Ordering CTCN's Real Success Method Was the Best Decision I
Next to Proposing to My Wife - by Joseph Murdock
Im sorry it has taken me so long to send you the promised thank you, but Im afraid you will have to shoulder some of the blame. For the past month I have been completely absorbed in watching and trading the "Real Success Methodology." Sitting here trying to write this Im finding it hard to find the words to appropriately express my gratitude and amazement. Fortunately, for me, the materials arrived (thank you Denise) just in time for me to go over them 2 or 3 times, and participate in crude, heating oil and wheat just as they were just starting to move. Thank you.
I have in the past, sent for, reviewed and returned a number of "sure fire systems." Some of the material was O.K., but none were equal to the hype. As far as Im concerned, the "Real Success Methodology" is the real thing.
I actually stumbled across the CTCN website quite by accident. I was looking for a website where I could get information about the Gann techniques. Fortunately I stayed long enough to browse your site and read a couple of the back newsletters, and just generally poke around. Boy, am I glad I did. Based on what I perceived to be a genuine desire to host a forum where traders could exchange thoughts and information, I immediately subscribed for two years, ordered 14 back-issues of CTCN, and the Gann (CTCN's W. D. Gann Techniques Trading Course) materials as well.
The Gann information is superb! In a small and very concise volume you took the mystery out of the Gann mumbo-gumbo. After applying what I read, I literally gasped when I applied the angle tool to a number of back charts. Probably one of the most valuable things I was able to see, was how difficult it would be to use only Gann to profitably trade the markets short-term. For a very small price you saved me thousands of dollars.
Based upon that experience, I went back to the CTCN website a number of times. I had seen the "Real Success Methodology" a few times, but never considered spending $800 or $900 for any trading method. I was reluctant. After downloading and reading the entire "Real Success . . . " website, I was convinced not only of your sincerity, but also of the potential value of the materials. I closed my eyes, made the call and ordered. Believe me it was the best decision (next to proposing to my wife) I have ever made.
At the risk of getting corny, you via the "Real Success Methodology," have without a doubt changed my life, and allowed a long time dream to come true. I had planned to move my family to rural Oregon this coming Fall, and was driving myself nuts looking for a way I could simply drop out of a very unrewarding and frustrating corporate environment to trade full-time. You have provided me with the means to do so. Thank you again.
In closing, I just what to emphasize that if the "Real Success Methodology" is studied and applied you can and will be successful.
Planning To Become Low Stress Full-Time Daytrader
I am enjoying watching the (CTCN's Real Success) tapes. I have just finished the first complete viewing. Tomorrow starts the second viewing. Thanks for sending a copy of the CTCN Newsletter with the tapes. Could you please start my 2-yr. Membership with the next issue after Issue 48 -Volume 7 No. 1 - Jan/Feb 1999, which I have received, from you? I look forward to getting the back issues also.
I have also received my disk with the Real Success (Omega Tradestation Compatible) Software on it. I was going to order TradeStation 2000, is the software that I received compatible with this version? (Editor's Note: Yes, it is).
I am planning on becoming a full-time daytrader. I got downsized at my job. I have done some (about 3-months worth) commodities trading during the last 18-years. I like your balanced approach toward trading. Trading has to be approached with a workmanlike low stress approach so that it can be done for the long-term to create a manageable livelihood, not trying to become a millionaire the first month or year at it.
I now can give the studying and paper trading my fulltime attention.
Can you please suggest the best way for me to proceed on the following items:
- Best way to get the real-time data feed? DBC? Signal online? Satellite feed?
- Best brokerage at this time to use for best fills, shortest fill times, and lower trading costs. Is online order execution the way to go? I have a Lind-Waldock account that I havent used for three years
- What is the best way to organize for the tax implications of hopefully very profitable trading? One of your CTCN back-issues mentions Ted Tessers "Traders Tax Survival Guide." Is this the best way to go? Should I apply for "Traders Status," incorporate, set up a company, or is there another option to do while at ground zero?
Now is the time for me to structure this "job" correctly, and I appreciate any information of how to proceed, and how best to organize. Thanks for any information or book recommendations that you can suggest.
Editor's Note: Obtaining real-time data over the Internet is probably the best way to go and is very popular compared to the old alternatives. As mentioned before, we no longer recommend BMI (Signal). We have received negative feedback on them from club members, our own experience with them has been quite negative and they seem to be lagging in the Internet Data feed area In addition, it's been said BMI's philosophy is "the customer is always wrong." We have recently signed up for the Internet Real-Time Data Feed of PC Quote. Unfortunately, we have had difficulty in getting the service to work. However, the problem could be with our computer and not the fault of PC Quote. Since it's both a new service and new technology, setup problems could also be attributable to possible bugs involving the PC Quote software and the Internet.
As far as Futures Brokerage Services are concerned, we currently recommend ZAP Futures in Chicago. We have received a number of positive feedback's on ZAP, especially involving the speed of their trade executions. You can reach CTCN's ZAP contact Ms. Rita Karpel, who we have known for many years. at 1-800-257-6842x1852 or send Rita an e-mail to email@example.com
Regarding Trader Status and Tax Implications, we do not have Ted Tesser's current address. It would be best if you consulted a CPA who is also familiar with trading and investing aspects of taxation.
By the way, perhaps your concern over taxes is somewhat premature, as it may be best if you first establish yourself as a profitable trader. As you may know, most commodity traders lose money and it's not easy to become a successful trader and get in the winners circle.
As Soon As I Received CTCN's Real Success) Video Tape (Course), Believe Me, I Learned to Look at The Markets in a Different Way and Feel More Confident and Secure - Torombolo from Germany
The purpose of this e-mail is to offer a testimony of what the Real Success Methodology has meant for me.
Let me begin letting everyone know that I'm a registered Introducing Broker and have 10-years of experience with a long interval of inactivity in between. Being 48-years old, my first 5-years as a broker were long ago in a South American country, after I graduated from University and obtained an MBA on finance.
I left the industry for 15-years and returned 5-years ago. Starting from the very beginning, opening accounts in the international department (I speak fluent German, English and Spanish) for a big German broker house. Two years later, I was hired by another smaller German broker house as head of the international department and appointed to build up this department. I hired 25 brokers coming from every edge of the world that you can imagine. There were people working in English, French, Czech, Polish, Arabic, Russian and Spanish.
This company worked with an omnibus account and after a year or so, I discovered some irregularities basically on the fills, because nobody but the owner called the global desk so we had no possibility to confirm when and where we were filled. Because of this we increased significantly the size of our stops. As always, we had good and bad months profit wise, until some of the clients requested funds back. At that stage the real problems begun, as they were simply not paid out. With approximately 80 customers and 25 million US Dollar Equity, people can imagine what that is!
We supported clients until the end, when we massively retired. I obtained a clearing agreement with a clearinghouse and FCM and started working independently from home.
At the present, I have a bunch of clients for which I trade with a general POA. Accounts are segregated accounts, and my Round Turn Commission is $16. Clients pay as a general rule $99, plus cost for each RTC, when accounts are down, commission is lowered to $50, plus hard costs.
After experiencing ups and downs (more downs) on my trades, I started looking for a better trading system that would support my psychology, which was rather disturbed after all I had gone through.
Surfing on the web, I came to CTCNs homepage and some of the testimonies picked up my attention immediately. So I wasnt the only one, if you saw my first 8-years of trading youd throw-up, my wife really did. I though to myself, heres somebody whos gone through it.
As soon as I received the (CTCN Real Success) Video Tape (Course), believe me, I learned to look at the markets in a different way, I feel more confident and secure, although the (video) quality is not perfect, and we have PAL (Video Format) in Germany, so reproduction is not the best.
I still have a way to go, it takes some time to face and approach the trades from a different angle, but Im learning how to get to it!
Im trading mostly E-Mini (S&P's), because of the equities, which are not too big. I use 3 and 5-minute bar charts side to side. Ive noticed that Im not picking up most of the signals, maybe because of fear or because Im looking at the forest instead of looking at the trees. This is why Im coming in late, making it much more difficult to achieve a good result by trading the E-Mini. I need at least 300 to 500 points, in other words a profit target between $150 and $250.
The daily movement of the market has to achieve reasonable results, yet one has to come in the beginning of the move, hopefully early enough so as to get in a second or third time, or if necessary correct the first trade to end up even, or with a small profit, scratching the trade.
OK thats for the general set-up now. When it comes to the execution of the procedure, I call it procedure because this word involves the necessary discipline everybody needs to be a trader. When Im in front of the screen, looking at these 3-5 minute charts trying to identify trends, pivots and hooks, I have windows that show the markets move for at least 8-hours.
As e-mini's are traded over the Globex Exchange, DBC my data vendor provides a data stream according to European hours that start at 0:00 or midnight. So when I login at 8:00 Central European Time, I have the Asian activity on screen and as the day goes by the European activity is added, and then when the floor open in USA I have 16:00 hours of history.
I hardly trade the overnight session and I normally wait for the floor to open, and here is where I get stuck. I have the bad habit of not trading the first 45-minutes, so that all those crossed currents fade away, and then I wait for two pivots backwards and then its lunch time, and when I decide to come in I feel Im late.
So what I was thinking, is changing my style, and getting rid of all my habits. To simply look for a signal to show up and jump in when it goes OK. Let the trade run and trail the stop as the trade develops, there are no stops on the E-Mini's, because a stops system is not compatible with the Globex-2. So, all stops are mental, which demands a lot of concentration.
My initial stop is 200 points and as the market develops, I trail the stop. Depending on the side I am on. Ill build up a support or resistance line toughing the highs or lows of each bar, and when there is a pullback that goes through, I exit the trade.
Now things depend on the fact that Im able to identify the signal as it appears, and this is the challenge, because here is where Im failing.
Editor's Note: Thanks for all the comments. Alex, I agree with you on the subject of stops, especially involving the need for E-Mini stops of at least 300 to 500 points and profit targets of between $150 and $250.
The larger stops are necessary in the E-Mini S&P in particular due to its very small contract size (compared to the full-size S&P 500 futures contract). Also, the combination of the stock market's much higher volatility and its price level of over 10,000 on the Dow compared to the lower numbers when we made the original Real Success Tapes.
For more information on the Real Success Video Course click here
Timing With Fibonacci - Rick Ratchford
Want a basic way to forecast future tops and bottoms? Try using Fibonacci ratios. The most popular ratios to use are .618 and 1.618. Several software packages have these ratios included as part of their tool set, and for good reason. For whatever the underlying cause, whether it is natural laws of the market or a self-fulfilled prophecy as some may conclude, using these ratios can help you find market turns. What you do with those turns are up to you.
Simply locate two concurrent tops or bottoms. Make sure they are no mere blips on the screen, but clearly trend changes. Count the number of price bars from one top or bottom to the other top or bottom. Okay, you have the distance in time from two extremes, now lets forecast out into the future.
Lets assume you are going to use the last two tops. Say the distance between them is 20 days. Take this distance (20), and multiply it by both .618 and 1.618, adding the result to second of the two extremes. Rounding for this article, .618 of 20 is around 12. Therefore, count 12-days from the second top or bottom of the two extremes you're using to arrive at your forecasted turning date.
How valuable is this information? Back in 1990, I was getting beaten up pretty good by market action. The Stochastic, moving averages, etc. were not helping. Then I came upon Fibonacci ratios and their applications, and from there went on a wonderful long streak of wins in Pork Bellies by forecasting exactly when the market would turn. All my debts were quickly wiped out and soon I was in the black by several thousands. This was the beginning of my trading career.
Today, I dont use Fibonacci time days as they are too far apart, and further study and experimentation has brought me to market geometry, which although Fibonacci no doubt is in there somewhere, it makes up only a small part of the whole equation. That is how Fdates was born early 1997. But the fact remains you can still use your hand calculator to get some time days, and you can learn to properly use the information for profit. Once you solve for a time day, simply wait to see if you will have an opportunity to use it. So pull out your calculator and try a few charts using these ratios. Soon you will find it easy to do. What I mean by this is that, even if you have a time day, there are other factors you should keep in mind. One of those is trading with the trend, not against it, and where to enter price wise. These are lessons for another day.
On the Other Hand . . . J. L. from Wimauma
Could Michael Calo be mostly right? Could this be the "Roaring 90s"? Could the 60-year cycle now be 70-years (because a "generation" now lives 70-years)? Not too many people around to remember the "bad old days." Could 60-years of inflation be followed by 60-years of Deflation? Could gasoline be 27-cents again? I remember buying it there only 32-years ago.
Was China the last demand engine, and with its slowdown, what does industry and the worlds economies do with all their excess capacity? Shrinking economies leading to political turmoil and violence do little for demand, especially when people are broke and out of work. Is it the bottom when countries are finally able to print enough money to stop the rioting and begin the inflation cycle all over again?
Speaking of China, after we have destroyed our dollar and thus our stock market with debt, wont the ensuing Depression be Chinas ticket to pounce on its neighbors, a la Adolph Hitler? You know theyd love to "get even" with S. Korea and especially our "client", Japan. It was nice of us to help them modernize their million-man army, dont you think? We proved that World Wars cure Depressions, sort of like cancer stops smoking.
Not only is debt the usual culprit, but I have read some truly disturbing things. The fine print. Are mutual funds legally allowed to borrow funds putting up your money for collateral? Do they regularly do this to finance redemptions during these mini-crashes, thus avoiding selling stock, which props up the market with more debt? And they regularly use your money to invest in "derivatives" including (horror of horrors) options and commodities! They callit hedging, I believe. Grandma Moses would have had a heart attack had she known she was also trading commodities with her "safe" income fund!
More fine print. Does that 30-year mortgage you have really allow the lender to CALL it if home values act as Michael predicts? Thats what I read! I have neither mutual funds nor a mortgage but that would really be the "coup de gras" if you have one of these "booby-traps." One more thing -- Does the law really exist for the government to convert T-Bills to bonds in a "national emergency?" The politicians are certainly not going to give up power without a fight. Usually thats the war that they (not the people) start -- a case of "Lets you and him fight." And I read that gold and silver did fairly well in the 30s. I wasnt there though and were not at that point . . . yet.
See what you started, Michael? If the good times are really over, how long did we expect to have three cars in the driveway while 1/3 of the world hasnt clean water or enough food? My answer may be to go back to reading the "Bobbsey Twins." Ill bet that you "boomers" never even heard of them, but I would certainly sleep better.
Some Random Thoughts M. Harris
My vote on the ongoing Greg Donio articles discussion: Keepem coming. They may be long, but theyre cogent and enlightening. What more is needed?
Ref. Jom Allen: Hey, I got one, too. Was it only 50? I thought they said only 100 systems would be sold.
It does make you wonder. Pick up any "trading" magazine (say S&C) and you find most of the articles tell you how hard trading is, how difficult it is to make a buck yet all the ads promise riches beyond your wildest dreams. Some will Fax (or e-mail) you the hot tip of the day and others require you "work" for 5-minutes a day (then enter your orders and sit back and collect your winnings).
Take a second to imagine all the money involved . . . look at all the ads in the financial papers and magazines (they dont give them away) think of the money going into data feeds, equipment and systems. And then one assumes Lind Waldock, Jack Carl (etc, etc) make a profit over and above expenses (and were talking serious expenses) and then there are the locals, the agencies, the exchanges, etc. And you know ALL this money somehow has got to come from the traders -its a wonder anyone ever shows a (long-range) profit.
Speaking of profitsbig profitsI highly recommend Marty Schwartzs book "Pit Bull" (Harper Business 1-800-331-3761). Its quite entertaining and very funny and has, at the end, Schwartzs guide to successful trading (and while it clearly works for Schwartz its unlikely itll work for you - but Schwartz says this, too). Since there are a couple of with authors, I imagine its ghostedbut its interesting to compare the book with the Schwartz interview in Schwagers Market Wizards. In that interview (remember?) Schwartz was JUST about to start a fund - the book will tell you how THAT turned out. (Hint: not good).
A word on the ongoing market Vs coin flipping argument. First off we ought to be clear about the statistics. The distribution of periodic returns (say daily percent changes) of commodities (including financials, etc) is neither gaussian nor binomial (i.e., the statistics produced by coin flipping, random walks, and so on). Mandlebrot wrote about this a long ago. You can prove it to yourself easily by plotting a large set of daily changes (remove any secular component first) of almost any tradable and then overlaying a bell curve on the same graph. Invariably, the tradable will have a narrower central peak and the tails will be wider. In most cases the curve for the tradable will not have a finite standard deviation.
Or look at it this way. Suppose that a large number of traders believe that after 10-days of continuous advance, the odds of an advance on the eleventh day are small. If this is the majority belief, then, indeed, the probability of an advance on the eleventh day is small. However, it really doesnt matter what coin flippers believe after ten consecutive "heads." If the coin is fair, the belief of the flipper and/or the bettors is rather immaterial.
Thus, I cast my vote with Rick Ratchford and C. J. Casebeer . . . coin flipping statistics dont apply to the market. As a matter of fact, in Fosbacks "Stock Market Logic" he shows that (in the stock market) an UP day has a better than 50/50 chance of being followed by another up day. (Of course, this is obvious since the S&P (or Dow) has a long-term upward bias). One reads that as more and more information gets distributed faster and faster (in this electronic age) the markets become more and more efficient. The question is can anyone make any money in an efficient market? (And dont forget all those establishments, data vendors and system sellers that were supporting!).
"Stock Patterns for Day Trading" a Book Review
by Raymond F. Kohn
"Stock Patterns for Day Trading - Intraday Trend Trades Scalps & Swing Trades" by Barry Rudd, (no copyright or print date listed - assumed 1993-2014), 221 pages, $95.00. Published by Traders Press, Inc.
The author, Barry Rudd, has a BS in Psychology from Texas A&M. He worked in pharmaceutical sales after college while casually trading in stocks, options and futures over a 10-year period. Recently he became a full-time trader and according to the introduction, "has made a living for well over a year using the methods he describes in his book."
When I read that he's been trading full-time for "well over a year," I said to myself, "Oh shit, I've got socks older than that." For those of you out there that have been trading for some time, and know the ropes, you know what I mean . . . Oh well, let it never will be said that I don't have an open mind, and can't learn something from some young "whipper-snapper."
It is necessary to provide some background before beginning this review. Some of you may be familiar with the SOES (Small Order Entry System) which permits almost "instantaneous execution" of small equity orders (typically 1,000 shares or less) via on-line computer systems. Other similar systems are offered and go by the abbreviated names: SOES, DOT, Instinet, Selectnet, Island, NQDS, etc.
The recent introduction of these Small Order Systems has lead to the development of "Trading Offices" whereby security firms have set up fully equipped, state-of-the-art, "Trading Rooms" for would-be-traders. A trader would typically pay a monthly "rental fee" for a "fully equipped trading desk," and begin daytrading to his hearts content. In some cases, if you're really good, the security firm will literally "hire you" to trade their capital, and to teach other would-be traders how to trade.
To learn more about these trading boutiques, check out the classified ads in the "Investors Business Daily" under the classification heading of: "Trading Services" or "Day Trading." You will see lots of ads for these "SOES Trading Offices." You'll probably notice an ad placed by "Sceptre Trading," they offer a Day Traders Course taught by Barry Rudd, the author of "Stock Patterns for Day Trading" (The object of this book review).
This type of trading is quite unique. You are typically glued to the computer screen watching the various bid/ask price postings along with the actual trades that are taking place, all in real-time. The trader must intuitively digest all of this instantaneous trading information and make buy and sell decisions immediately and without hesitation.
Its a little bit like that arcade game which has a number of gopher holes, and each time a gopher pops his head up for a split second you take this large hammer and try and hit him in the head before he disappears back down into his hole. Its fast paced, and you're trying to watch all those gopher holes at the same time.
Given the pace of trading and the limited decision-making time available, any trading technique has to be "Easy, Fast and Simple." And, even more importantly, it has to have a high percentage of winning trades. In many cases, you must act almost intuitively to be successful. Barry uses both daily bar charts and intra-day 5-minute bar charts in making his trading decisions. The only mathematical indicators that he uses are the 50-day and 200-day simple moving averages of the daily closes. To quote Barry: "Simplicity is your friend in this game. Get too technical and the probabilities of success begin to fade."
He acknowledges the importance of "learning" how each individual stock moves, learning its personality, and how the overall market indexes affect the stock's movement both on a daily and intraday basis. One of the key elements he mentions in order to successfully trade intraday price movements, is to carefully select "Trader Friendly" stocks, which are those stocks with little downside risk and decent profit potential. Barry provides a selection criteria for selecting good trading candidates.
His methods look for "Price Patterns" which typically "set-up" in advance of a very short intraday price trend for a given stock. The idea is to enter a trade with the goal of achieving a 1-point or better move for the day.
The book is divided into two broad sections, with each section being divided into various sub-sections: The first major section focuses on "Day Trading," while the second major section focuses on "Swing Trading." At the end of the book he provides a brief additional section on "Scalping," however, this type of trading is not the primary focus of the book.
The first section is titled "Intraday Trading Patterns (for daytrading)." All example bar charts and actual trading charts utilize 5-minute bar charts. The examples typically show "buy set-up," however; "sell set-up" are the same, just inverted The example bar charts are hand-drawn illustrations of what "ideal examples" of the trading patterns would look like as the 5-minute bars are charted on your screen. A total of 18 example chart patterns are described. The first 9 are called "High Probability Trades," while the next 4 chart patterns are referred to as "Lower Probability Trades," and the last 5 chart patterns are referred to as the "Lowest Probability Trades."
The "ideal example" bar charts are clearly illustrated and well described. However, the terms High, Lower and Lowest Probability Trades is the author's empirical evaluation of the various chart patterns, and is not supported or substantiated by any historical testing. For those of you who are students of technical analysis, the chart patterns he describes are not only recognizable on the intraday 5-minute bar charts, but can be easily found on daily and weekly bar charts. And, just as in the case of the daily or weekly charts, the "trigger" for making buy or sell decisions occurs when a price "break-out" occurs from a prior price consolidation pattern.
Following these "text book ideal examples" is a series of "Intraday Chart Examples" where he shows "actual 5-minute bar-charts" on over 100 stocks. Each chart shows a complete 5-minute bar chart extending over 2-trading days. Each chart is well marked showing support and resistance levels, breakout points, and a hand-written commentary, which realistically describes the application of his techniques.
The actual trading charts, and his hand-written commentary on each chart, provides the reader with a "look over the author's shoulder," which is both well done and very helpful in bridging the gap between the theoretical "ideal examples" of the various chart patterns, and real life trading.
Personal Note: I am not an intraday trader, but I do use intraday hourly charts to supplement the daily data that I follow. However, I was taken aback by the shocking similarity between the price movements and subsequent chart patterns that are generated on the intraday 5-minute bar-charts, and the daily and weekly bar-chart patterns that are formed over many days or several months.
I believe this surprising similarity in stock price movement, and the resulting identical chart patterns, is due to the "human element." It appears that regardless of the time periods involved, a human being's emotional reaction while trading, must be the same -- Therefore, price movements and the resulting chart patterns appear almost identical regardless of the time periods involved. As a result, this book has merit for all traders, not just intraday traders.
The next section of the book is divided into two sub-sections. The first is titled "1 to 3 Daily Bar Setups (for daytrading)." This section describes high probability trades based on yesterday's daily price bar and in some cases the previous 2 or 3 daily price bars. All illustrations of bar charts and actual trading charts utilize daily bars. The examples show both "buy and sell set-ups."
As before, the example bar charts are hand-drawn illustrations of what "ideal examples" of the trading patterns would look like as the daily bars are charted on your screen. Barry identifies only 2 general price patterns, however, each of these 2 patterns have several subtle variations which expand the possibilities. Based on the action of the prior day, a position is typically taken early in the morning, and then followed closely throughout the day.
Following these "text book ideal examples" is a series of "Daily Chart Examples" where he shows "actual daily bar-charts" on 11 stocks. Each chart shows approximately 3-months of trading activity. Each chart is well marked showing the 50-day and 200-day moving average, and includes hand-written notes, which describes the application of his techniques.
The next sub-section is title "Longer Term Daily Bar Patterns (for daytrading)." This section describes high probability trades based on daily price formations which occur over several days, (4 to 10-days). All example bar charts and actual trading charts utilize daily (open, high, low, close) data.
The examples show both "buy and sell set-ups." for daytrading)." This section describes high probability trades based on yesterday's daily price bar and in some cases the previous 2 or 3 daily price bars. All illustrations of bar charts and actual trading charts utilize daily bars. The examples show both "buy and sell set-ups."
As before, the example bar charts are hand-drawn illustrations of what "ideal examples" of the trading patterns would look like as the daily bars are charted on your screen. Barry identifies only 2 general price patterns, however, each of these 2 patterns have several subtle variations which expand the possibilities. Based on the action of the prior day, a position is typically taken early in the morning, and then followed closely throughout the day.
Following these "text book ideal examples" is a series of "Daily Chart Examples" where he shows "actual daily bar-charts" on 11 stocks. Each chart shows approximately 3-months of trading activity. Each chart is well marked showing the 50-day and 200-day moving average, and includes hand-written notes, which describes the application of his techniques.
The next sub-section is title "Longer Term Daily Bar Patterns (for daytrading)." This section describes high probability trades based on daily price formations which occur over several days, (4 to 10-days). All example bar charts and actual trading charts utilize daily (open, high, low, close) data. The examples show both "buy and sell set-ups."
As before, the example bar charts are hand-drawn illustrations of what "ideal examples" of the trading patterns would look like as the daily bars are charted on your screen. Barry identifies only 3 general price patterns; however, sometimes a pattern may have several subtle variations, which expand the possibilities. All of the patterns discussed are consolidation patterns. Thus, based on the price action over a prior number of days, a position is typically taken when the price breaks out of its most recent period of consolidation.
And as before: Following these "text book ideal examples" is a series of "Daily Chart Examples" where he shows "actual daily bar-charts" on 4 stocks. Each chart shows approximately 3-months of trading activity. Each chart is marked showing the 50-day and 200-day moving average, support and resistance areas, and a brief hand-written description of the pattern being formed on the chart.
The next section of the book describes "Support and Resistance" (S/R). In one page, Barry does a pretty fair job describing the concepts of S/R. (However, he does not describe a detailed methodology for drawing proper S/R lines.) Following this brief description of S/R levels, Barry provides us with 8 daily stock charts, which show a full year of trading activity. Each bar chart shows the 50-day and the 200-day moving average along with various support and resistance lines.
The idea is once long-term S/R levels are identified, these levels act as an additional "filter" for the purpose of finding the best day-trades to enter. In other words, if you got a "buy set-up" just as a stock has reached an important "resistance level," you would forego that trade in favor of a "buy set-up" which was reaching an important "support level." Below is a quote from this section of Barry's book.
"Trading congestion is something to stay away from. If a stock is not trending, has narrow range daily bars (from high to low), or is just chopping sideways, then avoid it. Wait until it breaks out of congestion and begins some good daily price swing activity. This is when you look for the trade setups to act upon. Also, look at the recent average range of a daily price bar (from high to low). If that stock doesn't trade over a point or more on a regular basis then you probably won't want to trade it.
Look for the bigger profit opportunities with stocks that are currently in a "trader-friendly" mode . . . Support and resistance levels aid your decision making for day trades. They show how far a stock can be expected to move up or down on both an intraday and daily time frame. This is the final step (or filter) to confirm a potential trade, or to rule it out."
The overall concept is correct, however, Barry's skill in drawing "proper" support and resistance lines needs a lot of work. Some of the S/R lines are drawn correctly, while others are very arbitrary. Additionally, all of his sample charts only show horizontal support and resistance lines, while excluding all (up and down) trend-related support and resistance lines.
The basic concept of using S/R lines as "filters" for shorter term trades is very good, however, Barry's knowledge, and abilities in drawing "proper" S/R lines is cursory at best. I would suggest that any reader look elsewhere for a proper methodology for constructing S/R lines before applying this concept, and ignore Barry's sample charts.
The next section of the book describes the various computer screens a "daytrader" will be looking at, and how to read the various pieces of information. He describes the "Market Maker" and "Time of Sale" screens as well as the "Ticker" screen. He combines these screens with the "daily bar-chart" and the "5-minute bar-chart" to provide a complete picture of the stock's recent history, and current status.
In summary Barry says: "Tying together the daily and intraday price pattern setups with the learned timing of the market maker and time of sale screens are essential to your success. Leave one component out and you reduce your odds for even the best price pattern setups. Only through experience with your universe of stocks will you improve your bottom line. This is the art of trading."
Barry provides 12 sample "Market Maker" and "Time of Sale" screens which are well marked with his hand-written notes. The last screen (#13) in this section shows you an example of how you would configure your computer screen to display all of the current market information along with your daily and 5-minute bar charts. It's a very nice screen layout.
The next section is titled "Swing Trading (trade setups for 2 to 5-day holds)." This section focuses on a few technical patterns, which are right out of Edwards & Magee's book on "Technical Analysis of Stock Trends." Once again, price breakouts of S/R levels are important indicators, as well as anticipating price reversals at significant S/R levels.
Barry uses hand-drawn examples to show the ideal pattern, and then supplies 23 daily charts, which are well marked with personal notes, to highlight the previous examples. Each chart provides daily price bars over a period of approximately 6-months, along with a 50-day and 200-day moving average line. The hand-drawn S/R lines are done far more accurately in this series of charts.)
The rest of the book is filled with helpful hints, additional trading ideas, and sample trade sheets to help you organize your activities, and 10 Commandments of Trading. The last section includes a brief supplement on "Scalping Trades." These are really short-term trades lasting sometimes only minutes, and aimed at capturing small fractions of a point.
Many of the same price pattern "set-up" examples he previously mentioned are repeated in this section. The only difference is you exit the trades as soon as a small profit is generated. My previous analogy of the arcade game with the "hammer and gopher holes" typifies the pace of this type of trading.
This book is well written, and his writing style clearly explains his trading ideas. As always, the BIG MISSING LINK (as with most other trading books) is that no "Historical Testing" or "Test Analysis Results" are presented to the reader in support of the presented trading methods and ideas. So, the reader is left with having to accumulate the necessary data, and test out the ideas presented in this book.
However, it is important to note the SOES arena is a unique animal unto itself. Therefore, the importance of having a very well developed intuitive gut response to a stock's developing technicals is vital to making this thing work. Barry acknowledges that trading in this fashion is much, if not more, "art" than "science." Not a bad job for a young "whipper snapper."
Cycle Scenarios - Jack Noahs Market Letter
In this edition of my newsletter - to which you can subscribe for free by mailing Jack Noah -Ill present you several cycle scenarios I found since April 4, 1994. At that day a Kitchin Cycle ended and a new one started. In the table below I have included the three Kitchin cycles preceding the one which started April 4, 1994.
Table in Printed Copy
After studying the Kitchin cycle, which started April 4, 1994, Im left with one unanswered question. Where does this cycle end? Is it at DJIA 6971,32 at October 28, 1997 after 1303 days or at DJIA 7400,30 at September 1, 1993-2014 after 1611 days? So far I havent read any good material on Kitchin cycles, so I have to decide myself on which rules and guidelines to use in order to solve the problem. I can assure you this doesnt make it any easier for me.
Tables in Printed Copy
On October 28, 1997 a brand new Kitchin Cycle started and that is my point of view. Kitchin Spoke Cycle I ended on January 12, 1993-2014 after 76-days. Kitchin Spoke Cycle 2 ended on June 16, 1993-2014 after 155-days. And Kitchin Spoke Cycle 3 ended on September 1, 1993-2014 after 77-days. I am still studying the Dow Jones Industrial Average chart to find conclusive clues on how to subdivide on average 3 to 4-year Kitchin Cycle. One thing I know for sure: cycles live. Thats probably the reason why their length differs each time.
American economist, Joseph A. Kitchin was the first to discover a 3 or 4-year cycle in business activity. Below a graphical presentation of a Kitchin Cycle and its subdivision into smaller cycles.
Table in Printed Copy
An average 3 to 4-year Cycles, first discovered by Joseph Kitchin after studying business activity, can be subdivided into 3 Kitchin Thirds and into 9 Kitchin Spoke Cycles. Cycles organic nature causes varying cycle-length.
This on average 3 to 4-year Kitchin cycle can also be applied to the stock market. Take a look at the SP500 table below. So counting the days seems to be the clue to successful investment management.
Table in Printed Copy
Still the Best J. L. from Wimauma
Ill say it again. Commodities are at once both the safest investment and the riskiest trading vehicle in the world! Lets talk investment once more Where else can you own a highly leveraged and instantly liquid investment for nothing? One that is completely safe because it can never go bankrupt be "delisted" or become worthless. (You can buy cheaply enough to handle a drawdown and maybe buy some more, cant you? After all, any drawdown is the amount of your Actual Investment.) You say Ive forgotten Margin? Not so. Thats in your T-Bill earning what your "sweep" account earns for you stock traders. Except for one thing. That money is no longer in that sweep account after you buy your stock.
Being as I am, when I decided to do commodities 17-years ago, on the way to the library I stopped and bought the only commodity book my local bookstore had. Pretty basic stuff, but the first lesson was to buy an historically cheap (also relative to my account size) corn contract putting up $540 and adding money only if my broker called. The rule was to take profit when it equaled my total maximum outlay (including margin). That would equal or exceed a 800 return on my money (exceed if my broker did call) even if it took two years of rollovers! The lesson really was, as long as youre a buyer, true commodities will always eventually return to a profitable price.
Now tell me that 99% of us cant figure that out. Dont 99% of us only think were in it for the money? Isnt the money the excuse to challenge ourselves to "beat the odds"? Maybe human ego, not a little greed and what the Catholic Church called the sin of presumption when I was a kid? (Not surprisingly the author of above book included two mechanical systems that he proves made him money. Then he says, "A strange thing happened. I lost interest in the methods. I had proven them and that was that). What a shock! We have met the enemy and it's us!"
Since the above simplicity will clearly double our money (it doesnt have to take 2-years), why do you think we all dont just do it? Ill be waiting here by my CTCN for your answers. My last New Years resolution is, from now on, to do (not trade) commodities.
Testing Births A Trading Plan - Rodney Marcantel
It was a long year, a great learning experience and a greater appreciation for the markets. Trading is not as easy as some would have you believe. Their goal is to sell you a product or collect fees.
I am thankful for being introduced into the commodities trading business by one of them, but even more thankful that Ive learned a craft through hard work and perseverance without loosing my shirt. What has helped is a combination of a will to succeed and finding a trading plan that works for me. Sticking to it will be the true test of success. Sticking to it is the application of discipline.
Its easy to get caught up in all the intrigue of striking it rich with all the opportunities commodities trading offers. Read the ads and articles in trading publications and magazines and youll see it for yourself. But if you work hard, plan the trade and trade the plan, and take a break every now and then, that hard work will pay off.
It started with trading options mostly because the thought of a high-risk futures contract was not something I was willing to risk being new to the markets. I spent way to many hours and money searching for something that did not exist . . . a Holy Grail type trading system or methodology that would bring about countless profits and a wealth of good fortune. But after many years of trading and hard work, something was discovered . . . a trading plan that works based on countless hours of testing and refining. That plan is the subject of this article.
The goal was to find a trading system that offers good signals based on sound technical indicators, test its ability to be profitable in the intended markets, and develop a plan that works according to my trading habits and comfort level. For some, this may be daytrading. For others, short-term to intermediate term on daily price bars. And for those with deep pockets and a great deal of patience, long-term trading (6-12 months). As for myself, any trade longer than 20 trading sessions is going to be very profitable or its a very bad trade, which meant I broke all my rules. A few years ago that may have been the case, but not today!
A trading plan must be tested and proven if one expects profitable results. Its difficult to assess slippage when testing a plan on paper (or in my case, on the computer). Its even more difficult to assess the necessary discipline that will keep you focussed. However, a disciplined trader coupled with a proven trading plan will help instill the confidence necessary to achieve success.
In my years of trading and 12-months of testing to-date, I have been able to witness market behavior and price action on a wide variety of markets during varying degrees of fundamental change. It is the fundamentals by which markets are driven and technicals by which they are traded. What I have learned is that testing my plan requires discipline to take every generated signal in all markets that can be afforded and to avoid the more volatile and expensive markets.
The analysis covered a wide variety of futures markets where a typical trade would last only 3 to 5-days with a few trades lasting 10+ trading days. I guess it makes me a short-term position trader. Several trades only lasted 2-days at best because price action must dictate a valid signal whether profitable or not over the next few days. Stop-loss was placed far enough away so spikes wouldnt stop me out yet protect against a major move against my position.
Trading is a discipline, not art nor science. There is no room for emotions here. I use the technicals for good entry strategies, stop-loss placement, and adding to positions. Candlesticks can aid in warning of reversals. Divergence adds to that confidence that a reversal is eminent. Discipline, must be learned through testing and real money trades.
A system on its own should have the ability to at least perform profitably with enough cash backing up the inherent drawdowns. This is the problem with almost all-mechanical trading systems. Not enough available funds to continue trading during periods of large drawdown. The development of some simple rules have proven profitable by not waiting to be stopped out of a trade either by an initial stop loss point or a trailing stop.
Rule 1: Price action must dictate a valid signal upon the day of entry or the trade is exited on the open the following day.
This works very well at preserving capital. The type of price action that must dictate the valid signal is best described with candlestick patterns where a white candle is bullish and a black candle bearish. This article is not intended for the study of the various candlestick patterns, but it is those patterns that determine the validity of a signal. If the terms doji, star, harami, engulfing candle, falling window, and thrusting candle mean anything, then you will be able to understand Rule Is application.
Candlesticks can be an asset to a traders arsenal if used to warn of an impending change. They are also useful as pattern entry signals if used properly with other technical indicators. I use candlesticks to do just that. An example would be if short a market and upon the day of entry and a bullish engulfing candle, rising window or thrusting candle occurred, then an order to exit the market on the open the following day would be placed. This would eliminate any second guessing or further losses if the market continued in the same direction against your position. The probabilities of the market moving back in your favor are much lower, although it does occur.
Other examples might be if a signal was generated to enter a market short based on a large bearish candlestick and the following days candlestick was a white harami or doji, the same exit criteria would be applied provided these patterns occurred near the high of the bearish candlestick. All other positions relative to the signaling candlestick would not invoke the exit criteria. If you are short a particular market and you get a bullish engulfing candle with higher lows and higher highs; it would invoke Rule 1 because the market could not break the previous low. This could indicate the correction or 'a' wave is not complete.
Rule 2: The breaking of short-term resistance/support on the close should be used to move stop to the projected extreme high or low pivot point (very close).
Stop loss points are used strictly to minimize large losses yet still leave room for small corrections inherent in the markets. A bullish engulfing candlestick 2-days in a row would be a good example if short the market. Breaking the highs set 3-6 days prior would be another example.
Not giving back all the gains made is what makes this rule valuable. However, it is more subjective than Rule 1 and should be applied cautiously. My system calculates the extreme high or extreme low pivot point, which is a projection of the next days extreme higher or lower trading range. If stopped out, likely a minor b wave will form on a correction, which will allow you to get back into the trade. If not, entry can be taken when market breaks support, for example, if looking to short into the trend.
These rules are basic and should be easy to follow. The application of these rules can improve a trading systems performance. Results show that these rules do preserve capital and therefore increase profitability. They are mechanical enough that emotion can be totally removed.
The trading plan - After one year of real- time testing (not back-testing), it has been proven that the addition of rules added to a mechanical trading system can increase the profitability and limit losses at times when markets are not trending. Trends only occur less than 20% of the time, so it makes sense to apply some rules to mechanical trading systems that only work well when markets trend.
This trading plan will be used in my money trades and will be profitable. To the extent of my testing is unclear. But the testing which brought this trading plan to life will reinforce the discipline necessary to succeed. I suppose many traders do not consider this vital step in their evolution to become successful traders and that will bring doubt and uncertainty into trading the mechanical trading system.
Analyzing a Trading System Promotion
Buzz M. Ross
A while back I received a promotion for a trading system called "IQ Trading System" and as I typically do, put it in a pile of other promotions to review at a later time. Recently I resurrected this promo, started reading it and was initially quite disturbed by the manner in which the performance claims were presented. I happen to know the promoter, who in all fairness, I believe to be a rather sincere and capable individual.
Although his systems do seem to be profitable, the stated statistical claims are presented in a fashion that I believe distort the representation of the systems performance. This promo is a perfect example of why you need to be very vigilant and very cautious when considering the viability and suitability of any system.
To be specific, here are some of the numbers that were stated for the hypothetical track record: Net profit of $846,924 achieved using 14 commodities traded over a period of 13-years, with an "average annual return of 187%." On the surface, 187% average return per year sounds exceptionally good, doesnt it? Pretty enticing, isnt it? Intuitively, it seemed to be rather high and possibly an exaggerated or misrepresented claim. Well, lets see . . .
When it comes to math and numbers, I check everything out, and I mean everything! So the first thing I did was to grab for my Texas Instruments BA-35 financial calculator to verify the claim. If you have the initial account size (PV or present value), final account size (FV or future value), and number of years involved (N or number of periods), then its very easy to calculate the percent annual return (1% or "periodic percent interest rate, compounded"). But heres where the trouble started. Nowhere in the promotion was the hypothetical initial account size (PV) mentioned. As long as you have data for 3 of the 4 variables (PV, FV, N, 1%), you can calculate the value of the 4th variable. In this case, the three variables given were N=13 years, 1%=187% annual return, and FV=$846,924 final account value. So, the result of calculating the initial account value, PV, was $0.94+! 94 cents? How absurd! Give me a break! Something was definitely wrong here.
But, wait a minute. Oops! I just made a mistake. I used the 846,924 as the final account value. Thats not correct! It is the net profit for 13-years. The final account is the total of the net profit plus the initial account value (which was not stated). I thought, "Well, I can assume a reasonable, initial account of anywhere between $20,000 and $50,000 and keep trying different values until I converge on the solution." So I next used the highest value of an assumed 50,000 (so that FV=896,924=846,924 + 50,000), and calculated an initial account, PV, of $1.00! This still wasnt making much sense.
My next thought was that perhaps the 187% average annual return was derived from simply dividing 13-years into the total return for that period. However, the total percent return was not stated anywhere, so I worked backward to infer that the total return=13-years x 187% or 2431%. That would mean the initial account grew by 24.31 times its initial value, NetProfit=24.31 x PV. So, the initial account value, PV, is calculated as NetProfit / 24.31=($846,924 / 24.31)=$34,839.
Now, this made much more sense as an initial account. If you now divide the $34,839 by the number of commodities (=14), you get an average of $2,488. Not knowing the exact margin requirements 13-years ago, but estimating that they were somewhat similar to todays margins, and leaving some room for drawdown margin call safety, a figure of $2,488 on average per commodity contract (some being higher and some being lower of course), seemed reasonable. Therefore, using $34,839 for simultaneously trading a single contract for each of the 14 commodities would make sense as a minimum initial account size.
My conclusion, therefore, was that the 187% average annual return was derived from simply dividing the total net profit for the entire period by the 13-years. I considered this to be an extremely inappropriate and very misleading measure to use for evaluating trading system performance for anything other than a single year! In my opinion, the only appropriate comparative measure is the compounded return for periods that do not equal a single unit period (such as one year).
So, where am heading with all this? Well, I really wanted to know what the compounded annual return is for this system, so I could fairly and accurately evaluate its effectiveness relative to other alternatives. Using the financial calculator again, this time I entered N=13 (years), PV=34,839 (initial account), and FV=881,763 (final account=net profit + initial account=846,924 + 34,839). Calculating for I% yields 28.2% compounded annual return! Now, I could decide whether or not this system is worth bothering with.
Frankly, from some of the other competing systems Ive seen, I wasnt particularly impressed, as a good sector mutual fund timing system, or good stock trading system, can out perform this with less risk (just my own opinion).
I was still uneasy about the results of my analysis, as it didnt seem that a promoter would bother to sell a commodities trading system for such a low, annual compounded return. So I went back to read the promo again, paying particular attention to the systems performance summary to see if I had missed something. Lo and behold, there it was . . . in the fine print! I quote, " . . . trading results were based on only one contract per trade and profits were not reinvested." Oh, boy, back to the drawing board!
More carefully reading the summary, a figure of "Average Net Profit Per Year" of $63,918 is stated. It was now clear how I had gone astray in my initial analysis. Instead of compounding, each year was being treated as an independent trading year using essentially the same initial account for each average year, and the total net profit was the 13-year accumulation of each average net profit per year. Time to eat a bit of crow and drag out the calculator again. These figures made more sense now!
Heres the new analysis: to determine the initial account size, I took the $63,918 and divided by 1.87 (the annual yield of 187%). So, (63,918 / 1.87)=$34,181, the average initial account value. The average margin per contract then becomes: ($34,181 / 14 commodities) $2,441 per contract. These figures seem reasonable when trading currencies, bonds, energy, some softs, and others.
Im not yet done, though, with the problems of this particular promotion, now my concern shifted from potential performance to potential risk. Im interested in loss and drawdown figures so I can estimate what to expect when I apply various leveraging money management methods to this system. Although the future will certainly be different from the hypothetical track record, this records statistics can be used to give some ballpark idea of viability for money management purposes. So, the integrity of the presented figures is important again. Lets examine further.
The biggest drawdown is stated as $13,626. If the average initial account is $34,181, then this max drawdown is (100 * 13626 / 34181)=39.9%. This is based upon hypothetical results; the actual real-time trading might likely produce an even larger drawdown, perhaps early on when beginning to trade this system!
Personally, I would not be comfortable with this magnitude of potential early drawdown, and unless I missed something again, I did not see anything about runs of sequential losses. If the system produced some early gains to build up the initial account, then the max drawdown might be tolerable. However, as we all know, there are no guarantees as to when profits, losses, and runs will occur.
In addition, when you calculate Average Win and Average Loss for each individual market traded, the resultant figures are generally significantly smaller than those stated and are not consistent with the data used from the table presented. This is quite troublesome.
As a minor issue (in this case), when you take the total net profit ($846,924) and divide by the average net profit per year ($63,918), you actually get 13.25 years, not 13-years -- perhaps the promoter used literary license to conveniently round off this number.
All these problems add up to "Red Flags" in my book. If the promotion has bugs in it, then how can I trust the integrity of the development of the system itself? The bottom line and moral to this story is that you need to be very careful in reading and massaging the stated statistics presented in any trading system promotion.
Comments on Michael Calos CTCN Article "Get Out
I agree wholeheartedly agreed with Michael that, as he so succinctly puts it, "Deflation is the greatest threat to the stability of this economy we have ever seen." I have been saying this for years. However, the economy is like a massive ocean liner -- it takes a long time for it to slow down from full steam ahead and then turn around to go in the reverse direction. Having said that, I feel like Michael, that the process is now all but completed.
Michaels fundamental reasoning is most convincing. In addition, I would like to add that the coming deflationary spiral is also cyclical - in short, human nature being what it is, we are due for a similarsituation to the 1930s (though not necessarilyexactly the same). It is true that the lightning fast advances in technology will eventuallyreinvigorate this (in general) great capitalist system we operate, but capitalism is not perfect; it is inexorably and detrimentally affected by those two deadly psychological forces - greed and fear.
Capitalism will not fail in the long run as communism has, because it thrives on competition - the exact opposite of communism, which destroys incentive thereby breeding slothfulness. However, the world is awash with a surplus of goods of every description and, as was the case in the 30s, we are due for a massive adjustment beforewe can power on again. Not even the mighty Greenspan, clever as he undoubtedly is, can stop this. Perversely, he may well have exacerbated the situation through "sophisticated" manipulation of the economy, thus inviting even worse deflation when it eventually arrives, as it inevitably will.
One thing Greenspan, and for that matter every other human who has ever existed, cannotdo is to alter human natureotherwise the market would be perfectly ordered and we chartists would not be able to profit from the deviations from true fundamentalsand wouldnt that be a shame!
No Michael you are definitely crazy. Please allow me to repeat some of your words of wisdom "Get out now. We may see 10 or even 11,000 (for the Dow), but when it falls it will fall hard and will not recover quickly.
Im truly convinced that the big money is to be made on the downside - and down is about to happen." I would add not to forget that usually the market leads the economy, so keep an eagle eye on those charts rather than wait for fundamental signals.
CFTC Takes Spam E-Mail Action
The Commodity Futures Trading Commission (CFTC) recently filed an action against a firm for allegedly soliciting customers over the Internet via Spam e-mails. The CFTC regulates the futures and options markets in the United States. It protects market participants against fraud, manipulation and abusive trade practices. In performing its duties, the CFTC uses various methods (including the Internet) to communicate with the public, all for the purpose of ensuring market integrity and customer protection. This posting, regarding a recent CFTC enforcement action against Dunhill Financial, concerns the rise of unsolicited Spam e-mails by firms to advertise and attract clients for futures and options trading.
Like any other form of advertising, when these kinds of Spam messages contain false or misleading statements and do not include the proper disclosures, they violate federal commodities laws. If anyone feels that the e-mails they receive concerning commodities futures trading violate the Commodity Exchange Act or CFTC regulations, please do not hesitate to forward the e-mails to us at firstname.lastname@example.org our review.
Commodity Options Fraud Allegation CFTC Press Release
CFTC Files Enforcement Action Alleging Commodity Options Fraud Against Dunhill Financial Group, Inc., Mark Hutcherson And Kevin Jackam; Respondents Allegedly Solicited Customers Over The Internet; CFTC Action Also Alleges New Millennium Promotions, Michael Thomas, and Forrest Dayton, Jr. Violated CFTC Registration Requirements. Docket No. 99-7.
WASHINGTONThe Commodity Futures Trading Commission (CFTC) announced today the filing of a four-count administrative complaint alleging that Dunhill Financial Group, Inc. (Dunhill); Mark Hutcherson, Dunhills Sales Manager; and Kevin Jackam, Dunhills Compliance Officer, all of the Atlanta, Georgia area, violated anti-fraud provisions of the Commodity Exchange Act (CEA) and CFTC regulations by fraudulently soliciting prospective customers to open accounts to trade options on commodity futures contracts.
The CFTC complaint alleges that Dunhill, Hutcherson, and Jackam made false, deceptive, and misleading statements regarding the trading of commodity options in publicly disseminated advertisements over the Internet, on the radio, in promotional materials sent to customers, and in direct telephone solicitations of prospective customers.
The complaint also alleges that New Millennium Promotions (New Millennium), Michael Thomas and Forrest Dayton, Jr., also of the Atlanta, Georgia area, violated the CEAs registration requirements and CFTC regulations. The complaint alleges that New Millennium, without being registered, operated as an introducing broker (IB) by soliciting prospective customers over the Internet on Dunhill's behalf in return for a fee paid by Dunhill. Thomas and Dayton are charged with failing to register as associated persons of New Millennium.
Specifically, the CFTC complaint alleges that Dunhill, Hutcherson, and Jackam fraudulently misrepresented, among other things, that customers who purchase options on futures contracts will profit from seasonal and other existing and known supply and demand forces that affect the prices of certain commodities in the cash market. The complaint further alleges that Dunhill, Hutcherson, and Jackam made fraudulent misrepresentations, and omitted disclosing material facts, concerning such that they:
- misrepresented the likelihood of profit from trading commodity options;
- misrepresented the risk of loss involved in trading commodity options; and
- failed to disclose the amount of commissions charged to customers and the substantial impact that commissions had upon the customers ability to earn a profit on options trading.
The complaint further alleges that at least 91.4 percent of the customer accounts opened by Dunhill from October 1995 through September 1993-2014 lost money, and that total net losses, including commissions, were in excess of $9.3 million.
Dunhill, Hutcherson, Jackam, NMP and Thomas are also charged with failing to exercise diligently their supervisory responsibilities. Dunhill has been registered with the CFTC as an independent IB since September 27, 1995.
Geoffrey Aronow, the Director of the Commissions Division of Enforcement, commented: "This proceeding presents a striking example of the many ways that people can now solicit business from the public, including the use of Internet websites and Spam e-mail messages. As we see here, these new methods allow people to reach out to millions of people quickly and cheaply. This case demonstrates the Commissions ability and commitment to respond to these new methods when we believe that they are being used in an improper manner to cheat, defraud, and otherwise violate the law."
The CFTCs complaint institutes a public administrative proceeding to determine if the allegations in the complaint are true and, if so, what sanctions, if any, are appropriate and in the public interest. Possible sanctions include an order directing the respondents to cease and desist from violating the CEA and CFTC regulations, civil monetary penalties of not more than the higher of $100,000 or triple the monetary gain for each violation ($110,000 for each violation committed after November 27, 1996), and restitution to customers of damages proximately caused by violations of respondents.
Give Yourself a Chance to Succeed - Rick J. Ratchford
It is a rare bird that can enter into the business of trading and do it well from the start. Like most things worthwhile, trading requires time to learn. One must learn the basics of finding a broker, proper order placement, how to read price charts, and whether to become proficient in technical analysis and/or fundamental analysis.
At this point, the new trader needs to hone his skill in the analysis of choice, understanding clearly how to use various indicators or how to interpret external influences, that which is usually provided by way of weather and crop reports, or other kinds of government releases.
Of course, the best teacher of all is in the "doing." To place a trade and work it from start to finish. Win or lose, the experience should help the trader become better, if the trader is "tuned into" the process and experience. Sadly, many dont learn from previous lessons only to repeat it again and again. Every trader, from the novice to the professional, is going to lose trades. That is a given. But the trader that is able to continue trading again and again after a loss is the one that has likely learned early on the wisdom of risk and money management.
Simply put, a trader who acknowledges that he/she is going to lose a trade is going to know how to limit those losses. When the losses are small, the trader not only has the resources to trade once again, but is not mentally devastated as well. What traders need to understand is that it isnt the big losses alone that can end the trading career. It is the mental damage those big losses can cause.
One analogy would be that of the gambler. Upon losing all his money on payday, he comes home to his wife and kids who depend on him for support. Unable to provide this, mental damage occurs due to stress and the feeling of failure. But then another animal surfaces, no longer the calm and collective person prior to losing, but one that is not reasoning properly. The overwhelming emotion here is the strong desire to "get even," to win back what was lost. Had the amount been small, the gambler could have simply shaken it off as "entertainment" costs. However, because it was more than simply that, the "double-or-nothing" mentality kicks in, and this person is doomed to repeat his errors.
The trader should always keep his losses small. They are so much easier to take. The mental damage if any is very minimal, and it allows the reasonable trader to reconsider his/her approach and try again and again. Unless the method is seriously flawed, a trader should be able to win trades. If you give yourself a chance to succeed by limiting your losses, you will have more chances to learn how to make your wins bigger.
Risk management is the component of limiting losses. You decide if the method of choice will provide you with the means of limiting your losses, in keeping them small. This is important for your success.
Money-Management is the component of trading within your means. You simply must calculate by some reasonable formula how many contracts to trade at any given time in relation to account size. If you are trading with a small account, you simply limit the number of contracts to one. As your account grows, you will come to a point where two contracts are within reason.
Both Risk and Money management require discipline to successfully execute. If the trader starts to over trade due to gut feeling, or lets a loss get bigger for likely the same reason, than discipline has been replaced with a gamblers mentality, and damage may occur. It is important for the new trader to understand the danger of not following a reasonable plan of risk and money management.
Discover an acceptable risk and exposure that fits your situation, and have the discipline to stick by it. Keep in mind that any deviation from your plan will likely not only sour a trade, but possibly many trades to come due to the psychological aspects involved. Unfortunately, many new traders dont think that psychology plays a part in successful trading. Because of this, they start off throwing caution to the wind and soon find that they "mentally" cant take the heat anymore.Plan to keep all your trades at a low risk level by setting some kind of limit on losses. Also, set limits on how much you will trade for an account size time frame. If you keep your per trade losses acceptably low, and do not over-trade, you will give yourself a chance to succeed.
Big Win For Economic Liberty! - Chip Mellow
Our lead plaintiff, Hector Ricketts once said, "We dont want a handout. All we want is the chance to provide good service to our customers and to earn an honest living. Is that too much to ask for in America?" Not any more.
The Institute for Justice scored a dramatic victory for the right to earn an honest living last Thursday when the Supreme Court - New Yorks trial court - struck down major portions of the commuter van licensing regime. Despite the fact that our clients commuter vans both put people to work and take people to work (tens of thousands every day), until now, the New York City Council has been able to enforce a de facto prohibition on this entry-level occupation through a series of arbitrary and capricious regulations designed to protect powerful special interests. This process turned hard-working men like our clients Hector Ricketts and Vincent Cummins into outlaws simply because they compete with the public bus monopoly.
You may recall that The Wall Street Journal described this fight as "an epic battle between inner-city entrepreneurs and the public transit monopoly." We filed this suit early in 1997 and thanks in no small part to your support; we had the resilience to withstand the wrath of the unions and the City Council in the political arena and in court.
The judge ruled in our favor on several key issues, most notably that the City Council couldn't exercise unilateral veto authority over commuter van applications. The judge further ruled in our favor when he struck down two sections of New York law: one that automatically denies van applications that are not granted within 180-days, and another allowing regulators to deny licenses without stating a reason. Although there remains considerable litigation ahead, no longer can the City Council unilaterally defeat the aspirations of honest entrepreneurs trying to provide efficient community-based transportation and a good living for themselves and their families. This decision profoundly changes the rules of the game for aspiring van entrepreneurs. Hundreds of new vans should soon be providing much-needed service to New Yorkers.
Well now appeal the portion of the decision keeping in place the laws that still impose arbitrary and unreasonable burdens on commuter vans. For instance, vans are prohibited from picking up or discharging passengers on any street where public buses operate. Instead vans are required to pick up passengers only by pre-arrangement.
In an interview with The New York Times, Hector Ricketts put the future of this litigation in context: "This case will decide the future of commuter vans in New York City, which each day carry 40,000 people to work, most of whom make minimum wage. Commuter vans break the economic isolation found in city after city by not only putting people to work, but by taking people to work."
With your support, well continue to break down the barriers on the road to the American Dream. Thank you for being an essential part of this victory.
A Different Kind Of Loss with BMI - Jim Bunyan
I daytrade the S&P 500. I use BMI to get real time quotes.
On 9/7/98 my wife and I were away on vacation. I left my computer running to collect data. Our house and/or line to the utility pole were hit by lightning. It hit at 7:00 a.m. It took out a box on the pole. Eight homes lost power. The strike took out my TV thru the cable fine. The strike thru the cable line also went thru my BMI cable receiver and zapped the COM2 port, which is part of the motherboard. The strike came thru the phone line and zapped my internal modem. Shortly after power returned at noon a fire started in the attic. The fire department put out the fire.
In actuality it took me more than three weeks to figure out all I said in the preceding paragraph. And, because the repairs to the roof and attic required that the ceiling be torn out and all things removed from that 2nd story room where I use my computer, it took more than 2-months to restore and repair everything.
My State Farm insurance paid for all damages and restoration, repair and replacement. State Farm treated me well. They were sympathetic because they view a lightning strike as an act of God. The last thing restored was reception of data by BMI. This succeeded only after getting a new computer because these days motherboards themselves are not replaced due to generally falling computer prices.
On 11/18/98, I finally succeeded in receiving data from BMI. On 11/19/98, I called BMI to get credit for the time period during which I could not trade. They say I get no credit. They say go back and read the contract you signed. They say they follow a rule, which says that if, the fault lies in the receiving computer then it is not their fault. And, of course, if the fault is not theirs, then it is mine. This rule was not revealed to me until I asked for credit.
There had been a multitude of opportunities for technicians trying to help me receive data again during the two months period to tell me I might be getting into trouble or might be in danger of losing money. However, from my point of view, if I had, at any time, cut off service by returning my cable receiver box, then I would have become unable to test my system to see if my latest step to repair it had worked. No technician ever suggested that I should return the box. When I protested I was told -- too bad, no credit. When I protested again later, I was told to submit my appeal in detail in writing. I did so. The reply came over the phone: too bad, no credit. And no explanation.
I feel that I deserved a written reply explaining just how they see everything and exactly how I should have handled the situation. I get the feeling that Im dealing with a powerful monopoly that has a "fortress of a communications system" designed to intimidate me. They give you first names but usually refuse to give a last name. They dont call back on their own to see how you are doing. They do not send a card to ask you how good their service was in your opinion. I mention these things because other companies Ive dealt with do these things.
In short, Im warning other traders out there that if you have any trouble with BMI, then look out! Their philosophy seems to be that the customer is always wrong. Or, more conservatively and at a minimum, they definitely do not believe that the customer is always right.
If any one has any idea of what further I could do to get credit from BMI, I would be glad to hear about it. Is there some agency I can appeal to?
Editor's Note: We have heard similar negative feedback on BMI (Bonneville Market Information). In addition, we can speak from first hand experience regarding the fact they allegedly could care less about satisfying and valuing their clients. They owe CTCN thousands of dollars, which have been past due for a very long time. BMI's John Gray and his supervisor have ignored many requests for payment.
It also appears their data feed and services have allegedly seriously declined in overall quality and usefulness compared to their services in the past. CTCN members should consider other data services when looking for an online real-time data feed. It also appears BMI and its parent company DBC Signal are seemingly lagging far behind in technology offering real-time Internet Data, which is something most everyone now wants compared to Cable TV or Satellite Data Feeds.
Law of Probability - C. J. Casebeer
I opened up a can of worms on the fact trends will and do reverse. Stocks and futures at times go to long extremes either up or down. On even money games a run of 8 is reversal time. Frank Barstow in his book "Beat the Casino" observed that it was between 7 & 8. I have noted this fact myself at the crap table. It is only rarely that an extreme goes past 8 runs on the same side.
Playing the 6 & 8 (same House PC of 14) either one seldom goes more than 4. Frank Barstow called this phenomenon "the maturity of chances" which is different than the law of probability and you and your daughter are right. The chances of head or tails or 1/1 odds is always 50/50.
Since you and many of your readers enjoy Greg Donio and his long articles, I would like to tell you a story about one of my escapades in Reno and playing the dime crap tables back in the late 40's.
I had read about the "double-up-add on base bet, also called the "Great or Grand Martingale." You profit one unit for each bet made. It goes like this: 1-3-7-15-31-63-127-255, which gives 8 bets. I decided to start playing on the side that just lost, giving me one more chance to win. Now the side I was playing had to lose 9 bets to beat me. (Note: the table limit was $100).
I played this way between 3 different clubs and dime crap tables for weeks with a $100 BR. The pit bosses didn't like it but considered me a skill and I didn't get too much heat, but finally left for home. I was profiting about $5/hour, which was good wages in those days.
Today there are no dime crap tables and it's hard to find 25¢ tables, but when you do, the limit is still $100 -- not so good.
For years the Nevada Club in Reno had a $1 minimum bet plus $1,000 limit -- a fair chance to make hourly profits with a $1,000 BR. That's $50 per hour! Nowadays it is hard to find a table like that. Forgive me for side tracking from futures trading.
Anyway, Dave just thought I'd help straighten out the "Law of Probability" that Rick and I were talking about.
Traders Should Be Extremely Wary - Of Independent IB's
In the commodities (futures) industry, presently "governed" by CFTC (and partly by NFA), there are two types of introducing brokers (IB) who deal with the public. They are Independent Brokers and Guaranteed Brokers.
The Guaranteed lBs are somewhat supervised by their FCM who clear the trades through the commodity exchange, because the FCM can be liable for certain improprieties of the IB. However, the independent IBs are not supervised by their FCM because the FCM is legally not liable for any of the IB's actions. The result of this situation is that FCMs accept trades from the independent Introducing Broker without concern or regard and by accepting the trades, endorse the IBs behavior regardless of what the IB did to get the trade or how he traded.
This includes high pressure sales tactics, intimidation, misrepresentation, unauthorized trades, lying, forging signatures on documents, forms filled out by the IB and not the investor, fictitious accounts, worthless promises, taking advantage, extremely high risk trades, unethical behavior, etc. Consequently, the unscrupulous independent lB's are more likely to rip off the public without significant interference from the regulating bodies or FCMs.
Because of this situation, traders should be extremely wary of dealing with independent IBs and should seriously consider doing business only with guaranteed IBs (if they have to deal with an IB in the first place).
If you end up having to sue your broker (or going to arbitration), you may find that suing the FCM also will not get you anywhere and in fact may cost you attorney's fees (the FCM's).
A Collection of Satire and Stuff about the Futures World
No One Said It Was Easy
Distribution or accumulation?
Work your studies for the right confirmation.
Those days of congestion can really be boring,
but its worth the waiting when the breakout goes soaring.
When you get the new high, take time to observe,
if its up and away on a parabolic curve.
But if its a whipsaw and your bet was all wrong,
youve been snared in a bull trap - get out - dont prolong.
If you cut your losses and let your profits run,
youll be spraying the Champagne when the race is won.
If you ignore this lore that others have learned -
theyll scrape you off the track when youve crashed and burned.
The Swing Bands
Bollinger bands and Keltner bands
swing rampant through the chart.
If you trade without knowing which way they are going
Your money and you will soon part.
These channels usually contain the price
and the price doesnt often stray.
But if it steps out of bounds, it will usually revert
and profits can be made in this way.
Occasionally the price will break out in a gallop
and the chase is on for the bounty.
So mount your steed and join the pack -
like a Royal Canadian Mounties.
Please study these "swing bands" and observe their actions
youll groove with them right from the start.
Theyll really help to improve your transactions -
its better than throwing a dart.
You Have To Be Enthusiastic
Some traders methods are quite bombastic.
Others trip the light fantastic.
To locate a system thats not too drastic,
try the fourteen day stochastic.
The message here is not real clear -
(I was doing my best to be clever)
So let me shift into another gear
and show no cleverness whatever.
Look for systems that suit your style
then give them a thorough test.
Youll then discover after awhile -
the simple ones work best.
You have to be comfortable with your systems routine -
its a very big essential
If it disturbs your calm and causes a scene,
its abandonment will be eventual.
There are just as many ways to trade
as there are traders in the fray.
Find the one thats tailor made
and uncork the Chardonnay.
Mighty Casey, known far and wide,
could hit a home run, bleary eyed.
He always took a powerful swing -
trading for him was one wild fling.
He loved the excitement of a whopping bet,
even when his trade did a Russian roulette.
To him it was nothing - "hey, no sweat -
you guys aint seen nuttin yet."
Load the boat, he told his broker -
Im betting the farm on this no lose smoker.
But inspite of his guts, his grit, his clout -
the Mighty Casey has just been tapped out.
Warning - Trading Can Be Harmful - To Your Health
An exciting life -
trading the futures,
but sometimes - "oy" -
nothing but sutures.
When blood is spilled
all over the floor -
this is the time
to head for the door.
Tomorrow will be
another new day,
so come back prepared -
you should be O.K.
But who really knows
what youll have to face -
bring some bandages
just in case.
Catch That Wave
Theres a great debate about the Elliott Wave.
Some will say they cant make it behave,
while others have become its obedient slave,
forever faithful this side of the grave.
If its mazes, puzzles and riddles you crave,
give it a shot if youre inclined to be brave.
Who knows, you might join up with the occultists who rave
about their Lord and Master - their Elliott Wave.
No Pain, No Gain
Risk and reward go hand in hand -
Its all part of the game.
So control these risks and take command -
its your ticket to fortune and fame
Without taking risks, youll never receive
all that youd hoped to gain
So take a deep breath (dont roll up your sleeve)
you can do it without novocaine.
Should We Limit Frequency & Size of Contributions
to CTCN? - S. H.
The publication is collapsing under the weight of Greg Donio's pseudo-intellectual diarrhea-of-the-mouth tomes of free association, demagoguery and claptrap. With each issue I suffer the renewed annoyance of weighing the benefits of the other articles versus the loss of it should I cancel my subscription.
In case anyone's listening, my vote is for a policy limiting not only the length, but also the frequency of submissions accepted from each writer. One and a half pages max -- or even one page. Perhaps then Mr. Donio will stick to trading and not continually browbeating the readers with condescension about the breadth of his interests
P.S. -- If published, use my initials only and no reference to my City, please.
Editor's Note: On an ongoing basis we receive approximately an equal number of both positive and negative feedback on Greg's lengthy articles. Some CTCN members have cancelled or threatened to cancel their memberships in protest against the long contributions. At the same time some club members have said they renewed their membership due to the value they perceived from Greg's articles. We request all club members give us feedback on limiting either (or both) the frequency and size of articles. If the majority is in favor we will implement a change with our next issue, especially involving Greg Donio.
OPTIONS & SPREADS: Cooked Pheasant on Park Avenue
or Pork & Beans in Jersey City By Greg Donio
A young man, a music student, went to Wolfgang Amadeus Mozart and said, "I would like to write a concerto. Can you tell me how?" "You are too young," Mozart replied. "Wait a couple of years."
"But you were composing music when you were seven or eight."
"I didn't have to ask anybody how."
To that anecdote must be added the qualifier that learning and developing are perpetual processes. Mozart continued to grow and deepen to the end. A pilot gets to "fly solo" at a certain stage of his training but continues learning about aviation and honing the knack for years.
Late in life, magician/author Burling Hull wrote in a how-to article on conjuring, "Please understand that when I say "teach" and "learn" I say them with no superior attitudes. I am learning about magic every day." Another spin on the subjects of development and doing something well can be found in a statement by artist Edgar Degas: "Painting is not very difficult when you don't know how. But when you know how, ah! then it's a different matter." Of course, the amateur who does slap-dash work and thinks him-self brilliant has an easy time of it while ruining numerous canvases. The master who handles 50 or 100 details well faces a more demanding task. Yet for the adept there is an inner smoothness and a lessening of tension --fringe benefits-of expertise. The polished orator is not immune to stage flight but has less of it than the incompetent or the mediocrity.
In financial risk, plenty of amateurs mess up their trades like an "I'm the new Degas" slops up his palette. One could blame the neophyte, the armchair warrior who puts down his storybook, approaches real battle, and expects a quick medallion from the queen. But woe and alas, too many traders have been at it for years with little or no money to show for it. Plenty of combat in the field followed by hard-luck stories and no medals.
Philologically, the word "expert" has its root in the word "experience." However, speculation provides a poor example. Too many "experienced" people have track records which resoundingly prevent their being called "experts." The driver with the string of traffic accidents and the horse-player who has been losing for years can both boast of "experience" but would you call them "experts" in their respective activities? But a child prodigy in music, Mozart was an expert without much experience.
Certainly time and experience count for something, but plenty of traders with plenty of both miss the target as frequently now as they did during the Ford and Carter presidencies, and the blunders of the Hoover Bear Market have far from disappeared. In my past articles on option spread strategy, I have repeated W. D. Gann's Maxim: "Handle speculation like a business, not like a gamble." That these words are read there exists no doubt because I have received nice letters from newsletter subscribers in the U.S., Canada, Great Britain, Switzerland and Hong Kong.
Yet every time l pick up a financial newspaper, the Gann Maxim appears to be the most ignored statement ever written. Everything hints of the slot machine with bells ringing and lights flashing. "Be A Day-Trader!" ads come in a fusillade. "Enter the Exciting World of Day-Trading!" The word "Exciting" appears frequently in these ads. Legally they cannot guarantee a profit but they can guarantee that it will do a job on your nervous system. On the 20/20 TV program they interviewed several of day-trading's financial stretcher-cases. Is a shot-up bank account your idea of "excitement?"
Another item flashing ceaselessly in the financial news: The National Association of Securities Dealers has before it a plan to extend its hours, so that participants may trade in the late evening. What does this resemble? Not business. The next time you visit a casino, look around for a clock. You will not see any. Interior casino designs deliberately omit clocks. If a customer sees that it is getting late, he may stop wagering and leave. More hours, more money for the house. Likewise, the NASD wants to eliminate or defer the "Stop -- It's Getting Late!" signal.
Some will call this "business" -- like a late-hours convenience store. Actually, it is craps and blackjack extending into the graveyard shift. It means a longer flow of commission money and IPO money. Additional good news for commission-collectors springs from those TV commercials for futures and options: "It's Now Possible to Trade the Dow!" or "Big Money Possible Trading the S&P." Futures and options on wheat or pork bellies or copper facilitated liquidity in business transactions involving these essentials. But the Dow and the S&P? This amounts to roulette -- with the brokerage commission being the house's cut of the pot.
No, it is not my intention to portray brokers as villains. Not usually, at least. Once I had an account with Merrill Lynch's Philadelphia office. While visiting New York, I phoned Manhattan's ML branch and explained to the broker that I was a Merrill Philly customer. Could he give me some stock quotes? Sure, I told him the stock symbol and he told me the current price. I took a breath to ask the price of a second stock and -- heard only a dial tone. He had hung up, stingy with his seconds on a no-commission phone call.
Then again. When I lived in southern New Jersey, local three-branch savings & loan went public. I thought it would be nice to own shares in a company that was both a money-business and local. I phoned a Jersey brokerage firm that handled part of the stock offering. "It's lousy," the broker said. "Those shares are ridiculously over-priced. Ridiculously inflated. It's a bad investment you should stay away from. I mean it."
I had no account with that office and the broker had never even heard of me until we spoke on the phone. Yet he preached hell-and damnation to save financial souls. Months later the savings & loan collapsed. Federal insurance protected depositors but not shareholders. Regretfully, I do not remember that broker's name or his firm. Yet he helped me not to lose a pound of paydirt. As though he were the Lone Ranger, I do not know who he was but I wanted to thank him.
I began to use discount brokers years ago because their commissions on stocks were lower. When I began specializing in option spreads, with two commissions (a buy and a sell) going in and two going out, discount houses became a monetary life's blood necessity. The guys and gals known as discount brokers have been found by me to embody the Scout Law: Trustworthy, Loyal, Helpful, Friendly, Courteous, Kind, Obedient, Cheerful, Thrift, Brave, Clean and Reverent. If cynics think this an exaggeration, remember that I am a cynic too and do not bestow praise loosely.
With many millions of dollars in expenses, plus the simple ordinary desire for the loot, the brokerage industry must inevitably be a commission-hungry industry. Consequently, the independent trader must continually take care that the bulk of his capital does get devoured by this factor alone. The industry's pretenses that it is a business as opposed to a gamble becomes ridiculous in view of such instruments as "hi-tech index options" and "pharmaceutical index options." What are these except more chances to bet? What are more commissions except more chances for the house to take a cut of the pot?
In addition to the fast-in-&-out day-traders at office screens are the at-home traders using the Internet who may carry a position longer. Yet here too the situation or milieu favors-quickness, an inescapable antsiness over the lively computer buttons. Casino regulators have railed against cocktail waitresses serving drinks to customers at the gaming tables. It sabotages judgment and caution and restraint. Yet no one shields the at-home Internet trader from the beer in the refrigerator or the scotch in the liquor cabinet. How many "businesses" are operated this way?
A certain repulsive asininity has happened in many a city and town. Word gets around that prostitutes are working such-and-such a street. Men go to that street looking for sex. Then it happens: Housewives on the way to the store get propositioned. You may call this "stupidity" or "the idiot factor" but remember that something similar thrives in the realm of speculation. The broker collects as big a commission out of a stupid dollar as a wise dollar, as much out of a whiskey-soaked judgment as a cold sober one.
Worse than that, if the dunce who propositions the police chief's wife makes many nervous, impulsive trades, he and not the pick-'em-carefully thinker may become the broker's favorite, the one sought out and encouraged. Those "Make 300 Percent" TV commercials for futures & options do not exactly seek out Mr. Sophisticate. If "the idiot factor" generates commissions, who will say no? Especially if Trigger-Happy Gus makes more trades than Charlie Careful Shot. Where does a broker turn down an astrological stock-picker? In a fiction story.
To speak of "trading addiction" may sound fanciful or even humorous, like mentioning "golf addiction." Yet by no means is it an exaggeration. Rebecca Buckman wrote the article "These Days, Online Trading Can Become an Addiction" in the Wall Street Journal, February 1, 1999:
"It has become accepted wisdom that using the Web to rapidly buy and sell stocks, particularly volatile Internet issues themselves, is highly speculative. But now, addictions specialists report, cases of glassy-eyed investors literally hooked on cheap, easy Web trading are beginning to trickle into treatment centers and call gambling hotlines."
"The Sierra Tucson center, a 63-bed behavioral health-care facility in Arizona, has seen a few online-trading addicts." Chris Anderson, head of the Illinois Council on Problem and Compulsive Gambling, said that the Internet as a financial tool is so easily accessible and always available that it "makes people much more susceptible to getting out of control. It's like for the addict, the pusher is right in your living room."
Regarding the "Be a Day-Trader!" huckstering, a New York Times "Market Watch" article (March 21, 1999) stated, "Regulators, rightly worried that many daytraders don't understand the risks of the practice, are starting to rein in the day-trading firms." The piece by Gretchen Morgenson defined these firms as places where "any investor with money and moxie can sit down in an office and lose both."
Quoted was Meyer S. Frucher, chairman and chief executives of the Philadelphia Stock Exchange: "We felt that people who did not have sufficient background as traders were being enticed to come in and risk large sums of money without education."
Gretchen said, "starting to rein in." How long the process or how thorough none can say. The fact that the huckster and the dupe are both as old as mankind gives scant reason for optimism. Happily, one can succeed as an independent trader; not be "glassy-eyed" and not have a pusher "right in your living room"; no "being enticed" or "without education."
Years ago, I was attracted to option spreads because (a) they enjoyed reduced risk and (b) they used substantial quantities of other people's money. These two facts have a cause-&-effect linkage. Risk is reduced because other people's money catches most of the gunfire. Often, other people's teardrops have been my gold spillover. At the close of 1997, an announcer on the financial cable channel remarked that it was a lousy year to be in the market. I overheard it from the next room and chuckled.
Oh the phone, a lady discount broker had just congratulated me for pulling out of an option-spread position at a profit. "You will buy me an orchid corsage, won't you?" She was joking but I sent her a no-foolin' bottle of Chardonnay. What is a typical profitable transaction? At that time, I would have bought 10 options at perhaps 4-1/4 or $4,250 for the 10, and sold 10 other options with a nearer expiration date for maybe 2-3/4 or $2,750. The money from the sale of the latter would go to pay for most of the former that I had bought. Out of my investment capital, I would pay the $1,500 difference or "spread" plus brokerage commissions.
In two or three weeks, the sold options would typically shrink in value to something like 1-1/2 or $1,500 for 10. The bought options, being farther off in time expiration-date-wise, would also shrink in value over the weeks but less -- a crucial point. They would trade for something like 3-1/2 or $3,500 for 10. Why would this be good news for me? The difference or "spread" between the two batches of options was $1,500 when I entered but widened to $2,000 by the time I exited. In short, a $500 profit (not counting commissions) on a $1,500 investment in two or three weeks.
Why would this be bad news for other people? Notice that the sold options had lost a third of their value (2-3/4 points to 1-1/2) so whoever bought the 10 I sold was down $1,250. As for the boughts, anyone who bought 10 at the same price I did but without spreading lost $750 (4-1/4 points to 3-1/2). Yes, Lady Elaine. Lancelot's and Galahad's sufferings in battle enriched me.
Three paragraphs back, I said, "At the time, I would have . . . " because nowadays my procedure is different on at least two key points. An opening spread of as much as 1-1/2 points? No, now it would have to be smaller. Selling options for as little as 2&a fraction? No, now they would have to be bigger. Every trader goes through one or another kind of evolution. Although not all changes people make are for the best, these added precious carats to the gold.
Adescription of my more recent maneuvers will serve to illustrate. Now even more than then, option spreading reduces the risk enough and produces a profit regularly enough that I can call it a business and not a gamble. Without being bled daily for commissions or anywhere near that often. Without a bed in an Arizona clinic. Without telling a hard-luck story to sad speculators three deep at the bar. In early March, I took profit on the Cisco spread with put options described in the previous issue of CTCN.
What to do next? Since it was March, the options with expiration dates in April had already started to shrink or deteriorate markedly value-wise from being near in time. Of course, the March ones were near-skeletons. So I anticipated being active in the May/June region, i.e. buying 10 Junes and selling 10 Mays with the same underlying stock and the same strike-price as the Junes. This I long ago christened my ship of the line --- the horizontal calendar spread; horizontal because of the same strike-price and calendar because of the different months.
A problem emerged at that particular time. On the Wall Street Journal's options page, only a paltry number of stocks had May puts & calls. Most jumped either from April to July or from April to June. The amount of the difference or "spread" between April and June or April and July was prohibitive: 2 & a fraction, 3 & a fraction or worse. I knew what I wanted: A spread of less than 1-1/2 points and the less the better. Also just fine by my reckoning were May options selling for 3 or 3 & a fraction or better and Junes in the 4 & a fraction area. The shortage of Mays hindered.
Of course, that spreads produce profits faster than numerous other forms of investing counts as a big plus. Yet one must not fall into the trap of the Internet stocks crapshooter, expecting astronomical gains lightning fast, then seeing no Klondike except in the gold tooth of the pawnbroker. If necessary, it is better to wait for a good position than to get into a bad or mediocre one quickly. Better a delayed profit than a rapid loss.
I waited, knowing that March options would expire the third week-end of that month and May ones would be born in quantity early the following week. The week following March 22, the option page gave me an ample slate of Mays and Junes from which to select a potential spread. Pfizer, General Electric, MCI World Com and Wal-Mart among others had May puts & calls trading at 3 or better and Junes 4 or better. All were rising in the "Dow 10,000" market but moved slowly.
Since spectacular rises seemed unlikely -- Dow 10,000 constituted a sell signal to many investors -- either a put spread or a call spread appeared tenable. Quite often with the same stock, the gap between calls of different months is wider than between puts of different months, the bias of optimism. On March 23, for example, Pfizer call options with an expiration date of May and a strike-price of 150 were bid 3-3/8; ask 3-3/4. The June 150s were bid 5-3/8; ask 5-5/8. The spread or gap: Approximately 2.
The shares closed that day at 140. With the nearest out-of-the-money put options, the May 135s were bid 4-3/8; ask 4-3/4. The June 135s --bid 5-3/4; ask 6-1/8. Nice. The Mays higher than 3, the Junes higher than 4. A spread of 1-3/8 points, just about below 1-1/2. A spectacular rise in a stock could hurt a put spread but Pfizer was a gradual riser with an inflated Price/ Earnings ratio of 55. The prior 52-week share price high: 144 & a fraction. With the Dow 10,000 shilly-shally, that pharmaceutical stock appeared likely to hover around 140 or not much higher.
I phoned an order to the broker. "Buy 10 PFE puts June 135 to open a position. Sell 10 PFE puts May 135 to open a position. This is a spread. These two orders go in together, each dependent on the other. This is a "covered" transaction, with the bought Junes covering the sold Mays. I want it at a debit of 1-3/8 points."
This would have been a "covered" transaction -- in this case, with one batch of options acting as security for another -- as opposed to a "naked" sale, in which the option-seller has nothing to back it but his word and his cash. The 1-3/8 point "debit" means that the buy price of the Junes and the sell price of the Mays are open but the difference between them is "fixed" at 1-3/8 points. In dollars, with 10 options bought and 10 sold, it means the trader must pay $1,375 plus commissions.
The report back from the broker: Nothing done. I phoned in a repeat the next day. Again, nothing done. The problems included low volume. On March 24, for example, only 16 of Pfizer's (PFE's) June 135 Puts transacted. Anyway, soon the spread widened to 1-1/2. It had moved out of bounds and I ceased trying to open a position in it. My attention turned to Wal-Mart (WMT) which had been rising but had lost steam and carried a non-conservative Price/Earnings ratio of 45.
Wal-Mart shares were a little off their 52-week high of 98 & a fraction and had a low an immediately previous week of 88 & a fraction. Its up-&-down price motion appeared to form a "box" in the middle 90s. Either a call spread at 100 or a put spread at 90 seemed all right. On March 29, Wal-Mart's May 100 calls were bid 3-1/8; ask 3-1/4. June l00s -- bid 4-1/4; ask 4-1/2. A spread of between 1-1/8 and 1-1/4. The May 90 puts-bid 3-3/8; ask 3-5/8. The June 90 puts -bid 4-3/8; ask 4-3/4. A spread of between 1 and 1-1/8.
I phoned in an order to buy 10 June 100 calls and sell 10 May 100s at a debit of 1-1/4. Nothing done. These too were low-volume options with just a few dozen contracts trading each day. I thought I could get in on the early action by phoning it my order early the next day about 15-minutes before the start of trading. Debit 1-3/8. Noon I called in for results. Nothing done as yet. I told the broker, "Cancel that order. I have a back-up plan. Puts instead of calls."
This was on March 30. Not only had the call-spread order not been executed. The May and June 100s kept showing differences of 1-1/4 on the bid side but 1-1/2 on the ask side. The latter was my good-bye signal. The May and June puts with strike-prices of 90 showed differences or gaps of between 1 and 1-1/8, fluctuating more at the latter. I considered a "buy 10, sell 10" order at a debit of 1-1/8 but after days of "nothing dones" it seemed it would happen again if I did not offer a number just a little better than the quoted figure. I said, "At a debit of 1-1/4."
I am placing sledgehammer emphasis on this opening stage of a spread and the amount of the debit at this opening because this is Silas Marner Time, the stage where it pays to be a miser. Invest Small, As Small As the Powers That Be Will Stand Still For. It had taken me some days to open a position because I insisted on being Stingy Sam instead of Lord Bountiful. No regrets have I on that item. Also at this time, May puts traded at 3 & a fraction, the Junes at 4 & a fraction -- in the right territory.
Yes, I was nervous. It started to seem like "nothing dones" would come in perpetuity. At 3:00 PM on March 30, I phoned the broker and jotted down his words with a glad hand on my lucky ballpoint. "You bought 10 puts WTM June 90 at 4-1/4. You sold 10 puts WTM May 90 at 3." In dollars, I bought $4,250 worth and sold $3,000 worth, paying the difference of $1,250 plus brokerage commissions. Inordinate numbers of "nothing dones" preceding this transaction made it more memorable.
Yet the greatest thing about owning the 10 Junes was and is that other people's money paid for more than two-thirds of them. The difference between my $1,250 and the $4,250 sprang from the cash in other people's pockets. They also face far more exposure to risk than I. At the time of this writing (April 6) one week has passed since I "opened the position." Today the May 90s traded at 2-3/8 and the June 90s at 3-5/8. At this gap of 1-1/4, the 1/8 point difference off of what I paid has happily disappeared. Also today the fluctuation occasionally inched above 1-1/4.
Standing pat and waiting. Any bad news for other people? Usually there is. As you can see, whoever paid $3,000 for the Mays I sold is minus siding more than $600, precisely the same sorry sum as whoever bought Junes at the price I did but without spreading. In trading, Smith's good news doubles as Jones' sad story. If a bunch of grandmothers in Illinois similar to the Beardstown Ladies bought any of these options, then their teardrops are my sunshine.
Among various types of businesses, funeral parlors have a low bankruptcy rate and new restaurants a high one. As for speculative trading, it is difficult to find an enterprise where so many would-be millionaires go in and so many whipped dogs and shorn lambs come out. More ironically, those "Exciting World of Day-Trading" ads and "Futures & Options Gold Mine" ads are not paralleled by come-ons saying "Be A Plumbing Supplies Wholesaler" or "Open Your Own Publishing House." People who would question their own qualifications and mind-sets before opening a shop instead get a "Better Hurry!" message from an industry craving new capital via commissions.
So examine your own qualifications and mind-set and personality and, well, the et ceteras could run lengthily. Successful traders come in all varieties and life-styles. Some enjoy cooked pheasant on Park Avenue and some pork & beans in Jersey City. They include doctors and Christian Scientists, vegetarians and butchers, physicists and diamond-cutters and "You want fries with that?"
Yet cultural factors and life-style factors do matter. A repeat-profits speculator can be either a neo-prohibitionist or a brandy and wine connoisseur but can he be a problem drinker? Problem drinking impairs judgment and timing, both of which stand as crucial to successful trading. An avid reader of cookie-cutter formula fiction who does not realize that he is reading the same story over and over will probably overlook the telling details and signals of the market. A leader of True Confessions who does not know it is fiction lacks solid wire-circuitry to reality and should stick to passbooks.
Regarding cultures and life-styles, numerous signals and under-tones can be read differently, adding to the complexity and the hazard. The July 6, 1993-2014 issue of William F. Buckley's conservative magazine The National Revue carried an editorial "Back to Brazil" which jeered at the sport of soccer as something of an undesirable alien in the U.S. It stated: "Sports are like slang, spices and manners -- every nation has its own, and their nuances can't easily be learned by outsiders."
It also said, "National games do not merely keep foreigners at bay; they bind a nation together. What, besides football, links small towns in Texas and in Pennsylvania? What, besides basketball, causes frenzies in rural Indiana and in Brooklyn? The country that plays together stays together."
No bigotry or xenophobia intended here, you understand. Just keeping foreigners at bay and befuddling outsiders with "nuances" they can't easily learn. After the recent death of baseball legend Joe DiMaggio, the New York Times and the Wall Street Journal both reprinted an excerpt from a 1930s article. A May 1939 issue of Life Magazine meant to compliment DiMaggio but bristled with demeaning ethnic stereotypes. It said that American-born Joe "speaks English without an accent, and is otherwise well adapted to most U.S. mores. Instead of olive oil or smelly bear grease he keeps his hair slick with water. He never reeks of garlic . . . "
No organ grinder he. How could they fail to mention that Jolt-in' Joe did not save his money in a sock or work for Lucky Luciano? A recent issue of The National Review (April 5, 1999) carries an obituary: "From our distance today, DiMaggio's time seems a simpler, clearer one. What was right and wrong was not subject to as much discussion. The public recognized stinkers and scoundrels when they saw them."
It was also the era when radio censors made cuts in the Maschwitz-Strachey-Link popular song "These Foolish Things," omitting the "silk stockings thrown aside" and the "gardenia perfume lingering on a pillow." It was also the era when Life Magazine felt it necessary to "prove" that Joe was no "greaseball." But then, if the athletic field is to be used to "keep foreigners at bay," then one must be sure that, say, a Polish-American home run hitter does not wear a bowling shirt under his pinstripes.
The 1930s were not the era of Italian opera or Dutch & Flemish paintings, but the Right Wing's "golden yesteryear" apples never do fall far from the present-day tree. It was the era when film censorship bigwig Joe Breen blamed so-called indecent movies on "lousy Jews . . . 95 percent of whom are Eastern Jew" the scum of the earth . . . whose only standard is the box office." The publication The Brooklyn Tablet had earlier stereotyped Jewish heads of studios as garment industry dollar-grabbers or nothing "more or less than alien ex-buttonhole makers and pressers" who ran Hollywood like "the cloak and suit trade" they had left on the east coast.
For financial traders, bigotry and similar types of thinking can be even more hazardous when not so raw or unvarnished. Who can forget Archie Bunker's famous question to Sammy Davis, Jr.? "That's one thing I could never understand. You couldn't help bein' born colored, but what made you decide to turn Jew?" Just as the question "Do you still beat your wife?" contains the assumption that you used to, so Archie's question contained the assumption that be-longing to a minority is a disease. It was as though Sammy already had cancer and then deliberately contracted leprosy.
Notice that neither Archie Bunker nor the Life Magazine writer were sheet-wearers screaming "Wop!" or "Kike!" or "Nigger!" They just had these "Do you still beat your wife?" type layers and layers of mental premises and assumptions. "Everybody knows" this or that. It is "common knowledge" that blacks dance well because they have natural rhythm and whiskey cures a cold and women have no sexual desire and hair on a man's chest means virility and foreigners must be kept at bay and you can't lose with blue chips and everybody but you is making vast fortunes with futures & options. How easily the mental rubbish from the bleechers spills into one's cashbox.
Ellen Goodman wrote, "Traditions are the guideposts driven deep in our subconscious minds. The most powerful ones are those we can't even describe, aren't even aware of." This is a reverential statement, which ignores its own downside. Many a neophyte speculator enters the battle zone with a subconscious approach something like Proposition One: I'm a nice guy. Proposition Two: Nice guys always win. It says so in all the John Wayne movies and singing cowboy movies. Conclusion: I shall make a fortune.
Bigotry and xenophobia are sub-divisions within the category of people believing what they want to believe. The speculative markets make chopped liver out of people who believe what they want to believe. As mentioned, it has less to do with flaming crosses than "nuances" and "aren't even aware of" type mind-sets. Many folks fond of roast beef medium and Tin Pan Alley may be "disturbed by the nuances of" meat lasagna and Neapolitan festival songs, kielbasa on bread and polka bands, chili peppers and flamenco, soul food and Dixieland, Peking duck and Mandarin melody. A trader with an inner streak of Marco Polo has better guideposts, and not just with the menu.
Trader's Diary for April 8: Contrary to expectation, Wal-Mart common shares broke out of their mid-90s box and rose to the low 100s. A stock's climb means bad news to put option buyers but not always for put spreaders. Today the May 90 puts were bid 1, ask 1-1/4, traded 1-1/4. The June 90s were bid 2-1/4, ask 2-1/2 traded 2-1/2. Notice that whoever paid 3 points for the Mays is down nearly two-thirds and whoever bought the Junes at 4-1/4 without spreading has shrunk almost half.
However, the "gap" or "difference" or "spread" remains at 1-1/4. Seven trading days after opening the position is usually (not always) too soon to expect a profit. Yet this serves to test the crucial "armoring" or protective quality of spreading, and test it under combat conditions. The newsletter publisher's deadline for this article approaches, so the results of my Wal-Mart venture may come too late to be reported in this piece. Spreads do not guarantee gain or guarantee against loss. Yet their ability to protect my moneybelt while other bankrolls get shot up now shows durability.
A topic the following day: Every Friday, the Wall Street Journal closes with a page entitled "Taste." Frequently the page gives much space to reactionaries who throw around the word "culture" a lot but whose reckonings of time and civilization seem to have begun with Shirley Temple's liberation from diapers. In that section of the latest Friday Journal (April 91 1999), Weekly Standard Magazine executive editor Fred Barnes extols the triumphs of the conservative Christians in an article that uses the word "culture" four times.
I like to fly a cultural flag on the ship's aft of my articles for several reasons. One, the fine arts proclivities of old-order-moguls J. Pierpont Morgan and Henry Clay Frick make fine heraldry for traders and investors to take inspiration. For another, traders need other areas of fascination so as not to use speculation as an expensive parlor game or a "make it interesting" cocktail shaker wager. (A business, not keno, not baccarat or wist.)
Also, both Wall Street and Main Street always seem to need more counter-voices against those whose notions of "time and civilization" appear a big blank preceding "The Charleston" and the circus tent. If the Bill Buckley conservatives try to get your signature on a petition declaring the sport of soccer "un-American," be sure that your "sense of nuance" is richer than theirs. It helps if you appreciate the atmosphere of Chopin's pianissimo in the candle-lit salon of a Paris duchess. Appreciate even across a distance.
Philadelphia "golden oldies" radio disc jockey Ed Hurst said on the air that whenever he hears Robert Merrill, he thinks of opening day at the ballpark. To Ed, an opera star is somebody who sings "Oh, say can you see" at the sports stadium. It would be nice also to think of him as someone who performs Verdi's IL Trovatore at the Academy of Music or on TV. But then, those titles are difficult to pronounce and one must "keep foreigners at bay."
Not everything from olden days is golden and, investment-wise, plenty of bad from the past haunts us still. A recent newspiece in the New York Time (April 6, 1999): "Ex-Financier Pleads Guilty in $20 Million Ponzi Scheme." A name from the 1920s and it ain't Eddie Cantor. Two days ago in the Wall Street Journal (April 8, 1999): "Extra! Extra! Internet Hoax." It involves the old Curb Era scam -- spreading false rumors and fake news reports to fraudulently boost the price of a stock -- but engineered to the World Wide Web. Finally a Meet Mr. Luckey newspaper proverb: "Footprints in the sands of time have taught many -- Little."
Trader's Diary for April 16: The Wal-Mart spread is repeatedly touching 1-1/2 points, a 20% improvement in 13 trading days. The first spoonful of gravity.
Chester Ray Williams - I trade in the futures market and primarily use indicators and system tools to enter a trade. However, no matter how strong or convincing a signal(s) may be, my final decision depends on the fundamental of supply and demand. I see an opportunity to go short in May Lumber if the price penetrates my projected support line of 321.60. As dumb as it may seem, somehow I deleted the bookmark that had monthly reports on housing starts. If you could give me the Web Page or E-mail address where I could find this information I would be very grateful. My e-mail address is: email@example.com
Eric Timmes - Data Question -- Im looking for a program that can calculate moon phenomena: true node, max/zero declination, max/zero latitude, apogee/perigee and import this information to an output file suitable for input into a spread sheet. Can you recommend something?
Anyone interested in data exchange for intraday data for patching data holes, call Ron Cink - 530-842-6840.
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