Learning How To Trade Futures, or A Journey Into "The
With all the recent talk of vendors in your newsletter, I thought I'd share one of my experiences with your readers.
In my quest to become a better trader, I took a course from a well-known trader and creator of a highly respected trading methodology. The class was being held at his training center/office about 1-½ hrs. drive from my home, in the grain belt of the Midwest (just far enough where driving home each day was impractical). Ah, beautiful downtown Cowpatty (not real name), the home of grain elevators, greasy food and people who smelled like livestock.
I spent 3-nights in the better of two motels available in town. (You'd be surprised how interesting cross-country truck drivers are. Farm implement salesmen are too bad either.) Kentucky Fried Chicken was the best meal in town, and you thanked the dear Lord for cable TV. Are you getting the picture?
The first morning, I began looking for an office of a man reportedly worth millions. What I found (after passing it three times), was a small rundown building that housed a dance studio with a window next to it that bore the name of the company I was looking for.
I had arrived early and sat in my car listening to the local radio station. What I heard were the daily obituaries --- complete with organ music in the background and a man's voice that was stereotypical a dulcet toned funeral director. I heard myself saying, "This is not a good start."
As the day progressed, I met Mr. Trader, a kindly old gentleman in worn pants and sweater (which he wore all 4-days). The other three students with whom I would spend the next few days included a retired businessman from Detroit, a young professional tennis player from Europe and a woman who wrote a book on the psychology of trading, from I can't remember where.
We were ushered into his "training center." A rather small and incredibly dirty office. It held a long folding table, a few folding chairs, and a coffeepot that was last washed circa 1980. An orange crate held a phone with the phone number written on it in big numbers with a felt tip pen. God only knows what critters lay beneath long strands of acrylic pea green shag carpet, circa 1975. Shelves with trading memorabilia lined the walls. Neither had ever seen the likes of a dust cloth. I really hesitate to discuss the bathroom, which was shared with the dance studio. Mr. Trader graciously asked if we'd like a cup of coffee as he held up coffee mugs that I was sure needed to be soaked in dish detergent. I hoped he hadn't seen me cross my eyes. "Oh well," I thought, "If this is going to help me trade better, I can do this!"
The class was structured to be 2-days of instruction and 2-days of live trading. Much to the chagrin of those of us around him, Mr. T. began by lighting up a cigar. He passed out his manual (which was 3/4's charts) and turned on the slide projector (which contained 3/4's charts). In between the slides of charts where his interpretations of double bottoms -- two women riding away on bicycles in bikinis -- double tops -- two women riding toward you in bikinis. My eyes crossed many times during the course of these 4-days, I'm surprised I don't have double vision! The 2-days of instruction were worth diddle squat. I could have learned what was offered in 2-hrs.
The following 2-days of live trading was even more of a challenge to my patience. We arrived early to be there for the opening of the currencies. Within the first half-hour Mr. T. proclaimed, "There are no trades. Bad trading day." At this point young Mr. Tennis took over one of the two keyboards to the computer. Miss Psychology took over the other. Mr. Retired Businessman and I stood behind. Mr. RB and I looked at one another in surprise when she said, "I don't share my toys." Her attitude was fast becoming intolerable. When someone would ask a question she felt was elementary, she would make a clicking noise with her tongue and shake her head. She professed the excellence of trading at every opportunity. I thought Mr. RB was going to lunge at her a couple of times during the course of the class.
Mr. T. convinced there were no-good trades, walked behind the computer built into a freestanding wall and began to burp and flatulent. (God, strike me dead if I'm lying!) To his credit, he said, "Excuse me."
On the 4th day, a snowstorm was threatening the area and the interstate adjacent to "Cowpatty" is famous for closing during these occurrences. Everyone decided to leave at around 9:30 A.M.
You too can have this wonderful experience for the small sum of $1,300.
Editor's Note: We were unable to contact Mr. Davidson for the name of this allegedly odd and weird but "well-known" seminar vendor. Perhaps Mr. Davidson, very kindly and generously doesn't want to use this vendor's name as he doesn't want to embarrass him by name, which this article certainly would do! Subsequent Editor's Note: We have now found out the identity of this trading seminar vendor. Contact CTCN if you are curious about who he is.
What You Know May Not Be So - J.L. from Wimauma
A cop on TV the other night said, "I believe nothing of what I'm told and 50% of what I see." To that I add "90% of what I've been told in life was either honestly mistaken or a damned lie." (Yes, that means starting with Santa Claus.) A new friend of mine (a stock broker for 4-years) told me, "To be a successful stock broker, you have to be a psychopathic liar." (For those who have forgotten, to be psychopathic means that you must really believe what you say.)
"There you go again." Last issue started with the oft-repeated "Litany" - "50-Rules for Success." No surprise that it was compiled by brokers. A lot of common sense is in there, but can the brokers be objective when their very existence depends on Cardinal Rule #1? (I'll let you figure out which one I mean.)
I don't think I'm stupid. Did I, for the most part, break those rules for 13-years or did I usually follow them? And then it hit me! Forget me. If 80%+ of traders are net losers (as I was), does that mean that they and these same experienced brokers broke those rules 80% of the time, or did they follow them 80% of the time? I rest my case.
To say it another way, my best year I made $8,000 when I accidentally said "Buy" when I meant "Sell" cotton right after the Tianimin Square Massacre! Last year I did $31,000. This year I'm grinding out $500-1,000/wk with no risk, mostly in a market that is still going against me! (See my last issue's article.) Will you agree that perspective is everything? Is the glass half full or half empty, i.e., when is a "loss" a loss? (The following was to be a future article but it fits too well right here.) I'll say it again. Stop-losses are needed for investments that we couldn't afford in the first place.
We spoiled brats. Someone somewhere told us commodity traders that we could buy 5, 10 even 100 contracts and not pay a penny for them! They probably told us that because amazingly we can! (Sure we have to protect our broker with margin, but I'm talking pay.) Of course, there is one little requirement. That's that huge condition that prices rise directly from our purchase price. (Prices do not pass go or collect $200 either.)
So the nerve of us! If prices don't go straight up we "risk" beginning to pay for our "investment." Or do we? Holding a contract that I never paid for in the first place, even after it might go down in value, never cost me a penny unless I picked up the phone and cried "Uncle." I still have to protect my broker from my possible foolishness but then he's such a swell guy anyhow! And we're complaining. The guy who bought 100 shares of IBM knows what it means to pay from the get-go. The market, not his account, has his money! We've got the contracts and our money!
My heart goes out to the scale trader who wrote that he lost his butt because he couldn't tolerate the paper losses. To him I say, "If you had only looked a little harder at your statement, your Open Positions would have told you that you were a rich man! You owned a whole bunch of something of value that you wouldn't even have had to pay for unless you 'bailed' (or rolled-over), and if your commodity was properly selected in the first place, I guarantee that you look at prices now and really get sick!
Do you see yet that "they" honestly lied to you?" Perspective matters. By the way, a weekend review of back-issues put the name on what I am really doing now -- Interval trading. Strict scale trading seems to have been an extremely important level of learning through which I've now passed.
I hope Paul Britain doesn't think that I'm criticizing him. I just hope that he and others when developing their "personal" strategy (the only way to succeed), will locate and trash that 4-word Cardinal Rule #1 that has traders leaving their money behind and buys their broker's next Mercedes! I take back what I said earlier. I must be stupid to take 13-years to "see the light!"
The Key Is Trading The System Correctly, Not Being Right Every Time - Michael B. Coleman
Commodity trading can be at best perverse. That is, the markets will do anything and everything they can to force you out through disillusionment, boredom, and of course, losses. It's only through discipline and cold hard adherence to system you're trading, do you even have a chance to succeed. There can be and probably will be periods of up to 3-mos. when any system can be no better than even or in the red.
Psychological studies have shown that such periods of negative or neutral performance will cause most people involved in speculative ventures such as commodity trading to become the aforementioned disillusioned, disgusted or bored. This causes them to quit although they have not lost what they originally intended to risk and usually right before a huge winning streak. All of this has happened to me, and it's only after this kind of "hands on" experience that I am able to relate it to you.
In summary, hang in there. Don't feel that you have to win every day or win every time. Nobody does. The key is trading the system correctly, not being right every time. It is the end result that counts, and we intend to win.
About The New Dow Jones & Mini-S&P Futures Contracts - Barry J. Lind
I'm writing to you to pass along two pieces of good news. One is something that I've waited about 15-years to hear: Dow Jones and Co., after resisting the idea for that long, have licensed its Dow Jones Industrial Average as the basis for a futures contract. With the new Dow Jones Industrial AverageÔfutures to be traded at the Chicago Board of Trade, the Chicago Merc has countered with an innovative entry of its own in the stock index futures arena: an electronically traded mini-S&P 500Ôfutures contract.
DJIA futures come in an affordable size (valued at $10 times the Index, or $80,000 with the Dow Jones Avg. at 8,000), and trade during U.S. stock market hours, although there's been some talk of opening the contract earlier so it can trade the same hours as the bonds. To make access to the contract easier, the CBOT is also considering putting in place an electronic system that delivers orders directly to brokers in the pit, something we've been asking the exchanges to do for many years. The Board of Trade is promising to spend a lot of money supporting this contract, and the CBOT traders I've talked to are ready to go all out to make sure that their latest foray into stock index futures markets does well. Dow Jones Industrial Average is the brand name, and now it's tradable. This contract has all the marks of a huge success.
In a long-awaited response to requests for a smaller S&P 500 contract, in September the Merc is introducing a "mini" version of the original, at one-tenth the size. The mini-S&P will be traded electronically over the GLOBEX system (there's a limit of 50 contracts for mini-S&P orders into GLOBEX). The mini-S&P will trade more than 23-hours a day, with only a small trading break after the stock market closes; this means the mini-S&Ps will be open before and during important early morning economic releases. There should be a lot of arbitrage between the mini and big S&P, which will keep the markets pretty much in line.
But the really good part is that when the Merc makes all the electronic interfaces it plans, you'll be able to use Lind On-Line to place your order directly into GLOBEX. Another great feature of the Mini-S&P is that you'll see the best bid, the best offer, and the size of the best bid and offer, real-time and free, and again, eventually this information will be available on Lind On-Line. Trading this contract through (Lind-Waldock & Co.) Lind On-Line should bring you the best of integrated electronic trading, a first in the futures markets.
Never before in our history have we heard more comments from customers about contracts that haven't even started.
Some Thoughts On The Four-Year Cycle In U.S. Stocks
It seems nearly every investor is aware of the "Presidential Election" cycle in U.S. stock market.
It goes something like this: during the U.S. presidential election campaign season, the incumbent party wants to get re-elected. In order to do so, it is in this party's best interest to do everything possible to make sure the economy is healthy. Conventional wisdom is that people vote primarily by their pocketbooks. They will usually re-elect their leaders if the economy is strong, and vote them out of office if the economy is unstable or weak. One measurement of a healthy economy is a strong stock market, which itself is influenced by stable and/or low interest rates.
Because of these favorable economic policies employed just prior to an election, the stock market tends to perform very well. However, in the middle of a President's term, the leadership is more likely to adopt policies that are not so popular, particularly with regards to the economy, such as: raise taxes and/or allow interest rates to rise (which the President doesn't really control, but even the Federal Reserve Board wants to avoid appearances of favoring one party over another, so they may adopt policies of credit restriction during the mid-term of a President's tenure rather than during the election campaign season). Thus the stock market tends to become weak - prices fall, and bottom - during the middle of Presidential term.
Since the U.S. President is elected every four years, many market analysts have reported a four-year cycle of troughs and crests in U.S. equities. The market tops out every four years, usually within a few months of the actual election, and it tends to bottom out every four years, usually near the middle of the President's term. But does this really happen according to the characteristics of cycles defined in this book? In other words, is the four-year cycle trough really a dominant cycle? And does the crest of that four-year cycle tend to happen consistently close to the actual election?
This article will cover the first part of the question: Is there a dominant 4-year cycle in stocks that bottoms around the median date of the middle of the U.S.A. President's term in office?
To start this study, let's begin by looking at a listing of all the probable 4-year cycle troughs in the U.S. stock market since 1893. This list will provide the month, year and the number of months (in parentheses) elapsed between these cycle troughs.
Probable Dates of a 4-Year Cycle Trough in U.S. Stocks:
August 1896 (37)*
September 1900 (49)
November 1903 (38) November 1907 (48) September 1911 (46) December 1914 (39)*
December 1917 (36) August 1921 (44) March 1926 (55) November 1929 (44) July 1932 (32)*
March 1938 (68) April 1942 (49)
October 1946 (54) June 1949 (32)
September 1953 (51)* October 1957 (49) June 1962 (56) October 1966 (52)
May 1970 (43) December 1974 (55)*
March 1978 (39) August 1982 (53)
October 1987 (62)* October 1990 (36)
April 1994 (42) or November 1994 (49)
Table: Four-year cycles - trough to trough in the U.S. stock market. The asterisks represent those which coincided with the longer-term 18-yr cycles.
In all, there were 26 instances of the 4-year cycle since 1893 with a range of 32-68 months. The average of these 26 cases was 46.92 months. In 22 of these 26 cases (84.6%), the four-year cycle occurred between the 36-56 month interval, with an average duration of 46.6 months. Two of these distortions coincided with the 54-year stock market cycle trough (1932 and 1987). If we count just those that would have fallen within the normal cycle time band (38-55 months, since that range is about a 1/6 orb of 46-48 months), we would have 19 cases (73%) that met our criteria of a "normal" cycle time band (two others missed by just one month), with an average interval of 45.3 months.
The evidence thus supports the presence of a 4-year cycle in the U.S. stock market. However, this particular long-term cycle requires a range which exceeds our normal cycle standards of "1/6 the median periodicity." For our purposes, we will assume this to be a 46-month stock market cycle, with an orb of 10 months (36-56 months). For convenience, we may frequently refer to it also as the four-year cycle in U.S. stocks.
Now what else is interesting about this cycle? Does it bottom consistently in the middle of the Presidential term? Is there a seasonal factor present? The U.S. Presidential election happens in November of every leap year. The middle of this election period would be November, two years afterwards. However, in studies of these troughs, the preponderance of cases occurred before the two-year mark (i.e., in the first two years following the election).
In fact, in 22 of the 27 lows used in this study (81.5%), the trough occurred before November of the two year mark. In two cases (three if we use November 1994), it occurred within one month of November, two years after the election. And in only three cases was it longer - and those were all in the early part of this century, and in consecutive cycles (1903, 1907 and 1911).
So if we apply this study to all instances after 1911, there were no cases wherein the 46-month cycle trough in U.S. stocks occurred after December of the mid-year of the Presidential term. In other words, all troughs occurred within 25 months following Presidential election. Apparently, if there is a relationship between the economy and power of the White House, the President-elect would rather see the hard times end very early in his term - before the midway point.
Of the 21 cases since 1911, 13 of these troughs (61.8% ... Mr. Fibonacci would like this too!) occurred between the 16-25 month period following the election. In fact, this correlation has been even more outstanding since the election of 1960. In the nine elections since then (1960-1996), eight (89%) have witnessed this trough between the 16-25 month after-election interval.
The seasonal distribution of these troughs is also noteworthy. In this regard, observe the total absence of any 4-year cycle troughs unfolding in either January or February. However, in two-thirds of the cases presented here (18), the 4-year cycle occurred between August-December. Thus there is a greater likelihood that the 4-year cycle trough will tend to unfold 16-25 months after the Presidential election, and between the months August-December. If it happens in the first eight months, the months of March and April are the most likely candidates for the low.
Reprinted with permission from Raymond A. Merriman, from his forthcoming book titled "The Ultimate Book on Stock Market Timing Vol. I: Cycles and Patterns In the Indexes," due out October 15, 1997.
What's It All About? - Peyton Morgan
The past year, we become involved with several groups of traders and investors. We attended meetings, seminars, Internet sessions, and had conversations with folks of varying degrees of trading and investing expertise and success. We have even had the good fortune to help start a new group.
During that time, we also maintained our studies of the usual array of information including mailings, both solicited and those to which we subscribe. Also did research into new trading ideas. The daily routine, of course, also includes perusing our charts and following our methods for our next potential trade.
In all of these activities, which all good traders and investors follow, we tried to maintain a sense of perspective about all of this. The name of the game is making money. Although we spend a great deal of time getting ready to make money, we must not lose our focus.
We take notes at meetings, so that when we get home, later than our spouse would have liked, we can have something to show for the several hours we spent away. Seriously, attending meetings can be great fun and very inspirational as well as educational. It can encourage us during the tough times and inspire us to new heights during market euphoria.
We attempt to keep good records of our activities on a daily and weekly, as well as a longer term basis. We actually maintain a daily activity log. Sometimes it includes numerous trades, ideas to pursue, and new things to study. Sometimes, just one sentence, but put it in the log none the less. The purpose of recordings of any type is to be able to use them later. We also review our logs, usually weekly.
Hey folks, this is a business, like any other business. It requires systematic activity specifically designed to make a profit.
Now the important part. If we intend to stay in business we have to put all that information to work to create income, which will hopefully exceed our expenses plus the U.S. Treasury Bill rate and maybe an accounting for some of the time we have spent.
Call it trading or call it investing. Whatever you call it, we're in the risk business. After all else, it's necessary to take the risk or the profits will go to the other guy.
London Financial & Curtis Arnold Press Release "CFTC Misses the Mark, Casually Bankrupts & Destroys American Families"
In a grab for power that should horrify liberty loving Americans, the U.S. Commodity Futures Trading Commission recently targeted innocent do gooders in order to protect their-pork barrel existence. Threatened with virtual extinction if a bill now in the Senate passes, the CFTC is trying hard to make press in order to justify their existence. In order to win cases, this bureaucratic, 2000 pound gorilla has turned its wrath on tiny family owned businesses. Instead of aiming at brokerage firms that routinely gouge customers while hiding behind high priced law firms, the CFTC instead brings frivolous law suits against the only professionals in the futures industry who might be able to help the trading public: experienced trading educators who offer advice and trading approaches that can tilt the odds in the public's favor.
Of course, on the surface this seems to make no sense. But there is a method to their madness. The CFTC hopes that, by winning small cases, they can set legal precedents which will help them in future cases as they attempt to grab more and more political power. So far, it seems to be working: the CFTC has never lost a case! No wonder. We small family owned business can possibly afford hundreds of thousands of dollars in leg fees to fight a government agency? Like dominoes, each has had to succumb to the but pressure. The stories are heartbreaking: careers abandoned, bankruptcy, mental breakdowns, families and livelihoods destroyed by heartless and greedy federal bureaucrats.
The win/loss record compiled by the CFTC is nothing less than uncanny until you know the facts. The facts are that the CFTC has set itself up so that they can't lose: they are the prosecutor, judge, and jury. They even collect the award (plunder) which goes directly into their coffers. That's right, the CFTC appoints its own judge and pays his salary. Can you imagine what the effect would be on his career longevity if he ruled against the CFTC? Once the defendant has lost his case in front of this appointed judge you can, of course, appeal the decision to a higher federal court. But by then, his financial resources have in most cases been exhausted. You can see why targeted victims, emotionally drained and financially ruined, stand little chance of winning the way the system currently stands. We can only hope that those representatives in Washington, we elected to protect our interests and liberties, hear our collective pleas for action against this agency - before even more small businesses and families are destroyed.
Divided We Fall - Rick J. Ratchford
As a market analyst and a publisher, not to leave out a full-time trader of the commodities market, I must cover about 30 markets each and every week.
The depths to which I must go prior to publishing my information is tedious and time consuming, but when completed does not leave much left unknown for the short to intermediate term.
One would think based on all this that I would be able to take advantage of many markets at the same time, therefore making a killing in the market. However, nothing can be further from the truth.
The problem here is that many markets divides ones attention and can actually be detrimental to trading. I have found that after analyzing up to 30 markets a week, there are at least 10 or more opportunities to take advantage of. Once I've entered 2 or 3 markets, I find that I have spread myself thin mentally and cannot watch anything else till I've liquidated my current positions.
Many times, I realize that I've let several other great opportunities, all of which I know what they would do, get away from me. I'll take profits from the markets I'm currently in, then look at entering other markets, letting those original markets make big moves now in the other direction of which I could have taken advantage of as well. Problem is, I've got too many markets in my basket due to the nature of my business, and am not focused on just one or two.
Many traders do this as well when they are following a newsletter or hotline. They must get into every market that is setting up. What happens is we never become really good at one market, but are just looking for the next table to play.
Before I got involved in publishing market information, my focus was just on Pork Bellies. I would make a trade on every swing because I know how to read it. An associate of mine does this with Soybeans. He can read it pretty well like a book since he concentrates more on that market.
It is a fact, as many long-term (survivors) traders can tell you that if you can specialize in one market, maybe two at the most, you can make a lot of money at it. Ask any question about the particular market, and that trader can tell you what that market will most likely do. He is focused.
When you are focused on a market, year in and year out, you know its characteristics. How can you possibly do this if you are diversified in a big way and changing your markets weekly? I have no idea about how Pork Bellies acts from one week to the other anymore, for now I only focus at the time I create the analysis, but then my mind will go partially blank once I've analyzed the next market and the next. Come trading, I end up missing some very large moves in one or two markets so as to be involved in nearly 30 of them.
My suggestion for traders, based on my experiences and that which I have discern by reading about many trading greats is to specialize in just a couple of markets or so. Know how it sets up, ride it both ways, and get to the point where you can recognize trouble ahead and reverse.
A trader who specializes just in Cotton can make a ton of money each and every year. It doesn't have to make mammoth moves either. Each month you catch the predominate wave and go with it, concentrating on your entry timing and your money management.
If you trade in too many markets, here is what may happen.
You put your orders in for a few markets. You then transfix your attention on one or two, since much could happen in a few minutes or hours. Meanwhile, another market just missed your entry stop and soon moves up without you.
Where are you? Your watching carefully this and that market, and had you been watching that other market, you could have acted in time to still enter low risk and not miss the move. Problem is, your attention is divided.
Here is another thing to consider: If you have 2-hours to work with each night, the more markets you consider, the less time you spend on each one. There is obviously a point where more time studying a market will not produce any better results, but less time than necessary can cause you to fall as at trader.
Pick a very small basket of markets, say 2 or 3, and learn them well. You will always have a trading opportunity come up at least in one of those markets almost every week. If you are a daytrader, no doubt you may already do this. But position traders would do well to do the same.
By concentrating a just a couple of markets, you soon will not only know the best way to apply your particular trading method or indicator to it, but you also enhance your intuition about the market and this in itself can make you a lot of money.
Trading Tactics and Strategies - When A Market Leaves Its Range, It's Called A Break-Out - Paul Britain
Break-out! The term alone suggests something fast, furious and volatile, which a break-out usually is. A break-out occurs when a market breaks-out of it's current trading range and heads elsewhere, sometimes it is an acceleration in the same direction of the already existing trend, sometimes it's not. What we will show you is one way of taking advantage of it when it happens, and what to do when it doesn't follow through (i.e., reverses on you).
There are several different types of break-outs, bullish, bearish, short-term and long-term. We will cover a bullish break-out on a daily chart in March Cocoa in order to demonstrate one way of taking advantage of this type of trading opportunity. This trading method uses stop orders to not only enter the market, but to exit the market as well.
By establishing the market's upper down trend line, we identified where to place our stops in order to enter the market on a trend reversal type break-out. We would place a buy stop above the upper down trend line and wait for the market to come to us. If the market kept going lower without breaking the range, we would follow it down with our stop. Once the break-out occurred and our order was filled, we would trail a stop loss behind the position. If the market continues to head in the direction of the break-out, our stop would eventually become a profit protection stop. It is a good rule to always enter break-outs using a stop, the trailing stop loss in order to manage your risk.
"There is No "Holy Grail" in trading strategies. Nothing is perfect, nothing can guarantee all winners. BLT is not promising absolute performance, only showing traditional trading methods." Chart in Print Copy
Options - The Write Stuff! - P.B.
Options on futures have received lots of attention lately, not only as way to hedge futures trades, but also as speculation in their own right. Options on futures can offer a way to play markets from a distance, and in some scenarios can be less risky than straight trading with futures contracts.
What are options? Options are a side-bet on the price of a futures contract. One party, the option buyer, thinks the market is going to make a move in a direction, while the seller is willing to accept the bet. The buyer pays money, called the premium, to the seller. In exchange, the buyer gets the right, but not the obligation, to exercise the option at any point and take a futures contract. In addition, the buyer's risk is limited to the premium that he pays out; if the option is not useful, it simply expires worthless.
The seller, on the other hand, collects the premium up front, but has an obligation to give the buyer a contract whenever it is demanded up until the option's expiration date. The profit a seller can make on any given trade is the premium he collected up front, but potential liability is unlimited.
Why would people sell options, given the theoretical possibility of unlimited loss? Because most out-of-the-money options expire worthless. Option buyers are trying to hit home runs and score big winnings. Option sellers are trying to take smaller wins, but win more often.
Here's an example in the gold market. Bill thinks the market, currently at $400 per ounce, is going to rise in the next two months, buys the expiration of the next set of gold options. Ted, begs to differ, and thinks gold will stay at $400/ounce or even go lower. Bill would like to buy a $420 call option, so that if the market should exceed $420/ounce, he will be able to buy a gold contract at a cheap price, and offers Ted $5 per ounce ($500 total, since the contract is for 100 ounces) to take the other side. Ted sees the trade as an easy win, and gladly agrees to collect the money and assumes the obligation. The break-even price for each party is $425; below that and Ted will win, above that, Bill will win. If the market goes out exactly on the strike price, the seller (Ted) would retain all the premium he collected while the option buyer (Bill) would lose the amount the option cost. But no matter how much the market moved against him, not more than he invested in it.
Collection of option premium does not guarantee the retention of option premium. Option trading is risky.
Scale Trading - Trading The Range - P.B.
We believe that a market spends about 80% of its time trading within a defined range -- by which we mean that the market trades back and forth between an upper and lower set of trend lines. There are both long-term and short-term range trading techniques that can exist in a market, sometimes simultaneously.
Several components will help you to identify these opportunities. The primary tools you need are a strategy, the right charts and technical patterns, and a highly developed sense of discipline. Many a good trader has seen good strategy and good planning overcome by an emotional response to market movement.
The above factors are combined nicely in Scale Trading, a strategy used when a market trades within the lower third of a ten-year range. Because goods cannot have negative prices, the system trades the long (buying) side only.
Below is a monthly chart on coffee that goes back 10-years. In scale trading, you choose an entry price. Next, determine a scale -- the number of points between buying contracts. In coffee, this might be 5-cents. From the entry point, every time the market drops 5-cents, you buy another contract, and every time the market rises 5-cents, you take profit on a contract. Continue until you're out of inventory. Rinse. Repeat. Warning: successful scale trading usually requires at least $25,000. Chart was published in Print CTCN only
"The CFTC Wants You Off-Line" by Scott Bullock -reprinted with the permission of The Institute for Justice
The ability to speak and publish freely is the birthright of all Americans. But not if the U.S. Commodity Futures Trading Commission (CFTC) gets its way.
The CFTC wants to license individuals who publish about trading commodities. Anyone who for compensation offers opinions, analysis, or even general information about this subject must register with the CFTC as a "commodity trading advisor (CTA)." Registration involves fingerprinting, submitting to a background check, paying fees, filing reports with the CFTC, turning over subscriber lists, and being subject to on-demand audits. CFTC officials have the awesome force of law behind them -- anyone not registered who publishes on commodities violates federal law, and faces $500,000 in fines and up to five years in jail.
Institute for Justice Attorney Scott Bullock shares with the media how the CFTC tried to limit the speech of Institute of Justice clients Frank Taucher and Steve Briese.
On July 30, the Institute filed a First Amendment lawsuit on behalf of five commodity newsletter publishers, software developers and Internet users, and five of their subscribers, seeking to end government-compelled registration of those who offer impersonal analysis and advice about commodities. The suit, filed in the U.S. District Court for the District of Columbia, aims to preserve both the rights of individuals to communicate truthful information and the ability of willing listeners to receive important information to guide their economic decision making.
The CFTC is the federal agency charged with regulating the commodity and futures markets in the United States. Unfortunately, rather than assume a discrete role for government regulation to protect individuals from fraud in the marketplace, the CFTC seeks to maximize its power at every turn. Not content to simply police individuals and firms actively managing investor accounts, in 1995 the CFTC asserted regulator power over everyone who publishes about commodities for a fee, demanding that they register as CTA's. The agency extended its broad reach even to persons who neither offer personalized investment advice nor invest customer funds.
In the 1980s the Securities and Exchange Commission (SEC) attempted to do the exact same thing to individuals who provide information on stock trading. But in 1985 the U.S. Supreme Court unanimously held that so long as individuals merely publish about securities, rather than trade them, they cannot be required to register with the SEC. As a result of that decision, the SEC returned to its authorized mission of rooting out fraud rather than harassing publishers. Importantly, this precedent did not hamper the ability of the SEC to go after the "bad guys" in the financial business, but instead led to a proliferation of new sources of information for people interested in stock trading.
Now CFTC has expanded beyond traditional publications to regulate computer software and information online. The CFTC has filed lawsuits to stop unregistered developers of computer software from offering their products. Moreover, while national attention focused on the Communications Decency Act and the government's attempt to regulate indecency on the Internet, the CFTC last year quietly attempted to regulate the Internet with potentially damaging consequences for all of society.
The CFTC's proposed Internet rule could mark the beginning of a new chapter of government regulation online. While the Communications Decency Act sought to regulate the content of speech online, the CFTC wants to regulate who may provide information. The proposal spares virtually nothing on the Internet from agency oversight and regulation - web sites, user groups, and hyperlinks come under the CFTC's assertion of jurisdiction. Anyone who establishes one of these tools must register as a CTA, complete with all the ramifications that entails. Although currently the CFTC has suspended enforcement of the rule pending further review, the proposal heralds the intrusion of the heavy hand of government into this vital emerging technology.
At its heart, the CFTC's policy is a policy of ignorance. The agency seems to believe that the less information people have about commodities, the better. Yet First Amendment and the tradition of open inquiry in this country are premised on the exact opposite principle. More information, more robust debate, and more speech create a marketplace of ideas where listeners, not government officials, choose which information is valuable and which speakers are worthy of listening to. Through its campaign, The CFTC stifles this marketplace and keeps consumers in the dark about valuable economic information.
With hope, the lawsuit filed by publishers and readers of commodity publications will close another sordid chapter in government's continuing campaign against free speech. Scott Bullock is an Institute for Justice staff attorney. Check out The Institute's Website: www.free.ij.org
Opinion On Bill Williams - Mike Cook
I am very interested in submitting a rebuttal to Don McCullough's article on how wonderful Bill Williams is. I am a graduate of Williams' $5,000 "tutorial" and found it to be a load of crap. I have also spoken with at least 10 other graduates who express the same conclusion. Not a single one of us has encountered someone who truly benefited (or is making any money) from Williams' course.
My question to you is this; If I buy a subscription and then submit an article saying this, are you going to not publish, or publish without including Bill's name for fear of a lawsuit? If this is the case, I won't waste my time.
Editor's Note: Once again, we want to make it clear all CTCN contributions are the opinions of our writers, and not the opinion of Commodity Traders Club News or its Editor. Under First Amendment rights you may give your opinion, as long as it is your true opinion of the truth and not said to cause harm, trouble or slander.
"Not Impressed With The Knowledge & Speed Of The Advantage Trading Group Brokers" - Randy Beeman
I'm writing in response to your request in the last issue -- CTCN for information from subscribers regarding accounts with Advantage Trading Group.
After having read several comments in the "Club News" about Advantage Trading Group and reading the letter written by their President touting their benefits, I opened an account with $4,500 in February 1997. Almost immediately, I was notified by letter that their introducing broker was being changed to Rosenthal Collins from First Options.
I called them twice to place trades, but was not impressed with the knowledge or speed of their brokers. I decided to close the account in June 1997 and currently do not have any balances with them. By the way, when I closed the account I had to call twice to inquire why it was taking so long to receive the check.
Following the recommendations in the newsletter, I also established a BMI account and started following the SP500 daily prices after purchasing and studying the Real Success video series. I canceled the account after the one year commitment expired, however, because I don't really have sufficient time in my daily schedule yet to consistently day trade. I do utilize some of the principles from the videos however in my position trading of commodities and stocks.
I enjoy reading about the experiences of others trying to build a successful trading business.
"New Concepts In Technical Trading Systems" - A Book Review of a Classic - Raymond F. Kohn
J. Welles Wilder Jr., is probably one of the most respected technical traders in the world. He has written many books over the years, and has developed many technical trading indicators which most of us now use -- and take for granted -- without ever realizing that he was the original creator. Welles Wilder is a true legend.
His first book published in 1978, even today, it remains a "classic works" by any standard. This original classic was titled New Concepts in Technical Trading Systems, 138 pgs - $65.00 -- represents the very foundation of many of the technical studies which are provided as standard features in trading system software packages.
Technical indicators like RSI (Relative Strength Index), The Parabolic Time/Price System, The Swing Index, CSI (Commodity Selection Index), The Volatility Index, and The Directional Movement Index. All of these, and many others are Welles' creations, and are included in this original classic work. Also included, is all of the necessary math to duplicate the indicator, detailed signal interpretations, and real-time trading results.
As the years have passed since this book was published, many other authors have published trading system books, (not unlike those I have recently reviewed in past issues of CTCN). I thought it would be a worthwhile exercise to compare the difference between this "original classic" in technical trading systems, to what is typically being offered today.
It is my hope that such a comparison will instill in each of us a more critical attitude when we are presented with the next "Holy-Grail" of a trading system, and we must evaluate the merits of that system, and more importantly, the "thoroughness of its presentation." A comparison between this original "classic work," whose merits have withstood the test of time, and the currently available trading system books being offered, can only enhance our level of understanding of what should be included in any worthwhile presentation of a technical trading system. Anything less, is either just plain sloppy and incomplete, or at worst, a deliberate misrepresentation of the potential merits of the proposed trading system.
On a personal note: It is my personal feeling that "entry systems" alone are a dime a dozen. However, a "complete trading system" which not only includes a viable entry system, but also includes the (typically missing) key elements that are necessary in a complete trading system, that being:
1. A very specific and well defined "exit strategy; 2. A very specific and well defined "stop-loss" strategy; and 3. Historical "back-testing" to support merits of trading system being proposed.
I have always been and will always be, very critical of any proposed trading system which is missing any one of above essential elements. My prior book review of "Street Smarts" accurately states my position when authors use "subjective" or vague terminology concerning an "exit strategy."
As a side note: It appears that I am not the only one who noticed the "vague" and "subjective" methods contained in "Street Smarts." I was able to locate another writer's book review of "Street Smarts" in order to provide CTCN readers with another point of view. In August 1996, Mr. Robert Miner, president of Dynamic Traders Group, Inc. in Tucson, Arizona did a book review of "Street Smarts" for Futures Magazine. In that book review Mr. Miner says: "the authors' warn the reader not to incorporate the setups and trading strategies as a mechanical trading system, but rather exercise judgment whether to initiate the trade within the context of the position or the market. No firm rules are provided as to where to take profits once a trade is successfully moving in a profitable direction. The decision is made by the trader . . ."
It appears that Mr. Robert Miner's review of "Street Smarts" is similar to my own -- That "Street Smarts" does not provide a complete trading plan with a well-defined exit strategy.
This brings us back to Welles Wilder. I thought it would be a worthwhile example to use Welles Wilder's classic book, (written back in the stone-age of modern trading), as an example of exactly how a trading system is supposed to be presented to the reading public.
Before beginning this review, it is important to realize that "New Concepts in Technical Trading Systems" was written in 1978 -- Computers, Trading Software, Online Data Sources, Back-Testing Software, none of that good stuff was even available to masses back then, as they are today.
To give you a perspective of just how primitive things were back in 1978 -- In his introduction Welles suggests: "The systems in this book have been programmed for the Sharp 365-P and the Texas Instruments TI-59 programmable calculators. For these units, I can supply the program on magnetic cards with operating instructions for any or all systems in this book for a nominal charge."
When I first started trading I also used a TI-59. Now I'm thinking of donating it to the Smithsonian. Compared to today's high-speed computer graphing capabilities, it's a technological antique to say the least.
It's fascinating to realize just how dramatically the technology available to traders has changed over the past 20-years. Yet the most surprising thing about re-reading Welles' book, is that the basic trading insights and advice that Welles also provides in his book, in addition to the technical trading systems presented, is just as relevant and accurate today, as it was back then. The conclusion is obvious -- Even though the markets and trading tools may have become more sophisticated over the years, "human nature," and its impact on the markets, remains a never changing constant.
Given the age of the book, and the lack of available technology at the time it was written, I am suspending my standard criticism regarding the absence of "long-term historical back-testing" information. In 1978, back-testing wasn't even an available option. However, given the extraordinary detail that Welles provides in this book, if long-term back-testing were available at the time, he surely would have provided it. However, even back in the stone-age, when this book was written, Welles understood the importance of "back-testing" and makes a valiant effort at providing us with an excellent substitute.
"New Concepts in Technical Trading Systems" is divided into 10-sections. Section One is a 2-page introduction which explains the terms and definitions used throughout the book. Section 10 is a 2-page section covering Capital Management. Both sections are direct and to the point.
The remaining eight sections each focus on a specific "Trading System." It is not necessary to read them in order, you can select the trading system that you want to learn about and read that section alone. Each section varies in length depending on the complexity of the trading system being discussed. The eight technical trading systems presented are as follows:
1. The Parabolic System
2. The Volatility Index
3. The Directional Movement System
4. The Trend Balance Point System
5. The Relative Strength Index (RSI)
6. The Reaction Trend System
7. The Swing Index
8. The Commodity Selection Index
Each section has a similar format. The section begins with a narrative, which explains the basic concept behind the given trading system. It then details the mathematical computations which are required to create the trading indicators. And, using a hand-drawn price chart on graph paper, he translates the calculated trading indicator numbers to a graphical presentation.
Once the indicators are calculated and graphed, a set of very specific "Trading Rules" is included. The importance of the "Trading Rules" are highlighted by being printed on a solid "red" page. The "Trading Rules" are very precise and specific. There are NO subjective elements whatsoever in the trading rules. The Trading Rules include a well-defined and precise entry point, and a well-defined and precise exit point. When protective stop-losses are used, their exact placement, and subsequent adjustment are well-defined and precise.
The reader's only responsibility is to "follow the rules." Now, that's a "Complete Trading System."
Following the "Trading Rules" is a "Daily Work Sheet." Since all the math is done by hand, or via a programmable calculator, the Daily Work Sheet provides a spread-sheet format with each of the individual calculations being entered into the various columns on a daily basis. On the far right side of the Daily Work Sheet, spaces are provided for "Entry Price," "Exit Price" and "Profit & Loss." When a trade is indicated for a given day, the appropriate Entry Price is written in. The calculations continue each day down the spread-sheet until an Exit is indicated, then the Selling Price and Profit or Loss are entered for that day.
Included with the "Daily Work Sheet" is a comprehensive "day-by-day" descriptive narrative of each spread-sheet entry, and the analysis of action taken, if any. Following the day-by-day descriptions, Welles includes a number of personal comments which adds clarity and insights into the use of given technical indicator. The Daily Work Sheet covers about 30 to 40-days of trading, and includes hand-drawn chart of the daily price action with calculated trading indicator properly plotted.
Historical back-testing over long periods of time via computer was not an available option in 1978, but he provides us with an excellent substitute. Another hand-drawn chart is provided which covers a full year of trading. Daily prices are plotted along with the calculated trading indicator. In addition, he highlights, and lists each and every entry and exit made during that year, indicating the position taken (long or short), the price level, the profit or loss for that trade, and accumulated profit or loss as each of the trades were closed out.
This last chart represents the "historical back-testing" for a year. Given the primitive technology of the times, what more could you ask for?
Each and every technical trading system he proposes follows this same comprehensive format.
Now that's the way it's supposed to be done.
"Misguided Federal Agency Targets Trading Public's Tenured Educators While Turning a Blind Eye to Unscrupulous Brokerage Firms"
Press Release from London Financial & Curtis M. Arnold. In an ongoing misuse of taxpayers' funds, the CFTC has targeted the trading public's educators with frivolous lawsuits and unwarranted harassment. Given that trading educators who write newsletters and market trading software are the only hope that the public has for making a profit in the futures arena, one can only be dismayed by the CFTC's use of their funds.
The fact is that for every 10 people who attempt to trade futures markets, 9 will lose money. This sad statistic is the direct result of brokerage fees. The bulk of the money lost by small speculators ends up in the pockets of futures brokers. Part of it goes to the customer's broker (commission) while the other part goes to the floor broker (slippage). The more times a speculator trades, the more likely he will lose his capital.
Picture a sieve full of flour being shaken back
and forth; eventually all the flour falls through what appear to be tiny holes
until there is none left. Liken the flour to the small speculators' capital and
you have a pretty fair analogy of how the futures industry operates.
To be complete, in addition to the brokers, there is another player in this game who capture's some of the speculator's capital. That player is the commercials - firms whose business encompasses the production or processing of, or who deal in the commodity or futures being traded. Commercials use the futures markets to hedge positions which they control in the physical market.
Futures markets were designed for commercials to offset their risk; the speculators' role is to bring liquidity to the market and absorb that risk by taking the opposite side of the "bet." Commercials, who understand the fundamentals of their own particular market better than the speculators, generally win the bet. Their superior knowledge of their market is only one reason why; a more important reason is the fact that commercials are far better capitalized: they can withstand market moves against them which, because of the high leverage in futures, speculators can not.
The trading public has about as much chance to make money in futures trading as he does at the local horse racing track or any major gambling casino. The skinny odds is not the issue here. Regulation of those veteran analysts who are attempting to help the public through education and the dissemination of trading approaches designed to improve the public's odds is the question before us. When you go to a race track, you can buy "tip sheets" advising which horses are likely to win. Those who publish such tip sheets are veteran track analysts whose advice can improve a bettor's chance at winning. You can subscribe to hundreds of services that will provide analysis and recommendations on all aspects of sports betting. If you don't like their advice or systems, you simply go elsewhere. Trading analysts who sell their advice and systems for a fee should be protected from interference by the CFTC under First Amendment rights granted to publishers.
"Law Must Be Applied Equally or Not At All ". . . Press Release from London Financial & Curtis M. Arnold
The CFTC requires CTA'S (Commodity Trading Advisors) to be registered with their agency as such. According to the CFTC, a CTA is defined as follows:
A CTA is any person who, for compensation or profit, directly advises others as to the advisability of buying or selling futures contracts or commodity options. Providing advice indirectly includes exercising trading authority over a customer's account as well as giving advice through written publications or other media.
The wording statute is so encompassing as to bring practically anyone who breaths a word about commodity trading under the dominion of this agency. But the CFTC has been very selective as to whom they have targeted to prosecute based upon their new and more encompassing definition of a CTA. Although many major financial publications such as the Wall Street Journal, Investors Business Daily, and Barrons as well as publishers such as McGraw Hill, John Wiley and Sons, and the New York Institute of Finance would, under this definition, all be deemed to be CTA'S. The CFTC has been reluctant to fight opponents who can afford to defend themselves. Instead, the CFTC has chosen to pick on and prosecute the weak: individual trading educators who make their living by offering teaching and advisory services to new traders who wish to pay for market analysis and recommendations.
The arbitrary enforcement of this statute is blatantly unfair, immoral, and against the law. I cry foul.
All About The Dow Jones Industrial Average and the New DJIA Futures
Chicago Board of Trade
Futures Contract reprinted with the permission of The Chicago Board
The Dow Jones Industrial Average really needs no introduction. First published in 1896 to help investors identify broad stock market trends, it has since become the "Dow"-the most widely quoted and followed benchmark for the U.S. stock market. The DJIA tracks the average price of 30 large NYSE stocks drawn from a cross section of sectors of the U.S. economy. The stocks in the DJIA are all household names and are heavily traded in the United States as well as in major foreign stock markets.
The DJIA portfolio consists of equal numbers of shares of each of the 30 stocks. The total market value of DJIA stocks was $2.125 trillion, as of June 1997. This represents approximately 25% of the market value of NYSE stocks and 20% of the market value of all U.S. stocks. Partly because of the vast value this basket of stocks represents, it is very difficult for individual investors to exactly replicate the performance of the Dow without owning shares of each of the 30 stocks that comprise index - a potentially exorbitant expense.
Now, by trading CBOT® DJIA futures, you can trade the exact components of the DJlA - the ultimate proxy for the U.S. stock market-simply by buying Or selling a futures contract.
Graph 1 charts the performance of the index since 1987. Chart in Print Copy
What Are CBOT® DJIA Futures?
A CBOT® DJIA futures contract, like all futures contracts, is an obligation to buy (a long position) or sell (a short position) a specific commodity -- in this case, the basket of stocks represented by the DJIA index. A futures contract also specifies the date by which this transaction must occur, known as the settlement date, and how the transaction will be fulfilled, known as delivery. The level of the futures contract closely tracks the level of the DJIA index but may be higher or lower due to the impact of several factors to be discussed later.
Value of the Contract - Value of the futures contract is determined by multiplying the index level of the futures contract by $10. For example, if the futures index price is 7800, the value of the contract is 7800 x $10=$78,000. As a buyer or seller of the futures contract, you are essentially trading approximately $78,000 worth of stock.
Investment Applications of CBOT® DJIA Futures Options - Options are often considered the basic building blocks of an investment strategy. Their payoff patterns and risk parameters make options quite different from futures. Their versatility makes them the ideal instruments to adjust a portfolio to changing expectations about stock market conditions. Moreover, these expectations can range from very general to very specific expectations about the future direction and volatility of stock prices. There is an option strategy suited to every set of market conditions.
Using CBOT- DJIA Options to Capture Market Movements
Often, investors are in the position of reacting to rapid and unexpected changes in the market.
The transaction costs and price impact of buying or selling a portfolio's stocks on short notice precludes many investors from reacting to market intelligence. Shorting stocks is an even less accessible option for the average investor because of the margin and risks involved.
The flexibility that options provide can help you take advantage of the profits from market cycles quickly and easily. A long call option on CBOT® DJIA futures profits at all levels above its strike price. A long put option profits at all levels below its strike price. Let's examine both strategies.
Capturing Upside Profits
Scenario: In August, the DJIA is 7800 and the CBOT® DJIA September futures is 7850. You expect the current bull market to persist for a while, and you would like to ride trend without tying up too much capital and by taking only limited risk.
Strategy: Buy a September call option on CBOT® DJIA futures. Recall that these options expire at the same time as Sept. futures, and the futures price equals the cash index at expiration.
You are moderately bullish, so the 8000 call (out-of-the-money strike price) is a reasonable alternative at a premium of 101.10. You pay $1,011.00 for the call ($10 x 101.10).
Results: At September expiration, the value of the DJIA is 8,110. Now, your call is in the money, and you exercise it and earn $89 ($1,100 - $1,011). If the DJIA stays at or below 8000, you let the call expire worthless and simply lose the premium. This is the maximum possible loss on the call. If the DJI increases by 101.10 points above the strike price, you break even.
Comments: An alternative to buying the call option would have been to invest $78,000 directly in the DJIA portfolio. Given a value of the DJIA of 8110 in September, you would have had a gain of $3,100. If you had invested directly in the stocks, however, an unexpected market decline would have led to a loss.
Taking Advantage of Market Reversals
Scenario: You expect a reversal of the bull market and would like some downside protection.
Strategy: Buy a put with a strike price of 7700 (out of the money). The premium of the put is 98.05, for a total cost of $980.50. If the DJIA decreases to 7600, with a corresponding decrease in the futures contract in September, the put is exercised at a value of $1,000. The maximum loss is the total premium cost, which is lost if the DJlA stays above 7700 at expiration and breaks even when the DJIA decreases by 98.05 index points below the strike price.
Using CBOT® DJIA Puts to Protect Profits from a Bull Market
During a sustained bull market, investors often search for ways of insulating their past gains from a possible market break. Even when fundamental economic factors tend to support a continued market expansion, investors have to watch out for unpredictable "technical market corrections" and market over reaction to news.
Selling stocks to reduce downside exposure is inefficient because it sacrifices potential price gains. Also, the transaction costs of quickly moving in and out of stocks as the market changes are exorbitant. What is desirable in a fluctuating market environment is an inexpensive financial instrument that protects the value of a portfolio against a market drop but does not constrain upside participation. Like previous example, this is precisely what put options are designed to do.
Scenario: The market is still in an uptrend in August. Signals about inflation, employment, and economic growth continue to be generally favorable yet there is lingering uncertainty. Market participants are already questioning whether inflation will pick up and the Federal Reserve will tighten short-term interest rates further in the coming months. You have $78,000 invested in the DJIA portfolio, and the DJIA is at 7800.
Strategy: Purchase a put option on September futures as a way of insuring your portfolio against a possible market downturn. The put you purchase will reflect the extent to which you believe the market may fall and your risk tolerance if your opinion is incorrect. You decide to buy a 7600 put at a premium of 66.10. Your cost is $10 x 66.10, or $661.00.
Results: Buying the put places a floor on the value of the portfolio at the strike price. Buying a put with a strike price of 7600 effectively locks in the value of your portfolio at $76,000. Above its strike price, a put is not exercised and the portfolio value is unconstrained. If you are wrong, and the market goes up, you are out of pocket the premium paid for the put. Depending on which strike price you choose, you increase or decrease your downside risk. You break even when the DJIA reaches a value of 7533.90 (7600 - 66.10), the strike price less the put premium. At this point, the unprotected and put-protected portfolio are equally profitable.
Comments: For different strike prices relative to the underlying futures, put options give partial or total protection from possible market breaks with no need to sacrifice the profit from additional stock price advances. You can elect to protect all or only part of your portfolio and can choose the strike price in accordance with your market forecast and risk tolerance. Chart in Print Copy
Achieving Low-Cost Portfolio Protection
There is a less expensive alternative than buying a put to protect the value of stocks-the collar. A collar consists of a long put and a short call at a higher strike price than the put. The collar builds a floor at the strike price of the put and a ceiling at the strike price of the call. In this fashion, you decrease your costs because premium you collect on short call reduces cost of the long put.
Scenario: In August, you would like to have complete portfolio protection from the bear market you anticipate, but you are concerned about the expense of the 7800 put. If you are wrong, and the rally continues, you believe there is a low probability that the DJIA will rise above 8000, and you are willing to trade off any appreciation above 8000 for this reduction in the cost of thorough portfolio protection. Chart in Print Copy
Strategy: Sell a call at a strike price of 8000 and buy a put at a strike price of 7800. Results: With this spread, the value of the portfolio cannot fall below $78,000. The call premium is 101.10 and the put premium is 139.22. The net cost of portfolio protection is $10 x (139.22 - 101. 10)=$381.20, about 40% less than the cost of the 7600 put in the previous example.
Comments: The collar has allowed you to gain some market upside while limiting your downside risk. The "cost' of this protection is that you forego the slice of profits from increases in the DJIA above the call strike price. Again, the choice of strike prices for the collar depends on your expectations and risk tolerance.
Enhancing Portfolio Yields
Stock price fluctuations often seem to alternate between directional bursts of volatility and direction less oscillations. These market phases are often called "trading range markets." When you expect the market to continue in a trading range, you can enhance the stagnant return on your portfolio by selling calls on CBOT® DJIA futures options.
Scenario: In August, the value of the DJIA is 7800. Based on your market observations, you do not believe that the DJIA will emerge from its current trading range and increase above 8200 within the next month.
Strategy: Sell calls at a strike price of 8200. The premium of the September 8200 call is 47.65; selling an 8200 call generates an immediate $476.50. Chart in Print Copy
Results: You keep the entire premium if the index stays below 8200 by the September expiration. In return for this immediate gain, however, you give up all price appreciation above 8200. Above 8200, the combined value of the portfolio and short call is $82,000. The break-even point is 8,247.65, where the DJIA is equal to the sum of the strike price and call premium. It is only above this point that the covered call portfolio becomes less profitable than the original portfolio.
Comments: Since the short call is covered by the portfolio, this strategy has no downside risk. The only upside risk is that you give up the price appreciation above the strike price of the call; however, the call premium paid at the outset may compensate for this risk. The optimal strike price of the call depends on the probabilities you have assigned to future increases of the DJIA.
How To Improve Your Trading With Knowledge On The Correlation Between Sport Betting, Wagering & Handicapping vs. Speculation - Tom D'Angelo
This is my seventh article intended to provide readers with a coherent, disciplined money management methodology, designed along the lines of a successful business. Refer to my previous articles in Vol. 3-8, Vol. 4-2, Vol. 4-3, Vol. 4-4, Vol. 4-5 and Vol. 5-1.
In this article, I will attempt to correlate handicapping and money management techniques used by professional sports and horse bettors here in Las Vegas with the world of speculation. Most of the professional bettors here in Las Vegas use money management software I developed about 6-years ago. I later modified the techniques utilized in that software for use by futures, stock and options traders and eventually developed The Manager software for traders. I attempted to describe these money management techniques and methodology in previous articles listed above.
Since a good number of traders also wager on sporting events or horse racing, I thought that the correlation between wagering and speculation may prove to be the basis for an interesting article.
Basically, the sports or horse player is looking for "value" before placing a wager. There are two definitions of "value." The first definition arises if you analyze a game and determine that the line offered on the game presents a team which should be favored, or an underdog, by an amount different than the line offered by the bookmaker.
For example, your legal bookmaker tells you that the Jets are favored to beat the Colts by 3-points. After you analyze the game yourself by poring over prior statistics, psychological factors, injuries, etc., you determine that the Jets should actually be favored by 10-points.
Since your legal bookmaker tells you they are favored by only 3-points, you have 7-points "value" in the bet since you are predicting they should be 10-point favorites and you are able to bet them at only 3-point favorites. Don't ask me how you determine your own line. Determining your own line is just like trading, there is no "right" way to make your own line, just there is no "right" trading system. The line, and the trading system you develop will reflect your own mental right brain/left brain makeup and your own prejudices as to what factors to include in developing a line.
Similarly, although they don't realize it, traders perform the same task in developing a trading system. The trading system is used to determine "value" and establish a "line."
For example, your bookmaker, excuse me, I mean the market, tells you that beans are currently trading at $6.50, but your trading system says to buy the beans.
Which obviously begs the questions, why on earth would you buy beans when your bookmaker, oops, excuse me, the market, is telling you that the current opinion of the entire universe of individuals in the world who have an interest in the price of soybeans are telling you that beans are currently worth $6.50 . . . no more . . . no less?
The answer is that your trading system says that you have "value," i.e., that beans should not be selling at $6.50 but at a price higher than $6.50, possibly $6.75 or $7.00. In other words, your bookmaker, oops again, I mean the market, is saying that beans are favored by 3 points but your handicapping says that beans should be favored by 10 points . . . so you buy (bet) on beans.
Now you know why traders have losing trades and 95% eventually fail. Your line is not as good as the bookmaker's, oops again, the market's line. You thought you had value but you didn't. Your line said that beans should be higher than $6.50 so you bought beans. But your line was not as good as the bookie's line. The bookie said that $6.50 was a fair price for beans, not $6.75 or $7.00. And the bookie was right, and you have a losing trade.
The Jets were actually reasonably priced as 3-point favorites as the bookie said, not 10-point favorites as you determined. The Jets do not win by more than 3-points, they don't "cover" the spread of 3-points, and you lose the bet.
When you make a trade, you are betting against the bookmaker . . . and the bookmaker, oops, I mean the market, is in the business of establishing the line. And the market is very good at what it does (random walk, efficient markets, etc.) just as Las Vegas bookmakers are very good at what they do.
Most lines provide little value in Las Vegas. Since no matter which method you use to establish your own line, your line will usually end up within 2-points of the bookie's line, affording little "value" in the bet. This is especially true of the lines on NFL games. Making the NFL close to unbeatable in the long run and NFL games are usually avoided by most professional bettors in Las Vegas (professional bettors call the NFL, the National Coin Flip League).
Regardless of the trading methodology you use, stocks, options, futures, long term, short-term, fundamental, technical, breakouts, patterns etc., the line created by your trading system must be better than the market's line for a sufficient number of trades in order to generate a profit.
If your trading system is not capable of creating a line better than market, you'll eventually go broke. The "value" you thought existed on your trades did not exist. . . it was an illusion.
The above discourse is the generally accepted definition of value." The second definition is one mostly of my own creation and leans towards task of identifying and exploiting a positive expectation game, or in other words, "value" comes about in situations where you have demonstrated that you have an "edge" in real-time trading.
The technique I use for determining whether this "edge" or "value" exists is the Profit Center methodology explained in my previous articles and is used in The Manager software I have developed. Refer to my previous articles for a detailed description of this methodology.
Basically, Profit Centers are established to categorize each actual trade after the trade is closed out. After a Profit Center contains about 30 trades, the trader will have a pretty good idea of his/her profitability performance in that Center. Centers which show profitability indicate that the trader has demonstrated success trading that particular technique and is enjoying "value" or an "edge" in that particular trading methodology.
For instance, assume that you set up a Profit Center named SP50OP1 which will include all your SP500 trades taken off of a price pattern identified as pattern #1 (P1). After you have entered 75 actual trades into this Center, you determine that the Profit factor is 1.82, indicating that you have a profitable Profit Center.
You have demonstrated that your line was better than the market's line when this price pattern developed. You have discovered a positive expectation game . . . you have found an "edge." You have found "value" since price pattern #1 for the SP500 indicates you have an advantage and an exploitable situation.
Professional bettors perform a similar task when they follow as many as 10 or 15 handicapping methods for each sport and attempt to wager on the 4 or 5 which show early signs of becoming the methods which will produce 57% or 58% winners for the season. Each handicapping system becomes a Profit Center which is analyzed on a daily basis as regards to profitability and determining what % of bankroll should be bet on each system, if a bet is called for at all.
Can this "value" disappear? Can a profitable Profit Center become less profitable, or even unprofitable? Of course.
This is what "money management" really means . . . how do you manage your trading business? How do you locate, hold on to and exploit situations where you have found "value." How do you lessen the negative financial impact when you bet into a situation where you thought you had value, but instead, no value existed? My previous articles dealt with this subject and I go into it in greater depth in book I've just published.
As a final comparison between wagering and speculation, I will offer some comments on "the vig." The "vig" or the "juice" as it also called, is the price you pay for being allowed to play the game. Everybody must pay the juice if you want to play the game. No one escapes. The juice in sports betting is having to bet $11 to win $10, providing the bookmaker 4.5% return on his investment. If you would like to win $100 on a bet, you must bet $110. If you lose the bet, you lose $110. If you win, you win $100. In horse racing, the juice is the 17% the track takes out of the pari-mutuel pool before winning bets are paid off.
click here for a dependable seller that will give you the heritage gold group you're looking for quickly and easily. In speculation, the juice is commissions and slippage. While deceptively small, the juice will eat you up in the long run, whether you are a bettor or trader. Many traders eventually learn this the hard way and evolve into trend followers which trade few trades and stay in trades a long period of time. This is the only way to decrease the juice. There is no other way other than negotiating the smallest commissions possible and attempting to obtain minimal slippage by trading direct to the floor. Unfortunately, no broker will let you trade for zero commissions and attaining zero slippage is impossible, so the only true means of reducing the juice is through less trading.
Many daytraders have a very difficult time achieving long-term profitability since they're in the worst situation, maximum juice and limited profits. They can't let profits run since they are day traders and must get out at the close. But the juice keeps piling up if they continually do 3 or 4 trades a day.
The juice is like being pecked to death by a thousand tiny birds, no one bird is big enough to kill you, but the continual pecking over hundreds of bites eventually reduces you to bag of bones.
I have seen many trading systems advertised which show magnificent profitability, but there always seems to be an asterisk somewhere that states "slippage and commissions not included in hypothetical trading results." Put in $125 slippage and commissions per trade and the high profit trading system turns into a marginally profitable system or even an outright loser.
For those of you who develop and test trading systems, use $125 per trade for slippage and commissions. Anything less and you are fooling yourself. Don't be deceived by the small amount of the juice on each trade. Bookmakers have turned a very tidy profit on this small percentage advantage over the decades. If you do a large volume of trading, you will be juiced to death if your Profit Factor is not sufficiently high enough to withstand the price you must pay to play the game.
In my next article, I will present an analysis used by The Manager which analyzes the impact of the "vig," commissions and slippage, on trading profits and losses.
Editor's Note: We want to thank Tom for his excellent series of money management articles. We asked Tom to do this one on Sport Betting as we have had many requests for info on the correlation of betting and handicapping to trading. We have also added Tom's Money Management Website as a link to our site. To visit Tom's site and many other interesting Websites, please visit our links at: www.webtrading.com/sites.htm
Tom goes on to mention he will be demonstrating The Manager software he uses for his own money management reports at the Dow Jones Telerate Seminar in Las Vegas at the Riviera Hotel during mid-October.
Unfortrunately, our publication was printed too late for you to get this announcement before the seminar.
Allegations About John Hill & Futures Truth" Why Are There Lawsuit Threats? for Printing Truth" - by Kent Calhoun, KCI Seminars
Friend Dave Green, I have come to respect you more than you know. That respect will not be diminished by your reluctance to publish the last letter I have sent you. I do think it would be to your advantage to review the Club 3000 News issue from which every figure in my letter was derived.
There are only two figures you may not recognize, is the 44% figure which is the Bell total of $765,973 divided into the difference between his testing and Hill's of $341,266=44.55%. The second figure of 87% which is the 14 commodities with lower total equity divided by the 16 total commodities in Hill's portfolio, 14/16=87.5%. (See these are on the chart inClub 3000.)
Dave, while anyone can sue anyone, it is not automatically accepted by a judge, who must first review the evidence and decided if a suit is justified. If your evidence comes from previously published figures, the suit should never be accepted. Any liability for such a suit defers to the previous publication of the figures quoted verbatim in your article. The Club 3000 issue by coincidence contains a letter by John Hill, which demonstrates his belief in the validity of the Club 3000 publication itself!
Still, you may want to back off. Knowing John Hill's nature and (alleged) love of money, I seriously doubt he would ever sue you, but it is probably not worth publishing my letter to take the chance. I believe my finances are suit proof, at least my attorneys tell me they are.
I will never forget that you were the only person, besides my dead Army buddies, to have the courage to stand and fight against the (alleged) unethical business practices and (alleged) lies of John R. Hill. You truly deserve a modal for being a real stand-up guy in a world of gutless wimps! Thank you Dave for all you have done. I am proud to be considered your friend.
Quote from Hill's letter enclosed. "Can you imagine General Motors or Proctor & Gamble withholding performance data on their products if they fail to live up to advertised expectations? Of course not! What did Hill do by not testing all most active contracts? He withheld information on his (alleged) faulty testing procedures.
Recently I wrote a letter (published in last issue of CTCN) reviewing the "All-Time Top 10 Trading Systems" by "Futures Truth." Every response I received was extremely positive. To the sophisticated trader it presented original trading system evaluation criteria that had been never seen before Dave's courageously published it. Few people possess Dave's guts and integrity.
Let me just share one insight. I stated to never trade a commodity whose profits were less than the maximum equity drawdown, since the system is producing more negative equity than positive equity. Nowhere in any book or article has this information ever been discussed before I sent it to Dave Green. If you trade a commodity that made $10,000 but produced a $50,000 negative drawdowns before making $10,000, your natural question should be as a trader, "when is the next $50,000 drawdown going to occur?" This is just one valuable insight. There were at least eight others presented.
Why is John Hill angry? Imagine you are a system developer. You have paid a testing company $13,500 in cash, provided two complete trading manuals, two software, two seminars, and 13 meals to Mr. Hill & Mr. (John) Fisher, to produce figures on your work. Now imagine an article is printed in a newsletter that shows (alleged) irregular testing procedures that financially benefit a trading system owned, ranked, and sold by the same testing company.
My telephone rung off the hook. My manual contained over 200-pages of testing results done by this testing company and traders wanted to know if the testing was accurate. Is this logical? I think so, after all these traders risk their money every day on these figures. I immediately wrote a letter of support for the testing company, and suggested positive testing procedural changes. I suggested they stop rating and selling their own trading system. I did this in the friendliest manner possible. I am told in so many words to "Go to Hell" This is after my clients and I spent over $50,000 with testing company for testing, software, trading systems, seminars, and books over l5-years!
My clients come first. There are dozens of incidents I could mention, but here are two that can be verified by CTCN subscribers. One CTCN subscriber in Canada was offered a full money-back refund on software sold more than a year ago beyond the refund time limit. Right Neil? I recently tried to save another CTCN subscriber over $2,000 in past KCI Updates by offering to work with him at no cost. Right Chuck? My purpose in wanting correct testing procedures was to verify the testing was accurate. I had provided over $25,000 to receive accurate testing results. Was l entitled to get what I paid for?
Another newsletter (Club 3000) recently
printed several untruths from Mr. Hill. One of these false allegations from Mr.
Hill stated, "I never made money" trading an account with Mr.
Hill's brokerage testing company. I have Faxed Dave my IRS-1099 trading
statement. It shows I produced a profit in 1993 with the brokerage account. (I
think my right of privacy was violated by Hill providing any personal
information to the public.) The account was closed because I was being over
charged by Mr. Hill 10% over the agreed commission rates. (Mr. Hill apologized
and offered to pay the total difference, but he had ignored this fact 3-times.)
Copy of Statement in Print Copy
Mr. Hill stated there was no record I have profitably traded an account. The U.S. Commodity Futures Trading Commission (CFTC) reads this newsletter and they know last year I traded two accounts. One made more than twice as much money as the other one lost in 1996. George Hanley, one of my friends, bought a trading system and testing software from Mr. H's company on my recommendation.
I am not a great trader. I am an excellent teacher, who cares a lot about his friends and clients. George Hanley was Chairman of the Chicago Board of Trade Soybean Options Committee during the same time I traded with Mr. H's company. I took a $25,000 account to $85,000 in six weeks of real-time trading that excluded a $17,000 profitable trade.
This trading was mentioned to the CFTC in court May 24, 1995. Mr. Hill had to know about it since Tom Birnam communicated these facts to Mr. Fisher, president of the testing company. (You may see George's letter in the most recent KCI ad - October 1997 pg.-101 of Technical Analysis of Stocks & Commodities Magazine which refers to this real-time trading demonstration.)
Mr. Hill is correct about one thing. KCI Seminars was investigated by the CFTC and I voluntarily went to court to defend myself. The reason for the investigation was a letter Mr. Hill (allegedly) sent to the CFTC that included false allegations about me. Mr. Hill did not know Mr. John Fisher provided KCI testing results on which KCI advertising was based. When the CFTC investigator handed me Mr. Hill's letter in court, I laughed. The CFTC had Mr. Fisher's KCI test results which proved Mr. Hill's allegations were false. Mr. Fisher's testing results were published verbatim in KCI Seminar ads.
I will not dignify Mr. Hill's hostile remarks (allegedly) offending my patriotism and religious beliefs. I am a veteran who volunteered to serve his country in Vietnam, and refused to accept a 25% monthly disability check from the government for injuries sustained while I was in the service of our country. Five years after my honorable discharge, I volunteered a second time for active duty believing my injuries had healed, but failed to pass physical. I apologize to no one for loving my country.
I apologize to no one for my spiritual emphasis of trading, which I believe contribute to achieve trading success. I do not proselytize any specific religious beliefs, but do emphasize only the most important spiritual values common to all the worlds' greatest religions. I am the object of Hill's hostility for my beliefs on these issues, but I will stand alone against the entire world and every person who holds his similar bigoted beliefs.
I would willingly die with honor for my country and my spiritual beliefs today. I am not a hero like David Braxton, Jimmy Davis, or Mark Thibadeux, three of my buddies who died in a rain-soaked hooch in Vietnam. I am just an American who loves this country, like are the majority of CTCN readers. Mr. Hill's remarks reflect his and the other newsletter editor's prejudicial value systems.
Two years ago, I sent a peace offering to the editor of the other newsletter (Club 3000 News) and Mr. Hill. My Christmas cards and presents were returned by them without an explanation. In my heart, I have forgiven them, yet I still believe Mr. Hill needs to explain why his testing procedures are very questionable, why his testing irregularities tend to financially benefit his trading systems, and why no independent testing has verified his results (as he still advises other vendors for their systems). I still have considerable doubts about his testing.
Editor's Note: There have been threats of lawsuits over these and other controversial articles. Please note the opinions and comments published in Commodity Traders Club News are not necessarily the opinion of CTCN or its Editor. Frequently, negative words or statements made are allegations, not verified or proven facts. This is true regarding everyone, and is not limited to only Kent Calhoun and John R. Hill.
Sometimes, the words "alleged" or "allegedly" are inserted by your Editor. Not only in Kent Calhoun KCI Seminars and John R. Hill Futures truth matters, but also sometimes involving other subjects, both in this and past/future issues. In particular, many words in italics and/or brackets are often inserted by your editor and not the author.
Manage It While You Can! - Rick Ratchford
My experience at Futures West Conference this year was a positive one. It was a pleasure to meet many trading personalities as well as fellow traders as myself, and discuss one of my favorite subjects . . . making money trading futures!
If I had to come up with one main subject that underlined the jest of what most of the speakers there were trying to convey, I would have to say that Money Management carried the greatest weight. Now, only one speaker really went into depth on this subject, that being Larry Williams in his keynote address. But it seemed to act as an impetus for this subject to pop up in almost every other speaker's outline.
Whether these were last minute changes prompted by their hearing Larry's keynote address, or something they had originally intended to talk about anyway, the bottom line is that they all recognized the importance of Money Management as a major part of one's trading plan.
It was very interesting to see the many examples that Larry and some of the other speakers were providing to show that even with a system that is so-so, you can make money with proper management. As a matter of fact, on the flip side they showed you could have an excellent system or method and not make money in the long run if you don't exercise, not only proper risk management, but proper money management.
Let me separate the two for those who may not be familiar with these terms. Risk management is more akin to determining how much you are willing to risk and taking steps not to lose more than that. This is usually done by placing stop loss orders in the market when you place your entry orders or shortly after once you are in the trade. Some may do so with mental stops, which take much more discipline, usually more than most traders possess.
Money Management is actually performing one or more calculations based on how much is in your account, how much you are willing to lose on a trade or how much drawdown your system is rated for, and largest loss expected ever for that system. The results are meant to help you decide on how many contracts you should be entering with.
The damage most traders do to themselves is over-trade. With big eyes on the pot-of-gold that is supposed to be at the end of the rainbow, they may put on very lopsided positions which their account cannot adequately handle for the long run. If a trader puts on more contracts than is mathematically feasible, results are devastating!
For example, if you have a $10,000 account and your risk is set to l0%, this is $1,000. If the max. loss allowable per contract is $500, your maximum exposure should be no more than two contracts. If you lose the $1,000, your next trade should now have a maximum risk of $900 (10% of $9,000). Again, if your maximum allowable loss is still $500, you now can only trade one contract.
The idea is akin to traveling from point A to point B, but each time only going halfway. In theory, you will never reach B. For example, say the halfway point to B is C. Now we have C to B. Now, go halfway again and call it D. Now we are at D and need to go to B. Again, go halfway. See what is happening here. If you only go halfway, you will technically never reach B.
So, if you always use just a percentage of your account per trade, you should theoretically never reach $0. This is part of a good money management plan.
Don't make the mistake of compounding the number of contracts you trade because you lost on the previous trade and want to win it back. My father was a compulsive gambler and each week he would lose his whole paycheck at the horse races trying to win what he had lost previously. Not only did he lose everything, he was miserable and made everyone else feel just as bad.
If you do not properly use Money Management in your trading, you are in essence gambling. You are not looking at trading as a business, which is the way you should be looking at it.
A formula was provided that works well for system traders. It goes like this: Account Balance - Risk % (ex: 2, 5, 10, 20%) divided by the largest loss rated for system. The largest loss is usually the drawdowns the system may experience.
Now, say your account balance is $20,000. You set your risk exposure to 20%. If the drawdowns for the system are $6,000, can you trade this system? No. Why? Take 20% of $20,000 and you get $4,000. Divide this by $6,000 and your result is less than one. In other words, you can trade ZERO contracts! Now, say the drawdowns of your system or method is $2,000 maximum. Divide your $4,000 by $2,000 and you can trade two contracts.
Say you lose. Your account is now $16,000. 20% is $3200. The next trade you divide $3,200 by $2,000 and it goes into it one time. Say you find a system where you will only risk $500 per trade. With $16,000 at 20% risk ratio, you trade six contracts for $3,000 maximum risk.
Now, you have to decide on what your risk exposure is going to be. The lower the risk, the lower profit potential (and loss potential) you will experience. However, if you enter only trades that offer at least 2, 3 or more to 1-profit/loss ratio, and you win just 3 or 4 out of every ten trades, you are going to come out way ahead! What this means is that you can trade with almost any halfway decent newsletter advice or system and if you use proper money management, you're going to make money.
Don't think in terms of how much you can make on each trade, but rather how much you can lose. If you keep this in mind, you are going to lose, you will be doing more to assure you stay in the game long enough for the wins to put you ahead. Then, and only then will your account take care of itself.
Manage your account while you can!
Beliefs That Don't Support Your Goals - Dee Switzer
Trading gives me many opportunities to address myself in becoming the best that I can become. I have learned to address each issue that surfaces because looking in the computer monitor, is like looking into my interior self.
One of the issues I am working on is to question all my beliefs that don't support my goals. When a belief doesn't support my goals, I ask myself as to where did that belief come from; an expert in the field, childhood rearing, from experience, etc. I then keep de-energizing the old belief until I am convinced this is not a belief I want to keep. I then develop a new belief that replaces the old one and will support my trading journey.
This is an on-going process and it helps me get red of excess baggage that gets in the way of becoming a consistently successful trader.
Factors Which Could Cause The Market To Decline - Arden Pulley
I have observed that when the price of crude oil goes very high, the stock market goes down. I saw it happen in 1973-74 and in 1990. I have heard that it happened in 1929. The price of oil has recently gone above $25 per barrel and then dropped to slightly less than $20 per barrel. The discovery of crude oil peaked in 1962 and has been declining since then. On the other hand, the consumption of crude oil has been increasing.
At some time in the future, it will become obvious that business as usual will not continue. The price will begin to rise and shortages will develop. It will be like the early seventies only it will not be a short-term problem like it was then. Many will not be able to afford gasoline and their lives will change significantly for the worse. Before this happens, the stock market will tank. Buy and hold investing in stocks will fall out of favor for a long time. I predict that this will happen within 10-years.
The government will step in to solve the problem by holding prices down and perhaps rationing. They will not solve the problem but will make it worse by spreading the shortage around and making it last longer. Those who are ready will profit when the situation arises; those who are not will suffer. Some have predicted that only the rich will be able to afford gasoline to drive their cars. There will be a problem for a few years, but companies doing research on alternative fuels will come up with a solution when it becomes obvious that they can make a profit by doing it.
An announcement by OPEC of a planned cutback in production sent the price of oil up and the stock market down on one particular day. The increase of the Deutsche Mark correlates with the decline of the stock market. The importance of following the DM was mentioned by Larry Williams in a recent interview appearing in Technical Analysis of Stocks & Commodities.
A rise in the interest rate or a decline of the bond market could trigger a decline of the stock market. Other factors which should be considered include: a rise in the price of gold, a loss of confidence in the government to pay its heavy debt, or a general lowering of corporate profits. These indicators should help you improve trading in the S&P 500 futures index. Some on a short-term basis, others long-term.
There are two ways to invest. One way is to study the supply and demand and then predict what will happen. The problem is that it is very difficult to accurately predict what will happen in the future. Once you make a prediction, you tend to stick with your prediction.
I predict that the Dow Jones Industrial Average will have a difficult time going above 8000 and staying there. If it does not, then that information is important. If you make a prediction and then do not change your opinion with changes in the market, then you are in when you should be out and out when you should be in.
Another way to invest is to figure which way the market is going and then establish your position according to what the market is doing. If you make an investment according to the prediction that I made above, I will not be there to tell you what to buy, when to buy it, how much to buy and when to sell. If you let the market tell you what to buy, when to buy, and when to sell; you will be more likely to be right. If you use money management to tell you how much to buy then your decisions are more intelligently made.
"Take Your Profits While They Are Still There" - This Is What Joe Told Me At His "Trade The Truth" Seminar Back In 1992 - Bill Donnally
In an attempt to evaluate Joe Ross' suggestion, I programmed a simple trend-following simple reversal system that executes trades at the highest or lowest price for, say, the last 9-days trading using the SuperCharts' system simulator. Although I tried 9-days for the breakout from highs or lows, other trials showed that the number of days was not critical. On the charts, the breakout trade-entry signal-arrows somehow remind me of breakouts from classic "l-2-3" chart patterns.
I used (Omega Research) Super Charts, version 4, trading-system simulator Easy Language which allowed long or short trade entries for the next bar (tomorrow) on a stop=today's high, or on a stop=today's low. Simulated trading costs were $20 round-trip commission plus $100 slippage per contract. I added a protective-stop loss (money-management), plus a "%-profit-risk trailing stop" to the simple breakout system to effectively "grab profits while they are there."
A "%-profit-risk trailing stop" triggers-on after the profit in a trade reaches a predetermined "floor," and then the trade is exited when a certain percentage of the profit is lost (for example, exit the trade when profit decreases, say, 50%, from a profit level ("floor") of $500 or more - therefore, the trailing stop, once the profit "floor" is reached, exits the trade with a profit of at least $250 (50% of at least $500). Adding those two kinds of stops "turned the sow's ear into a silk purse" -- that is, adding such %-profit-risk-trailing-stops generally transformed the system from a marginal, often losing system, to fairly consistent performance with big winners!
The system got the big moves. What appears to be interesting is the "% wins" rate, averaged over all tested contracts, seems was over 50%, together with a good average $ win/loss ratio. Surprisingly, the SuperCharts' simulation report summaries indicated the drawdowns were typically small or tolerable, due to addition of both protective money management and "%-profit risk" trailing, stops to the basic 9-day breakout system concept.
My initial system evaluation of more than five commodities (using still-active contracts like Gold, Corn, U.S. Treasury Bonds, Japanese Yen, etc.), showed surprising results. However, these markets have been trending rather well lately. Statically speaking, it's best to avoid arriving at conclusions until many more, different contracts are tested over several year time periods. I'm sure that similar trading-system simulations have been done by other traders, but some traders might want to check my initial findings and conduct further analysis.
Trading is really this easy -- or could it?
Perhaps something more is needed. Someone once told me you can have the greatest system in the world, but "90% of trading is psychological" you've got to conquer yourself -- have self-discipline. Resist changing your rules when involved in a trade, etc. Of course, realistic money management is important also. Financial reserves must be big enough to survive drawdowns.
I suppose trading a breakout system in "real-time" might involve some gut-wrenching, but highly profitable, trades that most people simply won't do. An example might be the Commodex System which has statistics downloadable from their Website showing an average annual profit greater than 800 over last 30+ years (assumes $250K account, trades all major commodities in US, and less than 50% of account was used for margin).
On an intuitive impulse, I just re-read part of the 1994 book "Winner Take All" by William Gallacher (an important book -- I'd say it's one of the five or ten must-read all-time best futures books that I'm aware of.
In Chapter 4, "Expectations,"
Gallacher makes the plausible argument that, over time, system or technical
traders can hardly hope to consistently achieve returns of 25% on account; and
Gallacher concludes: "any system trader who consistently doubles his money
on an annual basis has achieved the financial equivalent of skiing to the North
Pole in a bathing suit."
For the past couple of years I've been looking
at results published in Futures Magazine of Commodity Funds run by professional
money managers. I got the impression that 25% average return on account over
many years (not just one great year or two) is indeed the "stuff of
dream," and would be great for practically any trader.
Editor's Note:This is a good opportunity to discuss the Futures Magazine Commodity Fund monthly performance numbers which some of our members ask about from time-to-time. It's alleged most of these Funds are not really interested in making profits trading their managed accounts. Most of these "funds" have a very large amount of money under management. According to our information, the average fund charges a ½% per month management fee, based on account month-ending balances. This equals 6% per year gross profit to the Fund, on average.
They make this money regardless of whether they make profits or not. Since many of these managed futures funds have millions of dollars under management, you can see 6% profit adds up to lots of money. For example, 6% of ten-million dollars is $600,000 per year. Or a comfortable living of $60,000 a year in fee income, based on "only" having one-million under management. Not too bad for doing little more than basically break-even commodity trading! Also, remember, many money managers also receive significant income from the percentage they receive of each trades brokerage commission which is paid to the Introducing Brokers trading advisor.
Generally speaking, it seems that most successful traders I know of, also consider fundamentals in their approach to the markets (not just technical/mechanical analysis). Market selection would be an example.
I wonder if purchasing options-on-futures to hedge futures trades is basically a good idea. I've heard that it's better in the long run to make frequent attempts to enter a futures trade rather than buy options for protection (options-premium is a wasting asset, etc.). Any opinions on this?
Futures Truth Did A Disservice by Showing How Well My Systems Were Doing! - Bruce Babcock of Reality Based Trading Company
Thanks for publishing Kent Calhoun's critique of John Hill's article in Futures. I wrote Futures several very long letters back when my systems were showing very well in Hill's Futures Truth Top-Ten lists.
I told them they were doing a disservice to their readers by publishing his garbage. I also pointed out the conflict of interest of him rating his own system! I never could understand how they fail to see through John Hill. You are about the only person publishing the facts about what I have always called "Futures Half-Truth."
Editor's Note: This is probably one of the most amazing happenings of all-time in the pages of Commodity Traders Club News. Isn't it incredible how a trading system provider (Bruce Babcock's Reality Based Trading Co.) say's Futures Truth is doing a disservice ranking their trading system, whether it's doing well or doing poorly! Your editor never dreamed one day someone would "complain" about their trading system performing well! Only an incredibly honest and truthful person would ever say such a thing! What a compliment to Bruce Babcock!
Can Stress and A Poor Diet Combined With Making Money & Trading Cause Cancer? " End Of The Trail" - Gale Paxton
August 5, 1997, I just finished the May/June issue (Vol 5-3) of CTCN and was saddened at the realization that Jo and I are no longer a part of the world of traders. In January, Jo had major surgery for the "BIG C" and the prognosis was extremely negative. At the time of the diagnosis she chose not to go the chemotherapy route for a couple of reasons. First of all, we both felt that it made no sense to pump ones self full of a toxic chemical that not only attacked the cancer cells but her immune system as well. Second, there is no real clinical proof that chemo works against breast cancer any better than non-toxic therapies.
In fact, our research following the surgery indicated that naturopathic treatment had a better track record than the conventional surgery/chemo/radiation therapies. So far nothing seems to be stopping the spread, but we are hopeful that her therapies and a lot of prayer will start to take hold soon. For that reason we closed our trading account a couple of months ago.
Why am I telling you all this? Because I would like to pass on some of the information that we have dug up about cancer and some of the major causes. There are many factors that can bring one psychologically and physically to a point that weakens your immune system and allows those cancer cells (which we all have to a degree) to manifest into uncontrolled, full-blown cancer. The stress that occurs from putting too much emphasis on making money as a trader is just one of the factors that works against our immune system. The other major factor is our diet. The diet thing is weird because over the past 4 to 5-years we had become almost completely vegetarian with Jo eating almost no meat at all and me very little. As it turns out, even our attempts at trying eat a more healthy diet fell far short of our intent.
For the ladies out there, we are talking not only breast cancer as in Jo's case but vaginal and uterine cancer as well. For you guys, you need to think about colon and prostate cancer. As it turns out, much of our digging for information on cancer and the treatment of cancer has confirmed what I have felt all along about the AMA, Pharmaceutical industry, American Cancer Society and the American Cancer Institute and FDA, they are running a scam on the American public.
To retain or improve your mental and physical health, I think the best advice that we can give to all of our friends in CTCN Land, be they new traders just starting out or old pros:
1. get on a
really healthy diet;
2. make sure that you essentially have a laid back, no stress, objective mental attitude and;
3. last but not least, is to stop and smell the roses daily. You'll live longer, happier and healthier.
As you go through your daily routine think of Jo once in a while and if you're so inclined, say a little prayer for her recover. We both still feel very strongly that one can make a very nice living by trading if they have the right mental approach along with the right technical tools for them. So, if Jo beats this thing we may just get back into the old trading game.
I firmly believe that Dr. (Van) Tharp's' course would be of great benefit for all who are thinking about trading or just starting out, unless you have an unlimited margin account. Also, here are some books that may also be of great help from both a mental and health approach.
The McDougall Program, "Twelve Days to Dynamic Health" by Dr. John A. McDougall, MD The McDougall Tapes by Dr. John A. McDougall, MD. Note: The tapes can be obtained at your local library. Dr. McDougall also has other books. Dr. Depak Chropa, all of his books and tapes. Many can be obtained from your library. Dr. Wayne Dyer, all of his books and tapes. Many can be obtained from your library. Dr. Andrew Weil, all of his books and tapes. Many can be obtained from your library.
Please don't misunderstand my intent of the preceding. I write it to pass on some of the things that Jo and I have learned in the past six months in an attempt to make you all more aware, so you will start taking better care of yourselves. There is a lot more available at your local library, through the Internet and at you local naturopathic clinic or doctor's office. Don't look for any honesty from a regular MD (there are some exceptions) because they are part of the problem. But, do yourselves a big favor and learn.
Comments to the article by H. M. of Australia: I found the article very interesting and I'm with him. How can you trade using only a single "simple" indicator? There are too many factors that can and do affect the markets and I for one find it hard to believe that a single indicator gives the secret to good trades. I guess my question here, to those unknown mega-billionaires traders that have discovered the "One Indicator Holy Grail," would be; it is so simple why haven't you shared it with the CTCN family?
After trading for over three years and working with all of the standard indicators as well as some not so standard, it is my contention that there is probably three to five indicators, when used in the right time frame(s) that will provide the information for successful trading. However, one has to develop their own trading system and regardless of how many or how few indicators they use, if it works then stick with it no matter what others say.
Keith Carrs' Thoughts on Vendors: Keith writes of the fraudulent lawsuits brought by vendors as a weapon to prevent exposure of possible scams they are perpetrating. I also wrote about this problem several months ago and Dave wrote about the problem in the issue just prior to my article. What Dave proposed was to set up a legal fund that would be large enough to either stave of these fraudulent suites all together or to provide sufficient funds to fight them in court. Dave asked for subscriber comments/suggestions on their proposal and recommendations on how the fund should/could be financed.
I don't recall reading a subsequent article or editor's comments with regard to this legal fund, so it would appear that the CTCN subscribers are really not all that interested in taking on these vendors who may be marketing programs etc. using false advertising. I'm really sorry to see this issue dropped because it would have served notice to these vendors that we will continue to see published opinions from those who have used their products and found them not as advertised. The only reason the threat of law suits works is because of the high cost of defending ones right to their opinion. If your legal fund is large enough, your lawyers are potent enough and you have spoken or written the truth then these frivolous lawsuits will eventually disappear.
I think this legal fund should be revisited and reconsidered.
Editor's Note:The CTCN Legal Defense Fund was discontinued some time ago due to a lack of cash contributions. We had lots of good verbal support for the concept but not monetary support. P.S.: Please pray for Jo Paxton!
Own Perspective by R. J. Ratchford: I totally agree with R. J., there is a plethora of information that one can avail themselves on just about any subject including trading futures. Some of it is good and some is scam material. If one is careful to research the credentials of the person(s) offering the material they will find some excellent help for developing their trading system and plan. However as R.J. says, when it comes to planning and making trades you do so based on your own analysis and perspective of what your analysis is telling you the markets are going to do, not other peoples' opinions.
Losing Money by John Bond: I thought John's article on "cuffing" was extremely interesting and it may explain why Jo and I wondered why some of our fills, especially our exiting fills, were so bad and far from the numbers we were seeing from our broker's real-time data stream when we placed our order. What it shows is, that no matter how careful you are in selecting your broker or how careful the broker is when hiring his/her people, the non-local trader is still at the mercy of the integrity of their broker's people.
As an aside to the "cuffing" problem, non-locals are also at the mercy of the locals when it comes to running stops. I have often wondered how the locals know where all of these stops are and whether or not they are in cahoots with the brokers' floor people. Running stops are the only good reason I can think of for not placing stops on your order, but you better have very deep pockets.
Well friends, as they say in the newspaper movies "That's A Wrap." We wish you all the greatest success. Remember to "Plan your trade and trade your plan" and good trading.
A Letter Sent From Tom Cruckshank to Mr. R.S. of Advantage Trading Group
Dear Mr. R.S.: As per our conversation this morning, you will find the account application forms enclosed. If anything is incomplete or otherwise lacking give me a call. Please mail me copies of the completed, approved application forms for my records.
Please remit the TradeStation system and substantiating account statements. I realize that this may be somewhat onerous, but if you can send a complete day-by-day account record as well as the month-end statements, it will assist me in making my determination as to the number of contracts to trade. It will also give me a better feel for how the system performs and what to expect as to equity swings. If you can supply contract data in TS format for the period it would be much appreciated, however I realize that's asking a lot.
On the subject of commissions, you indicated that the $14-$15 range would be appropriate for this size volume. How about we start with the low end figure of $14 plus costs. In the future I would like to aim for the $12.50 and then the $9 figure that we discussed. When my volume increases, expect me to be requesting this.
I am looking forward to a long and mutually beneficial business relationship.
"Mr. R.S. - Please Call Me To Discuss This Submission & Closing Of My Trading Account" - Tom Cruckshank
In Commodity Traders Club issue (Volume 4-5, pages 11-12), R.S., President of Advantage Group, a discount firm, gave his views on why daytraders don't have a chance. Mr. R.S. made several arguments for his position and why his brokerage was superior in these regards. Although the article seemed like a veiled advertisement for his firm, I decided to give him a call and talk with him. In the call I explained that I had tried to day trade the S&P, but found that I just couldn't do it (the Don McCullough syndrome).
I did say that I was considering trying to trade from end-of-day again. Mr. R.S. immediately launched into a sales pitch offering me a system for Omegas Tradestation which had performed very well in a real time account since last May. He said he would provide the system gratis as well as copies of the account statements verifying his claims if I opened an account. At this point he also let me know that the commission he mentioned in his article was volume related and would not apply to this account, so we negotiated a commission slightly less than I was currently paying. This sounded pretty good, so on January 28, I mailed in my account forms. I accompanied the forms with a letter reminding Mr. R.S. of the content of our discussion and asking for promised items soon.
Here is what has ensued since then. On 2/6, I received a call from my previous broker that the in-house L.I.T. transfer was proceeding. The next day Friday 2/7, I put in a call to Mr. R.S. and spoke with someone else who took my number and assured me Mr. R.S. would call back that day. No call back.
On 2/10, the same thing happened, I called, talked to someone else, left message, no call back. The next day, Tuesday 2/11, I received a call from someone at Advantage notifying me that my account was open and telling me what I needed to know to initiate trades. Finally on Wednesday 2/12, I reached Mr. R.S. by phone.
He told me a story of how he had been very busy because the NFA had been in his office for the last four days going over his operation. His next words were that unfortunately this would affect his offer to me. He continued with his involved story of how the NFA was after Omega and that he was constrained from offering their program and was unable to mail the account statements. He had several reasons, etc., etc.
He mentioned that another trader had developed the system and I asked if he could put me in touch with this person if he agreed. Mr. R.S. felt this was possible and said he would check with this trader. I asked him to please call me back that day (2/12) and let me know whether he was able to make contact with this person or not and if he would talk with me. He assured me he would call back. It is now Friday, 2/21 and I have not heard a word from Mr. R.S.!
I invite you to reread Mr. R.S.'s letter in the previous issue of CTCN. You will note, that although Mr. R.S. makes some very good points as to how a broker should be selected, he omits the most important ingredient, TRUST. I posit that he received my property filled out account statements no later than 1/31, well before the alleged visit from the NFA; he could have remitted the promised items then. He did not. I contend that it is important to be able to reach your broker quickly and that telephone messages are returned promptly. It took me four days and two unreturned telephone calls to reach Mr. R.S..
Finally, given the forgoing, I say that if your broker promises to call you back on a matter that is of some import and completely ignores you, then that broker is duplicitous at best and more likely full of excreta. Trust, I think not!
Futures Truth's John Hill Responds to a Critic & Offers Explanations on Many Controversial Issues and Allegations
One severe critic of Futures Truth (Kent Calhoun of KCI Seminars) continues to spread untruths about us. Our response to these outright lies and slander is as follows:
1. "50% of Futures Truth tested has one or more losing commodities . . . " This is real world performance, without benefit of hindsight. I would like to see a system that trades a future that will not lose in the future. I do not necessarily agree that trading a future that loses is necessarily wrong. I can show you examples where it helps the overall equity curve and Sharpe Ratio.
His comments are criticisms of systems that have shown profits without the benefit of hindsight. Very few systems live up to the testing done with benefit of hindsight. The small trader has been led by the "Rainbow Sellers" to expect unrealistic profits and that is why most of them lose their funds because they can't sit through the flat periods or else double up if they get a good profit run.
2. "Flat-Time." Most small traders lose money because they cannot sit through the flat time that a system shows. We tracked about six of Kent Calhoun's systems and the best one had about a 3.5 years flat time. Who knows what the flat time of any system is in the future. I can show you many systems with no flat time in back time including some KCI systems. However, these same systems were disasters in real-time trading.
3. "We omitted drawdown." This is the most important factor in any trading and is pointed out in all our reports. The editors of Futures Magazine elected to delete it (not at our suggestion)
Editor's Note: Isn't it amazing how Futures Magazine somehow eliminated trading system drawdown numbers? As pointed out by John Hill and many others traders, including your Editor, drawdown is considered the most important statistic to be gleaned from the performance statistics of any trading system.
Some of our club members have discussed the possibility Futures Magazine allegedly does not really want their readers to know about drawdown, since many of the Futures Truth Top-10 Systems ran expensive advertisements in Futures Magazine and had large drawdowns.
Of course, there is little doubt far fewer traders would buy and trade many of these Top-10 Systems if the drawdown statistics were included in the Futures Truth Report as published in Futures Magazine. Is it possible, as has been alleged, Futures Magazine did not want potential buyers of these so called Top-10 Systems to be fully informed on this extremely important statistic.
If this is not the case, perhaps Futures Magazine will explain why they yanked the critical trading system equity drawdown numbers but left all the other (mostly far less significant) numbers in the report.
4. "Sharpe Ratio." Kent Calhoun's comments of this are a complete lie. He obviously does not understand Sharp Ratio.
5. One sales approach of "Rainbow Merchants" is to condemn the competition and that is what Kent Calhoun has done. Please show me one system of his that has done as well, without benefit of hindsight.
6. "Any company that rates a "black box system" should never be regarded as a respectable member of the professional financial community." This is outright slander. I also take strong exception to this conclusion. The numbers we show on "black-boxes" are without benefit of hindsight and is what investor could have expected in the real world.
I would never buy a black-box system that had no performance numbers in the real world. Black-box system vendors make them black-box because if they revealed their logic, the "Rainbow Merchants" would be teaching it at their next seminar. I don't blame them.
7. "Futures Truth has betrayed any ethical standards they once advocated for other vendors by clearly demonstrating a lack of that own." This is slander. Futures Truth has always noted that we have conflicts of interest and we would be happy to turn this business over to the National Futures Association or the Commodity Futures Trading Commission, if they would do it. We will continue to do so as we are traders and my son sells a couple of systems. We tell our clients if this bothers them they should not buy our reports. However, our numbers are correct, as I defy anyone to show us an incorrect number.
We are registered, unlike Kent Calhoun, and would not dare publish a number to suit our own agenda or the vendors' agenda. If we did, the National Futures Association (NFA) and CFTC would immediately put us out of business. The vendors in our current reports are honest business people who are willing to live with what the future holds on performance of their numbers.
8. At one time we did have Futures Truth in another address because I have been threatened with lawsuits around 15-20 times for telling the truth about the Rainbow Merchants' products. (We still do through private opinion letters.) If I were so wrong, why has only one actually sued (the Judge threw it out of court). We can back up every number we have ever published.
9. "Futures Truth's inconsistent testing procedures." The NFA (National Futures Association) sent a team of 4-5 people to my office where they spent over 3-weeks checking out all aspects of our business, including performance of systems. If we were not doing the numbers correctly and in an orderly manner, then we would be out of business. Kent Calhoun is simply irritated because we quit showing the performance of his systems when he wanted us to selectively show some performance, and the CFTC subpoenaed our records relating to him and his products.
Comments on your next article:
10. "Frank Bell." It is an outright lie that we did not return his phone calls.
Editor's Note: Your Editor called Mr. Bell and verified Futures Truth did call him back but it apparently was a delayed call. Frank also confirmed he has never spoken to Kent Calhoun, as stated by John Hill.
Kent Calhoun has never talked to Mr. Bell, so how could he fabricate such a story. We did respond to his problem and pointed out that we used every other month in crude rather than roll over every few weeks. This does distort the figures somewhat, particularly during the Gulf War. This is pointed out in our reports. We standby the performance shown in our reports.
11. "Continuous Contracts vs. real world data. " This is a continuing argument over which is right. We are in the camp of using real world data and so are most people we do or have done consulting work for such as the World Bank and many of the big CTA's. I do know the NFA and CFTC have no argument with how we are doing it. The continuous contracts are not the real world and do not take into account rollover costs, which ours do.
12. "Futures Truth made three common mistakes . . ." This is a lie.
13. "Futures Truth testing reflects mistakes made by most developers - the usage of over-optimized unstable parameters." This is a lie. We have always emphasized a system should have a broad width in parameter selection or else the system would probably bomb. We pointed this out to Kent Calhoun when he attended our seminar years ago. I see he now claims it as his original idea.
14. "Futures Truth uses the least accurate testing data base." This is also false. As a matter of fact we use the best data and most accurate procedures for testing in the industry. Again, if our methods were flawed, the regulatory authorities would put us out of business.
15. "Vendors Manipulate Trading Results." Some sure try and that is one reason we no longer show the performance of Kent Calhoun's (KCI) systems.
16. "Futures Truth's system not independently tested." This is a lie. We send a copy to Club 3000 for their tracking and independent verification of numbers. In addition, the NFA spent 3-weeks in our office verifying numbers and procedures.
More on (Concerns & Poor Communications) Involving Advantage Trading Group - Tom Cruckshank
This is in reference to your request for information regarding whether Commodity Traders Club News was involved with my opening an account with Advantage Trading Group (ATG) headed by Mr. R.S.
I found the 800 number for Advantage Trading Group, via a web search, sometime in January 1997, subsequent to reading Mr. R.S.'s article in CTCN (Volume 4-5, pages 11-12). I called Mr. R.S. and we spoke on a couple of occasions. I explained to Mr. R.S. that I was currently not trading but was formulating my strategy.
I also explained that it was unlikely that I would be able to day trade the S&P as you do, as I considered my leaning was toward end-of-day trading. At this point Mr. R.S. launched into a sales pitch that included telling me about this great system that some of his clients were following very successfully. This alleged system was an end-of-day system called "The Tide System" developed by a Mr. Gil Castillo. (I am unsure of the spelling of Mr. Castillo's name and if he really exists.)
Mr. R.S. told me he would provide me with the system in Omega TradeStation language. He also said he would provide statements for me to see the system's record. All I had to do was open an account with ATG.
On the strength of Mr. R.S.'s article, and his sales pitch including the promised system, I subsequently opened a trading account with ATG. The opening date was 2/11/97 and the account was cleared at LIT, account #700XX.
With the opening documents I did not receive the promised system. I called Mr. R.S. and could not reach him and my calls were not returned. Finally I reached him and he launched into this story that he had just suffered a four-day audit by the NFA. After a lot of palaver he informed me that as a result of this audit he couldn't supply me with the system, account statements and other information about system that he had promised.
Editor's Note: Advantage Trading Group's President Mr. R.S. also had a problem returning the phone calls of your Editor at the time we were trading our clients' funds with him and maintained a large managed fund trading account at his brokerage firm. Many of our calls went unanswered. In fact, poor communications was one of the reasons our relationship deteriorated and ended up in our having to file a lawsuit against him and Advantage Trading Group.
He assured me that the system was real and encouraged me to put a request in your newsletter or ask on web lists and I would get leads to Mr. Castillo and the "Tide System." So I decided to follow his suggestion and placed the ad in the March/April issue of CTCN (Volume 5-2 pages 31-32). I did not receive one response to my query. All this put my guard up and I vowed to myself not to place any trades with ATG until I saw the system. Somewhere along the line my account was transferred from LIT to Rosenthal Collins Group, retaining the same account number. When no system materialized and Mr. R.S. did not follow up on his promise, I transferred my account away from ATG without ever executing a trade.
Mr. R.S. called me acting very surprised and asked why I was transferring my account. I explained to him that I felt that he was less than truthful with me in the matter of the promised system and thus did not feel comfortable having him as my broker. He seemed to hesitate and then I instructed him in no uncertain terms to transfer my account immediately.
My account at Advantage Trading Group was closed on 5/27/97. I attest the foregoing is true.
"Bad Brokers" - George Famy from France
I'm sorry that you had such a bad experience with Advantage Trading Group, but I'm glad that you went into details of your experience. That helps make us aware of the problem and is the only way to "expose" some of the low life operators and charlatans in this business. By giving your readers all the information available, we can make better decisions.
It's equally regrettable that you have not been able to print some of the criticism written by your readers for fear of being sued. What's going on here, is this a free country or what? That type of behavior should tell your readers what kind of people are "operating" in the industry. Whatever happened with doing good clean business, adhering to previous agreements and taking care of the customer?
Nowadays, the prevailing attitude is more of the "how can we beat the customer" and "we're big enough to intimidate you with a lawsuit so don't say anything bad about us!"
I also had a bad experience with a broker. As Dave Green has done, I'd like to recount the details of the experience in order to inform the readers of CTCN what really can and will happen in real trading. Advise others to pay attention to even small "signs" of problems as these will often be the precursors of a bigger hidden danger which can later cost you money. This was my case.
I started trading a new customer account through Lind-Waldock's London, England office. I almost immediately started to see some problems: fills with excessive slippage, phones not being picked up promptly and late reports. My experience told me to start looking for another broker. I knew sooner or later it would cost me money if I didn't. I continued to trade the account while I was checking elsewhere. Because it was a small account, I couldn't put it in the same place as my institutional business.
Sure enough it happened . . . One day I had four phones going trying to get through. These were telephone numbers supplied to me by the brokers. The lines were all ringing out (no answer) or busy. I missed my initial stop order. Later, when I did get through, I put in a limit order hoping for a pullback.
The market came back to and traded through my price and then took off and ran to my profit taking level. Never doubting that I was filled was ready to pull the trigger (take profits) when my partner convinced me to wait for the fill. She said, "based on what I've seen the last two weeks I'd be careful if I were you, with these guys you never know . . . " Boy was she right! Much later, after my insisting for a report, I was given an "unable."
I missed a $2,500 profit for the customer in a new account where performance was critical. What was the broker's defense? Simple, he told me the old tried and true excuses . . . "the NFA says we have 3-minutes to fill an order" and "it's busy down there."
You know, I gave Lind-Waldock & Co. many chances to make it up to me. Even a simple "Sorry Mr. Client, you won't pay commissions for a month" or something like that would have appeased me. No way, the people that I spoke with were convinced that they had all their "bases" covered with their lame excuses. They were more interested in being right than keeping me as a customer.
I took the account elsewhere and now the client is trading four times as big and has added significantly more money to the account. He is now big enough that we deemed it worthwhile to set up an "offshore structure" for him. Lind Waldock blew it and doesn't even know it.
Like Dave, it was their attitude which annoyed me much more than the money. This was the same firm that 2-weeks earlier, when I described the type of trading that we do, told me that they would deliver a professional style service and that they were interested in CTA's. Guess what, actions speak louder than words!
This description of a real experience only confirms what many of us already know, that the vast majority of brokers, systems sellers, etc., don't care if we make a dime or "blow out" tomorrow. They want the quick dollar and not a long-term relationship which, ironically, would probably be more profitable to them over time.
There's a lot more unknowing, unsuspecting, retail customers around and so there is no reason for them to worry. There will always be more "sheep" waiting to be led to "slaughter." I just don't plan to be part of the group.
I recommend that everyone give full details and descriptions of any problems that they might have had, so that the readers of CTCN are better prepared for the "reality" of day-to-day trading and can perhaps avoid some of these bad experiences. Remember, pay attention to any small telltale signs of trouble which, if left unchecked, could mean dollars lost later. When in doubt, change brokers!
"Time To Set The Record Straight" by A. Edward Moore
I've sat quietly by for 2-years while I've been attacked in ads and in person by John Stenberg - AST Network, his students and even prospective students. It didn't matter until I saw John Stenberg's ads, "I make money almost everyday trading the S&P Futures Contract, and I'll teach you how as well." (Stocks and Commodities Jan. 1997) The John Stenberg I know does not trade anything, let alone the S&P's and I've known John Stenberg since 1990.
I see all his materials, nightly Faxes, etc. I'm currently teaching a number of his former (AST Network) students. I know some of the students he managed money for and "JS" lost most of the money they entrusted to him. I'm in contact with former students who took his personal course. He did NOT trade with them.
"When you take my personal course, we make or lose money together, mostly win I might add." I've talked with his current AST Network students. Their claim to fame is that now, they can break even, maybe make $1,500 a week. Questionable at best? It's important to note that nearly all are rank beginners, don't trade every day and wouldn't know a good methodology from a bad. None of whom have seen my work nor talked to me, and take JS's word that my course similar to his, when in fact less than 5% of what I teach today is related to Ad Step.
Who is Ed Moore? I'm 55-years old. I've been trading 35-years. I started on Wall Street with a BBA in accounting from Notre Dame 1963. I completed my MBA in Finance from Columbia Graduate School of Business 1967. The next 10-years were spent as an analyst/trader. Afterwards, President of Gabelli, where I managed money and headed firm trading for 5-years. After leaving, I formed my own money management firm - Moore, Grossman & DeRose. We managed over $200M. I compounded money at 30% a year for 10-years. Throughout this time I made millions trading stocks, commodities and options. However, I got caught up in the "Decade of Greed." Early 1987, I took my liquid net worth, $10 Million and tendered to buy all the stock of an NYSE company with $400 Million in sales. Had I been successful I would have made $150 Million. It wasn't meant to be. I lost all my money for reasons beyond my control, yet I bailed out my friends and clients by taking over the company in a proxy contest. I succeeded, but went broke. At this time I was saddled with huge alimony and three kids in or about to start college. I decided to test my trading skills day trading the S&P's. By late 1988, I was making money consistently every week.
I spent over $300,000 improving my trading. Too bad I wasn't a member of CTCN (Commodity Traders Club News) sooner, I could have saved a bundle. Enter John Stenberg, 1990. I received his flyer with my BMI (Bonneville) bill. His program was just one of the hundreds I tried. His material was poorly presented. To his credit, I liked his implementation of the popular Uni-channels. I called JS to share my thoughts. His annoyance at my call was quelled when I told him I made $50,000 on an OEX day trade. That got his attention. He put this trade in his ads. He now considered me a "John Stenberg expert." This invited countless calls from John's AST Network students for the next 3-years.
I was invited to one of his workshops. The first day was a disaster, nothing worked. The students demanded a refund. None was forthcoming. Sunday morning, the students asked to hear about my thoughts and techniques. That afternoon, Andy Armour asked to see me trade the S&P's. The next 3-hours, John Stenberg flashed 3-minute bars, one at a time with no indicators.
I successfully called 90% of the trades ahead of time, just reading price action. Most who watched were in awe, but attributed my success to over 30-years of trading experience. I disagreed, they too could learn. When Joe Conway, a university professor with a Ph.D. in communications, witnessed my trading, he offered to write a book about my methodology if I would teach him to trade like me. It was only after the book was written and countless phone calls that I considered becoming a vendor.
Now that "Rhythm of the Markets" has been out for 3-years with "Option Magic," how have my students fared? 50% are successful, averaging $2,000/day per contract after 1-year. Joe Conway now manages $10 million. He compounded these funds at 35% a year for 3- years trading "Rhythm" with no load funds. He gets 20% of profits. If he's up 30%, he earns $600,000.
One of my student's trading 25 S&P's at a time caught the attention of Russell Sands. Russell wanted to know where he learned to trade the S&P's so successfully. He referred Russell to me. I was honored when Russell called to invite me to his NY seminar in the hopes of sharing our methodologies. I declined because our methodologies are not compatible. Russell Sands is a breakout trader, while I trade counter-trend. I did meet Russell in NY. He's a credit to this industry and I'm proud to know him.
30% of my students are still learning "Rhythm." The remaining 20% failed primarily for two reasons: fear and lack of funds. My most notable failure is Todd Mitchell. I met TM at a 1992 Kent Calhoun seminar. I worked with Todd Mitchell for 2-years, but very few breakout players succeed in the S&P's intraday. TM did the next best thing. He became a vendor. Unfortunately, people like TM and JS, who contribute marginally to technical analysis, make it harder for the legitimate vendors. No wonder Gary Smith hates so many vendors.
Not only have I had a successful Wall Street career, I am recognized and endorsed by many of my peers for the proprietary trading methods I have developed. These are people who have successfully traded and/or taught for 25-40 years. They include John Hill, Joe DiNapoli, Larry Pesavento, Dr. Humphrey Lloyd and Kit Webster. Joe DiNapoli recommended me in a 4-page letter to his students. That's class!
Many of you have asked the $64,000 question, "If you trade so well, why do you bother to teach?" I never intended to become a vendor but did so by default. Yes, I got part of my $300,000 back but more importantly, I've met some of the smartest people one could ever hope to meet. They have taught me and continue to teach me more as a teacher than I learned as a student of the market. Today, I am a much better trader than I was just two years ago because of this experience. Furthermore, I challenge you to find anything negative about me. I'd like to end with just a small excerpt from Andy Armour, "From the first meeting, I knew Ed was a winner, both as a trader and a person. I was a complete stranger to him, yet, he invited me into his office and opened up completely to me, showing me all his techniques that obviously took him years to formulate and master. He had nothing to sell me, he was just sharing, one trader to another." This speaks volumes, more than any ad I could ever place.
An Advisor With A $200,000 Equity Change In 1-Year - J. S. from California
While looking thru an issue of Commodity Traders Consumer Report, the newsletter that tracks the performance of Commodity Newsletters and Hot Line Advisory Services, I noticed an advisor that had an equity change of over $200,000 in the last 12-months. Unfortunately for anyone that took all those recommendations, that was a loss of $200,000 in one year.
Robert Prechter, Jr., of the Elliot Wave Theorist lost $200,000 for his subscribers over a 12-month period. Now if Robert Prechter, Jr., one of the world's biggest proponents and follower of the Elliot Wave Theory can't make money, how can anyone else make money following Elliot Wave?
I may have the solution. Subscribe to Prechter's Elliot Wave Hotline and listen carefully to his recommendations, then do exact opposite! If he says buy, you sell. If he says sell, you buy. Will this work? Probably, Prechter has been a consistent big loser in the markets for years.
Info Wanted on Successful Commodity Hedging - John Boyd
The commodity market is a hedge market; however there is little information about how to successfully do hedging.
For example: buy 1 future and 1 put buy 1 - 650 call and sell 1 - 655 call
At what prices? How long do you hold? How much profit is reasonable?
More articles should stress hedging techniques. The emphasis in Commodity Traders Club News on trading methodology for using long or short positions are not sensible. Prices of all commodities change in whatever way is necessary so that the majority of traders lose money!
If You Lose On Options, You Make Money on Mutuals - If Your Lose on Mutuals, You Make Money on Options What Could Be Better! - Mervin Pearson
If you are a commodity trader you probably don't have more than 10 to 20% of your total liquid net worth in the commodity markets. If you have more than this then you're probably over extended.
One strategy I have been using for the last 10-years is to sell OEX or S&P call options against my mutual funds holdings. This is known in the option industry as a covered write. The strike prices I use are usually at least 500 Dow points away from the current market. Currently the OEX is at 890. The strike price I would use is the current month - September 950 strike price. Since the cash OEX is 890, then each OEX option carries a true value of $89,000 (890 x 100=$89,000). If a portfolio is $300,000, then sell 4 options. The current price of the 950 calls is $5.00. Therefore, $5.00 x 4=$2,000 premium income into your account.
My defensive strategy is if the cash OEX closes within 10 points of the strike price, I roll up ten points, i.e., from 950 to 960 strike price. A loss will probably be taken on this roll if there is a lot of time remaining before option expiration. Remember though if you take a loss on the option, your mutual funds are more than taking up the slack! This is a nice way to collect extra income on your portfolio.
The margin requirements are 15% of the cash value to the OEX. You can use T-Bills or your mutual funds to cover the margin requirements. If you use T-Bills or U.S. Government Bonds, 90% of the value of the T-Bills can be used to meet the margin requirements. If you use mutual funds for margin requirements then only 50% of their value counts for margin purposes.
I do not like to go out in time more than one month. When the current month expires, I then go to the next month.
Hope this helps some of you out there. Remember this is not an exact science. Some months there will be losses, but you should be profitable 10 out of 12-months of the year. You will always be 800 profitable on either your options and/or mutual funds. If you lose on your options, you are making money on your mutuals; if you lose on your mutuals, you are making money on your options. What could be greater?
Why Most Trading Systems Lose Money Part II by Kent Calhoun of KCI Seminars
Most trading system developers are honest individuals, but often encounter technical problems in producing their trading system's results. Independent testing conducted by a Futures Truth client reported in Club 3000, Futures Truth may have overstated their trading system's results by $341,266. This was shocking. Futures Truth (FT), was a highly respected source of unbiased testing and ranking of trading systems. KCI had paid FT $13,500 for testing plus another $15,000 in software, manuals, etc. for independent testing. I wrote a positive letter on their behalf to Club 3000 and sent FT a letter with suggested procedural changes. None of them were implemented.
This letter reviews the Futures Truth's trading system testing procedure as applied to their own $2,000 trading system. One ethical question is unanswered, "if Futures Truth is using questionable testing procedures to produce results, what mistakes are other vendors making to sell their trading systems?" This report reveals how improper testing procedures and incorrect optimization methods overstate hypothetical results in order to sell trading systems. All figures related to Futures Truth were produced from independent testing published in Club 3000 conducted Frank Bell, a client of Futures Truth.
Seven years before Futures Truth began, I incorporated a commodity research firm to discover a systematized approach that would allow me to project time and price for any time interval from minutes to years in advance. In the process of testing so many poor trading systems, I discovered many of the most profitable trading systems, techniques and methods. This quest eventually led to the 5-VBTP a method that predicted the S&P futures closing tick more than 10.5 months in advance, that missed by 1-tick.
When I began buying trading systems, I discovered most of them lost money. Only about 60 of over 200 systems actually showed any profits, yet 70% of the profitable systems had equity drawdowns greater than closed cumulative profits. Traders should never trade a system that lost $50,000 to show a $10,000 profit. When is the next $50,000 drawdown that will eliminate the temporary $10,000 profits? (See the previous letter for trading systems guidelines.)
Most trading system developers have a poor technical understanding of risk structure and optimal parameter selection; which may result in unintentionally produced inaccurate track records. This appears to apply to Futures Truth's inconsistent testing procedures. A vendor's ignorance does not justify the fact most purchasers of their systems will lose money trading them, or exonerate a vendor who improperly produces his results. If false advertising is sent through the mail to sell a system, it is called mail fraud.
The most important goal of trading system design is not to make money, but to protect the initial account capitalization from financial destruction. This is only accomplished from location of stable optimal parameters. Most vendors sell their systems by over emphasizing profits, without concern a system's risk may be beyond the psychological and financial tolerances of the potential purchaser.
When I lived in Chicago, I sold my trading systems to floor traders. I placed the amount of money they had paid me into an escrow account without mentioning it to the purchaser before he bought a system. This had two positive effects. It established my credibility, and provided the trader confidence to trade my $10,000 minimum priced system. When the trading system returned the original purchase price to the trader, usually within three months, I removed the trading system purchase price from escrow.
Floor traders were contacting me to buy my limited edition systems, which were profitable because the Calhoun Method for Optimal Parameter Selection created stable parameters with risks beyond the probability of financial ruin. After I taught floor traders to assume risks that guaranteed they would never lose their total trading capital, they had the confidence to purchase and trade my systems. Every system paid for itself.
Dr. Tushar Chande, an excellent technician, also discovered and published his work on the Probability of Financial Ruin a decade later. Let this be your rule of thumb: if you are risking under 5% of total capital per trade (closer to 2% preferable) -- require an expected positive return twice the amount of risk with 50% winning trades to assume risk beyond the probability of financial ruin. If we both have $10, risk .50 cents per binomial coin flip, and you are right 60% of the time, you will eventually win all my money 800 of the time. Your risk assumption is beyond the probability of financial ruin.
Most Trading Systems Lose Money for the following reasons:
1. Vendors Manipulate Testing Results - There are several ways an unethical vendor may manipulate figures to make his system look better than it will actually perform in real time trading. How did Futures Truth produce more profits than the testing performed by Frank Bell? After Mr. Bell paid FT $2,000 for their system, he tested it and sent the results to FT. Three weeks later, FT did not return his phone calls or respond. Bell's testing results were published in Club 3000 and revealed FT made three common mistakes used by many vendors to sell systems, which were often unknowingly designed to lose money.
a. Improper testing procedures - FT improperly rolled contract months on the last day of the month prior to expiration, which resulted in trading a contract for weeks after it was no longer the active contract. FT tested only the Feb., Apr., Jun., Aug., Oct., & Dec. contracts for crude oil. This means FT selectively skipped six of the most actively traded contracts, which no crude oil futures trader would ever do. Correct procedure would be to roll to all most active contracts after one or two consecutive days of higher volume occurs in the deferred contract, which would then become the most actively traded contract.
b. Use of least accurate testing data base with inconsistent procedures - Market Wizards author Jack Schwager wrote in the 6/27/96 issue of the Futures Technical Analyst, "continuous futures would be far more desirable when testing trading systems since the use of the nearest futures would lead to gross distortions." According to Mr. Schwager, Future Truth uses the least accurate testing data base to produce system results. That is they almost used the most actively traded contracts data base.
Why did FT subjectively choose to test only 50% the most actively traded contracts for crude oil? If a most actively traded contracts data base is used, then ALL of the most actively traded contracts must be used! FT showed a crude oil profit of $33,950, yet using all most active contracts with correct rollovers produced a loss of $17,420. A difference of $51,370! By not using a more accurate continuous data base, Futures Truth's testing of their own $2,000 trading system benefited from a "gross distortion" of 44% more profits. A difference of $341,266, according to Frank Bell's independent testing results.
2. Developers Improperly Select Over Optimized Unstable Parameters - Most developers select optimal parameters that contain one or more statistical outliers called equity spikes, which skew the optimal parameter set values away from the most stable parameters. Equity spikes should be eliminated since they produce a disproportionately high percentage of the system's closed cumulative profits, over 50% in some cases. The Calhoun Method for Optimal Parameter Selection finds the most stable parameters. Developers who select parameters that make the most money use unstable parameters over 80% of the time, and errors are compounded when using a least accurate data base.
All system vendors have ethical considerations testing results to sell a system. Do they select optimal parameters to sell a system or trade them? Do they use parameters that made a $100,000 with a $35,000 maximum equity drawdown or parameters that made $50,000 with a $10,000 drawdown? What kind of maximum risk is required to produce any system profits, greater than the total profits? FT's testing reflects mistakes made by most developers - the usage of over-optimized unstable parameters to produce profits over risk-averse parameters to protect capitalization. Is it called a reward-risk ratio?
Optimal parameter stability is the goal of the parameter selection method, but this requires flexibility to generate profits within an optimal parameter profit zone for four distinct market phases. The accumulation phase (bring to one) has low volume, ranges, decreased rate of change and low volatility. Orange juice at .75 is in accumulation, and trading more than one standard deviation below its 20-year average price. Accumulation and distribution are characterized by non-trending price action. The distribution phase (give to many) is the technical opposite of the accumulation phase, characterized by wide daily ranges and increased volatility price movements. Most trading systems generate rapid profits during the strong trending Up movement, which technically links accumulation to distribution, and Down movement as price returns to accumulation.
The Calhoun Method for Optimal Parameter Selection measures parameter stability by comparing the percentage cumulative equity shift to the percentage of optimal parameter shift. If an optimal parameter is a 10-day close moving average that makes $100,000, then a 20% parameter shift of 8-day and 12-day moving averages, should make $80,000 and a 10% parameter shift of 9 and 11-day moving averages, should make $90,000 if the optimal parameter has stability. When the equity shift is greater than the optimal parameter shift equity spikes may be responsible for testing results. Those trades should be eliminated with optimal parameters recalculated. The optimal parameter selection process locates the set that allows the greatest parameter shift & highest returns.
Flexibility and stability are opposite physical and metaphysical concepts. Structural design engineering determines a building's exponential sway, up to 48" in strong winds. The engineering design must be stable to maintain internal structure. This is accomplished by reinforced concrete designed to withstand wind effects. Applying design engineering knowledge to trading system design, I use adaptive historical volatility for parameter flexibility (risk) combined with scientific price action analysis for entry and exit structure.
Stable parameters should exhibit flexibility to be profitable in all four distinct market phases since optimal parameter values may shift 50% from extremes annually. When the equity shift percentage exceeds optimal parameter shift percentage, parameters may be unstable depending on the shift percentages. The Calhoun Method of Optimal Portfolio Structure will often override marginal unstable parameters for individual commodities by lowering maximum equity drawdowns and increasing closed cumulative profits.
3. Vendors Do not Use Independent Testing to Verify System Results - How can the same system tested on two different data bases with matched trade entries identical on both data bases to produce a $341,266 difference? The Futures Truth system appears over optimized with almost 10 parameters but worse, its results were optimized from a data base that was the least accurate. Most of FT's commodities (87.5%) benefited from least accurate data, and FT altered their system's parameters soon after it was sold.
If Futures Truth had their system independently tested, as FT owner John Hill has advocated to vendors, any liability for faulty testing is the responsibility of testing company. (All KCI systems have been independently tested for this reason.) A testing company that sells systems and rates vendors' systems has violated professional ethics; its testing results must be beyond reproach. Mr. Hill has refused to have their $2,000 system independently tested for over 4-years. Mr. Frank Bell's results appear most accurate.
(Futures Truth complicates testing using two rating methods. One does not "mark to market" open equity on existing trades at the beginning or end of the year. Futures Truth ignored a $5,000 open equity profit that existed as the year began on January 1 and a $6,000 open equity profit that existed when the year ended December 31 to show one system had lost about $2,000 for that year. The system was actually profitable the year it was traded, but FT testing showed a loss after they omitted $11,000 open and closed equity.)
Since FT did not use independent testing, used the least accurate data, improperly rolled contracts, and selectively omitted contracts these questions arise:
1. If Futures Truth overstated their system's performance by 44%, how many other systems ranked by FT have overstated results?
2. How many others ranked systems benefit from Futures Truth's inconsistent testing procedures?
3. Did FT select their testing procedures and misrepresent results to sell their $2,000 systems or lack the technical knowledge to correctly test trading systems?
4. With a huge $341,266 discrepancy between FT's results and Bell's figures even though all trade entries are matched on both data bases, how accurate is system testing from any vendor?
These are reasonable ethical questions to ask of any testing Company. Traders risk millions of dollars buying and trading systems affected by the quality of Futures Truth's testing procedures. If FT uses questionable testing methods, what intentional mistakes are made by dishonest vendors? Futures Truth's testing procedures allow the possibility of a losing trading system to be ranked as a #1 system, if it experienced good results for only a 12-month period. Two vendors of #1 ranked FT systems have been prosecuted by the CFTC for misrepresentation of their trading systems' performance.
Summary of Part II
The goal of all ethical system developers should be to sell trading systems that accurately represent their system's performance, as if it were traded under actual market conditions. Knowledge of how a system loses money is just as valuable as how the same system makes money and should be provided to the prospective buyer. By placing an informed buyer's interest first, unpleasant surprises that arise from questionable technical testing procedures will not negatively affect reputation or integrity of seller. The commodity industry needs a "real" Truth in Futures Company that will test systems in a statistically reliable manner without trying to sell their own systems at the same time.
Part III will explore more advanced trading concepts like the Calhoun Optimal Portfolio Structure, and Calhoun Profit Ratio, (I incorrectly used the Calhoun Profit Ratio values for the Sharpe Ratio value which does not exceed 1.0 in the last letter), how trading systems lose money you do not see, and what traders can do to improve any system's trading performance. Key concepts discussed will be how to trade beyond the probability of financial ruin. How to capitalize on the fact that all commodity prices are mean regressive, and the most important trading guidelines applied to trading system structure.
Again, I want to apologize to all honest systems vendors I reviewed in the previous letter. Under no circumstances did I mean to impugn their integrity or cast aspersions upon their work. The goal of all system developers is the same as science, to seek truth and use it to improve what exists today with higher quality tomorrow. The only ethical problems I have with anyone are when truth is knowingly misused for personal financial gain. When I started KCI, I offered a full money-back guarantee on every product sold including trading systems, software, manuals. and seminars. Vendors show no respect for themselves or others when they knowingly misrepresent truth in order to sell their products.
Opinions expressed in this letter are solely those of Kent Calhoun and do NOT express those of this newsletter, which may be very different. I want to thank all the readers for their overwhelming positive responses to my first letter. Thought in passing "if those who speak do not know, and those who know do not speak," as Lao Tze has informed us in a book of 5,000 words, then why was he such a blabbermouth if he was the one who knew? As Mark Twain wisely observed, "Truth is stranger than fiction because it does not have to make sense." You might think he had purchased the first commodity trading system to trade snake oil futures. While many people lack the intense love for truth that I have been blessed in my life, all people are certainly worthy of it.
As readers analyze what Mr. Hill and I have written, they should try to separate facts from opinions. I have cited a Futures Truth client as a credible independent third party testing source as the basis for FT's questionable testing procedures. In Club 3000, Mr. Hill has engaged in an unsubstantiated personal attack criticizing my religion and patriotism. I refused monthly disability checks for injuries received while I was in the Army. I do believe in God. In Club 3000, Mr. Hill made many false allegations: one is that I lost money trading and account with his firm. Dave Green has seen the 1099 statement showing my account, traded with Mr. Hill, was profitable. Dave has also seen the letter where Mr. Bell states Hill did not contact him for over 3-weeks. The KCI - CFTC investigation was based on figures Mr. Hill provided to the Commodity Futures Trading Commission, which were later proven false with testing conducted by John Fisher, then president of FT. Truth is sacred and comes from God and will be known to those who seek it.
The Mad Scientist - J. L. from Wimauma
My dad used to say, "Whenever I feel like exercising I lie down until the feeling goes away." My back-issues never mention what may be more important than anything. Making all this money for the doctors makes no sense at all. If any profession lent itself to sucking on cigarettes, slurping coffee or pop, junk foods or just general inactivity while "watching the bouncing ball" all day . . . you know who you are. And don't forget the stress most traders subject themselves to - like losing their money.
Well relax. I'm not here to recommend exercising even if Larry Williams is a handball buff! I quit "pumping iron" lots of years ago when I figured out that I didn't really need those big muscles and that even if I caught a girl, I couldn't afford her anyway.
Then lately I read an astounding fact. Every one of our billion or so cells (I used to know how many) must be continuously bathed in either blood or lymph fluids! That's because every one of those guys have to eat, breathe and do that other thing or they die! Then I imagined the miles and miles of microscopic vessels to accomplish such a task. And then I realized how the slightest muscular tension must "pinch off" some of those vessels and actually kill cells. Voila! There's the muscular fatigue we feel when we do exercise!
And then I discovered that, unless we're sleeping, our muscles are taut almost all of the time! Next time you're watching TV notice that, without a conscious effort to "go limp," you are sitting off your chair, not in it! This brings me to the most overlooked muscles of all. I daresay that most people, while awake, have never totally relaxed their facial and scalp muscles (probably because someone might see them).
Never mind that the scalp encloses whole bunches of vessels -- those that feed those "grey cells" that are deciding "long or short." I know this sounds crazy but try "going limp" starting with your jaw the next time you're at your "post." You will experience a rush of blood much like I used to when I put the barbell down. When you realize that you "tense up" even by thinking, it's no surprise that stress wrinkles and prematurely ages people's faces.
Then there is another matter. Whenever I do this exercise, I invariably feel the need for a deep breath or two. Could the body know that, the vessels now having been opened, the blood stream will now need more oxygen to supply those additional "lungs?" Put that with the fact today's air has 32% less oxygen in it than it had in prehistoric times (from deforestation and burning fossil fuels), and maybe we're onto something.
I'm convinced that today's "ills of civilization" are caused by not enough physical activity or breathing-relaxation exercises to overcome oxygen deficiency. 80% of people being dehydrated and don't know it (because municipal water tastes awful), poisoned and processed foods, and schedules that don't allow enough time to slow down, get enough sleep, chew your food, or even finish going to the bathroom! Time does not cause "old age."
Now even I admit that this next statement is weird, but I just can't "hep" myself. Thinking in this relaxed state (meditation, maybe?), is really effective, but where it really shines is in getting to sleep! Then the object is not to think of anything (count sheep, concentrate on your breathing, etc.). Believe it or not, I listen to my body. I can lie in a quiet room and hear a faint rushing sound that can only be my chemical factory at work. In fact when I first lie down I can also hear a lower pulsating frequency that is my circulation! That goes away as I stop thinking and my blood pressure drops. (If you don't believe me, press your ears closed and you can really hear the "rush" I am speaking of.)
So does good health make you a better trader (or a better anything)? You be the judge. I know that if everybody agreed with my "crazy" theories, I must be wrong. Does that sound like the market, or what? I've been kind enough to not bring up your nutrition, but I leave you with this grim fact. "You are not what you eat. You are what you ate a month ago" Healthy Investing!
OPTIONS & SPREADS: The Blue Max And The Silver Cup - Greg Donio
During the First World War a German fighter pilot wrote, "Hanging from the ceiling in my dugout is a lamp I had made, as a conversation piece, from the engine of an airplane I shot down. I mounted small lamps in the cylinders, and when I lie awake nights and let the light burn, Lord knows this chandelier looks fantastic and weird. When I lie that way, I have much to think about. The battle now taking place on all Fronts has become awfully serious; there is nothing left of the "lively, merry war, as our deeds were called in the beginning."
The writer was Manfred von Richthofen, the Red Baron credited with shooting down 80 Allied planes. He experienced depression at the time of writing because of a head wound and the fact that the war was going against his country. He knew the war's frivolity and its seriousness, the glory and the dark night of the souls, the blood-sacrifices and the medals.
Von Richthofen's awards included the Ehrenbecher (Victory Cup) presented to airmen after their first kill. Regarding another prize, Frederick the Great, King of Prussia during the 1700s, favored the French language and considered German fit only for stable boys. He instituted the award entitled the Pour le Merite which 150-years later the Red Baron received after his 16th aerial victory. English flyers nicknamed it the Blue Max because of its color.
The list of parallels between air combat and financial trading gets rather lengthy. Both are adversarial. Everybody wants to win but far from everybody will. Both involve risk in no small quantities. A smart airman and a smart trader both look for ways to reduce the risk. Newspapers during World War One quickly turned flyers into front-page heroes. (Designating a pilot an "ace" after five kills was an invention of the French news.) Today's news media respects traders and investors as "tycoons" while treating horseplayers as saps, despite the existence of a few smart horse-players and plenty of stupid traders. Taking a profit is a kind of medal and trophy experience, in terms of the feeling you get when you take one.
In their seamy depths, neither air war nor finance was ever a conflict between equals. Both milieus abounded with the able knight versus the dodderer who could not function in a suit of armor, a smoke-screen on half the playing field, Grandma Moses versus the Heavyweight Champ, a foot-racing track with trenches cut through several of the lanes, one dueling pistol of normal weight and the other too heavy to lift. Such are the disparities in the real world including the profit world. Pay dirt in the non-level playing field.
What is the difference between gambling and speculating? One of the best explanations I ever encountered appeared in an old tan book in Philadelphia's Mercantile Library: A speculator utilizes the risks already inherent in a situation. A gambler participates in artificial risks; actually, he creates risks for the sake of the gamble.
Alas, a things-must-be-equal clause tends to attach itself to that artificiality. The two football teams must have an equal number of players, and one team cannot be forced to wear blindfolds. What good does this "fair play" or "equality" do you when you place a bet? If you want to sink money into something lopsided in your favor, look to either combat or the business world.
During a World War I air battle, nine British planes advanced on five better-built and better-armed German planes. Aviation historian Richard Townshend Bickers called this "nine sheep attacking five wolves." Such is the kind of situation that should attract your attention if you want to venture your capital smartly. The focus of this piece--spread strategy with equity options-will show itself to be one fine way of placing your money on the wolves with the likelihood of your gaining quantities of mutton and wool.
Most gambling is relatively "fair," which is exactly what's wrong with it. You cannot bet on a pit-bull fighting a peacock. Yet sometimes you can in business as in aviation. Baron von Richthofen shot down his first 15 planes all in the latter third of 1916 and all were British craft inferior to his Albatross DII in speed, maneuverability and fire-power. Not one athletic official stepped forth and said, "No fair. Most of your soccer opponents are in wheelchairs." This was no "artificial risk" and could not be so easily architectured or game-planned to "keep the sides even." When that sort of situation occurs on the ground, the ace financial trader spots it in his gunsights. The ribbon-winning ways of options will be explored shortly.
The Germans could not expect their blue-sky picnic to last indefinitely. In 1917, the Allies flew forth in far better Sopwiths, Spads and Nieuports armed with more powerful Vickers and Lewis machine guns. Teutonic losses climbed but Baron von Richthofen still had ways of playing aerial checkers with more pieces than the foe and on a non-level board. The observation planes contributed immensely to preventing an even-money game.
With their limited bombing and strafing power, First World War planes were a minor military factor at best. One exception: Observation planes were extremely important militarily. Spotting enemy artillery placements, troop movements and positions, observations aircraft served as the "eyes" of the ground forces. The typical such craft had two cockpits, the pilot in front with two machine guns mounted atop his engine and the observer in back doubling as rear gunner with a ring-mounted rotating machine gun.
Most pilots either flew reconnaissance planes, flew fighters that guarded reconnaissance planes, or flew fighters that attacked recon craft and their escorts. Most two-seaters tended to be slow and lumbering. An occasional type of plane in this category was also designated a fighter but most were not fast and agile enough to qualify. Improvements in their development lagged compared to those of the single-seat fighters. This made them the ponderous "easy quarry" of the sky hunt. Attacked from underneath they were unprotected, fore and aft guns not even in sight. Manfred von Richthofen knew to boost his score by shooting the easier prey. His 80 confirmed kills included 46 two-seaters.
A ponderous craft routinely plundered. This came to mind during my recent spread activity. IBM attracted my attention because it was on an upslope and had a conservative price/earnings ratio of 18, making it a good candidate for a horizontal calendar spread with out-of-the-money call options. My recent profits from IBM options were neither a plus nor a minus in my decision. The latest facts carried the significance.
With IBM just slightly above 100 a share, call options with strike priced of 110 were close enough to the stock price to be plump but far enough not to be placed in-the-money by slight fluctuations. I did these calculations during the third week of July. August options had already begun to undergo time-decay but September and October were hardly touched and differed from each other only slightly price-wise. A mere single point separated them.
I phoned the broker with my customary buy 10/sell 10 order. "Buy 10 IBM call options, October expiration, strike price 110, to open a position. Sell 10 IBM calls, September 110, also to open. Both day orders. With a one-point debit." The amounts of the buy and the sell could be anything but the one-point debit fixed the difference between them to no more than $1,000, the amount that I would have to pay plus broker's commissions.
Later that day the broker informed me that I had purchased the 10 Octobers for $4,625 and sold the 10 Septembers for $3,625. The money my account gained selling the latter paid for all but $1,000 of the former. That was my expense or the amount of my investment plus $115 for two (buy, sell) brokerage commissions. Anticipating a similar pair of commissions when I closed or exited the position, I figured on a point and a quarter or slightly below ($1,250 roundly or $1,230 precisely) as the break-even amount.
Whoever bought the Septembers I sold paid $3,625. Whoever bought Octobers for the same price I did but without spreading paid $4,625. With my one-grand investment between these bigger amounts, I felt like the fighter pilot cutting open the larger, lethargic two-seaters. It was written that the speculator utilizes the risks already inherent in a situation, as opposed to the gambler creating artificial risks. I can add that the speculator utilizes inequalities and "unfair" advantages such as no gambler has available. No gambling hall will permit a deck of different-sized playing cards or a roulette wheel three-quarters red and one-quarter black. For these you must look to airplanes and option contracts.
Manfred von Richthofen enjoyed other advantages. As squadron commander, he often had his wing men at his sides when he dove on an enemy plane. This protected him against attack and also made him more likely to score a kill and be credited than the wing men. Precisely two weeks after I opened the above-described IBM position, the former single-point spread reached a width of 1¾-points, a $500 advance after commissions if I were to take profit, or a 40% gain in two weeks annualizing to 1,000%.
Then in three days, the IBM shares fell four points from 109 & a fraction to 105 & a fraction. The September calls fell from 4½ to 3-3/8, 25% drop. The Octobers dropped from 6¼ to 5, 20% set-back. The spread inched from 1¾ to 1-5/8, down only 7%. In such an instance I feel as though I am protected by September and October wing men who are taking the buffeting while I keep most of my gain.
We arrive at what must have been regarded in the air wars as killing off the incompetent and the disabled and what is known on the ground as "fleecing the suckers." This could be called the sad side of aerial combat, gambling and financial trading, the within-limits sorrow of Sorrowful Jones the bookie and his partner Regretful. Let us say that you and a poker opponent both have "smarts" and both steadily add to your knowledge. You notice that he scratches his ear when bluffing. He notices that you whistle Dixie when holding high cards. You both try diligently not to give off such signals and to gain some advantage.
Then who shows up at the poker table? A young beginning card player with penthouse dreams and dime store abilities, and an older compulsive gambler who has been losing for years. It is in the cards that you and your expert opponent will both shortly be blessed with fat wallets. Of course, these dupes have their counterparts in trading and investing: The neophyte who expects vast wealth in at the most a few effortless weeks but gets shafted and bled. The compulsive trader who keeps losing and keeps adding money to his brokerage account. Almost inevitably their cash ends up in the hands of the smarter and more expert.
What insights can the wooden bi-planes of 1914-1918 provide? British flying ace James McCudden shot down 57 German planes. He wrote of an artillery-spotting German observation plane he defeated: "This crew deserved to die, because they had no notion whatever of how to defend themselves, which showed that during their training they had been slack and lazy. They probably liked going to Berlin too often instead of sticking to their training and learning as much as they could. I had no sympathy for those fellows."
McCudden sounded like a prep school instructor invoking the rigor of the athletic training field. He disregarded the fact that his own side was vulnerable to like criticism. The Royal Flying Corps was more prone than the Luftstreitkrafte to rush hastily trained, inexperienced pilots into battle against the big boys. The royal squadrons had many able, experienced aviators, but lots of "still greens" filled in the gaps. Von Richthofen was an avid hunter like his nobleman father and the Kaiser himself, and in the air was less inclined than McCudden to be judgmental toward his "quarry." How many sandlot or beginner's-slope flyers the Red Baron shot down can only be guessed, but it must have been more than just a brace of quail.
Also, the Kaiser's War marked the infancy of military aircraft and rapid-fire weapons were in the own Model-T stage. Not infrequently a pilot experienced engine trouble or jammed guns. Stand-procedure consisted of heading back to base fast. Manfred von Richthofen had a particularly keen eye at spotting an enemy plane leaving the formation or the battle in the direction of its own lines. He would pursue the lame aircraft and imperiously send it plummeting in flames.
The Red Baron was an A-One flyer and shooter, the expert of experts on the stick and the trigger. Yet he also had a talent for appearing in lopsided competitions--scoring kills against the "fat lady" observation plane, the "grandmotherly" pilot new to flying, the gun and engine "cripple" of the air. This contains a lesson regarding where to put your money if you are gunning for profits. The bookmaker "plays fair" to keep down your winnings, which you must avoid. In sports and sports betting, Rocky Scapparelli cannot box a grandmother or a man on crutches. Yet it happened aplenty in the clouds over France and it happens daily in options-trading.
On December 28, 1917, Captain James McCudden downed three German two-seater, two-gun bombers in 20-minutes, the first of which he surprised with a rear attack. He later wrote, "I hate to shoot down a Hun without his seeing me, for although this is in accordance with my doctrine, it is against what little sporting instincts I have left." This did not appear to torment him too much when he was awarded the Victoria Cross by the King of England in April 1918, and subsequently promoted to major. Nor does it usually bother option trader when he routinely profits from financial bloodbaths.
According to widely-accepted estimates, more than 90% of all out-of-the-money options expire worthless. Bad news to the crap-shooters and instant-wealth types who think they have "inside information" that a stock will skyrocket or a "hunch" that it will plummet. Good news to the sellers of call options covered by shares they own, to the sellers of naked puts and calls, and to spread strategists who buy long-end options and sell short-end ones. The latter three face risk but it is casino or horse parlor risk, the money-goes-into-the-cashbox-and-the-wagerer-usually-loses kind of risk. A casino or bookmaker can go broke but they certainly do so far less often than the gambler.
What goes up must come down, but when two objects descend at different rates, the spread strategist profits. Time-decay pulls down the value of all options, but not all descend at the same speed. Let us say that one airplane is flying at 10,000 feet and another at 8,000 feet. Obviously, both aircraft are burning fuel and both will have to descend to ground zero eventually. However, it is known that the 8,000-feet plane has used up more of its gasoline then the 10,000-feet one and will give up altitude faster. So what is the spread strategist's role in all this and what does he do?
He invents his money in the 2,000-foot difference or "spread" between those two planes. As time passes, both continue burning fuel and both lose altitude. The higher one has descended to 9,000 feet and the lower one to 6,000 feet. So what? The one on top is still on top and both are still losing altitude. What's the big deal? The distance between them has widened from 2,000 feet to 3,000 feet, 50% increase on the investment! This explains why the spread strategist is perpetually conscious of "the distance between." It is the widening ore-field to which most of mankind pays little attention.
I make it a point not to launch a second spread until the first is more than slightly ahead. Anything is possible. If you launch two option spreads at the same time, you are exposed to the possibility of two losses. If the first is ahead when you launch the second, the one counter-balances if the other disappoints. Intel was on an upslope and had a price/earnings ratio of 23, certainly better than the other NASDAQ technology leaders (Microsoft P/E 53, Dell P/E 46). The common shares fluctuated in the high 80s and had gone no higher than 90 in the previous year (adjusted for a split) so call options with strike prices of 95 seemed far enough/close enough.
Near the end of July, I bought 10 October 95s and sold 10 September 95s (calls) with a spread of a point and a half plus commissions, resulting in a break-even figure of 1¾ points. Specifically, I bought 10 for $4,375 and sold 10 for $2,875, paying the $1,500 difference plus commissions. In the next few days the amount of the spread fell a sliver to 1-3/8 then inched up to the 1-5/8 - 1¾ area as the shares moved above 90.
I had wanted Intel stock to climb, but not that much that fast as what happened August 4. It rose above the 95 strike price to 96¾. I tolerate short-end options being in-the-money only fractionally and only overnight. This was more than a fraction and I anticipated the shares would keep rising (which they did in subsequent days). A continued climb could "squeeze" or narrow the spread, which it started to do already. I wanted out, but of course with as small a loss as possible.
In the early afternoon, the September calls posted a bid/ask of- 6-1/8 to 6½ and the Octobers 7¾ to 8¼. What if I told the broker to "Close out the position at the market?" At worst I would buy back/close out the Septembers at 6½ (the high figure in the bid/ask) and sell the Octobers at the bid/ask low of 7¾. That meant a spread of 1¼. Allowing ¼ point for entering and exiting commissions, I would emerge with just one point or $1,000 on approximately a $1,750 investment.
Another corker was the wide gap in the October bid/ask (7¾ to 8¼), a half-point or $500 difference on 10 contracts. A quarter of a point would have been more normal. How does one calculate intelligently with such a broad-range "maybe?" Your cavalry force might be 600 men or it might be 30. Now make a battle plan. If the sale of the Octobers occurred in the high portion of that $500 range (8 or above) -- good. If at the low end (7¾) -- bad. Such were the broad-ranged possibilities if I told the broker to close me out "at the market."
In the past, I had said "at the market" when exiting a spread only if the short end's high figure (the ask) and the long end's low figure (the bid) were farther apart. Now, that was not worth considering and I had to do better. I had to buy back the short-end Septembers at less than their high figure and sell the long-end Octobers for more than their low figure. I decided that such precision shooting was better done in person than over the phone, so at the start of the last hour of trading on August 4, I arrived at the York Securities brokerage office on Broadway near Wall Street.
With a short (option-selling) position, in-the-money options carry the danger of an exercise. If the Intel September calls I sold were exercised, I would be obligated to deliver 1,000 shares and to obtain them I would have to exercise the 10 October calls that I bought or "longed." That would wipe out my $1,000 investment and would also require that I pay commissions on the stock-buy and the stock-sale. Clearly the option-seller or taker-of-a-short-position must always be exercise-conscious, including the spreader who buys a long end and sells a short end.
Options are "assigned overnight," i.e., exercise orders are matched up with in-the-money puts and calls after the close of trading. So there is zero chance of the option-seller getting "assigned" or "exercised" during the trading day. Thus I arrived at the discount broker's with an hour left to trade and with a precise task: A tactical withdrawal without the abandonment of artillery and supplies.
I sat next to broker Bill Meehan at his desk, he with his computer screen and I with my out-of-pocket note paper. "Usually when I go into or out of an option spread," I explained to Bill, "I enter the two orders together--short-end, long-end--each dependent on the other. This time, I want to buy back the short-end Septembers and, I want to sell the long-end Octobers to close the position, but as separate orders. Each order going in by itself."
The adage "Buy low, sell high" now had a special meaning. I had to buy back the September options for as low a price as possible and sell the Octobers for as hefty a price. I asked Bill Meehan for a quote on Intel September 95 calls. His computer screen showed 6-3/8 bid, 6¾ ask, last trade 6-5/8. The 6¾ ask was the high figure indeed to beat by getting below it. Since 6-5/8 was the current trading price, it offered the likelihood of a transaction. I told Bill, "I want to sell 10 Intel September 95 calls at 6-5/8."
The computer's real-time quote showed October 95 calls at 8 bid, 8½ ask, last trade 8¼. That half-point gap between the bid and ask again! I needed to sell for more than that low figure, the 8 bid. The latest trade was 8¼ so I said, "I want to sell 10 Intel October 95 calls at 8¼." Rising and strolling the office, I stood ready to wait perhaps 15-minutes and ready to move either the buy or sell offer an eighth of a point in a less favorable direction if one or another transaction failed to materialize.
I could have timed the wait with a sprint-track stopwatch. Bill Meehan approached me with penned confirmations in hand, the news good as well as rapid. He said, "You bought the 10 Septembers at 6-5/8 and you sold the 10 Octobers at 8¼." I jotted this on my note paper. A spread of 1-5/8 points. A gain of an eighth without commissions but a loss of an eighth with. Nevertheless, far better than the single-point exit which had threatened. A loss of $125 instead of almost $750. I gave Bill the heartiest of handshakes. His actions as well as mine were to thank for the minimal loss of artillery.
Days later, action on the IBM front. The stock declined from a day's-ago high of 109 & a fraction past 105 & a fraction to 103. The September 110 calls slid from 4¾ to 2-5/8. The October 110s fell from 6½ to 4_. My outright-buy or long-buy wing men were certainly catching the bullets. Glance again at those figures, however, and you will note that the spread between September and October remained at 1¾. It has wobbled occasionally (1-5/8, 1-13/16) but has nonetheless shown commendable steadiness under fire.
Let us pause for field briefing about one's learning and self-development, more crucial in speculating than most other places. Of course, people should be wise and informed within any financial specialty. Yet if a market wizard and an elderly widow who confuses easily both hold Bank of Boston common shares, both will receive the cash dividend such as the stock has paid every year since 1784. Options, futures, casino junk bonds, initial public offerings from cold-calling brokers all carry the possibility of profit, but lack kindness of heart.
In their book, All About Options, Wasendorf & McCafferty wrote of losers. "They are usually attracted to options for wrong reasons -- to make a lot of money fast without exerting much effort. Therefore, they don't spend the time required to learn some of the more complicated, strategies that are more-conservative by comparisons." An excellent statement, it nevertheless detours around one gloomy, unyielding fact: Losers are essential. The trader's aim is not to abolish them but to stay out of their ranks.
To say that option-trading or other forms of trading is "adversarial" or "hardball" understates the case. It is gladiatorial. Someone must lose a pound of flesh for everyone who gains a pound of flesh. On the capability hierarchy, the new, borderline competent pilots and stodgy planes were the fodder, providing many of the wrecks and corpses that resulted in Von Richthofen's Blue Max and McCudden's Victoria Cross. Losing horse-players subsidize bookmaker and winners.
In zero-sum games where losses precisely match wins, losers pay for everything. Yet nobody wants to be in their category. Yet plenty of people always are. If your reading chair is your flying school and your practice battle-line, put in championship-grade time and effort at that crucial stage. Remember the graves in Flanders and the "How I lost my Citizens Bank passbook" barstool stories off those who did not.
Wasendorf & McCafferty also said in their highly-recommended book, "It's sad to see the number of traders we've seen over the years who have waffled from one approach to another without any clearly-stated plan. They wander in and out of the market, often making the same mistakes over and over. Your written plan need not be fancy."
As already suggested, calendar spreads with stock options will provide a fine strategy and written plan. However, let us focus on that other phrase "making the same mistakes over and over." To many traders, a "switch to a new approach" is like the casino gambler who says, "Gee. Maybe if I change tables it will improve my luck."
We all like to think that we improve with time and experience, but that does not always happen even with the intelligent and the educated. If you are over 35 you may remember the Groucho Marx quiz show "You Bet Your Life" on radio in the late 1940s and on TV from 1950-61, still on the rerun circuit. Groucho's side man was college math whiz, George Fenneman serving as score-keeper and courtly announcer. Both are now deceased.
According to one book on TV history, Fenneman also served as a "reality figure." As Groucho clowned, George's gentlemanly presence reminded everyone that this was a real quiz show. However, to label him a "straight man" or "half a comedy team" as some journalists did miss the target. Whenever Marx threw some humor at him, he became flustered and embarrassed. Fenneman had little if any comedic knack and absolutely no sense of uptake. Years later he said in an interview, "I ad-libbed out of terror. How that man could embarrass me!"
Some viewers wrote angry letters criticizing Groucho for "picking on" George. However, one could also fault Fenneman for never developing or "growing into" the role of comedy partner. 15- years as a fake doctor you're going to learn something! But no, George Fenneman never learned comedic repartee just as Ed Sullivan never learned posture or pronunciation. So face it. Not everybody develops. Even in the most challenging or inviting circumstances. Not even off the trading floor or on it.
In trading and elsewhere, growing and developing as a person means doing research. The supposed menace of it keeps many would-be "great authors" at the daydream stage. Utterances about creativity and visions of renown flee at the prospect of such a sweaty, chancy job of work. Also, neophyte traders anticipating "fast and easy wealth" skip fact-finding as easily as they skip basic training and strategic planning. In his book Renaissance in Italy: The Fine Arts, John Addington Symonds wrote of Leonardo Da Vinci:
"Through long days he would follow up and down the streets of Florence or of Milan beautiful unknown faces, learning them by heart, interpreting their changes of expressions, reading the thoughts through the features. These he afterwards committed to paper. We possess many such sketches -- a series of ideal portraits, containing each an unsolved riddle that the master read; . . . In some of them his fancy seems to be imprisoned in the labyrinths of hair; in others the eyes deep with feeling or hard with gemlike brilliancy have caught it, or the lips that tell and hide so much, or the nostrils quivering with momentary emotion."
Whoever said, "God is in the details" may have spoken for DaVinci. Yet the would-be novelist and the "instant wealth" trader count it beneath them to do some pavement-pounding, eye-work and paperwork. Macabre humor abounds when self-trained-between-pilsners optioneers go into battle as the nine sheep attacking five wolves. They exchange shots with speculator, Major McCuddens who said, "This crew deserved to die."
It is great being able to bet on a pit-bull fighting a peacock, but to make sure you are not the one with the feathers requires professional-strength, self-training, preparedness and research. Yet the latter need not always be voluminous. In the library, poring over Standard & Poor's large volumes, I scrutinize the detail cogs and foundation stones of optionable companies, condensed in these pages. Book value is a factor. Also, the up-ramp or down-ramp of earnings in years immediately preceding.
An earnings sob-story could bode well for a put spread. Statements by optimistic executives and projections of good future tallies require a skeptical eye. Malcolm Forbes said it best "Anybody who thinks businessmen deal in facts and not fiction has never read old projection reports." The researcher separates the wheat from the chaff and the baronial estate ad from the fire-trap by the swamp. Research will not entirely erase risk and unknown factors, but reduce them it does. Baron von Richthofen and the clumsy newly-arrived pilot and the flyer in the unmaneuverable plane and the one with his guns jammed all faced risks and unknown factors. But one flew with them reduced.
While in the library, I also read parts of Georgio Vasari's Lives of the Painters and Sir Joshua Reynolds' Treatises on Art. It remains my long-time wish that each trader also be "a gentleman and a scholar" and that a woman trader be a Catherine De Medici or "Lady of the Renaissance." Sadly, others are advancing a like notion but as part of a poisonous sales-pitch.
There is a cigar brand called "DaVinci" with the Mona Lisa reproduced in miniature on the box and the band. You may have seen the piece on the financial cable channel about cigar stocks ("in danger of being a passing fad") which also covered the trendy "cigar bars" with their British gentlemen's club atmosphere, mahogany leather chairs and copies of paintings by Gainsborough and Watteau. The glossy, bi-monthly Cigar Aficionado makes pretensions to gentility that would rival Town & Country Magazine.
Unfortunately, the closest many "gentlemen" will ever come to Old-world elegance and style are in these adjuncts to cancer-peddling. Cigar boxes carry illustrations of the English manor-house, the Italian villa, the Spanish hacienda. Some people will read John Ruskin's writings on traditional architecture. Others will buy a tape and hear the strum of a Spanish guitar under hacienda moonlight or the songs of the Italian vineyard and olive grove. Still, others just puff the panatella. The first two groups make better traders as well as better actuarial cases.
Without smokescreen or jeweled-crown insignia cigar band, please peruse the following by H. A. Taine, the French art historian who spend much time in Italy. In his 1869 book Italy: Rome and Naples, he wrote of two Venetian artists some of whose paintings were on display in Rome:
"Titian stands in the centre, equally strong on the side of sensuality and on that of energy. In a beautiful Italian landscape, fading away in blue distance, and near a fountain whose waters are disbursed by a little Cupid, his Callisto has fallen, violently stripped by her nymphs. No mere prettiness or epicureanism exists in this bold composition. The nymphs do their office brutally, like common women with vigorous arms. One, especially, erect and with a superb, almost masculine, torso, is a virago capable of giving a man a drubbing. Another, with the cruel malice of an experienced hand, bends the back of the poor culprit, in order the sooner to detect the signs of her misfortune."
"But in Titian's other picture, 'Vanity' naked on a white bed with a scepter and crown, a waving and elegant figure so seductively soft, is the most alluring mistress that a patrician could dock with his purple, and make use of at evening to feed his practiced eyes with exquisite sensuality."
"Finally comes Paul Veronese. He is a decorator, free of the virile gigantic lustiness which often carries Titian away; the most skillful of all in the art of distilling and combining those pleasures which pure color in its contrasts, gradations and harmonies, affords the eye."
"His picture represents a woman occupied it arranging her hair before a mirror held by a little Cupid. A violet curtain enlivens with its faded tints the beautiful flesh framed in by white linen. A small plaited border rests its delicate frill on the amber softness of the breast. The auburn hair is gathered in curls over the brow on the edge of the temples. You see the forms of the thigh and breasts beneath the chemise. With that vague vinous blush on those mingled faded darks of dead leaves, the entire flesh, permeated with inward light, palpitates, and its round pulpy forms seem to be trembling and if with a caress."
If your only contact with such as this is from a fancy humidor or a cigar box decorated with gilded epaulets, please be advised that you can do better. You must do better. A class-act trader, a gentleman and a scholar, needs fine arts, vintage music and literature to help him avoid bad company. Alright, you already avoid skid row and seedy pool hall, which is wise. Those folks chance of dragging you down may be small, but it is much bigger than your chance of pulling them up.
Something similar is true of the suit and tie "Who's Rachmaninoff? Who's Bernini?" types: Rush Limbaugh, Pat Buchanan, Judge Robert Bork, Reverend Pat Robertson and their Right Wing reactionary devotees. You have as much chance of transforming them into gentlemen of culture and real tradition as you have of transforming goose liver into gold. If you want to avoid them, figure that you have a one-percent chance of meeting them in a pornography shop and something like a zero-percent chance of meeting them in an opera house or an exhibit of Florentine and Venetian art. There is always the possibility of their straying but do they ever stray into anything cultural?
Their vision of "tradition" is not only dime storeish but involves a continual remake of the past. In his 1996 book, Slouching Towards Gomorrah, Judge Robert Bork hatcheted rock and rap music and while doing so he praised reverentially the old-time orchestras of Benny Goodman and Duke Ellington. He also honored the old movie-censoring Hays Office which he misspelled "Hayes." Will Hays' key subordinate was Catholic publisher Joseph L. Breen.
In 1934 before he moved to Hollywood, Joe Breen published the New World periodical which declared "whether indecencies be staged under the direction of unscrupulous directors of Hollywood or by command of the pagan kings of Babylon; . . . whether theme music echo the debauchery of Jezebel or reek with the jungle vulgarity of Duke Ellington, they all belong to the same category of filth."
The Duke sure had a mixed-reputation among "old-fashioned" types. Maybe one lover of "sweet yesterdays" does not like to think of his six-decades-past brethren as too much of a witch-hunter. So Bork said-nothing of Breen's evaluation. Is "witch-hunt" too strong a phrase? I shall let the evidence speak for itself. The state of Pennsylvania formed a film censorship board in 1911. One of its early decisions was to ban a silent film scene which showed a woman knitting clothes for her unborn child.
Under the 1930s Production Code, censorial movie scissors routinely snipped: Hula-dances in grass skirts. Any glimpse of a cow's or goat's udders. Any scene with a toilet or chamber pot visible in the background. The words "bathroom," "pregnant" and "diaper." The phrases "alley cat," "traveling salesman," "hold onto your hat" and "farmer's daughter jokes." In 1952, Cecil B. DeMille's circus epic The Greatest Show on Earth passed the censors only after much argument and debate because of the abbreviated costumes that women performers routinely wore under big top.
You must expect this with "old long ago" sorts who think that Correggio and Tintoretto drove a Capone rum truck. If you drink in the cobalt skies and rosy flesh-tones and swan-white linen under a gold chalice from the brush of Titian or Veronese, the gulf will widen between you and those who went to go back to censoring grass skirts and cows' udders. You will be as unblendable as oil and water with the folks whose vision of their cherished past jumps from Biblical times to the Coney Island songs and the illustration of the old farm house with no phone booth in the back yard.
That will keep you away from bad company as well as any minister blocking the doorway of a pool hall. Their fluttery thinking should not clutter or clog your trader's knack, which you must continually fine-tune. You can do that better without any cigars. The enemy plane you face may be good or mediocre, and fortunately for you there are plenty of the latter. But if you want a one-sided contest in your favor, leave the lagging and laxness to somebody else.
Let the other flyers be guilty of "going to Berlin too often instead of sticking to their training and learning as much as they could." Then the silver Victory Cup that all think they deserve will gravitate toward your hands.
UPDATE: At the time of this writing, the IBM September/October call spread stands at 1-7/8. Still in flight: No profit taking yet.
Is It Possible To Make A Living Trading? Doug Bowersox
My question is "How many S&P contracts have you been able to place At-The-Market without having very much slippage." Certainly there must be a point where one starts running the market against themselves. How many contracts do you think this occurs at?
Editor's Note:During my experience trading managed accounts on an off-and-on basis over the past year or so I have observed thru real-time trading five or less S&P 500 contracts enjoyed overall good fills and minimal slippage. However, when I exceeded five contracts on a trade, the slippage and fill price seemed to deteriorate by a fairly significant degree, including getting occasional so called "split-fills."
These comments are not based on a scientific study I have done but are based on my (somewhat subjective) personal opinion. However, I feel confident in the accuracy of this opinion, but can not guaranty the magic number for slippage or fill problems is in fact five contracts. I have also noticed this number of five contracts seemingly being important in some other markets, such as Eurodollar, Meats, etc. Have our members any comments on this? If so, please reply for our next issue.
Second question: I became interested in Commodity Speculating in January 1996. Since then, I have spent about $1,000 for data feeds, computers, TradeStation, Real Success Method, etc. I have also devoted about 40-hours a week to this. Live trading results are -$4,000 (all systems). "Paper-traded" Real Success (methodology) results have been -$7,600. You have a long career as a commodity trader and I respect your opinions.
Have you made your living during that time trading or has it been marketing trade related paraphernalia? Do you really believe that a person can make money trading? I would like to quit farming and do this. However, my farm business is suffering because of the time I've put into this. Also, I am becoming physically exhausted from working two jobs.
Editor's Note: Of course, so-called "paper trading" can not be compared to real-time trading. Actual real-time and also hypothetical real-time trading is much more telling than paper trading could ever be, especially involving a non-fully mechanical trading methodology.
For example, some of our Real Success traders report making money with the method and some losing money, in both real-time and hypothetical real-time trading. It's difficult, if not impossible to say the "Real Success" methodology (which is approximately 80% mechanical), or any other non-mechanical system, made or lost money involving paper trading.
There really is no way to say with complete certainty any method, which is not fully mechanical is either good or bad. This is impossible to say since its trading success is dependent to a very large degree on all important Trade Selection, Target and Stop-Losses used, Trade and Money Management issues. Also, a major issue is which entry signals are taken and which entries are bypassed, for perhaps arbitrary and non-mechanical reasons.
About your other questions. As stated so well by Kent Calhoun in an earlier article of his, I am also not "a great trader . . . but am an excellent teacher." Though I have been trading commodities since April 1982, I have never traded continuously for an extended time period. I have for the most part traded on-and-off over the past 15½ -years.
I will be the first to admit I have not made a living from my own personal trading. This does not preclude my being able to do it now (trading regularly and profitably for my own account), if I devoted complete attention and full-time to trading. By the way, being involved with Commodity Traders Club News is a full-time job and allows little spare time for personal trading.
In answer to your last question. Yes, I believe a person can make a living trading. However, as mentioned in our Real Success Disclosure Agreement, trading successfully is "simple but not easy," and you can not buy the "Holy Grail" trading method as some traders seem to expect! It's a sad fact an estimated 90% of commodity futures traders lose money.
However, what I about to say may seem alarming, but this losing statistic is actually "good news" in one very important way. Which is, if 90% or more lose money trading futures, it means the small numbers who make money trading commodities can make much of the money (excluding broker commissions and fees, etc.) lost by the losing 90% or so.
This is what makes trading futures so attractive. For a fairly "small" margin deposit you have a chance (albeit small) of making lots of money by getting some of the money the other 90% of traders have lost!
Keep Commenting On Systems - Doug Cragoe
Please keep publishing reviews and comments on systems. With the recent controversy, I'm not sure we can trust Futures Truth to honestly test systems. Is anyone else doing this?
"Saga Of Lawsuits" Trevor Byatt from Australia
I am sorry, but I just have to say it: I, and I suspect many others, just do not want to hear about your (Dave Green and CTC's) legal squabbles. They may well seem all important to you, but I have my own priorities. If you have to help finance that set of parasites called lawyers then please just get on with it in private. This year Advantage Trading Group and BMI. Enough is enough! By all means communicate privately with others involved, but please do not use Commodity Traders Club News as a forum to air your personal and/or business grievances. Admittedly you are the proprietor, but without us, your subscribers, I surely do not have to remind you that you just would not have such a forum.
Now on a more positive note - you are otherwise, doing a grand job which I thoroughly appreciate and I would not want to be without CTCN even if I had to continue being fed your ongoing saga of lawsuits!
Editor's Note: Thanks for your opinion and comments, Trevor. We can appreciate the fact both yourself and likely some other members do not want to hear about our unfortunate legal problems and lawsuits. By the way, please don't think we are overly litigious. That's not correct. Your editor is now in his early 50's and has rarely been involved in lawsuits (with two minor exceptions - non-trading related) until very recently, 1996/1997.
Member Comments & Requests
Bill Taaffe would like to know whether there is a member who wishes to sell his Omega Research Tradestation program, either version 3.5 or 4.0. Also, the CSI software product called "Trader's Money Manager." Feel free to call me at 770-953-3348 (home number), or e-mail: firstname.lastname@example.org "Great Spirits have always encountered violent opposition from mediocre minds." (Albert Einstein)
Woody Painter would like to know of any courses in selling options and information on doing it. Call 918-542-3747
I am just starting the futures. I would like to buy software that would give me the past few years charts on when the price is right to sell. Right now I am in oats. I may want to get into other futures, but without the graphs and charts of the past I am in the dark. Leon Keeley - e-mail email@example.com
Per some requests, Avid Trading Co. Website address is: www.avidtrader.com
This issue marks our 40th issue of Commodity Traders Club News since our first issue was published during May of 1993. This is our largest issue ever, with 50 or so articles and contributions jam-packed into 48-pages of knowledge for our club members.
As time goes by, we like to feel we have been improving our newsletter with each passing issue. However, there is always room for improvement, like almost everything else in life. Therefore, let us know what you like or don't like about CTCN and we will try to enhance it.
About our knowledge based website: www.webtrading.com We have added lots of new material to it. This includes giving you the new ability to do a keyword or phrase search of our entire web site yourself, using our new integrated individual Website Excite Search Engine. This engine will look at every file within our site and return search results in a flash. It's real nifty and can be valuable and informative to our web surfers and visitors who are looking for specific information.
For example, you can type the word "Keltner", as in Keltner Bands or Keltner Channels, and instantly find every reference to Keltner in some of our online back-issues and elsewhere within the many files on the site. You can also type names, such as Kent Calhoun and see where his name is mentioned (by the way, a surprising number of times) within our site and also within some of our back-issues. At the present time only nine of our Commodity Traders Club back-issues are online. However, we will be putting more of our older issues online in the near future.
We have also added real-time intra-day S&P and Dow Jones charts, courtesy of CNN/fn. The charts will update from time-to-time during the trading day.
Be sure to press your reload or refresh button frequently when visiting our Website. This is said because not only do the free real-time online charts update regularly, but our webtrading Website itself is being updated or enhanced on a continuing basis, frequently on a daily basis.
Some web surfers may not know this but if you do not press your reload or refresh buttons when visiting a Website your web browser will sometimes use its cache memory to display a website, based on an earlier visit.
The browsers do this in the interest of speed because stored PC cache memory is much faster than having to read the Website using significantly slower modem speeds. As a result, modifications and site enhancements may not be displayed resulting from your computers cache memory containing an older site visit.
Other new features and enhancements have been made to our ever-growing and comprehensive Website, including a number of new links to other helpful and interesting Websites.
Thanks to everyone who has contributed knowledge to this issue of Commodity Traders Club News. Without you it would not be possible. P.S. - Remember, as a special reward for making just one contribution/submission per year, you'll receive an automatic 50% price reduction on your renewal. Submissions can be any length, long or short; typed, handwritten or submitted on a disk. Formal or informal. Please participate by sharing your information and knowledge with other traders. Please make a contribution about your experiences, both good & bad with systems, services, advisors, data vendors, and other trading related product.
The reproduction, copying or publication of any part of this work beyond that permitted by Section 107 or 108 of the United States Copyright Act, and also World-Wide International Treaty Provisions, is unlawful. ALL RIGHTS RESERVED. Written permission from the Publisher/Editor is required for reproduction in any form (with proper credit to CTCN, including our address and phone number being required), and may be withdrawn at any time. Commodity Traders Club News (CTCN) is a 'Clearing House' or 'Information Exchange' for members only. We do not verify, (and we have not) verified the accuracy of the mathematics or numbers published herein, or accuracy of comments and remarks made by the authors. All information and remarks in the contributions are the opinions of the author or contributor, not the Editor or CTCN. You should be aware that P&L reports and advertisements are frequently based on hypothetical (not real-time/actual) trades. Article headlines or Sub-Headlines sometimes may be changed or written solely by the Editor, using verbiage the Editor believes highlights important points being made by the contributor. CTCN Membership, which includes our bi-monthly CTCN newsletter is "Your Guide To Profitable Trading and How To Save Money Along The Way." It's regularly priced at $100 (US) for 1-year. . . and includes free postage within USA & Canada (add $20 for Overseas Air Mail). Publisher: Webtrading.com, D.B.A. Our E-mail address is: firstname.lastname@example.org Our Website address is www.webtrading.com Editor is Dave Green. The opinions and recommendations are those of our writers and not those of Webtrading.com, CTCN, or its editor. (Note: There is high risk of loss in futures trading and past results may be difficult to achieve in the future and also may be based on hypothetical trading, with benefit of hindsight, and not actual trades) Note: We operate open member forums and consequently reserve the right to publish e-mail and other communications received. Therefore, please indicate "confidential" or "not-for-publication" on any e-mail or other correspondence sent us which you want kept private. Please contact us if we publish your comments and you object. Thank you.