 104 put and the 118 call. These options are sold to other traders who are "betting" on their prediction of market directionthat the market is going below 104 (puts) or above 118 (calls). We are making no prediction other than that it will remain in this wide trading range.
Neutral Option Position (104 Put - 118 Call)
104 put gains
118 call worthless (Both options worthless at expiration 104 Put SAFE ZONE 118 Call 118 call gains
104 put worthless
97 100 103 MARKET PRICE
104 111 118
119 122 125
Even if the market moves out of this range, the position can still be successful. This is because every day both options lose some of their time value. This continued loss of time value on both sides provides significant protection. Further, "adjustment" techniques are available, allowing us to "rebalance" this position when necessary. (However, always remember, when selling options there is unlimited risk of loss; therefore, you should use strict money management principles).
Benefits of Neutral Option Position include:
1. Not having to predict market direction.
2. Being able to collect premium from both sides of the transaction - from both the buyer of puts and buyer of calls.
3. Being able to take advantage of the "overvalued" time value of out-of-the-money options (although the amount of option premium changes from time to time, traders continue to buy options, thinking they can "beat the market").
4. We can use "special circumstances" to our advantage based on favorable market conditions (high option premium), and we have 40 different markets to choose from.
5. Finally, we have the ability to both adjust our positions and increase our position size. This is the reason that most casinos have limits on the amount of money you can bet, because it has been mathematically shown that with an unlimited amount of money, the odds of beating the "house" becomes significantly greater.
Member Comments & Requests
Paul Lester - For Sale- Omega SuperCharts 4.0 End-of-Day Software CD ROM version with Historical CD database. $125.00. Wanted: SuperEditor published by Investment Engineering Corp. (Doug Deming). This is an add-in for Omega SuperCharts. No longer being published. Like to locate a current user of the program. firstname.lastname@example.org
Steve Redington at email@example.com I saw information on https://web.trading/ issue35.htm - on that page, under Comments Regarding Article "Omega Total Lack of Quality" by Robert Gross. I saw some information on a DBC PCMCIA FM receiver. Could someone let me know how to order or get in touch with the company that offers this PCMCIA FM receiver? I would really appreciate it.
Kimball Letter - Robert Rardon - I just wanted to share some information I picked up by reading Commodity Traders Consumer Report. CTCR tracks approximately 25 different advisors on their trade recommendations. One of the advisors is L. M. Kimball (Kimball Letter). He bases most of his recommendations on what the large commercial traders are doing as reported in the Commitment of Traders Report. He doesnt give specific buy or sell prices, but tells you what markets might expect a change in trend. His letter is published every two weeks and coincides with the release of the Commitment of Traders. It is also very reasonable priced at $60 per year.
Joe "veteran" Trader - Trevor Byatt noted some helpful platitudes in his April article. He quoted Kroll, but did not reference nor recommend his writings. Anything written by Stanley Kroll is worthwhile reading . . . for novice or veteran trader.
We do apologize to members over having to publicize all the sad details on how Advantage Trading Group has cheated CTCN out of some hard earned money. What does all this say about them, their ethics, honesty, and integrity? By the way, these so called referral or finders fees are routinely offered by many companies in the futures and investment industry. They are commonly offered by brokers, data vendors and some software vendors. Individual private traders like yourself may also qualify for referral fees.
Of course, it's understood no one (including CTCN) would refer someone to a vendor unless they were happy with the vendor. For example, as mentioned within our Website, at one time we were trading with Advantage and were satisfied with their brokerage service, which is why we recommended them.
However, due to their lack of integrity as evident by not paying us and mostly due to their amazing violation of client confidentiality by disclosing details on our trading to outside third parties, we certainly would never recommend them again no matter how good their service and fills are. What makes all this even more alarming is the fact ATG allegedly disclosed this confidential client information to an unfriendly rival of ours, Mr. Bo Thunman of Club 3000, who in turn allegedly passed it on to others.
Try referring a trader friend to a place like Signal for example, and you will quickly find out how much time and patience is required in recommending them. Sometimes it may involve several lengthy phone calls, many questions, and lots of time. I recall several Advantage and Bonneville BMI referrals we made which involved perhaps an hour or more of time involved discussing the vendors service.
Speaking of BMI. They also failed to pay CTCN numerous referral fees over the past 1-½ years, mostly in conjunction with our Real Success Methodology. However, their default was not as blatant, as personal and as insulting as Advantage's default, even though there is probably a lot more money involved with the BMI default than Advantage.
By the way, we still recommend BMI but will have more details on them, including the speed, quality and cost of their data service, in our next issue. We will also let you know how you can still get online intra-day and end-of-day data from BMI but at the same time save lots of money with sharply lower monthly fees.
As time goes by you will see e-mail being substituted more and more for phone calls, Faxes and letters. It's definitely the best way to communicate, especially now that more and more traders the world-over are on-line.
Thanks to everyone who has contributed knowledge to this issue of Commodity Traders Club News. Without you it would not be possible. P.S. - Remember, as a special reward for making just one contribution/submission per year, you'll receive an automatic 50% price reduction on your renewal. Submissions can be any length, long or short; typed, handwritten or submitted on a disk. Formal or informal. Please participate by sharing your information and knowledge with other traders. Please make a contribution about your experiences, both good & bad with systems, services, advisors, data vendors, and other trading related product.
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