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Learning How To Trade Futures, or A Journey Into "The Pits"
M.K. Davidson

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
Raymond Merriman

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:

July 1893
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 Contract
Chicago Board of Trade Futures Contract reprinted with the permission of The Chicago Board of Trade

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.

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 inform

Commodity Traders Club NewsÔ

"The Commodity Futures Trading Knowledge Network"

Learning How To Trade Futures, or A Journey Into "The Pits"
M.K. Davidson

What You Know May Not Be So - J.L. from Wimauma

The Key Is Trading The System Correctly, Not Being Right Every Time - Michael B. Coleman

About The New Dow Jones & Mini-S&P Futures Contracts - Barry J. Lind

Some Thoughts On The Four-Year Cycle In U.S. Stocks
Raymond Merriman

Probable Dates of a 4-Year Cycle Trough in U.S. Stocks:

What's It All About? - Peyton Morgan

London Financial & Curtis Arnold Press Release "CFTC Misses the Mark, Casually Bankrupts & Destroys American Families"

Divided We Fall - Rick J. Ratchford

Trading Tactics and Strategies - When A Market Leaves Its Range, It's Called A Break-Out - Paul Britain

Options - The Write Stuff! - P.B.

Scale Trading - Trading The Range - P.B.

"The CFTC Wants You Off-Line" by Scott Bullock -

Opinion On Bill Williams - Mike Cook

"Not Impressed With The Knowledge & Speed Of The Advantage Trading Group Brokers" - Randy Beeman

"New Concepts In Technical Trading Systems" - A Book Review of a Classic - Raymond F. Kohn

"Misguided Federal Agency Targets Trading Public's Tenured Educators While Turning a Blind Eye to Unscrupulous Brokerage Firms"

"Law Must Be Applied Equally or Not At All ". . . Press Release from London Financial & Curtis M. Arnold

All About The Dow Jones Industrial Average and the New DJIA Futures Contract
Chicago Board of Trade Futures Contract reprinted with the permission of The Chicago Board of Trade

What Are CBOT® DJIA Futures?

Using CBOT- DJIA Options to Capture Market Movements

Capturing Upside Profits

Taking Advantage of Market Reversals

Using CBOT® DJIA Puts to Protect Profits from a Bull Market

Achieving Low-Cost Portfolio Protection

Enhancing Portfolio Yields

How To Improve Your Trading With Knowledge On The Correlation Between Sport Betting, Wagering & Handicapping vs. Speculation - Tom D'Angelo

Allegations About John Hill & Futures Truth" Why Are There Lawsuit Threats? for Printing Truth" - by Kent Calhoun, KCI Seminars

Manage It While You Can! - Rick Ratchford

Beliefs That Don't Support Your Goals - Dee Switzer

Factors Which Could Cause The Market To Decline - Arden Pulley

"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

Futures Truth Did A Disservice by Showing How Well My Systems Were Doing! - Bruce Babcock of Reality Based Trading Company

Can Stress and A Poor Diet Combined With Making Money & Trading Cause Cancer? " End Of The Trail" - Gale Paxton

Commodity Traders Club NewsÔ

"The Commodity Futures Trading Knowledge Network"

Learning How To Trade Futures, or A Journey Into "The Pits" M.K. Davidson

What You Know May Not Be So - J.L. from Wimauma

The Key Is Trading The System Correctly, Not Being Right Every Time - Michael B. Coleman

About The New Dow Jones & Mini-S&P Futures Contracts - Barry J. Lind

Some Thoughts On The Four-Year Cycle In U.S. Stocks Raymond Merriman

Probable Dates of a 4-Year Cycle Trough in U.S. Stocks:

What's It All About? - Peyton Morgan

London Financial & Curtis Arnold Press Release "CFTC Misses the Mark, Casually Bankrupts & Destroys American Families"

Divided We Fall - Rick J. Ratchford

Trading Tactics and Strategies - When A Market Leaves Its Range, It's Called A Break-Out - Paul Britain

Options - The Write Stuff! - P.B.

Scale Trading - Trading The Range - P.B.

"The CFTC Wants You Off-Line" by Scott Bullock -

Opinion On Bill Williams - Mike Cook

"Not Impressed With The Knowledge & Speed Of The Advantage Trading Group Brokers" - Randy Beeman

"New Concepts In Technical Trading Systems" - A Book Review of a Classic - Raymond F. Kohn

"Misguided Federal Agency Targets Trading Public's Tenured Educators While Turning a Blind Eye to Unscrupulous Brokerage Firms"

"Law Must Be Applied Equally or Not At All ". . . Press Release from London Financial & Curtis M. Arnold

All About The Dow Jones Industrial Average and the New DJIA Futures Contract Chicago Board of Trade Futures Contract reprinted with the permission of The Chicago Board of Trade

What Are CBOT® DJIA Futures?

Using CBOT- DJIA Options to Capture Market Movements

Capturing Upside Profits

Taking Advantage of Market Reversals

Using CBOT® DJIA Puts to Protect Profits from a Bull Market

Achieving Low-Cost Portfolio Protection

Enhancing Portfolio Yields

How To Improve Your Trading With Knowledge On The Correlation Between Sport Betting, Wagering & Handicapping vs. Speculation - Tom D'Angelo

Allegations About John Hill & Futures Truth" Why Are There Lawsuit Threats? for Printing Truth" - by Kent Calhoun, KCI Seminars

Manage It While You Can! - Rick Ratchford

Beliefs That Don't Support Your Goals - Dee Switzer

Factors Which Could Cause The Market To Decline - Arden Pulley

"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

Futures Truth Did A Disservice by Showing How Well My Systems Were Doing! - Bruce Babcock of Reality Based Trading Company

Can Stress and A Poor Diet Combined With Making Money & Trading Cause Cancer? " End Of The Trail" - Gale Paxton

Learning How To Trade Futures, or A Journey Into "The Pits"
M.K. Davidson

Some Thoughts On The Four-Year Cycle In U.S. Stocks
Raymond Merriman

All About The Dow Jones Industrial Average and the New DJIA Futures Contract
Chicago Board of Trade Futures Contract reprinted with the permission of The Chicago Board of Trade