Issue 52

Trade Dow Jones Futures Trade Smart - Bill Seideman

As so many have said before me, and I agree, you are offering individuals who trade futures and options a very worthwhile forum.

I’d like to get some feedback from you and other members why the Dow Jones Futures are not considered worthy of intraday or long-term trading. I have read all the back-issues but alas, nothing pro or con on daytrading the Dow.

Five reasons why I trade the Dow Jones futures contract instead of full-size S&P-500 or the e-mini S&P:

1. The Dow contract is valued at $10.00 per tick. When the Dow moves from 10,000 to 10,001, 100 ticks you win or lose $100.00. There is good daily volatility; volume and open interest, enough so a day trader can make a good living just trading the Dow contract. The daily volatility, volume and open interest are not as good as the S&P, but it is getting stronger every month. The average daily range exceeds 100-points. Sometime it exceeds 300-points. At $10.00 a point, the Dow is a conservative moneymaking machine.

The Big S&P 500 is valued at $25.00 per tick. When the Big S&P-500 moves from 1,000 to 1,001, you win or lose $250.00. I don’t want to get a margin call in the event the market goes “fast” and my stop becomes just some ink on a floor brokers trading card. At $25.00 a tick and virtually no limit, you are inviting disaster. Let the floor traders and the commercials fight it out in this market. I refuse to trade the full-size S&P-500 because you can be wiped out, even with a stop in place.

The e-mini S&P is valued at $12.50 per tick. When the e-mini moves from 1,000 to 1,001 you win or lose $50.00. The brokerage cost to trade one or two contracts is very expensive. Why make the brokers and the CME exchange more money than they deserve.

2. The Dow Futures Contract can be traded electronically direct to your broker or the pit. Just like the E-Mini.

3. The Dow Futures opens for business at 7:20 AM, 1-hour and 20-minutes before the stock market opens and stays open till 3:15 P.M., 15-minutes after the stock market closes. The Dow can also be traded on Project “A”

4. Having tracked the S&P - Dow Jones futures for 2-years and they pretty much trade in the same direction and with the same volatile intraday rallies and reversals.

5. You only need to know the names of 30-companies when you trade the Dow. How many of you who trade the S&P know the 500-companies that comprise the S&P? Don’t you need this information at your fingertips during earnings report season?

No, I don’t work for the Chicago Board of Trade or have any affiliation with them.

Have you tried trading the DJIA with your trading program? If you have time please see if it works as well as the S&P.

Editor’s Comment: No, have never traded the Dow Jones Index futures. However, the basic algorithm should “work” about the same in any actively traded market but tends to do best in markets with excellent liquidity like the S&P.

I am a new member and would consider ordering your Real Success TradeStation compatible trading software. I am using DTN for real time data. The data is via satellite, not the Internet. How can or will this work?

Editor’s Comment: It works great with the Internet Data Feed and Omega TradeStation or SuperCharts but unfortunately not with DTN. By the way, most everyone seems to be switching to Internet data feeds rather than the once more popular Cable TV and Satellite Feeds. For example, based on my own real-time trading experiences Internet data has great advantages, including portability and amazing Internet real time fills taking only 4 to 7-seconds on average in the e-mini S&P Market.

Question: Is Omega SuperCharts a superior charting program? I don’t need a bushel basket of indicators and don’t care to back test minimalist trading methods, i.e., support and resistance, pivot points and trading ranges.

Editor’s Comment: SuperCharts is a good charting program. It also does many other things but most of our clients use it for running the Real Success Software, data collection and charting. I agree with you, it’s best not to use many indicators and excessive back-testing, as all you are doing is curve-fitting. Keeping it simple, is the theme of the Real Success Method.

Fibonacci Numbers & Counting
Reprinted w/permission of Asimov On Numbers

Consider Leonardo Fibonacci, for instance, the most accomplished mathematician of the Middle Ages. (He was born in Pisa, Italy, so he is often called Leonardo of Pisa.) About 1200, when Fibonacci was in his prime, Pisa was a great commercial city, engaged in commerce with the Moors in North Africa. Leonardo had a chance to visit that region and profit from a Moorish education.

The Moslem world by then learned of a new system of numeration from Hindus. Fibonacci picked it up and in a book, Libber Abaci, published in 1202, introduced these “Arabic numerals” and passed them on to a Europe still suffering under the barbarism of the Roman numerals. Since Arabic numerals are only about a trillion times as useful as Roman numerals, it took a mere couple of centuries to convince European merchants to make the change.

In this same book, Fibonacci introduces the following problem: “How many rabbits can be produced from a single pair in a year if every month each pair begets a new pair, which from the second month on become productive, and no deaths occur?” (It is also assumed that each pair consists of a male and female and that rabbits have no objection to incest.)

In the first month, we begin with a pair of immature rabbits, and in the second month, we still have one pair, but now they are mature. By the third month, they have produced a new pair, so there are two pairs, one mature, one immature. By the fourth month the immature pair has become mature and the first pair has produced another immature pair, so there are three pairs, two mature and one immature.

You can go on if you wish, reasoning out how many pairs of rabbits there will be each month, but I will give you the series of numbers right now and save you the trouble. It is:

1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144

At the end of the year, you see, there would be 144 pairs of rabbits and that is the answer to Fibonacci’s problem.

The series of numbers evolved out of the problem is the “Fibonacci Number Series” and the individual numbers of the series are the “Fibonacci numbers.” Looking at the series shows each number (from the third member on) is the sum of the two preceding numbers.

This means we needn’t stop the series at the twelfth Fibonacci number (F12). We can construct F13 easily enough by adding F11 and F12. Since 89 and 144 are 233, that is F13. Adding 144 and 233 gives us 377 or F14. We can continue with F15 equal to 610, F16 equal to 987, and so on for as far as we care to go. Simple arithmetic, nothing more than addition, will give us all the Fibonacci numbers we want.

To be sure, the process gets tedious after a while as the Fibonacci numbers stretch into more and more digits and the chances of arithmetical error increase. One arithmetical error anywhere in the series, if uncorrected, throws off all the later members of the series.

But why should anyone want to carry the Fibonacci sequence on and on and on into large numbers? Well, the series has its applications. It is connected with cumulative growth, as the rabbit problem shows, and, as a matter of fact, the distribution of leaves spirally about a lengthening stem, the scales distributed about a pine cone, the seeds distributed in the sunflower center, all have an arrangement related to the Fibonacci series. The series is also related to the “golden section,” which is important to art and aesthetics as well as to mathematics.

But beyond all that, there are always people who are fascinated by large numbers. (I can’t explain the fascination but believe me it exists.) And if fascination falls short of working away night after night with pen and ink, it’s now possible to program a computer to do the work, and get large numbers it would be impractical to try to work out the old-fashioned way.

Recreational Mathematics Magazine lists the first 571 Fibonacci numbers as worked out on an IBM 7090 computer. The fifty-fifth Fibonacci number passes the trillion mark, so we can say F55 is greater than T-1.

From that point on, every interval of fifty-five or so Fibonacci numbers (the interval slowly lengthens) passes another T-number. Indeed, F481 is larger than a googol. It is equal to almost one and a half googols, in fact.

Those multiplying rabbits, in other words, will quickly surpass any conceivable device to encourage their multiplication. They will outrun any food supply that can be dreamed up, any room that can be imagined. There might be only 144 at the end of a year, but there would be nearly 50,000 at the end of two years, 15,000,000 at the end of three years, and so on. In 30-years there would be more rabbits than there are subatomic particles in the known universe, and in 40-years there would be more than a googol of rabbits.

To be sure, human beings do not multiply as quickly as Fibonacci’s rabbits, and old human beings do die. Nevertheless, the principle remains. What those rabbits can do in a few years, we can do in a few centuries or millenniums. Soon enough. Think of that when you tend to minimize the population explosion.

For the fun of it, I would like to write F571, which is the largest number.

Leonardo Fibonacci was born in Pisa Italy about 1170 and he died about 1230. His greatest achievement was in popularizing the Arabic numerals in his book Liber Abaci. In this, he had been anticipated by the English scholar Adelard of Bath (tutor of Henry II before that prince had succeeded to the throne) a century earlier. It was Fibonacci’s book, however, that made the necessary impression.

But why did he call it Liber Abaci, or Book of the Abacus? Because, oddly enough, the use of Arabic numerals was implicit in the “abacus,” a computing device that dates back to Babylonia and the earliest days of history.

The abacus, in its simplest form, is most easily visualized as a series of wires on each of which ten counters are strung. There is room on the wire to move one or more of the counters some distance to the right or left.

If you want to add five and four, for instance, you move five counters leftward, then four more, and count all you have moved-nine. If you want to add five and eight, you move five counters, but only have five more, not eight more, to move. You move the five, convert the ten counters into one counter in the wire above, then move the remaining three. The counters in the wire above are “tens,” so you have one ten and three ones for a total of thirteen.

The wires represent, successively, units, tens, hundreds, thousands, and so on, and Arabic numerals, in essence, give the number of counters moved in each of the wires. The manipulations required in the abacus are those required in Arabic numerals. What was needed was a special symbol for a wire in which no counters were moved. This was zero, 0, and Arabic numerals were in business.

Editor’s Note: It’s recommended traders study Fibonacci Numbers, as the numbers do seem to be reflected in the markets. In particular, .382%, 50% and .618% seem very significant.

Many traders watch for resistance and support areas at these numbers by calculating these levels between important highs and lows. They may also be used as far as time is concerned, not just prices.

Some traders say time is more important than price. Many times Gann said in his writings “when time is up watch for a change of trend.”

Gleaning From W. D. Gann - Rick J. Ratchford

Just as there is night from day, we find two camps in relation to the teachings of William D. Gann. There are some who feel he was the greatest market trader and analyst of all time, and those who believe the contrary. You won’t find many in middle territory.

Regardless of which way you tend to lean about this man, much can be learned from his writings. Even if the rumors are true that he left out the real secrets to trading successfully, much can be gleaned from his writings.

It matters not whether W. D. Gann made millions from trading or simply providing trading courses at $5,000 a pop (compared to today, that is quite a sum for the early part of this century.) He was without a doubt a gifted student of the markets, and was recognized as such, especially by those willing to pay such large amounts for his knowledge.

“Grace is given of God, but knowledge is bought in the market.” The Bothie of Toberna Vuolich (1848) pt. 4,1.159.

In this article, we will focus on a small fraction of his talents dealing with price pressure points. Taken from page 34 and 35 of his book, “How to Make Profits Trading in Commodities,” originally completed in 1942, under the subheading “Resistance Levels.”

“If we wish to avert failure in speculation, we must deal with causes. Everything in existence is based on exact proportion and perfect relation. There is no chance in nature, because mathematical principles of the highest order are at the foundation of all things. Faraday said: “There is nothing in the Universe but mathematical points of force.”

When I was a small boy, there were times when I’d climb to the top of a backstop at the local baseball field, and just lie there staring at the stars at night. This was a perfect time to reflect about the world around us. The stars, why don’t they fall on us? How come the earth keeps coming back to the same spot each day, instead of drifting away from the sun and moon? Why are we not floating off this planet into space as the earth continues to spin? I’m sure these are the thoughts most young people have before they let life itself take over their daily thoughts and forget the wonders of the things around us.

Former astronaut John Glenn once noted “the orderliness of the whole universe about us,” and that the galaxies were “all traveling in prescribed orbits in relation to one another.”

The universe is so precisely organized that man can use the heavenly bodies as the basis for his timekeeping. Rocket expert, Wernher von Braun went a step further when he stated: “The natural laws of the universe are so precise that we have no difficulty building a spaceship to fly to the moon and can time the flight with the precision of a fraction of a second.”

Among the many precise conditions vital to life on earth is the amount of light and heat received from the sun. The earth gets only a small fraction of the sun’s energy, just the right amount required to sustain life. This is because the earth is just the right distance from the sun, an average of 93,000,000 miles. If it were much closer or farther away, life would cease to exist here. We can look deeper into these laws of nature and become even more convinced of its influence on everything pertaining to life.

The earth is tilted 23.5 degrees in relation to the sun, which gives us change of seasons. Rotates once every 24-hours, which gives us day and night. Travels at 66,600 miles an hour, just the right amount of speed to offset the gravitational pull of the sun and keep the earth at the proper distance from the sun. Our atmosphere is made up of just the right ratios of oxygen (about 21%) and other gases; some of these gases by themselves would be deadly. The most predominant gas that makes up our atmosphere is nitrogen, about 78%.

W. D. Gann understood that our actions here on earth, and how we affect the patterns of the markets, are all connected mathematically with the universe around us. Our moods can change based on just the color of the sky. Ever notice how a gray sky may bring you down, while a sunny day may raise your spirits higher?

Weather can affect the way you feel and act, and we know that weather is affected by external influences. To a large degree, weather can be forecasted. News of drought, floods, fires and other forces of nature affect how we act. Is it any wonder how all these things tend to show up in market patterns? People move the markets, and nature moves the people.

Ever read how a full moon causes a change in moods and personalities in people? Crime rises, unrest in mental wards, are all attributed by some draw from the moon. It is said that the moon causes the tide to rise and fall in the world’s water supply. And considering that we are made up mostly of water, this affect from such a distant mass shouldn’t surprise us.

W. D. Gann further said in page 34, “Every commodity makes a top or bottom on some exact mathematical point in proportion to some previous high or low level.”

If the movement of these outside bodies of mass can be timed with precision due to natural laws, then their affect on nature and man itself should be something we can plot to some degree. There are think tanks in government that are paid to anticipate how people will react to various external stimuli.

Mass psychology is not a new study, but one that goes back ages. If one were to make a career of this, one thing they would learn early on is to examine the Past and note how people reacted to various situations. It has been said, “History repeats itself.” King Solomon once said “there is nothing new under the sun.” W. D. Gann was known to quote this from time to time.

One of the powerful known factors of natural law is the numerical relationship of various things in nature. Various plants can be used to demonstrate a direct mathematical relationship with the proportions of the human body. These relationships are also found in the pyramids of Egypt and that of the common seashell. This subject alone would fill volumes.

W. D. Gann focused on the relationships of these ratios found in market prices. He suggested that there are pressure points where price is likely to temporarily find difficult to penetrate. By noting these points on our price charts, it may provide additional insight as to what the market may do next.

“By carefully watching these Resistance Levels in connection with time periods, you can make a greater success and trade with closer stop loss orders.”

As a student of the markets, and one who has discovered some unique properties of market behavior useful in analysis, I certainly have to agree with Mr. Gann’s statement above. By determining where these pressure areas are in advance, we increase our probability of success by using them to place our stop loss orders if price turns away from them. This is an advantage over using a fixed dollar amount, or some other technique that does not take into account the natural laws controlling the markets.

“12½ or 1/8: Take the extreme low and extreme high of any important move. Subtract the low from the high to get the range. Then divide the range of fluctuation by 8 to get the 1/8-points ...” This is a simple technique, which I have found quite useful. Note these pressure price areas found at each 1/8-increment of a previous important range.

“After dividing a commodity by 8 to get the 1/8-points, the next important thing to do is to divide the range of fluctuation by 3 to get the S and T-points. These S and T-points are very strong, especially if they fall near other Resistance Points of previous moves or when they are divisions of a very wide range.”

What Gann is suggesting here is to divide an important range into thirds. He suggests that these are important if they fall near prices of previous moves. This means we would not be comparing them to the move that we just divided by 8, but rather a move made earlier than we divided by 8. Therefore, you certainly don’t want to throw away prior calculations if current price is still within the range of a previous important move. If we find a close match, this is worth watching when price comes close to meeting it.

He also indicated that the S and T price level is very strong alone when calculated against a very wide range, say the yearly high and low. Therefore, you may wish to get the long term high and low, as well as the yearly high and low and calculate for both.

“Next in importance is the division of the highest price at which a commodity has ever sold and each lower top.”

In other words, he suggests that we simply take the highest high price and divide that price alone by 8. Also, do this with each lower top as well. “. . . And also divide by 3 to get the S and T-points.”

So how does this all work in the real world? Curious? Well then, grab a price chart and start experimenting. Here are some results using these gems of W. D. Gann.

Applied to the monthly and weekly charts, I found that price being close to a [-line was still too far away when viewed on a daily chart. It is my opinion that it may have limited value here for most. However, the daily chart did provide some interesting results.

Using a continuous price chart of Soybeans (values may differ on your charts as the ones I’m using are reverse adjusted, which changes previous prices while keeping the relationships of past and present tops and the bottoms), I took the low of 421.25 of July 9, 1999 to the top of 533.25 on Sept 7, 1999 and divided this by 8. I then divided the top of 533.25 by 8 and overlapped the two sets of values. This showed one price zone that nearly overlapped that being 463.50 and 466.50.

The price range of 421.25 to 533.25 provided support for 7/16, 7/29, 8/30, 9/24, 10/4, 10/27 - 11/1, 11/12. One thing I’ve noticed is that if you use 16ths rather than 8ths, there are much better results. Many reversals occurred at 50% distance between 8ths.

Certainly, this is just one tool, and by itself would be of limited use. However, this was all taken from just page 34 of a book that is over 400 pages. So there are other gems in which to use in conjunction with this. I would also like to add that, when using such price aids with time calculations, it tends to narrow down the price area in which we would focus on, making the other divisions less important while in that narrow time window.

His book does deal with Time, mostly in relation with the anniversary of a previous turn, or dividing the year into 8ths and so forth. I highly recommend reading the book, but doing so more for digging out those gems as part of your continuing education rather than as expecting it to be the last word on the subject of natural law and the markets.

Gann Lines, Lines, Everywhere Are Lines - Rick J. Ratchford

At one of the trading classes, I conducted back in 1997 in North Hollywood; I was demonstrating the use of ratios to discover support and resistance price zones via a chart projected on the screen. After having completed several support and resistance lines, one student in the back of the room made an observation not unlike that of others before him. “There are lines everywhere! How can this be useful? How can we know which one is going to contain price on any given move?”

This was certainly a good question, although I had already provided clues to this prior to leading up to support and resistance. It appeared that most of the other students had already caught on to this as well, as several started to answer the question for me. Thus is the subject we will consider in this article. How do we take advantage of these lines?

There is no “one right approach” or use for support and resistance price lines. Situations and circumstances change from day to day, market to market. However, if you learn the various uses and approaches in analyzing markets using support and resistance lines, in time you will be able to “see” the clues you need to make better market calls.

Although I prefer Fibonacci ratios, let us start with the basics using Gann ratios. They are close enough for government work. For static Gann ratios you only need to divide any given price range by eight. Each division then, or support and resistance line will form at [ intervals. That is, each will be 12.5% of the overall range.

It should become obvious at this time that if you were to divide very small ranges into 8 divisions, you are going to get prices that are just a few ticks away from each other.

Granted, I would consider doing such a thing an exercise in futility. It is ultimately better to apply such divisions on price ranges that offer greater distance between each division.

W. D. Gann liked to make reference to the distance between these divisions. He once said “When the range between the 50% point (4 eighths) and the 62.5% point (5 eighths) is 8 to 12 cents or more, and the commodity crosses the 50% point, it will go to the 62.5% point and meet resistance.” We will cover what he is saying shortly. I want to point out how important some spacing is to have between divisions. By using well-defined ranges that are not too small to divide, you minimize the problem of having too many lines. Yet, this alone is not enough.

There usually will be many ranges in a price chart for which the analyst can apply Gann ratios to. And obviously, if you do enough ranges, you are going to have horizontal lines marking the divisions all over the place. We now must consider other ways of making sense of this webbing.

The first thing you will want to do is to note those lines that tend to overlap each other. Such overlapping is called “confluence.” These are support and resistance values that you want to watch closely.

Next, you want to pay more attention to those support and resistance levels that were produced by the more recently formed range. As a matter of fact, it should be the range that price is currently retracing.

For example, if price were currently moving down from a top, then the most recent range would be from that top down to the last bottom. If current price is already lower than the last bottom, then price has already exceeded 800 of the recent range and you will need to use the next range prior. Defining which tops and bottoms constitute a range is a completely different subject altogether, as you need to get into “scope” and “waves.” I will leave that for another time.

Now what did Gann mean in the quote mentioned earlier? Say for example that you have divided a decent price range by eight. How might you use this as is? Gann was saying that if price were to move to the one-half point (50%) and eventually break beyond it, that price would likely continue to the next [ division.

The best way to visualize the effect support or resistance has on market prices is to consider an office building with many floors. Now, if a large metal ball were to be hurled down from the sky towards the top of this building, it is likely to break below the roof and several floors before finally resting on one of the floors.

How many floors it breaks through depends on a few things, such as the thrust, mass and strength of the floors. Was the floor that the ball finally rests on stronger than the previous floors? Possibly, but that alone was not what stopped the ball from falling further. The floors above had “slowed” down the momentum of the falling ball to the point that the final floor was able to stop the failing. This is much like how support price zones work in the marketplace.

When price breaks below a support price level, it usually will move to the next support level and test it. Knowing this is very important to an analyst. If it still fails to hold price, it will usually drop to the price support zone below.

At times, I have provided the public with two or three of these support and resistance price zones. It soon became evident that many traders are not aware of their proper use based on a few comments it would generate.

A recent example would be the T-Bond market. Here I provided a support price of 89:03, then 88:19 and finally 87:08. For the uninformed (or uninitiated), this might have resulted in comments that no forecast is really being made. The problem here is that some want everything handed to them on a silver platter without any work at all on their part. Sorry, but I am not in the business of baby-sitting (except my little 4-year old daughter.) Educate I will do though.

Bond prices were dropping at the time, and went as low as 89:06 and bottomed out, followed by a rally. The bottom it made at this time was only 3-ticks off our 89:03 support zone. That is quite acceptable and close enough. At some time in the future it will be taken out in favor of even lower prices. The previous support zones may or may not apply at that future time. All depends of course on the most recent ranges soon to form. Now, if price were to drop below that first price zone, we would then have looked to the next one. This certainly helps if we were looking for a place to buy.

For example, if we had a support value of 250 in Wheat, and the next one at 241, and price were to move down to 246, would you want to buy at 245, 244 or 243? With price likely to drop to around 241, you would expect price to drop a few cents more rather than try for it at mid-distance. As you get better at solving for support and resistance, you will soon get familiar at how close certain markets get to pre-calculated price levels. This is yet another way to isolate the zones of importance.

My favorite use of price zones is in conjunction with “time” zones. For example, if price happens to be moving up from a newly formed bottom (a rally) in a down trending market, I am going to want to take the most recent price range and get many price zones. It is expected that a rally top will form at one of these. Now say that price reaches the 37.5% resistance price zone without breaking above it and closes. Without using “time,” I could plan to short with a stop-loss a few ticks above this zone. If wrong and price goes to the 50% or 62.5% zones, I will be stopped out and can try again later.

However, what if I am using “time” and it is not for at least a couple of days? Then the probability would be high that price will continue up to one of the higher levels to form that rally top within the expected “time” zone. Here, it does not matter how many lines are on the charts, does it? It only matters which ones price is around come the expected “time” day. Using “time” along with “price” increases your odds of discovering where a top or bottom will form.

We have discussed the importance of using ranges of decent size for calculating static price zones (support and resistance). We have discussed how the overlapping of these zones add extra credibility to a price zone that price will be resisted at that area if and when it gets there.

We have also discussed how the mid-price areas between these price zones would be better left alone when deciding where to enter, expecting that price will reach closer to your pre-calculated areas rather than in mid-flight. Finally, we have discussed how “time” can greatly increase your odds in discovering which price is likely to produce the price reversal.

Gann once said about the 50% division of the highest price in a market it’s the “balancing point because it divides the range of fluctuation into two equal parts.” He stated that it would act as resistance to rising price and support to falling price. Furthermore, he said “The wider the range and the longer the time period, the more important is this half-way point when it is reached.” You can make a fortune by following this one rule alone. A careful study and review of past movements in any Commodity will prove to you beyond doubt that this rule works. . .”

Yes, you will have to prove that to yourself. Also, take to heart the words “careful study and review.” There is so much to learn in price analysis. But if you have an open mind, a real desire to learn, and put in the time to do so, many doors will be opened to you.

“Plan Your Trade, Trade Your Plan” Mark Pennings

“Plan your Trade, Trade Your Plan!” This was the advice I heard from a professional trader when I first got started in this business. At first, it didn’t make much sense to me, but after a couple of trades it began to sink in.

Most of the successful traders I have met all seem to have this basic philosophy. They have learned that they must plan every trade before they ever think of entering the market. And once they are in the market, they must stick to that plan. “My best trades are the ones that I have planned well in advance, and I don’t deviate from that plan once I’m in.” Proclaimed one floor trader I spoke with.

The most successful people in life have a solid plan for how to achieve their goals. This also holds true for most successful traders.

Successful traders set their projections before they ever get into a trade, and when the market gets to their projection, they have no hesitation on getting out of the market. Now if the market should happen to go against their plan, they are also prepared to take their loss.

One of the most important aspects of being a successful trader is how you take losses. Every trader is going to have losses, that’s a fact of trading. It is accepting that fact and dealing with it that will separate successful from unsuccessful traders.

I have seen traders that will literally hold on to a losing position, until every penny they own is gone and they are forced to get out. This is no way to trade. Every trader should trade by the philosophy “the more experience you obtain trading, the better the trader you will become.” There will always be another trade tomorrow, and that trade may be the one that makes your entire year. Always keep faith in your plan and try not to deviate too much from that plan.

Real Success Daytrading Video Course Questions - Randall Small

I’m relatively new to CTCN but really impressed and enjoying the newsletters and website. Keep up the great work.

I ordered and received the Real Success Methodology package and software. I contacted your office shortly after I received the package with a question regarding the location of the recommended targets/stops on your website.

I was pleasantly surprised and impressed when you called back the next day with the info.

In any event, I’m starting to really study the tapes and method and have some questions:

1. In your Tapes, you rely on 5-minute charts and in the manual, you mention that now you use 1-minute charts as much or more than the 5-minute charts. How do you set up the various 1, 5, 15 and 30-minute charts in trade station? Do you have only one chart window open, switching from 1, 5, 15, and 30-minute charts; with most of the time in the 1-minute mode, or do you actually have four different charts open in the workspace?

Editor Comments and Answers: Many clients still use the 5-minute chart, but we are working more and more on using a 1-minute chart and also blending and merging a 5-minute, 15-minute and 30-minute chart and occasionally switching back and forth while online between the four charts but concentrating on the 1-minute or 5-minute bar chart. As you know, our original Real Success Video Tape Trading Course used the 5-minute bar chart exclusively.

The exact procedure for blending all four together is included in our new Real Success Video Course, which we are now taking early reservations on. Until you get the new trading course stick with the 5-minute chart by itself as taught in the original trading course.

Until you upgrade to the new trading course, try experimenting with the four charts on the fly while mainly trading the 5-minute chart and the CTCN original RS Methodology.

When you use the 1-minute charts, do you treat them the same way you do as the 5-minute charts in the tapes i.e.; with respect to all the rules regarding swing highs and lows, support/resistance, bands (Keltner or Bollinger) etc. In other words, do you trade off the 1-minute charts the exact same way you trade off the 5-minute charts in the tapes?

Answer: Yes, all the charts are treated the same way with respect to Retracements, Swings, etc. However, the 1-minute or 5-minute charts are the main ones to use, one or the other as the primary one. The main difference is if using only the 5-minute you do not look at the 1-minute, but if using the 1-minute as the primary chart you also look at the 5-15 & 30-minute charts. That’s the Chart Blending Method we cover in the updated video tapes and new trading manual.

3. I’m also interested in some real practice. Anybody with Omega TradeStation ProSuite 2000i has access to quite a bit of data from the history bank CD and .com resources (daily data of course). If you were simulating trading, and chose a market other than the S&P, what’s a reasonable way for selecting a stop/target value (realizing this is practice and keeping it simple)? Percentage daily range, percentage of margin, etc. What would you suggest and be easy?

Answer: If you want to look at other markets and employ good stops and targets, I suggest you use Drawdown Minimizer Logic (free report is at

But to keep it simple, I would use targets/stops approx the same as the suggested SP ones we update from time-to-time listed at this sister website

4. With regard to choosing a broker with the e-mini in mind. My understanding is that all e-minis are traded on Globex2 unless larger than 30 contracts. If that’s the case does it really matter which broker you use since the order will be routed through Globex2 regardless (excluding differences in web-pages, etc. - I’m thinking mostly about efficiency of execution).

5. Speaking of commodity brokers – when you stopped trading the e-mini in December to seek more reasonable commissions, did that mean the mini is not profitable or only marginally so with $20 commissions – even considering the 14 in a row successful trades? The lowest commissions I’ve seen is $8/rt including fees; hence question #4.

Answer: As far as futures brokers go, most online Internet brokers offer very similar speed and service. The reason I had trouble making money even with 14 wins in a row last Fall is because I was paying $15 RT and also had too much market order slippage on both entries and exits. I will be soon trading at a new broker at a lower commission rate. The lower rate will help a lot since the e-mini tick value is so small.

6. When trading the mini; at the end of the day do you leave the data collected from your real time provider or download from some other source, and do you ignore all but the regular trading hours or include the off hours.

Answer: I ignore all but the daytime trading hours 7:30 AM thru 3:15 PM Chicago Time. I start the data feed and my Omega 2000i TradeStation at 7:30 AM and stop after the day session closes. In my opinion, the off-hours trading is very light and choppy and not worthwhile tracking or trading. Perhaps in the future it will improve, but at this time it’s too lightly traded to be of much value.

7. When trading the e-mini, do you usually use a Market Order like on the Tapes, or a limit order whenever the particular signal conditions are met (penetrations of swing bars, confirmation bars, channel, resistances/support and trend lines etc.)?

Answer: We normally only use Market Orders which I feel is better and also has less slippage in most cases, or even occasional positive slippage! This is when the market is very fast and moves both positively and negatively in a matter of seconds. Sometimes the negative Retracement means we can get in at a better price, lower if buying or higher if selling.

8. Conversely, how do you get out of the e-mini trades, Market or Limit orders? Realizing that the difference between market and limit orders is substantial when phoning orders in (like in the videos), there must also be a difference in electronic market and limit orders and which one works best.

Answer: Again, using mostly Market Orders. The main reason is we can get out so quick with the Internet Orders, only a matter of 4 to 7-seconds on average. This compares to waiting 1 to 3-minutes in the past with phone orders.

9. With the slippage, you mentioned in the last response to the question regarding the profitability of the 14 in a row winners you had. Assuming the following and please correct me if I’m wrong (re: e-mini).

a) Minute move=l tick=25pts=$12.50 and
b) Your stops of

200pts=$100.00, and
400pts=$200; as well targets of
225pts=$112.50, and
550pts=$275.00: conservative, moderate & aggressive respectively.

Answer: We just updated the suggested stops and targets, something we only do rarely as we don’t want to optimize and curve-fit these numbers. Go to for the latest stop-loss and target price info

10. What do you estimate is your slippage (approximately) under the various conservative, moderate, and aggressive market conditions and again using which type of order (limit-true slippage or market-incurred slippage)?

Answer: Normally trade slippage is approx 1-tick regardless of the Mode. Sometimes more, sometimes none, sometime even positive slippage on both targets and stops! This is slippage regarding the fill price, the fact it’s difficult to get the last price, as you normally pay one tick more if buying and 1-tick less if selling.

Usually it’s appropriately 1-tick slippage both in and out. However, sometimes we manage to get Positive Slippage. During those 14 consecutive wins, we basically had zero positive slippage and the average real slippage was sometimes more than a tick. That was unusual as the real slippage is normally somewhat less and sometimes we get positive slippage on at least 2 or 3 out of 14 trades. Sometimes positive slippage makes up for normal slippage.

11. Also, have you had a hard time showing a profit with 14 winners in a row, how can less-experienced traders have much of a chance? And does the slippage and relatively higher commissions of e-mini make it tougher to make profits than the more “professionally” traded big S&P. I ask this question because it seems a reasonable plan to study and practice this method until one gains enough confidence to eventually trade with real money; then begin with the e-mini and graduate to multiple mini contracts or to the bigger regular S&P. But if the e-mini is too inconsistent, well what?

Answer: We still do not recommend multiple contracts on the e-mini, as the commission is still too high compared to the full-size contract. We suggest learning with the e-mini SP and then “graduating” to the larger contract, where the commission is much lower, by comparison.

Another factor is the fact Round-Turn Commissions have come down approx 50% at some firms since I wrote about those 14 straight winners. There are commodity brokers with R.T. rates of $10 to $15 or less, vs. the $15 to $30 or more, most were asking several months ago. With e-mini commissions dropping, we are getting near the time where multiple-contracts are more feasible.

12. Does an Omega TradeStation versions of your Drawdown Minimizer Logic exist?

Answer: Sorry, not ready yet. My programmer tells me it will several more months before he has time to finish it. I will let everyone know when ready with an Ezine via our Microsoft ListBot opt-in list. DML has great potential to improve the overall methodology, especially with regard to stops and targets being scientifically calculated and based on sound principles.

13. Bear with me on these questions, they’re somewhat cumbersome I know, but you probably get the idea. Is it possible to successfully trade e-minis or for now would you recommend sticking to the full-size contract.

Answer: No problem at all. Yes, the e-mini SP can be traded profitably but normally for only small profits. By the way, there is noting at all wrong with “small profits,” as long as you are trading well and also consistently, and with comparatively low risk and stress!

In fact, our goal in trading the mini contracts with the new Real Success Methodology is to try for fairly small but consistent profits. In the tapes we refer to expecting reasonable but small profits of perhaps $100 to $200 per day. We think this is achievable without excessive risk and lots of stress. Of course, even small profits are not and can not be guaranteed, and results will vary and profits are never assured.

For larger potential profits,I suggest you switch to the full-size contracts after you can prove to yourself you can trade the mini, especially regarding more than 50% winning trades. We also suggest using the e-mini to learn our new Real Success Method.

Vendor Problems – Phil Borsook

Four-years ago, I agreed to try software by a company called “Prophet Info Service.”

This software did not work for me. Therefore, I called and spoke to them and told them to discontinue this trial-package. They said it would not be necessary because they would not charge any further monies if I did not access the data from then on. Accordingly, I did not.

In fact, without my permission or knowledge, they continued to charge my Visa card for almost 4-years for a total of over $1,000. When confronted, they would only issue a credit note for a period of 2-months.

They renewed my unwanted subscription for years without my knowledge and without sending me a confirmation letter of these charges at least once a year. This is patently an abuse of the privilege of using credit card. It is obvious I was ripped off for a great deal of money and it appears that I do not have any recourse. If anyone has suggestions as to how I can recover this money, I would appreciate it. Doing business with unethical companies such as Prophet is dangerous to your pocket book.

Editor’s Comment: As soon as you notice charges on your credit card that shouldn’t be there, you should first contact the merchant and then the credit card company (800# and address on bill) immediately and put a stop to the charges. I don’t know if you would have any recourse now since it was going on for years. You have to contact the credit card company promptly for a refund of charges. It’s possible the vendor may be delaying you contacting the credit card company to stop the charges.

Incidentally, I have read the article by Eric Lippert and I know whereof he speaks. I purchased a Candlestick program from Gary Waggoner and used it for a short time. Then a glitch developed in our computer and we were required to reinstall all our programs. We could not reinstall the Candlestick program and we called Greg Waggoner’s office.

We were told that the program could only be installed once. Therefore, we would be required to purchase a further program for $495. This was ridiculous since no other program we are aware of will allow only one install.

We called his office again more than six times and we were given more than six different excuses by his secretary. She said he would call back but he never did. We never spoke to him again and were never able to use his program again. There are many legitimate vendors of software and we have bought and used a great many. They are ethical and very helpful, but Gary Waggoner is allegedly the exception. He allegedly gives other vendors a bad reputation.

Has Hell Frozen Over? – Mike Nagel

On Pg-19, of the last issue, the editor mentioned the “Daily Hell dealing with PC Quote (and its working within Omega’s TradeStation 2000i).” You mention also, how you changed from PC Quote to DBC e-Signal. My experience in summer’99 parallels yours with a twist.

During the summer of ‘99, hot with my Omega TradeStation 2000i, I signed up for the PC Quote Hyperfeed 2000. Their web site claimed they never lost any data. Friends claimed their speed was faster than DBC’s eSignal. I signed up over the summer, and soon experienced what seemed an endless series of dropped signals and PC Quote server failures. I had to laugh... if they never lost any data; perhaps it was because they hadn’t the reliability to send any data. In frustration, I cancelled my PC Quote account and opened an eSignal account. Then, guess what?

Three weeks ago, I cancelled my eSignal account and went back to PC Quote! During my three months of subscription with eSignal, I found that my real time feed was being dropped sometimes up to 5-times within a morning 2-hour trading session.

Too often, when I’d try to reconnect, the server wouldn’t allow me. In addition, the speed of the real-time data was slower than the data provided by a vendor-trading platform routing to my PC Quote data. In all, I found their service poorer than PC Quote. (Spending 40-min on hold to speak to a DBC customer service person to terminate my account also is indicative of their commitment to providing a quality service.)

Editor’s Note: My experience was the opposite regarding re-connecting if the phone line disconnects. I found it virtually impossible to manually re-connect to PC Quote but E-Signal re-connected most all the time and automatically.

I would not have given PC Quote another try, had I not received an email from them addressed all present (and former) Hyperfeed 2000 subscribers. The email acknowledged that they had had poor performance and service, and it announced that they had significantly upgraded their servers to support the Hyperfeed 2000 product. For several weeks now, I have had a flawless connection (using as always, a 56K modem and connection). No dropped signals, no server failures.

Surely, eSignal vs. PC Quote as a real time data provider is an issue that will remain undecided. However, in the interim, I wouldn’t rely on any conclusion whatsoever.

FYI ... At a trade presentation, a DBC signal rep mentioned to me that, yes, PC Quote was an excellent service. However, he said they were thwarted by a lack of capital to invest in their infrastructure, i.e. T3 lines, servers, etc. But that’s just hearsay.

Online Futures Trading – Analyst

I tried XpressTrade and found the results (slippage) to be better than what reported with Lind-Waldock’s Lind-Online. However, I also experienced horrendous delays in confirming trades - minutes count at this level and waited over an hour more than once to receive electronic fills. The price was at my order price, but I needed to be out, and blindly entered market exit orders when I didn't have proof I was filled, more than once.

I switched to ZAP Futures, which is truly amazing in speed. Commission for me was $28, and service was excellent. My only complaint is that there are separate screens for order entry, parked/pending orders, working orders, and filled orders.

Here, I found it a tedious task to follow up every trade with certainty that all the appropriate stop orders were cancelled when a profit was taken, or all the number of partial fills and multiple lots added up. I lost thousands one day walking away from the screen thinking I was flat and clear, when a single unaccounted for SP stop remained open on a volatile day.

The very simple solution to keeping track of your account is to call the trading desk and verify when you are done trading, that you are flat (all positions closed) and no open orders are working. They recommend this when you set up your account. Do it every day. Also have discussed my experience with other ZAP traders, and without exception, they have been 'surprised' a time or two to learn of an open order or even an open position. Even with the color-coded Red sells and Blue buys, it can be confusing to sort out.

I have not written to complain and whine however, for I have stumbled on the answer. A trading interface called BEST DIRECT displays open positions, and working orders, all on a screen you enter orders from. Any open positions are displayed with current real-time PAL value, and any open orders are in bright green until filled or cancelled. This sounds great, and yes, the high-speed fills are comparable to ZAP fills, but the real news is in the trading cost.

The BEST software is headed with PFG icons, but others use their system as well. Reifler Trading is one of them. Reifler is charging $10-trade, including all fees. Without fees, their commission is even less. How can they do it? I don't know, but Liz Baldwin says they are making money; she's a 20-year trading veteran and a key person at Reifler.

The story behind the news is what she told me got all this started. They wanted to put together a package that small size traders could use at the cost of less than one TICK. The e-mini S&P trades in 1/4 points, and is worth $50/pt, so one tick is $12.50. At a total round turn plus fees cost of only $10, you are already PAST the break-even point on the first tick the market makes in your direction. I can't tell you what a revelation this makes psychologically for trading real-time. I had my first ever week of 800 winning trades. I profited on every single one, averaging 4 positions a day. This will transform your trading more than any system; self help trading book, or broker/online high tech order entry system.

Appreciative comments have been made on Joe Ross' books on daytrading and his down to earth comments on taking an immediate partial profit to pay for the cost of the trade, and moving your stop to break even. Ross writes how the profit taking makes for a psychological advantage. Reifler brings that point to the first moment. Best Direct lets you see it clearly, and without tedious accounting or confusion.

If you really want to trade, stop calculating and accounting. Stop losing money at break even. Stop hoping the market will move 4 ticks so you can sell the first contract just to pay for the cost of a two lot, and still lose money on a break even stop because of trading fees.

Reifler is 1/3 the price, and better software. If anyone should be mad, it should be me. I do NOT work for Reifler, nor am I related to anyone there. I'm just a passionate trader who found something that has made all the difference. Good trading. Tell them Dale sent you.

Everyone seems paranoid, about real identities. There are enough kooks out there to merit this, but I don't have any real concern. I am trading with Reifler now, not Zap. Zap did a superb job, but in this insane world of escalating technology, they are outdated in only 6-months, after being the cutting edge.

Editor’s Comments: I’m just curious as to why you don't want to use your real name. Are you afraid of ZAP being mad or what? However, an excellent and informative article. I closed my account at ZAP, one reason being they seemed to be fairly non-competitive with the low e-mini commissions available elsewhere, as you also found out. Of course, we realize low commissions are not the only issue of importance, but it sure helps a lot, especially if you can find the same level or speed, service, communications and responsiveness from the brokerage firm and employees.

Broker With Reasonable Commissions - T. S. Bollmann

I was one of the original Real Success Methodology subscribers but opted out because RSM hit a dry spell right after I started using it and I could not afford the optional TS Compatible Software. For longer then I care to remember, I have been studying daytrading the S&P-500 and was using OR's WallStreetAnalyst SE/RT charting software, a freebie from BMI. It did everything TradeStation does except for all the bells and whistles.

Unfortunately, the Y2K bug got it. Since the first of the year, I have been looking for an economical alternative to TS. Tried Investor – R.T. from Linn Software for a month. Integrated nearly every data vendor out there, a big plus. Very good support but program is unstable and not very well organized.

Presently trying out Ensign. Just started. First impression is promising. Ensign is setup for eSignal, BMI and DTN. I have not approached them on integrating myTrack Internet data feed.

My biggest problem though is pulling the trigger. On paper I am doing fine. I have to make a decision very soon on how to support myself if I can't pull the trigger. Maybe instead of investing in software and Real-time data feeds, I should see a psychiatrist. Reading about it is not doing the trick.

Got stuck on Pg-17 of issue 51 until today. I wonder if you have run across Field Financial Group, Introducing Broker for 1st American Discount Corp. Website and Respectively, commissions are $3.78 for the e-mini's and $7.98 for all others. The order entry software looks even more user friendly than LeoWeb. I have not had the time to open an account with them to check it out. Hope you can comment on this issue.

Have you looked into the Internet myTrack data feed of It is much more economical than eSignal. It looks like Investor/RT of Linn Software is the only software provider that has incorporated this alternative into their software. In searching for a more economical alternative to TradeStation,

I ran across Ensign again. Unfortunately, they have not incorporated myTrack. May be some pressure from you would give them some incentive. It would be the most economical way to trade the e-mini $20 for myTrack + $25 for interface of myTrack with software (at least that is what they charge for the (RT interface) + $30 for the software, or total $75/month. Can't beat it! myTrack appears to be 4 to 5 seconds faster then BMI cable. Another plus. Looking forward to your valued comments in the Newsletter.

Editor’s Note: We are still in the process of researching commodity futures brokers and trying to work out a special offer for our clients. One consisting of great brokerage services, plus low commissions. Thus far we are leaning toward Alaron in Chicago but nothing firm has been worked out yet. We are trying to negotiate $15 R.T. or lower, Internet trading commissions.

Previously we suggested ZAP Futures. Though their Internet based trading software was excellent, commissions were thought to be too high by both ourselves and traders club members. ZAP typically quoted commissions to our clients of $23 to $28 per round-turn.

Keeping an Open Mind - Rick Ratchford

Do you have an open mind? When ideas and concepts differ from what you currently accept as fact, do you quickly dismiss them? If so, then this is likely to prevent you from learning that which you need to know.

To be successful in trading requires having an open mind. There is no single right approach to trading. There is only what we believe to be right or wrong.

Take for example a seminar dealing with a specific approach to trading. If just half of the people attending such a seminar actually learn a great deal that benefits their trading, what can be said about the half that did not? If you were to ask them, would they not point to the seminar’s material as being at fault or valueless? Most likely, they would.

However, if this truly was the case, then how would you explain the other half that actually benefited from the material presented? Again, if you asked the half that did not, some may reply that it wasn’t the material at all, but that those people did it all themselves. This would be true to the point that they effectively utilized what they have learned to some degree that had a positive affect on their trading. If they weren’t doing as well until after receiving the training, then of course this fact should not be ignored. So what about the half that did not?

Quite possibly, they have their own ideas about trading and are not open to suggestions that require some degree of change from their current beliefs. Without an open mind, the door to wonderful possibilities and trading success may never be opened. Therefore, if a trader currently falls short of their ideal of success in trading, then it becomes essential that the trader realize that change is required if to improve. To change requires modifying ones beliefs.

My trading concepts are my beliefs. Everything you’ve been taught and believe to be fact is your belief.

What is a fact? It is simply something that depends on some assumptions and your perspective, all based on your current beliefs. If you don’t agree with the assumptions and perspective another is using to prove something a fact, then at the moment, it may not be a fact to you. Obviously then, it would be to your benefit as a trader to be more flexible and open minded, accepting that facts are based on beliefs that can be changed, thus changing the reality we see ourselves in.

What is fact, my belief is that we each see reality differently. Why? Because our beliefs are different, thus our outlook on life is different, our opinion about books, movies, people and so forth are different. It is the same book, movie, and people, but we “see” things differently although subject matter is the same.

That a God exists is a fact for millions, as well as there, not being one. Yes, there are some obvious facts that most can agree on, such as water being very important to sustain life. Yet, we may differ on what degree such importance has on human life. Once we understand this about the connection of facts and our beliefs, and accept it, we can then start to open our minds to possibilities we previously shut our minds to.

When something differs from what we hold to be fact, instead of just dismissing it or ridiculing those who find value in it, consider if there is any chance that this information may prove to be a valuable belief to have. By asking yourself this every time you come across information that is not part of your belief model, you may find yourself open to new ideas and concepts that start to enhance your understanding of the markets and trading.

Closed-minded individuals consider what they “believe” to be facts. That is why it is hard for them to “see” the markets in its various forms. Ever know a rigid long-term trader that can’t see the trees within the forest? The short-term trader who sees the trend moving down in a market that has been appreciating more than 10% a year?

Our perspectives are based on our beliefs. If in reality we are not satisfied with our trading results, which is based on our current beliefs, then such beliefs must change if we are to alter our perspective and improve our reality. Change requires we alter our beliefs, which requires that we be open-minded to allow this to happen.

There are many excellent books on trading. Each book differs from another, because the perspectives are different. An excellent example of this is the book called Market Wizards. The traders interviewed are considered by many to be successful (this is again their perspective or opinions), yet their viewpoints in trading all differ. What lesson can be learned from this? That there is more than one-way to skin a cat (to all animal lovers, this is just a metaphor).

I’ve written several articles dealing with the psychology of trading. Obviously, it is my belief the subject is very important if we want to do well in the markets. My beliefs about the psychology of trading is molded by the many works I’ve read on the subject over the years from people I consider more qualified than I am. If my mind were not open to this, much in the way of valuable advice would have been lost on me. Many mistakes would have been repeated (still repeat a few of course), and my perspectives about the market would be extremely narrow and counter-productive.

“A man without an open mind is likened to a car in snow without tire chains.”

What do you currently believe about trading and the markets? Write them down. What are your objectives in trading? Write those down. Do you believe that your current beliefs are fulfilling your objectives? Be honest with yourself. Doing otherwise will only hurt you and nobody else.

Determine what kind of trader you want to be. Determine what kind of trader you currently are. What is your current preferred time frame for trading? Does it feel natural to you? In other words, are you trying to trade long-term while the pressure within you wants to trade everyday? Or are you trying to trade everyday when you know that a longer-term approach would be less stressful for you? Only you can answer these questions. Be open to the answers your mind is likely to provide you.

Just as long-term trading is not necessarily better than short-term, and vice-versa, there isn’t one method or approach to trading better for everyone over another. Keep in mind if half a classroom of individuals is able to improve their trading from the information they received, just because the other half fails to “see” what they see does not make it worthless or invaluable.

The next time you become critical of another’s approach or beliefs about the markets, ask yourself if it appears to be valuable to some others. This single point alone holds out knowledge that the world around is much bigger than we might be allowing ourselves to believe. Have an open-mind to viewpoints of others, which will help you reach your trading goals that much sooner.

Getting the Swing of It

The second component favored by a Time and Price trader is of course discovering Price. The methods used to do so vary, and several are as valid as another. Trend lines, Andrew’s Pitchfork, Fibonacci or Gann Ratios, Gann Angles, Fibonacci Spirals, my Divisional Lines, and Previous tops and bottoms are just a few techniques available.

To use many of these techniques effectively, the chartist needs to be able to identify previous market tops and bottoms on his or her price chart. No doubt, some will immediately think that this is simple, and this is true.

However, as simple as it is to do, most do not really see all the swing tops and bottoms that actually exist in any particular chart formation. Failing to do this denies the chartist very important information that he or she could have learned about the formation in question.

I am going to describe the procedure of drawing a minor swing chart. It is not the only type of swing chart that you can construct. There are intermediate and major swing charts that can be constructed as well. I am going to leave the latter two up to you to investigate and study. For now, please follow along as I describe this simple procedure for a minor swing chart.

On your price chart, whether it is daily, weekly or monthly, start from the most recent clearly defined swing top or bottom to draw your swing line. A clearly defined swing top is one that you can spot easily at first glance. It looks like a mountain peak, where a price bar stands higher than those to its immediate left and right. A clearly defined swing bottom looks the same upside down. For this example, we will start from a swing bottom.

As each consecutive price bar makes a higher high and low than the price bar before it, our swing line continues to move up. Once a price bar forms a lower high and lower low than the price bar before it, our line ends at the high of that previous price bar, and then swings down to the low of our new lower low.

As each consecutive price bar makes a lower high and low, we continue to draw that line down to the new low. This changes once a price bar makes a higher high and higher low once again. We end our swing line at the low of the previous lower low and then move it up to the new higher high. Continue this process as each bar either continues up or swings down, or continues down and then swings up.

There are of course exceptions to this rule. At times, you will come across a price bar that makes neither a higher high or lower low. This is called an Inside Bar. These you must treat differently, and require waiting for the bars to follow before continuing your line.

At times, you will come across a price bar that makes both a higher high and lower low. This is called an Outside Bar. Here, two swings are forming in short order. Usually, the swing has occurred first during the forming of the bar before the outside bar. But this will not be obvious looking at the price chart because the bar before the outside bar will not have a lower low or higher high than the outside bar itself. The trick here is to note the intraday pattern to determine whether the outside bar formed its bottom or top first.

For example, say price bars have been making lower highs and lows. We then come to a price bar making both a higher high and lower low. Do we draw our line to the lower low first, then up to the new higher high? Or do we draw our line from the low of the price bar before the outside bar to the high of the outside bar, and then back down to the low? It all depends on which way price actually went from the close of the previous price bar, does it not?

However, noting the intraday prices for both price bars, you can quickly tell where the actual swing occurred and whether the outside high or low formed first. Then you can continue your line from there. One quick way is to simply note which way price moves after the outside price bar. If the next bar makes a higher high, it is likely that the outside bar’s low formed first with the high last. If the next bar makes a lower low instead, you then can assume the outside bar’s high formed first, then it’s low.

Now, once you have constructed your swing chart, and can see swing bottoms and tops where you did not know existed before, you are ready to apply some of those price methods mentioned earlier to these swing tops and bottoms. Ratios can be applied using the large as well as the small ranges created by these swing tops and bottoms. You are on your way in getting more information out of your price charts than you may have previously.

Stacking the Odds in Your Favor

Being profitable in the high-risk business of trading requires a lot of work. So many advertise their trading services as a simple way to make lots of money, and this has been the downfall of many new trading careers. There exists a few (very few) trading programs on the market which instruct you when to enter and exit a market position with annualized percentage gains on investment. They require a large initial capital base and will usually experience large drawdowns from time to time.

Most new futures traders do not fit the requirements necessary to trade this way. Thus, they must learn to make their own trading decisions in the hopes of increasing their small stake in the markets. These are called “discretionary traders.” Many desire to trade this way even if they have the funding to trade using a trading program. Because discretionary trading requires that the trader make all the entry and exit decisions, work must be done to reap rewards from this type of approach.

A trading plan is a good start for any discretionary trader. The trader needs to adhere to a set of personal rules so that each trade is not some act of chance. Trading based on chance is no better than old fashion gambling, which trading is certainly not meant to be.

Trading is not some mere roll of the dice, where you have a 50/50 or less chance of success in a casino game. It is more like a merchant of a clothing store that must make fashion decisions each quarter, and if his insight into the market is a good one, profits will be made by the sales of his inventory.

However, a bad business decision and he is left with a rack filled with clothing nobody wants and a financial loss. His success depends on properly analyzing the market environment and acting accordingly. Trading is the same.

As a discretionary trader, the task is to stack the odds in your favor for any given trade consideration. The power to do this is in every trader’s hands. Do the job well, and you will be rewarded. Try to take shortcuts due to time restraints or laziness, and the outcome may be very disappointing. So how might a discretionary trader stack the odds in his or her favor? That is what we will now discuss.

See The Big Picture

Many new traders simply want to trade quickly and often. The desire to make quick money plagues many who enter this arena for the first time. In addition, they find little time to evaluate their approach to trading before jumping from one method to another. And the sad thing is, they may have come across a method that has helped many before them, but they were passing through at the speed of light and did not get the gist of it before moving on to something worthless and costly. I have seen this happen much too often.

Discretionary traders need to understand that time and study is very important if to ever achieve a good trading approach. So many common sense approaches are ignored for the quick and dirty buck. One such approach is simply to see the big picture. This author has written several articles relating to this very subject, and for good reason. It is not only a smart thing to do; it is also something most forget or are too lazy to do.

Market patterns and trends go beyond the simple daily price charts. They exist on weekly, monthly and yearly price charts as well. An uptrend on a daily chart may exist only as an one-bar rally on a weekly chart showing a strong downward direction.

And this weekly move may exist only as a bull trend pullback on a monthly chart. If you only focus on a daily price chart to base your trading decision on, you could be entering a market trending strong against your position.

Therefore, the wise thing to do regardless of the method you choose to use in trading is to start with the larger time frame (such as the monthly price chart) and work your way down to the daily time frame.

A good example of this is the use of a daily time reversal date. If a trader simply looks to enter a trade based on a daily reversal date, it may end up as a quick blip on the daily price charts in favor of the stronger trend long-term.

Trading small reversal blips are certainly not the way to go. To stack the odds in your favor, you will want to discern first the long-term direction (i.e., Monthly chart), then note the medium-term direction (i.e. Weekly chart), and if both are in agreement in direction, look to the daily price chart to time an entry in the same direction as your long and medium-term trends.

Keep in mind that the long-term trend will carry more power over the medium-term trend, just as the medium-term trend will carry more weight than the short-term or daily price trend. As a trader looking to stack the odds in your favor, you want to get the heavyweights on your side before getting into the ring.

The quick way for those with limited time on their hands to determine the likely trend is to use a trend line. Draw it under your major swing bottoms or across your major swing tops on the monthly, weekly and daily price charts to see the dominant trend direction.

For those who wisely take more time at doing this, it is best to look closely at the different time frame charts and note whether it shows higher swing bottoms (for an up trend), or lower swing tops and bottoms for a down trend. Learn to draw swing charts (one book on this subject is called “Pattern, Price and Time” by James A. Hyerczyk), which immediately gives you a birds eye view of the trend direction.

If your monthly chart trend is up, and your weekly trend is up, then when you come across a daily swing bottom forming (especially on an expected reversal date and support price) higher than the previous daily swing bottom, you have one very powerful signal to go long (buy).

CFTC Proposes to Exempt Some Commodity
Trading Advisors from Registration

Proposed New Rule Would Eliminate Registration Requirement for Distributors of Commodity Trading Advice through Periodicals, the Internet, and Similar Media

WASHINGTON -- The Commodity Futures Trading Commission (CFTC) announced today it will issue for public comment a proposed rule to would exempt from mandatory registration under the Commodity Exchange Act (CEA) those persons who engage in the business of distributing commodity interest trading advice through media such as periodicals, books, Internet websites, electronic mail, telephone voice recordings, facsimile services, and non-customized computer software.

Under current law, persons advising others about trading commodity futures and options contracts ordinarily must register with the Commission as commodity trading advisors (CTA’s). Although such CTA’s would be relieved of the burdens associated with registration, they would continue to be subject to other provisions of the CEA and Commission rules that apply to CTA’s, including prohibitions against fraud and deceptive advertising, prohibition against the handling of clients’ funds by a CTA, and prescribed disclosures concerning the limitations of hypothetical or simulated commodity trading.

The proposed exemption is designed to eliminate the legal uncertainty that has arisen from recent federal court decisions involving plaintiffs who published standardized commodity trading advice through impersonal media.

In these cases, the plaintiffs claimed that the First Amendment protected their right to publish without registration because they did not possess discretionary control over their clients’ commodity trading accounts; they did not provide advice tailored to their clients’ particular situations; and they had no personal contact with their clients. The proposed rule, which adds a new subdivision (9) to 17 C.F.R. & 4.14(a), reflects these considerations.

To qualify for the registration exemption, the CTA may not engage in any of the following activities: (i) directing client accounts; (ii) providing commodity interest trading advice that is tailored to a particular client’s circumstances; or (iii) providing such advice through interactive communications with individual clients, such as face-to-face or telephone conversations.

Looking for Profits - Ernest Goldstein

I have been a member of CTCN for 5-years and have read the articles many times over. Whether a neophyte or a professional there are statements that many have in common. They all have the same ring. Everyone is looking for continuous on-balance profits.

Their biggest problem is not the broker or the locals on the floor or even the big traders, it’s themselves.

The very thing that attracted them to commodity trading prevents their success. Commodity trading is too interesting, even exciting to most of these participants. Because of this, their responses to feedback generated from their trading tended to be emotional rather than dispassionate and analytical.

There is always that little addendum to their comment that they did not follow their system, but rather let their intuition or emotion keep the trade on a little longer.

From my observance, the emotionally charged trader is no match for the highly competitive commodity market where profits are made from the other trader’s mistakes. I do not know if there was or ever will be a true system, but if anyone finds it put on blinders and follow it.

Answer to Editor’s Note – Does a Coin Being Flipped Have A Memory? Rick Ratchford

Below is a question you posted in one of your older articles. I just noticed it. Please be kind enough to print this reply. I believe it has educational value. Thanks.

Editor’s Comment: Sorry to bring up an opposing point of view, Rick Ratchford and C J. Casebeer, but is this really correct information, in gambling, betting or trading situations?

The issue is, if there is a continuous advance for say 9-days in a row, does this mean by day-10 the chance of another up-day is 10% or any other number less than 50%? Or is the chance of one more up-day on day-10 still 50-50, as many statistical people say is true.

P.S.: Another example is if flipping a coin and it comes up tails say for 9 straight tosses, does this mean the chance of it coming up tails on toss number 10 is very slim, or is it still a 50-50 possibility on flip-10?

Although each day left by itself could be considered a 50/50 proposition, the historical facts show that moves in any particular direction will reverse trend in a matter of days. And if we were to describe a continuous move as being made up of at least x number of days, then 50/50 would not apply at all.

Consider: If each day was 50/50 for a continuous move to end or change, could you possibly have a continuous move start everyday? Today we flip and go start our continuous move down, tomorrow we flip and go up, the next day we flip and go down, etc. Not if you want to call it a Continuous Move.

One-day moves are not continuous. Continuous moves are made up of several days in one direction. When they end, they move in a different direction. Thus, each day cannot be a 50/50 chance for a continuous new move.

Naturally, the longer a move goes in one direction, the higher the probability that it will soon end. When probability is dynamic, in that it increases with time, it cannot be described with a fixed or static probability, such as 50/50.

This is why trading is not the same as gambling and betting. In trading, with proper preparation and understanding, you have control of your odds. In gambling, the house rules.

A trader is like a merchant, who has to decide on inventory to sell. If he chooses the right inventory and amount, that which ends up in demand, he makes money. If his homework is faulty and he orders merchandise that very few want, he loses money. The risk in business, being a store owner is not considered gambling. Same with our purchasing and selling futures.

About eSignal - Todd Sprinkmann

A Year 2000 resolution was to get a new computer, get online and get back on the trading horse. The computers great, I feel pretty comfortable online and now I’ve spent the last two weeks really trolling around futures related websites. I have eSignal real-time and I can move around OK in it (but I’d love to have an experienced tutor with it behind me sometimes!) I have a dormant trading account with enough funds; all that remains is getting in the markets.

I feel like a lot has probably passed me by. Now you’ve got overnight markets in just about everything, you’ve got online trading, boy, do I need more info before I jump back in. Commodity Traders Club News was always a good place for info. I’ll be happy to rejoin via the website. There are still some things I want to read in there before I do something.

It sure looks like you’ve been busy. I see websites galore in your e-mail. I’m going to have to look up and the e-mail thing, too.

Sorry to have you come down to the news group level. Yes, it is discouraging to see that so many people can’t just be quiet if they don’t have anything useful to contribute. However, I’m trying to use every resource that’s available now so I don’t miss anything. Later, I can narrow things down to the few pearls.

I really appreciate the offer of help. I may very well take you (and by extension, your subscribers and contributors) up on the offer. Right off the top of my head, I would want more resources re: other traders using eSignal, places on the web for traders to either chat in real-time or on discussion groups, even though I realize some of those places may be lacking in courtesy, content, and/or wisdom.

Also, learning a lot more about the day-in and day-out mechanics of online trading. An added bonus would be to find some sort of place where brokers are rated and their styles described. I realize many of these issues are probably already addressed within the website. I just have been in an info-accumulating phase right now. It feels good to be getting back in the mix.

Squaring the Circle

Reprinted w/permission of Asimov On Numbers

Given a circle, construct a square of the same area - this is called “squaring the circle.”

There are several ways of doing this.

Here’s one method. Measure the radius of the circle with the most accurate measuring device you have -- say, just for fun, that the radius proves to be one inch long precisely. (This method will work for a radius of any length, so why not luxuriate in simplicity.) Square that radius, leaving the value still 1, since 1X1 is 1, thank goodness, and multiply that by the best value of À you can find. (Were you wondering when I’d get back to À?) If you use 3.1415926 as your value of À, the area of the circle proves to be 3.1415926 square inches.

Now, take the square root of that, which is 1.7724539 inches, and draw a straight line exactly 1.7724539 inches long, using your measuring device to make sure of the length. Construct a perpendicular at each end of the line, mark off 1.7724539 inches on each perpendicular, and connect those two points.

Viola! You have a square equal in area to the given circle. Of course, you may feel uneasy. Your measuring device isn’t infinitely accurate and neither is the value of it which you used. Does this mean that the squaring of the circle is only approximate and not exact?

Yes, but it is not the details that count but the principle. We can assume the measuring device to be perfect, and the value of it, which was used to be accurate to an infinite number of places. After all, this is just as justifiable as assuming our actual drawn lines to represent ideal lines, considering our straightedge perfectly straight and our compass to end in two perfect points. In principle, we have indeed perfectly squared the circle.

Ah, but we have made use of a measuring device, which is not one of the only two tools of the trade allowed a gentleman geometer. That marks you as a cad and bounder and you are hereby voted out of the club.

Here’s another method of squaring the circle. What you really need, assuming the radius of your circle to represent 1, is another straight line representing -À. A square built on such a line would have just the area of a unit-radius circle. How to get such a line? Well, if you could construct a line equal to times the length of the radius, there are known methods, using straightedge and compass alone, to construct a line equal in length to the square root of that line, hence representing the -À, which we are after.

But it is simple to get a line that is À times the radius. According to a well-known formula, the circumference of the circle is equal in length to twice the radius times À. So let us imagine the circle resting on a straight line and let’s make a little mark at the point where the circle just touches the line.

Next, slowly turn the circle so it moves along the line (without slipping) until the point you have marked makes a complete circuit and once again touches the line. Make another mark where it again touches. Thus, you have marked off the circle circumference on a straight line and the distance between the two marks is twice.

Bisect that marked-off line by the usual methods of straightedge and compass geometry and you have a line representing it. Construct the square root of that line and you have -À.

Voila! By that act, you have in effect, squared the circle.

Editor’s Comment: It’s been said by some Gann traders W. D. Gann’s “best” and most effective method involves Squaring Price & Time and Squaring The Circle. This method of squaring a circle sounds somewhat complex for non-mathematicians. It also is not perfect and has some shortcomings according to the author himself. However, he also says it’s the “easiest” way to square a circle.

All About Volatility

Reprinted w/permission of Technical Traders Bulletin

Some measurement of market volatility is part of more technical studies and trading systems than most readers might expect. Practically all of Wilder’s techniques (RSI, DMI, CSI, Parabolics, and other studies) incorporate the concept of volatility in some fashion.

Volatility is also part of various trading band or envelope studies available (Bollinger Bands, for example), and volatility is even a key ingredient of point and figure analysis.

Not surprisingly, volatility is also the basis for a series of trading systems that have been sold by various vendors since the early 1970’s for prices ranging up to as much as $10,000. All of these systems were volatility based, and all used essentially the same methods.

Most were derived from similar earlier systems, with minor changes that in many cases seem to have been added only to avoid possible copyright infringement. Many of these volatility based systems have been very profitable, as evidenced by their regular appearance at the top of the list of trading system results published in John Hill’s Futures Truth.

Popular Volatility Trading Systems

As far as we are aware, the early groundwork for volatility-based trading systems was laid by Larry Williams in the early 1970’s.

He sold at least three systems based on the same technique, each at successively higher prices (one of them was called the Million Dollar System). Welles Wilder, in his 1978 book New Concepts in Technical Trading Systems, reiterated the essential principles, as did Perry Kaufman in Commodity Trading Systems and Methods. After Williams, a number of vendors sold systems based on the method.

The best known of which is probably the Volatility Breakout System offered by Doug Bry of Lakewood, Colorado. Anyone who is interested in reproducing and/or testing any of these volatility based systems should be aware of a very reasonably priced software package (Steve Notis’ Professional Breakout System), incorporating most, if not all, of the trading logic of systems sold for thousands of dollars.

The Basics - Measuring Volatility

The volatility-based trading systems all use the concept of range to define the extent of recent market movement. The simplest definition of range is the distance from high to low of any given time. This is usually a day, but it could be a week, a month, or even an intraday period measured in minutes.

This simple definition of range works fine most of the time, but it doesn’t take into account days of extreme price movement. Limit days, for example, may have a very narrow range, but the market is obviously very volatile and volatility is increasing.

Similarly, a day when there is a gap opening and the day’s trading takes place outside the prior day’s range is an example of increasing volatility, even if the actual range of the day is less than that of the prior day.

Welles Wilder recognized this problem and defined the True Range (TR) as the greatest of the following: The distance from today’s high to today’s low. - The distance from yesterday’s close to today’s high. - The distance from yesterday’s close to today’s low.

Chart in Printed Copy

By itself, the True Trading Range is still just an isolated number. To make it meaningful, we must take a number of past days and find the mean, giving us an Average True Range (ATR). This is a direct measurement of market volatility. If the ATR is increasing, the market is becoming more volatile. If the ATR is decreasing, the market is becoming less volatile.

How many days to use to produce the “best” ATR is a matter of conjecture. Welles Wilder’s original volatility formula (explained later) uses 14-days, but most of the modern system sellers have optimized this variable and found that anywhere from 2 to 9-days was better. The most profitable (as measured by Futures Truth) of these systems, the Volatility Breakout System, normally uses only 2-days.

How the Volatility Systems Work

All of the popular volatility-based trading systems work on the principle that a breakout or price spike outside of the recent Range or Average True Range is significant and should be used as a point at which to enter the market.

For example, let us say that the ATR for the last 5-days in the NYSE Composite futures is 1.00 points. We’d be interested in a price move that is a percentage, say 150%, of the ATR from the prior day’s close. This means we would be buying or selling if prices moved 150% x 1.00, or 1.50 points. If the prior day’s close was 190.00, we would buy at 191.50 or sell short at 188.50.

The two variables of the system are:

1. The number of days used to find ATR

2. The percent move from the prior day’s close that constitutes a valid breakout.

Most of the system vendors and presently available software rely on optimization to decide which values to be used for each variable.

As you may have deduced, the basic volatility breakout system is a reversal system that is always in the market. Each day after the close, calculate the ATR, and then multiply it by the percent move necessary to trigger a trade.

Add the result to the close, and you will get the point at which a buy will be triggered the next day. Subtract result from the close, and you’ll get the point at which a sell will be triggered. Enter both orders the next day and you are in business.

Chart in Printed Copy

Comments and Variations

One of the significant strategies of the basic system is that since you are either long or short, there is no neutral area. The risk on any one trade is simply the difference between the entry point and the reversal point. If they are both triggered on the same day or very close in time to one another, a whipsaw is the obvious result. Perhaps more importantly, the risk on a trade depends entirely on recent market volatility, which may or may not agree with a trader’s wallet size or money management techniques.

Another interesting aspect of volatility systems is that the entry point and the reversal point will move away from each other if short-term volatility increases. It is easy to see how this could happen: the market moves, the range increases, and the stops are positioned farther and farther away from each other.

This might tend to reduce whipsaws, but it can also increase the initial risk on a trade after the trade is entered. It can be disconcerting, and potentially disruptive to a strict money management scheme, planning to risk a certain dollar amount on a trade and then have the amount increase once the trade is underway.

It is also possible a reversal point could be delayed almost indefinitely. For instance, let’s assume that T-Bonds are at 100.00, the system is long, and the reversal percentage is 150% of the 2-day ATR. If the ATR remains the same, the move necessary to trigger a short will also remain the same. If T-Bonds move slowly downward every day with a daily range large enough to keep the ATR the same but the short is not triggered, theoretically the reversal point may never be hit. It will just keep moving away. This is obviously a rare occurrence, but it is possible and a sequence of this type could result in large losses (and in fact, at least in test sequences, it has).

What’s Wrong With Volatility-Based Systems? We think the volatility-based trading systems are good over the short run, but limited over the long run. Their trading results often show real promise in spurts, but they also tend to give back their gains over time and in the long run may be no better than a break even system.

There are several areas of concern for us. First, all of the system vendors have optimized extensively to find the “best” values for the major system variables, Average True Range and the percentage move needed to trigger a trade.

Apparently, they assumed that once the magic (optimized) numbers were found the system would be profitable forever. Any variations among volatility-based systems appear to be minor and concentrate on only these two variables.

For example, the definition of the average true range might be changed slightly, or a simple daily range might be substituted. Or, one vendor might elect calculating percentage move from the following day’s open, rather than the prior day’s close, in order to factor large overnight gaps into the system and reduce whipsaws.

These minor variations haven’t prevented large drawdowns in the system’s trading results. In our opinion, the drawdown problems seem to be the result of two factors: over optimization, and the perhaps invalid assumption that volatility works equally as well as an exit trigger as it does as an entry trigger.

Most of our subscribers are aware of our feelings about optimization and reversal systems. We believe that optimization is purely hindsight curve-fitting, giving only the illusion of potential profitability.

Back-testing and subsequent forward testing, followed by real-time tracking, is perhaps a worthwhile and valuable exercise, but let’s face it, if simple optimization really worked, by now a few diehard computer addicts would have cornered or busted all the markets.

Suggestions on Making It Work - Filters

Despite the problems we believe to be inherent in a volatility-based approach, we still feel that these systems have the potential to be workable. There is no question that they should always be in the right direction when a market is trending with enough volatility to be worth trading at all. The real difficulty, common to most trend-following approaches, is whipsaws when the markets have no trend and low volatility. Over a long period, markets will be alternately stagnant and dynamic with most of the time spent in the stagnant mode. Similar to moving average systems, a volatility system set up for a trending market will not work well in the sideways periods.

Obviously, a filter is needed. We can suggest several. First, it is possible to cut down the considerable initial risk on each trade by creating a neutral zone between long and short entry points. The simplest way to do this is to set a percentage risk stop that is smaller than the percentage of the ATR that triggers the entry. For instance, in our earlier example we had an ATR of 100-points in the NYSE Composite, and we would buy on a move upward of 150% of this, or 150-points. A tighter stop could be set by subtracting a smaller percentage of the ATR from the entry point. We are afraid that anything less than 800 of the ATR might be classified as too close and subject to almost random whipsaws, but using a number like 125% still gives a tighter stop level than our reversal point. If the risk stop is triggered, the system is now neutral until the sell reversal at 150% is hit, or until a new buy, entry is reached.

Another possible improvement might be to avoid trades when a market is acting poorly, especially when the volatility is unusually low. There may well be “windows” of optimum profitability for the ATR of each commodity where it is within acceptable boundaries, neither too high nor too low. (See sample table below.) It is safe to assume that a stagnant market with a relatively small range will result in losing trades, while a more volatile market will tend to be more profitable. The usual impulse is to reutilize when the markets become stagnant, but it might be more profitable in the long run to sit out completely during the quiet markets and wait until the ATR becomes more in line with what your system normally needs to be successful.

A third possibility is to add an external filter, something that identifies conditions that must be met before a breakout is taken. There are at least two possibilities for this among readily available technical studies: DMI/ADX and CCI. We often mention that an upturn in Wilder’s ADX signals a market is trending. Try trading volatility breakouts only when the 18-day ADX is rising.

Similarly, a 20-period CCI based on either monthly or weekly signals will also tell you to what extent a market is trending over the longer term. Look for rapid acceleration of the CCI from its null or zero line; if this condition exists, the market is probably moving rapidly enough to make volatility based trading highly profitable.

OPTIONS & SPREADS: The Money-Eating Monster & the Jeweled Goblet Greg Donio

The tavern’s Olde English interior clashed with the Bugaloo down Broadway recorded music. Chuck borrowed a few dollars from Jim over watered-down scotch. Chuck lamented, “I developed a system to bet the horses that was iron-clad. It couldn’t lose.”

“So what happened?” “The track opened.”

The old-time Prohibitionists campaigned to close down saloons because they not only served liquor but they were regarded as centers of sin and vice. The rum barrel competed for attention against various peripatetics -- the woman of the evening, the bookmaker carrying his files in his hat, the securities peddler with satchel of gilt-edged paper.

Investment-selling laws have strengthened since then but beery mentalities have not. Blue collar and white sit on barstools and say to themselves, “The priests and philosophers live in an ivory tower but not me. I know the real world!” Yeh, right. A case could be made for the condemnation of saloons and sports bars as centers of unscientific thinking and rehearsal halls for make-me-wealthy clown shows. Just because three-shell-games and counterfeit stock certificates are no longer blatant on the table-tops does not mean much has changed.

With all due respect to the friendly bartender and the foamy, refreshing lager, public drinking establishments have a way of being part ivory tower and part bad filter. In the early 1800s, Dr. Samuel Hahnemann developed homeopathic medicine, based on his theory that “like cures like” if given in tiny doses. It was controversial at best but at least the mildness of the tiny doses improved on the poisons, purges and vomits with which the rival allopathic physicians attacked the human body at that time.

Mark Twain wrote that homeopathy revolutionized medicine by forcing the allopaths who condemned it to come up with things more rational. Alas, it degenerated or passed through a “bad filter” at the folk medicine level. To treat a case of rabies you used “the hair of the dog that bit him.” It degenerated worse at the saloon level. The “like cures like” theory became a handy excuse to drink more. Problem drinkers and men looking to cure hangovers would ask the saloon-keeper for “the hair of the dog.”

Now as then, the process worsens on the subject of money. Financial information gets mangled, wrong theories popularized, and bad tips worsened as they pass from barstool to barstool. You can’t lose if you buy stocks and put them away. You can’t lose with commodities if you invest seasonally. That options a sure thing because its underlying can’t possibly . . . My barber cuts the hair of J.P. Moneybags and he said - My brother-in-law … the one whose shop went broke, told me about foreign currency options. That chain of tattoo parlors is expanding and selling IPO shares. In a few years, everybody in America will be illustrated from top to bottom.

The trader smart enough not venture money on the basis of handwriting-analysis or a horse parlor tout or the skirt-length theory of stock fluctuations cannot possibly be immune to every thing that is said. He seeks continually to grow and expand his knowledge and it is impossible not to take in some rubbish with the mental nourishment. He would laugh at a carnival swami gazing into a crystal but has no sure touchstone around people whose claims to being worldly-wise vary in validity.

More unfortunately, much good information gets filtered out on its way to the tavern or is just plain ignored there. The whiskey-colored “hair of the dog” had a cure rate of zero among firewater victims but facts never dimmed its popularity. Mountainous losses among horse-players are seldom mentioned with any candor there because hope and optimism mix liberally with the gin and vermouth. Likewise, when the talk centers on trades and investments, tonic fills the air as well as the glass -- the excitement of tomorrow’s alleged abundances!

Be the pirate. Drink up the rum today and scoop up the gold doubloons tomorrow. This is hardly a setting in which one mentions the various 90 percents: The percentage of futures traders who lose their skin, of out-of-the-money options that turn into scrap paper, IPOs and bulletin board shares yielding teardrops not dividends. Talk of spiced winds and full sea chests. Did you lose in the past? Hair of the risk-trade pooch will cure your financial ills.

My specialty is option spreads, which I think of as the profitable coffin warehouse between Fogarty’s Sports Bar and the Crystal Decanter Cocktail Lounge. Spreads make gains off other people’s money and transfer most of the risk to other people. Thus, they produce cash on the casket lid from the hangovers, teardrops and corpses generated by the places next door. With risk trades as with distilled goods, people look at a full glass and see only delight, despite all the world’s experience with bitter dregs libational and monetary.

Yet somebody always profits from the “Gee, that’s too bad” that follows. Also from the “Some people never learn!” factor. In Great Britain of centuries past, pickpockets were routinely hanged at public executions. Meanwhile, pickpockets routinely operated in the crowds of spectators. Obviously, what was happening on that platform did not impress them much. They did not get the message or the lesson no matter how powerful the delivery. If you think of those “90 percent” futures and options loss statistics as financial public hangings, vast numbers of speculators are likewise unimpressed until they themselves go to the gallows.

Thus spread strategy amounts to casket-making-for-profit amid a milieu of “Never die!” optimism. Pour a drink of perpetual blue skies and write a check to broker for everlasting wealth. This article comes down rather hard on public drinking establishments, yet you need not be inside the Happy Hour Tavern to get snared by that type nonsense, some of it well-disguised. Verbal moonshine proliferates everywhere like so many hidden stills.

Thus, beer truckloads of hearsay and misinformation travel anywhere. “Casino stocks and their underlying options are going to make spectacular comebacks.” So, do sales pitches with sincerity added in the retelling. Just as a used car buyer before the first breakdown can sound more enthusiastic than the seller, so can a neophyte trader sound more excited than a hard-sell broker or promoter.

Bad cures bodily and pecuniary can float far beyond the whiskey barrel, such as trying to make up what you lost by throwing good money after bad. So, can ivory tower theories that fail in the real world but survive like dingy booklets on occult candle-burning. “Nobody loses on gold” or “You’re sure to win on rebound if you keep averaging a loss.”

Facts get mangled into fallacies when passing between barstools, but also between smoking room chairs, pinochle hands and Web computers. “W. D. Gann said in 1965 to trade against the trend.” Interestingly, he said the exact opposite before his death a decade earlier. Old scams once as tattered as a bartender’s wipe-rag undergo laundering and starching for new heavy duty. Another Ponzi schemes? The old gyp goes Internet? Day-trading is a more recent strain of wood alcohol currently piling up corpses.

Like the fruity aroma of brandy in a snifter, the sweet scent of optimism spreads through every alcove and ante-room of speculative trading. One could cite the dictionary definition of “optimism” but this particular distillation of the word better fits the definition of “conjecture”: “inference from defective or presumptive evidence.” Thus, too often the trader is a pickpocket who infers fast future riches and defectively does not see the evidences of his hanged forerunners and cohorts.

I think of speculative trading as poison which, in daydreams and visions of tomorrow, promises to produce immense throngs of millionaires but which in actual practice does a rather bloody and extensive job of making sure the world does not teem with millionaires. I would not involve myself in it but for the advantage offered by spreading.

Spread strategies are the homeopathic dilutions, which can render the venoms medicinal. If homeopathy was always controversial, even its enemies and skeptics admitted that it watered down plenty of very deadly stuff, also halted much bloodletting and leech medicine.

If the above lines make trading sound Medieval, they are also intended to make spreading sound real-life alchemical. Imagine that you buy a jeweled goblet worth $5,000. Mind you, I did not say that you paid that much, only it is worth that much. Imagine that buying it gives you the right to create and sell a slightly smaller jeweled goblet for $3,500. The money from the latter sale is credited toward your purchase of the $5,000 item so you pay only the difference of $1,500 to own the original goblet.

Is there a guarantee you will profit? No, those wares could go up or down in value. So what advantage have you gained? Whoever bought an identical large jeweled cup but without selling one paid a full $5,000. Whoever bought the one you sold paid $3,500. Your investment of $1,500 is much less than either of theirs. You risk far less cash than they do because (drum and trumpet fanfare) this spread strategy uses mostly other people’s money.

Now hangs a second set of banners at the royal banquet table for the following reason: The spread transfers most of the risk to other people. That you hazarded less than they by putting up less is merely page one. Let us say that the original wine-vessel slips in value to $4,000. Alas, $1,000 worth of bad news for the $5,000 player. Let us say the other one drops to $2,000. A loss of nearly half for you $3,500 ventured!

Can you, noble knight, behold any good tidings in these sorrowful numbers? If yes, then hang another streamer on your lance. Of course, the difference or “spread” in value between the two goblets has widened to $2,000, no longer the $1,500 you floated. If you sell the one you bought and buy back the one you sold, your coin hath begot coin in the amount of $500 or an one-third profit.

So why is not every swain and varlet not a spreader? The talk at the alehouse was and is of fast, repeated doublings, of one bullion bar becoming five or 10 at a speed not irksome to those impatient.

Numbers talked of around the foaming tankards usually resembled those of the brass telescope and star-chart rather than the counting house ledgers. Fie on one-third profit! Add zeros and move the decimal place to the right with every hiccup! More Brandywine, please.

The non-spreading buyer of the $5,000 jeweled goblet portended something like a $10,000 or $20,000 return and with appreciable quickness. Were such a plundering by computation routinely possible, every lackey would hire a coachman. Of course, the valuable wine cup that gives birth is fanciful. Quite real are all those traders who anticipate buying limousines with champagne faucets and end up telling sad stories by the beer stein. Also quite real are strategies whereby the speculator’s quest for treasures can become the spreader’s bankable profits.

Spreading can be done with futures and options, options being available in futures contracts, bonds, foreign currencies and a few other items including stock shares. Stock options have been my specialty since the Atlantic City casino shares boomed in the late 1970s. Recently I received a letter from a gentleman in Illinois, a trader of admirable experience. He wrote that he was interested in my calendar-spread theory but he did not use it because “something would always keep me back. In retrospect, I believe that it was your portrayal of not making fantastic profits on each trade. The gambler in me said look for the big profit. That will make up for the innumerable small losses that may occur.”

I wrote a response, partly quoted here: “Being an option spreader requires, I believe, a mind-set markedly different from that of a “straight” options or futures player. A gambler views horse-playing as a road to possible quick wealth. A bookmaker views it as a money-eating monster.

“. . . I believe that a spreader needs an attitude closely akin to this. In short, I would stay the hell away from options unless I could do things quite differently from 99 percent of the participants. Unless I could use mostly other people’s money, which is what spreading (like bookmaking) involves.

What about going “for the big profit that will make up for the innumerable small losses” as you put it? That is what the horse-player hopes for when he bets a 50-to-one shot. He does this for years and only the pawnbroker profits. The wagerer wants to turn $100 into $5,000 in one afternoon so of course he scoffs at the bookmaker’s or pawnbroker’s 25 or 35 percent gains. Then come other bets to “make up what he lost.” Gambling to “make up what he lost” is the years-long exercise in futility.

“Is it so shabby to be the bookmaker or the pawnbroker? The GannMaxim says, “Handle speculation as a business, not as a gamble.” Sounds great, everybody says, until they realize it means accepting realistic, business-sized profits instead of quick astronomical wealth. That a conservative, business-like approach still involves risk also discourages many.”

So I continue to portray option spreads as the business-owner’s cashbox, not the waterfall of gold into your pocket or the instant cut of the U.S. Mint. I apologize to those who want lots more. But look at the track record of those who wanted and expected lots more, and those who sold them secrets on “how to.” The increase in “Make Big Money in Futures & Options!” commercials or the “Yen & Franc Fortunes” hype did not bring an increase in Lincoln Town cars.

However, do not be cynical. You know, of course, that casino presidents are popping headache pills and lamenting, “We’re being squeezed financially because all those systems-players at the roulette tables are winning left and right.” Every brokerage office has a domestic workers’ placement service next door, so that the throngs of successful traders can hire a butler and a maid with their winnings. You knew that, of course. Where’s the bourbon?

I spoke on the phone a while back to a writer for the rival “green pages” newsletter (Club 3000 News), who talked negatively of Joe Ross. Tsk tsk. If you can’t say something nice, don’t say anything. Ross has become known as “Bahama Joe” since he left the country for “a more comfortable climate.” No doubt, multitudes of people who paid handsomely for his methods made big fortunes and then drove him out of the country with their thank yous. I guess.

In the previous issue of CTCN, Dave Green reported quantities of obscenities on the Internet directed at the well-known Larry Williams. Also mentioned were a death threat against Kent Calhoun and proposals on the Web to flood his 800 phone number with useless phone calls he would have to pay for. Presumably, all these came from Cadillac dealers who lost business to other Cadillac dealers located-beside brokerage houses, where the students of Larry and Kent and Bahama Joe keep buying up every luxury car in sight. Certainly. Bartender, this beer is flat.

So by what ways and means do I make horizontal calendar spreads “a business, not a gamble?” As mentioned, a spread is a buy AND a sell. I buy a batch of 10 out-of-the-money stock options and sell a batch of 10. The ones I buy and the ones I sell are either both puts or both calls. Also, both always have the same underlying stock.

The spread is called “horizontal” because the options bought and those sold have the same strike-price, making them even or side by-side on a paper diagram. They are termed “calendar” because the ones sold have a different expiration date from the ones bought -- different months. Both are puts or both are calls, as mentioned, but people sometimes ask how I choose between the two. I prefer to place a call spread over an underlying stock that is gradually rising OR a point spread under one that is gradually declining.

Call options with strike-prices above that price of the underlying shares are automatically out-of-the-money, as are put options with strike-prices below the price of the underlying. Out-of-the moneys form the territory for this type of spread. Let us look, for example, at Microsoft as a possible underlying stock. Its share price peaked at 120 in December and has since inched downward. At the time of this writing, mid-February, it hovers around 100.

With the stock price so situated, call options with strike-prices of 105 or higher and put options with strike-prices 95 or lower both qualify as out-of-the-money. As mentioned, a spread with calls is a good idea with a gradually rising stock, puts with a gradually declining one. Since Microsoft occupies a downslope at this time, we look at put options with strike-prices of not more than 95.

Microsoft’s stock symbol is MSFT and its option symbol MSQ, these among the details readily supplied by brokers. Today, MSQ put options with a strike-price of 95 and an expiration date of March traded for 4 points. Puts with the same underlying stock and the same strike-price but with an expiration date of April traded for 5¾ points. Alchemically, how could you buy a jeweled goblet, sell another, and cause quantities of other people’s coin-of-the-realm to appear in the combination?

You focus on the gap or “spread” between the March (4) and the April (5¾), a difference of 1¾-points. I always buy and sell options in groups of 10. If you accept this configuration of MSQ 95 puts (and I am not saying you should) you would say to the broker, “Buy 10 April and sell 10 March with a debit of 1¾-points.” The latter figure is the spread or difference. With such an order, the amount for which you will buy the April is open, as is the amount for which you will sell the March, but the difference between them is fixed at 1¾-points or less.

At the end of the trading day, you might get a “Nothing done” or a “Transaction completed.” With the latter, if you bought a batch of 10 and sold 10 at the figures cited earlier, you would have bought 10 April options for $5,750 and sold 10 March for $4,000. The money you received from what you sold is credited toward the purchase price of what you bought, so that you pay only the difference (the “debit” or “debit spread”) of $1,750 plus brokerage commissions.

In actual practice, the buy and sell amounts may be a bit higher or lower in transaction but the debit you mentioned when you gave the order of 1¾-points (a difference of $1,750 on 10 options bought and 10 sold) is the inviolable “gotta be.” So stop and compare. Whoever bought the 10 March you sold paid $4,000. Whoever bought 10 April options identical to yours but without spreading, paid $5,750. Compared to your $1,750 -- more than double is March, more than triple is April.

So why did they risk so much cash? As in the saloon and the horse parlor, they envisioned tripling or quadrupling their money. Or maybe be punished and humbled by a mere doubling in a week. Recall the sad arithmetic mentioned earlier: More than 90 percent of all out-of-the-money options expire worthless. For a spreader, a 25 or 35 percent gain in a few weeks rings nicely in the cashbox. 30 percent in a month annualizes to 360 percent.

But this is too paltry for the two-cocktail math wizard formulating a dollar-multiplication theory or the roulette-player with a system in his pocket or the barfly who heard of a method. They call themselves businessmen but snub realistic, business-sized profits and if their results were concrete the grave-markers would-crowd the landscape. The hair-of-the-dog drinker manages not to see all those caskets of they who did likewise, a myopia shared by speculative traders who expect astronomical profits as if from a menu and at such a speed as not to keep a gentleman waiting.

In short, they expect etiquette from crocodiles. So, what gives calendar spreading its teeth and thick hide? Time-decay. All options diminish in value with the passing of time, a fact perennially sorrowful to the straight option-buyers. However, this particular Grim Reaper swings its blade unevenly, coming down harder on the near-in-time options than on the far-in-time ones, even if the near and far-in-time are only a month apart. Thus as weeks pass through June and toward July, the August puts or calls may typically lose a full point in value and the Septembers only half a point, and the discrepancy tends to increase over time.

So, the gap widens, increasing the spreader’s dollars within that gap. 90 percent of the option-buyers watch gloomily as their investments shrink while the spread strategist smiles because they shrink at different speeds. Spreading is not risk-free but other people’s money makes good armor, and in the calendar strategy it helps much that time-decay eats mostly at somebody else’s end of the table. Thus, the horizontal calendar spread often provides a systematized, business-like method for gathering the jewelry of those who would not settle for less than Fort Knox and fast.

A moment ago we looked at Microsoft put options with the possibility of opening a spread position using those particular months and strike-prices. Yet, I did not enter into such a position and did not advise anyone else to. You might ask, “What formula of the alchemy lab or the cocktail bar was he following when he decided to make that U-turn? Did that alleged skeptic Donio read some broker’s tea leaves?”

My reasons are not smoke signals but something more hard-edged. I recommend “handling it like a business” and like most business people, I measure. Like a jeweler weighing a gem on a carat scale, a lobster fisherman throwing back one too small, a bartender calculating the amount of gin in a Tom Collins, a navigator checking the sextant reading with the nautical almanac. So what ornithology chart showed that those Microsoft puts were a few feathers short of an eagle?

It requires no degree in calculus. In fact, I could etch it on a clamshell during dinner at a seafood house. A spread is, as mentioned, a buy and a sell, emphasis on the “and.” Let us now stress “How much?” Sell what you do sell, i.e. the near-in-time options, for 3-points or higher. Make sure the difference between what you sell and why you buy, i.e. the farther-in-time options, is less than a point and a half. Let us say that you sell 10 January calls at 3¼ and buy 10 Februarys at 4½ a difference of 1¼. Or you sell a batch of July puts at 4 and buy the same number of Augusts at 5-3/8, a 1-3/8 difference -- less than 1½.

Examples of the unwanted? The already mentioned Microsoft March trading at 4 and April at 5¾. At 4, the March qualifies as the sell-end of a spread, “3 points or higher” but the difference between the potential March sell and April buy tallies 1¾ points, too much for the less than 1½” requirement.

A few days ago, IBM put options with strike-prices of 110 (the stock was at 116) included, March trading at 2-13/16 and April at 4-7/8. The potential sell-end measures too small -- less than 3, and the difference or “spread” of 2-1/16 -- too much. Two thumbs down!

So what now my love? Wait -- until early next week. This coming weak-end, after the third Friday of the month, the February options will expire worthless. Then into the new trading week, the May options of many stocks and in some instances the June will come into existence for the first time. Many shares now have puts and calls with expiration dates in February, March, April and then jumping to July and beyond. Early next week the Februarys having passed on, many Mays and some Junes will be born. I shall look to the price gaps between April and May for spread opportunities.

I found that usually the gold lies buried in the month beyond the month after the one you are in. In February, for example, the potential spreads exist in the after-March expiration dates, such as April and May. In July, look to September and October. This could mean waiting for the right opportunity, as I wait a week. With so many leaky boats and sinking boats on the sea of speculation, awaiting a sound, worthwhile vessel makes stay-alive sense. Look at all the watery graves of those who did not.

Everyone has heard the old story of the poker addict. “Yeh, I know this game is crooked,” he whispered to a friend, “but it’s the only one in town.” This contains an implicit time factor. Continually itching to gamble, he would rather play in a crooked game right away than wait for an honest one that would give him a better chance of winning. The same with the futures & options “itch,” with the trader too anxious to await the right opportunity. The “rest in peace” rate being as high as it is, stepping on a financial land mine does not speed things up.

Since I do not have a trade off the launch pad and in flight at the time of this writing, please note that I do not claim or pretend to. I say this in response to a letter in the previous issue of CTCN. With a skepticism I appreciate, Nick Brockbank in England disapprovingly cited another subscriber who wondered if the trades detailed in my articles were “all made up.” To such a notion, my answer is twofold: First, the transactions described are real and straight from my personal brokerage account.

Second, do you suspect Carry Nation of selling drinks? For years I have been hostile in print to fatsos selling diet plans and gamblers writing “how to win” books to get back the money they lost. Even more hostile toward financial writers and seminar teachers who do not trade. They claim to know how to survive and win in high-body-count financial combat. Yet, they stay off the battleground. Please, suspect me of beating my grandmother before you suspect me of being a financial writer who does not trade.

Over a year ago, a woman subscriber almost went into shock when I reported a losing spread trade in one of my articles. She said in a published letter she thought there was some unwritten rule that financial writers tell of their gains but never their losses. Apparently, she envisioned some Duffy’s Tavern with the unwritten rule that nobody speak ill of such-and-such a boxer or ball player. Never bet against the home team.

She would have found nothing distressful in a hard sell-pamphlet that recently arrived in the mail: The Larry Williams Way to Wealth! Wall-to-wall testimonials about fabulous profits fast. The larger the gain reported by Larry’s customers in Ohio or Oregon, the bigger the print and the brighter the colored ink. Buried in the back-pages footnotes is the fine-print warning required by law about “large potential risks.” No big type, no vivid orange ink. Nor do the teardrops of the sorrowful 90 percent stain the pages.

Let us sip some absinthe, the strong, green wormwood cordial, and ponder reality. The tint of the liqueur brings to mind emeralds. All those dirty words on the Web must come from Cartier jewelers who cannot keep up with the demand. First those “mathematical formula” casino gamblers come in and buy up all the wares with their winnings. Then those futures & options seminar graduates enter with pockets full of cash and want more, more! Also, much of that Internet nastiness surely comes from fortune-hunting women turned down for marriage by those Fort Knox winners.

Sometimes the cocktail party stories settle on financial expeditions never heard from again. Josh Billings wrote, “A wise man profits by his own experience but a good deal wiser one lets the rattlesnake bite the other fellow.” I have found with calendar spreads, the near-in-time “sold” end catches most of the venom. And the way I do it, the farther-in-time “bought” end of the spread is more than two-thirds other people’s money and less-than one-third my own. The “sold” end is all other people’s money. While spreading is not risk free, these Hahnemann dilutions of my capital make fine anti-rattlesnake serum. To re-state: I would not touch options unless I could do so with mostly other people’s money.

Mark Twain wrote, “The burnt child shuns the fire until the next day.” At the adult level, this could explain why so many traders like so many horse-players have been getting burned again and again for years, include those playing to “make up what they lost.” A good point but Twain on the minus side may serve as an object lesson, an example of someone not to emulate, as in areas of culture and esthetics.

Wise though he was, he possessed a streak of the yokel deeply ingrained which emerged when he visited foreign lands. In the May 12, 1910 issue of The Nation,-- Stuart Pratt Sherman wrote:

“Mark Twain was a self-made man, of small Latin and less Greek, indifferent to abstractions, deficient in historical sympathy and imagination.

I confess with great apprehension that I do not much care for his books of foreign travel . . . He is the kind of traveling companion that makes you wonder why you went abroad. He turns the Old World into a laughing stock by shearing it of its storied humanity -- simply because there is nothing in him to respond to the glory that was Greece, to the grandeur that was Rome . . . he laughs at art, history, and antiquity from the point of view of one who is ignorant of them and mighty well satisfied with his ignorance.”

Sound familiar? In his column in a 1999 issue of the New York Post, William F. Buckley, Jr. wrote that he was invited to march in the city’s Columbus Day Parade a few years ago but he turned it down because he “favored a de-emphasis of ethnic taxonomy among Americans.”

In other words, the one-culture Right Wing discourages proud Italians and lasagna dinners with Neapolitan festival songs. Also Greeks quoting Euripides and discussing archaeological findings in Crete. Also a Spanish guitar hinting an Aztec chant or echoes of the Alhambra.

In the January 24, 2000, issue of Buckley’s publication The National Review, Richard Brookhiser warned of the chili-pepper incursions moving northward from South of the Border: “This is happening not just in California and Texas. The Rio Grande flows through every restaurant kitchen in New York City, and every upstate orchard.”

Never mind that these people work hard. This is Norman Rockwell’s America of apple pie and roast beef medium threatened by tacos and enchiladas. In addition to the kitchen, let us not ignore the bookshelf and the stereo. In that same issue of The National Revue, Richard Pipes laments that Americans today supposedly do not know history and heritage as well as did those of the Saturday Evening Post Era and other Golden Yesteryears.

A few pages later appears a two-page advertising spread: “Music & Memories! On Tapes and CDs.” YesterMusic offers “Mairzy Doats -- Hits from the Fun 1940s,” also “Remembering the Fifties,” also “Andy Griffith.” If this is YesterMusic, where are Mozart and Verdi, Rachmaninoff and Debussy? On a lighter plane, where are ragtime, vaudeville songs, barber shop quartets? Too long ago? Conservative Book Club also occupies a two-page spread and offers 24 titles. Apart from The Federalist and The Anti-Federalist, hardly a volume goes back farther in time than Spike Jones and his City Slickers Band.

Presumably, they know their audience. I used to gripe about Right Wing reactionary “traditionalists” whose knowledge of “tradition” went as far back as Mickey Mouse and Lassie. Now I must amend that. It goes as far back as the later stages of Mickey Mouse and Lassie. “There is nothing in him to respond to the glory that was Greece, to the grandeur that was Rome.” Bill Buckley avoided the Columbus Day Parade and his followers with rare exceptions avoid books by Benvenuto Cellini and Giorgio Vassar. God forbid the Adriatic Sea should flow through their cocktail soiree while they sing “Elmer’s Tune” or the Andrews Sisters’ “Rum and Coca-Cola.”

It may sound like a tall order when I ask you, dear reader, to surpass Mark Twain, but it is not all that difficult. If you run across a published piece about archaeological artifacts found during the digging of the Rome subway, show a degree of interest. Do not demean like “one who is ignorant of them and mighty well satisfied with his ignorance.” Recall the Gilded Ages art-loving cavaliers.

In Boito’s opera Mefistofele, feel some sympathy for young Margherita when she sings in her dungeon that she poisoned her mother and drowned her out-of-wedlock baby. A girl cannot be expected to do everything right. Her aria about wanting to escape across a turquoise ocean to blue islands with perfumed air beneath swans down clouds is music more rapturous than “Mairzy Doats.”

Dalmatians no longer hurry after horse-drawn coaches but more survives than has passed away, more than cognac and brandy. In the painting of composer Robert Schumann at the piano, a patroness of the arts listens as her golden ringlets fall across damask petal cheeks. These have not diminished any more than has the musical score. But if the trader or investor does not give such things his attention, he cannot expect Riverboat Twain or Wild Bill Buckley to do it for him.

One more piece of advice: When sipping sparkling burgundy, do not accept “hot financial tips” from a well-intentioned wine steward.

Moving Averages – Trendlines & Misc Comments - C. J. Casebeer

First, W. D. Gann and Market Timing by Peter Lim. I appreciate information as he wrote in his final paragraph “The inner orbital planets of our solar system which aligned May 5, 2000. Being aware of this time objective certainly merits intellectual curiosity as this will not occur again for nearly 6000-years.

Editor’s Note: I heard nothing significant happened on May 5th On May 17 they will bunch up even closer, though the Moon will have moved away by then.

I have always enjoyed any article on moving averages such as reprinted from Technical Traders Bulletin (TTB). The following statements are important to traders.

“One reason Moving Averages enjoy such popularity is when the markets trend, these simple little lines work as well or better than indicators which require a PhD to interpret.” Regarding this statement, I once read that a simple trend line will do just as well and less lag time. I have followed that advice ever since. KISS! Stated, “In our experience, this simple 12-month Moving Average is a stock market timing device that’s hard to beat.” Notice that it approximates a simple trend line.

Also trying to use these lines as a reversal system that is always in the market will tend to get you whipsawed. To avoid this, only trade with the trend, getting out on dips and rallies.

Stated, “our favorite filter or confirmation simple, wait until you get a close in the new direction” avoiding some false breakouts.

Stated, “Non-trending markets, as we have stated many times before should be avoided or traded using a Counter-trend type indicator.” This is where the original support and resistance lines can be traded.

Stated, “importance of proper money management far outweighs the importance of good trading signals. This may be true for some traders, but both are necessary for profitability.

Stated by Ivan Mark, “Best spots to enter trades are where everyone else has set stops.” How often do we know these points?

Envelopes, channels, bands! A lot of interesting information. Are they necessary? A lot of work for what? Drawdowns are unacceptable. Back to trendlines, use them! KISS!

Now for Greg Donio. Why do we have to read pages of his eloquent writing to get tidbits of various spread trading? Those bits of information could fit in a few paragraphs, a column or page at most. How many traders are spread traders?

Editor’s Comment: We also get opposite feedback on Greg’s long contributions from traders who enjoy them greatly. This is Greg’s writing style. He likes writing providing he also brings up names and issues not directly related to the trades and trading.

By the way, with Horizontal Calendar Spread Trading Greg writes about and teaches, it's possible to achieve 90% Winning Trades! This compares to perhaps 90% losing trades simply buying and selling puts and calls.

Some authors simply enjoy such a writing style, including the next article by Dann Dodd who spends considerable time writing on a subject seemingly not related to trading. Some readers enjoy this unique style of writing but some do not, such as yourself.

Hidden Knowledge, Technical Analysis and The Holy Grail – Dann Dodd

A Good Trader, I have the unique pleasure of working directly with small commodity traders as a large part of what I do for a living. Our small trader group is filled with diverse, interesting people from all walks of life from all over the world, who share at least one common goal -- To grow from a Small Trader into a Big, Successful Trader.

Small Traders have significant obstacles to overcome in this regard, many more than well capitalized traders and admittedly, many fail more than once in their attempt. As I have developed materials for publication to help small traders, it's become clear to me these obstacles to success are massive, or appear to be so.An education in technical analysis may contain the same ideas for large and small trader alike, but the small trader is the one who must pay attention. She has no choice. There is no room for sloppy thinking or sloppy action. You snooze, you lose, and you are out.

Interestingly enough, by my experience, small traders are a resilient group with a remarkable capacity for learning and change. Without exception, small traders who have traded for even six months have realized that massive obstacles stand between them and success at this game, but a large percentage keep on stepping up to the plate, usually with a new strategy, a new edge, a new plan. That didn't work last time -- now let’s work on this.

And I say, more power to you. Do it different. Keep looking. Keep experimenting. It is ironic advice from the best of the best commodity traders usually contains some reference to “sticking to the system" especially when you have lost 3 or 4 times in a row.

You have to hang through the losses to get to the wins. Changing the system will torpedo your trading.”

For a small trader, particularly a new one, experimenting with the system is the way to growth. There is no other way and oddly enough, the best of the best already know that. They have been in involved in the search for success at one time or another as well.

Back in the early 70’s, when I was 16-years old, I took my first job away from home as a Train Base Worker at the Mt. Washington Cog Railway (the Railway to the Moon). The ‘Cog’ was and is a tourist attraction in Northern New Hampshire. It was established in the middle 1800’s by a crackpot inventor named Sylvester Marsh who invented the machinery to run steam locomotives up and down sides of a mountain.

He built narrow tracks with what looked like huge bicycle chain laid out straight bolted in between the rails running all the way up Mt. Washington, the tallest peak in New England. He designed and built seven coal-fired steam locomotives to run up and down the mountain, pushing a train coach each, full of tourists.

By the time I got there, in 1974, not much had changed since 1900. There was DC power (like battery power), provided by a water wheel generator that worked until they shut the water wheel down at 9:00 pm, and we had a 1962 model front loader tractor to load coal into the bunker, but that’s about it. Everything else, circa 1900-1925. When the train crews up on the mountain wanted to communicate to the base station, they had to clip a WWI field phone to wires running up the tracks and turn a crank on the phone to give it power.

My first memory of the people who over the next four years were to become my friends was when I first arrived after dark at the old boarding house that first spring. I walked into the main common room, which was lit with kerosene lanterns and heated with a pot-bellied coal stove. There were perhaps a dozen men gathered there talking and drinking Schlitz by a lantern set on oil cloth on a wooden table. Each was covered from head to foot in black coal smoke film and black grease.

Their working clothes were also black with grime and grease and in the darkness, as they smoked and drank and told stories and cursed, in the lamp light, only the whites around their eyes showed anything but black. As I was to learn, coaxing the engines up the mountain was a black and dirty, hard-bitten and sweaty enterprise. These were the men who did it, and it appeared to me they had been locked in time.

Being 16, I was certain that I would be assigned to work on the trains on my arrival. Of course, I was wrong. I was assigned to be a ‘drone’ on the base, doing the most horrible work I could imagine for more than six weeks. My first job was to paint white parking lines in the parking lot by hand, with a paintbrush, on my hands and knees.

My second job, which lasted more than a week, was to shovel out the contents of three full outhouses into a trailer, haul it away and re-shovel it all into a gorge at the dump. This was in black fly season, and in the mountains of New Hampshire, they come and stay in thick black clouds. By the end of that week, my eyes had swollen almost shut from the constant fly bites, my eyes being the only part of my body that I couldn't adequately cover. I had taken to smoking cheap cigars as I shoveled, puffing big clouds of cigar smoke around my head to keep the black flies away for a while.

My misery those first weeks was great. Each day the qualified train workers rode by on the locomotives, headed up the mountain, and to my mind into a place that I wanted to be more than anything. At that time, I wanted to be anywhere but where I was, shoveling crap out of an outhouse and hauling it to the dump.

One day, I reported to work and was working on the main platform, cleaning sticky grease out from between the deck boards with an ice pick when one of the track crew came up to me and said “Hey, you- get on the train. Cal’s got a bad hangover and won't get out of bed. You're his replacement. We're leaving. Get on.”

Oh yeah, I got on all right. Never worked at the base again. That first morning I rode into paradise; dressed in my black, greasy rags, I rode into the Kingdom. As John Steinbeck wrote in ‘East of Eden’ about those few moments during our lives when ‘The Glory Happens… when the world around us is electric, and the air snaps with power, and everything, everything is brand new, everything is illuminated, as if we just stepped into OZ, well, that’s what happened to me, sitting on the flatbed, being pushed up the mountain by a noisy steam locomotive, dark blue sky, chilly mountain air -- chug, chug -- taken away from my misery onto Zanadu.

I worked harder than I have ever worked in my life that day. We rode down in the darkness. I stumbled off the train and ate shepard’s pie in the kitchen, the best food I have ever tasted. When I returned to the boarding house, I fell asleep on that same table I mentioned before, dead to the world, and I woke up 6 hours later smiling, ready to do it again.

Four seasons later, cog grease etched into the creases of my hands, I passed my Engineer’s practical test with Satch, the Master Engineer. It was my seventh try. Satch wouldn't pass me until I did a full trip perfectly. Seven tries. 3 days in between each try. But I made it. At night, during that trial, I studied blueprints of the locomotives and I pestered the engineers I knew with questions until they couldn't stand it any longer and threw beer cans at me. I wanted to be certified as an engineer, and I wanted to know how to make the engines run faster. That was all I cared about.

After the seventh try, Satch got out of the cab at the Base Station and said, “Take her up, Danny. You're qualified.” I was the second youngest Cog Railway Steam Engineer in history at that point. I was 19. My first trip solo was the last trip of the day. I ate supper, and at 6:00 pm my fireman, a student at UCLA, and I piloted the train up, up, up into a blood-red sunset, black cinders and smoke flying, steam chugging smoldering, laying on the deep monotone steam whistle as ravens cruised by, totally concentrated with our new responsibility, eyes set, nerves taught, laughing like idiots.

I mention this story as an allegory to some of the elements of our enterprise in becoming good successful traders. When we approach trading and try to do it, it doesn't take long before we begin looking for better ways to see what a market is going to do in the future and better ways to exploit knowledge. The more obstacles we face, the more likely we are to either quit or try and find what is constant and true and predictable in the markets.

As I said before, those with low equity tend to be the most sincere seekers of knowledge about the markets because they have to be. But there is an element of searching for the better way for each of us, regardless of circumstance as the ante is upped by technological innovation, which essentially adds speed to the process of evaluating and executing trades.

In any event, the views of the seekers invariably fall into two camps- There is the mind-set that believes we are in a world in which there is some secret, some buried treasure or a hidden store of knowledge which will lead us to trading success when we find it. There is another mind-set that denies the possibility of hidden knowledge, believing that all there is visible and clear for one and all.

My experience has been that those of us who are shoveling crap at the dump tend to believe in hidden knowledge and those of us who are running the trains tend to believe there is no such thing -- the world is practical and open and what is to be seen can be seen.

Regardless of our particular view of the world, and more specifically our view on the discovery and application of trading systems, the tools of technical analysis present us with a conundrum, a dilemma, which is presented to each of us and all of us.

The problem is inescapable, and most of us have never thought about it. It is almost as if the problem was hidden. Understanding this one dilemma is key, I believe, to understanding whether it is probable that hidden knowledge about trading the markets exists, and further, if we can find and use it.

The dilemma for technicians lies in the charts we use to do our analysis. Truly, some charts are better than others, but in this fundamental respect, all charts are seriously flawed. If charts are our technical windows on the markets, they must tell us the truth -- they are, in effect, all we have. Let me explain:

There is a body of literature that was written about the turn of the last century, up until just after WW1 that was very much concerned with dimensions and our understanding of them. Of course, this was the time when Albert Einstein and others were making history with their revolutionary ideas about physics, and perhaps the attention of many great minds of the time was focused in this area. I am not a science guy, but the discussion of dimensions was interesting to me because of the work I had done in technical analysis. I've shoveled lots of crap in my time.

One of the main ideas in this literature is that living beings actually live in the dimensions that they can sense, so that the world for each being is one, two or three dimensional based on their ability to perceive it. For the sake of simplicity, a straight line would represent one dimension.

A straight line and a line perpendicular to it, or a plane are two dimensions. Three lines, all perpendicular to each other, representing a solid are three dimensions.

We human beings actually see objects in two dimensions. We see surfaces. It is because of our ability to hold concepts in mind that we can perceive solids, we can understand them, although we can never fully see all of a solid at once.

The ability to hold concepts of solids in mind allows us to perceive three dimensions, unlike a dog, a higher animal that cannot hold concepts and therefore can only perceive in two dimensions, surfaces only. A snail, at the low end of the animal scale, perceives the world in a straight line, in one dimension, moving toward, moving away.

In each case, the view of the world is governed by the apparatus that each animal, including man has available to use for making her way in the world. The proofs for these ideas are interesting, but I will not go into them here. Activate your willing suspension of disbelief for a moment, and follow me.

In each case, the outer dimension that a living being cannot directly perceive is always relegated to time. And it is through time related to the dimensions it can sense that a living being perceives motion.

So follow this. For a snail, life is a straight line and everything else is time. For a dog, life is lines and surfaces and everything else is time. For a human being, life is lines, surfaces and solids and everything else is time.

Now look at a commodity or a stock price chart. This is a test: Which view of the world does it represent? The vertical axis is a physical dimension: Price. The horizontal axis is what? Yes, it's time.

When we look at a price chart, we perceive the market in one physical dimension. All the rest is time. Just like the snail. The low end, man. Imagine a snail’s view of an aircraft carrier in motion. It would not be our view at all, would it? We have a tiny bit of a problem here, oh yes we do. Let’s work it a little further.

A snail’s perception of a stone in its path is and always will be limited by its inability to perceive more than one dimension. It could never understand it as a solid physical thing. But we human beings, encountering the same stone would invariably come away with a much higher, much more useful understanding of that stone as a solid, that was in our path, that had a relationship to other objects, and so forth.

A snail could never actually perceive the stone the way we do, and for the snail a stone as a solid doesn't exist. But the stone as a solid does exist. The snail simply can't perceive it. OK, move it along. Do you see what I'm driving at? When we look at a chart, our perception of market price movement is limited to its lowest level, one dimension and the rest is time.

Most of our indicators are also one dimensional, because they rely on the use of time calculated in one fashion or another with price. What’s a moving average? How about Stochastics? RSI, Bollinger Bands? They are simply manipulations of price over the outside dimension of time - a snail’s view of the trading world.

The problem is compounded because, we traders are three-dimensional perceivers of the Universe (plus time), and we allow ourselves to be tricked into believing that our charts represent the same world that we ourselves occupy. We believe our price charts represent the same sort of physical thing that a floor plan to a house does. A subtle trick of the mind.

Try to draw a picture of your house making one dimension length and the other dimension time. It doesn't work and it never will. It is one physical dimension treated artificially as two. When we look at a chart, we think we're looking at a constantly updating surface, a plane, when in fact, all we are given is a straight line.

All right, here is the kicker: Just because the snail cannot perceive the stone in its path as a solid does not mean that the stone does not exist. In other words, the world for the snail is a straight line because that is all it can perceive, but a bigger, more accurate physical world does exist. Any human being can verify it on the spot, because humans have the capacity to perceive more dimensions.

If we think about technical analysis in this way, a whole new world can open up before us. Our current view is one dimensional, plus time. It would make sense to believe there are at least two more dimensions to market price movement which we would be capable of perceiving directly -- of understanding because we have the apparatus in our minds to do it.

Now how about that question about hidden knowledge in market movement?

All you crap shovelers, get on the train- Cals got a hangover and you are his replacement. You are headed for Zanadu. Today, you will do the hardest work of your life, but you'll sound the deep monotone steam whistle as you chug into the blood red meridian. Trading will never be the same, as you grin like an idiot.

That's it for this time. I've run out of space. Next issue, let’s talk about The Holy Grail and commodity trading, one of my very most favorite subjects.

Dann Dodd, CTA, is the principal of Good Trader. He has developed The Greyseal Trading Tool, a new technical indicator for commodities and stocks which adds a second dimension to price charts in a simple way, and uses the ancient Law of Three Forces to accurately trade short term swings. Dann is also the author of The Small Commodity Trader’s Handbook , which is designed to cut years off the small trader’s learning curve. You can sign up for a one week free trial of the Greyseal Swing Trade Hotline, sent by e-mail each trading day at about 6:30 am EST.

About Joe Ross - Mark

Dave you must keep that report about Joe Ross. When read it also brought home some truths I had about Joe. I attended his seminar years ago with numerous other would-be traders and every one of them today is out of the market having lost all their capital.

I couldn't understand his money management theory of buying 3 contracts and then liquidating 2 and so on. I even wrote to Dr. K. Tharp about this and he said ”this was for people who want to be right, but it was the wrong thing to do.”

I bought three of his books, which I feel have lots of merit, but are way too expensive. Everything this guy does is three times more expensive than anyone else. Seminars, books, newsletters. Come on Joe aren't you rich enough?

I passed your JR info onto the people who attended his seminar in Cape Town, South Africa and they are glad the truth is out. So am I.

I don't feel there is anything too bad written about Joe. But you are correct when “you” say there are discrepancies to his story. Why doesn't he just tell us the truth and then we can judge for ourselves?

Editor’s Note: I do not recall personally saying there were discrepancies in the Joe Ross story. However, we have published an article written by The Late Bruce Babcock in which Bruce alleged Joe’s story and his trading statements may have been false or exaggerated. It seems like sometimes articles we print (written by others), such as William Green of Forbes Magazine and Bruce Babcock, frequently are confused with our own writings

Denigration Without Facts - Tyrone Faulkner

This Lorique guy denigrates you and the Bruce Babcock article without offering any rebuttal of substance, save from referring to Joe Ross’s website. Anybody can do that type of thing -- politicians do it all the time. I say keep up the good work.

More on Joe Ross – Duane Howe

Good riddance! As you can tell, Bahama Joe is not high on my list of favorite people. You will see why when you read his DejaNews garbage. As for lawsuits, there won't be any from BJ, because what I said was all-true, and he didn't sue Bruce for the same reason. It isn't smart to sue for slander over something true.

As you see, he threatened me with a major lawsuit at first, but then didn't do a thing after I ran the article. He knew he didn't have a case. You will notice that in the news group he claimed to be "too Christian" to resort to lawyers. What a joke.

I don't care what you do with my file; just don't get me into a pointless exchange with BJ. It would be good to get the facts out, because Joe had the floor all to himself at DejaNews and probably convinced more than one that I was the devious one. I've had enough of it, and now I just want to live in peace and do a little trading on my own. If you have any questions about the stuff in the file I will be happy to discuss it with you by e-mail any time or by phone after S&P trading hours

Joe Ross & Negative Feedback

Boy! You sure got a thorough going over from Loree-Q. Is that a male or female? I believe you did right by publishing what you got from someone else. It's up to the reader to believe or disbelieve. At least we're put on notice. Joe Ross' comment about customers not appreciating his works if they're too cheap sucks. Him and his wife are out allegedly to get all they can just like all the rich corporations. If Joe has so much money, why does his wife have to get hers by gouging customers on shipping charges? If I were a publisher and got a $2,000 order, I'd ship it freight-free.

I bought the first part of The Ken Roberts Course and it may have been good but only (I believe) if I purchased the second course. He claims he doesn't need the money and is selling his course, a Rich man's secret at a cost of $100 or $79. I know what costs are involved and his is profiting.

The first Ken Roberts commodities trading course proved to be disastrous for the novice investor, since he doesn't give much needed information. Maybe the second course would, but why sell it in two parts? To make the cost appear low and to suck one in for a second round of profits.

First, he says that his commodity trading course is the best easiest money-making course in the world and then he comes out later trying to sell another course on investing in stocks. Enough is never enough for the rich. He sells books and holds expensive seminars, and I believe if he could make as much money selling groceries, he'd be doing it.

My wife's son-in-law bought all of Ken's courses and really believes in him and claims to be doing quite well, in his trading.

Go Ahead and Continue to Print The Truth - Don L.

Received the "About Joe Ross, Ken .... et al" info. Quite a coincidence, since I was just about to pitch out my file on Joe Ross. I need to get rid of all that negative stuff and surround myself with pleasant and positive thoughts and influences now. I am going to be doing some serious trading and finally make up all those losses that occurred at the hands of folks like Joe. You may have seen my expose on Joe in the Club 3000 Newsletter - 98-04.

I have the article, along with all the correspondence between Joe and myself, which occurred before and after I found out about Bruce Babcock's (alleged) discovery, Joe was a fraud. I also have a printout of some of the distortions and outright lies that Joe published in the DejaNews news group in response to that article. I did not participate in the exchange, but Gary Smith sent it to me for my perusal.

Joe's remarks are those of a man who is trying desperately to salvage his reputation. He severely distorts the facts and lies without remorse. I feel somewhat sorry for him, but could not ignore what he was doing to those who were paying him thousands of dollars to attend his seminars. He apparently does have some trading techniques that work by now, but I believe they came from other traders who he plagiarized. Gary Smith has some information on this, but he may be reluctant to talk now that it is ancient history.

Anyway, if you are interested in pursuing the truth about Joe Ross, I would be glad to send this stuff to you so you can see for yourself how Joe has distorted the facts and lied in order to discredit me and preserve his reputation.

There is a lot of stuff there, and it is too late to do anything about any of it, so I have no need for it any more, and I would not want it back. It reminds me of unpleasant times, and I need to get rid of it. You can bet that Joe will rebut anything negative that you put on your website regardless of its authenticity. I'm not really sure if he thinks he did no wrong or if he is in total denial. At any rate, he is a strange case.

I have not read your Joe Ross Report, and probably won't because it will just stir up my adrenaline, and I don't need that any more. It is history, and I want to look ahead, not behind. It would be comforting to have someone other than myself become aware of the facts of my encounter with Joe, but I don't know what other value it would have to anyone.

People pretty much believe whatever they want to according to their own limited experiences. On the other hand, if you wanted to, you could make Joe look pretty bad by comparing his statements about my letters and his with what is actually in them, and comparing his statements about my trading account with what it actually shows.

I am not sure if I still have the account statements Joe said I "doctored.” If I do, they would be in Wyoming where I lived for 20-years and where I was when I first learned about Joe through Club 3000 in 1992. I think I threw the statements out last fall, but I'm not sure. Whatever you want to do, I don't want to be involved with it other than donating my file.

Gann - A Great Trader? – Mark Crisp

I find it hard to believe you are promoting W. D. Gann and his methods so highly. It is my experience that trading with Gann techniques is a sure route to disaster.

I remember reading an interview with Gann’s son. He said his father made lots of money from selling courses but lost it all in the markets and if he was worth 50,000,000 then he didn't leave any.

In William Gallagher’s book "Winner Take All” p.29, an extract from Dr. Alex Elder's book "Trading for a Living" -- "Various opportunists sell William D. Gann trading courses and Gann software." They claim W. D. Gann was one of the best traders who ever lived, and left a $50 million estate and so on.

Not Comfortable Trading Yet - Lee Villarreal

Thank you for adding me to the commodity traders club e-mail List. I also bought Ken Roberts Course and agree that it certainly got my interest up in commodities. But with so little real information, I didn't feel comfortable attempting to do any trading yet. I've read several excellent books on options and commodities since then and hope to start trading sometime this year.

“Best” Broker & Minimum Amount Needed to Trade – Kevin Woolery

Where can I find a list of the best brokers? That is to say, the ones with the lowest commissions and best fill quality. Do you have a list or can you refer me to a website or company that rates brokers?

Also, with regard to opening an account, what's the minimum dollar amount a person needs to start trading with the Real Success trading method?

Editor’s Comment: Most all the major brokers in my opinion are pretty much equal. If one or two brokers were significantly better than all the others then everyone would find out about it and they would end up with most all of the business and the others may go out of business.

After a while, the top firm would then likely decrease in quality and speed due to its growth and size. It's the same with computerized trading systems but a greater final effect. If one or two were best then everyone would only buy them and the others would all go out of business.

However, because everyone has the same system, it would then stop "working" due to overuse and eventually become one of the poorer performing systems due to once being the best and over-popularity and over-use.

We are currently recommending Alaron in Chicago. They are a very well established firm and seem to have a good combination of speed, quality and low commissions. We once recommended ZAP but were disappointed by their high commissions and not wanting to reduce rates. This was in spite of the fact they were wanting $23 to $28 or more Round-Turn from our client referrals while others were only asking approximately $10 to $15 R.T. ZAP was also quite poor in replying to our e-mails and phone calls, ignoring most of them.

However, we had no complaints about their brokerage service itself, which was very good. The LFG Software Zap used for trading the E-Mini-SP over the Internet was extremely good and worked quite well. Fills only took on average from 4 to 7 seconds or so.

In reply to your questions, about minimum amounts of capital for trading single lots of the S&P using Real Success. This depends to a large degree on the Exchange and Broker Margins Requirements, more than drawdowns, which are unpredictable though normally smaller than Margin Requirements. I would suggest at least $5,000 for the e-mini SP and $25,000 or more for the full-size S&P Market. Check with a commodity broker to verify margins as they do change from time to time depending on volatility.

Confusion With A Negative Attitude - A Trader Named Robert

I have spent several hours reading your website, until I feel my eyes will fall out. Your articles regarding options spreads fascinate me. I am currently enrolled in the Ken Roberts Course. “Your article” referring to Mr. Roberts as a “Shark” confuses me.

I don't know who to believe regarding trading in general. It appears you attempt to make money by marketing info as well.

Editor’s Comment: As explained elsewhere, the Ken Roberts “Shark” Article was written by William Green of Forbes Magazine, not me and absolutely no relation to myself. What’s wrong with offering knowledge for a fee anyway? Should school teachers stop teaching for a salary and teach free, should educators stop educating? You seem to have a negative attitude. If so, it will prevent you from being a successful trader.

I have been forced to pursue a new occupation due to reasons that wouldn't matter to you, and stumbled on trading as a very real possible profession for me. I have read more this last month on commodities and trading than I care to admit.

Maybe I should find someone who is confident enough in their method, who would teach me for a percentage of my profits rather than bad mouth, even if true, someone else’s methods to possibly sell their own.

Editor’s Comment: Again, I did not “bad mouth” Ken Roberts or Name Withheld, but reprinted what was written in Forbes Magazine. Do you want us to remove these reprints (and others)? If so, why? Is this America and can authors write articles without censorship?

As I said, I have spent more time and money than I care to admit. I have diligently studied more on this subject than any other for quite some time. I was very excited about the possibilities but maybe should resign myself to reading your suggested reference books than believing there are (profitable) people out there?

Why Was My Article Not Published? - Robert Carr

I just read the latest issue of the CTCN and realized I had not seen the article, which I had submitted previously. I was wondering what the schedule was for publishing articles.

Editor’s Reply: I received your note about the unpublished article. We could not get our old computer to work so never did open up your Attached File article and then proceeded to unfortunately forget about it, until today!

As a matter of policy, we do not open-up attached files as in the past we have received viruses via these files. They can even come innocently from someone who does not know their PC has a virus and unwillingly sends it to others. It already happened once, but luckily, our anti-virus program managed to spot the virus before damage was done!

I apologize over all this. If it were not for our stupid fears and screw-ups, we would have published it. We are always looking for good articles and content! You will also get a 50% renewal discount if you decide to renew.

Please reconsider dropping out and resend the article as part of the email, non-attached. It will go in our next issue (this one). Thank you.

Useful Trading Information From Kent Calhoun & William O’Neil
Robert Carr

Here it is! As I read the article by Deborah Adamson (Nov/Dec 1993-2014), I decided that the method, which I use, might help overcome some of the misinformation, which is put forth by most of the investment publications.

I am a market timer and trend follower. I do not like to give back equity once it has accumulated, so I may be in and out more than some would be comfortable with.

I routinely follow stocks that are in the top 20% of all the companies in the USA. You may as well follow winners with a high probability of success as the losers.

I use William O'Neil's "CANSLIM" method and the Investors Business Daily newspaper. "CANSLIM" is an acronym for the various parameters, which he has found, are the characteristics of winning stocks from years of study. He has a book "How to Make Money in Stocks" which details the method (available from IBD 800-815-6300 for $10.95 + S&H).

I use the Investors Business Daily to pick the stocks, which I follow. It generally takes me less than 1 hour per day to review the IBD. The IBD was founded to help the average investor pick stocks and is formatted around the "CANSLIM" method. It has investment information, which you can't find anywhere else.

William O'Neil is one of the two class individuals in the investment industry whom I admire and use their information. He did not have to found the IBD. He made plenty of money trading stock.

I go the next step past O'Neil's method to define when to buy/sell. I do price bar analysis and use Kent Calhoun's 5 Vertical Bar Trading

Pattern method of analysis. He is the other class individual whom I admire as an honest, godly, caring person. He is also a successful trader. Kent's method of analysis (note: it is not a system) is a pattern recognition analysis method, which is statistically based and works on any kind of securities.

I also trade commodities short term 2 to 6 days typically, and day-trade the S&P Index.

I have no association with either Bill O'Neil or Kent Calhoun. I just use their information and know it works. Anyone who is willing to learn and work at improving their trading skills can benefit from them.

Trading is hard enough without a person being handicapped by having information, which does not work.

S&P E–Mini - Realistic Commissions - At Last – Dave Dawson

Since the S&P-500 e-mini started trading the main complaint of traders has been the high cost of commission, relative to its large brother in the pit. This situation had been brought about in my view by the brokerage industry tying to recoup their recent software development costs to enable us to trade over the Internet, but now one or two of them are starting to brake rank.

If you shop around you can trade on-line for as low as $8.00. At Field Financial, I am sure you will all agree they offer a much more realistic rate.

A slight change of story due to the fact I am told using a buy or sell stop you can get filled above or below your price just like in the pit.

I told Dave on Thursday (3-30-2000) when the S&P was at 1526 it would go down and the low would come in at 3.40. Well it came in at 3.35 at 1494, that is how good that fax service can be Monday can be off because of the weekend, but overall it can give you a good road map for 75% of the month. If you want to phone me at my number in England 1642-676613.

Member Requests & Comments

Bob Rinehart - I've been reading for 9-months and love CTCN - keep up the good work.

I've finished my trading plan and have a fund put together and I'm researching on-line brokers to trade the e-mini's. You've mentioned Zap Futures and Rita Karpel in the past, and I thought I'd check to see if you still maintain the opinion you've mentioned in the past.

Could you reply with a quick note when you get a moment? I'd appreciate it. Also, if there are any others you can recommend that would help.

I want fast executions and low commissions - I'll only be doing the e-mini’s in the future.

PS - I'll weigh in on the debate of the century - Greg Donio’s articles! I have to say I'm a big fan. I think he's a great example of a successful trader and we should all try to emulate his success in trading and enjoyment of life. Please allow them to continue the way Greg wants to send them. If people don't like them, they don't have to read them!

Joe Potts - I find your insights and articles very, very interesting. Keep them coming.

Comment from Sutton - I have recently purchased your real success-trading course and I'm pleased.

I recently purchased Bruce Babcock’s “80% Solution SP System” and “SP Daytrade System.” Was wondering if anyone has the TradeStation code for these? It sure would save me a lot of time in having to code them myself. I can do, but am very slow with easy language. Too bad Reality Based Trading does not provide code with the trading manuals, as they mention Bruce tested these systems with TradeStation. You can contact me at or via CTCN.

Norman Lap Earle requesting info on Candlestick Forecaster.

Norman is currently evaluating a program called Pattern Forecaster Plus/Brad Methane. Gary Wagner/Samurai program are co-writers of this program-same program different name. Pacific Trading International no longer exists, they parted company but program is still alive and well. Candlestick Forecaster - Samurai Edition - advertised (Web) at $1,300 and PEP is sold for around $700, again same program different name.

The site for Brad Methany/PFP is There are various iterations of the program. The best, I thought, is a $75.00 for 4-month trial. There is a detailed story of the evolution of the program Pacific Trading International, etc. at the web site. If the individual wanting info on the program wants my opinion you may send them my email address.

Milton Cooper - How can I find out more about Trident? Noticed on your site an article by Andrew Pustay on "Trident System. Do you have any other articles on it or can myself contact Andrew? He also mentions the TRENDX Program ... any details. Can you provide info on the Swing Catcher?

Editor’s Comment: The Trendx Swing Catcher is sold-out but may be re-released by this summer.

About the Ken Roberts and Name Withheld articles. Mr. William Green, an author at Forbes Magazine, wrote them. No relation to me! Never met him in person. He called me for some feedback on both Name Withheld and Roberts as he was preparing articles and heard of us.

I tried to avoid saying anything negative and recall saying some positive things such as Jake is quite knowledgeable and has contributed to traders’ knowledge perhaps more than anyone.

I also said Ken Roberts has introduced more new traders than anyone else to commodity trading and his commodities course helps educate traders, though it's very basic and hard to make money using the methods from what has been alleged by some of my clients.

The reason we reprinted Mr. Green’s Forbes Magazine Articles was because this is our job to report important news we receive on trading products and services, be it good news or negative news.

We prefer the good news but our clients are also interested in all the news, including negatives like Mr. William Green’s articles, including the negative sounding one he wrote on Name Withheld (also reprinted on our website

On another trading related subject, some of you have asked about ways to predict future market turning points based strictly on numbers and charts. The only way we know how to do this is to Square Price & Time and to draw Geometric Gann Angles using “Square Charts,” as outlined in our Gann Trading Course.

We also have some great reprints of old articles about W. D. Gann, the most famous stocks & commodities trader of all time.

Here is part of a fascinating article about Gann written in 1909 by a newspaper, which later became known as The Wall Street Journal.

“It is very difficult for me to remember all the predictions and operations of Mr. Gann which may be classed as phenomenal, but the following are a few. “In 1908 when the Union Pacific was 168-1/8, he told me it would not touch 169 before it had a good break. We sold it short all the way down to 152-5/8, covering on the weak spots and putting it out again on the rallies, securing 23-points profit out of an 18-point wave.”

“He came to me when United States Steel was selling around 50, and said, “This Steel will run up to 58 but it will not sell at 59. From there it should break 16 points.” We sold it short around 58 with a stop at 59. The highest it went was 58. From there it declined to 41-17 points.”

“At another time, Wheat was selling at about 89¢. He predicted the May option would sell at $1.35. We bought it and made large profits on the way up. It actually touched $1.35.”

“When Union Pacific was 172, he said it would go to 184-7/8 but not an eighth higher until it had a good break. It went to 184-7/8 and came back from there 8 or 9 times. We sold it short repeatedly, with a stop at 185, and were never caught. It eventually came back to 17.”

“Mr. Gann’s calculations are based on Natural Law. I have followed his work closely for years. I know that he has a firm grasp of the basic principles which govern stock market movements, and do not believe any other man can duplicate his method at the present time.”

Early this year, he figured that the top of the advance would fall on a certain day in August and calculated the prices at which the Dow Jones Averages would then stand. The market culminated on the exact day and within four-tenths of one percent of the figures predicted.”

“You and Mr. Gann must have cleaned up considerable money on all these operations,” was suggested. “Yes, we have made a great deal of money. He has taken half a million dollars out of the market in the past few years.

I once saw him take $130, and in less than one month run it up to over $12,000. He can compound money faster than any man I have ever met.” (Editor’s Note: these figures are 1909 Numbers – can you imagine their value today)

“One of the most astonishing calculations made by Mr. Gann was during last summer [1909] when he predicted that September Wheat would sell at $1.20. This meant that it must touch that figure before the end of the month of September. At twelve o'clock, Chicago time, on September 30th (the last day) the option was selling below $1.08, and it looked as though his prediction would not be fulfilled.

Mr. Gann said, “‘If it does not touch $1.20 by the close of the market it will prove that there is something wrong with my whole method of calculation. I do not care what the price is now, it must go there. It is common history that September Wheat surprised the whole country by selling at $1.20 and no higher in the very last hour of trading, closing at that figure.”

So much for what Mr. Gann has said and done as evidenced by him and others. Now as to what demonstrations have taken place before our representative: During the month of October, 1909, in twenty-five market days, Mr. Gann made, in the presence of our representative, made 286 transactions in various stocks, on both the long and short side of the market. 264 of these trades resulted in profits and 24 losses.

The capital with which he operated was doubled ten times, so that at the end of the month he had 1000% of his original margin.

In our presence, Mr. Gann sold Steel common short at 94-7/8, saying that it would not go to 95. It did not. On a drive occurring the week ending October 29, Mr. Gann bought Steel common at 86¼, saying that it would not go to 86. The lowest it sold was 86-1/3.

We have seen him give in one day sixteen successive orders in the same stock, eight of which turned out to be at either the top or the bottom eighth of that particular swing. The above we can positively verify. Such performances as these, coupled with the foregoing, are probably unparalleled in the history of the Street.

James R. Koene said, “The man who is right six times out of ten will make a fortune.” He is a trader who, without any attempt to make a showing, for he did not know the results were to be published, established a record of over ninety-two percent profitable trades.

Mr. Gann has refused to disclose his method at any price, but to those scientifically inclined he has unquestionably added to the stock of Wall Street knowledge and pointed out infinite possibilities.

The complete Gann article and others are at

Editor’s Notes: Did you know you can easily subscribe to our opt-in E-Zine email communications list via email? Simply send a blank email to

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It's important you subscribe to it if you have not already done so. We need everyone's correct email address as we plan to provide our traders knowledge via email more and more as time goes by, rather than using Postal Mail.

We received an email from Zap Futures saying you can now trade the full-size S&P-500, Nasdaq and many Currencies on Globex 2. This is good news on the surface but the bad news is unlike the e-mini contract, the full-size contracts traded on Globex 2 do not take Stops or Market Orders.

It's really amazing about Market Orders not being accepted as it seems like they would be the most basic and mandatory type of orders of all. There must be some odd reason for it.

You may access the Chicago Mercantile Exchange website to familiarize yourself with the types of orders accepted, trading hours, all contracts traded and trading specs at

Note: Orders do not work across the Globex2 and floor traded day-session.

These contracts trade on Globex-2: Australian & Canadian Dollar, Euro FX, Japanese Yen, British Pound, Swiss Franc, Mexican Peso, Deutsche Mark, Full-Size S&P-500 and Nasdaq..

These computer traded markets trade from mid-afternoon to the morning, when the day-session is closed.

Go here for exact trading hours

The e-mini S&P and e-mini Nasdaq trade as usual from 3:45 p.m. to 3:15 p.m. and accept Market, Limit, Stops, and Stop Limit orders.

Trade Stocks Electronically With No Commissions! – Benny Yee

Dave, as I mentioned to you, this is the website offering stock trading and not charging a commission. Go ahead and try it and see what you think of it. The address is

As you can see, this could be the start of many other sites offering zero commissions on trades. I'm not sure how the setup makes money but it certainly has a lot of appeal.

Editor’s Comment: Thanks Benny for this potentially valuable and surprising information! I did access their website, the site indicates stocks may be traded free of any commissions using electronic Market Orders. No other order types are free. However, you are correct in that Market Orders apparently can be placed at no cost. An amazing development and the first time I have heard of this. It's too bad Limit and Stop Orders are also not free of commissions.

We extracted this info from their website:

San Francisco, May 3, 2000 - In a revolutionary development in the world of on-line finance, investors can now place free electronic market orders on all stock transactions with no minimum balance for cash accounts, any quantity or price, whether over-the-counter or on an exchange, without commissions or other limitations, along with top-notch financial products and service. www.TheFinancialCafe.Com


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