Issue 10

Can Money Be Made Based on Price Movement That Takes
Place Just Prior To The Close? - David Stone

This research was done using data from the Live Cattle market over a 4-1/2 month period. The results probably would be similar using data from other markets but I've not verified that to be correct.

Using my Quote Machine I made a note of the price exactly 30-minutes prior to the close each day. On the next day I noted the opening price, the days high/low range above or below the open, and closing price. Days were ignored if the 30-minute price and subsequent close were the same.

During the test period a total of 61 trading days had up-trends the last 30-minutes, and 78-days had down-trend the last 30-minutes.

Next Days Close Higher 62% of Time
Next Days Close Lower 56% of Time

The results were bullish for the next day if the price trend was up during the last 30-minutes, a total of 38 out of 61 times, or 62% of the time.

If the last 30-minute trend was down, the next day was likely to be bearish 44 out of 78 times, or 56% of the time.

This test has some good statistical validity. It seems to me that a good trading system could easily be developed based on this research.

Unfortunately, the percentage numbers may not be quite strong enough to make the potential trading system that reliable or profitable. However, with more extensive research done in a number of varied markets, and good money management skills, any potential system based on this research could in fact be highly profitable.

Additional research needs to be done on this subject to decide on the reliability of any potential system based on this concept.


Can Money Be Made Based on Difference Between Closing Price
and Settlement Price? - David Stone

Did you now that the official settlement price and the actual closing price are frequently different and quite often are changed some time after the actual trading ceases?

Some Club Members may not be aware of this fact. However, if you have a quote machine I am sure you have noticed this regular occurrence.

The market stops trading and perhaps Soybeans last tick at exactly 679. Usually, about 10 to 20-minutes or so AFTER all trading stops, the Exchange gives the day's so called settlement price, of say 678-1/2.

Official Closing Price Not Necessarily Based
on The Last Actual Trade That Took Place

Thus, even though the last actual trade was at 679, the official closing price will be 678-1/2 that will be published in newspapers and data vendors.

Another example is TBonds last trading at say 113-04, but about 15-minutes AFTER trading stops the Exchange reports they settled at 113-03.

Why does that occur? The exact reason is somewhat unclear. However, it seems to be related to the fact the Floor Brokers do some type of settlement between themselves after the actual close of public trading.

It's Possible To Make Money
Based On Close/Settlement Phenomenon

Is there any way money could be made based on this common settlement procedure? Quite possibly! I tested this concept in the Live Cattle market and discovered the following:

A total of 30 closes were observed where the final settlement price was higher than the last tick actual trade price. On 22 days the next day's closing price was bullish, or 73% of the time!

A total of 28 closes took place that resulted in the days final settlement being lower than the day's last tick. On 21 days the next day's close was lower, or 75% of the time!

This analysis is far from complete. Additional markets and a greater time period need to be analyzed. However, there's a reasonable chance money could be made using these observations and concepts.


Opinion on Swing Catcher - William Taaffe

I wanted to let you know that I am quite impressed with Swing Catcher System and the level of support Dave Green have provided me following its purchase.

The system really does a marvelous job of standing on its own. I found it very easy to set up and operate.

In fact, I am not sure that the well prepared manual is really needed for successful set up and operation of the system. However, I appreciated the in-depth work put into it, because I love to read all I can about the background and operation of what I am doing. It has satisfied my appetite.

At the personal level, Dave Green being available to me every time I have called with computer or trading related questions is most appreciated.

Many people and companies make attractive promises of support after purchase, but many do not deliver. Dave Green has lived up to his advertised promise.


By Not Quitting When Down - You Too Can Trade Successfully
Robert Edwards

For most traders, commodity trading is a roller coaster ride. Climbing the hill is often slow and tedious, no sooner do you get to the top, you fall off a big drop and end up below where you started.

The slow back and forth climb can take weeks, but a large loss comes so fast and carries our wills to win with it. A loss can be so devastating!

Realize then that you have made money before and you can do it again. Keep following your plan if it is a proven plan, or try to make the necessary adjustments, but don't quit when you are down!

The sun will come out tomorrow. It is always the darkest just before the dawn. I have made some of my biggest trades right after big losses.

I may be unique, but when I get down, I really get serious and disciplined and trade my best.

I have to watch myself when I get in a hot streak. That is when I get reckless and play hunches rather than stick to my plan. Or I will not be selective and take marginal trades; or I will refuse to get out when a mental stop is hit and add to a losing position and really get clobbered.

Quit When You're Ahead and Never Quit at the Bottom

Quit when you are at the top of the mountain, after a big win. A roller coaster rider can be saved a lot of grief by quitting at the top of the hill before the big plunge. After the plunge, it's too late.

Stop when you are ahead or after you have come back substantially. Never quit at the bottom!

I once gave up commodities for good (I thought). I could trade and make money, but after a big loss I always quit. Then I began trading mutual funds and I discovered a secret that has made all the difference. In March 1990, I began mutual fund switching in an IRA account and because it was my retirement money I could not quit. Also the account wasn't leveraged so I had staying power.

Losses Made Me Feel Like A Complete Failure

On my first trade, I bought gold shares and quickly lost over 12% of my capital. I started with $8,000 and was down $1,000 within two weeks. I stayed in and in August, 6 months later, the Iraqi invasion of Kuwait rallied the gold market enough to let me out. I was so relieved.

I switched to technology and health section funds and by January 1991, I was a thousand dollars ahead at $9,000. Just before the Iraqi invasion, I again bought gold shares at the top of the market.

When gold plunged the next day, I was down over $1,100 to $7,900. I jumped out at the bottom and put my money in a money market account. I buried my head in the sand. I was a failure. Not only could I not trade commodities, but I couldn't even trade mutual funds that were not leveraged.

I saw the stock market rally and I stayed out because I missed the bottom and thought I couldn't afford another loss. I stayed in cash until late April, thereby missing a major stock market rally.

However, I then realized if I lost my money in the market, the market was the only vehicle that could ever bring me back.

You Must Trade With A Plan and Diversification

I got serious and began trading with a plan and used technical analysis timing and S&P to switch back and forth from sector funds to cash.

I learned to put only 1/4 of my money in on any trade any day and to diversity. In a correction, I would then have money left over to buy at lower prices and average down.

However, when the market exploded, I bought 800 in one day, knowing the momentum would carry me up for a few days.

Because I was in a no-load account, a $25 gain was meaningful because there were no commissions.

50% Gain Thanks to New Approach
But Lost Money on First Commodity Trades

By the end of the year my account had started at $9,000 and grown to $13,500. I had a 50% gain for the year and a 70% gain from the low.

Over the two years I had averaged a respectable 25% annual gain. But had I quit at the bottom, it would have been different.

With these lessons I learned from trading mutual funds, I was ready to tackle commodities in August 1993. I started with $9,424. I began trading because I wanted to get in on the seasonal rally in Wheat. The market was very sloppy but when it started to get support around my $3.02 to $3.05 target, I quit day-trading to finally buy Wheat. I ended up buying December Wheat within 1/2 cent of the Sept. low. But then it started down, I jumped out just before it made a new fractional low. That same day the market reversed strongly back up, but I was already out.

I never got in Wheat again. I was frustrated and quickly lost money in Soybeans. I was devastated. My account was down to $5,500.

Made Money by Not Quitting At the Bottom Winning and Winning Big
- All My Losses Recovered and New Equity High

I always have a $5,000 yearly limit to what I am willing to lose in commodities in a year. Once my account was down $5,000 to $4,400, I would have pulled out, based on my yearly $5,000 money management stop.

I only had $1,100 more to lose and it was all over for the year. But this time, I remembered the gold losses in my mutual fund account and told myself I could not stop at the bottom.

I almost immediately started winning and winning big and caught the Cocoa rally on a couple contracts and in just a few weeks I had all my money back.

In November I hit my high water market of $11,200. It was time to quit now. I was at the top.

But with success, I became reckless since I was playing now on the market's money. I threw away my discipline and over-traded. A small move against me in a couple trades knocked me back to a low of $4,990 by mid-December.

That was when I had a real day of reckoning. This time my wife found out how bad I was doing and she was devastated. We went over 80% of my trades but a few losses killed me.

Success Made Me Reckless but Stopping Big
Losses Allowed the Gains For Successful Trading

If I could just stop the big losses, the big gains will put me on top. I got serious and decided I would only buy at support levels and would try and get out when the support levels were breached.

I would quit giving my hard fought gains back. I started on the road to recovery. By January 1, 1994, my account had $5,490 in it, a $500 gain the last couple weeks of December.

I Quit My Job Thanks To Trading Successfully

I have continued to gain and on Friday, January 28, 1994, my account registered an equity total of $10,544. I made over $5,000 in the first 4 weeks of 1994, nearly doubling my account for the first month. That weekend I quit my job at Employment Dynamics Inc., a private rehab company my wife and I started.

Confuscious said that you should choose a job that you love and you won't have to work a day of your life. In commodities I will work night and day because I love it so much, it isn't work.

Now Taking $2000 A Month Out Of Profits

I am taking $2,000 per month out of my trading account to pay my share of the household expenses. If I lose all my money I will have to go back to work with my wife. I now have real incentive to keep my commodity account above water (HA-HA).

Profits above the $2,000 drawdown I am going to place in a mutual fund account at the end of each month, so that I will have a nest egg to start over with if I have to and so I won't over-trade. I am very excited. My goal is to average $200 per day or $1,000 per week.

Had to Bypass Some Large Winners Due To Having A Small Account

On paper I made thousands and thousands of dollars in January, thanks to a new indicator I have developed. However, I could not take but a few of the trades because I had a small account. Things should be better in February, with the additional capital which should allow me to better diversify.

I am using the Swing Catcher program as a filter. I place my trades intra-day and look to get a confirmation with a corresponding buy or sell signal from Swing Catcher. If I get the signal from it I add a contract the following morning (adding to an already winning trade). If I don't get a confirmation from Swing Catcher, I will quickly bail out.

Making Money By Pursuing Winners and Getting Rid of Losers

By doubling up on my winners and getting rid of dogs and losers, I am hitting a home run or two each week. Despite the hours and hours of technical research, my trading boils down to my intuition.

I have recently been able to quantify what I am doing intuitively, into a set of indicators which gives objective buy and sell signals. I make daily calculations on 35 Futures Markets.

Each day after the close I calculate if I should go long or short or do nothing, based on what I perceive the market should do. Every time I am wrong I learn something. I really do believe it is possible to repeat what Gann did. Richard Dennis did it recently, as told in the Market Wizards book.

Mr. Dennis is my inspiration. He took a small amount of money and turned it into large amounts of money. Without dangerously pyramiding. He did it based on mathematical probabilities. I hope to do it too. If I fail, it won't be because I quit at the bottom. I have only one goal this year, that is I never allow myself to get over a $5,000 drawdown, no matter how much money gets into my account. I made money in January based largely on loss control. Now I need to learn to let my profits run a bit more. I am making progress.

Became Profitable By Not Quitting When Down,
Learn From Mistakes and Stick To A Plan

If I had quit when I was down to $5,500 or $4,990 mark, this would not have been possible. I wonder how many possible millionaires quit just before they learned that last secret which could have made the difference between mega-success and failure.

Get a plan and stick to it. Learn from your mistakes and don't get down on yourself. If you did it once you can do it again. It requires confidence. Richard Dennis lost money early when he started on the Mid-Am, yet he never lost confidence in himself. When he was interviewed for the first Market Mavens book he was in the middle of a horrendous losing streak, with accounts he managed losing millions. Yet he never lost his confidence. He was unshaken.

In November 1989, I had the confidence to start Employment Dynamics, Inc. and had the audacity to predict a million dollar gross by December 1994. I reached that goal early, in January 1994, after only 4 years and 2 months.

On A 5-Year Plan To A Million Dollars Trading Commodities

We billed our one millionth dollar. When I started the company my family laughed at my predications. They are not laughing now. I am now on a five year plan to net rather than gross, one million dollars in commodities. Go ahead and laugh now. We will see who is laughing in 5-yrs.

I have always had impeccable confidence in my paper trading. I now need to get that confidence in my real trading. Since I started my mutual fund account in March 1990, I have not traded well. Often my timing stunk. But I have managed to average over 20% gains per year in my mutual funds. In my commodity trading, a 20% gain compounded monthly, would increase my January 1, 1994 initial $5,490 to nearly $50,000 this year. This is the goal I have set.

I will keep you posted, so you can see how things turn out. But one thing you can be sure, no matter what happens, I will not quit when I am losing. I will not pull out at the bottom. Remember, you must never quit when you are down.


How I Lost Money By Trading Perpetual Data Instead of Actual Contract Data - Dave Montgomery

When I first started trading commodities some years back, I decided to build a computerized data base by buying Perpetual Data. I had read that CSI Perpetual Data was a wise choice for a data base because of several reasons.

For me, the most important reason was the fact I could save both money and time by simply maintaining one permanent data file per commodity. I would never have any reason to acquire back-data because the perpetual data was good for back-testing. I also read how well Perpetual Data mimics the actual signature of the specific contract months.

Therefore, I started trading April Live Hogs using my computerized charting software, trend lines and cycle analysis. After careful and detailed chart analysis, I determined with great confidence the Hogs were bullish and would continue moving up. Consequently, I decided to trade April Live Hogs strictly on the long side based on my bullish chart analysis, etc.

How's It Possible To Be Losing When I'm
Trading In Same Direction As The Trend?

Much to my chagrin and light pocketbook I had a string of consistent losing trades. After each loss I looked at my Perpetual Data bar chart in amazement and said to myself "how did I possibly lose on that trade when my chart is obviously in a bullish trend and my trade was betting it would in fact go up"?

After 7 out of 8 losing trades, all on the long side of Hogs, the reason for the loses suddenly hit me.

The Reason For My Loss Was Due to Not Using The Correct Data

As I was looking at my bullish looking Perpetual Data Live Hog chart I also by chance happened to look at chart of April Hogs from a charting service. It immediately dawned on me what was going on. The chart service specific contract month chart of the April Contract had a decidedly bearish look to it. However, my Perpetual Chart had a definite bullish look!

Why was my Perpetual Data chart bullish looking but the April Chart bearish looking? That's because the Perpetual Data was based on a blend of the two near contract months, April and June.

Due to seasonal factors, the June Contract happened to be strongly bullish but the April Contract I was trading was somewhat bearish.

In addition, since the Perpetual contract is weighted based on 'X' number of days into the future, the bullish June Contract was getting much more weighting than the nearby April Contract. Thus, the Perpetual price was based on a blending of the 2 contract months and it was heavily favoring the June Contract. That resulted in the perpetual data looking considerably more bullish than the April Contract I was actually trading.

Trading Against The Trend Without Realizing It and Why Perpetual Data Should Not Be Used By Itself For Actual Trading

Consequently, all my losing trades on the long side were going against the negative trend of the April Contract. The trend was bearish, but I thought it was bullish because my Perpetual chart looked bullish. I can't blame CSI for this because their sales literature did not say you should trade using the Perpetual Data, which is artificial data. In fact, CSI infers Perpetual Data is most valuable for historical testing, rather than actual usage for real-time trading.

Now I know to only trade using actual contract month data. In fact, I use back-adjusted Continulink (Continuous) Data, which is based on the actual contract month being traded.


What I Didn't Like About A Competing Newsletter ... Too Many Vendors - Also, Information Wanted - Phil Baker

I like the idea of a newsletter like this. You and the readers should help each other through this Commodity Traders Club News each month to learn how to trade properly and give ideas.

I subscribed to another competing newsletter once for about a year, but the writers and readers were always pushing products of their own, or if they wrote in about a product they didn't or did like it, but they never told why. Also, I don't want to pay for a newsletter unless they tell why they do or don't like a system and how the system works.

I would think CTCN has some subscribers who use SuperCharts by Omega Research. So I would like your readers to give trading ideas each month to be used with SuperCharts. I would also like you and your readers' opinion on Nature's Pulse System from Ed Kasanjian Research.


How I Made Enough Money To Pay For the New House I Am Building - Don Smeathers

I'm very happy with the Trend Index Trading Company's Dow Jones Trading System for trading OEX Index Options.

The strategy I have found most productive is to put on credit put spreads each month using the total number of contracts from the buy date with 5 contracts for each buy.

The target is usually the strike price I sell and the current spot (cash) is the puts I buy. It takes $1,000 for the first 5 points spread difference and $500 for each additional 5 points.

Thus, $5,000 will permit 5 contracts to be written with a five point spread (sell 445 puts buy 440 puts). The short puts are the only contracts bought back when the stops are hit. Using this strategy with the Dow Jones System, in 4 months I have made enough money to pay for a new home. I started with $50k - I now have over $100,000!


My T-Bond Trading System - Frank Morgan

I want to share some information and make an offer. First, by way of introduction, I have been following various commodities for many years and have been a trader since 1990. I have been a diligent searcher and have had some success and some failures.

Recently, I have come upon an approach to trading T-Bonds that was quite rewarding, yet surprisingly has had no drawdowns to-date. This is not my system, nor is it available to me on disk yet. After looking into it, I've started to trade it. The negation of drawdown is accomplished by scaling the number of contracts available; an account of about $25k is needed to take advantage of this scaling potential.

I would like to have partners and co-traders with me. I am offering a return of 40%, payable as 10% per quarter to be sure there are issues of trust and success here.

The most effective way I can think of to address those issues is to offer to send by phone/Fax the trading signals as they are generated and to do this for some reasonable period of time to potential co-investors. Realistically, the position we are going to take tomorrow and then the analysis of how that position performs at some time in the future is the most effective way of convincing myself and/or anyone else what a system can be expected to do. If interested, please call me at 404-525-1130.


Solving The Problem of How To Get On Board A Run-Away Market, Thrust Trading Method - submitted by C. R.

The problem with getting on board a runaway market may be solved by using what is called the thrust method, which is useful in establishing positions in runaway markets with definable risk.

The thrust method helps you overcome the problems of catching a running bull (or bear) market. If you buy (sell) at any price, you might buy the high day just before a significant correction.

Getting on board just prior to a big correction would require additional margin money to stick with the position. On the other hand, if you buy during a correction, you never know how many days the reaction will last.

To use the thrust method in a bull market, you must first have a down day where the high is lower than the previous day's high and the low is lower than the previous day's low.

Three days are marked on the March NYSE composite index chart which satisfy this requirement. (There are also some others that are not marked, such as the setback on December 6, which gave another profitable signal.)

Runaway Bear Market Entry Technique First Requires An Up Day

In bear markets, use a reverse of the method for a bull market. In runaway bear markets, you must first have an up day where the high is higher than the previous day's high and the low is higher than the previous day's low.

Let's take the setback into the December 2 low as an example. The December 2 setback has a high that is lower than the November 29 high and a low that is lower than the November 29 low.

After the first down day, a buy stop is placed over the high of the down day. In this example, the buy stop is at 118.30, which is just above the December 2 high. If the correction continues, lower the buy stop to just over the high of the next down day as long as prices retreat.

Prices did not make a new low on December 3, so the buy stop could not be lowered. (Inside days are ignored, and the previous day's highs and lows are used as your key chart points.) The buy stop was filled on the December 4 rally to new highs.

You Always Know Where Your Stop Is

Whenever you enter the market using the thrust method, you know exactly where your protective stop will be. Once the buy stop is filled, the initial stop loss protection using the thrust is just under the reaction low. For the entry at 118.30, the protective stop is at 116.95. End.

P.S.: The Thrust Method is reprinted with permission of Commodity Closeup. However, I (C.R.) personally differ a little with it because I believe that a market does not have to be a "runaway" for this to provide some help in managing money positions. Chart in Print Copy


EDITOR'S COMMENTS

A special note from the Editor: For a number of years Futures Truth has done a great job of carefully testing some 200 different trading systems.

For your information, Swing Catcher was tested by them for 4-yrs from 1990 thru Jan 1994. Their latest ranking in January 1994 had Swing Catcher Trading System ranked as the 5th best trading system tested by them, since release date, with a 78% return.

However, starting with the Feb/Mar issue, Swing Catcher is no longer ranked by them. There are several reasons for my asking them to discontinue the tracking. The main reason is because as a result of their admitted lack of resources, they were only able to trade it using a fixed portfolio of just 4-markets that were originally randomly selected.

The system in actuality follows 35-markets, and then ranks the best 18-markets to be trading based on their trending characteristics and profit potential. Due to their being able to only track 4-markets (DMark-BPound -TBonds-Euro$), it resulted in their published results being considerably different than actual results. That's because some (possibly all) of the markets Futures Truth was tracking may not have been the same markets being traded by system users.

System users are in fact using the built-in Trend Ranking capability to isolate the best markets to be trading, and then selecting from that list of 18 recommended markets, ranked in-order.

The Futures Truth ranking (though quite good and complimentary overall), was nevertheless at certain times, considerably different than the results system users were achieving. Thus, to avoid any confusion or discrepancies, I thought it best if they stopped ranking it for now, or until we can figure out a solution to this problem.

With reference to Dave Montgomery's contribution about how he lost money due to using CSI Perpetual Data for actual trading. I just read the CSI Version 4.05 Manual and will quote some of the contents about their Perpetual Data: "Many traders have found it very helpful as both an analytic and trading aid ... It represents a weighted average of the two contracts that lie adjacent to a given period-ahead point in time ... Traders employ this concept to study a markets characteristics, etc".

Unfortunately, Dave realized too late that this data is not recommended or suitable for actual trading. As stated by CSI, it's only a trading aid.


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Special Note: 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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