Issue 54

The Magic of Compounding - Richard C. Stoyeck

Some of you know about this, some of you don't. Either way I'm going to put radically different slants on this concept. As you read what follows, I want you to keep certain ideas in your mind. I also suggest you read the following not once, but several times. If you have children, print this and give it to them to read. If they master this, they’ll become rich. If they don't, it’s the difference between being the entrepreneur and the worker drawing a paycheck.

The first idea to remember is that computers are composed of both hardware and software. The software can be changed. The hardware is something you live with, until you're ready to throw it out and buy another computer. The analogy I want to use for a computer is a human being. The hardware is our bodies and our minds. What we have to start out with is what we live with. If you are destined to grow to be six feet tall, you are not going to change that and become seven feet tall. You live with it.

Our minds are both hardwired and softwired. We can change the software. How we think about things, our prejudices, our attitudes, and our mindsets, this can all be changed and worked with. Certain things cannot be change. You either have a gift for mathematics and languages or you don't. Certainly, whatever level of gift you have can be augmented and worked with, but if you don't have Einstein's gift for math, that's just the way it is.

Now what does this have to do with the magic of compounding? And what is the magic of compounding by the way. The magic of compounding very simply is the difference between an arithmetic progression and a geometric progression.

The arithmetic progression goes like this: 2,4,6,8,10,12,14. The geometric progression or an exponential progression likes this: 2,4,16,32,64

The difference is everything in investing. When I am done, you will truly understand the magic of compounding, you will become a believer, and you will astound all your friends.

The reason why I talked about the computer analogy is because I believe as human beings we are hardwired in our brains. Our brains compel us to think about progressions as being simple arithmetic ones. An arithmetic progression is simple. You know 2,4,6,8,10, or 3,6,9,12,15. I also believe that Warren Buffet is hardwired to think geometrically. That is why he is the world's greatest investor.

So let's put it together. Now, I want you and your children to solve the following puzzle. What would you rather have someone give you; a million dollars, or a penny a day and the right to have that penny doubled every day for a month The answer appears at the end of this article under PUZZLE.

I'm assuming you looked at the answer. Amazing, is it not? This is why the wealthiest guy I know who is a member of the Forbes 400, has always told me," One of the dumbest things you can do with money is spend it." He puts everything into investments. Where he makes his mistake is he does not live a balanced life.

I have received e-mail from Oscar B. in Dayton, Ohio. Oscar must have several billion dollars in cash by now. He also drove a 20-year-old station wagon when I knew him. He could afford to buy 5% of General Motors and he's driving a 20-year-old station wagon. It shows how he values money.

At the same time, this behavior does not lead to a balanced life.

Have you ever noticed how mutual funds that have been around for decades tell you the following? If you had placed $10,000 with us in 1981, you would have $96,000 today. It's no big deal. It's the magic of compounding, not the magic of their thinking. Or they will say; assuming dividends and capital gains are reinvested. This is lunacy. People have to pay taxes; they can't pay taxes with capital gains. They have to pay taxes with cash. This is why mutual funds lie when they give you their returns. Every one of them assumes you reinvest the dividends and capital gains. Where are you supposed to get the cash from to pay your tax bill if not from the capital gains themselves, thus lessening your re-investment?

Now, back to Warren Buffet. He is the most successful investor in the world because he believes in the magic of compounding heart. He also executes on the concept. I am going to get these numbers wrong, but it doesn’t matter, you'll get the concept. I'm doing the numbers from memory. Buffet started a partnership way back when. He had a number of limited partners invest with him and he took a percentage of the gains. In the late 60s, early 1970's he terminated the partnership with his famous letter, "When you no longer understand the way the game is played, it's time to leave the game." I'm paraphrasing, even though it's in quotes.

In 1974, when the bear market bottomed, it might have been early 1975, he started another raise. Then came Berkshire Hathaway. Buffet took about $ 100 million out of that first partnership for himself. So he was working with $100 million, keep that in mind.

Do you know the rule of 72? If you don't you should memorize it. It's easy to work with. If you get a 12% return on your money and you want to know how long it will take your money to double, it's simple.

Take 72 and divide by 12. The answer is 6 years. If you get 6% on your money, it's 72 divided by 6 or 12 years. If you get 9 % on your money, it's 72 divided by 9 or 8 years. Buffet since the 1970's has been getting a compounded (remember that means exponential) growth rate of about 22 to 24%. That means 72 divided by 22 is 3.27 years, or he doubles his money every 3-years 4-months.

Since he's at it about 25 years with that hundred million he had to play with, that means he's doubled his original $100 million about seven times. Remember 25 years dividend by a double every 3 years and 4 months (25 divided by 3.4=7.69). Let's go with seven doubles.

Remember he's not making 7-times his money with the $100 million (that would be an arithmetic progression) he's making 7-doubles (a geometric or compounded progression).

Let's show the difference.

Warren Buffet's Geometric Progression Starting Dollar Amount: 100 million Time Periods Involved: 7 times (3-year 4-month periods)

Period Compounded (Exponential $)
0 starting point 100,000,000
1 - 3 years 4months later 200,000,000
2 - 6 years 8months later 400,000,000
3 - 10 years 8 months later 800,000,000
4 - 13 years 4 months later 1,600,000,000
5 - 16 years 8 months later 3,200,000,000
6 - 20 years later 6,400,000,000
7 - 23 years 4 months later 12,800,000,000

Buffet I believe is worth about $15 billion; it could be $20 billion at this point. It does not matter. He is somewhere in his eighth double. This is the magic of compounding.

You'll also notice he never sells. That means his money is doubling every 3-years 4- months with no tax consequences. He is taxed when he sells, only when he sells. The money compounds until he dies and then it's at a capital gain rate in the far, distant future. He could not sell if he wanted to. Emotionally, he can't bring himself to stop the compounding effect.

Teach your children this technique and you will have very rich children. In stocks I show you how to make money at the bottom, by buying depressed securities that are going to go right back, thus you make a fortune as they rocket off the bottom. In the future, I will also show you how to make money with the Warren Buffet concept or classical Graham and Dodd analysis. In the mean time, good luck with understanding the magic of compounding and good luck with stocksatbottom.com.

PUZZLE: Answer

On the one hand: On the other hand:
$ 1,000,000 Day Amount
1 $ .01
2 $ .02
3 $ .04
4 $ .08
5 $ .16
6 $ .32
7 $ .64
8 $ 1.28

Hey folks, it's day eight and I am up to $1.28. I only have a month; maybe I am better off by taking the one shot deal, a million dollars. Let's see what happens:

Day Amount Day Amount
9 $ 2.5610 $ 5.12
11 10.24 12 20.48
13 40.96 14 81.82
15 163.8416 327.68
17 655.36 18 1,310.72
19 2,621.44 20 5,242.88

Incidentally, did any of you ask what month of the year we're in? Is it February with 28 days, or leap year with 29 days, or September with 30 days, or October with 31 days? You should realize, it's going to make a difference. Do you want the million dollars, ask your kids by the way? Which would they choose?

Let's continue:
Day Amount
21 $ 10485.76
22 20,971.52
23 41,943.04
24 83,886.08
25 167,772.16
26 335,544.32
27 671,088.64
28 1,342,177.28
29 2,684,354.56
30 5,368,709.12
31 10,737,418.24

Leap year compounding wins, if I give you October with 30 days, you make over $5,000,000. With December, it's over $10,000,000. I have never met the child, who didn't leap for the $1,000,000 on day one.

This is because we think arithmetically, not exponentially. Start thinking exponentially, Make Money Now.


Real Success2 Video Series - Walter Tweedie

I feel I must also express my gratitude to you for your work. Your latest video series (Real Success2 – www.traders.org) has helped my trading skills and results a lot. I am currently using candlestick charts with a Keltner Channel overlay, plus an additional 50 or 100 period moving average, in a 1 or 5-minute time frame. I also use market profile to ascertain additional support and resistance levels, which help a lot. I trade predominately the Nikkei 225, and find this market is suitable to our time zone and has plenty to offer most days by way of ranges even in a non-trending market.

The quality of the material on your site is exceptional and I feel we have a great forum for learning. If more members were to have some input by way of communication, I think we would all benefit.

In my trading, I agree with Dave it’s better not to have too many indicators as it ended to make me hesitate more than I should. Also CNN News clouds the vision more than it should.

I am not able to run your software, as I don’t have Tradestation or Supercharts. I was wondering if any members have a copy they would like to sell, I would love to hear from them at oztrader@hotmail.com

Our dollar has gone down so much against your dollar it makes any purchase quite expensive. In fact, if anyone wants to communicate re trading skills I would love to hear from you. Happy trading!


Timing Is Crucial - Rick Ratchford

Because the trading of futures markets are highly leveraged, timing is crucial if you are to make a success of trading. If your timing is off, even by a small amount of time, you can sustain quite a loss.

Many have experienced the trade that got away, where the direction of the trend was correct, but the entry was made just a little early and the trade stopped out. The feeling of knowing you were correct, yet instead of making a profit you get a loss, is one I can still recall. It is truly frustrating. It all has to do with timing. If you are too early, you will likely sustain a loss. If you are too late, you can miss the profitable part of the trade and end up with a loss. Thus, timing is crucial.

The margin requirements are low, thus providing the leverage for making big profits. However, it also narrows the time frame in which you can be early or late. Unlike stocks where you can take a "buy and hold" approach, futures traders usually cannot take the pressure and expense of "holding" when timing is off. As a matter of fact, it is not wise to "hold" while accumulating losses but to cut them out quickly and attempt re-entry at a later time. If you make too many of these off-timing trades, you'll soon be out the margin needed to trade.

There are two camps on market timing. On the one hand, you have the Fundamentalist who attempts to time his trades based on market demand and supply numbers, weather and other related data. This is the trader that wants to know the reason behind the move, and thus use this information to time a trade entry when such circumstances appear again in the future.

The other is the Technician who attempts to time his trades based on chart patterns of past market action. It is the technicians opinion that market patterns repeat, and by identifying such market patterns in the future, the outcome can somewhat be anticipated.

Both Fundamental and Technical Analysis attempts to take currently available information and derive a timing signal from it. Whether it is past or present data, both camps realize the importance of timing. If timing were not important, there would be no need for all this research and calculations. The trader could simply flip a coin and enter on a chance.

Timing takes many forms. The two camps of analysis briefly touched on so far is a generalization. If you delve deeper into either form of analysis, you’ll discover that it is divided into even more variations. A Fundamentalist might specialize in Economic Forecasting, while another into the weather implications. A Technician may specialize in identifying market patterns, while another prefers using indicators such as oscillators and moving averages. There are also those who time by the planets, those who use only trend lines, and others that prefer to time by market cycles.

The path a trader takes will usually be unique. I do not believe that any two traders take the exact same path to their preferred approach in market timing. Rather, they will enter the trading field by whatever it was that attracted them in the first place, be it a promotional offer in the mail or a broker's cold call to open an account. From the beginning, the new trader is highly dependent on the original source that lured him or her in. From there, this trader can branch off into many different avenues that will be unique and their own. Thus, no matter whom a trader may attribute their success to as the greatest influence in their development as a trader, the end result will be all the trader's own doing. No one can pick the path you will take as a trader, only you.

It is hoped that along the path one takes, the keys to expert timing will be found. But for many, the paths taken usually end up at the beginning or a dead end. Only a few make all the right choices to expert timing. Unfortunately, even successfully managing the maze of information correctly and to a satisfactory result, some simply fail to take advantage of their timing acumen. The psychological barriers may be too great to overcome for some, and others may either run out of patience to break these barriers or simply run out of money.

There is simply no hurry when it comes to education. Timing is crucial for trade entry, but the path one takes to improve their ability to improve timing should not be rushed along. Patience is a psychological aspect that is rarely mastered by most. Yet, it is one of the most important psychological attributes a trader can attain. In a rush to make large sums of money, many traders get edgy to place their money on the line. Patience is tossed out the window, and the trader takes many bad hits on their account.

I've written several articles on patience, so I won't get into that subject too deeply here. Instead, the emphasis here is on the importance of market timing. Whatever path you end up taking to improve this aspect of your analysis, do not commit yourself to big losses. Trade the smaller and slower contracts. The Mid-American Exchange offers traders still working on their timing skills a lower risk arena to trade. Paper trading is certainly an option also, but it lacks the emotional attachment that is so part of real trading. It is this trader's opinion that using a little money is a far cry better than none at all. Even a small risk will let you feel the emotions associated with getting a profit or loss. As you learn to develop the all-important skill of timing your trades, you will also be able to associate the emotions involved. You need this mental connection, the emotion and the action, if you are to have any hope of duplicating your actions to become a consistent participant.

Remember, it is one thing to be wrong and take a loss, and to be right as to direction and still lose money. Timing should never be taken for granted. Timing is crucial.


The Time Factor Of W. D. Gann - James Smithson

SUMMARY

W.D. Gann’s outstanding skill was his ability to produce accurate annual forecasts of the stock and commodity markets. Gann stated that his forecasts were based on his secret “time factor.” However, careful analysis of his novel entitled “The Tunnel Thru the Air” reveals Gann’s belief in the overwhelming importance of astrology. Therefore, astrology is the real basis of Gann’s annual forecasts. Indeed, astrological analysis is implicit at key points in his books and courses. Consequently, it is concluded that if we wish to emulate Gann’s outstanding forecasting skills we must follow in his footsteps by firstly learning astrology and then apply this knowledge to the stock and commodity markets.

INTRODUCTION

William D. Gann (1878 to 1955) was an outstanding stock and commodities trader. He was also a prolific teacher of how to make speculation a profitable profession, writing some seven books and producing two courses on trading the stock and commodity markets. However, Gann’s superlative skill was his ability to produce annual forecasts of the stock and commodity markets one year in advance. Although he also sent his clients supplements, which corrected his annual forecasts when necessary, the overall accuracy of these annual forecasts is highly impressive. For example, Gann’s annual stockmarket forecast for 1929, which was published in November 1928, unequivocally forecast the “Great Crash” in the fall of 1929. However, Gann continued to produce and publish annual forecasts of the stock and commodity markets until shortly before his death in 1955.

THE “TIME FACTOR” IS THE KEY TO GANN’S FORECASTS

Gann’s forecasts of the stock and commodity markets were based on the “time factor,” the dictionary definition of which is “The passage of time as a limitation on what can be achieved.” Gann provided the following comments on the time factor:

“The most important thing of all is the Time factor, which I use in making up my annual forecasts. It is not my object here to give away that secret, but I am showing you plain enough and giving you rules enough that, if you follow them, you will be able to make a success in the stock market” (“Truth Of The Stock Tape,” 1923, pg 116).

“Many people want to know what method I use to determine future indications on the market. I keep charts of the various active stocks and a set of averages. My charts are different from the charts of the average statistician because they are based on a discovery of my own. I have discovered a ‘time’ factor that enables me to determine important tops and bottoms one year or more in advance. My annual forecasts on stocks, issued in December for ten years past, have proved remarkably correct. The cotton and grain markets can also be forecast by this ‘time’ factor, which enables me to tell when extreme highs and lows will be made, as well as the minor moves” (“Truth Of The Stock Tape,” 1923, pg 41 of appendix).

“The time factor and time periods are most important in determining a change in trend because time can over balance price, and when the time is up the volume of sales will increase and force prices higher or lower” (“45 Years In Wall Street,” 1941, pg 10).

“Time is the most important factor of all and not until sufficient time has expired does any big move start up or down. The time factor will overbalance both space and volume. When time is up, space movement will start and large volume will begin, either up or down. At the end of any important movement – monthly, weekly or daily – Time must be allowed for accumulation or distribution or for buying and selling to be completed” (“How To Make Profits In Commodities,” 1951, pg 56).

Therefore we learn from Gann that:

  1. The time factor is the most important element in forecasting markets; and he used this time factor in producing his highly accurate annual forecasts of the stock and commodity markets.
  2. The time factor is so fundamental that it precedes (and therefore causes) changes in prices and changes in volume in the stock and commodity markets.
  3. The time factor is a valuable secret, details of which he is unwilling to reveal. He is however prepared to teach trading rules which, when properly applied, produce profits in the stock and commodity markets.

GANN’S NOVEL ENTITLED “THE TUNNEL THRU THE AIR”

Although Gann was unwilling to explicitly reveal his time factor in his books and courses on trading the stock and commodity markets, he was prepared to leave strong clues in his novel entitled “The Tunnel Thru The Air,” which he wrote in 1927.

This book describes the events in the United States leading up to the Second World War through the life of the principal character, Robert Gordon. Most importantly, in the foreword to this book Gann wrote, “‘The Tunnel Thru the Air’ is mysterious and contains a valuable secret, clothed in veiled language … when you read it the third time, a new light will dawn. You will find the hidden secret. The future will become an open book.”

Gann’s “valuable secret, clothed in veiled language” is that, as the Bible clearly states, astrology really works. This theme runs throughout the book and is highlighted in the following quotations:

“Robert was a great believer in Astrology because he had found this great science referred to so many times in the Holy Bible. He had made notes as he read the Bible at different times where it referred to Astrology or the signs in the heavens and was thoroughly convinced that the influence of the heavenly bodies govern our lives” (pg 172).

“I believe in the stars, I believe in astrology, and I have figured out my destiny. The Bible makes it plain that the stars do rule” (pg 66).

“Through my study of the Bible, I have determined the major and minor time factors which repeat in the history of nations, men and markets” (pg 70).

“I have studied the Bible very carefully because I believe it is the greatest scientific book ever written. The laws are plainly laid down how to make a success. There is a time and a season for everything and if a man does things according to the time, he will succeed” (pg 204).

“Robert had gone deeply into the Bible study in order to learn more about the great science of Astrology” (pg 213).

“He read all the books he could get on astrology and began to understand why thing had happened as they had” (pg 215).

THE FRONT COVER OF GANN’S NOVEL ENTITLED “THE TUNNEL THRU THE AIR”

Gann’s “valuable secret” that astrology really works is not confined to the content of “The Tunnel Thru The Air.” Indeed, Gann subtly reveals his “valuable secret” on the book cover.

The illustration on the front cover of “The Tunnel Thru The Air” has three elements:

  1. In the background is an interlocking compass and setsquare, from which comes a tunnel.
  2. In the foreground is a pair of scales, on one side of which is an hourglass and on the other side is a price movement.
  3. Stretching between the background and foreground is a series of interlocking squares.

The esoteric meaning behind this illustration on the front cover of the book is as follows: The interlocking compass and setsquare is the symbol of the Freemasons (Gann himself was a senior Freemason). More specifically, the compass (which is of course used for drawing circles) symbolizes the circle of the heavens, or the astrological zodiac. The setsquare (which is of course used for drawing “square” angles of 90 degrees) symbolizes the most important angle between two planets in astrology, which is 90 degrees (or a “square” aspect). Therefore, the esoteric meaning behind the Freemasons’ symbol is that the great circle of the heavens and the angles between the planets (i.e. the science of astrology) is of fundamental and eternal importance.

Moreover, according to occultism, astrological forces are vibrations, which are transmitted to earth via an infinite number of longitudinal waves through the ether. Therefore, the tunnel through the air in Gann’s illustration (and indeed in the book’s title) symbolizes this transmission of astrological forces from the heavens to the earth.

On one side of the scales is an hourglass, which symbolizes the time factor. On the other side of the scales is a price movement. Therefore, this pair of scales symbolizes the fact that, in his forecasting of the stock and commodity markets, Gann “weighed up” or examined the time factors (i.e. the astrological influences) and their past, present and future impact on prices.

The series of interlocking squares symbolizes the fact that, as Gann observed, the price action of a particular stock or commodity unfolds according to a series of interlocking squares. This is the reason, according to Gann, that “Every stock makes tops or bottoms on some exact mathematical point in proportion to some previous move” (Stock market Course). And “Each top or bottom in wheat, or other commodities, comes out in accordance with an exact mathematical proportion to some other top or bottom” (“How To Make Profits In Commodities,” pg 32).

In summary, the illustration on the front cover of “The Tunnel Thru The Air” highlights the fact that astrological influences (i.e., the angles between the planets in the circle of the zodiac) are transmitted to earth (via waves which resemble tunnels through the air) and after weighing the historical influence of these astrological forces on a particular stock or commodity, one can forecast the future price movements (and in particular the future price squares).

THE BACK COVER OF GANN’S NOVEL ENTITLED “THE TUNNEL THRU THE AIR”

Gann’s “valuable secret” that astrology really works is not confined to the content and front cover of his book “The Tunnel Thru The Air.” Indeed, this “valuable secret” is also subtly revealed in the illustration on the back cover.

The illustration on the back cover of “The Tunnel Thru the Air” shows two sets of interlocking squares stretching to the horizon. One set is shown in the sky and one set is shown on the earth. Also shown on the earth is a pyramid inscribed with the name of W. D. Gann.

In this illustration, the squares in the sky symbolize astrological “squares” (i.e. when the planets form an angle of 90 degrees with respect to each other). The squares on the earth symbolize the unfolding of price action in the stock and commodity markets, in the form of interlocking price squares. Here Gann is illustrating the age-old astrological saying “As above, so below.” However, Gann’s more specific symbolism is that the astrological squares in the heavens cause the price squares in the stock and commodity markets on earth. Gann made this point elsewhere when he stated, “We use the square of odd and even numbers to get not only the proof of market movements, but the cause” (Stockmarket Course And Commodities Course).

The final point about this illustration is the position of the pyramid, which bears Gann’s name. This is located between heaven and earth, and reflects Gann’s view that he was a seer destined to observe astrological squares in the heavens and to forecast their influence on price squares in the stock and commodity markets on earth.

In summary therefore, the “valuable secret, clothed in veiled language” of Gann’s book “The Tunnel Thru The Air” is that, as the Bible clearly states, astrology really works.

GANN’S “TIME FACTOR” IS ASTROLOGY

As stated above, Gann’s forecasts of the stock and commodity markets were based on the “time factor,” which may be defined as “The passage of time as a limitation on what can be achieved.” Since astrology may be defined as “The study of the effects of the trends of time,” we see that time factor may be synonymous with astrology. It therefore appears that Gann preferred to state that his market forecasts were based on the “time factor,” rather than to state that they were based on astrology. Indeed, this is certain after carefully studying Gann’s book “The Tunnel Thru The Air” and identifying its “valuable secret”, that astrology really works.

The reason for Gann’s secrecy is suggested in the following quotation: “It has taken me twenty years of exhaustive study to learn the cause that produces effects according to time. That is my secret and is too valuable to be spread broadcast. Besides, the public is not yet ready for it” (“Morning Telegraph” interview, December 1922).

Therefore, Gann preferred not to reveal that astrology is the basis of his market forecasts for the following reasons:

The principle that astrology may be used to produce detailed forecasts of the stock and commodity markets is a valuable secret that had taken Gann much time and effort to master.

Gann firmly believed that his students should, like him, devote much time and hard work to their studies on how to make speculation a profitable profession.

Gann was aware that the suggestion that the stock and commodity markets are governed by astrological influences is an astounding new paradigm, which violates the conventional wisdom and would therefore attract hostility.

This is highlighted in the following quotation: “It appears to be a fact that Mr. Gann has developed an entirely new idea as to the principles governing stockmarket movements. He bases his operations on certain natural laws, which, though existing since the world began, have only in recent years been analyzed with precision and added to the list of so-called modern discoveries.

We have asked Mr. Gann for an outline of his work, and have secured some remarkable evidence as to the results obtained there from. We submit this in full recognition of the fact that a man in Wall Street with a new idea – an idea which violates the traditions and encourages a scientific view of the proposition – is not usually welcomed by the majority, for the reason that he stimulates thought and research. These activities said majority abhors” (“Ticker & Investment Digest” interview, December 1909).

GANN AND ASTROLOGY

Since Gann’s book “The Tunnel Thru The Air” reveals the “valuable secret” that astrology really works and, by implication, astrology is the basis of Gann’s stock and commodity market forecasts, one should look for evidence of the use of astrology by Gann in his other writings.

1. GANN’S CHAPTERS ON FORECASTING IN HIS
STOCK AND COMMODITY MARKET COURSES

Gann produced and sold separate courses for trading the stock and commodity markets. These courses overlapped to some significant extent. One chapter common to both courses is entitled “The Basis Of My Forecasting Method: Geometrical Angles.” An important quotation from this chapter is as follows: “We use three figures in geometry, the circle, the square and the triangle. We get the square and triangle points of a circle to determine points of time, price and space resistance. We use the circle of 360 degrees to measure time and price.

There are 360 degrees in a circle, no matter how large or small the circle may be. Certain numbers of these degrees and angles are of vast importance and indicate when important tops and bottoms occur on stocks and commodities, as well as denote important resistance levels.

Every movement in the market is the result of a natural law and of a cause which exists long before the effect takes place and can be determined years in advance” (Stockmarket Course and Commodities Course).

The esoteric meaning behind this statement is as follows: There are 360 degrees in any circle, the largest of which is the great circle of the heavens, or the zodiac. Certain points on this zodiac (identified by a precise number of degrees) are very important because they relate to specific stocks and to specific commodity markets. Consequently the angles between a planet and these specific points on the zodiac and also the angles between two planets are very important because they signify tops and bottoms in the stock and commodity markets. Two important angles (or “aspects,” as they are called in astrology) are the square (or 90 degrees) and the triune (or 120 degrees). Since the angles between a planet and a particular point on the zodiac or between two planets can be calculated years in advance, stock and commodity markets can in principle be forecast years in advance.

It is also important to note that the above quotation by Gann was in the introduction to his chapter on forecasting by means of “Gann angles”; i.e. forecasting by using the 1 X 1, 2 X 1, 1 X 2, etc. trendlines from important tops and bottoms on price charts. Therefore the very important implication here is that (as the chapter title suggests) the basis of Gann’s forecasting method was not merely the geometrical “Gann angles” drawn on a price chart, but (more fundamentally) the geometrical angles between planets and the zodiac (which is of course astrology). In summary therefore, Gann is suggesting that the angles between the planets and the zodiac in the heavens (i.e. astrological influences) cause the particular angle of a trendline on a price chart, and this is the real basis of his forecasting method.

2. GANN’S EMPHASIS ON ANNIVERSARY DATES AND SEASONAL TENDENCIES IN THE STOCK AND COMMODITY MARKETS

Gann’s consummate book on the stockmarket was “45 Years In Wall Street” (written in 1949) and his consummate book on the commodity markets was “How To Make Profits In Commodities” (first written in 1941 and updated in 1951).

The common feature of both books is their emphasis on the importance of anniversary dates and seasonal tendencies, as the following quotations illustrate: “My object in writing this book ‘45 Years In Wall Street’ is to give you some new and valuable rules on time periods which will help to guide you in determining high and low prices in the future. In my research work, I have discovered that stocks make an important change in trend in the months when they reach extreme high and low. These are what I call anniversary dates. These important dates should be watched each year for important changes in trend” (“45 Years In Wall Street,” pg 92).

“It is very important to watch the date when an individual commodity makes extreme high or low. The first important time period to watch from any anniversary date is third or fourth month, then around the sixth or seventh month, where many important tops and bottoms are reached” (“How To Make Profits In Commodities,” pg 58).

The esoteric meaning behind these statements are as follows: Certain points on the zodiac (identified by a precise number of degrees) relate to specific stocks and to specific commodity markets. The sun is unique amongst the planets in that it completes one revolution of the zodiac every year. Moreover, on any given day of the year the sun is in exactly the same position (in the zodiac) as it was on that day one year earlier, ten years earlier or a century earlier. Consequently, the sun will aspect a particular point on the zodiac on the same day every year. This is the cause of seasonal tendencies in the stock and commodity markets (indeed, this is the cause of all seasonal tendencies on earth).

The important point to note here is that Gann emphasized the seasonal tendencies in the stock and commodity markets to encourage his students to think about and to identify the cause. The cause is the position of the planets, and in particular their angles to a specific point on the zodiac (which is of course astrology).

3. GANN’S RECOMMENDATION TO STUDY ASTROLOGICAL INFLUENCES ON THE COMMODITY MARKETS

Amongst Gann’s surviving papers are his two “astrology letters.” More specifically, in January 1954 Gann wrote to one of his students recommending that he study the astrological influences on the soybean market (“The longitude of the planets and the longitude of the average of the planets determine the resistance levels as the price of soybeans moves around each cycle of 24 cents per bushel”); and in March 1954 he again wrote to his student recommending that he study the astrological influences on the coffee market (“By studying all of the (astrological) data outlined above and applying it to coffee, you will be able to learn more about what causes changes in trend”).

Gann died in June 1955 and therefore these astrology letters are some of his last teachings. However, it is notable that in these two short letters Gann does not reveal any clear and specific method of astrological forecasting of the commodity markets. Instead, Gann encouraged his student to observe, experiment and learn for himself how the angles between the planets and their angles to specific points on the zodiac forecast the changes in price trends. Indeed, it appears Gann had for over fifty years kept secret his method of market forecasting and at the age of 76 he was not simply going to reveal it to a student. Nevertheless, Gann was continuing his lifelong practice of helping his students to make speculation a profitable profession by giving them guidance and letting them learn for themselves.

CONCLUSION AND RECOMMENDATIONS

W.D. Gann’s highly accurate annual forecasts of the stock and commodity markets were based on astrology. Therefore, if we as investors and traders wish to emulate Gann’s outstanding forecasting ability, it is absolutely necessary that we learn astrology.

Although astrology may be learned from a variety of sources, the present writer recommends as a first step, the correspondence courses in spiritual astrology taught by The Rosicrucian Fellowship, which may be contacted at International Headquarters, 2222 Mission Avenue, Oceanside, California 92054, U.S.A.

Once we have learned astrology, we must apply this knowledge to the stock and commodity markets. This task requires much hard work, as Gann himself observed:

“I soon began to note the periodical recurrence of the rise and fall in stocks and commodities. This led me to conclude that natural law was the basis of market movements. I then decided to devote ten years of my life to the study of natural law as applicable to the speculative markets and to devote my best energies toward making speculation a profitable profession” (“Ticker & Investment Digest” interview, December 1909).

However, Gann has provided us with specific guidance. In summary, we should obtain daily price charts, which depict important tops and bottoms in the stock and commodity markets, and we should observe the following:

The angles between the planets (the most important of which is the 90 degrees, or “square,” angle);

The angles (especially the 90 degrees angle) between the planets and particular points on the zodiac;

The longitudinal position of the sun and especially its 90 degrees angle to particular points on the zodiac (because this causes the seasonal tendency in a particular market).

When we have mastered how astrological influences affect the stock and commodity markets, we will be in a position to produce accurate annual forecasts. Like Gann, we will then become the foremost speculators and traders of our generation.

Although there are many individuals and companies around the world claiming to teach “Gann analysis” through books, courses, videotapes and computer programs, they should certainly be avoided. This is because, since none of these individuals or companies can produce an accurate annual forecast of the stock or commodity markets, they do not in fact teach Gann’s real method.


Adin the Great

I have been tracking your website for a few months and I think it is terrific. The concept and the variety of useful information offered is truly excellent. Please keep up the good work.

I'd like to discuss something, which is quite important.

I live in Malaysia (for time being) but I come from Eastern Europe. I classify myself as a trading affectionado and a part-time trading system developer.

A few months ago, I was working on some trading ideas that were buzzing around my head for. What I have developed is something that I consider a powerful trading tool. Spent the past 3-months back-testing it on various time frames and under various market conditions. The results are truly amazing.

Firstly, applied new trading method to local stocks and then proceeded to test on US stocks and futures. In both cases, got above 80% accuracy estimate. Even when deducting the commission and slippage, this system produced constant profits.

I'm reluctant to market this system in Malaysia, since the markets here are depressed and lacking in investor confidence.

The reason for addressing myself to you is that you're the only investment service in US that I’m aware of presently. Would like to propose if we can establish some partnership platform based on which you could help market this product to US traders.

Lastly, will send you a brief brochure of my work. Don't have much time to prepare a professional presentation; but have explained in general terms how the system works.

PART 2

Went back to Europe for a month to enjoy the beginning of spring season, while there I came up with another idea. Couldn’t wait to get back to Malaysia and try to put it in a Metastock code.

The underlying idea was to identify large buying and selling pressure solely based on price information, not utilizing volume figures.

I tested this on variety of stocks and futures and for the past month. I am testing it on E Mini S&P500, 5-minute charts. Every day I am getting $500 out of the index. And that is only based on conservative profit objectives. On many days, the index offers me more.

This system consists of eight components. Each complementing the other. It works superbly in swing markets and effectively avoids sideways markets by giving signals at the lowest and highest points. For trending markets, I use two moving averages (5 period MA offset 3 periods + 8 period smoothed MA offset 5 periods – 5 period smoothed MA offset 3 periods AND 5 period smoothed MA offset 3 periods + 5 period smoothed MA offset 3 periods – 13 period smoothed MA offset 8 periods). These two MAs could be used as a simple trading system on their own. (Notice how the black colored MA defines support and resistance) I was really surprised to see it all come up as I expected it in Metastock. I guess the Equis people won me for life. I’ll just go over it briefly and charts in themselves can explain everything.

1. The whole system evolves around the blue and red histograms. The blank spaces in between the two blocks of a histogram highlight the areas of price reversals.

2. For identifying the peaks and troughs within those areas I use Peaks and Troughs Id. (that’s from the previous work I sent you). Because they are dynamic in nature, I couldn’t run tests in Metastock. It would be neat if a software could be developed that would enable those signals to remain on the chart after their occurrence. I found no sufficient replacement for identifying peaks and troughs except through these two indicators. Do you have any suggestions?

3. I’ve also added the two divergence indicators that I’ve developed. The red bars on the charts indicate negative divergences and the green bars indicate the positive. Normally, the first signal after their occurrence should be taken.

4. Everyone says, the trend is your friend. Well, I made the trend to not be your friend. That’s why I brought in the two MAs for a trend to be your friend again. You see, without the MA duo, the system does not respond to trending markets. It generates unnecessary signals. So when there is an indication of a beginning of a trend, only the two MAs should be used. They’ll get you through the trend with excellent profits.

How to know when the trend is about to start? I’ll take an example from the first chart. A hypothetical trader has gone short at the market top. He looks for a trough in between the two blocks of a red histogram that surpassed the previous through. As trough appears he exits and if the close goes below the immediate trough, he goes short again and follows the two MAs until the trend is over.

5. The second set of histograms I made out of Zero Lag MACD. They fill out the blanks that first set of histograms sometimes miss (this happens seldom). E.g. in the first chart, on April 2, you can see a top signal but there is no bottom signal.. And the Zero Lag MACD histogram fills out the blank by giving out a buy signal at the bottom. You can see a few more instances of this back up support in the charts below. (PUT IN CHARTS)

If all these components could be programmed into a software package and made fully automated, this could become the “Dream System.” What’s most important, it’s not a closed system. The parameters could be adjusted to accommodate different volatility conditions.

Let me tell you something about myself. I’m 27 years old and I’m still going through my college degree (I started a bit late). I got my fascination for trading while I was briefly employed in a local investment firm. I used to trade coffee futures for one client, but since the trading hours in New York correspond to early morning hours in Malaysia, I found myself not waking up for morning lectures. So, I had to quit. But I swore to myself that I’ll devote the rest of my life to trading. In my spare time, I started to develop trading systems. I read many books from the library and they got me thinking and gave me many ideas. This is the near culmination of my work, although I still have more ideas lingering in my brain. I just need sufficient motivation to develop them.

Here in Malaysia, it would take at least 10-years to save up some capital to open up a trading account. Over here, the market is in doldrums, lots of people have lost money due to the ignorance of local brokers, and there is no short selling. I can’t promote my work in Malaysia since people are afraid to invest.

This system works incredibly well and by trading only E Mini S&P 500 anyone can make a million dollars within 2-years. It’s really hurting me to see all those profits being made on paper and not going to my bank account.

I need to sell this system to start trading on my own. I can make a million dollars with it. Here’s my proposal, I will email you 5-minute charts of E Mini and daily charts of various stocks and futures showing the performance of my system for you to be convinced that this makes big money. I am willing to give it up to you (including the previous work I sent you) and you can put a trademark on it and develop it as software or later write a book about it. All I would ask is a sufficient amount of money to open up an on-line trading account and start with one Mini contract. I can’t help the investing public from my position but you can. You are in position to get this out to people and let them make money. After all, I don’t need to tell you this since you know more about these things than I do. I just need to start trading on my own and that’s all I am concerned about.


Another 30 Year “Bull Market?” - Mark A. Pennings

“This has been the biggest Bull Market in history!” These are the phrases we keep hearing from the media. Today, it seems that everyone is intrigued by the stock market. However you still have those investors who are waiting for the “inevitable’ correction. “When is this market going to come back down?” Is a question I constantly hear from investors. The answer, of course, is nobody knows for sure. Most long-term analysts agree that the market will continue to go higher for many years to come. I will attempt to explain why I think that we could be set for another 30-year Bull Market in the stock market.

“The baby boomer generation will inherit over 2-trillion dollars over the next 40-years.” Proclaimed the speaker at a recent trading seminar I attended. This is an amazing statistic. It can be assumed that a large portion of this money will be put in the stock market. As the market continues to climb higher, there is more and more money being generated.

This “generated” money is ready to buy any dips the market may bring. Which brings up the question, “when would investors take their money out of the market?” Ideally, people pulling out some of their money will not have a catastrophic effect on the market. Inevitably, investors will look to “cash out” at some point, however I still think they will leave the majority of their capital in the market. The market is still the ideal place for generating positive returns.

Another reason why we will see the market continue to go higher is because the younger generations are realizing how important a strong market is to the overall economy. These young adults will continue to invest heavily in the market.

Another key factor in this market is how much wealth has been generated and will continue to be generated by the rising market. The price of a stock is simply determined by what the current bid and offer is on that particular stock. So the idea that a stock price is too high or too low is simply a matter of opinion because a stock can go as high as people are willing to pay for it. Most investors who make money in the market will continue to put more and more money into the stock market.

So many different factors indicate the market will continue higher for the next 30-years. The momentum will continue to drive this market well into the early part of the 21st century. If you are currently in the market stick with it and try not to get rattled out of the volatile market. If you are not currently in the market, by all means try to become involved because the market has a very bright future.


Elliott Waves - Gregory Tubby jr. MM

Elliott waves are commonly used as a tool to forecast movements in the stock and commodity market. Elliott wave is much deeper than just market forecasting; it is a naturally occurring phenomenon. Elliott was able to predict when wars would break out, the rise and fall of government, anything that deals with human sociology can be charted and forecasted.

Elliott waves in its simplest form are a pattern of progression and regression. It is most important to understand how patterns unfold, and how to use the formulas for different types of scenarios. There are more corrective patterns than there are impulsive patterns, not every chart is as easy as 1, 2, 3, 4, 5 and A, B, C.

For people to say most Ellioticians make money on the way up, then lose most of the profits on the way down. Those traders either are not using the patterns correctly, or they do not know how to apply the formulas. Personally, money is made faster in a downward cycle. Looking at my buddy the NASDAQ, we have dropped over 3,000-points in less than a year. These opportunities come all the time. R.N. Elliott called the end of the depression down to the hour.

The important thing with wave analysis is not to get lazy. Examine the whole chart; don’t always look for the quick and easy. Though it is nice when a basic pattern shows up, be disciplined, use the Fibonacci equations, and take care that your work is precise.

For me it is more of a passion than work. I enjoy looking for Fibonacci numbers while walking down the street. Watching people do repetitious tasks and charting when they will make a mistake. Elliott wave, when used properly and completely is the most rewarding markets forecasting tool available.


Fieldonline Broker - John Barragan

I felt I should write concerning my most recent experience with Fieldonline (Field Financial Group Brokerage). I recently read a couple of articles on your Ezine and issue 53 regarding this same broker.

I have been using this broker for about a year with several disappointing experiences and I thought some of the disagreements might have been some negligence of mine. However, after reading other's similar experiences and then most recent one of mine, encouraged me to write about it, so hopefully others may benefit from this.

This occurred (1-24-01). I was following the March Canadian Dollar and entered a market order at 7:28 am (cst). After waiting 10 minutes and no fill, I called and was told they would check on it. After more waiting and no confirmation, I entered a limit order and got no fill after 10 minutes waiting. I then cancelled that trade, entered another limit order, and waited another 10 minutes -- no fill. I cancelled this trade, entered another limit order, and waited 10 more minutes -- still no fill. So I cancelled this one also, entered my 4th limit order around 9:45 am, and waited for 15 minutes -- still no fill, so I decided to just give up for the day.

Then around 11:40 am, 1st American called to ask what my position was on cdh1,I said I tried unsuccessfully to place 4 trades and didn't get one fill, so I quit for the day and I'm flat the market. They said no, you are long 4 fills and the market is going against you. I said NO WAY! I never got one fill even after calling to find out my position.

The brokerage still charged my account for the loss. I asked what can a small time trader do about such wrong business practices? Hopefully this experience may help others.

Take a walk on the Dark Side – The truth will set you free - “This treasure that I hold More precious than the finest gold It is you Lord, it is you”

We set out on our trading journey seeking riches, fame and fortune with a heart full of ambition and a clear vision of the pot of gold at the end of the rainbow. Yet somehow, many of us never get there, and as we stumble on the vision becomes increasingly blurry and intangible. What is it that makes some traders successful and others fall by the wayside. These serious questions beg for an answer. In order to find these answers we must go for a walk on the dark side. Many traders gloss over this side of the business because it is essentially a negative subject. This is not a feel good subject and nobody wants to go there. But for those traders hungry for success we need to get introspective.

The Beginning

Here we are stuck in a job that’s going nowhere with little freedom to do what we really like. Or else we are very successful in our chosen business and profession and feel burnt out and in need of a change.

Mistake Number 1

We assume that trading requires less of an effort than our day job. All of a sudden we now feel we can earn twice as much money for only a few hours work each day. Wrongggg!

If you want to be successful in this business be prepared to study and work. Buy the books, read the articles and keep testing various methods and strategies. A continuous learning process that requires a huge time commitment and a “back to university” approach.

Mistake Number 2

Because we are successful in our chosen professions or businesses and may be intellectually gifted we automatically feel that this will translate into success as a trader. Wrongggg!

Professional and business success can in fact hinder our progress as a trader. Education can be a major stumbling block. How so? Because, as we go through life we develop lots of filters and screening mechanisms that can be powerful in our acceptance or dismissal of new ideas.

Through personal success, we develop confidence in our ability to discern the good from the bad and we become more critical and less accepting of new or different ideas. Our opinions take over and begin to run our lives. We become set in our ways and increasingly resistant to change. For instance, I have discovered that I can provide convincing evidence of a successful methodology to a group of 10 people. Yet, on average only 2 out of the 10 will finish up with proper follow through and successful implementation. Very poor odds indeed!

Some of us have to be dragged kicking and screaming to the party. A simple invitation is no longer good enough.

The book of wisdom teaches many good points concerning the value of being humble and open to new ideas:

James 4:10 - Humble yourselves in the sight of the Lord, and He will lift you up.
Prov 3:34 - Surely He scorns the scornful, But gives grace to the humble.
Prov 11:22 - When pride comes, then comes shame; But with the humble is wisdom.

High achievers can have special problems because generally speaking our eyes are not open and our ears do not hear. Our brain filter acts as the interpreter and self-importance fed by achievements creates significant blockage.

I did not care too much for my time spent in the army but I have to grudgingly acknowledge that boot camp did a lot to bring me back to earth and change my value system. I believe that the shock tactics used in the boot camp approach can be a very useful in shaking us out of our preconceptions and bring us face to face with the harsh realities of the trading business.

On of my best students recites the following litany before he starts trading the E-mini NQ Futures in real time. At 20 bucks a point errors can be very costly. It goes like this: “I am not a trader. I am a typist, not even a good typist. I am not as good as a trained monkey because trained monkeys have brains. I don’t have one of these because I left mine in the corner. All I know is that when the system tells me to do something I do it. When the night is over I will recover my brain from the corner and go use my calculator to add up my profits.”

Trader know thyself

Lets wander then through some of these dark corridors and take a real close look in the mirror. Allow me to introduce you to a few stereotypes and their qualities. These same personality traits exist in each of us to a greater or lesser extent. Look hard and you will find them. Truth is a bitter pill to swallow.

The Cheapskate & Shortcut Specialist

This person is constantly looking for the cheapest book, the cheapest software and the biggest results. He is more interested in saving not trading. The book he should buy costs $140. He sees another book on the same subject for $40. So, he rushes out and buys that one. Does not realize that by getting only half the story he will end up paying much more in losing trades.

Should be putting his money into a savings account and keeping an eye on the weekly grocery specials, NOT trading!

Most of us would agree that if we were looking to set up a new and highly profitable business we would expect to spend many thousands of dollars on tools, equipment, stocked. Yet when we come to set up our trading business we look for the cheapest software, a superseded computer and someone who will let us borrow their trading books and magazines. How stupid is this??? Unfortunately, 90% of trading hopefuls die because they are undercapitalized and constantly looking to cut corners. Compare this to the successful businessman who will confirm that he spent a lot of money in set up and development of his business and constantly seeks to reinvest and expand by allocating money for research and development. Trading is a business and should be treated like a business. Once and we must get a hold of this.

The Analyst/Perfectionist

This guy will try to rip everything to bits to find out how it’s all put together. When he gets a piece of software, he will turn himself into a programmer. If it doesn’t work, he will find ways to make it work, even if it is a dud. He is not happy with daily data, hourly data or even minute data. He will settle only for tick data. Programmers generally make lousy traders. The analyst will analyze every trade to death and ultimately is a poor decision maker.

The Software Junkie

Works on principle that “more is better.” More indicators, more pictures, more data. Spends most of his time bedding down new and more exciting programs and “fighting” data. More toys usually means more confusion and there is no substitute for hard work of the proper variety.

The Opinionated

Will state emphatically that the Aussie dollar is going down, the Dow is going up, da da da da dah . Has very little to back up his opinion but is a legend in his own mind. Will hold onto his position until grim death and frequently without a stop. His view is that the market will eventually come to its senses and discover that he was right. $25,000 later, he eventually has to concede his position when his broker advises him that he is over margin. This last nail in the coffin in no way dissuades him from pronouncing precise and clear judgments for the future. This guy really is in a class of his own and I have come across him several times.

With pride comes destruction. Plain and simple. The Book of Proverbs makes many, many references to this. Go there and read it. There is nothing like a few wins to make one cocky and set up for the big fall. Our opinions grow more important as we become more successful. The market loves this quality and cares diddlysquat about your opinions.

Posers

Frequently seen outside seminars with their cell phones and beepers issuing rapid-fire instructions to brokers. Very outspoken at parties and social gatherings. Brag about their wins but can’t remember too much about their losses. It’s all about “looking good” and keeping the ego well nourished.

Many of us carry this “Star complex.” The world is full of people who can talk the talk but can’t walk the walk. Have a look around you. These people are attracted by the glitz and glamour of the markets and the attention they get from their little speeches.

Posers need to understand that the real game goes on in the privacy of their own trading screen. Winning trades, not winning approval should be their focus. Professional traders go quietly about their business knowing fully well that the more noise they make the greater the pressure they put on themselves as traders.

The Laggard

Attracted by the lure of easy money – more money for less effort. It’s pretty cool to push a couple of buttons and have dollars spit into your bank account. But, heaven forbid, can there be some prerequisite to earn this? The operative word here is “earn.” How do you propose to earn this money? What, pray tell, is going to be your valuable contribution? How much time and effort are you prepared to commit to educating and upskilling yourself? How much discipline do you have?

A few days back I got a call for help from a trader who purchased a new software program a couple of months previously. I asked him if he had taken the time to view the instructional videos that came with the software. His answer was “No, he hadn’t got around to it.” Yet, here he was asking me to give up my time to show him the basics. Height of laziness & arrogance.

Groupies

Identify with a particular guru and buy everything that has the guru’s stamp. Do not take the time to test and develop their own thinking. Spend half their lives emailing or calling their tutor for his opinion on what should be obvious. Fall into the trap of becoming co-dependants and lose the power to make their own decisions.

The solution is to follow the guru’s teachings but develop your own thinking and decision making ability. A true guru will not throw you fish but will teach you how to fish. You must learn to do and apply the rest.

Gamblers

There is some truth in the observation that trading is simply a civilized and slightly more respected form of gambling. It falls under the guise of speculating. We need to acknowledge this up front. We need to acknowledge and control our gambling tendencies. Lack of control quickly leads to speedy and inevitable destruction.

Small Thinkers

This is your typical nitpicker that majors on the minors. Never gets past the cost of the data, the cost of the subscription, etc, etc. Goes round and round in circles. Generally aims very low. Keeps very tight stops and as a result frequently gets kicked out of winning positions. The big picture and the pot of gold that comes with it passes him by because he is intensely focused on the many specks of bull dust that preoccupy his thoughts. Tiny vision brings tiny profits.

Poor Me’s

Everything seems to be going wrong for them, but it’s not their fault. It’s always something or someone else. They are victims of circumstance. Victims are constantly blaming external factors. They have a never-ending list of complaints about anything and everything. They love to whine and complain. Usually have a history of bad trading experiences and feed off this to perpetuate their misery cycle. A silver bullet would provide an expeditious solution.

Control Freaks

Want to dominate and control everything. Suffer great frustration when things don’t go exactly to plan. Big on vengeance trades. Have strong opinions and cling to those opinions even after the market has proven them wrong. Will hold onto losing positions until the final nail has hit the coffin. Generally, have few friends and finish up lonely and depressed.

The Mule

Resistant to change and slow to adapt – the markets are continually changing and newer and better markets are always emerging. I have walked away from a market after only a few months because I was able to recognize that it changed and became a poorer trading proposition. We want to keep doing the same things and keep expecting different results (definition of insanity). Most of us are not open to new ideas and ways to do things as much as we like to pretend.

The Horse that won’t drink

Characterized by a lack of follow through. Very persistent in asking for advice but never follows it. You tell him to visit a site and download a program – he doesn’t do it. You tell him to buy a book – he doesn’t do it. Keeps coming back with the same proposition – “Teach me, teach me.” Are these people deaf, dumb or both?

The Smart ass

This guy is very, very clever (or at least he thinks he is). He secretly believes that he has all the answers. He pretends to listen and then goes off and does his own thing (after all he knows best). Typically, this person has traded the markets before. Has he made a lot of money? No. On the contrary, chances are he has lost a s…load. Has this experience even slightly dented his self-esteem? No way!

The Nervous Nellie

Generally, risk averse and driven by fear. He should not even think about trading yet he feels he should give it a go because it all sounds so easy. Later…the trade is there staring him in the face. He will look at it from a hundred different angles and eventually talk himself out of it. Tendency to over dramatize situations and chatter about them incessantly.

The Confused

This guy has been to every seminar, read every book and tried out every software program, but he hasn’t finished yet. Where does he go from here?

We need to weigh up and optimize our intake. Lets not become professional students. Practice makes perfect and at some point, we have to make the first incision.

The Two Dimensional Thinker

I teach him to trade between certain hours in a particular market. He is now making lots of money. I tell him that at the end of the days session he should review the entire days activity to get the feel of the market and gain intimacy. His response? – “Nah, that doesn’t concern me. I don’t trade in that timeslot.” Cannot see the bigger picture.

The Neanderthal

Computer illiterate but does not want to do anything about it. Will not enroll for training courses or make an effort to upskill. Still believes he can do it all without software and computers. Yes, it is possible but also highly difficult. Why make it hard for yourself?

The Bore

No sense of humor. Takes life too seriously and has trouble coping with his losses and weaknesses. Hey, none of us are perfect. We should be able to take a step back and laugh at our own stupidity. Laughter is the best medicine.

The Procrastinator

Sounds too much like hard work so lets do the easy bits for today. Full of good intentions but none of them have wheels. The road to ruin is littered with good intentions.

The Skeptic

Arms are permanently folded in a “convince me attitude.” Trusts nothing and nobody. Trying to get through to him is like trying to get through a brick wall. He only hears less than 10% and then only accepts 1% of that. Judges everyone by his own low standards. Bit of a lost cause.

All is not lost

Clearly, we have the potential to act as our own worst enemy. I have highlighted above only some of the weaknesses that can affect your results. If we put that together with the statistical evidence of success versus failure we can draw only one conclusion - Trading is a Loser’s game. This is a game for losers NOT winners. It follows then that if we are to succeed we must learn to lose less as opposed to winning more.

So, is it all too hard – should we in fact bother?

Yes, we should – because the rewards are great. Successful traders do it all with seeming effortless ease. A bit like the pop star that is judged to be an overnight success after 20 years in the business. Nevertheless, if they can so can we. If it was too easy the rewards would be correspondingly low. It is still possible to be highly successful provided we make the effort to know ourselves and manage our weaknesses.

The markets are constantly speaking to us. The problem is we are not listening. We must learn to tune in to the market and develop the right sort of filters. We must be able to look in the mirror and see the truth about ourselves not what we want to see.

I promise you that if you are successful in this business you will learn a lot about yourself and build your character in the process. Whether you get to enjoy it all will depend very much on your other values and how you preserve your relationships.

Remember, the truth will set you free and after all, what is more important – your ego or your bank balance? Decide this once and for all. Leave all your baggage behind. This is not a touchy feely business so lets be prepared for a few “insults.” If you don’t like it, there’s always social studies. Many of my comments are designed to provoke and shake you out of your complacency. Why? Because we need to penetrate that fog, we sometimes call a brain! I can help you with the markets but who is going to protect you from yourself. You must be quick to recognize your own weaknesses and take corrective action.

Ask yourself what it is about you that will allow you to succeed where more than 90% of others have failed. What is your special claim to fame? Why do you “deserve” to succeed where many fail miserably? What is going to set you apart from the crowd? Remember, the market owes you NOTHING.

You might be thinking – hey its my time and my money – I don’t need this. Well in that case, the market is ready and waiting for you – Goodbye and good luck!

“The fear of the Lord is the beginning of knowledge, but fools despise wisdom and discipline” Prov 1:7


"Technical Trading Systems for Commodities & Stocks"
A book Review by Raymond F. Kohn

This book was originally written and copyrighted in 1980 by Charles Patel, was currently out of print until Traders Press re-released, and published the book in August of 1993-2014. It is 202 pgs and contains 82 technical trading systems.

1980 is a lifetime ago considering all the developments that have taken place in technology, trading systems and software. Powerful personal computers didn’t even exist back then, let alone sophisticated trading and back testing software.

The book was written for the investor who doesn’t have a computer handy, but does have access to a pocket calculator. This book is very reminiscent of Wilder’s classic book “New Concepts in Technical Trading Systems” that was written in 1978. If you liked Wilder’s classic reference book, you’ll like this book also.

One of the first things you notice when you review the Table of Contents, is that most of the sophisticated analysis technics which are typically pre-loaded in most of today’s technical analysis software, are not listed in the Contents. Given the original publication date of the book, it is highly likely that most modern technical trading technics were developed and published after 1980. It wasn’t until the Colby and Meyers book “The Encyclopedia of Technical Market Indicators” which was published in 1988 that a number of contemporary indicators are reviewed and evaluated such as Stochastics, Relative Strength Index, Directional Movement Index, Commodity Channel Index, and many others.

However, this book does cover a few of the old classics such as various permutations of the Donchian methods, On Balance Volume, and the Williams’ Accumulation/Distribution method. But for the most part, the focus of the book details a wide variety of trading technics, which highlight specific price and volume relationships, combined with certain entry and exit filters.

Unfortunately, back-testing software was not readily available back then, so the reader is left to do this research on his own prior to utilizing any of the systems included in the book. In the “Forward” Mr. Dobson, of Trader’s Press, invites readers to do systems research and back-testing of any or all of the systems contained in the book, and requested feedback on their results of the research.

This book is a collection of trading systems numbered 1 through 82, on average each system is given 2 to 3 pgs of space and typically includes the following information:

The “System Number” (1), (2), (3), etc. Then the “Name” of the system being discussed, such as Simple Moving Average. The “System Definitions,” this includes the exact calculation methods that are used in creating the indicator, along with very specific Buying and Selling rules. And lastly, a “Discussion of the System” which identifies the pros and cons of the system in a very general manner. Note: Not all systems listed in the book have a “Discussion of the System,” which is most unfortunate.

Some systems actually identify which markets the particular system was designed to work in, ranging from specific commodity markets, to the general stock market and equities. The sub-heading “Applicable For” is used with some of the systems when specific markets are indicated.

Following these sub-headings is a “Worksheet” which is done in a ledger column format with each of the calculation results listed with specific Buy and Sell points identified. Typically, about 30 periods are shown. A calculation period can be days, weeks, or other segments of time. Unfortunately, the 30 periods is only enough space to provide the reader with an “example” of how the system is used, and not to offer any confirmation of the system’s effectiveness.

The first 18 systems contained in the book cover a wide range of various “Moving Average” based trading systems. At the end of “System 18” he concludes with a synopsis of the various Moving Average systems by saying:

“A Single moving average without any filter (time or price) is a very inadequate technical tool likely to be too costly to stock/commodity traders.”
“A Single moving average with time filter is a good technical tool.”
“A Single moving average with time and price filter is a better technical tool.”
“An Optimized single moving average with time and price filter is the best technical tool.”

This is about as close as the author gets in providing you with an evaluation of the effectiveness of each of the trading systems discussed.

Systems 19 thru 31 are “Volume” oriented trading systems, whereby “Volume,” or “Price and Volume” are major components within the trading system being discussed. System 31 is titled “Volume - General Discussion” and contains 12 key points regarding volume. Every one of these key points is a valuable lesson in evaluating how volume can foretell future price activity. This is a very worthwhile couple of pgs very reminiscent of the “Wyckoff Trading Methods.” Don’t skim over this section. Below are a few random examples of some of these key points he mentions regarding volume:

“(2) An advance starting on high or ultra-high volume is likely to lead to further gains.”
“(6) Heavy volume following sustained advance without any appreciable price rise is a sign of price distribution.”
“(10) Light volume on decline is usually neither bullish nor bearish.”

Systems 32 thru 35 are “Trading Range Indicators” which tend to use oscillators. Buys and Sells are made when the oscillator reaches extreme levels and begins to reverse direction.

Systems 36 thru 38 are “Momentum Indictors” which again use oscillators in a similar fashion as in prior systems.

Systems 39 thru 46 are various “Relative Strength Indicators” which utilize an oscillator at extremes with Buy and Sell signals given as the oscillator reverses direction.

Systems 47 thru 59 contain a variety of “Channel Breakout Indicators” which are strictly price action oriented indicators, such as “Donigan’s Thrust Method,” “Donchian’s Four Week Channel Breakout,” and many variations using different time periods.

Systems 60 thru 82 contain a wide variety of “Price Trend-Line” indicators, ranging from “Speed Resistance Lines” to various “Momentum Trend Indicators.”

It is highly likely that some of the indicators contained in this book have merit; it is unfortunate that a companion addendum was not added to the reprint, which attempted to back-test and evaluates the 82 systems covered in the book. I would recommend that you DO NOT USE ANY OF THE SYSTEMS mentioned in this book without testing them out for yourself within the markets that you trade. To do otherwise would be courting disaster.

However, despite this cautionary note, there are many interesting ideas and insights throughout this book, which would be of great value to any trader. This book should be on the shelf next to Wilder’s 1978 classic reference.


OPTIONS & SPREADS:
Memories of Green Felt and a Gold Cigarette Case – Greg Donio

Several years ago, searchers in an Italian bay recovered a sunken Roman ship nearly 2,000 years old containing priceless bronze statuary, goddesses and warriors of a mythic age. Yet, there can also be “business archaeology” with the handcrafted vestiges appearing not in ancient metals, but in more recent building materials.

Little Italy of South Philadelphia is widely-known for its quaint row-houses, stucco and brownstone facades, wrought ironwork intricate as licorice. Mentioned less frequently are the traceries of businesses long gone. Near the waterfront, a build-now serves as a furniture warehouse with office furnishings behind plate glass windows. But large letters etched in exterior concrete overhead say “Tripoli Barber Supplies.”

At Seventh and Christian Streets, 6-three-story building of tan brick has curved cornicing suggesting castle turrets. Currently it houses a cigar wholesaler but the long-ago business name is embossed in the brickwork over the portal: “Banca Calabrese” or Calabrian Bank, after the province forming the toe of the Italian boot. It was one of many “immigrant banks” that flourished in the late 1800s and early 1900s with a varied assortment of halos and horns.

The book From Immigrants to Ethnics-The Italian Americans by Humbert S. Nelli says, “The typical banker had little experience in business methods, ran his office with a minimal accumulation of capital, and for the most part worked outside legal controls. Immigrant bankers were not, for example, restricted as to the kinds of investments they could make with money deposited (restrictions that applied to state and national banks). As a result, speculative ventures of private bankers often ended in disaster, particularly for immigrant depositors; since they had no legal safeguards, they lost their savings.”

Generalities make bad lasagna because the layers differ. Many immigrant bankers had impressive integrity and capability. Yet with regulation loose or lacking, they varied one to another like shop-keepers in honesty, competency and specific notions of what to do and how. Also, one or two vacant side offices in those banks could be a temporary desk-top headquarters for a peddler with a portfolio, selling bearer bonds that might or might not be stolen and stock certificates in companies sound, shaky or imaginary.

“So why bring that up now?” you ask. “What has this to do with today’s financial scene? It’s been a long time since the era of horse liniment and moustache wax.” However . . . Yes, but . . . Ice-boxes and fancy suspenders have vanished with time but bad investments are forever. Also, many vestiges of an earlier day keep coming back, like the green-grocer worried about his penny stocks and odd lots.

Read today’s news, Charlie. The front page of the New York Times for March 16, 2001. Dateline York, Pennsylvania. “The stock market’s shrapnel is spraying all over this industrial town, just under 200 miles from Wall Street.” It says that the city’s truck drivers, office and store clerks, nurses and factory workers are “new and largely accidental participants in a game that was once played by men who wore suits.”

What the NY Times calls “the remarkable democratization of stock market” is showing its downside, and brutally. At the time of this writing, publicly-traded stocks have lost a value of four trillion dollars in the past year. It rips across tax-deferred IRAs, kids’ college funds and workers buying into their employers’ 401K retirement plans, not to mention vast-numbers of former passbook savers who “graduated” to portfolios. Agonies once uttered by pinstripes at country clubs now find blue-collar voices.

I wish I could send sky-writing planes over all the industrial towns, spelling out across the blue a quote from Nick Darvas: “There is no such thing as ‘can’t’ in the stock market. A stock can do anything.” Millions of people who could have sold at a profit instead spent 12 months repeating the mantra, “They can’t go any lower.” The New York Post for March 15, 2001 quoted Long Islander Howard Hirsch: “I was just about to buy a townhouse in Miami, but I can forget about that.”

On March 16, Friday of Dow/Nasdaq hell week, John the broker told me on the phone, “Those 10 Compaq options you sold expire worthless today. I’d hate to be the guy who bought them but for you it’s all gravy. You’re one of the few people I know who can say anything good about this Rocky Horror market.”

The fellow who bought them. The gulf bridged by brokerage math and electronics is all that prevents me from being the bookmaker saying to the horse-player, “It breaks my heart you lost. What’s your next bet?” That separation makes me feel more a gentleman. However, it does not alter the fact that somebody else’s financial trip-to the whipping post is my cash till. Somebody else’s vanished Miami townhouse is my Broadway theater tickets first edition Tales of Chekhov, swordfish dinner at the captain’s table.

So, what did I do precisely? On January 29, 2001, I bought 10 out-of-the-money call options on Compaq Computer stock with an expiration date of July and a strike-price of 25. These options were out-of-the-money because Compaq common shares sold at the time in the low 20s, below the strike-price of 25. The options traded at 2-3/4 points; meaning $275 for one or $2,750 for the 10 that I bought.

What did these call options entitle me to do? Their expiration date was nearly six months off (third Friday in July) at time of purchase. Let us say that the price of Compaq stock were to zoom upward at any time during those six months, say to 35 or 45 dollars a share. One call option with a strike-price of 25 would enable me to buy 100 share s. at 25 dollars a share, no matter how high above that the stock climbs. The 10 calls I bought would entitle me to purchase 1,000 shares at $25,000 even if the value of 1,000 shares rises to $35,000 or $45,000.

Buying the stock under this arrangement is called “exercising the options” although that is seldom necessary in actual practice. If the under lying shares were to soar 10 or 20 points upward, 10 calls bought for $2,750 would swell in market value to over $10,000 or $20,000. The option purchaser would not need to exercise them because he could simply re-sell them at a profit. Notice that just a 50 percent increase in the price of the underlying stock (low 20s to 35) would more than triple the worth of the calls ($2,’750 to $10,000). This resembles how a moderate increase in the value of an underlying commodity multiplies a futures contract.

So how come every hotel doorman and bootblack you meet does not swim in futures trader wealth or optioneer wealth? Usually the “underlying” does not move so spectacularly. Over 90 percent of all out-of-the-money options expire worthless and between 80 and 90 percent of all futures traders get gored on one or another horn. Also the passing of time continually whittles away at an option’s value, shrinking it markedly in weeks. A tea party entourage in a den of lions would have a higher survival rate.

So what ELSE does owning 10 Compaq “July 25” call options entitle me to do. How about creating and selling other options for hard cash? Owning stocks and bonds does not give you the right to print and sell more stocks and bonds. Owning US paper currency does not give you the right to create another batch. With options, happily the rules change. On that day in late January I bought 10 calls with an expiration date of July, I automatically acquired the right to create and sell 10 calls with an expiration date of February, or March, or April, or May, or June.

How? If I sold a March or a May and it went into the money (i.e. if the underlying shares rose) and calls I sold were exercised, I would be required to deliver 1,000 shares at 25-per even though the stock is trading on the market for more. I could do that simply by exercising my July 25s. The person exercising the pre-July calls would pay $25,000 to purchase the shares but I would pay only brokerage commissions and—alas—lose the $2,750 I paid for the Julys, since they would cease to exist if I exercised them. The point is that buying Julys in January, gives one the right to create and sell for cash a batch of Februarys or Marchs or . . .

The strategy described above is called a Horizontal Calendar Spread—Horizontal because of the same strike-prices (25) and Calendar because of the different expiration months (buy the July, sell the preceding March). The bought options are called the “long end” of the Spread and the sold ones the “short end.” So, when I bought the Julys for $ 2,750, I could have sold Februarys that preceded them but the Febs were near in time and shrunk to a small fraction in value. March 25s traded for a full point each so I sold 10 for $1,000.

A little less than seven weeks later, March options expired worthless on the third Friday of that month. Compared to what I paid for the Julys, the “pure gravy” $ 1,000 is a profit of 36 percent not counting commissions and annualizes to over 250 percent. The big print in the New York Post says, “Wall Street Is a Bloody Mess.” My eyes are dry because Street shrapnel is my coin. Whoever bought March 25s hoped Compaq would lift off. It remains below 25 a share. More good news, at least from my vantage point: I still own the July 25s and have the right to sell the Aprils, and when they expire, the Mays, and golden et-cetera.

The above marks a departure from my usual procedure. Those who have read my past columns know that the long and short ends of my spreads are usually back-to-back—buy October and sell September, buy March and sell February. In this instance, I bought call options nearly six months far in time and sold ones that were nearer in time by several months. This is a variation on what is widely regarded as the most conservative of option strategies: Selling covered calls on stock that you own.

Let us say you own 1,000 common shares of Compaq. Each 100 shares give you the right to “write” or create and sell one call option. With 1,000, you may sell 10 calls that expire in February, then after they expire, 10 March, then etc. Each “etc.” is fool’s gold for the option-buyer and real nuggets for the seller. The options you sell are termed “covered calls” because they are “covered” by the stock you own. If the shares rise in value above the strike-price of the call options you sold, and the buyer of the calls exercises them, you must sell the stock at the strike-price even though its market price is higher.

A Horizontal Calendar Spread with several months between the buy end and the sell end is a take-off on the selling of options by a stockholder. With this type of spread, the near-in-time options you sell are “covered options” because they are covered by far-in-time ones you own. In the example given, the July 25s I bought and own “covered” the March 25s I sold, with 10 July calls providing the same “covering” function as 1,000 shares of Compaq stock. A stockholder has 1,000 shares and a holder of 10 calls can get hold of 1,000 shares at the strike-price no matter how high the stock climbs. Thus each may write (sell) “covered” options, and each may continue to “write” month after month, continue to sell options on the same block of common shares or the same batch of August 35s or November 40s or whatever.

The hazards? Selling covered options is risk-reduced, not risk-free. The bookmaker and the gambling house owner both win far more consistently than the gamblers but the business could fail and the start-up investment could be lost. The share-owner who sells calls can take a severe loss if his stocks drop markedly. The spread strategist may see his long-end options shrink to a tiny fraction if the underlying shares plunge. Spreading can upgrade option-trading from a brat-shoot risk to a business risk but there is no guarantee. That is why it is life’ so-blood essential that an optioneer also be a stock trend follower.

South Philadelphia does not teem with business grave-markers but the occasional one serves to remind. Engraved in the masonry overhead is Mama D’Orazio’s Spice Shop but a more current sign in the window announces a plumbing fixture store. A securities trader’s business may be in his pockets or desk drawer or portfolio but it should be near to eternal, with the start-up money still generating through corridors of time. It was on South’ Eighth Street that Moses came down off Mount Vesuvius and handed me four words etched on terracotta.

Maybe it was not so dramatically obvious at first. My old friend from Catholic school, Michael Iaconelli, had an ice cream shop on South Eighth Street. From a second-floor office over the shop and a third floor recreation room and sometimes movie projection room, Mike ran a community program to help keep kids and teens away from street drugs. He won a humanitarian award, I did volunteer work for the project as a publicity writer, doing local newspaper pieces sometimes under my own name and sometimes ghosted over Michael’s signature.

In a room behind the ice cream shop was a pool table where two or three pals could gather. It will disappoint the fans of old George Raft movies that no oily, sinister character stood in the shadows flipping a coin. It will disappoint fans of “The Sopranos” that we did not hit each other over the head with wastebaskets or discuss the measurements of cement overshoes for those scheduled for river bottom.

The conversation did, sometimes contain a hazardous mix of the false and the true. I fell into a chat with a sweatshirted, mustached lad named Dominic as he chalked the tip of a pool cue and we talked investments. “Y’know, during the Crash of 1929 and the early ‘30s, the stock market did level off for a while,” he told me. “There was this big tycoon with lots of money who said he was going to turn the market around while it was falling. He used all his money to buy lots of shares. That stopped the market from falling for a while. Then it kept going down and he lost everything.”

Stripped of misinformation, the story proved instructive. My subsequent research revealed that the man was William C. Durant, the founder of General Motors. The events occurred not in 1929 or the early ‘30s but during the bear market of 1922. His efforts involved not the whole market but the stock of his own company. In previous years, he had built General Motors into a giant conglomerate with the high-priced Cadillac, the low-priced Chevrolet in competition against Henry ford, and several other car models in-between.

William C. Durant was an experimenter sometimes to the point of frivolity. On the minus side from his list of successes, his career was cratered with bad decisions, plant closings, and car models that failed to catch on. The reference book The World Guide to Automobile Manufacturers mentions “William Durant’s doomed scheme” in 1909 and “Durant’s ill-starred empire” in 1922. The latter doubtlessly ranked as his Titanic.

In the first two decades of the 20th century, automobile-manufacturing stocks rose to the stratosphere on waves of investor enthusiasm-and visions of America as “A Nation on Wheels.” Then in the early 1920s, share prices grew vastly in excess of earnings and potential earnings, and the supply of eager investors ran out. Auto stocks plummeted. Bill Durant said, “Not if Ian help it!”

He took the huge fortune he had accumulated, plus borrowing, and attempted to halt the fall in the price of General Motors stock by buying up immense numbers of shares. The stock’s plunge stopped and leveled off for a time. Then it kept falling, reducing his cash fortune to a pittance. In the years before his death in 1947, Durant operated a bowling alley and a diner. The Four Words that should be etched in stone masonry or cake icing or skin with a tattooing needle may be rendered as “Go with the Trend” or “Trends Are Your Friends” or “Don’t Buck the Trend!” The sin of the transgressor is marked with burgers, beans and bowling pins.

If “bucking the trend” can put a greasy spoon in the hand of an automobile titan, what can it do to lesser-gauge stock-buyers and, more to the point of this article, option handlers? On the financial cable channel today (3-22-01), Mike Murphy of First Union Securities said, “I don’t want to call the bottom of this market. I’ve already called it a couple of times and I was wrong.” He could afford to sound amused since the chart descent and his wrong calls did not knock even one penny off his executive salary. Unfortunately, things like that knock off bundles of bucks from plenty of other people.

Let us focus on the “tech blue chip” Cisco Systems as an example. Several months ago, it hit its 52-week peak of 82 dollars per share. After it slanted downward to 60, more than a few bargain-hunters and market fundamentalists began buying up this “bargain-priced stock.” Option-buyers purchased calls with strike-prices of 60 (at-the-money) or 65 (out-of-the-money) to rake in profits during the “real soon” anticipated rebound. Spreaders who trade only out-of-the-moneys “horizontaled” by buying far-in-time 65s and selling near-in-times with the same strike-price.

When Cisco stock sunk to 40, those who “bought at the top” lost more than half and “bargain-hunters at 60” lost a third. Doubles those figures for those who bought shares on margin. Straight option-buyers saw their calls shrink to tiny fractions then expire. Spreaders saw their bought or “long end” far-in-times do likewise but with more months until expiration. At that same time, more bargain-hunters bought large numbers of these “wonderful half-price shares.” Plenty of non-spreading optioneers grabbed up calls with strike-prices of 40 or 45 in expectation of the bounce back. Calendar Spreads formed along the 45 strike-price level. Oh my God, it’s still slipping!

The story repeated when the shares touched 30. Cisco’s price today: 19 & a fraction. Sad faces abound as the ghost of Bill Durant stands by the billiard table and sings, “They can’t go any lower.” That line would fit well in the brickwork over the entrance of a South Philly business that no longer is. Much better, though, would be a gold pot with engraving, “Respect trends, cook pheasant” or some such four-word combination on the shelf.

Buyers of put options did far better in the recent market. All the options described in preceding pages have been calls. Put options have to do with a stock’s downside and were designed for “downside protection” if the chart motion veers south. One put “protects” 100 shares of a given stock. For example, a person who bought 1,000 shares of Cisco at the top, or 82 dollars a share, could also have bought 10 Cisco put options with a strike-price of 80. That gives the stockholder/option-holder the right to “put” or sell the 1,000 shares at the strike-price, even if the market value of the stock falls below that price.

When Cisco fell to 50 or 4-0, the owner of the put options had the right to unload the shares at the strike-price of 80-per to the option-seller, who was obligated until the put’s expiration date. Sweet. So why did stock “downsides” not vanish with the Packards and Edsels? Like calls, puts usually cost more than they deliver. Over 90 percent of all out-of-the-money options expire worthless, puts as well as calls.

A put-buyer need not exercise it or even own any stock since a fall in the value of underlying shares increases the re-sale value of the put. In the above example, a 30-drop in Cisco common would increase the market value of one near-the-money put by $3,000 and 10 of them by $30,000 approximately. With puts as with calls, alas, the underlying stock usually does not move so spectacularly, so the worthless-at-expiration story tends to recur. A glad story for spreaders, you say? Thou catcheth on.

The put’s role as “downside insurance” is no less questionable than its role as “lose nine times out of 10” trader’s dice. The Sunday New York Times for Feb. 4, 2001 printed in its “Money & Business” section an article entitled, “The Option as a Shield in a Shaky Market.” It gave the example of 1,000 shares of AT & T stock worth $23,380 protected for two and a half months (early February to late April) by 10 put options which cost $2,800 or 11.2 percent of the shares’ value.

I wrote a response explaining that, in this example and at this price, a year of “protection” would cost over half the value of the stock. The stock would have to gain over 50 percent in dividends and share price increase in a year just for the investor to break even. The NY Times printed the piece in the Feb.25 “Money & Business” section and in it I also said, “Put options are great if a stock nosedives but, if used for any length of time, they are the cattle insurance that eats half the steer.” That, the piece declared, is why “downsides” are not extinct monsters.

Film actors complain that their best scenes wound up on the cutting room floor and writers gripe likewise about editing cuts. The Sunday newspaper lopped off a concluding paragraph which appears here in print for the first time: “You (the NY Times) quoted an investment house chief who said, ‘Protective puts are one of the best ways to hedge . . .’ Yes, investment firms do love options. With their expiration-date disappearing acts, puts & calls keep investors reaching for their checkbooks again and again and again.”

Obviously, option-sellers including spread strategists profit as much as do brokerage firms from the “again and again.” Only occasionally, do options serve their original and still-touted purpose as “downside insurance” puts and “foot in the door of rising stocks” calls. Behind the sophisticated window-dressing are bets on which raindrop will reach the bottom of the windowpane first and which of two sugar cubes the fly will land on. With Compaq, I sold 10 raindrops with March expirations for $1,000 and anticipate selling 10 April or May sugar cubes at a price still to be determined.

If I had it to do over, I could have bought back and thus erased the “short end” March 25s for $400 a couple of weeks before expiration. To “short” or sell 10 for $1,000 and buy them back for $400 is a $600 gain minus brokerage commissions. At that point in time, the Aprils would have been fatter, less time-decayed, while today the Mays remain plump. Still owning the Julys, I can sell April and then May and then June or May and then June, whichever shoots the fattest buffalo. The trend-follower in me expects the Compaq shares to rise, placing the options in the money and requiring a closing out or ending of the spread position with gains.

“Closing out” means buying back the near-in-time short end and selling the far-in-time long end. However, you may do “diagonal spreading” by selling calls at a strike-price higher than calls you own or puts at a strike-price lower than puts you own, and still be “covered.” For example, you buy August 25 calls, sell April 25s, both “out of the money” because the underlying stock is at 22. Then the shares rise to 27 or 28. You must buy back and thus close out that “in the money” short April because an exercise would wipe out your long-end August and add commission costs. You could pull out of both April and August. Or you could buy back/close out the April 25s while keeping the August 25s, then do a recovered diagonal” spread by selling April 30s (or May or June 30s).

With puts, the “covered diagonal” works on the downside. You buy August 20s and sell April 20s—both sets of puts “out of the money” with the stock at 22 or 23. Then the underlying shares fall to the high teens. You may keep the August 20s and buy back the vulnerable “in the money” April 20s, then sell “out of the money” April 15s or May 15s still covered by the Augusts. Admittedly, I have not either “diagonaled” or used put options in a while. I do not recommend what I do not do. I write as an active trader—a financial sailboat instructor who (a) sails and (b) does not need Coast Guard rescuers.

This is in contrast “landlubbers,” i.e., pure theoreticians who never traded in their lives but advise on the subject, and “shipwrecked” financial stretcher-cases who lost savagely then make money selling alleged “Win Big!” advice. Dave Green wrote kindly of non-trading “advisors,” comparing them to a teacher in law school or medical school who does not practice law or medicine at the time. My attitude is more cold-hearted. They differ barely from the wagerer who takes a licking at the casino tables then collects fees “teaching gambling” or selling “roulette system” books.

Such a “teacher” has found another way to “fleece the suckers,” siphoning off part of the cash that goes to buying chips. I do not claim superiority, since I sell Aprils that expire worthless and Octobers that expire worthless. My money belt swells as other people’s stacks of chips dwindle and their dreams of quick fortunes dissolve. But I do claim to have made dollars by following my own instructions, something like the successful businessman who writes a gem dealer’s manual or an auto accessories manual. Unlike the peddlers who only win in theory and sell the theory.

Mark Twain’s first published writing was an Old West piece about bored sourdoughs betting on which frog would jump the farthest (“The Jumping Frog of Calavaras County”). Yeh, tell me how much everything has “changed” since then, thanks to SEC regulations and engineering degrees and Internet computers. Practically everybody agrees that trading should be “a business, not a gamble” just as practically everybody agrees that tobacco is bad for you. Yet, millions of people still walk around in smokescreens and millions leave the frogs alone only because other “investment vehicles” jump more energetically.

All right, so I sell green amphibians with expiration dates. Spreading is essentially a type of bookmaking because the “short end” or “sold end” of the option spread pulls in quantities of other people’s money and thus transfers much of the risk to others. Also, buy August and sell April, then sell May, etc., pulls in other people’s money repeatedly. How sweetly that latter word resonates while it adds to the cash till in the horse parlor. I mentioned, “bored sourdoughs” for a special reason. Although trading can fascinate and spellbind, it is the world’s worst way to fight boredom.

The horse-players are riveted to the radio as the ponies round the far turn, while the bookmaker reads science-fiction or pulp adventure. The gambler’s emblematic phrase is “make it interesting.” Example: “Let’s you and me have a bet on the side to make it interesting.” Notice that the horse parlor proprietor with the magazine has found something “interesting” not connected to racing. Whether a financial trader handles it as a business or a gamble frequently rises or falls on what is interesting, even if it not be related to trading.

My articles contain references to culture, fine arts and literature for two reasons: (1) the financial community has been failing in its role as a keystone of culture. (2) The individual trader is less likely to end up in those “90 percent lose” statistics if he cultivates the traits of the Renaissance Man, including a variety of interests. There are no guarantees but the trader with a fascination for, say, Babylonian archaeology has some kind of a head start on the fly-on-a-sugar-cube gambler who loves the suspense. Remember that plenty of the latter have brokers instead of sugar bowls.

Why do I say the financial community is dropping the cultural banner? Part of the prophetic “handwriting on the wall” appeared in the Wall Street Journal. In the April 10, 1993-2014 issue, Oklahoma’s Republican governor Frank Keating slammed current movies, songs, TV and books for supposedly causing immoral behavior and youth crime. He praised the songs (“Yellow Rose of Texas”) and the movie musicals (Oklahoma!) of his 1950s boyhood and declared.

“As a former prosecutor, I would feel confident in indicting the popular culture as an accessory” in school shootings.

For some mysterious reason he failed to denounce Medea, whom devotees of classical Greek drama know as the wife of Jason, sorceress-and-murderess of her two children. There is more to the story according to the Columbia Encyclopedia: “She induced the daughters of Jason’s uncle Pelias to murder their father, promising to restore his youth. When Jason wished to marry Cruesa, Medea sent her an enchanted wedding gown which burned her to death.” Why did Governor Keating never mention that he would “feel confident in indicting” the publishers for the alleged piles of slain children, murdered daddies, incinerated brides that must surely crowd the crime statistics even to this day due to the pen of Euripides? Too far from his Rodgers & Hammerstein crow’s nest?

Apparently, the targets are limited when you use a 1950s boyhood as map and telescope. I called the 1993-2014 Wall Street Journal “prophetic” because Gov. Frank Keating was in the news more recently. In late 2000, his name appeared on the short list of potential G.O.P. vice presidential candidates before Dick Cheney was chosen. Another foreshadowing Journal issue (June 11, 1993-2014) quoted then-Princeton professor and Philadelphia cop’s son John DiIulio raging against rock and rap: “The music pounds and pounds with messages of violence and degradation of women; if you talk to people on the streets, they will tell you this is public enemy number one.”

Why was this crystal-ballish? In weeks recent to this writing, President George W. Bush has named John DiIulio to head the White House Council on Faith-Basel Initiatives. The old-time religionists and the hayride crowd singing Harvest Moon have a friend in the Bush Administration. So does the proprietress of the shop that sells religious articles in the Italian neighborhood. But she never heard Aida’s aria from the tomb and it appears likely that neither did DiIulio. Handwriting on the Wall (Street Journal) indicates that it is largely a soap box for Right Wingers whose roots of culture and tradition are buried closer to Disney celluloid than to Cellini gold or saved-from-the-sea Roman bronze.

If I show extra snidenes toward Professor John, lay the cause to his ethnic background, which he disappoints. Any paisan worth his red sauce knows that grand opera such as Donizetti’s Lucrezia Borgia did not bring about real-life seduction beds or bloody scimitarra or poisoned wine cups. After the recent death of Dale Evans, the New York Times retrospective said she and her cowboy star husband Roy Rogers never kissed on screen “because they knew children were watching.” Amazingly, children have watched Leoncavallo’s opera I Pagliacci for over a century without being driven to commit adultery or stabbing.

I do not totally condemn screen gangsters but the hit TV series The Sopranos is easy to reject due to its lack of a past. Even if a billiard room is hardly a tabernacle of culture, in real life one or another paisan occasionally mentions a Caruso aria or a Bernini marble while lining up a cue ball. You would never know that from watching The Sopranos. The title character in Mario Puzo’s The Godfather, Vito Corleone appreciated poetry by Dante, music by Rossini, paintings by Tintoretto. Tony Soprano’s “traditions” include old James Cagney movies, strip joints, and a glow of nostalgia around aluminum diners. He seems to be the only one on TV who knows less Italian culture than Rev. Pat Robertson, who occasionally writer, for the Wall Street Journal.

If the investment community is to have any cultural gas in its tank, dear reader and financial trader, do not expect it to come from the Wall Street newspaper or the White House, nor South Philadelphia banks long gone or TV mobsters playing poker or a Schenectady bowling alley (or wherever Bill Durant had his cash register). If classicism does not come from you, it will sink like statuary in a wooden ship. You will have a long wait if you expect the George W. Bush coterie to read about Lord Carnarvon’s archaeological findings at Luxor or order a video of Verdi’s Aida or Gounod’s Faust by phone from the Metropolitan Opera Gift Shop in New York City.

The French word “flaneur” literally means “loafer” but its usage was less negative. In Paris of the late 1800s, it referred to a class of elegant, well-tailored gentlemen-idlers who cultivated an interest in art and literature. The dapper Impressionist painter Eduard Manet was one. They included bankers, also brokers and traders from the Paris Bourse. The flaneurs knew cafe society and ruby brocades, the aroma of cognac and the sound of Debussy piano chords.

Paul Landormy wrote that musically, “Claude Debussy is a dreamer who does not seem to believe in the reality of life, and lives in a dream. Even in objects themselves he seizes only an illusory semblance . . .” The composer himself wrote in a program note for the “Festivals” passage of his Nocturnes: “Here, also, the episode is of a procession (a wholly impalpable and visionary pageant) passing through the festival and blended with it.” He also penned notations of the “melancholy march of clouds ending in a gray agony tinted with white” and “luminous dust participating in tonal rhythm.”

In contrast to this ephemera, Eduard Manet sent forth-unsettling ripples with his realism, most notably by painting nudes in realistic settings. Manet’s Olympia reclines on a sofa in an opulent boudoir while her black maid shows her a bouquet. The implications offended many members of Paris polite society. Here was a “kept” woman viewing flowers sent by her boulevardier or Diamond Jim. The woman whom people envisioned in Debussy’s “Clair de Lune” waxed ethereally, a moon-mist Aphrodite transmuted into melody. A Manet nude sipped claret from a very tangible goblet.

I cannot make Bordeaux wine or chandelier music rise from this page. However, a silver-plate fondue of some literary samplings awaits your taste. Translated from the French, Guy de Maupassant’s fiction story “The Rondoli Family” told of a young Parisian’s trip to Italy: “That delightful coast from Marseilles to Genoa is a kingdom of perfumes in a home of flowers . . . And the roses—fields, hedges, groves of roses! They climb up the walls, blossom on the roofs, hang from the trees, peep out from among the bushes . . .”

“The train went on through the tunnels, along the slopes, above the water, on straight, wall-like viaducts, and a soft, vague, saltish smell, a smell of drying seaweed, mingled-at times with the strong, heavy perfume of the flowers.”

On another page of the same story: “You know Paul, and how he idealizes women. To him the earth is habitable only because they are there; the sun gives light and warmth because it shines upon them; the air is soft and balmy because it blows upon their skin and ruffles the soft hair on their temples; and the moon charms because it makes them dream and imparts a languorous charm to love.

Notice the side-effects on an author who looked at plenty of brush-strikes by Boucher in France and Titian in Italy. What this country needs, to invoke an overworked phrase about the USA, is more “flaneurs” active on the opposite side of the Atlantic from the Paris Bourse. South Philadelphia used to have a local opera house—Verdi Hall. When that closed down, paisans went several blocks north to the world-famed Academy of Music. On New York’s Wall Street and elsewhere, alas, the old-style tycoon with the coachman in tow and the art museum’s membership ticket seems to have died without replacements.

Culturally, the investment world resounds with the voices of Professor DiIulio and Governor Keating shouting for a return to the zenith of Roy Rogers and Dale Evans. Financially, it swarms with millions of people who—despite neckties and computer discs-are essentially bored sourdoughs betting on jumping frogs and losing 90 percent of the gold nuggets.

Debussy-like, I envision a shop not tangible. Embossed in brick and concrete overhead are the words “Wealth Unlimited” but a more recent sign hangs in the store window: “Gone Out of Business.” You won’t find that place on any street but it is real enough to fit millions of traders and investors. Perhaps I should not have sentimentalized the billiard table because too much bad financial advice has traveled over green felt. Yet, it also travels over pinball machines and cans of motor oil and pipes and tweeds in professors’ lounges and freshly-shot quail in the marshlands. Your alertness is your only immunity shot.

Bad trading tips echoed off the gold cigarette case held-by the duke and again when held by the pawnbroker. I advocate Horizontal Calendar Spreads as a business-like manner of trading, not risk-free but a marked improvement over the supposedly “business-like” bets on raindrops and the thousand variations. Remember spreading’s ability to tap routinely into other people’s money, knocking dollars off those droplets on the windowpane. It rains in April, then May, then June, etc.

I also advocate your writing a letter to the Wall Street Journal regarding the “Culture Wars.” Those editors appear to need reminding that the “echoing past” did not begin with Betty Crocker and that Sophocles Oedipus Rex did not fill the morgues with stabbed fathers. The diamond stickpin wearers of an earlier age cannot write from the crypt. You do it. Be their successor. A letter on this or any other matter to your elected representatives in government would be far from a bad idea. They hear from the “old-fashioned folks” who think Stravinsky owned a junk wagon. Let them hear from the latter-day tycoon.

TRADER’S DIARY: On March 30, 2001, I bought 10 Dell call options with a strike-price of 30 and August expiration. A minute later, I sold 10 Dell calls with the same strike-price and expiration in April. Both sets of options are “out of the money” with the underlying stock in the mid-20s. I bought at 2-3/8 points and sold at 15/16 of a point. In dollars, this means I bought or “longed” 10 Augusts for $2,375 and sold or “shorted” 10 Aprils for $937.50 before commissions.

That established the two ends of the spread. Strategy-wise, I plan to buy back and thus kill off the Aprils when they shrink to a small fraction in the weeks ahead, then sell Mays. Continuing to own the August gives me that “covered selling” power. Why did I choose Dell? I have anticipated a resurgence in presseddown-in-recent-months “tech blue chips.” However, in the first place I could be wrong and in the second, all tech blue is not created equal. The trend-follower in me noticed that Cisco continues sliding and Intel might or might not have a foot-hold. Dell and Oracle both appear to have found a bottom and a fractions-of inches upward direction. Both reportedly are financially durable.

Oracle has my attention as possibly the next “underlying.”

A dose of “handle trading like a business” scrutiny says Oracle does not guarantee but looks like a good prospect, given ample fundamentals and the early rudiments of an up-trend. Cindy Adams in her week-end newspaper column says we ought to “be grateful the stock market plunged into the lavatory the same month we had the St. Patrick’s Day Parade. It was the last green anybody’s going to see for a long time.” (New York Post, 4-1-2001)

Hey, Cindy. The 900-dollar bills gained in my brokerage account on Friday March 30 are not wine-colored. Those Four-Word “Trend” Axioms (“Don’t Buck The . . .”) can be elaborated on as follows—There are two kinds of traders: Those who see the gold in the trend and those who see the pawnbroker’s gold tooth.

Then What Happened? - Greg Donio

TRADER’S DIARY: On May 10, 2001, I bought 10 Oracle call options with an expiration date of December and a strike-price of 20 at a cost of 2.65 points or 10 for $2,650 plus commission. On the same day, I sold 10 Oracle calls with the same strike-price of 20 but an expiration in June (third Friday of) for six-tenths of a point (.6) or 10 for $600 minus commission.

The latter is a “covered sale” with the Decembers covering the Junes. With a horizontal option spread (same strike-price, different months), owing the far-in-times gives the optioneer the right to create and sell near-in-times, and not just once. As the value of the Junes diminish in late May (they have shrunk to .25 or $250 for 10 as of this date, May 16), I plan to buy back the Junes (a “closing” transaction by which they cease to exist) and sell Julys, then perhaps Augusts.

The difference between “the Junes sold” and “the Junes bought back” is profit, and may repeat with subsequent months. “Spreadus interruptus” is possible. At an earlier date I closed out my Dell horizontal position (with profit) because the value of the underlying stock climbed above the strike-price of the calls, placing them “in the money.” For horizontalers, the party’s over. Likewise, I shall pull out or close the position if Oracle shares (now 15 or 16 and a fraction) rise above the strike-price of 20.

I may resume a position in Dell out-of-the-moneys. Also Compaq with a well-in-the-future expiration date. One may have an eye on the call option possibilities of Intel and NASD 100, the latter an optionable closed-end fund with the advantage of diversity.


I thought I would subscribe until ... - BTW

Until I saw on your website an article by Ritch Ratchford (widely known on Misc.Invest.Futures as Ratboy). In my opinion, he can write some nice sounding fluff, but this infamous Fdates author and scam artist pollutes newsgroup with his deception, spam, scam, etc.

How can I have any confidence in the writings of any of your correspondents when I see him in the group?

Editor’s Comments: Every trading system vendor, including ourselves and the best ones get both positive and negative feedback. One person may love a vendor and his system and the same day another person hates him and calls him names likes Ratboy, etc.

This happens all the time and has happened to both us and everyone else.

Rick R is one of our top-3 authors and contributors and has been so for many years. He is extremely knowledgeable and writes amazingly good articles to help traders. We receive many compliments on his excellent articles published in CTCN.

Try to ignore a lot of the negative stuff about Ratboy, as they may be overblown and over-done.

For your information, I do not participate in those Forums as I find some of the people there very hateful and nasty toward all vendors, not just Rick R.

I have seem some of these news group posters even threaten the life and use very obscene language against some vendors like Kent Calhoun and Larry Williams, for example. Much of the hatred is due to exaggerations on both sides, misunderstandings about profit potential of systems, misstatements, sensitive people, angry people, and allegations of too much hype by the vendors also makes the situation worse.

Also, many traders think wrongly they can purchase the Holy Grail and get upset when they end up losing money; this contributes a lot to the nastiness out there. Still another problem is over 90% of commodity traders end up losing money. Even if some had tomorrow’s newspaper, they may still lose money. The fact so many lose makes the entire industry very negative and hostile.

Thanks for your feedback. BTW, would it be OK if we published all this for the benefit of our Club Members as others also wonder about these issues.

P.S. I have taken the liberty of sending a copy of this to Rick R. Don't worry, I have not given your real name but I doubt if Rick R would spam you anyway. Plus, I deleted your email address anyway by sending this to you using the blind carbon copy field for your address with the main address being Rick R's.

BTW, Why do you think he is a Scam Artist? What did he do to earn this title?

EOD Proven Signals? A Program That Would Sell! - Don Mccullough

Took a glance at your EOD offer. Are the signals proven to your satisfaction?

For some time, I have thought how nice it would be to have a program that would allow one to "replay" the days intra-day activity just exactly like the real thing.

I can manually scroll past chart bars 1-bar or more at a time, but that's still not nearly as good as having the whole days activity go by you just like the first time in REAL real-time.

This would be what I would call "ultimate trading practice" as opposed to scrolling or eyeballing historical day trading charts. Such a program would be of great benefit for developing the mental discipline successful day trading requires. Would give one a much better understanding of why they did not take so many of those signals and the degree of courage-experience-discipline such signals require.

I mention this type of program to you knowing you have dealt much with programmers and thinking you might want to get involved with the development of such a program. Perhaps such a program already exists. It might even be copyrighted and therefore keep one from legally developing such a program. Surely, such a program would help firms get their new traders up to speed.

If such a program has not been monopolized would think it would really appeal to a lot of day traders and make the developer tons of money.


How to order SuperCharts and TradeStation 2000i - Mitch Ackles

After speaking with our sales manager he wanted me to provide this additional direct sales contact should your customers need it: Brian Pla - 800-793-0149. Brian can take orders for SuperCharts and our 2000i product line.

If you want to post a message in your newsletter to clarify how someone can order SuperCharts or TradeStation 2000i I recommend you point them to this website:

http://www.tradestationtechnologies.com/products/tradestation/default.shtm

You can also tell them to call (800) 793-0144 ext. 1322.

Feel free to call me with any questions at either (305)485-7202 direct or (800) 556-2022.


MEMBER REQUESTS & COMMENTS

Bob Carpenter - what is the evidence that Gann did not use astrology?

Mike Green – I was wondering if anybody has any information on the brokerage firm Anco Futures. I am thinking about opening an account with them but would like some info first. They only charge $9 a round turn and I was wondering what kind of service you get for that amount. Please either call me at 513-367-4661 or send an email to: mgreen4@cinci.rr.com


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