Foreign Exchange Trading - Adam Hartley
With the growth of Internet sites offering interbank foreign exchange trading for small deal sizes, this market is starting to be accessible to private individuals with relatively small account sizes. This article is designed to inform beginners on some of the practical details of what is involved in trading the foreign exchange interbank market as opposed to the IMM currency futures market. Readers may wish to visit the Website http://www.snapdragon.co.uk/ which contains this article and other trading articles and links to other sites, etc.
Some Internet sites that offer interbank trading over the Internet are:
Currency Management Corporation: http://www.forex-cmc.co.uk/
Money Garden: http://www.forexmg.com/
What is a Foreign Exchange Quote?
Take a typical quote for the dollar/mark rate: USD/DEM 1.7263/68. What this indicates is the number of German marks that there are to one US dollar. Note that the rate name (USD/DEM) is made up of two parts, the primary currency (USD) and the secondary currency (DEM). The order that these are given in is important: DEM/USD is not that same as USD/DEM, in fact one is the reciprocal of the other.
The important thing to remember is that if the dollar strengthens then the rate will go up. In other words, if the primary currency strengthens then the rate increases so that more marks are required per dollar as the dollar is stronger. This means that if you believe that the rate will increase you want to buy dollars or to sell marks. Similarly, if you believe that the rate will go down then you want to sell dollars or to buy marks (more on this later).
The Bid/Ask Spread
Note that the quote above has two parts to it: 1.7263 and 1.7268 (typically shortened to 1.7263/68). What this means is that the bank offering the quote will buy dollars/sell marks from you at 1.7263 and sell dollars/buy marks at 1.7268. This means that you will be selling at the lower price and buying at the higher price. It is important that you get this correct -- as in a typical deal you do not necessarily have to bother saying whether you are buying or selling dollars you only indicate the price you want to deal at.
For example if you are quoted 1.7263/68 and you want to buy dollars/sell marks -- you would say "at 68" or "68 done" whereas if you wanted to sell dollars/buy marks -- then you would say "at 63" or "63 done" etc.
Most currencies are quoted with the dollar as the primary rate, with a few notable exceptions being: GBP/USD, AUD/USD. There are also markets quoted for the major "cross rates," i.e., markets that do not involve the dollars at all. For example: GBP/DEM, DEM/JYP, DEM/CHF. Note in each case the first named currency is the primary rate so that the DEM/JPY rate goes up if the German mark strengthens against the Japanese yen.
An interbank trade consists of the following:
Whether you are buying or selling
The rate at which it was done
The date for the deal
The amount for the deal
For example you might be buying dollars at 1.7268 for settlement in two business days time (a spot trade) for an amount of 1-million dollars. What this means is that in 2-days time you will take delivery of 1-million dollars, paying 1,726,800 marks in exchange.
Now if you are merely speculating on the direction of the rate and do not actually want to receive 1-million dollars, then you will need to offset this transaction with an opposite one. For example, later in the day the rate might move to 1.7318/23 and you sell 1-million dollars at 1.7318 again for delivery in two business days times. This trade means that you will be delivering 1-million dollars, receiving 1,731,800 marks in exchange. What you should notice is that the two dollar amounts cancel out, so that you are no longer required to deliver or receive any dollars, your account is merely credited with the difference in the number of marks that was to be exchanged.
Transaction 1 - USD +1,000,000 - DEM -1,726,800
Transaction 2 - USD -1,000,000 - DEM +1,731,800
Result - USD 0 - DEM - +5,000
As you can see the net result is a profit of 5,000 marks. When the amount specified for the trade is given in the denomination of the primary currency, then the profit is given in the secondary currency and the amount equals the difference between the buying and selling price multiplied by the size of the transaction: Primary Currency Size: Profit=Size * (Rate sold at - Rate bought at)
Alternatively, one could have traded in amounts that were denominated in the secondary currency, marks in this instance. For example, if one bought dollars/sold marks at 1.7268 for an amount of 1.5 million marks, then in order to offset the trade one would need to sell dollars/buy marks at 1.7318 again for 1.5 million marks.
Transaction 1 - USD+868,659 - DEM-1,500,000
Transaction 2 - USD -866,151 - DEM+1,500,000
Result - USD + 2,508 - DEM 0
As you can see, if the size is specified in the secondary currency then the profit is given in the primary currency.
Secondary Currency Size: Profit=Size* (1/ (Rate bought at) - 1/( Rate sold at))
Note that in either case for margined foreign exchange trading case, you do not have to have the full 1 million dollars in your account, but only a small percentage of this amount (e.g., 5%) to be used as margin on the deal.
While most quotes are given for the spot market with settlement in two business days time -- one can agree on a settlement day further in the future.
There is a simple relationship between the spot market and the forward rate which depends on the differences in the interest rates between the primary and the secondary currencies for the specified times.
Forward Rate=Spot Rate * (1 + Isecd) / (1 + Iprim) where Iprim=the interest earned over the period in the primary currency
Isecd=the interest earned over the period in the secondary currency.
In practice, you merely ask the dealer to roll the deal forward to a given date and to give you the new price as the above calculations are quite standard. Note that there is a bigger Bid/Ask spread for forward contracts as there is less liquidity.
Reminiscences of Future History - Rick Ratchford
When dealing with the subject of cycles, it would be neglectful on the part of the presenter to leave out a key ingredient of its usefulness, that being history of market action repeats itself.
Advocates of cycle analysis, those who consider it based on market geometry, will quickly point out that future cycles can be predicted by considering past cycles.
On the other hand, critics of cycle analysis are likely to take a stand for randomness of the markets, saying that each new day brings completely new and different situations that is not a repeat of the past.
Curious though, is that many of these critics, when asked about recommended books to read, will quickly draw your attention to the book by Edwin Lefevre, titled "Reminiscences of a Stock Operator," now an investment classic.
Written in the early 1900's, this book is believed to be a reflection on the trading life of Jesse Livermore, considered one of the finest traders of this century. The words found on page 10 caught my eye immediately, and I couldn't help the grin that immediately surfaced upon my face.
"It was not long before I was anticipating movements in prices. My only guide, as I say, was their past performances."
W. D. Gann, recognized by many as a master of market analysis, also believed that historical information played a major part in anticipating future events. He would research price data going back hundreds of years, noting how market action would repeat itself at regular intervals into the future, which was still his past.
Today, there are still some strong students of Gann, who also have been able to overlay charts of past market action with current events and find uncanny matches in their complete moves. Based on these findings, it has been relatively simple to anticipate what direction a market is likely to take from there into the future.
Here is another interesting quote found in "Reminiscences of a Stock Operator" . . . "I noticed those advances as well as declines, stock prices were apt to show certain HABITS, so to speak. There was no end to PARALLEL cases and these made PRECEDENTS to guide me."
"Habits, Parallel cases, precedents," are words to refer to repetition of past events, cases that are not unique but that has occurred before, and can be used in future instances. All these words certainly speak volumes on the fact that the past is very important in anticipating the future, especially when dealing with market action.
The term cycles, clearly fall under the same category as "going full circle." Repetition is what cycles are all about. Critics of cycle analysis fail to understand that those patterns they look for to trade from are recognizable only because they are not new. Those patterns have appeared time and time again (cycle).
Head and shoulders, ascending/descending triangles, 1-2-3 patterns, bullish/bearish flags, and so-forth. If it were not for past price patterns (actions), these cycle critics would have no reference (precedents) to trade from.
Those who analyze cycles correctly understand that history is the basis of the future. The future is history. It has already happened (pattern wise), although the reasons for the patterns, the people and events for causing the moves will be different. It matters not to a trader if 100-years ago the market made a 10-week bull run up due to floods, 100-years ago prior to that it made a major run up for 10-weeks due to drought, and today 100-years later, it makes a bull run up due to nuclear waste. The reasons themselves are not what is necessarily repeatable, as the individuals and environment will have all changed. But that the movement of the market itself will continue to repeat, using whatever current affair is necessary for the future to be history.
Feedback and Technical Support on Omega SuperCharts - Luc Jauron
I use Omega SuperCharts Ver.4. Recently I contacted their technical support department many times for different reasons. Here is my conclusion so far. When I called I waited about 30-seconds before I could talk to a technician. For e-mails, the average time for a response has been less than a day -- something like 5-6 working hours.
The solution hasn't always been found on the first communication and I think that we have to expect it. The interaction of a software with Windows is not simple. What I expect from technical support is to be responsive to our problems or even sometimes to our lack of understanding the software. I always got this from Omega Research technical support team. But I would not say this of all the divisions of Omega Research. The technicians have always been polite and they really try to help.
I know the technical support of Omega Research has been the object of many comments in the past. I think it was an element to consider in the past for those who were looking to buy SuperCharts or MetaStock. To me it is not an element to consider anymore.
Screen Capture Utility for Technical Support
I found that a screen capture utility (like Snag-it) can be very useful to communicate a problem to a technical support team. These utilities capture a complete screen or part of it as an object. This object can be embedded in an application document that can use OLE (object linking and embedding). For example you can write your message with embedded capture windows in Word, WordPerfect or even Wordpad and send this message as an attached document with your e-mail. You cannot embed directly in your e-mail (I am sure Outlook 98 or Eudora Pro 5 can do it now). You have to attach the capture object in your e-mail or attach a word processor document. To me the last option is better, because your question and the capture windows that details the error message can be side to side.
A capture utility costs about $30 to $40. Most of them are shareware. You can make a search for <<screen capture>> at this web site and many others: http://tucows.dsuper.net, http://www.pc.world, or http://www.hotfiles.com.
I think that an e-mail with embedded capture windows can provide a very systematic way of presenting what we have done and the error message that resulted from it.
You want to test and develop your trading ideas. You better look at the new window version of Technifilter Plus. You can download a free and fully functional copy for evaluation at http://rtrsoftware.com
This version comes with a set of data, so you can test and see if the software answers your needs. This free version will not work with other data than the set provided. The cost for the normal version is $425.
Daytrading the S&P 500 with End of Day Data,
Suggestions Needed - W. B. DeNeen
I'm a new subscriber (07/98) and to start, would like to say how helpful and informative CTCN has been to me already.
I've been daytrading the S&P 500 futures for almost a year now. Built a system that uses a series of MA's (3 close MA's over I open MA) with 4 confirming screens: Stochastics, MACD, Detrend with Momentum and a Volume Weighted RSI.
In the beginning, with limited knowledge, a system that does its job and possibly a bit of blind luck, I did quite well. I know that I still don't know a lot, so I read and study every evening.
In April of this year things began to change - slowly at first. My stops started to get hit more often --didn't have a chance at times to trail down to break-even point. Trading ranges became narrower and more volatile. My indicators were still doing their job, but I evidently was not.
A string of losses ensued, small at first. I widened my stops -- not smart. Now a series of big losses. My account was now 2/3 less than when I started trading.
I stopped trading for two months. Retested my system, adjusted MA's to filter out market "noise," went over previous trades and notes of each market day to see where and if I'd screwed up. Found some violations of my trading rules -especially stops.
Began trading again in July. Results have been mediocre to poor. My system still gives me good indications, but I believe what's happening now is that I'm losing my decisiveness and confidence in taking or not taking a trade.
I would like to ask some questions and hope that the readers will offer some suggestions.
1. Can one daytrade the S&P 500 profitably with end-of-day OHLC data?
2. My S/R calculations are always within 1 to 2 big ticks (I 00-200), yet I've been failing to time my entry correctly. When I've entered a trade, my tight stops get hit, I'm knocked out, only to see my original calculations come to pass later in the trading day. After my previous bad experience with stops, I'm hesitant to do so again. I've been unable to come up with an answer.
3. One side of the trading camp says to trade the trend for the day (enter on open -- exit on close). The other says to trade for small, but steady profits. Yes, my mouth waters when I see a day's trading range of 15 to 20+ big points, but I prefer to go for small and steady. Seems lately though (July) the only way I can profit is to trade Open to Close. Not comfortable with that at this point -- what to do?
4. I've been told by some that I should buy all the "bells and whistles" (real time tick-by-tick data feed, TradeStation plus a "when to buy/sell" program, etc.) that would do the analysis for me and also the decision process.
Have a hard time with that. First, I enjoy the analysis and decision making process. Second, I'm thinking, what did the past and current good traders do before the electronic age? I have no problem using what's available today to help me speed up the process, but can't one be a good trader without the "bells and whistles?"
That's it. Very basic stuff to some I'm sure, but to me, important basic stuff. Thank you all for your time. Once again, would really appreciate some feedback from the membership via the newsletter or e-mail me at firstname.lastname@example.org
Electronic Order Entry - LEO-WEB - Keith Johnson
I read with particular interest the articles in CTCN on electronic order entry via the Internet in the Jan/Feb issue, and would be pleased to contribute to the discussion from my unique position with regards to employment and background.
As the European Sales Manager of Linnco Europe limited, I have watched with fascination as both interest in and sophistication of electronic order entry has grown.
Linnco Europe tends to specialize in London, Europe and the Middle East, and in the great majority of these markets English is not the first language. We find in particular many eastern European clients are a lot more comfortable using electronic order entry as the great majority are more comfortable using written rather than spoken English on the markets. In fact, many banks and larger institutions like the added facility of an audit trail which they gain from trading on the Internet. To-date some 400,000 orders have been entered using our electronic order program, Leo.Web.
I have been in the markets as a broker for some 20-years, and it is fascinating to watch the evolution of what is perhaps the most substantial change since the introduction screens to replace ticker tape. While many clients are still more comfortable using the phone, we are seeing a gradual change. This usually commences with clients opening a number two account and developing confidence before they become totally electronic.
I was somewhat surprised that none of your contributors commented on what is the undeniable advantage of electronic order "independence and distance from noise."
I have studied over the years the profile of those traders who consistently make money and found that a number of characteristics are common via:
® a systematic mechanical
® money management
® and independence and indifference to the market noise
It is this last characteristic which defeats many traders. Often they have the system and the money management but when they come to place the orders they are tempted to change their rules. Sometimes they sense by the tone of the order taker that their order looks naive, other times the broker will say outright "did you know that . . . " In the end the process of placing orders brings them in touch with the market noise and destroys their system. The great benefit of electronic order entry is the ability to blindly follow a system without interference because in the end it is only those traders who make the money.
On the technical side, it is encouraging that every few months the electronic order entry program becomes more reliable and flexible in order type it will accept. If anyone has any doubt that electronic order entry is the way of the future they should look how LIFFE lost market share to the electronic DTB exchange.
I am interested in seeing the system improve and would be pleased to hear any suggestions regarding improvement, or to assist traders in setting up a test program. I can be contacted on email@example.com.
A sample program can be downloaded from Website http://www.linncoeurope.com
In the case of a test program, the order actually goes to the floor and an order number is given. This allows potential traders to practice without the orders being executed.
"The Millionaire Next Door" - A Book Review by: Raymond F. Kohn
I just finished reading a most fascinating book, titled: "The Millionaire Next Door" by Thomas J. Stanley, Ph.D. and William D. Danko, Ph.D. 1996, $22.00, 258 pages. The authors have been studying the wealthy in this country for over 20- years, and it's this research that is the basis for their book. The authors are marketing research specialists who advise commercial businesses on the best ways to market their products or services to the rich of this country.
The authors have taken their two decades of research, numerous interviews, combined with their personal insights, and wrote a book about what makes the rich tick, and how they got rich in the first place. The idea is, if we can learn how the rich got rich in the first place, we could all learn how to become wealthy too. One of the true benefits of this book is that it finally puts to rest the many myths, and misguided assumptions, about whom the rich really are and how they got that way. It is a real eye-opener to say the least.
Despite what you have heard, or read about in the press, or even seen on television shows like: "The Lifestyles of the Rich and Famous," the vast majority of "Rich Americans" do not live high profile lives of conspicuous consumption. In fact, just the opposite is true.
The book opens with a hard hitting "Introduction" which lays the groundwork for the eight chapters that follow. The introduction states: "Many people who live in expensive homes and drive luxury cars do not actually have much wealth . . . Many people who have a great deal of wealth do not even live in upscale neighborhoods." The authors go on to say: "we have discovered who the wealthy really are, and who they are not. And, most important, we have determined how ordinary people can become wealthy."
The authors draw a distinction between "wealth" and "income." There are many "high income" individuals who have very little "wealth" or "net worth." These high income individuals literally are spending every dime they earn and then some, leaving little or nothing left over to go toward the accumulation of real "wealth."
Here are some quick statistics which help bring home the point: More than 25 million households have incomes above $50,000 per year. More than 7-million households have incomes above $100,000 per year. But in spite of these high incomes, these same people have very low levels of "accumulated wealth" (net worth).
The average American household has a net worth of less than $15,000 (excluding home equity). And, when you remove automobiles, furniture, and personal possessions, their net worth drops to zero.
Even the very top quintile of Americans are not really wealthy. Their median household net worth is less than $150,000, and when you exclude their home equity, it falls to less than $60,000.
The "rich" highlighted in this book are true "millionaires." They are financially independent. They could maintain their current lifestyle for many years without ever earning another paycheck. And more important, they are not the Rockefellers or Vanderbilts, they did not win lotteries, or sign multimillion dollar contracts with the Yankees. More than 80 percent of the "rich" are ordinary people who have accumulated their wealth slowly, and steadily. The typical American millionaire is a compulsive saver and investor. They are self-made millionaires and are first-generation rich.
Over the many years of research, the authors have noticed seven keys "common denominators" that many millionaires have in common with each other. Below is a list of those seven common denominators:
1. They live well
below their means
2. They allocate their time, energy, and money efficiently, in ways conducive to building wealth
3. They believe that financial independence is more important than displaying high social status.
4. Their parents did not provide economic outpatient care
5. Their adult children are economically self-sufficient
6. They are proficient in targeting market opportunities
7. They chose the right occupation
In the first chapter the authors give you a typical "Portrait of a Millionaire." Again, the information is most insightful. The typical millionaire is:
A 57 year old male, married with three children. About one in five is retired. About two-thirds are self-employed. (Being self-employed is a key element that comes up often throughout the book: Their research indicates that less than 20% of the working population in America is self-employed, yet 66% of millionaires are self-employed. This is not coincidence.) Many of the businesses they operate are "dull and normal" ranging from janitorial services, auctioneers, to owners of mobile home parks. Their median taxable income is $131,000 per year. Median net worth is $1.6 million. 97% are homeowners, and the average home value is $320,000. 80% are first generation affluent. They live well below their means, wear inexpensive suits purchased at J.C. Penny's, and drive older American cars. In other words, most millionaires are not only hard working, but are serious tightwads. They have an enormous respect for the American work ethic and don't take their hard earned wealth for granted. And, more important, they do not show off their wealth with expensive possessions. They live so modestly, that even their own children are totally unaware of their parent's millionaire status.
They are fastidious investors, investing nearly 20% of their household income each year. And, they typically make their own investment decisions. They maintain strict household budgets, and can tell you exactly how much they spent on food or clothing during the past year.
For the most part, it takes many years to accumulate wealth, hence the typical age for a millionaire is over 50. For those of you who are under the age of 50, the big question becomes -- How do you know if you are on track to becoming a millionaire? The answer to this question is one of the real values of this book. The authors have created a formula which takes into consideration your current age and annual income in determining whether or not you are "on track" to eventually becoming rich. This formula is one of the most valuable elements contained in this book.
It is a very simple formula: Take your "Current Age" divided by "10" and then multiply that result by your "Annual Income": The result will equal what your "Current Net Worth" should be (excluding your home equity).
If your net worth is less than half the calculated amount, you are considered an "Under Accumulator of Wealth" (UAW) and will probably never become a millionaire without changing your ways. If your net worth is as calculated, you are considered an "Average Accumulator of Wealth" (AAW) and will very likely become a millionaire before retiring. And, if your net worth is twice the calculated amount you are considered a "Prodigious Accumulator of Wealth" (PAW) and will most assuredly reach your goals.
It should be noted that becoming a millionaire is a combination of having a reasonable good level of current "income" while maintaining a frugal lifestyle, combined with an aggressive savings and investment program. The authors make reference to the fact that if your annual income falls below $75,000 per year, it becomes far more difficult to accumulate wealth because you have less income to work with. However, it should be noted that there are many examples of people who have started saving early enough in their lifetimes thus taking advantage of many decades of compounded investment returns to eventually become millionaires.
The book's purpose is to highlight the personal traits of PAW's who have become millionaires. The reader can compare their own sense of monetary values against those of the typical PAW and find similarities or discrepancies, as the case may be. You quickly learn that having a "high income" alone has absolutely nothing to do with being "wealthy." The authors highlight countless case studies of individuals earning in excess of $200,000 per year, and yet could barely make ends meet. In one case a physician was earning over $600,000 per year and could not save enough for his own retirement. He fell into that category of being a "high consumption - low savings" UAW personality.
While on the other end of the spectrum, the authors highlighted individuals who had very modest incomes, chose to live well below their means, and saved every penny they possibly could. Their frugal lifestyle, combined with a dedication to saving and investing resulted in them being able to accumulate enormous wealth in their lifetimes.
Living a life of Thrift and Investment is the universal secret of becoming "rich" in America.
Despite the life lessons regarding wealth accumulation, this book gives the reader enormous insight into how parents relate to their children. In some cases, "high consumption" parents raise "high consumption" children who have never learned the virtues of frugality.
Likewise, at the opposite end of the spectrum, it is so easy for the wealthy to indulge their own children to protect them from the "slings and arrows" of life, that the wealthy inadvertently create "dependent adults" who become serious underachievers with all of the related negative consequences of such a circumstance.
This portion of the book will give all of us who have children serious pause for thought.
I am so impressed with this book, that I have been recommending it to everyone I know. I am insisting that my son read it. And, if I ever loose sight of the American work ethic, I will reread it again and again.
This book should be mandatory reading for every American in this country. It's no wonder that it is a New York Times Best Seller.
Regards to A Traders Press Offer to Open Futures Bookstore Partnership
Dear Ron Albriton: This is in reply to your e-mail offer for CTCN becoming an advertising partner with a Traders Press Co-Branded Investment Bookstore partnership, via our webtrading.com site.
The main reason we replied to suggest Traders Press first advertise on our Website or in our CTCN newsletter is because of past hard feelings between Commodity Traders Club News and your firm. We thought there may be a chance of resurrecting our ruined relationship if you would first give us some needed advertising income (to help defray our membership and postage costs, to keep our subscription rates low), rather than us first giving you (referral) business.
You may not know this but unfortunately several significant events happened to seriously harm our relationship, perhaps 4 or 5-years ago.
First, CTCN was prohibited from the pages of your Traders Press Catalog due to the fact your Ed Dobson told me he was a personal friend of Bo Thunman of Club 3000 News. Ed implied he did not want to jeopardize his friendship or take any business away from Bo due to CTCN's direct competition.
By an odd coincidence, at about the same time, the identical thing happened involving Futures Truth and John Hill. John rejected our check for $250 to pay for an ad in his Master Performance Tables, as he said he was also a personal friend of Bo and was concerned about Bo being upset or losing business to us!
At the time Club 3000 was an unfriendly rival of ours. C3 was bitter because we went into business in competition with their one-time monopoly (with this type of member feedback newsletter). Traders Press (and also Futures Truth) freely promoted C3 for many years but would not let us advertise, even on a paid basis, let alone a freebie basis.
At about the same time as rejecting our name from the pages of your catalog, Ed placed a paid classified ad in our CTCN newsletter offering your books and 800 number for orders. When you did not renew your ad for the following issue, we called Ed to ask why. Ed said he could not advertise any more because you failed to get any orders or even inquiries from his paid ad.
We found this very hard to believe as our 1500 or so (at the time) club members were very active and constantly buying trading products and books. I asked Ed if perhaps his order takers did not keep a record of the source of the orders and Ed said absolutely not as they always asked.
A few days later I personally called your 800 number Order Line, and as an experiment placed a book order with your order taker. When finished with the order he started to say goodbye and never asked how I learned about your company. I asked him why he never asked how I contacted you? He said (exact quote): "why would I ask callers this question?"
He seriously could not understand why he would ask this important marketing tracking question. When questioned further, he said he had being taking orders for a long time and was a "long time employee" and had NEVER (asked anyone the source of their order! I asked him why, he said no one had ever asked him to get this valuable info from callers!
Yet Ed claimed he was not advertising with CTCN again because of not getting any orders from our members. We found this very upsetting for several reasons:
1. It was apparently
2. We lost an advertiser due to this incorrect info
3. It hurt our reputation in the commodity business as you may have told other Vendors CTCN ads were not effective
4. You may have told Bo Thunman this false info and;
5. C3 then likely told many other vendors, etc.
All this makes us very uncomfortable in future dealings with Traders Press. Also, very importantly, what does this say about you actually reporting our true sales and paying our correct commissions!
This ended up also hurting your company in the future, as for years we recommended either Lind-Waldock Traders Catalog or Traders World Magazine Catalog to our members, who purchased many books from them.
By an odd coincidence, Club 3000's business and influence has allegedly declined over the past few years. In fact, its Editor/Owner, Mr. Bo Thunman has now seemingly retired from Club 3000 and it was being run by his wife's cousin, who (at least at the time) had never even traded commodities, from what we are told. It seems we at CTCN rarely hear C3's name mentioned anymore for some odd reason.
"Copping Out" - J. L. from Wimauma
I've said it in a previous article and I'll say it again: "It ain't the money!" I said this to a seasoned trader and he thought I had a screw loose. As far as I know, my screws are all tight (except whenever I buy gold). My point is: can we ever succeed at doing anything well if we don't really understand why we're doing it in the first place? Sure we could get lucky once or twice, but I mean being consistently successful. Maybe I'm just talking about defining that "success" but, at least for me, it just "ain't the money." I just read that some millionaires actually love to lose in the markets (maybe a "status symbol?") That sounds like a hobby, and hobbies cost, not make, money. I'm certainly not there yet.
Right now most of you readers are also wondering about my "nuts and bolts." Until you too have experienced the thrill of a "Perfect" $200 profit (or even a well-executed loss) and the emptiness of a $1,000 profit by accident (did you really say "Sell" instead of "Buy?"), you'll never believe me. Oh, I know you took the little lady out on that $1,000 profit (you did, didn't you?), but your gut is a lot harder to fool!
And I used to think that the money was the "measure" of our . . . acumen." Then I asked myself, "Does Larry Williams feel any better than I with his $20,000 afternoons vs. my $200 one?" How could anyone have felt better than I did? So what the heck good is this "money" thing anyway? Maybe it's only the "admission fee." Pretty hard to enter the sweepstakes without that. And if you're just trading for "boasting rights," you'd better start with a bundle!
I just read a book entitled "Die Broke" (believe it or not). I figured that I should be able to do that right. Written by the country's #1 estate planner (I believe book liners), the theory is clearly that the ideal "estate" spends its last penny on the coffin. It agrees with the bumper sticker, "I'm spending my kid's inheritance." Well maybe there's something to it. If there wasn't, I might be buying into all of those junk-mail "make me a millionaire" offers. When the trading strategy that guarantees to make me a happier man finds my mailbox, they've got me, but I won't hold my breath. Why do they all assume that I just want to make money at any cost?
Oh well. Do you suppose that I might just be "copping out" because I didn't make any money today? Anything is possible, you know, But maybe I struck a chord or two out there in trader-land! I drink (my cranberry juice) to the source of all human pleasure - Accomplishment! Healthy investing to all!
Need for the Truth - Arthur Johannpeter
Arthur Johannpeter wrote --I read your Website http://www.webtrading.coml/sutrader.htm I was impressed. The Commodity Traders Club News says that performance rankings of Futures Truth are of very dubious value.
I am pretty much lost and I don't who to trust now . . . I am sure many traders are in the same situation. Would you please make a big favor for the whole trading community and bring some truth about the best trading system available . . . Please publish some serious scientific work. We all will appreciate that. We are all looking forward to that.
Editor's Comment: The problem is I know of no one who does serious ongoing work on trading system performance other than Futures Truth.
I believe they try to do a good job and have the tools to do the job well and the people at Futures Truth are apparently honest people.
However, many commodity traders experience vastly inferior results trading a system, they (Futures Truth's Master Performance Tables) had ranked highly.
We are not sure why this is so. We have asked John Hill of Futures Truth, Ltd., to write an article about this odd phenomenon, but for some reason he seemingly will not write about it for us. Regards, Dave Green, CTCN
Thanks Dave for your honest answer . . . it is important to clarify this issue.
The Way - Jeff Leas
You do not have to like trading -- like what is in the trading: the opportunity to find yourself. The time spent trading can be a parable for the rest of the day (or for the rest of your life). Align yourself with the higher purpose of fulfilling your own potential and joy will be the result.
It is a myth that the markets make sense. Markets are nonlinear, infinite parameter worlds and therefore are chaotic. Nothing is firm, nothing is balanced, nothing is durable. Nothing remains in its current state - each moment brings change. The goal of trading is to discover regularities within this perpetual change. Markets are chaotic systems and therefore fractal in nature (they are self-similar at various orders of magnitude, by any measure -- price, volume, time). Market conditions that you may be waiting for will probably not be significantly different next hour or next week or next year. Only the scale of the change may be different.
Let go of the false ideas of what makes the market tick and simply respond as the market unfolds. Create your own reality. Make the universe your own creation and harness any regularity that is there to your own uses. There is more to trading than technique. Move beyond technical mastery to touch the very soul of your craft. Perceive and merge with the very essence of what makes your calling an "art." Develop a sense of energy relationships. Energy absorbs the patterns of things and builds with those patterns. Your subconscious energy will connect to an energy within the universe that is larger than your own energy. Operate from a plane of existence that is attuned to a harmonious flow within the universe. When you are aligned properly, you will feel yourself flowing with the universe. You will trust in yourself and trust in the universe. Expend your energy on positive ideas, creativity and action. Make your actions match your intentions. If you are going to do something important, the best time to start is right now. Trust in yourself with the awareness that you have everything it takes to win.
Success originates in the mind and translates into the material world. The mind must be allowed to act of itself. Quiet down your mind so that answers can arise within the quietness. The best answers come from the silence within. The wisdom you experience comes not from you but from the silence. Keep a clear mind, maintain a softer focus and use less effort and you will automatically access your wisdom. Wisdom is the ability to "see" an answer without having to "think" of an answer. The best way to access your wisdom is to know that it exists and to trust it. Remain in a responsive mode, the most relaxed state of mind. You will see the bigger picture and take things less personally. You will stay flexible and calm so that when an opportunity comes the mind will be open and receptive to abundance and success. Use your conscious mind to give positive orders to your subconscious mind. It will in turn connect to the body and make you strong; it will connect to your feelings and make you confident; it will connect to your intellect and make you think clearly; it will fill you with positive energy.
Fear is instinctual and healthy and is simply a fact of life, but it should not be a barrier to success. Fears are only rationalizations for quitting or not getting started. Think of your fears as lazy thoughts that should not be taken seriously and can be dismissed. Admit that your fear is not working to your advantage. Remaining fearful is not safe at all. Make decisions from a place of wisdom rather than a place of fear. Fears that clearly and directly interfere with your dreams are the dream snatchers of your own making. All fearful thoughts are useless and hold you back all of the time. Concentrate exclusively on the present moment and you will avoid fearful thoughts of the past or future. You are not the only one experiencing fear at this moment -- all other traders are also. Push through the fear rather than live with it. Let go of fear and allow success to unfold. You are stronger than your fears and more competent than your worries. You are going to do whatever you are worried about anyway. Trust yourself so that whatever happens you are in a position to handle it. Learn to trust that you will survive, no matter what happens. Be a warrior who consistently faces daily risk with stoic composure and calm.
Reduce your strategy to its point of application. Trading demands the work of this instant. Recognize that there is no real mystery about the market at this moment. If these are the conditions you want now, then trade. If the trade proves wrong later, you can correct it then. Every judgement teeters on the brink of error. Trading is an unending adventure at the edge of uncertainty. Kiss the old, irrelevant logical systems goodbye. Live and focus in the present moment. Trade with an empty mind. Let the market make your decisions. Act upon what you see, not what you want to see. The here and now is all there is. Allow the truth of the moment to surface, without bias or personal agenda. Act from a place of wisdom and safety. Listen to your inner voice and wisdom and the path to success will be clear. Feel the moves as they are occurring. Trust these feelings and go with them. Be truly one with the market and when you are wrong, correct your mistakes quickly. Listen, feel and respond to the market without hesitation. The spirit and sword must be united as one.
Be systematic in your trading; you will feel in control of the process. Aim for performance over the long run. Any single trade, winning or losing, is just part of a bigger process. The system or technique practiced is not as important as implementing it with discipline, consistency and control. Abandon certainty. Strive for excellence, not perfection. Do not be attached to trading outcomes. Attachment creates fear. Belief that everything must work out perfectly creates enormous worry, fear and immobilization. Acceptance of imperfection allows you to not worry, to move on and to stay focused on your purpose.
See yourself as your own worst enemy and as your own best friend. You are the cause of all your experiences. One who is able to change and transform in accord with the market and wrest victory is termed spiritual.
Down Staircase" There are Many Ways To Define
Technical Issues - J. L. from Wimauma
As we ponder the self-created perplexities of something so absurdly transparent as the commodities market, we will only find solutions by embracing the two facts just alluded to. How's that for a mouthful? Make room, Greg Donio!
As to that "self-created" part. Aren't all traders basically looking for the same thing on their charts, i.e., turning points? It seems to me that a turning point must be one or more "up" days followed by a "down" day (or vice versa). And then it hit me! After 15-years of trading, I wasn't really sure how to best define an "up" day (or a "down" day)! Sure I thought I knew, but did I? How in the world was I to therefore ever identify a "turning point?" I'll make you a bet right now . . .
If I polled a room full of traders, I would get a show of hands for each of the following definitions. An "up" day is:
a) a daily Hi higher than the previous day's Hi,
b) a daily CL higher than the previous day's CL,
c) a daily CL higher than that day's midpoint, or
d) a daily CL higher than that day's Open.
I know we could create many more definitions, so the point is, no wonder lots of us can't make any money at this. I'll never dispute that any one of the above (usually more than one at the same time) could indeed signal a turning point, but back to the initial question. It implies a "stand-alone" up day, not an "up" day relative to any previous day. That eliminates "a & b." Then I reasoned that if an Example "c" Close was still lower than that day's Open, could that still be an "up" day? That leaves only "d." After all, for my money (literally), if a market can't close above its day's Open, the "bears" won the day. If the Open is indeed the traders' consensus after the overnight news, then surely the Close must represent the consensus after the day's trading, i.e., an "up or down" day!
Let me tell you, if my definition also works for you, we have just opened some huge doors! Link these days with swing Support and Resistance lines, and for the first time I can tell you short-term whether the market is unequivocally Up, Down or Sideways - Trending or Correcting! Does anybody care to know what the "friend" is, even if it might switch on you the following day (like any other "friend?") Since we're talking "swinging" here, you don't need a heck of a lot more, except maybe . . .
How about a good intraday, "early warning" signal so that you don't have to miss those $'s lost by always waiting for the close? I think mine is dynamite, but a little too complicated to explain here. I'll leave this subject with this challenge. Just as the otherwise useless (to me) Parabolic studies are based on where a market has gone "too far" counter-trend (causing the original trend to be in doubt), don't you think you could now calculate an intraday "sweet spot" where you've got about 80% odds that you will have an Up or Down day (and often a "turning point") at least by my definition? Well it works for me, and I'm no rocket scientist (even if I do live with Mrs. Einstein)! As for my "up-down" definition, try it -- you might like it! If nothing else, a five-year-old could spot these days on a chart! That's at least good for "starters."
Just received my new issue and note that Andrew Abraham's trend definition is basically what I was referring to above. However, when "the previous down wave in the uptrend is surpassed," I'm willing to say that the trend has already reversed, even tho I still wouldn't reverse until the confirming "failure" swing. The difference is probably just semantics, but let me say that his is good advice! I use his "dual time frame" idea also!
And one final note, on my last issue's subject (drinking water). The formula is ½ oz per # of body weight per day. That's one lofty target! What works for me: all 8 oz glasses -- two first thing when I arise, and another in about 30 minutes. That "starts the ball rolling" and thereafter I'm reminded to drink another glass each time I "go." Skip too close to meals (so as not to dilute those stomach acids needed for digestion) and too close to bedtime (for obvious reasons)! You won't believe how good you feel! "Healthy investing" to all!
Markets in Motion - Rick Ratchford
Markets are not random. Random is the explanation one gives when one is unable to provide an answer to why it moves the way it does. The reality of the markets is that it is made up of cycles. Some cycles have a greater length than other cycles, and when combined, they tend to distort the pattern from a simple sinwave pattern of a lone cycle.
Many "cycle traders" try to find these simple sinwave patterns in the hopes of trading them. They note that Hogs have a 24-day cycle or Sugar has a 120-day cycle, and so-forth. (Note: Cycle lengths are examples only and not necessarily the accurate count.)
The problem of using such cycle counts is that it may work one, two, maybe three times before disappearing. The problem is not taking into account the other cycles combined.
Back in 1991, I took a test for my FCC General Telegraph License. A very difficult test on vacuum tubes and radio waves, etc. One of the things a person has to know to pass this test was the fact that cycles can become distorted by the inclusion of other cycles. It has help me tremendously to learn about the reality of market cycles, to visualize this when learning the concepts from various esoteric teachers.
It is understandable why many want to discount the fact that cycles exist in the markets. Hocus pocus they exclaim! Is it really hocus pocus, or simply ones limited understanding of a higher order?
Imagine demonstrating the microwave oven to those in Salem back during the witch hunts. Or how about telling someone about the electric light bulb in Columbus' day. "If man was meant to fly, they would have wings!" "Man will never walk on the moon." I bet you all chuckle at these people today. How short sided they were. Obviously, they would not be the ones to fly or walk on the moon.
It is no different today than it was back then. Without the proper background, some things are just too much for some to believe.
A very good example of this is my brand of cycle work. That which I have labeled Fdates . It is cycle work, in the sense that the mathematics used to create the dates are based on market Geometry.
Yes, you heard right, Geometry. To get a better understanding of market Geometry, you might want to read the works of Brad Cowan or Michael Jenkins for starters. The markets are geometrically perfect. The problem is that we are not perfect and so can forecast movements with a little room for error. Yet, if one really wants to dedicate time to learning about Market Geometry, he/she will be greatly rewarded. My discovering these things for myself have paid me dearly in many, many ways. One way is enlightenment -- knowing something and being in awe of it.
It is not my goal in trying to convince every one of the wonders of the universe. Fibonacci ratios in nature and the markets, geometric relationships of the universe and the markets, etc. Too much material to cover. More time than I wish to commit. No, I leave this endeavor to those who are tired of following the masses into the pit of account depletion. Anything worth having or knowing is worth the effort to go after it. There is no reward for sloth.
Because markets are not random, but rather made up of cycles combined, their movements can be anticipated with a very high degree of accuracy. This can be done on several levels, such as daily, weekly or monthly.
The Fdates mathematical algorithm is applied to the daily market prices. I've used the algorithm, with slight modification due to the uniqueness of the weekly data, to derive weekly cycle dates, or what I like to call Wdates. Yes, I'm big on using the alphabet for my cycle date names.
The result of this work has been incredible. When properly applied and used, one can note the time frame a weekly trend change is due, then move down to the Fdates that fall within that weekly time frame window to isolate those which will have you going in the new weekly direction. It has been a boon for longer term trading. Again, it won't reward laziness, but the practice of mathematically extracting cycles has been quite rewarding, and has clearly shown that the markets are not random. Too many accurate forecasts, regardless of those that do not pan out, show that randomness is not the answer to the flow of the markets. The answer lies in learning more about what makes the markets move the way it does and how to discover this early.
When one thinks of the markets as random, they've automatically laid their money on the table and spun the roulette. Might as well trade using a coin. You'll soon find that to be futile.
A later discovery of mine, though I did not discover on my own but by the information derived by many authors, has lead me to learn how to extract cycle information using other methods. Now imagine the excitement I experienced as soon as I overlaid the results of my cycle work using Fdates/Wdates and the results of using a completely different method of cycle extraction. It is amazing! The cycle mapping is almost identical, with dates maybe being only a day apart of the samples. Using two completely different methods, one mathematical, the other historical, and having them confirm each other almost to perfection! What chance could that have happened if the market was random? None!
Very few have ever stepped into my office and seen what I've seen. I know that there are but a handful of people reading this that can fully appreciate what I'm talking about. The rest may be curious or down right skeptical. That is just to be expected.
But I did not always know nor believe that such things were possible. No, it was one piece of the puzzle after another, and an open mind to complement it. Never quick to criticize that which I may not fully understand, nor try to sound scientific in telling someone this or that is impossible. "Man will never walk on the moon!" How ridiculous that seriously made statement sounds now. Just imagine how ridiculous hearing some say "Market turns cannot be forecasted!" sounds to those of us who actually know better. Ah yes, that last statement is sure to raise some hairs on people's necks. Those witch hunters in Salem had the hairs raised on their necks as well. It was their actions later that said it all.
Knowing and learning these truths is only the beginning, knowing how to use them takes effort as well. Gann proved forecasting was possible as it was documented in many press articles where he demonstrated this time and time again. Yet, even Gann had not discovered all the secrets. If he had, he would not have lost 8% of his trades. He kept looking for all the answers up until his death. No, I don't believe he amassed $50 million, but he did amass millions from understanding that markets are not random. His life is another story in itself.
Yes, knowing that the markets are not random is just the beginning. Need to know how to exploit the knowledge? That is what we endeavor to do each week in The Membership. Some are more masters at it then others. That is another truth about markets and cycles. Never settle for the common beliefs.
A Review of Currency Management Corporation - Adam Hartley
It used to be the case that spot foreign exchange trading was only accessible to traders who were prepared to deal in large amounts. The trader who wanted to trade small sizes would either not be catered for or would be charged large spread prices that made trading on all but the longest time frame prohibitive.
However, with the growth of the Internet, had come new companies offering interbank foreign exchange trading at much more competitive rates. The reason for this is that much of the trading is now more computerized and more efficient which means that the spreads can be decreased and the minimum transaction sizes reduced as well. One of the pioneers of this service is Currency Management Corporation (CMC) which offers spot forex trading at interbank rates with small minimum deal sizes either over the phone or using their Market Maker trading software.
CMC offer forex quotes with fixed 5-pip spreads (except when market conditions are extremely volatile) for major rates on deal sizes of $100,000 (or equivalent) or more. This might be a problem for traders of larger sizes who would normally expect narrower quotes though it is possible that this could be accommodated somehow.
The minimum account size is $20,000 though interest is only given on accounts of size $50,000 or more. CMC is regulated by the UK's Security & Futures Authority (SFA) and so clients are protected from the shady practices that have been associated with some spot forex operations in the past. However, the client has to sign agreements to be treated as a non-private client (as defined by the SFA) which means that the level of protection offered is less than for trading futures for example. This would include the lack of automatic compensation should CMC go bust. In addition, the client has to sign an agreement that their funds are not held in segregated client accounts which again could cause problems should CMC go under.
As far as trading is concerned there are two ways of doing this. Traders can use the phone or the Internet. The most appealing method is definitely the Internet trading which is done using CMC's Market Maker software.
The client establishes an Internet connection and then starts the Market Maker software. Live quotes are then immediately available for the most actively traded rates and cross rates. In theory these quotes can actually be traded whereas for normal forex operations one has to ask for a quote before dealing. To trade, one simply double click on the desired rate, say Dollar/Mark whereupon an order ticket appears. The client then fills in the trade details such as Buy or Sell, the amount and whether the order is a Market order, a limit or a stop together with an associated price if necessary. The client is asked to confirm the transaction before it is sent off to CMC. Once the order has been accepted and processed then this fact is reported back to the client. This whole process can take the matter of a few seconds.
In practice, the system works fine most of the time. However, there are times when the system really slows to a crawl, especially around the time that the US markets are opening and when there is a key economic report due out. This can make the whole process extremely frustrating at best and at worst one sometimes doesn't know whether an order has got through or not. In such cases I usually resort to using the phone. Occasionally the computers even lock or crash at CMC's end which means that they don't know what your position is which can make things a bit fraught but they write down all the trades and things are sorted out eventually. I understand that many problems will be sorted out once the next version of Market Maker is released though it was originally scheduled for February 1993-2014 and there is still no sign of it.
There is one other gripe which is that although the quotes are tradable in theory, CMC do reserve the right to update the quote when you make a request to trade. This is because sometimes the quotes have not been updated for a while and are a bit behind the market or the market may be moving very quickly.
In such cases the client is offered a new quote with 10-seconds to accept it or reject it. My one complaint is that one never gets a better quote offered if the market has moved in ones favor, only if it has moved against the position that one is trying to put on. When trying to establish a position and when every pip counts, I usually resort to the telephone as the quote received over the phone is guaranteed tradable and is up to the second.
The main worry with spot Forex trading is that one is not trading on an exchange where the prices are regulated, the quotes that you are trading off come entirely from the counterparty, CMC in this case. In theory they could offer poor quotes as they will know your market position or even deliberately stop you out as they know where your stops are. In practice I only once had a stop deliberately taken out: during a quiet period the quote was banged down to hit the stop and then moved straight back up again. I immediately rang up to query this and they were very apologetic and reinstated the trade. I can only guess that it was a novice dealer who thought that it was OK to do this. Word would soon get round if a Forex dealer were to operate in this manner and they would soon lose their clients. In general, I have found that CMC has been very fair in their dealing.
In conclusion, CMC offers a good spot Forex trading service aimed at the smaller traders and using cutting edge Internet technology. 0nce they get some of their computer problems sorted out to cope with the huge increase in clients that they have had, then their services will be even better.
Congress Attacks Free
Publishing Industry Needs Help - By William S. Scott, Attorney-at-Law
The United States Congress created the Commodity Futures Trading Commission, an obscure government agency, and empowered that agency to regulate and control all speech concerning the commodity industry. So far, this intrusion upon the First Amendment to the Constitution of the United States has not been stopped by the Courts. This is because Congress exempted the large publishers from regulation. And, the small publishers have too little resources to withstand the cost to sustain a protracted fight.
It is time for all Americans to recognize that government intrusion of the freedoms we enjoy begins with the regulation of a small, unnoticed, group of people. In this case, the commodity publishing industry.
The present attack is against those who want to express opinions concerning commodities and to publish commodity software. No one knows where the next attack will be.
The Commodity Futures Trading Commission, under the threat of a budget cut or extinction because its job can be better accomplished by the Securities and Exchange Commission, without regard to the rights guaranteed by the First Amendment, has said to express opinion concerning commodities requires registration, i.e., government control. Congress created this agency without the provision of adequate supervision of its activities. It is currently running amuck causing ruin to innocent people who own and manage a small segment of the publishing industry.
This industry needs help. You can provide that help in the form of your financial support to the defense of the members of this industry. Send your contribution to: Publisher's Defense Fund.
Editor's Note: CTCN members should thoroughly investigate the Publisher's Defense Fund and the author of the above anti-CFTC article (Mr. William Sumner Scott, an Attorney located in Florida) before sending any "contribution" there. We say this for several reasons:
1. Of course use caution when sending money to anyone asking for contributions.
2. Mr. Scott was previously disbarred by a CFTC Administrative Law Judge involving allegations of wrong-doing.
3. Mr. Scott at one time did some legal work for Commodity Traders Club. It's alleged he did a "unsatisfactory" job involving several issues
4. Including, the non-disclosure of relevant facts to CTCN, such as withholding knowledge of his previous disbarment.
5. Finally, and most alarming, Mr. Scott promised both verbally and in writing to refund our additional $1,000 payment to him, in the event our court case was not heard for any reason.
The case was in fact not heard and dismissed, but Mr. Scott still hasn't refunded our money after numerous requests. He allegedly has no intention of honoring his refund promise.
For Immediate Release, June 19, 1993-2014 - By William S. Scott, Attorney-at-Law
In an effort to avoid being taken over by the Securities and Exchange Commission, the Commodity Futures Trading Commission has asserted that it has the right to regulate the publication of opinions regarding futures trading while the Securities and Exchange Commission lost the same argument in regard to opinions on stocks in the Supreme Court of the United States in 1985 in the case of Lowe v SEC, 472 U.S. 181. But for now, the Commodity agency has unlimited money available to attempt to prove that it is better than the SEC. Unfortunately for all Americans who value the free expression of opinion, the risk is if commodity opinion is regulated, the next step will be to regulate other forms of speech. This Country was founded by a number of people who were looking for the right to say and print what they wished. Now your taxes are being used in an attempt to overturn that freedom.
The government has made an all out attack on free speech on many fronts.
It has said that a seller of opinions in the form of computer software can not be sold because technical analysis of past price action can not predict future prices. And, not surprisingly, an admin. law judge appointed by the same agency, has agreed. The defense by the seller is that opinion should be free to sell on whatever terms an informed buyer wished to pay. For more info on this case contact Mr. Greg M. Reagan, R&W Technical Services Ltd., 713-995-4477.
It has also said that a publisher of commodity analysis of past price action to predict futures prices which many occur at the same time each year has to disclose his list of buyers and the research report he generates to permit the government to determine if he has done anything wrong. The publisher contends that his sales information provided the government with all the information that is relevant to permit the government to determine what he is doing. For more information, contact Richard Tokheim 402-964-9042.
The same government agency has said that because a respected McGraw-Hill book publisher said he produced 2,500% profit over five years when he only produced 1,700% in profit according to the government calculation, the book publisher should be fined. And they have stripped him of the attorney of his choice. Contact Curtis Arnold 561-747-1554.
Another respected publisher is under attach for the publication of its opinions on commodity prices and the publication of charts. For more information contact Nick Van Nice at 561-694-0960.
The industry, with the help of the Institute for Justice, has filed an action to stop these abuses. Contact Scott Bullock, 202-955-1300 (IFG).
Editor's Note: These opinions are Mr. Scott's, not those of CTCN or its Editor. Our position on the CFTC appears below.
Release from CTCN, Aug 1993-2014:
A Letter to Commodity Traders Club Clients & Supporters re the CFTC:
Please help and support us in our efforts to (at a minimum) tone-down the U.S. Commodity Futures Trading Commission's (CFTC for short) apparent (but in our opinion NOT deliberate) harm to Financial Privacy Rights. The CFTC say's they adhere to these privacy rights and in fact routinely mails Privacy Act Notices to everyone they contact. However, unfortunately, financial privacy seems to get frequently violated, even though the CFTC does not do this with intent. This occurs because of the CFTC's power and amazingly in-depth activities, including great subpoena authority. As a result, it seems financial privacy is routinely violated in fact (but not in theory), what with their questionable, powerful and seemingly heavy-handed investigative activities.
At one time we did not think highly of the U.S. Commodity Futures Trading Commission and their policies. However, our quite negative views over the past 2-years have now changed to generally positive opinions of the CFTC and their Staff and employees, including their 140 or so Attorneys.
We have a lot of respect for the CFTC and feel the Staff Attorneys we have come into contact with seem to be very professional, dedicated, hard working, reputable, honest and fair-minded individuals. However, their heavy-handed barrages of subpoenas, legal and investigative procedures, may unfortunately not be "fair" or warranted in all cases.
Although the CFTC obviously does not deliberately do things with the intent of harassing, harming anyone, or intending to violate anyone's privacy, nevertheless it unfortunately ends-up in actuality having this sad effect. We greatly respect the CFTC, (and several officials we know well, in particular). Nevertheless, it's alleged the CFTC's Division of Enforcement "investigations" are similar in some ways to a "witch hunt" and "fishing expedition," though apparently not intentional.
The (non-intentional) end-results are incredibly troublesome, time consuming, business disrupting and income destroying activities against a number of varied futures industry firms, in addition to Dave Green and CTCN.
Some of their investigations and subsequent actions are warranted, such as investigating Commodities Telemarketing Schemes, so-called Boiler Room frauds (common in Florida for some odd reason), worthless and fraudulent commodity futures trading product vendors who have committed fraud or sold worthless systems, sold expensive courses and seminars for up to $4,000 and offered their clients an absurd one-day money-back guaranty, lied about their personal trading successes and past trading records, churned managed accounts, lost all of clients funds due to over-trading (to generate commissions), deliberately used and/or stole money from customers, promised guaranteed huge profits to traders, Ponzi scheme operators, etc.
Unfortunately, it seems by virtue of the CFTC's extremely involved and amazingly strong investigative activities, they end up coming down very hard and having the effect of seriously harming most everyone whose affairs they decide to look into, justified or not.
P.S.: It's really too bad the CFTC does not investigate all major white-collar crimes (and even criminal cases), not only futures issues, as their arrest and conviction rate would likely be almost 800! We really believe this to be true! Your support is greatly appreciated, even more than you know. We are indebted to you because of your help and support on this difficult issue.
90% Claims Are Hard to Believe - Robert Bennett
I am not familiar with WinWaves but 90% claims are hard to believe. As a member I am looking for some trading software. If you were me what would you buy today. I see that WinWaves has a 90% guarantee that their software is right! What's the catch? And can they be that good?
I did buy Omni trader. I have not traded anything yet, it looks nice. But can it make money.
I have just ordered TradeStation, should have it today. How do you like it? (Editor: Very well)
Determination + Attitude=Success! - Rick J. Ratchford
A race is never won unless you finish. It is never started unless you believe you can do it. To begin and end any endeavor, you must have the attitude that you can do it and be determined to finish what you start.
The field of trading is no different. Finish what you start! But to do so, you must have the attitude that it is possible to win. You must be determined to prove yourself right. The facts are: If you believe you can do it, you can do it!
I once heard the words from a man who was paralyzed from the chest down and told he would not be able to get around on his own, but now moves around freely in his wheelchair, as well as drives, "If it's difficult, you can overcome it. If it's impossible, it just means it will take a little more time." How true those words are! Do you allow others to tell you that you cannot succeed? Do you tell yourself you are not good enough? Do you put off taking action although you know you really should? Do you find yourself giving up before completing what you started? If so, you need to readjust your attitude and become determined to finish what you start. All people are unique with different gifts. Yet, with a positive mental attitude, a belief that you are just as capable as anyone else to succeed, you will have the foundation to build on. Let me tell you a story I found interesting:
There were these two eggs that were soon to come alive. They were discussing what they wanted to be in life. The one egg says to the other, "I would like to be an oyster. An oyster only has to lie at the bottom of the ocean and just lets the water move him about. I will eat the food that comes between my shells as the water moves past me. I will eat only what the water passes by me, no more and no less. I will go where the water moves me. As an oyster, I won't have to do anything at all. The other egg said, "That is not the life for me. I want to be an eagle. Sure I will have to hunt for my food, but I will be able to go where I want to go. Sure life as an eagle will be harder, but I will be able to soar above the mountains or into the valleys below. I will control where I will go, not be controlled. Yes, it will be harder to be an eagle, yet I will be free to chose where I will go.
This is exactly what life is about, and also trading. The water is likened to the masses of traders who inevitably lose. The reasons why usually start with attitude and determination. Instead of choosing for themselves the direction in which to travel, they let the masses do the choosing for them. The results are disastrous, and they soon drop out of the race. I suggest an affirmation which has shown great results with many people employing them.
Each day, on a clean piece of paper, write the following line 20 times. Do this each morning for 21-days straight. By doing this, you will reinforce in your mind that you will succeed, and your determination to do so will improve daily. It is up to you to stick to this for 21-days to be effective. This is the affirmation:
"All my thoughts and actions draw success toward me more and more each day."
In almost any endeavor worth the effort, it takes climbing some major obstacles to get over the hump. Too many people actually quit right when they are on the one yard line! Don't let this be you. Believe in yourself, as you are just as capable as anyone else who has succeeded before you. What made them successful was always believing they would be without question.
If you hear yourself saying to yourself, "I can't do this," it will take three affirmations on a positive basis or more to correct. Keep thinking positive thoughts and believe them. It has allowed many to rise from the ashes of mediocrity to the heights of greatness. Step out of your bubble and do something you might have been afraid to do before, no matter how small. Small steps will eventually get you to the finish line. Time is not relevant if you start now. You will finish. Be determined to do so regardless. Avoid those who talk the negative talk, as they have given up and do not wish for anyone around them to be successful, thus leaving them alone. Surround yourself with positive people, people motivated to improve, always encouraging you to continue in your dreams, your goals.
As the Bible says in 1 Corinthian 15:33, "Bad associations spoil useful habits." This fact is as ancient as man! Keep yourself deep in positive material, avoid the negative of the newspapers. Read more entrepreneurial material such as Success magazine and other encouraging press.
What you feed your mind is what will motor your mind and actions. Make sure you feed it the food of positive thinking. Be determined to succeed in your dreams to be a successful trader, no matter how long it may take. Because if you ever give up, this will most definitely carry over into other aspects of your life. Don't let it!
Be like the eagle. You are in control! Fly the heights in whichever direction you choose. It doesn't matter, as long as you are the one making the choices, and not others for you, like that of the oyster in the ocean. Be determined to succeed. Have the positive attitude that you will succeed. You will then succeed!
SPREADS: Anti-Martingale Strategy
--- How NOT to Roll Dice on Concrete - Greg Donio
During World War One, British recruiting posters said, "Enlist with a Pal!" The arrangement was that men who volunteered together would be allowed to serve together. The pitch worked well in terms of the numbers it brought in. Whole streets signed up, as did entire factory crews and upper-school classes.
Alehouse cliques and beanery cliques disappeared. "Not a soul down on the corner. That's a pretty certain sign. Those wedding bells are breaking up that old gang of mine." Now, however, the sound vacating the street corners was not a bell but a bugle.
The downside of this proved horrendous. Battlefield carnage mounted, wiping out entire streets and factories. Eton College's rollbook of alumni killed in action grew many pages. The sad and sentimental empty stool at the pub multiplied vastly.
Financially, trading futures and options resembles July 1, 1916, day one in the Battle of the Somme. It began with huge multitudes of would-be heroes and medalists. It ended with over 60,000 Britons dead or wounded. On the eve of trading as on the eve of battle, immensities of optimism grow with few roots in reality. Always, always, more optimism will grow no matter how badly the last batch fared.
Over 90 percent. That is the estimate generally given of how many futures traders end up as financial "ashes to ashes," also how many out-of-the-money futures options and stock options do a "dust to dust" by expiring worthless. Few see that carnage. Countless thousands of white crosses cover the grass at Flanders Fields. For traders, however, only a small-print phrase marks all the deep sixes: "a high turnover rate."
The names on the "active list" of the futures and options brokers are not the same ones that graced it a few months ago. Different voices when the phone rings. Steinberg has replaced Silverman. Costa has replaced Corelli. Princess Waterleaf has replaced Chief Whitehawk. Optimists crowd around the brokerage desk as around the recruiting desk, despite all knowledge of past battles and thinned ranks and why they need new blood.
Optimism. It brought Andrew Carnegie to the shores of America with just 50 cents in his pocket and it brings the sucker to the back alley crap-shoot. Many a speculator starts out to be the Carnegie of futures contracts or the J.P. Morgan of puts & calls, but does little more strategy-wise than throw dice on concrete. Optimism caused investors to buy Resorts International's rich stock and Charles Ponzi's fake promissory notes. After Ponzi's arrest, government expediters seized his holdings and were able to return to note-holders 28-cents of each dollar invested. That seems like a fortune compared to what many traders are left with--with no laws broken.
An abundance of high hopes the day before the battle. Boxcars of caskets the day after. Yet high hopes keep growing in all types of soil. No amounts of losses at the horse parlor in the past prevent the placing of more bets tomorrow. I am involved with spread strategies on stock options because they involve profits from both the recruiting desk enthusiasts and the coffin train, with the latter not dampening the former; from both the excited placing of bets and sad losses, with the latter not dampening the former.
There is an old saying, "More than one pessimist got that way by financing an optimist." Yet it is possible to profit from optimism that loses money. Bookmakers do it every day. Brokers collect a commission whether a trade or investment wins or loses. Most importantly, they make money regularly and over the long term. Not so with people whose high hopes get ahead of their good sense. Any brain-dead gambler or trader can tell you about his big win back in 1995 and can you lend me two dollars? Option spreads include that ongoing, long-term plus-factor -- not just profits but profits with businesslike regularity.
Remember Damon Runyon's two fictional bookmakers? Sorrowful Jones and his partner Regretful. Those names fit when their clients lost but what about at the excitement stage earlier on? The thrill of a bet and the hope of a win? Sunshine Jones and his partner Brighter Day would have been appropriate. The glad, hopeful bet and the sad loss are the two profit bookends, all the more since the Sorrowful does not dim the Sunshine of the next bet.
High hopes, sunshine and a vein of gold. The horseplayer believes in these no matter how many torn tickets and hurt faces he sees at the track, no matter how many times he has emptied his own passbook. The bookmaker's optimism, though tinged with cynicism, is more grounded in reality. The rainbow-chaser's visions may be fantasy but he spends real money in his quest for them. There's gold in them thar--in them thar other people's wallets and checkbooks. The option spreader sells puts or calls which, when they expire worthless, hold far less value than the spurious Ponzi notes. What the spreader buys, the other bookend, gets most of its gains from other people's money. Prison food for Ponzi, broiled lobster for the spread strategist.
Over 90 percent. By that much the sad stories told over pork & beans out number the treasure tales related during lobster thermidoro. Yet trading success exists and is not the exclusive domain of any one cuisine, character type or geographic location, no more than in the past. Dated 1870, James K. Medbery's book Men and Mysteries of Wall Street told of the buy & sell orders that flowed through the cables of Western Union and the Bankers and Brokers' Telegraph Company in and between major cities. Medbery added:
"But the most significant illustration of the deep-seated and widely ramified tendency toward speculation is found in the occasional commissions which trickle in from strange and wayside places. Villages whose names are scarcely known beyond the boundary of their counties have their rustic Fisks and Vanderbilts. Sparks of electricity fly up from the marshes of the Mississippi Valley, from the golden desolation of Nevada, from factory hamlets in Connecticut, from the pastoral seclusions of Vermont; bearing emergent orders to sell Hudson short, to buy 500 Fort Wayne, to take a put on Rock Island, or a call on Tennessee 6s."
"In the flush days, between 1863 and '67, the sum total of these outside speculators reached enormous figures. Now York City, and the population included in a radius of a hundred miles of that center, furnished its thousands. Women pawned their jewels for margins. Clergymen staked their salaries. One man sent his horse to his broker, and realized in the end $300,000 from this small beginning. Brokers cleared from three hundred to three thousand dollars a week in commissions alone."
"The unlucky never tell of their misfortunes. An author in two months lost the profits of three books. A bank clerk, in one of the chain of towns between Albany and the city, on the Hudson railway, made $30,000, in successive strokes. Then he offered himself to a fair young girl, and put the whole of his gains into (Wall) street, promising his affianced the rarest of bridal gifts. Three days after he received a despatch with the warning word, "10% more margin." His resources were exhausted."
The bank clerk hurried to New York City and, with much pleading and imploring, persuaded his brokers to carry him for just one more day. It only prolonged the agony and slightly postponed the wipe-out. The printed account does not say whether the fellow ended up as a groom in a low-budget wedding chapel or a bachelor in a sanitarium. Did it not occur to him to limit his risk? Could he not have ventured part of his $30,000 and banked the rest at Chase Manhattan? Also, shares in Bank of Boston, Bank of New York and Chase Manhattan have paid cash dividends every year since 1784, 1785 and 1848 respectively. He did not have to hazard everything in one speculative cargo hold.
Do not pay too much attention to the Horace Greeley for President posters that young man strolled past afterward. It could have been a William Jennings Bryan poster or Al Smith or Wendell Willkie or Dan Quayle. Floating too large a portion of trading capital on a substantially risky venture happens in every era. So does disregarding the fact that margin magnifies potential loss as well as potential profit. Optimism survives despite past shipwrecks but, alas, hazardous sailing survives also.
Stinginess is a virtue for traders, when they are trading. If you possess a generous streak, please mail a donation to St. Jude Children's Research Hospital (PO Box 50, Memphis, TN 38101) but when you trade guard each dollar of capital with a sword. Too many people concentrate on the big amount at the conclusion of a venture while not concentrating on the small amount at the start that this requires. In fact, they pay extra at the entrance gate because they are so anxious to "get in." An age-old bungle, paying too much at square one -- anting up too many dollars for "a piece of the action" -- sabotages many trades because that square one figure is the basis for comparison when you ask, "Any profits?" This may seem obvious when viewed objectively but anxious, cash-in-themitt souls at the entrance gate get low marks for objectivity.
For me, stinginess provided an invaluable shield. Recently, I pondered a stock option game plan involving a horizontal calendar spread and considered moving it from blackboard practice to the playing field. In such a plan, I buy options that have a far-in-time expiration month and sell options with a near-in-time expiration month (hence the "calendar" of the horizontal calendar spread). While expiration dates differ, the underlying stock is the same, as is the strike price of the different options (hence the "horizontal" regarding the strike prices as opposed to a higher and a lower on the chart).
In my standard strategy, the batch I sell must be worth more than half of the batch I buy and preferably around two-thirds. With options, one point equals $100 but since I routinely buy 10 option contracts and sell 10, one point means $1,000 in my reckoning. The 10 far-month contracts that I buy having more time-value than the 10 near-month ones that I sell, the fars will be more expensive than the nears thus creating a "gap" or "spread" in the respective dollar amounts. For example, if I buy 10 Decembers at 3-5/8 points sell 10 Novembers at 2½ points, the "spread" is 1-1/8 points which equals a cost to me of $1,125 plus commissions.
Note that the sold Novembers are worth more than half, in fact, slightly more than two-thirds of the bought Decembers. Other people's money enters the game plan in that what I sold pays for better than two-thirds of what I bought with my capital paying just the remainder. The precise amount of that gap or remainder figures crucially and this is where stinginess pays. Please excuse me for restating what I have written before but the jeweler's scale & chart deserve repeated attention. A one-point spread is rare gold, 1-1/8 point is gold easier to find, 1¼ and 1-3/8 points are good-grade ore. Half avoid 1½ and wholly avoid 1-5/8 or higher.
It was while visualizing the above mental gem-chart that I scrutinized some IBM call options. IBM shares showed months of lethargy in terms of upward movement but enjoyed a conservative price/earnings ratio and a solid floor, i.e., a sudden plunge that would bleed the call option white seemed unlikely. During the first week of June 1993-2014, IBM's stock price moved in the middle teens between 110 and 120. On June 8th, IBM's June 120 calls sold for 2¼ and the July 120s for 4½. Later that trading day, they inched down to 2 and 4¼ respectively.
This raised my eyebrows because the June expiration date was less then two weeks away. Picking up the phone the next day and buying 10 Julys would give me the right to sell 10 Junes as part of a horizontal spread for a whopping $2,000, with the obligation attached to the latter disintegrating at expiration in only nine trading days. So what made me hesitate? For one thing, the June call options wore worth less than half the Julys, not the more than half which I call my vicinity or the two-thirds where the sun shines brighter still.
Worse than that, this would mean an opening spread of 2¼ points after I have trained my eyes to view I½ as half a warning flag. What would I actually own on the long end or "buy" end of the spread? 10 July calls worth $4,250 for which I paid $2,250 plus commissions, the other $2,000 coming from other people's money. Late the following week, with dwindling, vanishing time-value devouring the burden of short-end Junes, I would realize a profit if the 10 Julys continued to be worth any amount more than $2,250. The brevity of nine trading days or less added more fruits of temptation.
When Sherlock Holmes had to ponder the details of a deep and complex case, he would reach for the slipper of tobacco on his mantlepiece and say to Dr. Watson, "This is a two or three pipe mystery." Being a nonsmoker, I meditated over a couple of bottles of Stewart's original cold-brewed Root Beer. Who appeared in the bubbles but Nicholas Darvas, the professional dancer turned speculator who wrote the books How I Made $2,000,000 in the Stock Market and Wall Street: The Other Las Vegas.
Nick Darvas developed a pragmatic system called the "pyramid of boxes" which involved trend-following and the heavy use of stop losses. After enjoying much success, he scrapped this methodology for a time and invested on hunches and impulses. By now he thought he had a knack which needed no safeguards but, according to his own written account, he came within an inch of total ruin. Fortunately, the return to his box theory and his stop-loss trigger brought a return to wealth and more of it.
Many other cases I had read about ended tragically. Great names of Wall Street and the Chicago trading pits and the Bourses died paupers. Usually, past success made them think they could not fail. Whatever they did right yesterday they thought was unnecessary today. They risked too much on flimsy ventures, figuring that with their great flying ability they needed less plane engine caution.
Well, my engine manual said to let other optioneers pay for most of it, not just part, and to limit the spread to not much above a point. So no deal at 2¼. Thursday of the following week, the day before June expiration, the July 120s shriveled to ¾ of a point from the previous day's 1-1/8. $2,250? 10 calls would have been worth $750! This resulted from IBM shares dropping to 107. Ah, the blessings of not eagerly paying any price at the entrance gate. Best root beer I ever drank.
"Handle speculation like a business, not like a gamble." Practically no one disagrees with W.D. Gann's golden axiom. But practice it? It is the pheasant and filet maxim to which vast numbers of traders nod in agreement before they eat at the greasy spoon. To varying degrees, certain occupations create a climate conducive to gambling. In the movie The Five Pennies, the young wife of band leader Red Nichols enters a delicatessen and says hello to several musicians during one of the rare instances when they are seated around a table, without playing poker. Then she acts woozy and heads for the ladies' room. Instantly they start betting each other on "what month she is in."
During idle periods, soldiers bet pocket money or a pie ration on everything from the weather to your health. In financial spheres, the virulence spreads in the form of the bookmaking bartender near the Exchange and the office bets on what color shoes the secretary will wear or which statue the pigeon will land on. With musicians and soldiers the wagering will probably not taint their work but with people of finance a spillover occurs in the wrong direction. The crap game does not become more businesslike but the business of trading becomes more of a crap-shoot.
How does one distinguish a businessperson from a gambler even when they may look the same while speculating in stocks, futures or options? For one thing, the businessperson insists on the "right opportunity" while a gambler's eagerness frequently plunges him into the wrong ones. That old, much-told story contains plenty of truth. As Sam plays poker, his friend sidles over and whispers to him that the game is crooked. "I know it is," Sam whispers back, "but it's the only game in town."
A gamester anxious and itching to play is not stopped by hell or high water, bottom-deals or marked cards. Notice that the bookmaker and the card sharp put good sense ahead of eagerness. They planned and organized and stepped into the right opportunity, not only winning but winning consistently. Not so with Mr. Sam I-Just-Gotta-Get-A-Bet-Down. Similarly a businesslike, scientific-minded trader realizes not all "opportunities" are good ones and all but a few deserve to be rejected.
Regarding the time element, the gambler sings the "I'm In a Hurry!" song. The businessperson does not wait eternally but does accept the time factors inherent in one or another business methodology. The curing and smoking of meats, the refining of oil, the breeding of thoroughbreds, the advertising and publicizing of shows or the building of homes and bungalows. Short-cuts mean trouble. For the hurry-up wagerer, the questionable adage, "Better a fast nickel than a slow dollar" translates into the even worse, "Better a crooked poker game today than a fair-chance one tomorrow." The businessperson occasionally waits for the right opportunity or the right situation while Roulette Randy says, "Right now, right away!"
Recently I waited nearly a couple of weeks for The Opportunity or The Situation. I scanned the daily option page regularly but was not comfortable with what I saw. Then the stocks of certain major banks began to attract my interest: Citicorp, Chase Manhattan, Mellon. All had conservative price/earnings ratios and all showed varying but ongoing amounts of upward motion.
Good candidates for a horizontal calendar spread with call options. Citicorp seemed too volatile, however. With Chase Manhattan, the call options with strike prices a fairly comfortable 4 & a fraction or more above the share price were too skinny value-wise. I needed 2 & a fraction or 3 & a fraction or 4 & a fraction of market value.
Mellon appeared to be it. Since this was late June, the worth of the July options had already shrunk with the dwindling of time. Augusts and Septembers remained sirloin-thick. With Mellon's share price in the low 70's, I focused on August and September calls with strike prices of 75 and 80. According to my measuring stick, there was plenty to attract attention. The spread between Augusts and Septembers stood at less than, a full point! It touched only 5/8 of a point at some moments in the fluctuations, usually just slightly higher.
The possibility of a quick stock rise prompted me to wait it out for a couple of days. The crossing of a spread's strike price by the share price would require a pulling up of stakes with the loss of commission costs. The shares rose to 74 & a fraction, causing me to disregard call options with a strike price of 75 as "too close" at the moment and to focus on the 80s. August 80s traded at 3-3/8, Septembers at 4-1/8.
The stock ebbed, to around 69-70. There appeared to be a 69-70 "floor" and a 74 & a fraction "ceiling." A horizontal calendar spread with calls at the 75 strike price level now seemed a worthwhile idea. I decided that tomorrow I would phone the broker with an order at a ¾ of a point spread or debit, which looked to be a realistic, likely-to-get-executed figure. Today, though, I would indulge in a psychological gimmick. I phoned the order to the broker but with a 5/8 point debit, knowing there was little chance of execution at such a great figure.
That was my trial run, my rehearsal. I have found that "crossing the crucial threshold" goes easier on the nerves if you cross it for practice beforehand. Thus I went through all the motions beforehand for the sake of warming up and the slight possibility of it connecting. The order came back "nothing done" but mentally I was past the opening night jitters and already on stage.
The next day, Mellon Bank's August 75 calls traded at 3 and the September 75s at 3¾. I phoned the broker: "Buy 10 Mellon call options September 75 to open a position. Sell 10 Mellon call options August 75 to open a position. The two orders going in together, each dependent on the other. The sell side covered by the buy side. This is at a debit of ¾ of a point." The statement, "The sell side covered by the buy side" meant that the transaction involved no "naked" options, only "covered" ones. "The two orders going in together, etc." is a boilerplate statement within the yards of spread activity.
The word came back "nothing done." The next day, I entered the same order but with a 7/8 point debit. Again no execution. That these were low-volume options could have caused the hindrance. According to my measuring stick, a single point debit was rare gold and less than that practically El Dorado. I had to act fast before the spread widened, and with something more aggressive than the two-seater bicycle. I would handle the two transactions separately, like a non-spreading optioneer doing a buy or a sell.
July First. Mellon's September 75 calls were bid 3-3/8, ask 3-5/8, last traded at 3½. For a buyer, the low or bid figure would be wonderful but is almost impossible in actual practice. The high or ask figure? Too expensive! The in-between one seemed practical, more so since options had just traded at that price. I told the broker to buy me 10 at 3½ and within minutes I was proud owner. With opening a spread and handling the two transactions separately, the buy must occur before the sell to avoid the hazard of "naked" option selling. Selling naked options means that a strong, sudden move in the underlying turns a $2,000 gain into a $3,000 or $4,000 or worse debt. On spreads, your long end grows too.
Now that I owned Septembers, I could sell Augusts, the key figures of which I had already been watching. Bid 2-9/16, ask 2¾, last traded at 2-3/4. When you sell, the bid number is too low and the ask nice but unrealistic. 2-5/8 was in between and realistic enough to have just happened. The amount worked out right spread-wise. I told the broker to sell 10 August 75s at 2-5/8 and prompt execution followed. Debit: 7/8 of a point.
The 10 Septembers cost $3,500, paid for with $2,625 from the sale of the Augusts and $875 plus commissions from my own capital. In my stinginess, I paid much less than whoever bought the Augusts and whoever bought comparable Septembers but without spreading. Many spread traders routinely handle the buy and the sell separately and shun the "Two orders going in together, each dependent on the other."
The hazard lies in the possible lack of buyers/sellers at the desired price. For example, if my offer to sell the Augusts for 2-5/8 ($2,625) had gone unexecuted, I might have had to lower my price and thus enlarge the debit or opening spread. However, handling the two transactions separately does make for fast, cut through-it action, as opposed to my three days of "nothing dones." I might take up this matter in future writings.
July Tenth: Mellon shares climbed to 74 & a fraction then closed at 74, a single point below strike price. The spread between the August and September options fluctuated around 1 and 1-1/8.
July Thirteenth (after the weekend): Having "tested its ceiling" on Friday, the stock spent most of today at 73 and various fractions before closing at 72-7/8. The spread wiggled between 1-1/8 and 1¼, swaying in the right direction.
July Fourteenth: Shares fluctuated between 72-7/8 and 73¾, closing at 73-3/16. The August calls last traded at 3-3/8, Septembers last at 4¾, fattening the gap to 1-3/8.
What is another difference between a businesslike, scientific-minded trader (I humbly hope I qualify) and a casino sucker transplanted to an Exchange? Realistic profit goals. A haberdasher price-tags a suit at double the wholesale cost and, after factoring in overhead, may figure that a third of the garment's retail price will be profit. The professional handicapper at the race track anticipates a 20% or slightly better profit after several bets. The horse junkie expects to turn $100 into $1,000 or $1,000 into many grand, without ever telling us why everybody does not ride limousines if the bank breaks that easily.
In spread trading, a 25% profit in four weeks annualizes to 325%, and bigger gains in less time are not unusual. Clearly this is not dividends or 30-year bond coupons. Yet the spread strategist does not expect his capital to multiply rampantly -- each dollar birthing a dozen -- within a beer-fermentation time period. That is the realm of the "wealthy in a week or two" traders who will have been better off brewing beer. Too many brokers "no longer active" client files are mass financial graves for such "multipliers."
Still another item of contrast between the businessperson trader and the crap-shooting trader resounds: The former looks farther ahead in time and, in tandem with that, is more aware of what can go wrong. The gambler tends to focus on the next thrilling win while the businessperson intends to be around for the long campaign, and thinks and plans accordingly. To illustrate, "doubling up" is a standard gimmick of casino wagerers. You bet $5, then if you lose you bet $10, and keep doubling until you win.
You will win perhaps a half-dozen such run-ups for a total gain of $30. Then around the seventh run-up, you will lose $40 on the fourth bet, $80 on the fifth, $160 on the sixth. The gambler delights in the immediate win while the businessperson stands alert to the mathematical land mine a few steps into the procedure. At the Exchange or the broker's office, this awareness prompts the scientific speculator to pass up nine potential trades and to risk only a conservative amount of capital on the tenth. The gambler "keeps reloading" by repeatedly adding money to his trading account. The businessperson makes his original capital last a long time. He sees the distance and goes the distance.
A particularly crucial distinction between the Exchange businessperson and the Exchange crap-shooter lies in the latter "make it interesting" syndrome and, accompanying that, the need to be "interested" all the time. Many people find a sporting event watchable for its own sake. Some find that betting a few dollars "makes it interesting" and a larger amount more so. This often snags the speculator in options or futures or stocks who is structured inside like a gambler instead of a businessperson. Venturing a conservative amount wisely limits the risk but a larger stake makes it more "interesting."
A closely-related germ is the "all the time including periods in between" disease. Years ago on his TV situation comedy, comedian Danny Thomas remarked, "That kid of mine eats so much. I've heard of eating between meals, but he's the only kid I know who eats between bites." Something similar can really happen. A problem drinker craves something stronger than the half-finished glass of beer in front of him. He goes to the whiskey bottle, downs a shot, then returns to his glass of beer. He is "drinking between gulps!" Symptoms of addiction include wanting to "high all the time" which means "filling those interludes."
Trouble aplenty oozes between the slats in financial speculation. Mention was made in the previous issue of CTCN of "dead pools" -- betting on which celebrities will die in the coming year or month, an activity indulged in by office workers, Internet surfers, and most frequently Wall Streeters during boring, inactive periods on the trading floors. In other words, wagering between bets. Using corpses as dice before or after using options and other securities as dice. Gotta fill in those dull stretches.
Since the last issue, players in stocks or futures or options have collected on their side bets on Maureen O'Sullivan and Roy Rogers. Less macabre deals include the bookmaking barber and the poker deck in the desk drawer. A piece of the action here and a piece there "make it interesting." Handle speculation like a business? Yeh, bet on which sugar cube a fly will land, then use option contracts as de facto flies and sugar cubes. Remember that plenty of businesses have been dragged down to the saloon bet level but that saloon bets have never been pulled the other way. Stay off the one-way escalator down.
Five minutes before the close of trading a couple of days ago, I obtained a welcomed quote on Mellon Bank shares. Where was I at the time? Playing video poker? Betting on Milton Berle to tell his last Pearly Gates joke? I was on the basement phone of the New York University library. Although many people are more scholarly than I, I find that being a scholar of sorts makes the days "interesting" without recourse to crap games between crap games. While there I Xeroxed a piece by English author Ford Madox Ford on British-born poetess Christina Rossetti (1839-1894):
"I do not know that in her drawing-room in the gloomy London square Christina Rossetti found life in any way ennobling or inspiring. . . Her poetry is very full of a desire, of a passionate yearning for the country, yet there in box-like rooms she lived, her windows brushed by the leaves, her rooms rendered dark by the shade of those black-trunked London trees that are like a grim mockery of their green-boled sisters of the open country . . .
"She put love from her with both hands and yearned for it unceasingly; she let life pass by and wrote of glowing tapestries, of wine and pomegranates; she was thinking always of heaths, the wide sands of the seashore, of south walls on which the apricots glow, and she lived always of her own free will in the gloom of a London square."
Yet the bright side shines exceptionally: When her fancy roamed it roamed with gusto, finding the violets and the sea-foam and the picturesque ruins of abbeys, not Brighton coast roulette or bets between street vendors. Would that many traders follow her example, sending forth their spirits from trading pit or office cubicle or laptop to something better than a barroom bet or a sports wager? Scientific investing can turn into a back alley crap-shoot but a back alley crap-shoot cannot become scientific. Martingale strategy (doubling up) goes deeper and deeper below the hash house.
In the previous issue of CTCN I made a request which I do hereby repeat to financial readers: Please cast yourself in the role of the carriage-trade tycoon. Even if you do not drink, send your inner self strolling through the Rothschild's wine cellar rather than the Diet Pepsi plant. Whether you are the scientific trader or the poker deck patsy of the Exchange depends on precisely how you "fill the interludes" and "make things interesting." Let your spirit roam among the ghosts and archaeological artifacts of the ancient Greek temples at Agrigento, island of Sicily. The spiced winds from there will not taint your investing. The dead air around the slot machines might.
Among other items I researched at the NYU library were details regarding the opera Turandot by Giacomo Puccini, which I had seen several years earlier at the Academy of Music in Philadelphia. Puccini had died while writing it in 1924 with the third and final act not quite complete. Composer Franco Alfano finished it based on the late creator's notes. This brought about the famous "unfinished premiere." At the premiere performance of Turandot in 1926, maestro Arturo Toscanini conducted up to the last notes written by Puccini. Then he told the audience, "It was here that the composer put down his pen." He laid down his conductor's baton and walked off.
Toscanini served as maestro for several performances of the opera in its entirety during the remainder of that season. The title character is a beautiful but cold princess in old China. Her ancestress was kidnaped, raped and died while a captive of a foreign mogul. Turandot extracts revenge by letting foreign princes come to her court and propose marriage, then having them beheaded. During Act One, the Prince of Persia's severed head is brought onstage. An interrogation by torture and a suicide follow until an unknown prince thaws her out romantically for a happy ending. Among the portions of Act Three which Puccini did complete was the standout tenor aria "Nessun Dorma" ("None Shall Sleep") which has in recent times become the signature piece of the great Luciano Pavarottio.
Like swallows to Capistrano or a mysterious melody, they keep coming back. I refer to the lovers of "golden yesteryear" to whom "traditions" is anything remembered by people with lousy memories and little or no culture. Richard Nixon's vice president Spiro Agnew expressed pride in his Greek heritage. Yet he was the champion on a pedestal to millions and millions of right-wing reactionaries -- Americans who thought Pericles and Euripides owned pushcarts. Today they keep coming back even in the pages of the Wall Street Journal.
After the teen-age school shootings in Springfield, Oregon, conservative publications such as the National Review and the Weekly Standard routinely blamed "the culture" -- movies, magazines, rock and rap lyrics. In the Wall Street Journal (June 11, 1993-2014) Albert R. Hunt wrote of anti-censorship people: "Defenders of this rot insist there is no reliable data that links violence to cultures. That flies in the face of common sense. If Frank Sinatra songs make people feel romantic and John Phillips (sic) Sousa makes people feel patriotic, then the obscene violence of shook rocker Marilyn Manson or gangsta-rapper Snoop Doggy Dog might encourage impressionable teenagers to feel perverted or violent."
Sousa's middle name was Philip -- one "1" and no "s" at the end. The reactionaries finally come up with a "good old days" advocate whose knowledge of music history goes farther back in time than the 1930s and "Looky, Looky, Looky, Here Comes Cookie," and he messes up the spelling. Similarly, Judge Robert Bork cheered in retrospect Will Hays and his 1930s movie censorship but misspelled the name Hayes." Their look-back-in-time telescopes appear to be of Woolworth grade with faulty focus beyond the Ozzie & Harriet period. No wonder they did not try to teach Spiro Agnew about the plays of Aristophanes or the sculpturing by Praxiteles. Nor do they reveal to us how many real-life poisonings and adulteries have been traced to grand opera by Giuseppe Verdi.
Hunt and Bork and others of their stripe would have liked the recent (July 7, 1993-2014) New York Times retrospective on the late Roy Rogers and his wife Dale Evans, who acted together in many movies and TV episodes from 1944 to 1957: "Devoted as they were, they never kissed on screen. Mr. Rogers frowned on such public displays and was ever mindful that he was a potent role model for millions of children." The article was remiss in failing to mention the miracle of the housebroken horses. The film crew strained to prevent the cameras from catching a glimpse of horse manure, on which the censors frowned. Studio hands with shovels helped and were the unsung heroes of screen decency.
Only one thing bothers me more than seeing traders and tycoons accept this lacy blushes-in-the -candle-shop notion of culture, and that is seeing members of a certain ethnic group accept it. In his already-mentioned Wall Street Journal article, Albert R. Hunt quotes as an authority criminologist John DiIulio: "The music pounds and pounds with messages of violence and degradation of women; if you talk to people on the streets, they will tell you this is public enemy number one," says Mr. Dilulio of Princeton University.
An intriguing statement coming from an Italian-American. Does he use, if not singing cowboy movies, accordion music and Spike Jones as measuring sticks? Was the shooting of a pregnant women in Roberto Rossellini's landmark film Rome: Open City too much for him? I am sure that Professor DiIulio shares my fondness for kitchens aromatic with garlic and tomatoes and sweet basil. Beyond that, I just hope he knows Italian heritage better than Spiro T. Agnew knew Greek heritage.
One does not easily cringe at rook and rap music that "pounds and pounds" when one has thrilled to the sight and sound of a baritone stabbing a tenor and seducing a soprano. Heavy, yes, if you are used to Glenn Miller and roses that sigh in the June night. As for speculators and investors, no cowards in my regiment! Also no "traditionalists" who think that Botticelli sold protection on the east side. I insist. In 1859, the premiere of Verdi's opera Un Ballo in Maschera (A Masked Ball) was plagued with cancellations and postponements because it dramatized the assassination of a king. Many people feared that performances would encourage real regicides. If you talk to people on the streets, they will tell you. Higher-ups in royalty and government too.
Back then, they lacked the blessed influence of Roy not kissing Dale. It may be that I do Professor Dilulio an injustice. Perhaps his criminology files at Princeton University teem with cases of real-life rapes, beheadings, suicides and interrogations by torture caused by the Puccini tale of the ice princess. You get away from boy & his dog fiction and all sorts of trouble break loose. Where are songs like "In the Shade of the Old Apple Tree" and "My Sweetheart Went Down with the Maine" now that we need them? However, if you are a trader who must "fill the interludes," explore the pyramids and catacombs for something stronger, if only from your desk or armchair.
The Roman and Florentine labyrinths still come alive in the autobiography of Benvenuto Cellini as much as when he wrote it in the 1500's, as do his bronze Perseus holding the Gorgon's viper-hair head and his gold medallion Leda and the Swan. Did sapphires, rubies and emeralds turn into liquids on the palettes of artists of the Neapolitan school? Have a look and decide for yourself. A soprano aria shimmers like polished silver as much today as when the ink on the score sheets barely dried.
If another trader tries to lure you into a stairwell dice game or a bet on Kirk Douglas' life expectancy, or another right-wing reactionary shows up in the Wall Street Journal and tries to "save" you with saddle songs and heroes who do not kiss anybody, show your intaglio of Old World influence. Either enjoy a plate of manicotti with marinara sauce or slay with the sword of Ulysses. But guard the fine-tune of your trading knack.
July Twentieth (exactly 13-trading days or 2½ weeks after starting the Mellon position): The August options clocked in at 1¼, the Septembers at 2-7/8. Those who bought the Augusts on July First are down more than half; those who bought Septembers but without spreading are off a fifth. This 1-5/8 spread nearly doubled my 7/8 point stake. Dry hole for others; the spreader's gusher.
Release - In the matter of MBH Commodity Advisors
and JacobName Withheld
NFA Case No. 96-BCC-015 On May 5, 1993-2014, a designated panel of NFA's Hearing committee issued a Decision to MBH Commodity Advisors, Inc. (MBH) and JacobName Withheld (Bernstein) after a hearing was held. MBH andName Withheld denied the material allegations against them. The Decision expels MBH from NFA membership and barsName Withheld from association with or being a principal of any NFA Member.
MBH andName Withheld may reapply for membership after 18-months from the effective date of the Decision. The Decision also jointly fines MBH andName Withheld $200,000.
On May 20, 1993-2014, MBH andName Withheld filed a Notice of Appeal with NFA's Appeals Committee. The filing of that Notice stayed the Hearing Panel's Decision. MBH is a commodity trading advisor Member of NFA.Name Withheld is an associated person of MBH andName Withheld Investments, Inc., an introducing broker Member of NFA.Name Withheld and MBH are located in Northbrook, Illinois.
The panel found that MBH andName Withheld used misleading promotional material which emphasized profit while downplaying risk [C.R.s 2-29(a)(1), (b)(1) and (b)(3)]. The panel also found that MBH andName Withheld represented that futures trading is for everyone [C.R. 2-29(a)(3)] and used hypothetical trading results without the required disclaimer.
Release - In the Matter of Advantage Trading
Group - and Richard Allen Spohr
NFA Case No. 98-MRA-002 and 98-ARA-002 On May 29, 1993-2014, NFA took a Member Responsibility Action (MRA) and an Associate Responsibility Action (ARA) against Advantage Trading Group, LLC (ATG), a guaranteed introducing broker Member of NFA and Richard Allen Spohr (Spohr), a principal and associated person of ATG. ATG and Spohr are located in Phoenix, Arizona.
The MRA and ARA suspend ATG and Spohr from NFA membership and Associate membership and prohibit them from soliciting or accepting (including via ATG's Website) any additional investments in ATG. The MRA and ARA also prohibit Spohr from disbursing any funds from any ATG accounts for any purpose prior to NFA's approval.
These actions were deemed necessary to protect commodity futures markets, customers or other NFA Members because NFA has reason to believe that ATG and Spohr engaged in fraudulent activity in connection with the solicitation of futures customers and others to acquire an ownership interest in ATG. ATG and Spohr have also repeatedly failed to provide NFA access to certain books and records requested by NFA and have provided false and misleading information to NFA.
The MRA and ARA became effective immediately and will remain in effect until such time as Spohr and ATG have demonstrated compliance with all NFA Requirements to satisfaction of NFA.
Editor's Note: As a side note, you may already know last year Commodity Traders Club filed suit in the U.S. District Court against Advantage Trading Group and Mr. Richard A. Spohr. CTC's suit resulted from ATG's default on marketing services oral contracts performed on their behalf, and also for slanderous activities Spohr was participating in.
Our lawsuit was eventually dismissed due to a technicality as the court ruled we had filed suit in the wrong court, which lacked jurisdiction. We were working on a new lawsuit in a different court when we received word about Advantage Trading Group and Mr. Spohr being suspended. Due to this NFA suspension, CTC's new suit has been deferred.
Editor's Note: This is an additional side note. We won't go into much detail on this, but only touch upon the main concerns since this situation is similar to the ATG and Spohr matter, but even more serious, at least as far as we are concerned.
This involves still another commodity broker who also defaulted on a (written) marketing services contract with Commodity Traders Club. Actually, this claim is much more clear-cut and solid than the ATG matter. This is because we have a signed written contract from the President of BLT Financial Group, Mr. Paul Brittain. In addition, he previously sent us several compensation checks which also had the effect of legally ratifying the signed contract.
When we asked for the additional funds owed us, this Broker became immensely hostile and made up lies, amazingly denying the existence of the signed contract and blatantly denying the fact he compensated us in the past, under the contract.
After we asked again about the matter, and at a minimum an apology and acknowledgement of the true facts, he became even more hostile and displayed even greater dishonesty. We received an e-mail from him dated 7-22-98, which because it was so alarming, we referred it to the Police Dept., as an interstate commerce threat.
These are his words in his e-mail: "To CTCN and Staff: Bye, Bye, So Long and don't let the door hit you in the ass ... I answer your letter only out of amusement. However, I think I'm going to come to Arizona and personally kick your little ass. Go Dave Green, reap the whirlwind. May your days be filled with unhappiness and your life long." Paul Brittain, BLT Financial Group, Sparta, New Jersey.
Editor's Note: For legal reasons CTCN would greatly appreciate hearing from club members who had (or have) a commodity trading account at BLT at any time during the period of July 1997 to now. Thank you.
Timing and Limiting Losses - Rick J. Ratchford
The different facets of trading are numerous. Need to trade within our means (money management), need to cut our losses short (preplanned stop loss locations), patience and discipline must be exercised constantly, profit objectives or stop-loss exits must be calculated, trading plan must be adhered to the letter, and so-forth and so-on.
There are two givens in trading. You will have wins and you will have losses. Every beginner and every veteran in this business (game) of trading will experience both of these realities. There are a few other realities that my escape notice:
1. Having more wins than losses does not necessarily
constitute a winning program
2. Having more losses than wins does not necessarily constitute a losing program.
3. Having equal wins and losses does not necessarily constitute a break-even program.
There are a few things that must be addressed here. How big are the wins, and how small are the losses per contract (trade)? How much commissions are being paid which will add to the negative side of program, thus making it necessary to marginally profitable just to break even?
To go along with money management, patience, discipline, and other facets of trading, there is Risk Management. Risk management is not the same as money management. Risk management defines what you are willing to risk on any given trade based on factors you have determined to be in your best interest. How you come up with these factors is a subject all its own.
With risk management, you are attempting to limit your losses, so that they do not exceed your winning expectations. Thus, if you can limit your losses to an amount less than the size of your average winnings, all things being equal, if you have the same number or wins to losses, you will then be ahead of the game.
Now, there are different schools of thought on limiting losses. Some choose to use a fixed amount, say $200 on cattle trades, $300 in soybeans, etc. Others may define their risk based on how far away their stop loss will have to be to be beyond the last swing top or bottom (resistance/support).
Both of these have merit and downfalls. If you set a fixed limit, that is merely your limit, not the markets. It does not have to acknowledge that just because you are using a $200 stop in cattle that it cannot move against you and hit that stop. Many times that is exactly what it will do. Using previous swing tops and bottoms is a good strategy, yet it is well known to floor traders that orders are sitting there (that is what they tell us anyway), and also it may make your stop-loss a tad larger than you (or your account) is comfortable with to reach beyond the previous swing point.
So now that I've introduced the subject, I will take this opportunity to share how I might go about limiting risk using the method of trading comfortable to me. My risk management is directly linked to market timing for which I use Fdates.
Consider an example: Based on market swing research (Fdates and cycles), it is determined that the probability of a swing bottom to occur today is very high. Prices have indeed made lower prices. Now these are the things I start to consider:
1. Did prices happen to find support, and if so, is it
2. Are weekly price charts showing this market to be merely in a retracement trend, as the main trend is actually bullish?
3. If the weekly price charts are showing this to be a bear trend, does it appear to be at the end of this trend based on cycles or some other indicators?
If I find that the situation looks good for a move to the upside based on market timing, the next thing I will plan to do is to let the market tell me it is ready to march higher. The procedure to do this is extremely simple.
First off, I will let the market close on my swing bottom day. Then, knowing what the high of the day is, I simply place a buy stop order a couple of tics above the high prior to open of following day.
Now think about what I'm doing here. When working with high probability swing dates, I'm expecting that if the date is accurate, a higher high will be made the next day as prices start to turn up. Unless this happens, my being in the trade is very small thus keeping the risk down. Once my trade is taken by making a higher high, I must protect my position with a stop loss order to limit my risk.
Where do I place it? Well, if this trade was taken based on high expectations of a swing bottom having just been made, then obviously lower prices than the swing bottom would nullify this belief. Once this belief has been nullified, so should the trade. The logical place then is to put a stop-loss order a couple tics below the swing bottom at this time.
A word of caution here. If you use this strategy, common sense should be employed that placing a buy stop order just above a swing point range which is much smaller than the average daily range for the market in question is not a good idea. It would be very easy for the market to simply make an outside day range the following day (a range that has a higher high and lower low than the previous day) which could pick up your trade and your stop-loss in very short order. It is preferable that the range be average or greater which would require a big move on the part of the market to take out both orders. Again, start with the buy stop first, then place the stop-loss only if the trade is initiated. No need to have your stop initiated first if both orders are placed at the same time and you truly expect a turn during this period. It could easily be one day late.
Talking about one day late, since this is the margin of error given for a swing turn date, if it just wants to go lower the day following, then we have yet to be in the trade and no harm down. Again, we are working to limit our exposure. The next day following the day late time period, we again place our buy stop above the high of that day. Now, we will either be going long here, or this trade will be completely nullified (unless a lower low was not made, such as with an inside day, in which we would then place our buy stop at the same location for the following day, not above the high of the inside day).
Our probability of loss is limited. We put the probabilities on our side by first timing the market using our timing techniques. In the above example, this was done using Fdates (cycle swing dates). Next, we let the market prove us right or wrong, likely keeping us out of the trade if wrong or early, and into the trade when right and it is time. We can then easily determine our risk amount and decide before the open of the market if it is too much in relation to our account or profit objective, or just right to go for it.
This is just one timing model, as there are others. This is also one loss limiting strategy that I personally have found to be a major factor in keeping me trading year after year.
Learn how to time a market, and importantly how to limit your losses in relation to your timing model. The only problem you will then have is you, in determining when to get out (hopefully with profits greater than your risked amount).
About Real Success Video Course & CTCN - James Shaw
I'd be flattered to think I've made a useful contribution to such a fine publication. It's very disconcerting to me to hear about your troubles with the CFTC. Please don't let them hound you out of business. If it comes to that take publishing offshore. CTCN is too valuable to let go.
But about the Real Success method, you mention again the drawdowns, is it still a viable method to work in your opinion or does it need retooling of some sort?
Editor's Note: Yes, the basic methodology is still intact and viable. However, the stop-loss and target levels need to be adjusted upward to compensate for the markets greater volatility and higher price level since the tapes were produced during 1996.
Lastly, I do hope the problems you're having with the government get resolved, because I thoroughly enjoy the learning experience of reading CTCN. It always seems whenever I find a source about Futures trading that I can actually learn from our govt (for my own good, I'm sure) steps in and interferes. They drove the Pacific Commodity Newsletters and its editor Dr. Martin Miller into bankruptcy. I hope they don't do the same to you.
Randomness at Work - John R.S. Piper
The expectations of any market approach are heavily based on the law of randomness, but few traders really understand these rules, nor do they make any attempt to do so. In an attempt to remedy this omission I have recently been reading The Jungles of Randomness by Ivars Peterson (ISBN 0 14 02.7172 4). I recommend this book to anyone trading markets.
Let's look at a "typical" trading system. System X has a 50% expectation of profit or loss, meaning that it will make winning trades as often as it makes losing trades. When it wins it averages a 2.5 multiple over its losses. So if the system uses a fixed stop at 20 DOW points, then each loss will be $200 (ignoring slippage, overnight gaps, etc. - I am not trying to be 800 realistic here, I am trying to demonstrate a simple point). The average profit would be $500. Is this a good system? Most definitely, over 1,000 trades it will have 500 losers totalling $100,000 and 500 winners totalling $250,000. I am ignoring commissions which at $25 per trade would reduce the total by $25,000, but it is still good news.
But how many traders would be able to use such a system? Not many because within that 1,000 trades there would be some fairly long strings of losses. This is where randomness comes in.
Out of every 1,000 trades we would have 500 winners and 500 losers, albeit this would vary slightly with each sample of 1,000 trades. Of those 500 losers, half that number would be followed by a further loss, thus 250 of those would form a string of at least 2 losers. Of those 250, half again would form a string of 3 or more losers. So it goes, thus we end up with a table something like this:
500 losers forming a string of 1 or more losses.
250 losers forming a string of 2 or more losses.
125 losers forming a string of 3 or more losses.
63 losers forming a string of 4 or more losses.
32 losers forming a string of 5 or more losses.
16 losers forming a string of 6 or more losses.
8 losers forming a string of 7 or more losses.
4 losers forming a string of 8 or more losses.
2 losers forming a string of 9 or more losses.
1 loser forming a string of 10 or more losses.
If an individual is asked to list out a string of random results it usually fails to include the long strings that are bound to form part of that result. Thus the more knowledgeable observer can tell such a human creation from a truly random string.
But think about what these results mean in the real world. Many traders abandon any system which produces more than 3 or 4 losers. Out of every 1000 trades 125 sequences will produce 3 or more losses, 63 will produce 4 or more losses. Out of every 10 trades there is liable to be one string of 3 or more losers. So most traders will abandon a good system simply because it loses 3 or more times, something that is bound to occur probably in the first 10 trades. So do traders give systems a chance? OK, I am generalizing, but I suggest the answer is "NO." To truly judge performance you need to know what to expect and prepare yourself for just that. Only then will you give any market approach a fair crack of the whip.
Paul Lester - I've enjoyed my subscription to the "CTCN" BUT . . . Trading is just too intense. It demands my full attention. I've learned a lot about my self during the past few years. I've stopped trading. Because of this, I am selling my official copy of Omega's SuperCharts 4.0 Real Time software with security block, permanent password, all original CD's and documentation plus the Easy Language videos for $650.00. Anyone out there interested may contact me at: firstname.lastname@example.org
Thanks to everyone who has contributed knowledge to this issue of Commodity Traders Club News. Without you it would not be possible. P.S. - Remember, as a special reward for making just one contribution/submission per year, you'll receive an automatic 50% price reduction on your renewal. Submissions can be any length, long or short; typed, handwritten or submitted on a disk. Formal or informal. Please participate by sharing your information and knowledge with other traders. Please make a contribution about your experiences, both good & bad with systems, services, advisors, data vendors, and other trading related product.
The reproduction, copying or publication of any part of this work beyond that permitted by Section 107 or 108 of the United States Copyright Act, and also World-Wide International Treaty Provisions, is unlawful. ALL RIGHTS RESERVED. Written permission from the Publisher/Editor is required for reproduction in any form (with proper credit to CTCN, including our address and phone number being required), and may be withdrawn at any time. Commodity Traders Club News (CTCN) is a 'Clearing House' or 'Information Exchange' for members only. We do not verify, (and we have not) verified the accuracy of the mathematics or numbers published herein, or accuracy of comments and remarks made by the authors. All information and remarks in the contributions are the opinions of the author or contributor, not the Editor or CTCN. You should be aware that P&L reports and advertisements are frequently based on hypothetical (not real-time/actual) trades. Article headlines or Sub-Headlines sometimes may be changed or written solely by the Editor, using verbiage the Editor believes highlights important points being made by the contributor. CTCN Membership, which includes our bi-monthly CTCN newsletter is "Your Guide To Profitable Trading and How To Save Money Along The Way." It's regularly priced at $100 (US) for 1-year. . . and includes free postage within USA & Canada (add $20 for Overseas Air Mail). Publisher: Webtrading.com, D.B.A. Our E-mail address is: email@example.com Our Website address is www.webtrading.com Editor is Dave Green. The opinions and recommendations are those of our writers and not those of Webtrading.com, CTCN, or its editor. (Note: There is high risk of loss in futures trading and past results may be difficult to achieve in the future and also may be based on hypothetical trading, with benefit of hindsight, and not actual trades) Note: We operate open member forums and consequently reserve the right to publish e-mail and other communications received. Therefore, please indicate "confidential" or "not-for-publication" on any e-mail or other correspondence sent us which you want kept private. Please contact us if we publish your comments and you object. Thank you.