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Sheep in Sheep's Clothing - Patrick Smith

We have become accustomed to seeing contributions from the ever growing flock who have discovered that they can make money trading stocks from the long side during a bull market. As brokers like to say, "It's easy to confuse a bull market with brains" (or trading ability). It happens in every mature bull market and this has been a big one. But the tone of the most recent "bull market supertrader's" contribution provoked me into a response.

I bought my first stock in the early 1960's. Western Equities (later renamed Westech) was at 22. In a few months it had appreciated to 60. I returned from a vacation in Europe to find that trading had been halted. The last trade had been at 45. Many months later I sold it on the day trading resumed at 8.

From that time on, I wanted to be a stock trader. But how to learn? In 1970, I took a job as a retail broker (customers were individual investors) with a large Wall Street firm.

One of the first things I learned was that you could make a lot of money as a broker, specialist or OTC market-maker. But for our stock trader customers, commissions, bid offer spreads and fees translated into steep transaction costs of about 1% in the case of liquid listed stocks and 2% or more in the case of thinly traded unlisted stocks. Even with discount brokers I could never figure out how to get round-turn transaction costs much below 1%.

I also learned that while our trading customers did well while the markets were going up, they gave it back when the markets went down. By the end of the first year of the '73-74 bear market, all of our traders had either blown out or wouldn't speak to their broker.

I further noticed that we all had customers that had been with the firm for years, but never listened to our advice. Once every year or two they would call and place buy orders for stocks, but not the ones we recommended. Sometimes I would call one of these independent investors and recommend a stock or relay a sell opinion on a stock they owned from one of our "expert" analysts. They would listen politely and ignore the advice.

One customer actually bought more of a stock our analyst was bearish on. He (the customer) was right. These "buy and hold" customers were the only ones who made money. They didn't have yachts, but by avoiding the transaction costs of trading in and out (not to mention capital gains taxes) they were able to make market returns. Of course, if all of our customers had used the buy and hold strategy we (the brokers) would have gone broke. So we didn't mention that strategy to other customers.

But, the biggest thing that bothered me about being a stock trader was the bear markets. I knew there would always be bear markets and that they were hard to predict in advance. I knew that everyone who held stocks lost money in a bear market, so the only way to avoid one or two years of losses was to be out of stocks and in cash equivalents.

So even if I was the one out of a hundred who could see one coming and get out of the market, what would I do while waiting for the bear to run its course? Trading stocks solely from the long side is an incomplete strategy. If you're to be successful, it's only a temporary job.

In 1977, I became an institutional equity derivatives broker (customers were pension funds, mutual funds & insurance companies) in Chicago. There I learned how insiders beat stock traders.

Did you ever notice how a stock often goes down 10-20 or even 30% before the release of bad news? Here's how. When a highly disappointing event looms on the horizon, company management has a tendency to sell a lot of their stock. Most of us would too. Then they get their friends and relatives out.

Next they repay their favorite analysts (the ones who have recommended their stock over the years) with a hint of trouble ahead. The analysts get their most important customers out. Their most important customers are, of course, the largest institutions so this can result in some really big selling. Only now, after the stock price has discounted the new fundamentals, do we see the news release.

Warren Buffett said, "If you're in a poker game and you don't know who the mark is, you're the mark." A big poker game run by a casino is an excellent analogy for the stock market. The brokers, specialists and market-makers are the house. They take a cut from every pot. Players at your table include insiders, their friends and institutions. They know who the mark is.

So I never could figure out how to overcome the stock markets' negative edge of high transaction costs and the insiders' advantage, except to try for the market return with a long-term buy and hold strategy. If I traded in and out, I would use up my 10% historical stock market return edge with a few trades and an insider donation or two.

What would I do about the bear markets? The historical return is an average annual return over many decades, but the market doesn't pay off that way. It's up 30% some years and down 20% others.

Then the S&P futures began to trade. You could round-turn $100,000 worth of 500 stocks for a $25 commission plus a $25 tick or two. One tenth of 1% was all a round-turn would cost and the insider edge was diversified away. Going short was as easy as going long, so bear market profits were possible. I found an edge and made some money.

In 1988, I left Wall Street to trade for a living. My partner/wife and I bought SystemWriter (preceded TradeStation) and went to work. We had to pay our dues, but we now trade eight markets (four currencies, bonds, notes, Euro's and S&P). Our transaction costs are never more then 1/10th of 1% and are largely offset by interest received on margin and cash balances.

The only insiders that can "punish" us are the central banks and sometimes they end-up as the marks. We have a complete strategy that trades both sides of every market. Every year a couple of markets are trending and some years most are trending. Those are our best years.

My point is that if you can't make it as a futures trader, it is extremely unlikely you will make it as a stock trader. That is not to say that if you take a long view (more than ten years), buy and hold good stocks or mutual funds even though they may decline for several years, you won't be able to realize a return comparable to the market return.

There, I feel better now. But I doubt my thoughts have saved any bull market stock traders from the next bear market. They always figure they can beat the game with their superior stock selection (after all, their latest hot stock did out perform the market). Or they figure they will know the difference between a correction and the start of the next bear market, or maybe this time is different.

An old broker I sat near during the growth stock binge of the early seventies used to say: "If God didn't want them sheared, he wouldn't have made them sheep."

Writing Systems with TradeStation - Bruce Ballard

In the last few weeks, I have written what I thought were some really good systems. I tested them on historical data supplied by Omega and they were showing results like 70% winners and very little drawdown.

My surprise was finding that TradeStation was not evaluating the systems correctly. My mistake was using daily bar charts for my setup, entry and for stops. Even with a stop of $1,000, TradeStation could not tell if my stop was hit or not. Price could go $2,000 against me, but if the day ended significantly up, TradeStation would probably analyze the trade as a winner.

To correctly analyze the results, you have to use a small-time frame for the stops. I think anything over 5-minutes and you can't be very sure of the results. So the problem comes in of having plenty of daily data, but little intra-day data. Also it's much harder to write systems using two time frames. I wasted a lot of time. I hope this will keep someone else from doing the same thing. The systems may still be good, but I can't be sure.

Comments Regarding the Last Issue - Don McCullough

Appears to me as though you are making a great success of the newsletter. Shall we shed a tear for Bo of Club 3000? Perhaps not, eh? Continued success.

T. Judd, be careful with your scale trading. Sooner or later a market will drop to totally unexpected levels and you will be forced to take a whopping loss. If you have "deep pockets" this may not be a problem for you.

Theoretically, a person with huge sums of money could buy a market at a low price and as it kept dropping, keep buying, doubling each previous amount at preselected levels. Once the market finally bottomed-out, your last position would be so huge you would break-even and start making lots of money with a relatively small up move.

This kind of scale trading is calledThe Martingale Strategy and is mentioned by Larry Williams in his book, The Definitive Guide To Futures Trading, Volume II. On the surface this method appears to be foolproof.

With further thought, you find you might have to wait a year or two for a market to bottom-out. In the meantime, you might have a nervous breakdown! Too, the market may go primarily sideways for a year or two while you're holding gigantic paper losses -- wouldn't that be fun? This method would also often require rolling over into succeeding contracts.

That could entail a lot of commissions once you had lots of contracts. Also, the month you're rolling over into could be at a considerable discount to the one you're getting out of. You'd also have to space your purchase levels so as to avoid going over the number of contracts allowed a single individual by the exchange.

As Larry says, "if you want to try a trading method that will really get your heart to pumping, try the Martingale!" I wonder if this method is used successfully by some of the big boys, especially those who are well connected and know when they and their cronies will make a bottom in the market with their huge buying power. The legal term for this is "collusion." In the case of speculative markets that's when traders work together to illegally stop or move a market.

Speaking of collusion, what's to keep several large traders from wearing headsets in order to instantly communicate with each other and buy and sell in a huge manner and cause major, if not minor market turns? Of course, I would expect them to place their orders in a manner so as not to raise suspicion. Anyone have any thoughts on this? Have traders been caught doing this?

Earl McHugh - I think you are correct in being most impressed that the most successful traders who write articles in CTCN seem to be self-taught and follow simple methods. I would add, as a pro once said: "Simple but not easy." I am totally convinced that getting rid of huge amounts of misinformation or clutter is a big part of the battle when it comes to trading success.

I believe the better pros have a double lock on their profitable trading chest. One "lock" is the difficulty of discovering their outstanding signals or knowledge. The other "lock" is the self-confidence or psychology required to trade these signals in a consistent, and thus profitable manner. Actually, there may be a third "lock." That is, enough capital and available time to gain the actual trading experience needed to achieve a really good trader's psychology.

Evelyn Mooney - I can easily identify with your being too paralyzed to trade. Take heart. I read of one successful pro trader who says he's had this problem and it's very real. Your statement: "I've lost lots more money by not trading than I ever lost by trading," is also something I can very much appreciate. It sounds like you really know what to do, but you can't bring yourself to do it consistently. Welcome to the club!

It may well be that once we gain enough self-trust to trade nearly all of our signals, we'll do better than we ever imagined. I say nearly all because I don't think it's possible for the discretionary trader to see, let alone take, 800 of the signals 800 of the time.

Some pros have referred to this as "trading full-out" and say this is what you have to be able to do in order to succeed. This "full-out trading" may well entail a lot of reversing or establishing an opposite position at the same time you're exiting your old one. My experience watching the intra-day movements of the S&P market tells me the better pros are doing this a lot.

Self-trust or self-confidence. Is anything more important in any field of endeavor? Trusting yourself to find the best answers to successful trading and trusting yourself enough to trade those answers. In very basic terms, I think that's the solution most people avoid and that's the basic reason most people fail. It takes a self-confident, independent, individualistic and very determined kind of person to accept this self-trust solution.

Even with equally good knowledge a relatively inexperienced trader is at a considerable disadvantage to the very experienced pro -- especially with respect to daytrading. Most of us have a degree of fear the better pros have not felt for years.

When daytrading the S&P (other markets too) I find I must usually see or anticipate the signal and have the order placed -- all in one single minute. This kind of required, unhesitating, decisive action does not come easy to the inexperienced!

I'm talking about at-the-market orders here. Since placing limit or stop orders ahead of the signal should be psychologically easier to do, that might be the best types of orders for the newcomer to daytrading. However, the often long wait for the fill report from such orders can make them much less appealing. Here's where being "well-connected" or having your own broker on the floor would be an advantage.

Greg Donio - You state in your article that there's a theory the morning hours of trading are dominated by the amateurs and the afternoon hours by the pros. I don't know about all markets, but I feel strongly that the reverse of this is true with respect to the S&P market. I'm becoming convinced that many of the more experienced S&P daytraders trade the mornings only. Over many years, I expect they've become very intolerant of the boredom and long periods of focusing on the intra-day market. Many have probably even experienced "burn-out."

I'm sure many have chosen to trade only during the very active and liquid mornings which permits the best fills for their large orders. By doubling up their position size they can make just as much as they did with their former full-day trading and stay fresher both mentally and physically as a result. This is no small point: When you feel better you trade better!

In my opinion, morning only daytrading has a lot going for it. I know you can take a I or 2-hour break at the Chicago and New York lunch times, but I expect morning only trading may be the better way. You will often miss some great afternoon moves, but I think the more mature trader has learned to put himself and his overall well-being first. He's learned to be a master of the market and to prevent the reverse of that from happening.

Anthony Fote - Several issues back I had an article in which I listed my favorite books. That list has changed somewhat and here's my present favorite book list. The primary thing that separates these books from the 100 plus others I have, is they all contain advice from proven successful professional traders. Several of these books have a lot to say regarding the psychological aspects of successful trading.

In time you'll find that the knowledge of good signals is not enough. (DT) means the book is especially about daytrading.

Both Market Wizard books by Jack Schwager

Aerodynamic Trading by Constance Brown (DT)

The Innergame of Trading by Robert Koppel and Howard Abell

The Day Trader's Advantage-Howard Abell (DT)

The Intuitive Trader by Robert Koppel

The Outer Game of Trading by Robert Koppel and Howard Abell

The Disciplined Trader by Mark Douglas

These are now my favorites, but a few other general knowledge books like Jack Schwager's, A Complete Guide to the Futures Markets, would be a worthwhile addition to every trader's library. Person to person help from a proven professional is by far the best way to learn about trading the markets.

Even then the approach that "fits" him may not fit you. And a lot of people who have read a lot of books about the markets have failed with their trading. "If I know enough - I can do it," is true about a lot of things, but it's impossible to do some things well -- if at all -- merely from books. Actual experience is often required. With trading, sufficient experience can be more costly in terms of both money and persistence than most people can afford or are willing to pay. The better pros have the great advantage of great experience.

Someone once said: "Lovers who love truly never write of their love." What's meant by this is they are too busy loving and living happily to have time to write about it. I think about the same thing could be said about the better traders.

George Famy and Galen Cawley - I appreciate your response to my Things I Wonder About article in the last issue. I respect the real world experience you bring to the subject of professional trading rooms, but I still contend some of the best traders are in professional trading rooms. Maybe not in most of the banks or many of the others, but in some. Surely, banks and insurance companies with their great wealth would attract and be able to afford some of the better traders.

I think it's quite possible that some very good traders trade best with other people's money and may also be happier in the presence of other good traders as opposed to the aloneness or even loneliness of most individual traders.

Learning to trade is not my goal with respect to my wondering about professional trading rooms. l was just curious to know how the better ones selected and trained their beginning traders. MBA's don't mean much to me, and it's common knowledge that a lot of Ph.D.'s lose their shirts in the markets. I still think it's true that we need to trade as the better traders trade no matter where they trade from. No doubt, you would be best served to find the pro that trades in accordance with your personal temperament.

I agree and believe that some of the very best traders are loners. I think many of them chose trading, to a significant degree, to avoid being subordinate to others. Truly independent and creative thinking, I agree, can be vital to trading success and no doubt some of these very independently minded loners therefore start out with a more suitable aptitude for trading. I can see where a "socially conscious" Mr. MBA would have a tough time (and he's certainly not alone) of shaking off all of the clutter that's accepted as gospel by the majority.

Have the better independent traders taken away the dominance the professional trading rooms of banks, etc. once had in the markets? Were these professional trading rooms ever dominant? Years ago, I would tend to think so.

About "Omega's Total Lack of Quality" by Robert Gross - Peter Somogyi

I am a new member to CTCN and just received my new subscription together with the back-issues, all of which I read. First, I would like to commend our editor for his organizational and editorial skills and for publishing a newsletter that freely shares worthwhile information on a wide variety of topics related to investing and trading.

Second, I want to acknowledge that in each of the back-issues of CTCN, I found at least one article which was worth the $177.00 I paid for my subscription and back-issues. So for anyone who did not order all the back-issues with their subscription, I would highly recommend to reconsider.

As to the article submitted by Robert Gross regarding "Omega's Total Lack of Quality" I would like to share with my fellow readers my recent experience with Omega Research.

About a week ago I ordered the software "SuperCharts Realtime" from Omega Research asking that they send it express mail accepting the $30.00 extra fee for fast delivery. The software arrived on time all right, but inside the box I found some deficiencies. The content was not well packed, articles were loose. The downloader manual and instructional videotape together with some other promotional material were missing.

Needless to say I was disappointed and phoned my account rep. right away, but she could not be reached. I then asked to speak with a supervisor, but because it was nearly the end of the day Florida time, I could speak only with another rep who took down the details of my complaints.

The next business day my account rep, phoned back apologizing for the mix-up of their shipping department and offered to replace the order with new software at Omega's expense. Since I already evaluated the software the previous afternoon and thought that it was not what I really wanted, my account rep offered instead to send me TradeStation for evaluation free of charge whenever I was ready to evaluate it.

In addition to sending the TS software without any charge to my credit card, Omega Research had credited my credit card account fully, including the $30 express shipping charge.

So here is the moral of the story: When you are on the phone it is a good practice to be polite and courteous, even if you are upset because things did not work the way you expected them to. The person on the other end of the line is a human being and also deserves a certain amount of respect, especially when it is often not their fault that an order was not filled the way it should have been. It should be kept in mind that it is difficult to run a large business organization without a "glitch." After all the people who carry out our orders may make mistakes (and if you heard about "Murphy's Law" you know that they will make mistakes) for people have colds, flu, headaches, periods, PMS and whatever else, whether we like it or not.

A person who wants to be a successful trader (or human being for that matter) should plan accordingly. And that is the secret. Plan well, expect the unexpected, and not unlike a chess player think ahead a few steps in your planning.

But above all, strive to become fully human. Treat your follows with compassion and respect and you will, and in most cases, be treated the same way.

For those of you who do not believe in treating others humanly, at least consider your own bottom line. Examine my experience with Omega Research, they really bend over backwards to accommodate their customers' requests. And don't forget, to be courteous and polite. In addition, it's the right thing to do and also makes good economic sense!

Thanks again for your excellent newsletter.

Interpreting the Information Age - Nagaprasad Mummaneni

I'm a subscriber. I received a free copy last year and after reading it, I immediately subscribed. It is interesting to read the tales of different people making and losing money in the markets. I lost money in bogus oil, gas and real estate partnerships. This was all before I woke up and smelled the coffee. All of this was before 1985. I do my own investing now. In July 1996, I registered as a CTA.

In this electronic information age, winners and losers have the same access to the same information. It's all how fast one gets it and interprets it that makes the difference. This same information is sold commercially by different vendors in different forms. It's up to the person to understand it and use it successfully to his advantage.

In my first profession we used pulmonary artery heart catheters to gather information during various heart surgery procedures and to treat the patients. I always said any catheter is as good as the person who uses it. What makes the difference in the treatment is the interpretation of the information given out by the catheter and not the catheter itself.

A buy signal given out by one mechanical system may be a sell signal given out by another system! I have tried most of the systems on a trial basis (example: OptionVue, SuperCharts, Opcalc and many other mechanical systems) without any great results. Maybe my interpretation was wrong! For the mechanical systems who claim sure profits and no interpretation needed (idiot proof or no brainer) I suggest the customers ask for a guaranty of the money invested through the system. It is not the amount that is spent to buy the system, but the amount of money lost trading with the system. If their (mechanical system vendors) claims are so good they should stand behind what they sell. Systems that help you to devise your own methodology for testing are desirable (example: TradeStation).

At the present time, I use DTN for real-time information and quotes and Knight-Ridder end-of- the- day news and quotes.

Books and seminars are wonderful for education. One should read and hear about the experiences of professional trader teachers and accordingly modify your trading behavior (if you are a consistent loser in the markets). If the systems are so good, the sellers would be making money in the markets for themselves.

More than anything else, psychology and capitalization plays a big role in the markets. Under capitalization for the faint hearted may ruin them even if their picks are in the correct direction, because of a temporary set-back. A disciplined trader will win over other traders in the long run.

After studying the global currency and interest rate markets for 2-years between 1991-93, I have started trading for my own accounts since 1994 in the currency markets. My excellent results in currency markets with my bi-directional conservative currency trading program gave me a boost to register as a CTA. Now I offer guaranteed Principal for 1-year to my customers.

At this time I cannot go into the details of this trading program. This program is simply the reversal of buying futures and hedging with options. As far as I am concerned, this program is time tested for me with real money (mine) and works well. This program is good not only for currency and interest markets, but also for S&P 500, NASDAQ 100 futures markets.

At this time, I trade only currency and interest rate markets for the clients. This program is excellent for the inter-bank markets in currencies, but requires huge capital because of the size of the contracts that trade in the inter-bank markets. This program as per the name, does not make you rich overnight, but makes enough profits 30+% per year. This is for non-trending markets. If the markets are trending, profits could go over 100+% per year.

There is no free lunch in commodities. The letters printed in CTCN are proof that only 10% of the traders make it in commodity trading and 90% lose. Everyone who trades commodities strive to be one of the top 10% winners.

This is not intended for commercial use by me. I am trying to get the point across to investing customers and traders about the realities in the industry. To show that I am not bluffing about the guaranteed Principal, I am enclosing my disclosure document (for your information). Your comments are most appreciated.

Walk Forward Testing - Ed Forys

Now, let me see if I understand correctly. You bought a system for X dollars. Then you back-tested it against a bunch of old data. The results were favorable, so you started trading the system in real-time. You believed that you had thoroughly tested the system that you had just bought.

You Dummy! What makes you think that the vendor hasn't already used the same data that you have to curve-fit his system and get the right answers?

Without a true walk forward test using data that the vendor/system/program has never seen, you don't have a chance of making money. Oh sure, the system might do OK for a while. But sooner or later, it will undoubtedly start to lose money and at best allow you to trade with only small losses (mainly commission and slippage). Trading commodities is not exactly a zero sum game, the broker always makes money on a trade.

It took me a long time to understand and appreciate the value of walk forward testing and I believe it is mandatory for evaluating any system. There are other things you must also do which I am sure you have already heard about; but, if you don't do a true walk forward test, the rest is meaningless.

A Note to Bob Perry - Larry Williams

I think Bob's still in a pretty bad mood and took a broad side swipe at guys like myself . . . who have tried to share some understanding of how the markets work.

Bob said he'd tried lots of stuff and "Larry Williams seminars (lots of TS systems that have made money over the last 10 years, but they don't work anymore."

I'll be the first to admit that not everything I have learned, traded and taught has held up as well in the future as the past . . after all, the future is pretty fickle. I take no umbrage at shots at me or my work.

But to say, "they don't work anymore" forced me to check out how some of them have done. I started with the original "Mother" of all volatility breakouts, sold in 1986, and ran it with the exact same parameters and markets as taught back then. Guess what, it netted $63,525 in the S&P's this year, $15,968 in the Bonds.

I then ran my OOPS! system for the S&P and again we saw profits, this time $7,800 over the last 3-years with no losing trades. OOPS! was first made public about 10-years ago. I then ran one called 6X6 for the S&P . . . it did not fare as well this year, but is ahead $6,450 as of 10/7/96.

My point to Bob is some of this stuff has held up, has been profitable and has made money. Other stuff hasn't or I have made some alterations . . . all systems . . . just like all traders . . . run hot and cold. You bet, my system development has not panned out sometimes. But to make a blanket statement suggesting none of them worked in the future simply does not square up with actual performance

My Experiences as a Floor Trader - Jim Molinaro

After reading CTCN for a few months, I thought it was time to contribute.

Started trading in 1982, as a Floor Trader, and have been trading ever since. Made the transition from floor trader, to off floor several years ago. It was quite a journey needless to say.

I would like to relate a story that occurred about my second or third year as a floor trader. It's a theme that I see repeated over and over again and would like to reiterate the importance of planning and simplicity.

During those early years, my entire life was consumed by trading and success. It seems there was not a moment during the day or night that I was thinking about or working on trading. Of course, my thinking and working was all wrong and disorganized at this time in my trading career.

Everyday I would arrive at least one hour prior to opening, and review all the numbers, news and other irrelevant BS . After the close I would do the same thing. Things just weren't working out like I had planned. The money wasn't flowing in.

There was a young trader named Tommy who would stroll into the pit at no set time, just whenever he got there. He would trade ten and twenty lots for a few hours a day. He was making several thousand dollars a week.

I was in total amazement of this guy. How could he be so successful? It seemed he hardly worked at it, where in contrast I was consumed by trading. One day I asked Tommy how he traded so successfully. He told me all he did was buy breaks, and sell rally's at the support and resistance numbers. If prices broke through those levels, he would immediately take his one or two tic loss and reverse his position, if the order flow was sufficient. He traded like this on normal trading days. On trend days he would go with the market action.

Many months later during one of my soul searching periods, I realized why he was so successful. He had a very simple, but effective trading plan. He took small loses and let his profits run. He knew where he was going to enter, put his stop, reverse, and take his profits. He had a great mental attitude, very positive upbeat type of person, extremely relaxed and nonchalant. Intuitively he had mastered what I call the 3-M's. Which is Mental, Management, Strategy and Method.

Later, I found out from a fellow trader that Tommy had been on the floor a year or two earlier and "Busted Out. " Evidently he paid his dues and learned from his mistakes, persistence paid off!

Review on Power Trading - Richard Storck

Thanks much for all of the work that you put into CTCN. It's a great help to all of us.

Like most of you, I trade. I am not yet trading like I plan to. That is trading for a living, but each day I am trying to get a little closer. Part of getting there is learning to separate the information from the facts. Then separate the few important facts from the many trivial ones.

What I have found thus far, is that there is not just a lot of information out there, but a lot of hype and far too little good information. What I have been getting from CTCN for the last year is a lot of very honest and excellent information, and it has helped me, so it's time I tried to do my share.

First, over the last few issues there has been discussion about setting up a library. My feeling is that I would much prefer some in-depth book, course, and seminar reviews from those of you who have participated. This would help the rest of us know where the good information is and whether it's worth paying for and putting into our own library.

"Risk of Ruin" Calculations - Tom Dyste

I have seen numerous articles mention risk of ruin, and several rules of thumb, such as don't risk over X% on any one trade. But no one has cited what I consider the best implementation of this mathematical calculation.

Ralph Vince, in his book about math formulae for portfolio management, provides a calculation that is simple enough to be practical for normal traders. I started out looking for answers in the gaming literature. I soon hit a dead-end, because in futures trading the size of "wins" does not equal size of "losses" which among other things, makes calculation of risk of ruin a severely complicated math problem. Vince's approximation brings a useful calculation within reach of anyone wining to work for an answer.

Ruin is defined as the loss, from a starting amount of capital (investment), a user-chosen fraction (MaxRisk) of the starting capital. Basically, you calculate the odds you will go broke (ruin) before you get enough profits stacked up to statistically out run the chances of ruin. There are other ways to use this formula for capital allocation and risk management. But a basic task is to know what level of risk your back-tested system, named, say, "Holy-Grail 87b," has of losing the nest-egg your wife will let you risk trading it.

I found a book by Balsara (book title has been forgotten) which cited Vince's formula in enough detail to test and study it in Excel. I have reason to believe the formula is sufficiently accurate to be useful. Balsara's book is best found in large university libraries, or in Agricultural College libraries. I found it in the Oklahoma State University Library. I have never sought to locate Vince's book.

The attached Excel sheets show first the formula at work, then the cell contents showing the exact implementation that produces the results. Cells F7-F11 (trading is a crap shoot) are where your inputs are entered. I just got a sales flyer on Dillon's Trading system, so I took the total winnings ($576,428) and divided that by number of winners (86) to get the average win (cell F7, $6,701). A similar process gave the average loss (cell F8), and the 69 break-even trades noted in the sales flyer are ignored for this example.

The Investment is supposed to be your total account size, and MaxRisk is the fraction of Investment you are willing to risk on this system before stopping trading. For simplicity, I enter 1.0 into MaxRisk (F10), and then whatever amount of money I enter into Investment (F9) is all considered at risk.

The only other mandatory input is the probability of any trade being a winner. Most system testing tools give you a "percent wins," which you convert to a probability (e.g., a number from 0 to 1) and enter into cell F11. In this case, I used the number of winners (89 trades) divided by winners+losers (89 + 49) from the system sales flyer. If you are not a systematic trader then your percent wins, average win, and average loss will vary with the phase of the moon, hormone levels, time since last traffic ticket, and intensity of your civilian job's distractions from your trading. Until you trade long enough to get a track record, this formula won't be useful.

All other cells are calculated values, or fixed text for readability.

For Dillon's system in the junk mail flyer, the risk of losing $10,000 from a standing start calculates to 3.70%. Personally, I trade at 2% risk levels because I have had enough "ruin" to last me quite a few years already.

The more risk of ruin you accept, the higher your return on capital and the sooner you will lose your capital. To make this 2% calculation, I just plug in different Investment (F9) numbers until the risk of ruin (G14) comes out close to 2%, and allocate that capital to trade that system. You can use Excel's "Solver" or "Table" capabilities to munch this formula through more cases, but I find this basic spreadsheet is all I really use.

Risk of ruin is extremely non-linear based on changes in any input value. Ralph Vince has done a great service to traders by concocting this "fair approximation" for our use. If more of us used it wisely, the average time traders take to reach ruin would no doubt be extended, saving brokers and telemarketers hours of work drumming up new victims.

A final example of how I use this formula is to calculate the amount of money that gives me a 50% chance of ruin. It will be a much smaller amount. For our sales flyer example, it is $2,100. This means I could trade the system with only a 50% chance of losing that amount from my starting capital.

This letter does not offer any opinion of the advisability of buying or trading Dillon's Trading system. Since the flyer placed the system's results in many of our mailboxes, it was chosen to demonstrate a real-world application of the formula.

I trust some will find this formula helpful in their trading.

Requirements Of My Personal Trading System - WTG - Toronto

Have been trading for some 20-years with lots of ups and downs. I have found what works for me is to develop my own trading system that is unique to me. Requirements of my system are:

1. I am very comfortable with it;
2. I have a lot of confidence in it and;
3. Over 90% accuracy.

These three above items are absolutely required essentials for me.

I have back-tested my system over the last 4-years in all commodities and over the last 20 years in one commodity by itself as a final check. Have found trading in the 70's and 80's to be different from today's trading. Thus feel it necessary to backtest in these various periods.

Is An Educational Training Course Giving Advice? - Cal Boicourt

I'm amazed to hear that the CFTC is "apparently" saying that you are giving trading advice.

What you have done is show me how you daytrade the S&P futures index. You have not given me any specific trades to take, nor any advice about the condition of the market. I believe it is absolutely proper for you to share a methodology that you use, as long as there is no specific investment advice or no specific entries or exits given.

I don't consider getting your educational information any different from reading a book on how to daytrade the S&P.

I appreciate what you do and wish you the best.

What Happened To Swing Catcher System - Rodney Gibson

I hated to hear that about Swing Catcher. You have a very good program. Is there anything about the program that caused you to stop selling it, or are you working on new products.

I do need to start Autosig files for 97. If I create some new files will Swing Catcher write the information to the file?

Editor's Note: We are no longer supporting or selling Swing Catcher and have no SuperCharts version available. The CSI/Trendx Portfolio should work fine with CSI's new Advantage.

Asking for Advice - David

Have you checked-out web-site/URL: (http://www.trading.com)?

What do you think? Any help there, for your going more 'international'?

What do you think, too, of gold, silver, platinum, and palladium, here?

Editor's Note: I looked at the site trading.com. Very interesting. . . thanks!

Sorry, I can't give advise on the metals. The CFTC may be alleging that I have been giving "trading advice" without being registered with them. Until this matter is settled, I can't give any form of advice.

Feedback On Real Success - Method Donnie

I thought I would drop you a note to let you know how pleased I am with the Real Success Method. I am presently paper trading the method and have been averaging $150 to $200 per day until 7-16-96. On that day I made paper profits of $12,425. I am very excited about this method and am looking forward to trading it real-time. Thanks again for all your help.

Message From Happy Subscriber - Jeff Salisbury

I've been subscribing to your excellent newsletter for over a year now. Listening to other neophyte (and more experienced traders) is really helpful as I claw my way up the learning curve. Maybe I'll write something for the club. I've been daytrading T-bonds and am finally starting to get the hang of it and show a profit.

Well, gotta go. Good luck in your endeavors and thanks!

More Real Success Methodology Feedback - Bob Stephanak

Thanks for putting together the Real Success Methodology tapes and manuals as well as the newsletter which I recently received. I have learned much from the tapes and the first issue of the newsletter was, in my opinion, very informative. It definitely exceeded my expectations.

So far, I have not traded the methodology in real-time, but I expect to do so in the next few months. I recently purchased TradeStation 4.0 and am becoming familiar with using it. I do not as yet have a real-time quote feed, but I am able to practice analyzing the market through the tick data which is available from Omega Research.

You might want to mention that Omega Research clients are able to download tick data via the Internet which can be used for TradeStation. This data is free to Omega Research clients (it can only be used, however, with TradeStation). I find this data to be very valuable in learning the methodology as long as you realize that it has its limitations compared to real-time data.

These limitations are:
1. there is no pressure to "think on your feet" and make decisions within a very short time span and;
2. no matter how hard you try to not look ahead at the remainder of the day's price action, I think that it does subconsciously affect your trading decisions if you have seen the day's price action, even briefly, or know what the range for the day was.

One suggestion for coverage in the newsletter. I would like to know more about how the Keltner reversal bars influence your trading decisions. You don't seem to talk much about them on the tapes but, since they are included in the software, you obviously place some importance on them. Any additional guidance on possible interpretations of these bars would be appreciated.

An Insiders View On Why "Discount" Daytraders Don't Stand a Chance - Advantage Trading Group

There are many reasons why daytraders lose money. The following are a few the industry would prefer you didn't know.

By R.S., President of Advantage Trading Group, a discount firm catering to daytraders.

When I tell prospective clients that I can do at least 60% better trading their system through our firm than they can do trading the same system through one of the 'big three' discounters, they usually don't believe me. Then I explain some of the reasons why I feel it is impossible to make money for any length of time Daytrading through a typical retail firm.

The following are what I have found to be the biggest reasons for a Daytrader to fail, that 99% of all the Daytraders I have ever spoken to did not know.

1. The Handshake: Most traders realize that calling direct to the pit is essential to their success. I won't waste time expounding on the reasons for this. It's what happens once you get the clerk on the phone that's imperative. Most firms require the client to state their name, their account number, their password and then their order. Provided the clerk understands all of this and does not make the client repeat anything, then the order will go into the pit. This says nothing of the time required to pull up the client's account in the computer and make sure there is enough money in the account to be allowed to place the trade.

The handshake can be, and is much faster with our firm. Each client is "pre-approved" to call the pit. Therefore, the only identifying statement necessary is a three digit office code (this lets the clerk know which firm the client trades through). The trader states the following: "699 Buy two Dec. S&P's at 750." The clerk then repeats the order and if it is correct Arb's it into the floor broker.

This may amount to a difference of 10-20 seconds per order which at first may seem a little trivial, but once you add up all the time wasted it's amazing. Let's figure an average of 2.5 trades per day, and look at the difference. Two and a half trades per day is a total of five orders placed per day (buys and sells). If the time saved is only 10 seconds per order, that adds up to 50 seconds saved per day. With 21 trading days in the average month, that adds up to 1050 seconds or 17.5-minutes per month, and a total of 12,600 seconds or 210-minutes per year. Think about how much movement that equates to in the S&P. Needless to say, this makes a tremendous difference.

2. Market Orders: Free Lunch For Floor Traders: Does your broker answer the phone with a Real-Time bid or offer? When you call direct to the pit, the clerk who picks up the phone should be giving you the current bid or offer. The reason for this is to let you know where the trader can execute your order. Example: "S&P 35-45" A trader looking to buy can reply: "699 buy me 2 Dec. at 45" and expect to be filled. However, if at that same instant the client replied "buy me 2 Dec. Market" the best that client can expect to be filled at is 50. Most retail traders do not realize that Market orders always give up one-tick. This is why people pay hundreds of thousands of dollars for exchange memberships.

Once again, lets look at the big picture here. If a client executes two market orders per day in the S&P, that's $50 per day he is contributing to the "lunch fund." Over the course of a year that's $12,600 most retail traders don't even know their losing.

3. Day trade Margins: Margins are set by the exchanges, not the brokers, and there is no such thing as daytrade margin. Margins are calculated at the end-of-the-day, which means a $5,000 account can do 100 round-turns during the course of the day, and as long as he is flat, there will be no margin call.

"Discount" brokers set daytrade margins for two reasons. The first is obvious: to protect the firm from deficits. It's the second reason which isn't so obvious, Float. As most of you realize, firms get paid interest on the unused portion of customer funds. This of course translates into large profits. By requiring larger account sizes for daytraders, the firms make more money on the "Float."

4. Commissions: Everyone pays commissions and no one likes it, but the days of the $18-$25 daytrade commission are over. When I talk to a prospective customer who is paying what I consider high commissions, the first thing I do is break out the calculator and show them the difference between our $12.50 rate and their current "discount" broker. The average rate I run across is around $20 for daytraders. This $7.50 difference per trade translates into $4,725 in commission savings per year for a trader who averages 2.5 trades per day.

5. "Bucket" Accounts: One of the least known facts about "Discount" brokers is that they set up what I call "Bucket Accounts" for their floor traders. This is an account that may start with $50,000 or so that the trader has given to him by the firm, and he gets to split all profits generated. I personally know of brokers at two of the largest "Discount" firms who have these accounts.

When I tell someone this, I like to say that "being on the floor is like having a license to steal, the last thing the firms should do is give them an account to put it in." Slippage is a part of the business, but I find it hard to believe that some of it isn't slipping into these "bucket" accounts.

Editor's Website Update Bulletin dated 7-23-97: CTCN at one time recommended Advantage Trading Group to our clients and many of them opened accounts there. However, ATG did a couple very serious things. Things like allegedly revealing confidential information on our account and P&L information (which as an interesting aside was false or exaggerated information) in violation of both our signed Non-Disclosure Agreement and common industry ethics. This confidential information was allegedly given to third parties who had no interest or involvement in any way with our trading activities, including a private trader Mr. Joe Bristor and to the Editor of Club 3000 News, Mr. Bo Thunman, an unfriendly rival of CTCN's.

In addition, Advantage Trading Group also reneged on an oral contract they had with Commodity Traders Club News. We did lots of work on ATG's behalf over a nine-month period and were not paid for all our efforts. The last time we talked to ATG on 7-7-97 Mr. R.S. said there is "no way he will pay" and hung-up the phone. As to why the contract reneging occurred, we really don't know, as Mr. R.S. gave no reason for the non-payment. He did offer us some excuses, stalling tactics, and arbitrary changing of the contracted rules after the game had started and was well under way, during the nine-months the staff of CTCN worked hard for him. What does this say about him and his firm?

We are now surveying CTCN readers to see how many opened trading accounts at ATG from Oct. 1996 thru July 1997. Please let us know if you did. Thank you for your help.

Gann's Rules For Successful Trading In The Futures Market

Michael Riley, publisher of the Gann-Elliott Cycle Report offers the following rules for trading in the futures market that W. D. Gann used to become a successful trader.

1. Amount Of Capital To Use: Divide your capital into (10) equal parts and never risk more than 1/10 of it on any trade, (try 5%). In today's market, you should work with at least $10,000, preferably $25,000, in risk capital and not risk more than 10% on any idea. If you try to work with less capital or don't have enough risk capital, I believe you should not trade commodities. This capital should not exceed 10% of your net worth.

2. Use Stop Loss Orders: Always protect a trade with stop loss orders to limit your losses. In today's market, use a (3) to (1) risk-reward ratio, risking no more than 10% of your risk capital, (try 5%); risk $500 to make $1,500, or do not make the trade.

3. Never Overtrade: This is violating your capital rules. Put only 10% of your capital at risk; never put more on any one idea.

4. Never Let A Profit Become A Loss: After you have a profit of $500 or more, move your stop loss up to break even so there will be no loss.

5. Don't Buck The Trend: Never buy or sell if you are not sure of the trend as indicated by your charts and rules. If you can't determine the trend to be either up or down stay out of the market.

6. When In Doubt, Get Out: Conversely, never get in until you're sure by using your trading rules.

7. Trade Only Active Markets: Keep out of slow, dead ones.

8. Distribute Risk Equally: Follow only (3) to (5) markets, trade in two or three different commodities. Trade a mixture of metals, grains, meats, currencies and interest rate futures. Small Traders try grains, meats, metals and foods. Large Traders can use any of the markets.

9. Use Market Orders To Exit A Trade: Trade at the market when you liquidate a position. Limit orders to enter a trade, but market orders are the best to liquidate.

10. Don't Close Out Your Trades Without A Good Reason: Follow up with stop loss orders to protect your profits. Let your stops for losses take your position out of the market. Short-term Traders liquidate at Double Tops, Double Bottoms, and Triple Tops, Triple Bottoms, unless the market is moving extremely fast, hold at Triple Tops and Bottoms.

11. Accumulate A Surplus: After you have made a series of successful trades, put some money into a surplus account for a buffer.

12. Never Buy Or Sell Just To Get A Scalping Profit. Trade with the trend for the long pull. The more you enter trades, the more risk you take.

13. Never Average A Loss: This is one of the worst mistakes a trader can

make. For example, Gold bought at $400 per oz. falls to $450. Don't buy more to average your price at $475. It could fall to $450 again leaving you twice the loss.

14. Never Get Out Of The Market Because You Have Lost Patience: Nor should you get into the market because you are anxious from waiting. For example, if you are holding Gold long for (2)-(3) weeks and it goes nowhere, as long as the trend is up, and you are not stopped out, stay in.

15. Never Cancel A Stop Loss Order: Once it has been placed at the time of the trade, leave it. This is the kind of discipline needed to make money.

16. Be Just As Willing To Sell Short As You Are To Buy Long: Your objective is to stay with the trend and to make money. If the trend slows down, sell on rallies to buy back at a lower price.

17. Never Buy Just Because The Price Of A Commodity Is Low Or Sell Short Just Because The Price Is High.

18. Be Careful About Pyramiding At The Wrong Time: Wait until the commodity is very active and has crossed resistance levels before buying more and until it has broken out of the zone of distribution before selling more. Adding to your positions can be very profitable at the right time. Select commodities with a strong trend up when buying and with definite downtrend to sell short.

19. Never Hedge: If you are long one commodity and it starts to go down, don't sell another commodity short to hedge it. Get out of the market. Take your loss and wait for another opportunity.

20. Never Change Your Position In The Market Without A Good Reason: When you make a trade, make it with good reason according to some definite rule. Then do not get out unless there is a definite indication of change in trend.

21. Avoid Increasing Your Trading After A Long Period Of Profitable Trades: You should keep a disciplined, planned trading program based on 5%-10% risk.

22. Don't Guess When The Market Has Topped: For long-term Trades (one month or more), let the market prove it is at its top. The same holds true for bottoms. By following definite rules, you can do this with accuracy. We give you how many times a top or bottom should be tested before breaking out.

23. Don't Follow Another Man's Advice Unless You Know That His Trading Systems Work.

24. Reduce Trading After The First Loss - Never increase! Risk 5% on the next trade.

25. Avoid Buying or Selling Late: These are double mistakes.

When you decide to make a trade, be sure that YOU are not violating any of the (25) rules. These are vital to your success. It is important to have enough money to trade these markets for many years to come. Proper use of risk capital will keep you in there. When you close a trade with a loss, go over these rules and see which ones you have violated. Then, do not make the same mistake again. Experience and investigation will convince you of the value of these rules. Observation and study will lead you to a correct and practical theory for successful trading in the futures market.

Editor's Note (Bull & Bear): Michael Riley will send CTCN readers a FREE trial to the Gann-Elliott Cycle Report, weekly trading newsletter. Riley has over 28 years of experience in trading the commodity markets. Call 1-800-948-9317 or write Michael Riley, Gann-Elliott Cycle Report, Rt. 2, Box 71-Z2, Denison, TX 75020.

Comments Regarding Article "Omega Total Lack Of Quality" by Robert Gross in Aug/Sep CTCN - Jeffrey Leas

I felt obligated to write in rebuttal to the article by Robert Gross and his escapades with BMI and Omega TradeStation.

If one were to take the information in that article at face value without analyzing some of the circumstances behind the events, I think one would be led to believe that both of these vendors were the most unethical, profit driven sleazeballs in the industry. First a few observations about the article:

1. Mr. Gross apparently greatly underestimated the amount of time required to order, receive and install the hardware and software from the chosen vendors.

2. He also underestimated the complexities of coordinating the installation and integration of hardware and software from multiple vendors.

3. Mr. Gross apparently had neither the time nor the interest required to understand even the simplest startup procedures.

4. There also appeared to be something lacking in his ability and patience in working with others to resolve the problems.

Like Mr. Gross, I also recently endeavored to purchase and integrate the following: a Fujitsu Monte Carlo laptop PC with Win95, added an extra 16Meg of memory (from a 3rd party), added a Xircom 28.8 k PCMCIA modem, subscribed to AT&T WorldNet for Internet access, installed TS 4.0, installed DBC (PCMCIA FM receiver), installed FM antennae with signal boosters both at home and at work, installed the Real Success trading system in TS and finally installed MS Excel and wrote or modified a half dozen spreadsheets to assist with the trading and money management.

I wanted to emphasize that this entire exercise was not without its problems and it was not done within the space of a week. It took a day off from my real job and two phone calls to Omega. Three phone calls to DBC and one call to Fujitsu before it all came together. Although the actual integration took a day. I was prepared for the process to take longer. The technical support staffs of all parties involved were excellent. There was no finger pointing and everyone was very helpful with suggestions and maintained a very professional demeanor.

I have spent the last two weeks "paper trading in real-time" -- i.e., doing everything but make the phone calls to my broker. Most of the problems that I have encountered have been of my own doing.

Some observations and words of advice gained from my own experiences and observing those of Mr. Gross:

1. Be conservative in your time estimates - triple or quadruple them and be happy if it takes less time.

2. Recognize that you are not a particular vendor's only customer with problem at that time; like us, they have finite resources.

3. Read the instructions and documentation carefully before you install something.

4. Take advantage of the system's On-line help features.

5. Treat everyone you deal with, whether on the phone or in person, with the respect they deserve.

In conclusion, although it has cost me about $8,000 (exclusive of the trading margin) and two months of my time for several hours a day, I now have a trading system that performs well for daytrading and that I have confidence in.

With this out of the way, I look forward to facing and conquering the more difficult aspects of trading! With CTCN and Real Success, DBC and TS 4.0, "It doesn't get much better than this!"

Out-Of-Range Settlement Prices - Our Answer To An Overlooked Problem
Bob Pelletier - President of CSI

The process of building a trading system involves not only proposing a credible method for measuring market movement, but also accurately interpreting historical market information. Your successful simulated trading technique may not operate as expected in the markets if your data resources do not accurately express the market's behavior.

A basic flaw of many analysis systems which has been perpetuated by most data vendors is the assumption that the settlement price of a commodity is equivalent to the market's final closing price. In reality, the settlement price may represent a price outside the high-low range. Data vendors reluctantly adopted the compromise at the urging of the software vendors who wanted to keep matters as simple as possible.

CSI, fortunately always kept the data in their data warehouse in exchange released form, but at the urging of the analytical purist and with the flexibility offered by Unfair Advantage, we have been asked to unwrap the exchange released data set and provide the data in a way that is not subject to industry norm compromises.

Unlike security closing prices, the settlement price in the futures arena is the price exchanges use to compute daily gains and losses for open positions. Each day, following the final bell, an exchange settlement committee meets to establish the settlement price. They focus on the time and price of the last trade, the last bid and ask, and pricing information on more active nearby delivery months.

Very often, the last consummated price is used for the settlement. However, if trading is not continuous and the last trade for a given contract is not time-wise correlated with nearer and more heavily traded delivery months, more discretion is introduced. The resulting judgment can be a settlement that lies outside the high-low range. It can be a value where no trading occurred which can lead to confusion among traders and analysts as to how the true high, low and settlement should be represented.

CSI, in our QuickTrieve update service, and all of the eight competitive data vendors we surveyed handle the dilemma this way: If the settlement price is above the high, the high is adjusted upward to match the settlement. If the settlement is below the low, the low is adjusted downward to match the settlement. The result is an open-high-low-settlement data set that may include a range of prices where no trading occurred.

This is a convention adopted in the 1970's to accommodate analysis programs of the day. Then, as now, most charting programs required that the close be within the trading range. This convention was accepted as the industry norm.

Even sophisticated analysts could easily overlook the fact that the high, low and settlement information downloaded from your favorite data vendor may not fully reveal the market's past statistical experience. Traders should be aware that in the commodity markets, the given high and low may reflect adjustments made to accommodate decades -- old charting techniques.

We took a look at New York Mercantile energy markets to see how often the settlement price occurred outside the high-low trading range. Our analysis showed that at NYMEX, about half the time contracts more than three calendar months from their delivery month were affected. The price distance from the high or low of the day can easily become quite significant.

These more distant delivery months can represent about 10% or more of the total contract volume recorded. This suggests that at least 5% of the time a trader following these markets will be examining adjusted statistics. It should be noted that out-of-range settlements are more common at NYMEX and mercantile markets than at most other markets, but it can happen in all futures markets wherever the settlement mechanism is used.

If your system requires entering or exiting the market at the closing price and you used the settlement price as a proxy, then your results may be flawed. Similarly, if your system buys or sells at some projected price within the high-low range, you may be focusing upon a price that lies outside the actual trading range.

Simulated profit calculations could include transactions where no trading could have occurred. A failure to understand these points could cast doubt on your efforts to explore market behavior in search of workable trading procedure.

Fortunately, CSI appears to be one firm who has saved the true high, low and settlement price for every contract in our data base and our new Windows based Unfair Advantage software can chart the unusual price bars they produce and deliver data in your favorite format in the same way. An interesting observation on competitive data services, and where CSI deviates from the norm, is that every one of the eight who would take our call reported they could not recover the raw data to reveal the true high-low trading range in this way. Neither they nor their suppliers had saved the original information.

I could have supplied you with some charts to illustrate the startling differences between the way the exchange provides the data and the way data vendors have been supplying it. But I didn't know if you were set up to handle that in your CTCN News. With the click of a mouse, users of Unfair Advantage® can express data in "Chart A, Chart B or Chart C" form, as shown below depending upon the conditions and objectives of their research.

Editor's Note: The charts are published in our printed version of CTCN but not this on-line version you are reading

Case 'A's improved method of reporting high, low and settlement prices represents a real breakthrough in accurately interpreting historical market information. This type of charting eliminates the common flaw of assuming that the settlement price of a commodity is equivalent to the market's final closing price. It also avoids the common practice of corrupting the high-low range to accommodate an out-of range settlement.

Your successful simulated trading technique, operating on data resources which more accurately express the market's behavior will likely perform better in actual trading. If it moves only 1% of the losses into the win column, this could be a 2% total profit advantage and could be very helpful to every trader/analyst.

Case 'B' represents the current norm (possibly adjusted highs or lows) - Note that the voids in chart A were filled by extending the high-low bar to accommodate the outer settlement prices whenever the settlement was positioned outside the high -low range.

Case 'C' represents the adjusted settlements - The settlement may be adjusted to match the closest point in the high-low range where trading could have actually occurred.

To graphically demonstrate Case A exchange released data with data compromised as in Case B and Case C, I could have supplied you with some charts. I believe your readers may be able to use their imagination for this one. Or if they have a copy of Unfair Advantage(R) they can see the difference on their own. Take a look at NYMEX Crude Oil. You could use a January '97 or a February '97 contract for all three cases, but focus on a period earlier than October 1996.

Taking positions this distant from expiration would be a typical scenario followed by a speculator who is sufficiently risk adverse to track the market sometime before and away from first notice days in hopes of avoiding the receipt of a troublesome delivery notice. In addition, it would give such a trader sufficient time for his short-term trading algorithm to develop into a profitable posture before facing eventual contract termination or roll-forward.

If you go through an exercise of reviewing past data you will observe frequent evidence of trading voids in Case 'A' charts where the settlement regularly appears above or below the day's trading range. Each example of a void is an invitation to misrepresent the true high or low for the day by expanding the range (changing the high or the low) to include the settlement price or changing the settlement to approximate the closest possible close. Case 'B' and 'C' show two examples of how a data firm might arbitrarily compromise the day's trading action.

As I mentioned above, Unfair Advantage may be directed to display any one of the 'A, B, or C' possibilities with a single mouse click because the data in that system is represented in all three ways. Incidentally, Unfair Advantage comes with a 500 megabyte commodity data base that represents every market that our extensive green fact sheets identify from the first day of trading (back to the 1940's). The entire data base sits on customer PCs in no more space than is used by your WordPerfect or any typical word processor software.

UA also has extensive back adjusted, forward adjusted, Perpetual Contrac®, Gann contracts nearest future contracts, and open interest weighted contracts for every one of 436 commodities traded in 34 countries on 50 worldwide exchanges for only $26 or $39 (depending upon coverage) per month plus a nominal license fee. All popular formats are supported.

Trading Systems by RB from MO

Some of your contributors have developed trading systems which they refuse to reveal. Quite often they have a disdain for the popular technical analysis tools and systems. After what happened to Welles Wilder when his Delta club system was revealed by some switch. It is the better part of discretion to simply keep quiet about a unique successful system.

A successful system becomes the standard against which other technical analysis is compared and evaluated and usually found wanting. Moreover, if everyone used the same system it would soon become compromised and useless. It is for this reason that I have not bought into any systems myself. Nor do I have any fancy software/computer setup. I use DTNstant as a quote service which is adequate for my needs.

Some 10-years ago I took an interest in futures trading, bought books, took chart services. Then about 6-years ago I discovered a unique leading indicator and from that point on have found no need to use standard technical analysis.

There are only two other sources whose work I find of any value at this time. It has convinced me that if W. D. Gann was as successful as touted, then he did not reveal his real secret, but concealed it artfully with a time consuming and arbitrary system.

The ongoing discussion of whether one system or the other is good/no good is a lost cause. I feel, because each successful trader must develop his own system - a principle spoken to be the best books on trading. How can anyone system be considered as fitting everyone's trading style or requirement? The best one can hope for is to have access to a smorgasbord of ideas out there and dish up a system to his personal liking. There are few short cuts to paying your dues. If a system is so proprietary that it cannot be revealed, then it doesn't have anything to contribute to one's own development as a trader. Such black box packages are for those that prefer to run on autopilot and suffer the consequences.

Anyone who complains about system packages not doing what they expected is like someone who complains about having bought a college degree without taking the course and then wondering why he isn't competent.

If package trading systems are not worth the money and intrinsically cannot deliver success, why bother with them especially if someone is so proud of his that he wants to defend it with a lawsuit. Let him keep it to himself. Large corporations do not package their secrets for sale. They guard their secrets. They patent their ideas, then they can license them with the protection of law. System vendors should do the same if they want similar protection. Have you noticed how hard it is for some traders to keep a secret?

When a trader finally develops a system that works, he begins to recognize the valid trading elements of others that coincide with his methods or reinforce his methods. And when a trader develops a successful system, why would he reveal it? I would not expect him to except that he might reveal some elements which are common knowledge, but overlooked by most.

I'm sure there is more than one Holy Grail waiting to be discovered and at least one of them will look as follows:
Ö it will be able to pick tops and bottoms (or pivots)
Ö it will give a signal which determines both the time and price at which to enter/exit
Ö it will signal a runaway move
Ö it will signal its own failure mode such that the market can be exited before or at break even Ö it will signal when to stay out of a stalled market
Ö it will identify by comparison, that technical analysis which doesn't work
Ö finally, it should be quick and easy to determine (either graphically or mathematically or both) in all markets and time frames.

Any systems which have success in some of these points are worthy of attention.

How to Avoid Paying Heavy Referral Fees to Your Software Developer - Bob Pelletier

Data seems to be more affordable these days, but many traders who do not engage CSI pay nearly double the going rate for the data they need to fuel their trading algorithm.

Popular trading and market study software is typically equipped by mainstream developers with either a "preferred" data vendor disk included in the study software package or an attribution link to the preferred data vendor from your main computer screen. By clicking on the computer screen attribution or installing that data vendor disk, you will be taken directly to the preferred data vendor's computer doorstep where you can supply your credit card and instantly sigh up.

When clicking that icon, the likelihood is high that you will unknowingly open the floodgates to begin a flow of money (your money) in the form of monthly kickbacks to the very study software provider you just paid for his system. How much? Perhaps half of the data fees you are obliged to pay the data firm go right back to the study software provider. And this free annuity to the study software provider will go on for as many years as you remain a customer of the data vendor.

Fortunately, there is an alternative to indirectly paying those heavy fees to the study software provider you thought you had paid in full. You can simply engage data firm that pays minimal royalties or none at all and pocket the difference. CSI's Unfair Advantage® software might be a viable alternative to obtain not only low cost data resources, but uncompromised data as well.

If you suspect your software developer has been profiting from your data fee payments, please don't accuse him of any wrongdoing. I'm sure he will truthfully state his position which can be as innocent as a marketing program to recover advertising costs. The fact is, you can find firms who are not burdened by such arrangements and reduce your overall market trading expenses.

And finally, should anyone want more Information on what we are doing here at CSI, contact us via CTCN.

Loving to Lose - Don McCullough

In many of my articles I have spelled day trading as one word. i.e., daytrading. I believe two, separate words is correct.

What's one to think about a guy who first says he believes in a Holy Grail and now he's saying you should love to lose? We all begin our efforts towards trading success with one primary thing on our minds -- winning! What I intend to prove in this article is how losing, or more precisely, losing properly should be the foremost thing on any aspiring trader's mind. I'll prove that many of the better traders learn to love their losing trades in a very important and meaningful sense.

You read it time and time again in the better books about proper trading psychology --"Successful trading is all about knowing how to lose." Or, "Trading is all about taking losses." Bill Williams, author of Trading Chaos, said old-timers used to tell him, "You have to love your losses," and Bill said this never made much sense to him. Actually, since I believe Bill is successful with his trading, I think he's had to make more sense of it than he realizes --- perhaps I should say, consciously realizes. I'm sure the same thing holds true for many other successful traders.

I believe that losing trades and learning to lose properly is the primary thing that makes successful trading possible. (And, the primary thing that causes the defeat of most traders). For one thing, if you're not willing to be in there for the losing signals, you'll also more often than not, fail to be in there for the winning signals or trades. A functional trader's psychology must accept losing as a totally necessary and vital part of the trading process. Losing makes winning possible!

Still, it's not enough to accept the fact that losing makes winning possible -- and ain't that a wild concept! You have to learn to be able to take those losers and not let them dissuade you from continuing to consistently take your high probability signals. (All of what I'm saying here assumes genuine, high probability signals).

You have to learn to take your losses calmly and keep on trading your signals. I can tell you from hard won personal experience -- this is no easy task! (This is one of the main reasons day trading is so hard. The day trader has to take many more losses than the long-term trader. Not only must he take more losses, but he must take them much more frequently. The next signal may be only minutes from the last loss. Your psychological recuperative powers had better be turned on high).

Another vital aspect of knowing how to lose is you must never give in to the temptation to ride your losses, which amounts to saying to yourself: "It'll come back." That type of thinking has ruined many traders. In other words, you must have the discipline to always cut your losses or keep them small. This is the main thing that will allow you to stay in the game long enough to become successful. (Another thing that will help keep you in the game is "go slow" or trade very sparingly in the early years).

Successful trading can be stated very simply.

1. You must have genuinely good, high probability signals. Certainties don't exist.

2. You must have or acquire the ability to trade these signals consistently without letting losses prevent you from doing so.

3. You must always keep your losses small.

I think I have proven how vitally important losing in a proper way is to successful trading. You may never learn to love your individual losing trades, but you just might come to love losing in the sense that losers, and how you handle them psychologically, are the very stepping stones to the winners and eventual trading success.

Patrick Arbor, chairman of the Chicago Board of Trade said: "It's very important that you know how to take your losses and come right back."

A pro trader once said: "You've got to turn your head around 180 degree in order to be a successful trader." I'm sure loving to lose, or at least, losing makes winning possible was part of what he had in mind when he made that statement. (Incidentally, buying and selling when most people are doing the opposite would also seem to meet the 180 degree requirement).

Sequel To Negative Omega Article - Robert Gross

In regards to Ensign, the beta program can be downloaded at:

www.srv.net/~ensign/dbc.html

If you have any problem, as they have recently changed their web page, just go to the basic page for further info on the Ensign for Windows program. I feel it will beat the socks off the TS., particularly for the $.

I suggest you talk to the BMI Tech support for their comments relative to the overhand of the data input. Two of their guys gave me the same story of delay.

As for Omega, here is my sequel for publication: As I had meant my letter of discontent published in the last issue, concerning Omega Research, and the purchase of TS, I should give the readers the final outcome of the whole situation.

After writing the letter, I further discovered that TS had a program overhead delay of approximately 10-14" as compared to my broker's screen on more than one occasion, which helped to explain the "negative slippage" that I was getting on fills.

I checked with BMI, and was told that it might be my computer configuration, as well as it might be part of the TS delaying data while it checked it before admission to the database. They suggested that I increase my RAM to 32 and activate Smartdrv, which Windows 95 doesn't use, as starter. I did that over the weekend and again checked with my broker screen, finding my delay now to be 7-12."

They also had strongly suggested that I download from the Internet the Ensign for Windows beta program (www.srv.net/~ensign) which I did. Here I was very pleased with the program, but particularly that my screen now lagged my broker by only 1-2." At one point I noted 6" delay, but learned that the delay varies from the satellite depending on market activity and associated "pit" factors. But mostly, in several checks with two different brokers, my lag is 1-3", a big difference from TS.

Now what to do with a $2,100 program that I don't like. I called Omega, and after some negotiation, they agreed to take it back, deducting only the 1-month usage cost, that I offered to pay, just to get away. Several days later Robert Ruiz left a message on my voice mail, that they now intended to refund all of my costs including shipping fees, and that they were very sorry that I was so unhappy. I am relieved, to say the least.

Even though Ensign, as a beta program, has a few bugs, which I am sending them info on, (isn't that what a beta tester is supposed to be willing to do)? I find their tech support extremely helpful, patient and considerate of my helping find the problems, along with many other beta users. I think it will be a real winner for much less money (monthly lease for < $25) and thus is what I would call a great deal.

I hope this will be of help to others of you. The only problem now is how to get the Real Success programmed into Ensign. Dave (CTCN) intends to look into it, I believe.

I also want to say thank you to several of you who have also written published letters giving me helpful ideas. I purchased Joe Ross' Trading the Ross Hook ($185) and found it very helpful. Even though I hadn't thought of myself as contributing much, I now realize how important the idea is. Think hard and write. It just might be the thing a few of us need.

Trading Success - Jeff Salisbury

Hey ho, we're back On-line. You may quote me.

Had a good and very lucky day in the bonds Thursday; I got in $240 off the bottom of the day's range and made $1,140. I had an order to sell me out at -04, but there was such a rush to the upside that I got filled at the high of the day (first time that's ever happened to me. l couldn't believe it).

I had an IB (I think) named Bill Hickman @LFG call me last month looking for business. He was a floor trader in bonds when they first started and he sure impressed me. We had opened on a gap up day the day he called. He said that when that happens and when the market trades back down through the previous day's high it usually bottoms out 10 ticks in. Well it did that day . . . to the tick!

He called me again a couple days prior to the low made on 10/16 @109-26. 1 asked if he thought the bonds would hold their current uptrend. He said yes, if the earlier support at 109-26 held, we should probably see 113 or 114. Well it held. I was short that day. Got out at 109-30. Wished I'd reversed and went long. Oh well, if wishes were horses. That's one for the "woulda, coulda, shoulda" department.

As for last Thursday's trade, I WCS ("woulda, coulda, shoulda") been trading two contracts instead of one, but I'd just had two big hits in a row and was being cautious.

Anyway, all this is by way of saying I talked with Bill about maybe writing an article or series of articles for us about his experiences trading bonds (my favorite market) and some of the techniques he used. He seemed interested. I told him I'd send him a back-issue of the newsletter. So, we'll see. I hope this meets with your approval.

Letter Written To Omega - William Raworth

Part of my problems may stem from both the fact that my 4.02 version is very new (in fact, a FutureSource expert told me that I was a "Beta tester;" if so, TS hasn't told me) and there may be some real problems with meshing TS with FS. The few Faxes that TS has bothered to answer don't even mention this as a possible excuse, however. For about 3-months I've struggled with your TradeStation 4.02, Build 12, using Future Source data. As an active daytrader, my patience has found its bounds, and all are labeled "TradeStation."

Let me share with you some major defects and outright mysteries I've encountered in my struggles. (These have to do with only variable charts and data windows; if I were to detail other faults -- such as daily "TS" crashes, I'd be writing until doomsday).

1. Each morning I have to set "Days Back" to usually 4. If I'm lucky this will stay so set for as long as 10-minutes, when TS will decide, without any warning to me, that this figure should be 2 (which really means 1-day plus about 10-minutes). When this happens, some indicators previously plotted either disappear or change drastically, and trendlines vanish or are re-drawn.

Editor's Note: My TradeStation 4.01 also has this problem. Each day, and sometimes during the day, my "Days Back" also defaults to (usually) 4-days. This requires constantly manually changing the days back setting to allow for more days of intra-day data to be charted and analyzed. This is a simple operation, but it's annoying to do all the time.

Normally, I prefer to have about 30-days of intraday data for better market analysis. In fact, some indicators built into our Real Success software require several weeks of intraday data to display properly on the TS screen.

Omega's tech support has walked me thru it and said it will now default to the number of days I selected and will automatically now save this new days back selection. However, it does not save it and always defaults back to 4-days or so. I may be wrong but it seems I recall it sometimes will go to 2 or 3-days for some odd reason.

Are other CTCN members also having this problem or is it only Mr. Raworth and I? Omega's tech support seems unaware of this problem, so perhaps it's an uncommon problem or maybe I am doing something wrong.

Please note I do not recall having the problems alluded to below by Mr. Raworth. Also, my TradeStation has never "crashed" in about 10-months of more or less continuous daily operation. In fact, the only "glitches" I have observed involve the "day back" setting and the "time of day" sometimes being wrong. For example, the time corresponding to a 5-minute bar may sometimes say 1:20 PM, but its really 11:20 AM. It seems the first time digit occasionally is missing from my screen chart.

These two fairly minor glitches are the only problems I have ever experienced with my TS. Perhaps I am lucky, or have a "good" TS software program, or a "good" computer configuration. Alternatively, maybe I am not using all my TradeStation features and power (I try to keep my trading simple) as heavily as others do and therefore not seeing the problems others have referred to in CTCN.

2. If I'm quick enough, I can click on my data showing in the chart window and go to View Data Windows and get to read a few of the figures of my RSPU6 data before it suddenly morphs into YXU6 Data Window. Just about when I've decided to multiply the values by 1.9 to approximate S&P values, the Data Window changes again to CZ6, which I usually find of no use at the time.

3. Because of the problem in 2. above, I hit on the idea of printing the page, hoping thus to "lock" my Data Window on to RSPU6. My first production was done on an ink-cartridge-depleting black background (even though your black background charts will printout cleverly with black lines on a white background). Further, the red data figures (which are what I wanted to study most of all) do not show well (as in "not at all") on the black background.

4. Next -- with the patient help of a Future Source expert (who, unlike you Omega people responding to Faxes, will actually talk live to me -- and about a TradeStation problem), I laboriously changed the black background of your Data Window to white. The trouble with this is that the price figures show as a painfully pale green on white, which I'm unable to change to a more visible color (even though I can click easily from color to color on the chart window on which the Data Window is superimposed).

5. Still speaking of the Data Window, it refuses to show the closing prices for any bar. (Inexplicably, on tick charts -- just where I need it the least -- the Data Window will proudly display O, H, L and C for each price. Of course, all 4 of these prices are necessarily the same, although I look for a surprise here any day now).

6. Something very odd happens in the first minute or two of every active variable chart bar. Using a 5-minute bar on the S&P yesterday, I noticed the "11:20" bar showed an open of 66440, quickly rose to a high of 66450 and then fell off. (I looked at the tick chart, and this seems correct). A minute or so later I look at this same bar and it then tells me the open is really 40 points lower at 66400, and the high is only 66430. This same insanity is repeated throughout the day.

Another war story: I was unable to take a look at my screen until about 10-minutes after the YX open today. My 5-minute bar chart showed me the high to be 35430, and I calculated a day-trade order based on this. Imagine my surprise (and concurrent loss of an extra $300) when I discovered later that the high immediately after the open was 60 points higher at 35490. I found that your tick chart also had it right, but your bar chart was still proclaiming 35430 a half-hour later. A final note about today's action: While flipping from my bond chart to the YXU6 chart, your program decided to change the latter to just plain old YXY. Luckily I caught on to this clever trick soon when I noticed my highs and lows were ending in such digits as "3" and "7."

Unless you can offer immediate relief in the areas mentioned above, just count me out of your laudably-ambitious, but as you can tell from my experience unworkable and downright dangerous TradeStation program.

Don't charge my credit card with another installment until you've cleared it with me that this impossible set of quirks has been cleared up.

Don't bother to work on stopping the daily crashes; they kind of keep me alert. But couldn't you figure a way to program an audible alert for crashes before you release Version 4.03? It's hard to enjoy my mid-morning coffee break for worry of an unknown crash and a therefore undetected penetration of a high or low alert I've set.

And this time, how about splurging a buck or two on an LD call? I don't think you can Fax your way around this.

The "Conservative" Approach - G. C. Campbell

Just finished the most recent Issue of CTCN and enjoyed it as usual. It is always refreshing to see how many of the contributions by subscribers that relate to my own trading experiences. Both good and bad. I'm sure that most of us who love "Trading" and survived our early mistakes, have not all traveled the some path.

But I'll bet we all (or nearly all) learned the same lessons, as they have been pointed out so clearly many times before. I'm sure like many, I didn't relate to these truths until I had a "lump" of my own. Experience really has a way of getting ones attention.

I decided back in 1990, that I was going to learn to trade commodities. I had a shipmate that I sailed with in the Merchant Marine that got me interested and guided me to books and information that began my education. For the next four sailing years, I divided my time between part-time trading and sailing as an officer in the merchant service. During that time I spent a considerable amount of money on books, data services and trading programs. For the most part, I consider this money well spent and necessary for my education. This is not to say that all the books were worth while, or the trading programs keys to success. They were not, but they did aid the learning process.

In January 1995, having had my fill of endless months at sea, I embarked upon my now profession as a full-time trader. Let me add, this was not a decision that was lightly made. Having to turn your back on a well paid profession to start your own business has more than its share of anxious late night episodes.

In just a few months, I will have completed my second year as a full-time trader and can safely say that I made the right decision. My time in my own and I really enjoy what I'm doing. So from my perspective and experience, what I call the "conservative approach," is to just take your time. Take the time to evaluate your trades, winners as well as those that fail. Go SLOOOOOW! Don't trade, just to be in the market.

I will use ATM orders only to add to a position or to exit in a hurry. I always try to enter and exit a position at a price and rarely use "stops" when initialing a new position. If I think stops are in order, then I probably shouldn't be making the trade, or I should be trading the options instead of the futures. So again, its the go slow approach.

In the past six years, I weeded my trading tools down to three things. First, I use FutureLink as my data source. Its an excellent service and quite reasonable and very reliable. The Futures World News that it provides is important to me. I started strictly as a technical trader, but as I progressed in my trading, the fundamentals now play an ever increasing role in my decision making process. FutureLink is a very good source for this information.

Second, I use a program called "Candle Power 5" from North Systems. This program will provide graphical display of twenty different oscillators. Either individually or ten-at-a-time, along with a lot of very useful candlestick charting features. This in a modestly priced program that works very well for me. I can export the data from FutureLink to this program so there are no added data costs. Third, I use the gray matter between the ears to evaluate the first two items . It's as simple as that. I have tried several mechanical trading systems (some quite costly) and find I'm just not comfortable with them. I suppose it's a matter of trust. In the end, we all find a method that works for each of us, that gives us confidence in our trading style and the ability to steadily improve the win/loss ratio.

One last thought. I use two deferent brokers. One a deep discount house for simple straight forward market orders (about $15.00 round turn). And one for what are usually more complicated trades, involving spreads, straddles, strangles, etc. (about $35.00 round turn). I always deal with the same person which helps order clarity. It costs a little more, but I speak from experience in that one snafu can be very costly.

So that is my "conservative approach." I still go slow with both time and money, and often repeat the aphorism about Bulls, Bears & Pigs.

Market Forces - Mervin Pearson

To put some wit in commodity trading, I have some phases that I have used over the years describing certain market forces.

1. When the wind blows even the turkeys will fly.
2. An option that goes to "0" is called a rotter.
3. If you don't have your line in the water (order) you can't catch fish.
4. Never place a new order without a stop.
5. The floor traders are like hunters -- they gun for your Stops on their stop hunt.
6. If you try to go bottom fishing you will probably get a snag.
7. The trouble with Elliott Wave is that you never know what wave you are in until you get swept out to sea.
8. Most OEX option expiration weeks tend to be positive for the stock market.

Commodity Boot Camp - JGW

I just returned from a week In Chicago at William Greenspan's Commodity Boot Camp (312-930-1777), and want to share my experience. The Boot Camp has three options: a two-day seminar in trading theory, followed by; ‚ a three-day, real-time, off-floor trading experience, followed by; ƒ a five-day, on-floor trading experience. I enrolled for the first five days, and will return at a later date for the second five days. Bill is a member of the Merc and a successful pit trader. He has been a speaker at several conferences and has written articles about his methods for Stocks and Commodities Magazine. In the first part of the course, Bill discusses his basic methods, and is joined by two other (local) traders who describe related methods. In the second half of the first week, Bill supervises and reviews the trades actually made by the students.

I have been position trading commodities for over 5-years. I got into the habit of Faxing orders to my broker (who accepts contingent orders) each morning and then heading off to work. When I'd get home, I'd download daily data (Telescan), check my positions and plan the next day (SuperCharts). I was OK successful. This year, I left my full-time job and started learning to daytrade the S&P (John Stenberg, (call CTCN for number), more in another article). So far, I've been very satisfied with the methods I'm using, but not very satisfied with my execution.

Since Greenspan's motto is, "'You will learn how to trade," I headed off to his Commodity Boot Camp.

Bill trades as both a pit trader and an upstairs trader, and freely admits his pit style won't work off the floor. But much of the methodology is the same, and he's happy to fully divulge what he does in both places. Fundamentally (no pun intended) he's a pivot breakout trader with firm money management skills. And (gasp) he doesn't use indicators -- he relies on price, and its relationship to other prices.

His associate, Carolyn Boroden, supervised our trades for three days, and demonstrated how she uses Fibonacci time and price. (Her intraday projections were stunningly accurate - ahead of time!) And during slow periods, Warren peppered the discussion with various trading topics, like why traders cut their profits short and let their losers run, and why option analysis is replacing present value calculations when making financial decisions.

Our class day traded several markets, including the S&P, Bonds, D-Mark, C-Dollar, corn and coffee. And we practiced several strategies. We weren't paper trading, we were using real money from the Boot Camp account, so we placed real orders and got real fills. Collectively, we broke even the first day (with a tiny profit), but were very profitable on the second and third days. My own trading was well above my average.

Coincidentally, a former student of his from Atlanta dropped by to say hello while he was in town. He's been using Bill's methodology for 5-years (without modification) and he's successful beyond his expectations. He encouraged us to follow the system. The rules are very simple -- the hard part is the discipline of:

1. taking each signal and;
2. using good money management.

So what did I got out of it? A lot.

I got to watch a successful trader in action, to see what s/he does before the market opens, as a trade sets up, how it gets managed and how it exits.

I listened to order placement, and learned that even exchange members have the same problems with order execution that I do!

I traded (successfully) without a screenful of indicators!

I had a seasoned professional watch over my shoulder as I managed a trade.

"Why are you taking this trade?" "Where are you putting your protective stop?" "Shouldn't you move your stop to break-even?" "What's the market doing now? Should you move your stop? Should you take profits?"

And this one really bugged me. "Now, where's your next trade?

I experienced entering a trade as the setup occurred, instead of watching it pass by as I usually do. I experienced money-management in real-time instead of passively reading about it. And I experienced taking profits, not letting a winner turn into a loser and exiting a bad trade quickly.

The bottom line is what Bill repeated to me several times: "In order to learn how to trade, you have to Make Trades!" There's no other way. Part of the reason the group didn't do so well the first day (and why I don't take trades In general) was 'analysis paralysis.' (On the second day, he threw us into a bond trade, told us to manage it, and walked away!) Once I started employing a single method on a single market I was much better able to answer, "Where's the next trade?"

Will the Boot Camp make a difference in my trading? I dunno, check with me in 3-months. But I expect it will. All I need to do is keep doing what I was doing while I was there, and I know I can do that!

Welles Wilder's Delta Method - Richard Wells

If anyone is interested in Welles Wilder's Delta method, there is an Internet mailing list devoted to this. Updates on the upcoming daily and weekly Delta points are given, the Delta solutions are available, and there is even a software program written for Wave Wise spreadsheet available. Contact Ganntrader to get on the list. One caveat: Since Delta is copyrighted, you have to own Wilder's book to get on the list.

Incidentally, Ganntrader has developed a method for locating turning points that is very simple and elegant. I think another writer contributed a review on this in the past.

Disciplined Money Management Methodology - Tom D'Angelo

This is my sixth 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 3-8, Vol 4-1, Vol 4-2, Vol 4-3 and Vol 4-4. In this article, I will discuss three techniques for determining how many contracts to trade.

To begin with, we must know our minimum and maximum number. Our minimum number is obviously one, but what is the maximum? And if we know the maximum, do we trade the maximum or some number between one and the maximum?

Before we begin to talk about minimum and maximum, we must first be properly organized. Using the Profit Center concept of money management I described in previous articles, set up a Profit Center for each trading system that you use. For example, if you are using the Real Success trading system for the S&P500, set up a Profit Center named RSSP500 and enter all your S&P500 trades taken from the Real Success system into this Profit Center. After you have about 30 trades in the Center, you will have a large enough sample size to perform the necessary calculations.

The first method is "hi-tech." Purchase Ralph Vince's book entitled "Portfolio Money Management Formulas." Ralph provides a complicated formula for determining the optimum number of contracts to trade. If you trade the optimum number, you will maximize equity growth at the expense of large drawdowns and a roller coaster equity graph. Perform Ralph's calculations on the RSSP500 Profit Center and you will know the maximum number to trade. Ralph's formula is not perfect but it is a good approximation.

The second method is used by many professional sports and blackjack bettors here in Las Vegas. Basically, you risk. a percentage of capital based on a formula developed by a man named Kelly who worked for the phone company in the 1950's. The Kelly percentage is the optimum percentage of capital to risk.

The formula is: Kelly %=A - (1-A) / B
B=Average Winning Trade / Average Losing Trade
If A=58.8%
If average winning trade=700
If average losing trade=614
Then Kelly % would=22.6 %

As an example, assume the Kelly is 6% for the RSSP500 Profit Center. If you had $100,000 in capital, you would risk 6% of $100,000 which=$6,000. If your trading system calls for a $1,000 stop, the maximum number of contracts to trade would be 6 (6000 / 1000=6 ). A Kelly % less than 0 indicates that the Profit Center is unprofitable and that you are playing a negative expectation game, similar to casino games in Las Vegas.

The Kelly % suffers from a major drawback in that it assumes all profits and losses are equal which obviously is not the case. However, it serves as at good approximation.

The third method utilizes drawdown. I used a variation this technique myself and a few readers of CTCN who contacted me on the phone also use it.

First calculate the largest historical drawdown in the RSSP500 Profit Center. For example, assume that your largest historical drawdown after 30 trades is $2,000. Then multiply that amount by a drawdown multiplier which can be any number greater than 0. Suppose you choose 2 as the multiplier. Multiply the drawdown by 2 which equals 4,000. (2,000 x 2=4,000) . Then add the margin requirement for the future. Assume the margin for S&P500=10,000. Then we will obtain 4,000 + 10,000=14,000. Now divide this number into our trading capital and that is the number of contracts to trade. If we had $28,000 in capital, we would trade 20 contracts (280,000 / 14,000=20).

The larger the drawdown multiplier, the less contracts and less aggressive we will trade. The lower the drawdown multiplier, the more contracts and more aggressive we will trader. The drawdown multiplier technique is very simple to understand and the trader is able to control his aggressiveness or conservativeness by choosing the appropriate drawdown multiplier.

The drawdown technique suffers from the fact that it does not take profitability into account, only drawdown. Therefore, you must make sure that the Profit Center is profitable before using the drawdown multiplier method. If the Profit Center is unprofitable, you are playing a negative expectation game and no money management system or betting scheme can turn a negative expectation game into a positive expectation game.

Ralph Vince's method may only be used by future traders. The Kelly % and drawdown multiplier methods may be used by futures, stocks, funds and options traders.

Now that we have some approximation of the maximum number to trade, how many do we trade? Personally, I use another "low tech" method. I graph the Profit Factor for the Profit Center under analysis and visually judge the trend. The Profit Factor formula is :

(% profitable x average profit) / (% unprofitable x avg. loss)
If % profitable=58.8%%, % unprofitable=41.2 % and average profit=700 and average loss,=614 then;
PF=(588 x 700) / (.412 x 614)=411/251=1.63
A Profit Factor greater than 1.0 indicates a profitable Profit Center.

If the graph of the Profit Factor for the RSSP500 Profit Center is slopping upwards, I would trade more aggressively, gravitating towards the maximum number to trade. If I am using Ralph Vince's formula and the optimum to trade is 4 contracts, I would trade 3 contracts. If the Profit Factor is sloping downwards, I would trade more conservatively and maybe trade 2 contracts.

Using this technique, you are assured that you are: playing a positive expectation game and; ‚ playing more aggressively in games where you have shown that not only have you been profitable but also that your profitability is sloping upwards. This is the only way you can be profitable in speculation . . . play positive expectation games and try to try to get into the long run.