Money Management Techniques For More Profitable Trading - 7th of a Series by Tom D'Angelo
This is my seventh article intended to provide readers with a coherent, disciplined money management methodology, designed along the lines of a successful business. Refer to my previous articles in Vol 4-5, Vol 4-4, Vol 4-3, Vol 4-2, Vol 4-1 and Vol 3-8.
In this article, I will discuss a money management concept originally developed by sports bettors here in Las Vegas which can also be utilized by traders.
This technique is comprised of the following seven concepts:
- Proper organization of trading results into a business like structure
- Determination of a highly profitable business organization
- Determination of profitability's trend
- Establishment of a new business organization
- Determination of optimal amount of contracts to trade for the new business organization
- Allocation of a percentage of total trading capital to the new business organization
- Determination of profit or loss levels which signals termination of trading for the new business organization.
The proper organization of trading results into Profit Centers has been described in my previous articles. In this case, we would like to have all our trading systems established as Profit Centers. For example, for those who day trade the S&P500 using Real Success (trading methodology), establish a Profit Center named RSSP500 and enter all trading results taken from the Real Success method into that Profit Center.
Then establish Profit Centers for other trading systems which you use. For example, if you also day trade the S&P500 using a breakout system you designed yourself, then enter the results of those trades into a Profit Center named SP500BO. We now have our trading systems segregated into different "business" organizations.
The next step is to identify highly profitable "business" organizations. A good measure of profitability is the Profit Factor which is: (% profitable trades x average profitable trade / % unprofitable trades x average unprofitable trade)
For example: % profitable=40%
Average profitable trade=500
Average unprofitable trade=200
Profit Factor=(.40 x 500 / .60 x 200)=(200/120)=1.67
A Profit Factor greater than 1.0 indicates a profitable Profit Center. A Profit Factor less than 1.0 indicates an unprofitable Profit Center.
Perform the Profit Factor calculation for all your Profit Centers. Wait until you have about 30 trades in the Profit Center so that you have a good sample size.
Now select the 3 or 4 Profit Centers which show the highest Profit Factor. If your Profit Centers are trading systems, you will be selecting trading systems which you have been most profitable trading.
The next step is to graph the Profit Factor calculation for each of the most profitable Profit Centers. Select the Profit Center which shows the Profit Factor statistic trending upwards (lower left to upper right on your graph). This Profit Center is not only profitable, but becoming more profitable. This is a Profit Center in which you have shown a high skill level in trading and is producing profits at an increasing rate. In other words, this Profit Center is a positive expectation game, a game where you have the edge based on past performance. We will now attempt to exploit this perceived edge.
The fourth step is to establish a new Profit Center business organization in which we will assume an aggressive trading posture. For example, if you have selected the RSSP500 as you most profitable Center, we will create a new Profit Center named RSSP500AG. The AG suffix on the name indicates that we will trade this new Profit Center in an aggressive manner.
The fifth step is to determine the optimal number of contracts to trade for maximum equity growth. I personally use Ralph Vince's optimal number of contracts calculation. Although the calculation has its flaws, it's a close enough approximation.
wanting to use a systematic approach to trading.
This optimal number to trade will maximize equity growth at the expense of very volatile swings in the equity curve along with large drawdowns. The optimal contracts calculation also provides the minimum percentage drawdown we can expect if we trade the optimum number of contracts. Knowing this drawdown percentage is very important from a psychological point of view, since we must mentally prepare ourselves for the inevitable volatile equity swings.
The sixth step is to allocate a percentage of total trading capital to the new business organization. For example, assume we have $100,000 in total trading capital. We decide to allocate 20% of total trading capital, or $20,000 to the new business organization Profit Center named RSSP500AG.
Thus, we have created a new business which has been funded with $20,000 to cover margin and trading losses. We have determined that the RSSP500 Profit Center has an optimal number of contracts to trade of 4 contracts based on 30 trades in the RSSP500 Profit Center. We will now take an aggressive trading posture and trade 4 contracts for the RSSP500AG Profit Center. We will enter all our S&P500 day trades using the Real Success trading system into the newly created RSSP500AG Profit Center.
The seventh and last step is to determine when, and if, to cease trading the new RSSP500AG Profit Center. If we are able to continue our prior trading success, we will easily be able to multiply our initial trading capital of $20,000 by a factor of 3 or 4 times to $60,000 or $80,000. If we are not able to continue our success, we will lose most of the $20,000 Initial Capital. Thus, we are risking $20,000 to win $60,000 or $ 80,000. We are thus getting 3 to 1 or 4 to 1 "odds" on our money by playing a game in which we have shown to be not only profitable, but also upward trending in profitability. If we lose the $20,000, we will still have $80,000 in trading capital remaining and we will still be in the game.
The trader should establish profit and loss levels which will signal an end to trading the new RSSP500AG Profit Center. For example, if the RSSP500AG Profit Center incurs trading losses and Initial Capital decreases from $20,000 to $5,000, he may decide to cease trading and close out the RSSP500AG Profit Center. On the other hand, if he continues trading in a profitable manner, and Initial Capital increases from $20,000 to $60,000, he may also decide to stop trading and close out the RSSP500AG Center, satisfied with the $40,000 profit. The decision of when to cease trading is arbitrary and is best left up to each individual trader to work out for himself.
This technique is similar to betting on a heavy favorite in a horse race, and instead of having to bet $5 to win $3 on the favorite, the track is actually giving us 3 to 1 or 4 to 1 odds on the horse. This is like betting on Secretariat to win a race and instead of having to bet $5 to win $1, we will win $3 for every $1 we will bet on Secretariat to win.
This technique is used by many professional sports bettors here in Las Vegas. They will follow numerous handicapping systems and when 2 or 3 systems show a high degree of profitability after 20 or so bets, they will allocate a percentage of total betting capital to these profitable systems and bet extremely aggressively using the Kelly percentage calculation. I have seen initial betting capital increase 5 or 6 times in 3 or 4 months using this technique.
The basic idea is to play a game in which you have shown prior profitability and then play that game in an aggressive manner, risking about 20% of your total bankroll. Play only games where you have shown prior success. Play only games where you have shown a prior positive expectation. You cannot change a negative expectation game to a positive expectation game by the way you bet. Play to your strengths. Play your game, not someone else's. Only play games where you have a perceived edge or advantage.
There is no guarantee that we can continue our prior profitability and unfortunately, our game will cease to be positive. We can only make decisions based on prior performance and hope future trading performance will reflect prior success. If our prior trading performance indicates profitability, then that's the game I am going to play. Also notice the tremendous psychological benefits afforded by this technique.
Every time you see a trading signal, you will know that this signal has been extremely profitable in the past. This instills great confidence in the trader, significantly reducing the anxiety and fear which accompanies every trade. It's sort of like a baseball player facing a pitcher which he has hit well in the past. When he steps up to the plate, he knows that he has hit well off this pitcher before and this generates great confidence in his ability to get a hit or home run.
As a final comment, I still notice that some CTCN subscribers are still trading system addicts based on the articles in CTCN I have read. If you read Market Wizards 1 and 2 by Jack Schwager, you will notice that all the traders profiled achieved tremendous trading success. This was done by daytrading, long-term trading, fundamental trading, technical trading, intuition trading, trading futures, stocks or options. In other words, you can be successful trading any time frame, using any trading technique and using any type of trading instrument.
The trading system is not the controlling factor in determining your long-term success. If the trading system was the controlling factor, then all the traders in Market Wizards would be using the same trading system . . . but they don't. In fact, the trading system you eventually adopt will mostly be irrelevant in determining your eventual long-term success in speculation.
As I have tried to explain in my prior articles, you must evolve into a profitable trader by advancing up the trading curves of the three disciplines necessary for success which are: 1. Money Management; 2. Psychological Discipline and; 3. Trading Methodology.
You must master all three disciplines, not just one or two. You must adopt a professional, business like approach to trading in order to provide you with the information necessary to move up the learning curves in these three disciplines. This is the point I have been trying to communicate in my previous articles. Businesslike organization which provides the information necessary to evolve you into a successful trader is the Holy Grail to successful trading. (Yes, there is a Holy Grail and now you all know what is. Your search is over).
For a free booklet on the reports I use in my own trading and information on a book I have just finished on money management, feel free to call 800-MONEY30 or 702-261-9417.
The Trading Systems Toolkit (A Book Review) - Raymond F. Kohn
Many years ago (1989) I attended a seminar in Houston, which was held at a downtown hotel. The seminar leader was Mr. Joe Krutsinger. He was demonstrating Omega Research's new "SystemWriter Plus" program.
(I'm sure you're all familiar with "SystemWriter" and "TradeStation" offered by Omega Research, and the trading system testing capabilities that these programs offer).
Joe did a marvelous job demonstrating the program. But equally important, he shared some of his personal experiences and trading insights. To this day, I remember many of those shared thoughts and ideas.
He began by telling the audience some early personal experiences, (which he subsequently re-told in his 1994 book: The Trading Systems Toolkit). He talked of taking a client's $2,000 commodity account to $96,000 in 11-weeks. However, swift market changes resulted in a fast drawdown and the client netted $34,000 on his $2,000 initial investment. The client accepted a check for $34,000, and then proceeded to badmouth Joe, to anyone who would listen, saying that Joe had lost him over $60,000 in the commodity markets. The client thought Joe had done a bad job in "only" increasing his account by 1,600 percent instead of the higher gain that was achieved prior to the drawdown.
In another personal story while working as a successful retail commodity broker with a substantial customer list, his trading techniques and personal talents enabled him to provide his customers with 42 consecutive winning trades. And then, he had his first losing trade of just ten ticks ($312.50 in the bond market). With that first losing trade he lost 25% of his client base. This one minor loss was followed by eight consecutive winning trades and then another loss of $562.50. With that second loss, he lost another 25% of his customer base. With just two modest trading losses, he lost 50% of his customer base. They obviously and unrealistically expected the never ending stream of winning trades to continue forever.
As I listened to his stories during that seminar, you could almost sense the unspoken frustration toward these unanimously ungrateful clients. They had benefited and profited from his rare talents, and then deserted him when he had the inevitable, albeit modest, losing trade. I don't know if it's just a part of human nature, but Joe's clients are a perfect example.
It has always amazed me how so many people can be such (A-Holes so often). It is my feeling that these early experiences had a significant impact on him. He left the retail side of the business and traded his own account exclusively. At that seminar (which was many years ago when a dollar was worth a lot more) he indicated that his personal trading profits exceeded $400,000 for the most recent year. A further tribute to his successful trading style.
With his focus on commodities and trading systems, "SystemWriter" was a great research tool that he wanted to share with other would-be traders who were just getting started. As a result of his exceptional demonstration of "SystemWriter Plus," I bought the program, and have loved it ever since. (I still use the program to this day, periodically testing new trading ideas).
In 1994, Joe wrote " The Trading Systems Toolkit," "(How to Build, Test and Apply Money-Making Stock and Futures Trading Systems)", published by Probus Publishing, Chicago Illinois, 246 pages. Based on what I knew of him, and that one-day seminar when I had the pleasure of meeting him, I knew his book would be great, and I had to have it. I bought it in '94 when it came out and have read it many times over the years. Each time I re-read the book, I pick up new insights that have always been helpful to my trading.
The book assumes that you have access to SystemWriter, TradeStation, or at least an equivalent back-testing program with which to test various trading system ideas. But even without these programming tools, the book is filled with many trading insights and a good dose of reality that is extraordinarily helpful to anyone using, or wanting to use a systematic approach to trading.
The book begins with a basic frame of reference and defines its purpose. The book is meant for those who wish to develop a systematic approach to trading, and not for those who wish to embrace a discretionary trading style. The purpose of the book is to give the reader a well-defined methodology for developing or evaluating trading systems.
I am reminded of that philosophical anecdote which goes something like this: "If you give a man food, you have fed him for the day. If you teach him how to fish, you have fed him for the rest of his life." This book teaches you how to fish.
Many of the examples he uses, in showing you how to develop or evaluate trading systems are based on commodities. However, he makes reference to the fact that the same principles apply to equities equally as well, and gives periodic examples. Also, the data time frames mentioned range from intra-day to long-term monthly data.
For those readers who still believe that they can achieve 800 to 1,000% return in commodity trading year after year, he gives you a strong dose of reality. Such as: 90% of all future traders lose money and eventually quit trading; 80-90% of traders will jump from one system to another looking for that "perfect" system, usually taking three loses in a row before jumping ship; and finally, that most good trading systems win only 40-50% of the time, generating an annual return of at least 25-30% per year.
The book is designed to be a basic primer in developing trading systems, and evaluating existing systems which you may want to use. It takes you through the basics of system design, development, testing and evaluation.
This book is not intended to be a collection of trading systems for you to use as is. (Even though many of the trading system examples and systems he gives you are great systems and could very well be used as is). Joe's educational examples of trading systems are ones he actually developed and successfully used in the past. He provides these proven systems as an initial foundation for you to begin building your own trading systems which you would uniquely tailor to your personality and trading expectations.
He is very frank and forthright in saying that he has personally developed better trading systems than those offered in his book, but will not reveal them until he has eventually replaced them with even better trading systems.
He systematically deals with the key elements required of every trading system. It begins with an "initial mission statement," whereby the reader is encouraged to come to terms with selecting an appropriate trading style, time frame, risk tolerance, deciding on the most appropriate markets to trade, the inclusion of any personal trading biases, and to personally evaluate your own ability to handle the inevitable losses and drawdowns.
To quote Joe: "When you pick a system you must decide what is right for you. Determine your temperament and preferences, your capital, your time restraints. Be sure to weigh each benefit against its cost. Most important, always assume there is a disadvantage to every benefit because there is."
And then, beginning with the three essential
building blocks required of any successful trading system:
1. market entry;
2. exiting with a profit; and
3. exiting with a loss.
He begins building successful trading systems, while simultaneously dealing with the problems of: Setting stop loss points - Over optimization - System complexity - Trading discipline - Money management techniques - Taking the time to 'think' - and most importantly Simplicity.
Below is a list of the chapter headings from the Table of Contents. It will give you an idea of the kinds of topics which are covered in the book.
1. Do Trading Systems Work?
2. Trading System Basics: Market Entry, Exit with Profit, Exit with Loss
3. How to Build and Test a System
4. Selecting the Right System for You
5. System Ingredients
6. Sophisticated and Unusual Systems
7. Questions and Answers
8. Implementing a Trading System
9. $48,000 Worth of Trading Systems? (Note: Includes 16 Actual Trading Systems)
10. The Future of Trading Systems
There are plenty of charts and graphs throughout the book. Each of the trading system examples is accompanied by the "SystemWriter" analysis printout. And, most importantly he shows you how to evaluate the pros and cons of each trading system you develop on your own, or are considering using.
Joe has a refreshing candid style of writing whereby the reader is effectively retaught how to think about successful trading systems. He sparks your imagination to begin thinking of simple, yet viable trading systems which you might never have thought of before, but has the potential of making very good profits.
On a personal note: In this day and age we are all bombarded with sales advertisements, offering us the "previously undiscovered trading secrets of the universe, which will only be revealed to a few choice individuals" (typically sent to you via mass bulk-mailing). Or, on the other hand, we are bombarded by self-styled arrogant gurus, who profess to not want to be bothered by the petty clamoring of the little people who hang on to their every word, while they themselves clamor for the lime-light.
Contrary to the hype that is typically offered to us, Joe Krutsinger's book is a treasure trove of valuable trading insights and immediately usable information. It is worth many times its modest purchase price. And equally, if not more important, I am impressed with Joe's sincerity and integrity. He is a man of high principles and personal honor. Which in this business, is often not easy to come by.
Once you read this book, you will never look at another "trading system for sale" in the same way again.
Great Publication - Mike Murphy
Thanks for the information on CSI. Maybe now I will get off my dead? and start trading! I'm really enjoying CTCN. There's quite a difference between your publication and Club 3000. Keep up the good work.
Profits Run Dry - John Piper
It has been a while since I have made a contribution and I would be interested in other traders' experiences with the ratio of profits to=losses.
I suspect that many others like me endeavor to catch big moves with little risk. This has the inexorable result of increasing the number of losses. It is particularly frustrating because I seem to catch a good number of trades that move well into profit, say=A3750+ per contract, only to see it all virtually eliminated, as I endeavor to let profits run.
This month I would be well up, if only I had taken some of these profits, up perhaps 5% in 2-weeks. But last year it became obvious that all the money I made was from the few really good trades, i.e.,=A33000 + per contract. So those are what I want to catch. I am sure some of your readers have been through this "phase" and would welcome the benefit of their experience.
While writing, I must compliment you on the last
issue. In particular I would be interested in quoting the contributions from RB
from MO and Don McCullough in my newsletter. If this is OK, I will give
subscription details of CTCN and urge my subscribers to subscribe to CTCN.
Editor's Note:> Yes, it's OK to re-publish those two excellent contributions. However, everyone should be cautioned it's only permissible to reprint or quote materials appearing in Commodity Traders Club News providing you first obtain written permission from us and also give complete credit to CTCN, including our address and phone number.
OPTIONS & SPREADS: The Fine-Tuned Science of Buying a Dollar for 40 cents - by Greg Donio
A visitor to a small town noticed some activity on a street corner. Some loiterers outside a saloon were having some fun with the village idiot. A barfly held some money in each hand and said, "which would you like? The nice, shiny 50-cent piece or the dirty old dollar bill?"
The village idiot replied, "The shiny 50-cent piece." Everybody laughed as the loiterer handed him the coin. Another barfly stepped forth. Same question. Same answer. More laughter as the alleged, dunce got another half-dollar.
After watching this four times, the out-of-towner could stand it no longer. He walked up to the village idiot and said, "Don't you know that the dollar bill is worth twice as much as the 50-cent pieces?" "I know that." "Then why do you keep picking the coin?" "Because when I pick the dollar bill, they stop playing the game."
That street corner-sharp-in-disguise knew two things: (a) economics, and (b) psychology. Someone once said, "Mention economics and everybody is bored. Mention money and their eyes light up." Many a trader and gambler and man on the street are interested in money but not in economics, with the result that he has no money.
The easiest thing in the world: Inventing a game in which you always win. The hardest thing in the world: Getting other people to play it. You can create a form of wagering in which you always win, but you will make no money at it because you will be the only one at the gaming table. Both psychology and economics require that the other people who play must at least think that they have a chance of winning.
The seedy gambler sets out to "break the bank" and claims to have a system that "can't lose." Remember that a thousand dollars has to double only 10 times to become a million, another 10 times to become a billion, another 10 to become a trillion. If such a system existed, if there were a sure and quick and easy way to double again and again, what would happen? Mr. Gimme-Some-Chips with the rent past due would soon have all the money in the world, or at the very least, would bankrupt casino after casino and track after track.
Alas, this is an economic point, something not readily grasped by people whose fingers itch for money. There also exists a psychological point toward which many traders and gamblers have a mental blind spot. They think of the exchange or the track or the other participants as "my source of income" at least potentially. It simply does not occur to them, "Maybe I'm their source of income." Albert Pacelli in his book The Speculator's Edge quoted Warren Buffet: "If you're in a poker game for 30-minutes and you don't know who the patsy is, then you're the patsy."
In finance, so easily the hunter becomes the hunted and the cannibal notices that the main course on the menu resembles himself. Yet what a psychological aversion we all have to labeling ourselves "the patsy" or "the catch of the day."
The stock, futures & options exchanges, the casino & race track--the eye of the economist sees that there is not nearly enough money in all these places to make every participant a multi-millionaire. The total amount of capital ventured by everyone collectively may seem vast, but it is small compared to everyone's dreams of wealth totaled. The unwanted but inevitable outcome: Multitudes of disappointed people. Such a setup mass-produces also-rans, though nobody wants to be one.
Yet the eye of the economist also sees opportunities. After the races, thousands of discarded pari-mutuel tickets litter the grandstands. Torn by people who had wanted to stuff their pockets but who became "somebody else's source of income" without intending to be. Occasionally a hanger-around rummages through the tickets, hoping to find a winning one thrown away by mistake. The scotch & soda philosopher gazes at the litter and ponders all that money lost and gone. The economist/opportunist (not a bad combination) contemplates a way to be on the receiving end of those disappearing dollars.
A good receiving end? No easy find. In recent years, holders of casino stocks and race track stocks have had little to sing about while awaiting a repeat of Resorts International. Other forms of gambling beckon, but dice and roulette in your basement could make you an "income source" for a bail-bondsman. Selling junk bonds or IPO shares for a chain of empty restaurants requires an office with high overhead. Also, piles of negotiable paper sit unsold because many potential investors "stopped playing the game."
I have found that with option spreads, people do not stop playing the game: Daily action shunts put & call contracts on most optionable stocks. Except for a desk at home, my office is in my pockets. Bookmaking out of my hat could not be more compact or more mobile, and it is legal. I once closed out a spread position for a profit on my dentist's phone before going under the drill. Having overheard, he questioned me about investments while stuffing cotton in my mouth. I have since stopped giving dentist chair seminars.
Without a broker's license, I have sold more securities than some licensed brokers. While one broker I know hands out his card to people on a commuter train, my buyers purchase automatically via the options exchanges. I have never met them, which may be for the best because, alas, I have sold them so much worthless paper and pocketed their money. Like race track tickets, the items I sell could become worth something but usually do not.
Imagine that the month is February and you pay $5,000 for a deed which bears an expiration date--the third Friday of the upcoming June. You do not know what is under that topsoil; maybe oil or gold, maybe pebbles. In the months ahead, the deed may come to be worth more or less in resale value thin you paid for it, but after the expiration date it becomes penny scrap-paper. Also, bearing a definite expiration date, it tends to lose value steadily as time passes.
Let us imagine, however, that the very day you spend the $5,000, acquiring that deed entitles you to print another deed bearing a March expiration date and to sell it for $3,000. You can either put that $3,000 in your pocket or you can credit it toward your purchase of the June deed and then pay only $2,000 out of your own capital. The deed you sold expires on the third Friday of March, entitling you to print and sell another deed bearing an April expiration date for maybe more, maybe less cash than the March. Maybe more, maybe less because fluctuations affect both Junes and Aprils. April expires, sell May.
But take another look at that buy-the-June/sell-the-March deal. If you simply bought the June, it would eventually have to become worth more than $5,000 for you to make a profit. If, however, you also sold the March, you are ahead if the June is worth anything more than $2,000 after the March expires. Thus a "spread" is called that because your actual investment is the amount between the buy figure ($5,000) and the sell figure ($3,000), the aforementioned two grand.
The procedure is not risk-free because the June could drop in value to below $2,000 or even to zero. Yet funding an investment with 60% other people's money and only 40% your own is one hell of a head start, not even counting what you sell after March expires. Thus with spread strategies, put & call options are the race track tickets which, once you buy a batch, entitle you to print and sell more batches. The ones you bought could lose the race, but you can re-sell them before the final furlong, i.e., before the expiration date. The others you sell are bookmakers' revenues.
Value-oriented investment legend Benjamin Graham once said, "When you can buy a dollar for 40 cents, you don't have to worry about what the stock market is doing." The "dollars for 40 cents" were depressed stocks in solid companies, shares selling at market prices substantially below their estimated "true value." Something similar could be remarked about option spreads: The 10-dollar horse-racing ticket for four dollars. The 10-dollar ticket allowing you to now sell several two-dollar ones. If the ticket wins, fine. If not, well, you are part bookie working mostly with other people's money, and with the mathematical odds far more in your favor.
The phrase "money management" when applied to traders or speculators amounts to a euphemism for "risk management." Of course "money" sounds sweeter to the ear than "risk" just as a "market correction" sounds nicer than a "crash" and a "fiscal pause" better than a "depression." Cold comfort in bankruptcy court. Those pathetic booklets on how to win at gambling does contain at least one good piece of advice: No more than 5% of total in-pocket capital per dice-roll. Then, no matter how venomous the snake eyes, they cannot poison more than one 20th of one's bankroll.
One 10th of the capital per venture recurs as a viable loss limit or risk management limit for traders in margined stocks, futures, options; and better a still smaller slice of the bankroll than a larger. A good added ingredient is a certain mindset or mental approach which I utilize. One of the best books I ever read was Dale Carnegie's How to Stop Worrying and Start Living. I regret not recommending it in earlier writings because every trader should have a copy.
An early chapter in the book contains a
three-part method for handling worry situations which applies excellently to
finance and speculation.
1. Ask yourself, "What is the worst that could possibly?"
2. Prepare yourself to accept that a "worst."
3. Try to improve on or find ways to improve on the worst.
I do not want to be one of those trader/writers who tell about their wins, but never their losses. Gains from option spreads are the mother-lode of my income but a "failed expedition" will serve to illustrate the above. In November of 1996, common stock in Citicorp, the New York bank, hovered around 100 per share and slightly above, and seemed to be rising. I opened a "horizontal calendar" spread position in call options with a strike price of 110.
I bought 10 calls with a January 1997 expiration date for $4,190 including commission and simultaneously sold 10 calls with a December expiration for $2,324.92 including commission. The money from the sell was credited toward the buy, so that I had to "put up" only $1,865.08 of my own capital. A good mathematical rule: Let other people's money pay for more than half of what you buy, and the farther above the halfway mark the better.
Anyway, the underlying Citicorp stock lingered lethargically then ebbed a bit instead of rising further. On the third Friday and early Saturday of December, the "short-end" or obligation end of my spread disappeared when the December 110 calls reached expiration. Alas, the "long-end" January 110s were badly shrinking due to the stock's wane and the passage of time. To prevent further attrition, I sold the Januarys the following Monday for $714.97 including commissions--a net loss of $1,150.11.
A minus, yes, but an instructive one. Dale Carnegie's question "What is the worst that could possibly happen?" is an excellent one to ask before a financial venture. Stocks rarely drop to zero, but with "wasting assets" (expiration date securities) such as futures and options, and with margined shares, one can lose the entire amount ventured.
I could have lost the whole $1,865 invested in the spread but I salvaged $714.97--some "improvement on the worst" at least. Yet the larger amounts involved should not be ignored. Whoever paid $2,324.92 for the December calls lost it all. More significantly, anyone who paid $4,190 for January options as I did and sold when I did--but without spreading -- lost $3,470.03!
So why did I lose less than a third of that amount? Thanks to spreads and their magic ingredient (fanfare!) other folks' cash, I had bought a $4.19 horse-racing ticket for $1.86. That had to mean a smaller lose. Cashing in before the end of the expiration date race also helped.
Thus spread strategy contains helpful gadgetry for calculating the worst, improving upon the worst, counter-acting the worst. It boosts the likelihood of other people being your source of income instead of the other way around. You can stop playing the game at intervals, but the street corner loiterers keep shelling out the silver. It requires a bookmaker's knowledge of economics and a bookie's willingness to let economics work for you as it works against the gambler.
As mentioned earlier in this article, the psychology of trading carries no less importance than the economics of it. Would you expect "psychological insight" from a bubble gum comic? Bazooka Joe sees a tall, broad-shouldered, white-bearded man walking down the street. "Sam, you look so different!" Joe erupts. "I hardly recognize you! You're taller. You've gained weight. You're bald. You've grown a beard. Sam, I can hardly tell it's you!" The puzzled passer-by responds, "What are you talking about? My name's not Sam." "You've even changed your name!"
Such is the all-to-human tendency to believe what we want to believe. Despite available evidence. Even despite additional evidence ("My name's not Sam") piling up in front of us. Usually this is pretty harmless. The members of the Flat Earth Society do not sail off the edge and are not bankrupted by their beliefs. Sometimes the world is too unpunishing. Dr. Jonas Salk was Jewish, yet no one was ever denied Salk polio vaccine because he called somebody a "God-damn Jew."
Not so the financial markets. They habitually break the legs of the "I'm never wrong" types. There is a beautifully severe justice when a Ku Klux Klansman decides to take up trading in stocks or futures or options, accompanied by his chronic tendency to believe what he wants to believe. He finds himself tied to the plantation whipping post, financially-speaking, his back bare to the lash.
Unfortunately, the markets can also be merciless to nice people and will lop off pounds of flesh for innocent "Sam, I can hardly tell it's you!" kinds of errors. Citicorp stock has to rise heroically through the 110 mark. It cannot do otherwise! It will turn those December and January 110 call options into gold mines. If the shares tarry or wane as if to say, "My name's not Sam," that's just a trick to fool the ignorant, of course.
For the record, Citicorp's January 110s followed the Decembers in expiring worthless. The stock climbed subsequently. I was the buy & sell spread-strategy walking wounded-while the option-buyers or "long player" ended up as stretcher cases or graves details. The "Offer a dirty $1 bill on a street corner" types and the "That's Sam in disguise" types, both-over-pleased with their own calculations, beliefs, ways of thinking, got hit the hardest. Being a bookmaker is no iron-clad insurance policy against loss, but compared to the horseplayers it adds up to better economics and better psychology.
Within the realm of investor psychology, one pinnacle that looms large is intuition. Is it or is not, people ask, a valid financial tool? A broad term, intuition can be summed up in the statement, "I don't know how I know. I just know." This is as opposed to scientific or empirical thinking, for which there must be known and visible evidence. Like folk medicine, intuition comes in various types, some valid, some not.
Going to a theater to see a movie, I arrived a bit early and lingered in the lobby for a few minutes. A large, ornate staircase ascended from the lobby to the rest rooms and the balcony. A standing sign on the stair landing said the balcony was closed.
A young black couple entered the theater, he and she both about age 20. After handing over their tickets, they stopped at the refreshment stand, then began to ascend the stairs. An usher standing nearby said, "Excuse me. The balcony's closed." "Okay," the woman replied, Both descended. Then the gal asked, "How did you know we weren't going to the rest rooms?" The usher shrugged. "Just a hunch."
I had the same hunch. Not until a minute later did I realize what prompted it. Both carried refreshments. People generally avoid taking food to the bathroom. At it's most on-target, intuition at the conscious level is evidence at the unconscious level. Other varieties tend toward voodoo dream book nonsense.
What is said at every coffee table conversation? "I was thinking about my cousin Sidney, whom I hadn't seen in months. Right that minute, he showed up at my front door. It's ESP." No mention of 1,000 people thought of who did not surprisingly show up. TV and print announce some housewife's pre-monition that dramatically came true, no mention of hundreds of other prophecies that did not. When Jeanne Dixon passed away recently, nobody spoke of her predictions that World War Three would break out in 1958 or that Richard Nixon would be the Republican presidential candidate in 1964 with running-mate-Walter Reuther.
All right, so you will not venture a large chunk of capital based on what a palm-reader said at a party. But you might make a trade in stocks or options based on some financial data, an elevator conversation, and an "intuitive impression" that shares in Podunk, Inc. will rise. One should ask: Is that really an "intuitive impression" or a desire disguised as intuition? Desires abound in the market, and they appear both masked and unmasked. Is that a crystal ball inside you or a wishing well?
When you find yourself saying, "I don't know how I know. I just know," look below the surface mentally and subconsciously. You might find a voice singing "Wishing Will Make It So" or you might find solid evidence. You may have noticed a stock gradually rising over the weeks (a call spread opportunity) or gradually declining (a put spread opportunity) and stored the data mentally at an unconscious level. Remember, always, that gamblers "playing hunches" go broke with monotonous regularity, as do their counterparts on the exchanges. Intuition well-used can be accurate, but it makes a warning label of the ancient Greek maxim, "Know Thyself."
Art historian Richard Muther, Ph.D. did not intend his two volumes The History of Painting as a psychology dissertation. Yet his illuminations on the human psyche are awakening. In Volume 1, Muther wrote about Italian Renaissance artist Alessandro Botticelli, who created his finest paintings under the aegis of Florentine banker-prince Lorenzo de Medici (I1 Magnifico or The Magnificent). Excerpts follow:
"A new type of the Madonna, independently created by Botticelli, enters the domain of art. A curly-haired angel offer her grapes and ears of wheat, the symbol of the sacrifice . . . and the angels press forward bedecked with wreaths of roses, bearing vases, candles and lily stalks.
"He only needs to apply the brush, and we are transported into a wide and lofty cathedral where the odor of incense mounts to heaven and a thousand great white candles flicker. We see solemn processions with flower-decked baldachins marching across the floor strewn with roses, and hear the silvery voices of children singing the praises of the Infinite One." (Pages 175-6)
"Everybody knows that from these entrancing paintings is wafted a perfume of youth, purity and grace, identifying Botticelli himself with the springtime . . . In his Pallas the head of the goddess, with its soft full outlines and long wavy hair, is of such radiant beauty . . . that one thinks of the transcendental sweetness of Leonardo da Vinci."
In The Birth of Venus, Botticelli "develops the sentiment from the landscape, the wide and endless ocean, upon whose quietly rippling waves the Cyprian goddess is wafted like a fair dreamland picture. The ringing of bells, the song of voices, and the rustling of garments is in the air; a longing, dreamy feeling pervades the entire earth." (page 179)
"A midsummer night's dream has taken form in his Primavera, with its nymph-like graceful beings which seem like an anticipation of Bocklin. Botticelli was the first to see the elves dance. Slender dryads who housed in a thicket of the wood beside bubbling springs, have come to take part in the dance of spring.
"It is wonderful how in these paintings also he uses flowers to enhance the effect. Clive branches encircle Pallas and crown her head, and in The Birth of Venus, the mantle of the hour is decked with flowers of spring, and the wind god strews roses in the air. In the Primavera oranges and myrtles shimmer; golden fruits and white blossoms gleam from the dark foliage.
"Like the Sleeping Beauty of the fable, Primavera is envelope with wild roses; flowers of the meadow encompass her neck; blue cornflowers and white primroses are entwined in her fair hair . . . Botticelli appears as a perfectly charming mannerist in his treatment of draperies, these transparent veils and fluttering bands. None before him used such fine gauze draperies, clinging tightly to the limbs and clearly revealing the flower-like forms." (page 180)
Did you think that painting was strictly a visual art form? The sound of bells chiming, voices singing, waves splashing, garments rustling. The scent of perfumes and incense, flowers and blossoms. The taste of oranges and golden fruit. The feeling of sylvan breezes and ocean breezes, spring sunshine and leafy coolness, wispy fabric clinging to voluptuous limbs.
Some would say, "The paints are real but the rest is merely your imagination." Imagination, yes, but "merely?" Your imagination is a far-from-faint pipe organ to play upon. As for the key word here, Webster defines Evoke as " 1. to bring to mind or recollection; 2. to recreate imaginatively." Under synonyms for Educe, the dictionary says, "Evoke implies a strong stimulus that arouses an emotion or an interest or recalls an image or a memory." Even that power-definition understates it since we have seen from Florentine art that "evoking" can kindle all five senses as "a longing, dreamy feeling pervades the entire earth."
Intuition gone rampant and awry will see a vein of gold where only dirt exists, "evoking" a vision of wealth which reality will replace with a bankruptcy judge. Knowledgeable and fine-tuned, intuition often evokes quite accurately the topography of the unseen land beyond the hills, where ores and nuggets are not unlikely.
No one can always be right, but as a trader's knack and intelligence improve, his intuition and evocations probably will also. He will smell the blue cornflowers that the Italian Renaissance goddess of spring wears in her hair, but he will not see Fort Knox in huckstered shares or the Hope Diamond in hearsay over double-bourbon.
Recommended Readings: Options as a Strategic Investment by Lawrence G. McMillan; Option Strategies by Courtney D. Smith.
Find Ways to Avoid Deviating From Your Research - David Wong from Macau
I have been reading CTCN for a long time and enjoy a lot of ideas from the contributors. They are very generous to share their idea to other people. Recently I have a small own idea from my small experience.
Normally I use my volatility breakout method to trade Hong Kong Hang Seng Index futures. Before I trade, I make a backtest research for 5-years daily data. This is a daytrade method. You enter during the day and exit on day's close. As Hong Kong Futures Exchange do not accept all kinds of limit orders, I have to watch the quote machine very carefully each day. Before entry, I watch out for the entry point. After entry, I watch out for the exit point.
Now, the point is: Where should I exit with profit or with lost?
As my research (back-test research) is based on closing price, my exit should be on the close. Unfortunately, the Exchange does not accept MOC orders and the brokerage firm does not accept orders after the last 5-minutes. In this case, theoretically, I have to place my order before the last 5-minutes.
At first I always quit 20 or even 30-minutes before close if I have a paper profit or small loss. I found that I often miss more profits or opportunities to turn my losses to profits. Now, I always exit about the last 5-minutes. Now, I find my results are very close to my research and sometimes enjoy turning a paper loss to a profit.
I would like to give some small advice to the beginner. You should follow your research exactly (if you are trading it).
Option Combinations Can Limit Losses - David Sligar
I have enjoyed CTCN for about 3-years. It's a wonderful publication, and a good way for us to share our various experiences and discoveries. I would like to relate a trading experience I had in January '96 for its interest and for its potential usefulness.
In November 1995, I put on a Call Back- Spread in crude oil. Many readers will be familiar with this option combination, but for those who might be newer, it consists of selling calls and buying a greater number of less expensive calls, often for a modest debit or even a credit. This trade makes money if the price falls enough.
On November 29, I sold 2 Feb. 17.00 calls and bought 3 Feb. 17.50 calls at .05 debit (plus 5 round-turn commissions). The price of crude oil on that day was about $18 a barrel. My cost was about $160.00, with a risk of that amount plus $1,000. If the price of crude oil had been $17.50 at option expiration, my loss would have been $1160. At a price of $18.50, I would be close to break-even, and above, say $18.70, I would be making money.
It happened that November 29, was a perfect time to go long crude oil. Oil went up steadily through December, and on January 6, it peaked at over 20.25. My position, had the price held at that level, would have netted over $1,500 profit at option expiration. The price of crude oil, however, was volatile.
I was on vacation at the time, and I remember being on the phone for price quotes all too frequently during that week. What I had not done, and did not do during that vacation week was to plan my exit from the trade. Notice that mistake! I remember wanting to close the position, but I knew it would be impossible to close all five options simultaneously (using market orders) without losing a good part of my profit. I hoped that the price of oil would hold.
The week of Jan. 9, I returned home, was back at work, and had traveled to yet another state in connection with my job. Monday evening, I noticed that oil had slipped, but the chart did not show any break in the upward trend, and I slept soundly that night, knowing I still had plenty of profit left. Tuesday, oil had fallen another 25¢, a break to the downside, but I still did not want to close my options at market.
The next day was a busy one for me at work. Mid-morning I called for quotes, and was chagrined to learn that oil was in crash mode. My profits, slowly accumulated over five-weeks, were gone, and I was in danger of moving into loss territory! The little gray cells, as Hercule Poirot says, began to work!
Sometime that night, as I stared at the profit/loss graph of the position, I realized there was another way out. All I had to do was to sell one February contract, and I would be flat to the upside, and could still make money if oil fell below 17.50. On January 12 at 4:50 a.m., I called my broker's night desk and sold one Feb. crude oil at the market. I was filled at 18.65. Unfortunately, oil never went below 17.50 during that period, but I was out of the position without losing money. I will never forget that particular exit!
When we trade option combinations, there are often ways to offset the position using (more liquid) futures, thereby easily locking in profits and/or limiting losses. I hope my experience "under fire" will help someone else avoid one of those sleepless nights.
To Avoid Losses, Do Not Violate Sound Trading Rules - T. B. Slattery
As a new member, I have surely benefited from all the information and give/take discussions in CTCN. I've finally finished the back-issues and my first new one.
Thought I would recap my prior attempt to trade futures 5-years ago and the pitfalls I encountered, which a novice trader can fall into.
The story begins with completion of the Ken Roberts paper trading course in 1991. In retrospect, that course is only good (as any paper trading one) in getting familiar with the mechanics of trading. The factors of emotion, fear, greed are missing and per many of your writers. These are the most important.
I then set up a small ($6,000) account with a new research group of a well-known commodities trading brokerage. This group was starting to do its own trading and I must have been one of their earliest customers. I dealt directly with the manager, who was always accessible. Sometimes we would talk for half an hour on various strategies, technical indicators, specific fundamentals affecting and planned trades, etc. I mentioned this accessibility to a canny friend and he remarked "maybe you are his only customer!" That remark didn't sink in until later!
Anyway, we started trading one or two contracts at a time, based upon the groups recommendations (not quite a discretionary account, but close to it).
I had subscribed to the weekly chart service provided by Commodity Trend Service and generally concurred with their recommendations. When I did have reservations, the manager's erudite reasoning eased them. This trading began in 9-92 and by 5-93, it had one up-month out of the 10 and about 3 successful trades out of 14 or 15. Commissions ate up about 1/4 of the account which I closed out at $280 (those land telephone discussions were not cheap).
Reviewing this experience in retrospect, I found
that I had violated almost every point covered so eloquently by some of your
» No money management plan
» No control of risk
» Too much reliance on "experts" opinions'
» Too ready to use them as an excuse for my failure to get more involved
» No trading plan
» Little follow-up on why so many traders failed
» Little emotion or fear on my part because I considered the action a little abstractly, although it was my money.
So much for the past, compared with some of your writers, it was a small price to pay. Now I plan to develop my own trading/money management plan based on considerable accumulated, but not properly used stock options knowledge. I believe this can be transferred to the futures market.
I'm not sure I want to use a computer. I note that many of your writers seem so mesmerized by the programs, that they often lose sight of the fact that the computer is just a means (efficient one perhaps) to an end, not the end itself. Would appreciate a reader's rebuttal to this point.
Note to T. Judd - August/Sept 96 issue - How did you get out on that ratio spread? What can one learn from your experience?
Opinion TS 4.0 is Not Much Better Than 3.5 & Not More User Friendly - Sam Fuqua
Thank you for your efforts for providing CTCN. I always look forward to reading it.
I have been using TradeStation for 1-½ years. My computer skills are weak, so I just use the basic pre-programmed indicators. If someone has the ability or desire to learn how to backtest and program (Omega) Easy Language, TradeStation may be worth the cost.
3.5 TradeStation users - If planning on upgrading to 4.0. The only advantage that I find useful is win beep in 4.0. As far as 4.0 being anymore user friendly, it's not.
After upgrading you will have to learn how to reuse about 40% of the basic functions. Before upgrading to 4.0 be sure to use the 3.5 portfolio copy out function. This will keep you from possibly loosing your 3.5 data. Before using 4.0 convert data, be sure to set up your portfolio allowing adequate days of storage for intra-day data.
I was down-loading Signal intraday 3.5 IF data from Omega Research. The data needed to be cleaned up but was usable, and the price was right "free." I am now using BMI data which is clean. It's a hassle to try to use IF data in 4.0 and Omega has made it so you cannot run 3.5 and 4.0 on the same hard drive. I don't know if you can run 3.5 on a different drive. Possibly if you want to fool around with the 3.5 password.
I have read Ted Tesser's book, the trader's tax survival guide, which sounds good. I am having trouble locating a tax preparer who is will to use Ted's book as a guideline. If there are any CTCN subscribers that knows of a tax preparer in the Portland, Oregon area that can use Tesser's philosophy in preparing my taxes, I would appreciate you contacting me. I can be reached via CTCN.
Opinion Larger Stops Is Poor Approach & Opinion Clearest Signals Occur When Average True Range Picks Up & More Losses When Average Range is Smallest - TS Formula - Tom Cruckshank
I see where you have raised the initial risk for the Real Success method from 60 to 85 points because of recent volatility. I feel that this is a poor approach to this problem; even in dull markets you can have sporadic bursts of volatility which can slay a fixed risk amount.
Robert Miner preaches that one should have a technical point that invalidates a trade. I agree with this sentiment. However, when daytrading the S&P market from a 5-minute time frame, this often makes the risk amount unacceptable.
Robert or Ray Barros, among others, would say that you must let the trade go. Although this is sound advice, often the best trades slip away and I have opted for a variable risk amount which usually puts my risk point at or near the technical point which would invalidate the trade. The times where the stop is not near the technical point is where you are entering after a large spike.
With the large burst in volatility lately, I have had to rethink my risk parameters. I realized that having a set initial risk amount is impractical in wild ranging markets. In fact, after studying the problem I realize that my new approach is superior in all markets and allows me to reduce my initial risk in quiet markets.
What I did was set a 5-minute chart with as many days of solid data as I had collected. (Note, don't use a "new" contract like March but a mature one like the just expired Dec.). I then applied a 250 period AveTrueRange indicator to this chart. (The 250 represents about a year's worth of "trading days" for the 5-minute. I figured this would be adequate to cover most volatility situations I might encounter).
I then found the highest and lowest readings that I could find on the indicator for the entire period. I subtracted the lower from the higher and divided that number by 4. (1.323(H) - .623(L)=.7/4=.175) I now added this .175 back to .623 and then again twice more to get the 25, 50 and 75% levels of this volatility range. They are: (rounded) .8, .97, and 1.15.
Next I created a simple Show-Me study that plots a point when "X" period AveTrueRge is below /between/ above these levels. I feel that a 10-period ATR is about right for "X." Now I had to rethink my initial risk amount to reflect the higher volatility. I flat out had to risk more (or pass on the trade) when the market is in high range situations or I would get stopped out of most trades. Conversely, I found that I was able to reduce my risk when the market is puttering along.
I am still assessing the risk amounts (for my style and pain threshold) but it looks like 60 points for low vol., 75 for above .8, 90 for above .97, and 105 for above 1.15. It seems a logical risk point would be slightly larger than these amounts to exceed the average range calculation. It seems to me that this would work for any issue and any time frame if adjustments were made to reflect the issue traded. It really seems to work well on my initial observations.
It is interesting to see the volatility wax and wane during the trading day. I have found that the clearest signals seem to occur when the average range picks up. It also appears that perhaps more losing trades occur when the range is smallest. Of course, this is when you will be risking the least. It will bear careful watching to form a statistical base from which to make assumptions. Perhaps it will prove to be that I should not trade during periods of low volatility or when it is highest.
I have included the TradeStation formula here. Just remember that the inputs will work for the 5-minute S&P only. To adapt to another time frame or issue just follow the above procedure.
Set the plots to different colored points of a medium size. Display the study in a sub-graph and scrunch it down to the bottom of the chart window. You will have a line that changes color as the 10-bar average true range changes for the historical parameters. It takes very little chart space and doesn't clutter up the price action. The "names" can be changed to reflect your personal risk amounts.
If AvgTrueRange(Length) < P1 then begin
If AvgTrueRange(Length) >=P1 and
AvgTrueRange(Length)< P2 then begin
If AvgTrueRange(Length) >=P2 and
AvgTrueRange(Length) < P3 then
If AvgTrueRange(Length) >=P3 then
Methodology Showdown Trading Contest - Greg Meadors
The 3-year Methodology Showdown trading contest provided a unique opportunity for professional advisors and system vendors to demonstrate their ability to convert trading advice into real-time trades via Auditrack, a professional simulated brokerage firm.
Originating with 21 contestants only a few were able to both maintain profitability, and actively trade the contest for the 3-year period. This reveals that while some may give good Market timing advice, most advisors and system vendors are unable to trade profitably.
Our methodology was called Harmonics which represents a holistic approach incorporating computer trend modeling, conventional technical analysis, cyclical analysis and astro-harmonic methods.
Regarding astro-harmonic indicators, it was the writing of the late W. D. Gann and his "Law of Vibration" that inspired me to spend several years doing original research to determine if there were any correlations between astronomical cycles/events and Stockmarket cycles/events. Our research did discover various correlations that were beyond chance expectations. Therefore, since astronomical events are pre-destined, one can then forecast Market movements in advance, obviously a priceless methodology.
Regardless of the methods used, the most important element in any trading methodology is money management and the preservation of capital. Thus, all our trades had stop-loss orders, and also used other trading techniques to capture profits and minimize losses. We teach all of our Market timing and trading methods in our Home Study Market Timing Course.
After we took a substantial lead in the contest in February 1995, many traders lost the initial $50,000 start-up capital or resigned during 1995. The number of active contestants continued to diminish until there were only 4 active traders during 1996. The contest became very close though during the last few months, with the final standings not known until the last day of trading on December 31, 1996. For more information and many links to other interesting Websites (write c/o CTCN)
Editor's Note: Greg wanted to list the address of his web page in his article above. However, we do not want to promote them in any way due to their alleged un-democratic, free speech and free enterprise violating behavior. They allegedly do not want to promote open access to their site and the world wide web.
As so well stated by Avid Trading Co. and published in CTCN Vol 4, No. 4: "Competition that dissuades traffic from even entering the marketplace is simply not good business. The Web is a mall, and each page's links are its corridors. Would you shop at a mall without corridors?"
Greg's site is not a "free standing" WWW Website such as ours, but it's part of a large commercial Website which has various commodity products, services and vendors on it. The vendors on this site pay a fee to the Website provider to place their sites on the commercial site.
This particular Website service provider in the past refused to allow CTCN to go on their site and allegedly fabricated an excuse for not wanting us on the site. This is allegedly because someone does not want any competition coming from us, the main competitor of their featured commodity Website and one of their featured vendors, and who may in fact be the sites main showcase.
If you would like to explore other futures sites and get lots of free and interesting information you are invited to visit a commercial site which hosts CTCN, ino.com. You may access our site direct via world wide web at www.commoditytraders.com or via ino.com site at the address www.ino.com.
Methodology Showdown Trading Contest 1/1/94 - 1/1/97 in print copy
An Invitation To Vendors To Join Class Action Against CFTC Represented by Institute For Justice, Re First Amendment Rights - Frank Taucher
It is clear that the CFTC is broadly attacking small financial publishers' right to freely express their opinion as a matter of POLICY and NOT due to specific, unlawful acts.
I know the personal stories of some of the brightest minds in the business and haven't seen anyone defeat, or even slow down, the CFTC's onward march. Few legal experts do not believe that our activities are not Constitutionally protected or that we will not prevail.
The problems seem to be one of organization and the simple will to stand up and say, "This is wrong!"
If we leave the matter up to "someone else" and the wrong person represents us or the right person represents us but does a poor job of articulating the issues, precedent might be established against all of us.
To prevent this situation, we must become lawfully certified AS A CLASS and attack CFTC's oppression AS A CLASS.
If we do not, we will EACH experience that day when the THREAT of "the knock" becomes reality.
Our cherished liberties are too precious for us to stand idly by and allow them to be sheared like lamb's wool.
It is amidst this urgency that I am proud to bring you astonishingly good news! I have been informed that the Board of Directors for the Institute for Justice has reviewed our situation and has voted to provide us with legal representation.
I now need your commitment and for you to join as plaintiff in sustaining the provisions of the First Amendment of the United States Constitution to those who might wish to commercially express "pork belly" opinions. I realize how difficult this commitment is for a few of you.
Placing your business and career on the line is the equivalent of leading the charge at the height of the battle.
The risk is not if you try and fail, however. The risk is that, if your peers try and fail for lack of your support, you will be left alone to face the onslaught of the reactionary force.
It is, literally, now or never.
I have personally selected a wide group of publishers with diverse activities so that our case might establish the broadest of precedents - book publishers, newsletter publishers, consumer interest publishers, trading system publishers, software publishers, and so on. You represent an important part of this group.
If you share my concern regarding the importance of our battle, I ask you to be prepared to receive papers from the Institute describing who they are and the objectives of our case.
You will also need to be prepared to provide them with copies of your product and information regarding your publishing activities along with the name and address of two purchasers / subscribers who wish to continue to receive your product free of government censorship.
Our case will further attempt to extend protection to our activities on the Internet.
There are few actions in life in which we can participate as individuals that might help assure not only our own personal liberties and those of our loved ones, but might also help preserve the principles upon which this country was founded.
In closing, if you are still wavering, I ask you to consider the following: You may someday have your grandson on your knee. What type of future do you plan to hand over to him? When duty called for you to assure his liberties and future, what will you tell him you did?
Will you beam proudly of your brave choice and share with him his proud legacy of courage, or will you cower then as you will for the rest of your life if you do not step forward now?
I need your commitment now and hope to hear from you immediately. Please indicate to me that you are "in". The address to which the Institute should forward their packet and agreement, and the name and address of two customers who are willing to stand by you and assert their right to continue to receive your publication without government interference. If you have any comments or questions, I am at your disposal. 8210 East 71st Street #190, Tulsa, OK 74133 - 918-493-3384 Fax - 918-493-1132 firstname.lastname@example.org
Editor's Note: Although we agree in principle with Frank Taucher, nevertheless we have decided to fully cooperate with the CFTC rather than get Commodity Traders Club involved in costly and time consuming litigation involving the U.S. Government.
Trading Futures is a Tough Business - J.W. in Torrance, CA
I know. I've been doing it on and off for 30-years with varied success (meaning I lost most of the time). Why I even started down that road can be traced to my first commodity transaction. That first trade was not a futures contract at all. In fact, it was the 3 to 1 leveraged purchase of actual silver through a Swiss bank. It was a perfect, low risk trade, because the Federal Government was supporting the price of silver at the time. My purchase, as luck had it, occurred two weeks before the Treasury threw in the towel. Wow! You should have seen the price of silver soar after the feds gave up control of the price of silver.
Imagine getting up at 3:00am to call in my order to buy and sell using secret codes. Very exciting. After awhile, I thought it was easy and it was time for the futures market. I was very fortunate to meet a commodity broker who pointed out that the chart now was beginning to develop signs of topping (head and shoulders, a triangle. I don't remember, exactly). I sold out.
Fortunately (maybe unfortunately), it was a very successful trade and I was smitten ever since. But after that, it was down hill all the way. I traded and lost, gave up, only to return several years later to repeat the cycle. The cycles were repeated often. My wife despises the thought of future trading. Any trading I do now is in the closet --- and I'm not about to come out yet.
Why does anyone ever get into this racket? Is it because we expect to get very rich while we show how smart we are by beating the market? Everyone has their own story.
I bought the Real Success S&P daytrading tapes from Dave. They are great, very useful, but not for me. Too early in the a.m. in my part of country to become dedicated to sit in front of the computer. I prefer to lead a normal life; I want my breakfast, coffee, and a 5-mile run first. I can never make the market opening with this schedule. (The tapes and manual will be up for sale if Dave allows - It's OK). I do know that the principles are sound and the instruction is great.
Editor's Note: It's not mandatory for you to start trading at or near the opening. In fact, it's probably best to let the market settle down after the opening and establish an early trend. During your editor's real-time trading experiences with this method it seems many of the "best" trades during the day occurred between 9:00 AM and 11:00 AM and 1:00 PM and 2:30 PM, Chicago times. Even if 7:00 AM (California time) is still too early you could trade either later in the morning (before 9:00 AM CA. time, or the afternoon hours. One of the "secrets" to this daytrading method is to not overtrade and only trade certain signals(not every single signal setup) using some judgement (as the method is not 800 mechanical), and only providing the setups come during a convenient low stress time frame.
I'm not about to tell you how to trade. It is a tough road to follow. Though I have decided that daytrading is not for me, I'm not out of the market entirety. But I do not call my own shots.
I invested some hard cash in some proprietary programs (three, to be exact. Programs well regarded by Futures Truth). I have a broker who follows the signals of all three and takes the trades called for by each program. I'm very happy with the results. Please note that we are not into everything on the board, just a select portfolio with each program calling the shots on the contracts it does best in. After one year of trading one contract per signal the account is up 800. The biggest drawdown was in mid-year with a 15% decline, but the account recuperated very quickly to new equity highs.
This year I am increasing the number of contracts based on my broker's money management expertise as well as on Romery & Lehman's software. If there is any interest, I'll give you a report next year.
A Quotation on Which to Ponder - Trevor Byatt from Australia
"Crunchiness brings wealth. Wealth leads to sogginess. Sogginess brings poverty. Poverty creates crunchiness. From this immutable cycle we know that to hang on to wealth, you must keep things crunchy.
Crunchy systems are those in which small changes have big effects - leaving those affected by them in no doubt whether they are up or down, rich or broke, winning or losing, dead or alive.
A crunchy policy is not necessarily right, only more certain than a soggy one to deliver the results it deserves. Run your country, or your company, or your life as you think fit. But whatever you decide, Keep Things Crunchy."
Nico Colchester, deceased. Late Deputy Editor of 'The Economist'
Using Neutral Option Positions to Trade Without Having to Predict Market Direction - David Caplan
Most traders had found 1996 a difficult year to predict the direction of the Treasury Bond market. After pushing through the 120 level in January and matching its best levels in 20 years, bonds quickly slid to 105 over the next few months on fears of potential Fed tightening. When these rumors proved unfounded, bonds began their recovery, and it was then straight up for bonds in September, October and November. However, in December, bonds gave up much of those gains, after rumors of Japanese liquidation of bonds and reports that showed more potential for inflation than expected were released.
After successfully challenging the long-term support at 112, bonds first rallied 2 full points from their mid-month lows, but then dropped 1 full point when stronger than expected reports hit the market on the last day of 1996. The fundamental picture was as muddled as the technical pattern, with analysts equally divided and providing good reasons for moves on both sides of the market.
(FutureSource chart here in print version)
Although we recognized that option premium was high for bond options, we did not have a clear view of market direction. We initiated an option strategy called the Neutral Option Position, that could be successful in a 'choppy' trading range market without predicting market direction of selling the June bond 104 and 118 call. This position had an 80% probability of profit (futures being between the range of 104-118 at option expiration).
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 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" can 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 for a profit of $100,000. However, the Neutral OptionPosition 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 112, 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 direction -- that the market is going below 104 (puts) or above 118 (calls). We are making no prediction other than it will remain in this wide trading range.
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, that when selling options there is unlimited risk of loss; therefore, you should use strict money management principles).
The benefits of the Neutral Option Position
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.
The author of this article, David L. Caplan is president of Opportunities i n Options in Oxnard, CA. Opportunities in Options specializes in option trading and research. A pioneer in innovative option trading strategies, Mr. Caplan is the author of several best-selling books and newsletters including The Options Advantage, The Option Secret, and Trade Like A Bookie. For information on his services or a free sample of his "Bookie" newsletter, call 800-456-9699. There is risk of loss in all trading. Past performance is no guarantee of future results.
Prove It! - Steven Astley
Years ago, having tired of reading all the marketing rhetoric, promising astronomical financial gains and a relaxed life-style, while my trading results were a disaster, I decided to start over and "prove" the validity of each and every step in trading. The first question I asked was: "how much money does the Market make available per week?"
I built a spreadsheet of all commodities (and optionable indices-e.g.: OEX, XAU, XOI) that I trade/follow. I simply take the commodity's weekly high and subtract the weekly low from it and multiply that quantity times its dollar value. Obviously, this calculated amount is the absolute maximum gross dollar amount available for that commodity during that particular week. I then total, at the bottom, the column for the week and under that I get a weekly average. The second column is an average of each commodities (row) values. NB: do not expect to get identical results, it depends on the timing of contract rollovers, etc.
What this confirmed was that there was, indeed, money to be made and lost in the markets. And the markets, directly told me so, not some over-inflated guru or software vendor. The market, period! Also, I know which markets are most volatile, and those are the ones I trade, if and when my proven methodology gives me a signal.
Finally, don't expect to make the specific dollar amounts shown, that's unimportant (they are absolute maximums). But, paraphrasing the legendary Bernard Baruch: "be happy with a percentage of the move."
Success is: consistently implementing your proven trading strategy! But you've got to take the time and make the effort yourself, to prove it!
"Rules of Thumb" and Thought Processes of a Trader - Robert W Suit
I began trading futures in November '95 after 17-years experience trading in the stock market with mixed emotions. I knew that futures trading would be difficult, but hoped that my stock market experience would shorten my learning curve. Perhaps it did, perhaps not.
I began with the idea that I was going to make mistakes, and that I had just to make note of all mistakes and not repeat them, and all would be well. Easier to say than do, of course. My first trades were in stock indexes and bonds, since this was more familiar territory for me. I will list and discuss some "rules of thumb" that I developed in the first six months of trading. Most of the concepts are not unique, and some may even be wrong, but I am just trying to illustrate some thought processes that a new futures trader goes through, not making any claims. The order is generally chronological.
1. Don't fight the TRIN. Several S&P positions taken in direct opposition to strong TRIN readings the other way proved unwise.
2. Use fairly tight stops on T-Bond trades, about $500 or less. I got nailed twice breaking this rule. Very painful!
3. Set adjustable trailing stops as soon as you have a decent profit on a position. Don't let a profit become a loss? I've broken this a couple of times. Very conducive to self-flagellation!
4. Give a position time to work - don't bail out too soon, i.e., be disciplined.
5. If a position requires prayer, get out!
6. After entering a short position with a market order, if you want to place an OCO order with two prices, figure it out and call back. This avoids mistakes which are easy to make on short positions.
7. If you are in a position you wouldn't initiate right now, consider getting out.
8. FYFH! Above all, follow your plan! If you don't follow a reasonable plan, it is amazing how many ways you can find to lose!
This list pretty well represents where I was after 6-months. I'll cover the second 6-months later, and probably raise the level of sophistication. It's a tough game!
"One Guys Trading Experience" Jack from Portland
I told you in previous e-mail that I would give you additional info on my experience with my S&P daytrading method. This is being written mainly to see if you have any suggestions (probably through the bulletin) for me to trade better. I don't care if you describe my comments as "one guy's experiences trading" in your newsletter, but I think I would rather not have my name mentioned. Are there any other traders in the Portland, Oregon area who purchased daytrading method? If there are, would there be any way to find out through you if they would like to communicate with me or get together with me and discuss the program?
Editor's Note: We can't give out members names and phone numbers without their consent. However, traders in Jack's area may contact him via CTCN.
Daytrading using my method since August '96, I have made over 60 trades. I believe the only way to learn a program is to trade it. Paper trading doesn't work for me at least until I have learned something about the market I am attempting to trade. I tried to stick to the method. After each trade was completed and I was out, I reviewed the trade to see if I was following the method. I made some bad trades by sometimes getting in too early or too late, or not making sure there was a real trend developing (I think that is more important in these choppier markets).
My greatest problem is getting decent fills. After you see a signal, it seems to take too long to get in, with the process involved with placing an order with the broker, even with so-called flash fills. I perceive that on average the markets are more choppy and volatile lately. I am down over $5,000 so far. My other problem is stops.
One day the market reversed on me, I didn't get out until the market took about $2,000 away from me. Though I have been trading about 6-years, (I even had a couple of winning years). I have never day traded before and made bad mistakes in getting out because I was not used to markets moving so fast. Besides it is my tendency to hope the market will spring back in my direction (like so many traders do - not good).
After the market hits your stop, it's easy to let it go a little longer to see if it will bounce back. Sometimes it does and goes your way, but I have found in most cases it is better to get out at the stop immediately and wait for the next signal. I believe that many traders, especially beginners, should enter the stop order with the broker at the time they enter the trade.
Doing this takes a lot of pressure off me, because if the price hits my stop, I know I am out and I can go on from there to the next setup and potential trade. This has helped me to be more objective about the trade. If I had done this from the beginning while trading my daytrading method, I would have taken less losses. I realize that a person learning a method like this has to pay-up (tuition). I expected to make mistakes.
Another pressure that a novice trader such as myself feels is the overhead cost, especially when trading results are so poor. With the purchase of the methodology, TradeStation and BMI for a year we have a total of $6,700 for 12-months (not including the computer). Losses on top of that begin to gnaw at you and put you under more pressure and fear.
I know that if I ever feel confident that I am learning the method so that I can win more than lose, I will feel a lot better and this pressure will start to go to the background. I definitely intend to stick with it and follow it every day. I am fortunate in that I can be in front of my monitor for the entire session almost all the time. I don't understand how anyone can make this method work if they aren't in front of the monitor, learning every day.
Besides looking at educational video tapes often, what am I going to do to improve?
Per SAT, I purchased the book, The Disciplined Trader by Douglas. The book has helped me understand about discipline.
I have not traded for a month. I have seen some beautiful moves in the market. I wish I could be more confident when I see a trade setup. So many setups look good, but they turn out to be losers because of the choppy markets or whatever. (It was apparently determined that an 85-point stop works better, but now with slippage the loss approaches $500).
Thanks for your helpful attitude. I hope this is not too trite and rambling. Upon reviewing what I have written here, it seems I am just reiterating the ever present problems of traders who haven't figured out how to win on a consistent basis.
Editor's Note: We ask other CTCN members to offer Jack suggestions (via publication in our next issue) on ways to improve his daytrading. There are no doubt many successful traders who may offer help to Jack and others. In addition, there are a number of trading tips in this issue to help Jack and others.
'Ya Gotta Know When to Hold 'Em" - J. L. - Wimauma
"Know when to fold 'em; know when to walk away, know when to run; Ya never count your money, while you're sittin' at the table; there'll be plenty time for countin', when the dealin's done." Thank You Kenny Rogers ("The Gambler"), (Can you tell I used to be in show-biz?)
Well I was until around May Day of last year '96. In Vol. 4-3, I crowed about breaking thru that "wall" we all create for ourselves. How does actual trading profits from May thru Dec '96 of 160% annualized return on my account balances sound? Yeah, that's even after - you guessed it - I screwed around with my "strategy" in Dec and as usual, am still paying the price. Why can't most of us stand success? But it hasn't stopped my "crowing" (in case you haven't noticed).
If you're like me, you don't have the smarts of a Tom D'Angelo or the moxie of a Larry Williams. You too need an almost "idiot-proof" system. (I'm still looking for the "no-brainer" method). Woe is me! Guess I'll have to struggle along with my measly 800 a year!
I've got to say it again. 160% return on what? Neither on my account balances nor on some irrelevant margin deposit amount (or multiple thereof) could be correct. The only accurate number would have to be the average drawdown during the trades (if any developed at all). And since I only risked a small portion of my accounts as most of us do, isn't my actual return on capital at risk more like 1000-2000%?
Well anyhow, I did it. I mortgaged the ranch (literally). January just ended, and it looks like with that fresh capital, I've done about $12,000 and have a drawdown of $14,000. (I told you I messed up December. That drawdown should be about $5,000). I'll tell you it's a little different doing 8's and 10's instead of 1 and 2-lots! Not complaining tho. We all need some room for improvement! (Without giving too much away, the above numbers mean that I have pocketed 87% on my "investment" in one month. Everybody laugh together now).
I'd like to close with the four steps to a successful conclusion which I adapted from a TV show on angels, would you believe?
1. Plan (research)
2. Execute (place the darn trade correctly)
3. LET IT HAPPEN (that's the hardest one), and
4. Say thank you (after you've taken the darned profit).
Well so much for the wonderful world of commodities! What other profession can save you so much money in laxatives? And speaking of laxatives, isn't it nice to go to the bathroom when you want to - not when the boss says it's O.K.? Good investing to you!
Opportunities in Options Announces "$25,000 Beat the Bookie Challenge"
Opportunities in Options (OIO), a full service futures and options brokerage company today announced the "$25,000 Beat The Bookie Challenge." This is the first time a trading challenge with a cash award and the opportunity to become a professional trader has been offered in the futures industry.
David L. Caplan, president of OIO, renowned trader, and creator/author of the "Trade Like A Bookie" trading methodology, is challenging contestants to beat "The Bookie" by using his option strategies. "The Bookie" will establish a $25,000 trading account to compete with contestants own $25,000 accounts.
A first place prize of $25,000 cash and the opportunity to become a trader with OIO will he awarded to the trader who has the most profitable account and beats the "Bookie" account. The most profitable trader, but is not lucky enough to beat the bookie will be awarded $10,000 and the opportunity to managed CTA trading account. Opportunities in Options will assist the winner in registering as a Commodity Trading Advisor. The second and third place winners will be awarded cash prizes and the opportunity to become a Commodity Trading Advisor.
Contestants must register for "The $25,000 Beat the Bookie Challenge" by March 31, 1997. Trading can begin anytime after February 1, 1997. The "Bookie Challenge" will end December 31, 1997. Individuals interested in registering and/or receiving further details regarding official challenge rules can call O.I.O. at 800-456-9699.
Opportunities in Options was founded by David Caplan in 1984 and currently has over 100 employees in Oxnard, Calif., Denver, Chicago and Oregon. In addition to futures brokerage, OIO also has a publications division, The Options College educational program, seminar division and options trading software development programs.
Daytrading the S&P Is A Matter of Identifying Trends & Trading
I get a lot out of CTCN and wish I had information to contribute from time to time, but being a struggling S&P daytrader makes my experience very narrow. Try as I might, I'm not able to think of a topic to write about that anyone else might find useful.
S&P daytrading is just a matter of watching price movement all day, identifying trend, and entering on retracements. I notice in CTCN that you regularly ask for contributions. In the next few weeks I'll put more effort into identifying a topic and see if I can't compose something that would be a useful addition to your publication.
Asking For A Recommendation of Advantage Trading Group - Chuck Milich & Others
In the Oct/Nov/Dec issue, I noticed an article about the Advantage Trading Group. The author of the article describes the type of floor broker I would like to use but have never found.
Also, if you're aware of any members who have experience with Advantage Trading Group's S&P pit order service, I would be interested in learning about it via CTCN.
I really appreciate the good work your doing with CTCN. The last issue's article about the Risk of Ruin was very helpful.
Editor's Note: The contribution made by Mr. R.S. of Advantage Trading in our last issue was very well done and informative. As a result it drew a very large response from our members who are looking for a broker with great service, fast direct floor access, no "hand-shaking" type of delays when placing an order, and of-course low rates, etc.
Several months ago your editor traded an account with Advantage Trading Group. At the time, our overall experience with ATG as far as trade executions go was good. However, we did not keep detailed records on the speed of their fills, the fairness of the fill price, and how often their floor broker asked for our account information (Note: This occured a number of times, thus delaying our orders, even though we thought (and were told) this would never, or rarely happen), and several other important items needed to properly evaluate a broker.
To enable us to gather important statistics about Advantage we plan to transfer managed funds to them by March 10th and commence trading there, while keeping accurate records on the many significant issues outlined earlier. Therefore, we ask you not to call about Advantage, or ask for our formal recommendation until we have sufficient time to completely evaluate them with actual concise numbers to rely on and give to you.
We also did not trade with ATG as long as planned because we incurred an unexpected but reasonable drawdown and temporarily stopped trading to limit losses and reevaluate or redefine our technical analysis trading methodology.
Editor's Subsequent Website Note July 1997: When we commenced trading again at Advanatage we were well satisfied with our overall trading results but ended up closing our account (7/97) due to a "falling out" with Mr. R.S..
Editor's Subsequent Note dated 7-19-97: Unfortunately, due to later developments we are no longer able to recommend Advantage Trading Group to our members. If you opened an account at ATG because of CTCN, or an article in CTCN between October 1996 and July 1997 we would greatly appreciate you letting us know. Also, you may contact us for information on our new commodity broker.
Editor's Subsequent Website Update Bulletin: "We had serious problems in our dealings with Advantage Trading Group and Mr. R.S., Pres. & CEO of ATG. As of 7-19-97, CTCN is planning to file complaints against Advantage Trading with various organizations. After we closed our account we were told by a Real Success client that Mr. R.S. allegedly disclosed confidential account and P&L information to both the editor of Club 3000 News, who is unfortunately an unfriendly rival of ours, and himself. Not only was our trading and account information allegedly given, some incorrect or exagerated information was also allegedly revealed.
If these allegations are correct, it not only violates our specially prepared Non- Disclosure Agreement we had Mr. R.S. sign when we opened the account but it also violates common brokerage firm ethics and we are sure will be frowned upon by the NFA - CFTC.
In addition, on July 7, 1997 Advantage Trading Group reneged on a much discussed and clearly understood contract we had with them. They refused to pay us as they agreed to, after we did a lot of work on their behalf over a period of nine-months. What does their reneging on their oral contract to pay us say about them? Our contract with Advantage Trading Group was far from a moneymaking proposition in the first place. Payments under our agreement were only intended as a way to cover CTCN's considerable hard work, time and expenses. The payment agreement was definately not for profit.
Commodity Option Vertical Spreads As A Risk Management Tool - Don A. Singletary
Ever sell out of a trade too early because it ran against you only to have the market turn the instant you sell? Or maybe your stops are getting hit a little too often? These are all too familiar to many traders. If this happens to you, one of the reasons could be that your trades are not matching your risk tolerance. At a certain point, and everybody's is different, it's like a buzzer goes off inside you. This happens when you have reached your emotional risk tolerance limit. Very few investors can successfully manage a trade that is out of their comfort zone.
One solution is to select trades that will allow you a much broader comfort range, at least until you get more experience with the markets. Vertical option spreads offer a very wide selection of risks and margin requirements that can be tailored to fit almost any risk tolerance and account size. There are basically two types of vertical spreads - the credit spread and the debit spread. Both involve selling one option and buying another at the same time in the same month, but at a different strike price - one above the other or "vertical."
The debit spread is so-called because you sell one option and buy another resulting in a net debit or cost to your account. This strategy can reduce the cost of buying an in-the-money option. Here's an example: Suppose it's the middle of November and the January OJ futures are at 118.70. Take a look at these option prices: (chart in print copy)
If you are bullish on the January OJ there are several ways to enter an option trade and each has its own degree of risk and financial requirements. You could buy an in-the-money Jan 115 call at 5.00, costing $750 or you could purchase a riskier out-of-the-money call like the 120 for 2.50 or $425. However, by using an options spread, you can buy the 115 call and sell the 120 call. Pay $750 for the 115, and receive $425 for the 120 call. The net debit or investment is the difference of $325; the "spread" is 250 points.
You order the trade by saying,"l want to buy the OJ Jan 115 call and sell the Jan 120 call on a spread of 250 points." Be perfectly clear about what you are doing. All brokers are not completely familiar with these types of trades and the margins they require. Also be sure you know exactly when your options expire.
Using this type of debit spread does several things. It makes the 115 call affordable to the trader; it decreases the risk of the trade and the maximum loss is limited.
Another even less risky play is the credit spread; sell the Jan 115 put for 150 points and buy the Jan 110 put for 50 points, a net credit of 100 points, or $150. Your account is credited the $150 per spread and if the options expire worthless you keep the money. That's a change! You make money when the options expire with no value! The risk on this credit spread is a maximum of $750 minus the credit of $150, or $600. You may put in a stop loss at about 50 points and decide to risk only $75 plus commissions per spread.
Risk vs. reward is again about a 1:2 ratio. The unique thing about the credit spread is that you can win if the commodity goes up or even if it stays the same - assuming you always pick out of the money options. This type of trade limits the gain but also reduces risk substantially.
There is one other notable advantage of using these option vertical-spread strategies. You will be somewhat insulated from loss due to time decay of the option prices. Whichever strategy you use, you will always be long one option and short the other. Since the time-decay of the two will erode at approximately the same rate, the spread has the effect of cancelling out time decay loss! If you have ever bought an option and watched time decay eat away your investment, you will appreciate this feature.
The combinations of spreads and the wide menu of options can allow you to tailor a trade that suits your budget and risk tolerance. You will better manage a trade that stays in your comfort zone every time! The vertical spread can easily allow you to do just that. It is a little confusing at first, but worth the effort. Get a pad and pencil and practice. It won't take long before you begin to see the many possibilities which option spreads offer. After all, the more tools you have in your trading kit, the better craftsman you will become.
Copyright©1994 D.A. Singletary (and jointly copyrighted by Commodity Traders Club News by virtue of its publication herein). About the author - Don A. Singletary is currently full-time trader and risk management consultant, and was a registered representative for a NYSE firm for many years; and has served in the Economic Development Division of the Florida Department of Commerce. His new book Option Wizardry will be published in 1997 by Windsor Books.
Offense Taken by "Cheapskates" Remarks - Larry Schniepp
I took the "cheapskates" remarks by Thomas Mylotte in the Oct/Nov/Dec 1996 issue as pointed directly at me because I was one who chose not to purchase the Real Success Software along with the Real Success Video. I hope he is more careful when addressing such remarks in face-to-face situations. It is very clear that Mr. Mylotte simply doesn't know what he is talking about and I don't like being called a cheapskate because of it.
The fact is that the software is useable only when running with TradeStation. You made that abundantly clear, Dave.
Editor's Note: This is correct, optional Resistance/Support/Keltner & Signal Setup software only works from within TS.
In fact, a quote from your announcement is as follows: "This great supplemental software is not really needed and certainly not mandatory to learn and successfully trade this methodology." Since I don't own TradeStation and have no intention of buying it there was/is no reason to purchase your auxiliary software no matter how helpful it might be.
Mr. Mylotte goes on to criticize you, Dave, for allotting those "cheapskates" 5 videos containing Bollinger Bands and only 2 videos containing "your" software, meaning Keltner Bands. I can only guess where his mind was as you were constantly reminding the viewer that both bands worked equally well in the methodology and were almost identical. There is absolutely no merit in that personal attack. That shot and the one above would have been better left unsaid.
The methodology works just fine for at least this "cheapskate" who charts real time using one of the many other programs out there.
I had to get that off my chest. I'll have more, positive contributions to make in the near future.
TradeStation Seminar Too Simplistic For Experienced & Too Technical For
Beginners - Joe Schuchter
As with other contributors to CTCN have both positive and negative experiences with Omega Research and TradeStation. I signed up for their TradeStation Seminar in December '96. As a rather new user of TradeStation I found myself 'left behind' after just a few hours, and at the same seminar I talked to veteran TradeStation users who found the presentations too simplistic. Clearly the seminar was aimed at TradeStation users with a good knowledge of TradeStation, but of little value to those who are beginners or experts.
Omega Research had monitors present and they were quite interested in participant feedback and in taking steps to make the seminar more effective. Further, they responded to my written concerns about the seminar with an in-house refund credit for the cost of the seminar. They respond quickly to customers' concerns and willing to make changes that improve their products.
10-Year Historical Data Base & End-Of-Day Data $89.00 Yearly - Joseph Light
Members looking for an economical database should scrutinize Investors Alliance at 888-683-1181 or 607-243-3601. This non-profit association has survived since 1987.
They offer fundamentals on 9,000 stocks, technicals on 16,000 stocks, information on 5,300 mutual funds end-of-day data, and a 10-year plus historical CD ROM database.
Most indexes are included, however no commodity information is available. Analysis software is included.
It's great for that spare slower computer. TradeStation and Bonneville it is not. It certainly qualifies as a functional, economical source worthy of comparison to other software and data sources. I am not affiliated with Investors Alliance.
Questions About the Real Success methodology & S&P Daytrading - David Kent
Just a note following up my Fax of 12/11/96 (copy enc) requesting updated CTCN subscriber information for 1997. I've read and reread CTCN articles about daytrading which you sent out last Spring, and would like to know how much all the back-issues of CTCN would be. Also, (at one time) you had stated that you could only fulfill Revealed Secrets trading program orders for the first 100 or so people.
Editor's Note: About our educational trading package, we did decide to make available a number of packages in excess of the planned original number. This was because we later determined since the method is NOT 800 mechanical there was really little, if any, danger of too many traders taking the same trade at the same price and time.
Our Real Success methodology uses different entry techniques, different target prices and a number of various signal setups to select from. In fact, there is a degree of subjectivity and judgement involved in the signal setups, all of which are not meant to be traded. This results in different interpretations and diverse trades and subsequent varied trading results by our traders.
Even so, what are the chances for the program and tapes, etc., being re-offered in the future, such as in 1997? And if the program won't be or is no longer made available, can the software you advertised still be purchased? You have probably had to answer these same questions innumerable times since you first began taking orders for the program, and so I hate to sound like the proverbial parrot, but Dave, you happened upon a really good one.
A few more questions: What kinds of successes are your subscribers having, using the method? Have there been any rookies in your rank and file?
Editor's Note: As mentioned before, we did in fact produce additional educational packages (at high pre-paid production cost) but decided to not offer them to our members because we are working on a new series of tapes which utilize our new enhanced trading methodology. This was done because the original methodology unfortunately did incur a drawdown in real-time trading last fall, mostly during the Oct/Nov time period.
Of course, we were not happy with the drawdown so proceeded to modify the methodology to make it work "better." We have been paper trading the new method and it definitely seems to be enhanced with lower drawdown and good success.
Commencing by mid-March (or earlier) we plan to be trading the new methodology in real-time and also taping our trades. This new enhanced educational package will be offered to our members (when taping, editing and re-production is finished, in all likelihood by July or August 1997). We also plan to send it "free" (we will only ask for payment of our out-of-pocket duplication cost and S&H) to all registered owners of the original Real Success Educational package.
About your question in regards to "what kinds of successes" our Real Success traders have achieved. The success rate varies quite a bit. This is a result of it not being totally mechanical. The trades actually taken in real-time and subsequent overall trading results are highly variable.
Many Real Success traders report they have made excellent profits using this method, while some have reported losses, others report break-even trading results. Some others have never actually traded it in real-time and some traders did not use it exactly as designed, but instead used the methodology in conjunction with their own trading method, as an enhancement or supplement.
By the way, the above variable results scenario is quite common with most all futures trading methods or systems. For varied reasons, not the least of which is interpretation, judgement and discipline, trading results are extremely variable using basically the same method or system. In the past I have received calls or letters from traders (sometimes on the same day!) with one highly critical of a method/system and complaining about losses but the other trader is complimentary and talks about his profits and success using the identical system or method.
Also, yes, we have a number of beginner traders using the methodology with variable results but most find the methodology very useful, educational and helpful.
As with so many of your subscribers, I would like to learn how to trade successfully for a living from my home, and learn how to keep most of the profits. I need to learn a lot more, but just how much does a beginner have to learn before many of the kinks are ironed out? For about one year (7/92-7/93) I traded many markets, some haphazardly, some cautiously, and still I lost--both my own money and a partner's.
Originally I had taken the TWMPMM course from Ken Roberts, but hardly used his methods, because it seemed that at the time I began trading, most of his trades were held for weeks, and he wasn't profiting consistently from the trades I monitored on his hotline. So I abandoned his system (this was in Spring and Summer of 1992) and I soon whittled away everything because I didn't stick to any plan or use enough discipline to be a wise student of the markets.
Now, in retrospect, I can see that I need a proven system, good money management and self-discipline to be a winner. It is you against you in the markets.
To daytrade the S&P 500, how much capital would you say needs to be secured to begin? You should not risk more than 2% of your equity on any one trade. Does that mean I should forget daytrading the S&P 500 if I have less than $10,000 in a margin account?
Also, Mark Douglas suggest setting aside some money you won't mind losing. Does anybody ever not mind losing when they're only starting with a limited amount? So how much is enough?
I'm truly searching for sage advice, and there must be good, right answers for someone in the same position I am in. I want to do this right, to begin and to end well, for a change. Dave, I believe that from what I've read, you have much advice on these matters. What do you say, and what would you recommend for me?
Editor's Note:We will answer all these questions, and many others, in our newly updated Real Success Info-Guide, due to be published and mailed out sometime during 1997.
I know each person's situation is different, but some others' experiences, hangups and financial disadvantages might be similar enough to mine, to offer suggestions. I know quite a few of the basics of trading, and many of the concepts. I have a wife and four kids to care for and want to learn to make a better living than I now am, doing something I enjoy, out of my home and working in leveraged markets.
From what I've seen, after some broken dreams playing the markets, I and many others like me have been scared away because of stupid mistakes, ignorance and lack of discipline in their trading. But many also appear to have made successful comebacks. What do you say?
Any wisdom you could share will be well-taken and greatly appreciated. Dave, thanks for your time and attention to helping others like me find a forum and advice that could change lives.
Commodity Option Selling and The Stock Market - Don Twist
Commodity Options in Grain
In that article I discussed commodity options and the fact that most options expire worthless or as Mervin Pearson calls them a rotter. In that article I stated "this will be another golden opportunity to sell puts as the market rises and sell calls after it peaks." "Look back in history and you will find these markets will peak before planting or the latest in late June. This was right again with record prices paid for corn and wheat and peaking from May to mid-July. How many traders bought those out of the money calls and saw them rot? They were once again selling options on soybeans for November at prices up to $10.00 per bushel that rotted.
I will add another dimension to option trading in selling the premium and not buying the premium. My current data vendor TBSP has daily option volume available the same day, unlike futures contracts that offer no volume the same day.
As I stated last year, you must chart options like futures and use the same methods. Now look for the days with abnormal volume compared to the open interest and you will find the turning points. In November there were excellent signals in the soybeans with abnormal volume days. On 11/1/96 there were 6,443 January 675 puts traded and they closed at 23.50 cents. On 11/29/96 they were selling at 1-cent.
I would speculate that this year could be the year for soybeans, as last year saw record prices in wheat and corn. Think of the premium that was available last year on calls in the distant months that rotted or could be still rotting for those that sold 1997 calls in wheat and corn.
If one would compare the great bull market in cotton in 1995 and the wheat corn markets of 1996 and then look at the year after in cotton which was very subdued. This might be the scenario for wheat and corn for 1997. If the grains peak in May, selling the call options for the new crop months should be easy money again.
I have read numerous articles in various daily publications calling key reversal days in commodities or stocks and to find that these were not reversal days, but brief trend change days with the prevailing trend resuming in the next couple of days.
A key reversal occurs only when the vehicle you are watching or trading closes above or below the previous four days closes.
Four days is the key, not one day as most newspapers state in the daily explanation of what the markets had done yesterday.
Stock Market Comments
I would like to thank Patrick Smith for his excellent article on Sheep in Sheep's clothing.
Did you ever wonder why a stock hitting a new all time high can advance so rapidly? Let me give you my scenario.
In any stock there are numerous orders in the book to buy or sell at specific prices and the amount of shares for sale at each price. Now consider the fact that if the stock has never traded this high or low how many orders could be on the books to buy or sell at these new prices?
If a money manager is in the process of ramping up a stock he continues to place buy orders at new highs which has very little stock for sale, what happens to the prices? He and his fellow fund managers can ramp a stock up relentlessly which improves their fund performance. While everyone knew America Online was over priced for years, the Fidelity Funds were large buyers of this stock and continued to squeeze the shorts and have this stock rise how many fold before they finally sold.
Everyone must remember that the brokerage houses are very big traders and when they make a buy recommendation they have their own agenda based upon their inventory. Until recently, most recommendations have done exactly what they were supposed to do. However, as this BULL is getting very old and the trends in many stocks are down, beware of the buy recommendations as they may be unloading some inventory of their own or a big client's holdings. They can also label this a secondary offering when none of the proceeds accrue to the company and some big shareholders are gracefully exiting their large position.
In the Wall Street Journal on 12/26/96 in the Heard on the Street column there were some interesting comments from Robin Carpenter, "Years in which the full four digit numbers form a prime are worse then when a two-digit number forms a prime."
There have been only six of these years: 1901, 1907, 1913, 1931, 1973 and 1979 and they showed an average loss of 20.3%
He notes that 1997 is a double whammy since both 97 and 1997 are primary numbers. I believe the first half of the year will have surprises with an ugly spring and a bottom in the second half of the year.
OPTIONS & SPREADS: A Gann/Elliot Report for
Night-Owls & Tomb-Robbers - Greg Donio
In a book of essays published in 1920 and entitled Old Junk, London Nation associate editor Mr. H.M. Tomlinson wrote a piece called "Bed-Books and Night-Lights" which began:
"The rain flashed across the midnight window with a myriad feet. There was a groan in outer darkness the voice of all nameless dreads. The nervous candle-flame shuddered by my bedside. The groaning rose to a shriek, and the little flame jumped in a panic, and nearly left its white column.
Out of the corners of the room swarmed the released shadows. Black specters danced in ecstasy over my bed. I love fresh air, but I cannot allow it to slay the shining . . . candle-flame, the comrade who ventures with me into the solitudes beyond midnight. I shut the window.
There are few books which go with midnight, solitude, and a candle . . . For though at that hour the body may be dog-tired, the mind is white and lucid . . . It has a sharp focus, small and starlike, as a clear and lonely flame left burning by the altar of a shrine from which all have gone but one.
A book which approaches that light in the privacy of that place must come, as it were, with honest and open pages."
My own midnight readings? Professor C. Leonard Woolley's book The Sumerians has escorted me via Manhattan lamplight through the shadowy vaults and chambers of Mesopotamian crypts circa 3,000 B.C. Then there are the books and articles by or about W.D. Gann and R.N. Elliot.
I have done well enough as an option-trader to stay up, sleep late in the morning, and otherwise make my own hours, thanks at least in part to the latter two gentlemen. Also, to prodigious readings of a variety of authors at mixed-mosaic hours. So why are those two particularly suited to night-owl perusal?
In "Nature's Law -- The Secret of the Universe" (The major Works of R.N. Elliot), Elliot wrote "Pythagoras a great man, lived in-the fifth century B.C., and made an impression on history that is seldom approached. (Mention of Encyclopedia Britannica passages. He was a persistent investigator of the discoveries of others and visited Egypt which is often mentioned as 'The Cradle of Civilization!
"Pythagoras is prominently known for his studies in mathematics. He drew a triangle and placed thereunder the cryptic title The Secret of the Universe." (page 231)
"It was made after he returned to Greece following a prolonged visit to Egypt. It is fair to assume that the Pythagoras diagram refers to a pyramid." (page 158)
Elliot went on to tell of 13th century A.D. Italian mathematician Fibonacci, also known as Leonardo da Pisa. "He visited Egypt and Greece and on his return to Italy disclosed what is known as a summation series." That is, the Fibonacci numerical sequence. (page 159)
In the Oct./Nov. 1990 issue of Trader's World Magazine, Gregory and Helen Meadors wrote that W.D. Gann "would incorporate Scripture, natural laws, numerics, Pythagorian harmonics, astro-cycles and the Law of Vibrations.
"As a student of ancient sources of knowledge, Gann may have also studied the Great Pyramid (the structuring of which) contains an amazing array of mathematical (Fibonacci) ratios, Biblical correspondences and knowledge of the heavens." (page 32)
W.D. Gann and R.N. Elliot both drew heavily upon the classic Dow Theory of Charles H. Dow and his subaltern scribes Robert Rhea, William P. Hamilton and S.A. Nelson who wrote books expounding on his concepts. Yet Gann, Elliot and their own "take-off" doctrinal theorists also reached much farther back in time to gain wisdom, which is sometimes a good idea and sometimes not.
The archaeology buff in me cannot help but be spellbound by the notion of Elliot and Gann walking with Pythagoras in the hills of Italy back when it was called Greater Greece because of the Hellenic colonies there. Likewise when they strolled in spirit among the dead pharaohs in the Valley of the Kings near Luxor.
My midnight oil-burning interest in ancient artifacts is only part of it. Religion-wise I am skeptical about Afterlife. Yet I enjoy spooky stories about torch-lit castles and alchemy labs. I am semi-cynical toward the occult and regard astrology as a false science. Yet I have a weakness for wooden bookstalls containing volumes brown with age on "ancient secrets."
Ancient secrets. Jersey City take-offs on centuries-old hermetic and kabbalistic tomes. Depression Era bargain reprints of Babylonian esoterica. Seven keys to wisdom and the evil eye.
All nonsense? No, but a mixture of wisdom and nonsense, of gems and pebbles and cheap fragments that shine deceptively. Archaeology is rich in mystery and adventure but is also an evidence-oriented science. The same can be said of financial speculation or trading. Both attract too many phrenologists and bumped heads. Both have their distinguished doctors, their snake oil frauds, their well-intentioned bloodletters.
Of course, in these fields as in politics and religion, one person's wisdom is another's nonsense and vice-versa, complicating matters even more. R.N. Elliot sent his spirit back in time to sip vintages with Fibonacci in pre-Renaissance Florence and to pore over papyrus with Egyptologists at the Karnak temples. In his theorizings, W.D. Gann communed with Old Testament patriarchs and Sumerian astronomers.
Such notions release some intriguing phantoms and ritual candles into the pagan darkness of one's musings after all lights vanish but the reading lamp. Yet hieroglyphics must be viewed with an eye of scientific skepticism. What passes for ancient wisdom may be a failed alchemy formula or a superstitious cure.
Spread strategies using Put or Call options have paid for everything from the tenderloin and lasagna in my freezer to the Certificate in Finance I recently received for courses taken at New York University. Un-owned "underlying securities" are either commodities contracts for futures options or, in my trading, stock shares for equity options.
W.D. Gann and R.N. Elliot made those stocks navigable for me. In Gann's writings, share prices bounced between floors of support and ceilings of resistance as though along the stone passageway of a pyramid. I soon learned to sense whether the stock gravitated more toward the ceiling or floor; also to check whether it stood on a long-term upslope or downslope.
If ceiling-pull/upslope showed and earnings and P/E looked robust, I positioned a horizontal spread of Call options above that ceiling. If the share price pulled toward floor/downslope, also having decrepit earnings and P/E, I positioned a horizontal Put spread under that floor.
Ergo, if the stock stayed within the passageway, I profited from time-decay, the natural progression of horizontal calendar spreads. If the share price broke through the anticipated ceiling or floor, placing the options "in the money." I bought back the short-end of the spread and held the fattening long-end. Gann's pyramids held ample treasures for me.
Thanks to R.N. Elliot's impulse waves and corrective waves, fluctuations fit within the blueprint instead of ripping at it. A study of Wave Principle brought me far fewer unwanted surprises. With fair accuracy I could anticipate whipsaws and angular line-juts, and incorporate them into my schemata.
Admittedly, I had to clear away a fair amount of dross to get at the conceptual shine. Elliot put into print some occasional bits of pseudo-paleontology and what sounded like encore-to-palm-reading numerology. Gann could find financial "powers and interpretations" in varieties of Biblical numbers, readily tying in the 61,000 donkeys and 32,000 virgins (Book of Numbers 31;34) with the Dow Industrial Average of such-and-such a lunar-cycle date.
Self-proclaimed Gannophiles of astrological persuasion have carried such questionable reckonings even further. The 60-degree angles in the Seal of Solomon supposedly connect with the sun/moon woman in Revelation 12 and zodiac sign Virgo in force when the Dow soared Aug 1987.
It can make for bewitching reading in the wee hours, like examining cuneiform clay tablets by lantern-light. Yet both situations call for the archaeologist's scientific objectivity and skeptical eye. Thus, we separate ancient wisdom from ancient superstition, Hippocratic ethics and science-by-observation from Hippocratic bloodletting.
Gann theory and Elliot theory both offer plenty if you will settle for good, helpful methods but not "perfect" ones. There is no holy grail or philosopher's stone; there are the trail compass and the surveyor's theodolite in the Yukon. El Dorado? A myth. But gold-rich soil known as "paydirt" ain't no fairy tale. Nor the hammer-built "Long Tom" separating trough.
Through the dim corridors of 25 centuries, Pythagoras utters his teachings: The eternal recurrence of all things; the profound, elemental significance of numbers. History repeats, Gann said. Numbers form ceilings and floors. Patterns repeat, Elliot said. Five waves up and three down.
If the securities--stocks, futures, options--do not always follow the game plan, at least the game plan robs them of a lot of their surprises. Also, the Gann Maxim, "Discover the trend and go with it," would make for fewer troubled spirits in the financial boneyard. The screech-owl goes silent as the radio on the night table finishes playing "Ebb-Tide." The distinctively after-midnight book closes. And so to bed.
Recommended Readings: W.D. Gann's two books in one bound volume The Truth of the Stock Tape & The Wall Street Stock Selector; The Major Works of R.N. Elliot; George Angell's Sure-Thing Options Trading...
Editor's Note: Greg referred a book source who would not list CTCN in their catalog but listed a competing publication because he is a "old friend of the editor." They also fabricated a story about an ad they once placed in CTCN. See our Elliot Manuscript reprint offer below.
Editor's Note: "Nature's Law -- The Secret of the Universe" (the major work of R. N. Elliot) is available thru CTCN. Send $27., plus $3 S&H, $30.00 total ($12 foreign S&H), to get this rare, fascinating and interesting 63-page spiral-bound re-print of Mr. Elliot's original manuscript.
Technical vs. Fundamental - Keith Carr
Some thoughts pertaining to the question of whether technical analysis has merit in a successful trading campaign. The first question is: How does the fundamentalist define accurately the point where his analysis is wrong? This is coincidentally the same point where the educated technician will place a stop (limit the risk). Market price is ultimately the consensus of all the participants' opinions represented by the net sum of all the buying and selling pressures in the market at any time. So it seems logical to attempt to trade with an awareness of just what those vertical bars are telling you.
Next question: How does the fundamental analyst scientifically quantify volatility in the market? The inability to be able to define volatility and tie it into one's analysis is one of the main reasons why many traders are not successful. Volatility and time both qualify price action.
The successful chartist does not need a boat-load of different indicators to trade with. Most traders cannot really define what the indicators are telling them about the market, especially when several different indicators are apparently saying different things at the same time.
Scientific price action analysis combined with accurate multiple time frame interfacing is in fact the key to learning to read those vertical price bars. The astute trader defines trends on multiple time frames within the framework of clearly repeatable top and bottom formations. Of course, this means that the trader must do his homework prior to trading the markets.
It is a mistake to believe that trading commodities is a quick pathway to riches without much hard work and dues paying. The use of a canned trading system that generates buy and sell signals is to imply that the trader is denying himself the use of extremely necessary and valid information that is to be obtained from careful consideration of different time frames.
Remember the market is telling you what it wants to do if you'll pay attention. Could it be that the fundamental analyst might be mislead by [intentionally] false information such as government reports, news services, etc.? Nothing in trading is 800. But at least the technician can work volatility and truthfully enter the market knowing beforehand what he's going to do given any possible scenario he might encounter. How does a fundamentalist define support and resistance zones accurately? The same way a technician does, I suspect, he looks at a chart. Can a fundamental analyst generate statistically verifiable profit objectives and price targets on different time frames? This is extremely important, because it ties in directly with proper money management. One must learn to trade the price action.
In the end, the successful trader and individual has attained knowledge of where he is in relation to the market and his discipline and self-control. My education continues.
Much thanks to Kent Calhoun. It would be difficult to find a teacher and technician who is more ethical and knowledgeable.
Editor's Note: New CTCN member Ms. Ellen Halpin recently attended Kent's KCI Seminar and purchased Kent's Trading Manual and video tape. To satisfy member requests for information on Kent she has volunteered to do a review on Kent's methodology in an upcoming issue.
Ken Roberts' Course Review - J. Salisburg
In the OCT/NOV/DEC issue, Maury Breecher asked about Ken Roberts "Most Powerful Money Manual & Course." I subscribed to that for about a year back in 1987 and again in 1993 (for 3-months). I think Ken is really sincere in his desire to help people learn about markets. He had added bunch of options courses in 1993.
My experience in '87 was I got too excited too soon. Didn't learn about money management until I had taken my $5,000 account down to about 2K. Then I took a month off from his hotline. Got long and lucky on two sugar contracts which I rode up to 11K. Then euphoria took over and I traded it back down to 2K and quit for 5-years.
He basically was teaching position trading. I am finding out that I am more comfortable daytrading the bonds. Less margin and less stress. If I blow out again (I don't intend to) it is easier to start again.
His course, and Larry Williams hotline are good places to start. I also read & reread Larry's 2-volumes on Futures trading, especially the money management parts, and Taylor's Book method. Available from Trader's Press.
The Ken Roberts Course Is For Absolute Beginners - Dan Wu
Rats! I just cleaned up my house and gave away my Ken Roberts' stuff to the local library. Anyway, If you really want to buy it, maybe you should look at the ad on the last page of the CTCN (last issue). There is someone willing to sell it at a reduced price.
Ken Roberts stuff is good for absolute beginners, however in my opinion a bit over-priced. It has lots of hype and very little meat. It is good reading though, you won't get bored. Oh, you will probably spend more than $200 because he has other products. If you really want to learn, probably get a few books to start (which is a lot cheaper than the Ken Roberts course and a lot more meat).
You can get good decent commodity trading books at a good book store or a decent library. Or you can get a catalog from Lind-Waldock (they happened to have an ad in the ad section of the CTCN). There are other good book sources like Traders Library for example.
Anyway, if you decide to get Ken Robert's stuff and after going through the material and listen to testimonies, and after you paper traded a few times and made tons of money of paper - please, please, please do not quit your normal job.
If commodity trading interests you, be prepared to put in lots of hard work to learn and spend lots of money, because it's an expensive hobby to say the least. You probably will read your share of books, buy your share of tapes, attend your share of seminars, and make your share of mistakes in the market. What I am trying to say is, you got to really like commodity trading or this is one hack of a depressing hobby. Wish you success in your commodity education.
If a man loudly blesses his neighbor early in the morning, it will be taken as a curse. Proverbs 27.14
An Unscientific Study on Slippage - T.M. from SC
I've never seen a scientific study on slippage, so here's an unscientific one. My last 100 stop orders on the S&P averaged $37 slippage each way. In my case the commission is $15 plus fees of $4.54, so my average round trip cost is $93.54. Sort of gives me some confidence in the old "$100 commission and slippage."
I trade with a discount table at First American Discount Corp., breakouts of short-term support and resistance, where my stops probably have plenty of company. I think the fills are pretty good. I couldn't help but notice that my best fills (some even in my favor) generally occurred in very dull markets or when I'd buy at the high, or sold at the low for the day (mostly losers). While the worst slippage, of course, came with fast market conditions in my direction (mostly winners).
Does this mean that along with "loving our losers," we should "love our bad fills" also?
What You Need to Know About W. D. Gann - Norman Winski
Are you one of those people who has tried to read some of the writings of W.D. Gann and felt like you might as well be reading Greek?
Consolation is here. Most beginning students of Gann's works feel thoroughly confused if not totally baffled. The situation is somewhat analogous to someone who picks up a book written in Greek, having absolutely no knowledge of Greek, and tries to understand those writings on the assumption that they are reading English. The difference is that Gann's writings utilize the English alphabet. Therefore, further wrongly reinforcing the illusion that he is communicating to you in normal conversational English. W.D. Gann was actually writing in another "language" or jargon, but he usually didn't bother to tell most people this.
The language of W.D. Gann is Astrology. Throughout the writings and charts of Gann are allusions to the principles of Astrology. For example, in your Gann research you may have noticed Gann's use of; the date of incorporation for a company, the date of the first day of trading for a stock or futures contract, the zodiacal dates surrounding the "square of nine" chart, the planetary symbols found on his own handwritten market charts, the planetary ephemerides with his personal notes written inside found among his books, the use of angles basic to astrology, and the collaboration with other astrologers. I said "other astrologers" because first and foremost W.D. Gann was an astrologer. Everything else is supplementary.
Astrology is the correlation of extra-terrestrial phenomena with terrestrial phenomena. It is a specialized branch of cycles. Gann liked to refer to it as "the law of nature" or "natural law." The bottom line is that Gann said that timing was the most important factor and he based most of his market timing on astrological factors or principles.
Several years ago, I had the good fortune to talk on the telephone, on several occasions, with a former associate of W.D. Gann's. Due to a promise to keep his identity a secret, I cannot tell you his name. But, he lived in Pittsburgh, PA, and his initials are R.C. R.C.'s father was a very good astrologer and had worked with Gann. When R.C. was a young man, he followed in his father's footsteps and starting working with Gann. He worked with Gann on a full-time basis as a partner and collaborating astrologer for about 10-years, from the late 1930's to the late 1940's.
During our conversations, R.C. told me that "first and foremost Gann was astrological." He also said that during the period he worked with Gann, Gann made most of his money by selling market letters and $5,000 courses. In 1948, when Gann accurately forecast the top of the Soybean market, almost to the penny and the minute, Gann sold one soybean futures contract short and rode it down one dollar for a gain of $5,000.
This is certainly a tribute to "Gann the man" but it does punch a hole in Gann the fifty million dollar super genius trader. Of course, no trader is better than the system he uses. Was Gann a genius? Perhaps, but knowing that will neither help you trade or help you learn the systems and perspectives Gann utilized. Were the systems Gann used ingenious? On that there is no doubt the answer is a resounding yes. Gann was successful because he had the benefit of thousands of years of ancient principles on his side, of which he was a relentless student.
Just in case you are still skeptical about W.D. Gann using astrology, I have included a chart of May Soybean futures used by Gann. A copy of this same chart also appears on page 202 of P.C. Kaufman's 1978 book, Commodity Trading Systems and Methods. I mention this so that you can see for yourself that I did not in anyway alter this chart. Now, please refer to this chart. In the upper left-hand corner you will find "May Soybeans." Follow the vertical line, down which goes through the "y" in May, three horizontal lines. There you should find a strange looking four, followed by a 30 and an arrow like glyph. The strange looking four is the astrological/astronomical symbol glyph for the planet Jupiter. The 30 represents thirty degrees. The arrow like glyph is the symbol for the sign of Sagittarius (240º). Gann was indicating that with Jupiter at 30º of Sagittarius, 240º plus 30º=270º, there should be important support/resistance at a price of 270.
There is another Jupiter glyph on the left side of the chart near the price of 264 on the price scale, with a dotted jagged line extending up and to the right. The dotted line plots the movement of Jupiter. Directly to the right of this last Jupiter glyph, below the "a" in "Soybeans," you will find a small circle with an arrow on top, the symbol for the planet Mars. This is followed by "22", and the arrow like glyph for Sagittarius. Gann drew a line to the right pointing to another dotted jagged line. This line represents the movement of Mars. Now, follow this line up and to the right. Notice that it intersects with the Jupiter line. This represents Mars conjunct Jupiter or in the same place by longitude. This is an important astrological event which coincided closely with the retest high of the market.
The time has come for you to decide for yourself whether to learn the true ancient principles that Gann studied or to remain in a confused cloud of delusion. There are no easy answers. W.D. Gann took 10-years of his life to study at the world's greatest repositories of ancient knowledge and continued to study the rest of his life. For those so inclined, there is no greater awe inspiring adventure than to pursue the study of the universal laws of nature.
I have studied for 19-years and have had the good fortune to have acquired libraries that were accumulated over several lifetimes. You can benefit from my good fortune, hard work and experience. Norman Winski & Associates offers you the leading technology in Gann and astrological investment/trading total support. I look forward to being of assistance to you at 941-261-7261. copyright© 1989 Norman Winski (and jointly copyrighted by Commodity Traders Club News by virtue of its publication herein).
Unabomber - 1-Minute Trading System for the S&P -Terry R. Davis, C.B.M.
Before trading this you should know / need:
1. floor access (call me for a very good broker)
2. speed dialer on phone
3. a reliable data feed (under no circumstances use DTN)
4. good software package - Ensign 6 or Vista recommended (TradeStation will not receive data fast enough to produce the same signals as a DOS based program)
5. iron will to be able to watch the market all day and respond immediately to trades.
6. if you don't like it, don't use it
7. this system will not transfer to any other market
8. I developed this system for a violent market and I have no way to get in on a longer time frame where I normally trade -- have since started trading it exclusively along with 4-minute system
9. System buys / sells more or less on pullbacks - we are trading against the crowd - a real plus
10. Paper trade for at least 2-weeks before placing real money on-line
You will generate the most trades and have the most opportunity for profit from the shortest practical time frame where there is reasonable volume. The potential for large intra-day profits exists only on the S&P. I already know that many of you will take what I will present here and change it. Good! It will not work for you and I will take all of your money when you take the other side of a trade I am in. There are absolutely no guarantees real or implied in this article. It is simply presented as a method that I have been using along with a couple others. If it is so good why am I giving it away? The answer is: if I present something this good for free maybe I really do have something better to sell. The second part of the answer is: no one ever follows anything anyway.
I am not going to try to explain the whys of the system. I am only going to present the rules as I apply them. The technicals you will use are:
1. 78 period simple
2. 21.3.05 volatility stop
3. 9,2 Keltner channel
4. 67 period exp average of low with .11% bands (unichannel 67L, 11%,11%)
Chart Patterns to Be Familiar with: Charts in print copy
Using the technicals:
- the 78 simple is used as a coarse filter to gauge what is up and what is down - we will look at its value when the trade is setting up and its value 6-periods ago. The direction that it is facing is the "true" trend of the market - remember the true trend on a 1-minute can be of very short duration (and frequently is) - this system was developed to solidify (qualify) my entries on the 4-minute
- the volatility stop (Welles Wilder) gives us a couple trades we wouldn't otherwise have without it. By the way, the VS concept is by far the best thing Wilder has ever developed. It can be modified to fit any time frame with different values.
- Keltner channel gives us a "fast" channel to contain market movement
- unichannel gives us a "slow" channel to contain market movement
- when 3 and 4 are in general agreement market will change direction
1. all entries are stop entries
2. when you are 40 pts ahead go to theoretical entry for a breakeven trade -move your stop to this price - if you were trying to buy 74560 stop and your actual fill was 74565 and price touches 74600 (40 points profit) your stop goes to 74560 not 74565 - this will keep you in a lot of good trades
initial risk is between 50-60 pts. If the pivot is greater than this much you
should either skip the trade or arbitrarily risk no more than 60 pts
Number 4 with charts is in print copy
Many times on the 1-minute the 78 line will appear flat and you have to physically go into program to get values.
Shorts are exactly the opposite - before you go any further in this article take a pencil and paper and construct the shorts so you have no doubt about how it will look.
Type 1 buy - Look at Figure 1 - Sloppy! Not so bad when everything is color coded. Hard to show without color, but follow on and we will learn the first buy.
step 1 - qualification 1 met
step 2 - trade can be taken above 78 or below 78
step 3 - reversal bar must form at bottom of Keltner Channel or bottom of unichannel (either or) - if reversal bar occurs at bottom of Keltner low must also at least touch center of unichannel step 4 - at time of trade 78 must be higher than 6 periods ago
Look at Figure 2 where the actual trade sets up. The actual trade is a stop entry 3 ticks over the top of the reversal bar. The high of the bar is 74260 so our entry is buy 74275 stop - our protective stop is 2 ticks under this pivot if it is filled. The low is 74230 so our protective stop is 74220.
Look at Figure 3 for trade as it expands. Depending on the volatility of the day, I try to make $500 $1000 on each trade. Look at Figure 4 for a trade that occurs at the very bottom of the swing.
Type 1 Sell - Sells are exactly opposite of buys. Look at Figure 5. Notice on this particular trade that both the top of the Keltner and the top of the unichannel came together at the same time. Normally both don't come together at the same time. It is imperative that you move your stop as soon as your breakeven level is reached. You will have many break-evens or small losses. With this system by itself there is no way to rectify it.
Castle Buys or Sells - These trades are basically the same as the type 1 trade with the exception of the pattern of entry. Instead of the reversal formation there is the castle formation - everything else is the same.
Look at Figure 6 for sell. Look at Figure 7 for buy. In all of the previous trades the 78 was facing in the direction of the trade. In all buys this period's value was higher than the value 6 periods ago. In the case of the sells this periods value was lower than the value 6 periods ago.
Screamer Buy - I have only seen this trade on buys. It may or may not exist on sells. My feeling is that it probably does. Again Qualifier 1 must be satisfied. This trade uses the 78 line and reversal bars.
It takes two things lining up. the 78 and: center line of Keltner or bottom line of Keltner center line of unichannel or bottom line of unichannel Look at figure 8.
Volatility Sell - Qualifier 1 has to be in effect.
Anytime that the volatility stop and center line of Keltner or 78 are together take trade with either reversal or castle pattern. Look at Figure 9.
This system should provide you with all of the action (as well as profits) that you could ever want. I always try to get my students to paper trade for a couple of weeks before they put their money on the line. I would suggest you do the same.
I can be reached at 217-347-5101 during market hours if you have questions.
Editor's Note: Terry included many charts in our printed newsletter.
Liang Zhou - I would like to get more information on how to trade futures. Some people say futures trading is very risky, but you can make quick and big profits if done properly. In the past, someone in the USA, through correspondence, introduced me some sort of training course on futures trading and claimed that his method is very simple and I could never lose if following his methods. He did not tell me exactly how, of course, because I would have to pay to purchase his training materials. I don't know if futures trading can really be as simple as he claimed and worth purchasing his training materials (around $350). I would appreciate if anyone could advise.
G. Tudor-Matthews - I have about $2,000 in a mutual fund, but I am getting nervous the way the stock market is behaving; it simply cannot continue to make new highs indefinitely - someday there will be a day of reckoning. Someone suggested to me that a Canadian, a William Grandmill, was exceedingly successful trading soybean options, and that's because there is constant demand for soybeans and their by-products, it was a relatively safe way to get into the commodity market. Grandmill wrote a book about it, which I have, but I am uncertain about whether I have enough capital to take option trading on. I am retired, living on a fixed income and seeking a practical way to augment a somewhat meager social security check. So, given these parameters, would you agree with my friend's advice and, if so, how much do I need to trade soybean options at a minimal level?
David Lamkinl - I am interested in taking a course that would give me strong fundamentals of options and futures trading. It should be well done and easy to comprehend. If you can be helpful to a novice trader, I would be grateful. Thank you
Ron Eckert - I am somewhat interested in joining a commodities club to interact with other traders. Being a novice futures trader, I need exposure to other traders to learn and exchange ideas. Are there any members in your club from southern California? I do use SuperCharts and I'm a technical trader.
Editor's Note: We have many active members in Southern California, which by the way, has more off-the-floor commodity traders than anywhere else in the country. However, the geographic location of our members is not important as we normally communicate via the newsletter, with little, if any, personal contact.
George Campbell - I noticed on the Website, reference is made to "webtrading," and in the most recent issue of CTCN, you explained about the e-mail address change. I assume the web page is more up-to-date than CTCN. Was unable to find "webtrading, what's the story?
Editor's Note: As explained earlier, even though our name is "webtrading", we are not currently involved in actual real-time trading over the Internet. We do eventually plan to do this, but we need authorization from the CFTC before we can proceed. In addition, as of now, there are technical difficulties in trading via the world wide web.
About your assumption our Website is more up-to-date than this newsletter, this is incorrect. The newsletter is much more up-to-date than the Website. The Website is mostly used for prospective clients to obtain information prior to joining CTCN and not designed for any recent or current information.
Michael E. Mobley - Before I submit personal information (i.e., home number and address)l would like to know if your newsletter also includes insights from different traders about current market trends and viewpoints to which they anticipate prices to move. I actively trade option contracts on the grains, cotton and livestock. These are areas I am mostly interested in at this time.
Editor's Note: We are an educational type of newsletter and not an advisory service. There is little, if any, coverage on current market trends. In addition, since we are not a CTA, we are not permitted to give specific trading advice, as mentioned previously. If you want specific trades, CTCN is not for you. You should contact an advisory type newsletter, a hotline, a market analysis type of publication, or a CTA, etc.
Tim Majewski - Everyone I've talked to so far, says stay away from futures because they are too risky. My wife and I aren't scared off yet (high risk tolerance???)! Why are you and those you're associated with so enthusiastic about futures?
Editor Comments & Announcements
A number of members have incurred problems contacting us via e-mail or have not received a reply from us. This is because for various reasons we have changed e-mail addresses and providers four times in the past 7-months. Our current e-mail address will in all likelihood (barring unforeseen problems) be permanent. It is ctcn@web-trading
By the way, if you did not receive a response from us, either via your e-mailPhone call, letter or Fax, we do apologize to you. In addition to e-mail, we also incurred communication problems due to both new mailing addresses and new telephone and Fax numbers. Please resubmit any communications to which you did not hear back from us. Sorry for any inconvenience or problems this has caused you.
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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