Trading for a Living and keeping the Profits - Bob Pelletier (CSI Technical Journal)
I was introduced to the futures markets by a master trader. He was a co-worker and friend, who had a unique set of skills that brought him success. Patience was his forte, and the reason he realized what most investors fail to achieve. Thirty-five years ago he and I worked together on the top of a mountain in Pennsylvania. It was the height of the cold war. As contractors of GE, we wrote computer code to process azimuth and spherical information on electromagnetic, optical and seismic signals. Our objective was to triangulate the likely point of a nuclear attack against the U.S.
In addition to our regular work on that classified military project, my friend patiently waited for opportunities in the futures markets. One day he took a small long position in sugar. His reasoning was that the price of World Sugar Futures was "impossibly low," at less than one and one-half (1.5) cents per pound. He felt he couldn't go wrong because the price was significantly below the cost of production. Along came the Cuban Missile Crisis and the Bay of Pigs invasion, resulting in a surge in the price of sugar by nearly 1000% to over 13.5 cents per pound! My friend used pyramiding to skillfully parlay a couple of sugar contracts that were margined for perhaps $800 into over a million dollars.
This spectacular success in the world sugar market involved a rare moment in history, but similar opportunities can and do surface from other commodities over time. Patience paid off for my friend in this trade and many others. He continues to invest using the same strategy, and consistently does quite well.
Like a lion on the prowl, this trader waited for a suitable opportunity to present itself. When the position exploded into a remarkable windfall, he kept his wits about him to play out the scene and reap a fantastic bounty. It takes patient watching and waiting to know when a market suggests the right opportunity. It takes honesty and good relationships to continue the journey begun with that first successful trade - to trade for a living. Today we humbly offer some basic insights into how one might hold on to the gains that may fall your way, allowing you to not only earn profits, but to also, perhaps, earn a living through your investments.
The accumulation of wealth requires honestly knowing who you tare and knowing that rewards come only when you are not fooling yourself or others. When setting out to make a living off the markets, you must ask yourself if you have what it takes to be an exceptionally successful trader. Measure your prospects carefully, because the bigger the package of benefits you seek, the bigger the risks required to achieve it. Honesty and patience are more than virtues. They are prerequisites.
Making Money with Money
Most people make a living by selling their services. They earn a wage for performing a task for which others are willing to pay. Trading is a different, more difficult way to make a living. Based on the idea of making money with money, it is the art of capitalizing on price fluctuations.
I have had the experience of trading for a living, albeit somewhat vicariously. I sold my services as a registered Commodity Trading Advisor (CTA), staking my reputation and future employment on my market successes. For the bulk of the trades I have booked, the at-risk capital and profits were not my own. My first client was a New York executive who hired me to trade his commodity account while he was out of the country. Profits rolled in and soon I was asked to move my family to Florida so I could work exclusively for him near his winter residence.
My original client unexpectedly passed away, whereupon I bought the computers and transformed CSI into a data-vending firm. Although I successfully managed several accounts in the ensuing years, data vending and software design eventually replaced the advisory business entirely. This line of work rests more easily on my shoulders.
Making money with money may appear to be easy when the stakes are low and the rewards are moderate, but the difficulty factor increases exponentially with investment dollars. At lower levels, the emotional attachment to positions is relatively minor, and decision-making is easy to control. Add a couple of zeros on to both the investment risks and the reward, and things materially change for the worse.
Trading for a living involves assuming the perils of an uncooperative market. Losses are likely to occur even under the best of circumstances. You must know in advance how much account value attrition you can afford before you will exit from the market. In order to attain a viable risk-reward ratio, it is crucial that you know in advance what will be the expected value or outcome of your trading experience. The Trading System Performance Evaluator a product within CSI's Unfair Advantage~ system, can show you the probability of returning a profit with your investment capital. This is important because even a highly profitable system can turn into a loser if your goal is statistically unreachable. Balancing investment funds with a reachable level of achievement is a mandatory requirement.
As you move forward in your trading success (or failures), your goals will change. In a series of successful experiences, your goal should increase, provided the ratio of your goal to investment capital does not increase. Just as statistical confidence is derived from a large sample, frequent profitable experiences will add to your confidence in trading.
When long-term goals are realized, spend some time becoming accustomed to your newly found wealth by taking a vacation from trading. Relax. Pay taxes on your gains and set a new future goal. In the event of a large loss, it is time to change your focus and scale back your investments.
If you are in any way unfamiliar with the terms, risks, conditions, procedures, etc. in trading, I highly recommend opening a traditional account with a full-service broker. An online Internet-based alternative would likely offer lower fees, immediate trade confirmations and other automated services, but they won't make up for the disadvantage of being~ on your own. A full service broker offers procedural market knowledge and a possible assessment of situational conditions that can be useful to anyone - even an expert trader.
When dealing with a broker, make sure everyone involved recognizes that the money in your account is yours. It does not belong to the broker, and he or she does not have to know your objectives. You should be in control. Open an account with the expectation of making one or two trades. No broker should expect continued business from you. Keep a minimum of resources available for trading, and don't feel guilty about withdrawing your money; you are not required to keep your broker solvent. If you are happy with your broker and the way your account is being handled, keep it funded and use it to your best advantage. A good relationship with a trusted broker is a valuable asset.
Be wary of tips and unsolicited advice from your broker recommending the liquidation of existing positions or entry into new ones. Brokers are not necessarily qualified advisers, so check the track record and reputation of your broker before taking any action. If you have your own trading plan, don't let the broker lead you astray. If you don't want advice, say so. A good broker, however, will point out delivery risk notices for futures, margin requirements, limit-move risks, and perhaps relevant news and relationships between products, etc. Your broker should routinely offer procedural information that may be useful, but you should do your homework so that minimal assistance becomes necessary.
Your relationships with peers, and especially with your broker, can impact your decisions, and not always for the good. Avoid the temptation to share stories about trading experiences with your broker and friends. Such public forums tend to elicit feedback that is not conducive to uninhibited trading. If you must talk about your trading adventures, balance stories of triumph equally with stories of humbling failures. Each success story will bolster your courage to take on more risk, perhaps more than you can afford. There is no advantage in adopting a behavior that can lead you to shed assets. Great traders don't boast of their successes because they know that losses are always on the horizon.
If you honestly evaluate your ability to sustain a trading life, it is likely that you'll find yourself better suited to selling your services than to making money with money. There's no shame in that. In fact, it is the best course for most of us. Even if you don't earn a living from the markets, you can still benefit from investing disposable income. We hope these suggestions will help you along the way. Focus on patience, honesty and relationships. These are the intangibles that separate the master traders from the rest.
I wish you great success!
Never Trade Without a Plan - Rick Ratchford
Whenever you take a trip, plans are made so that you may feel confident that you have brought along most or all of the things you will be needing. You will know where you are going, how you will get there, where you will stay, things you will do, and your trip back.
To take a trip without a plan and proper preparation is foolish. It is also foolish to trade without a plan.
Just like taking a trip, where you know 'why' you are going and 'where' you are going, trade planning requires you know 'why' you want to take a trade and 'where' you want to take it.
The 'why' aspect of planning is important. Are you taking the trade out of hope, or are you following a method of approach that has instilled in you a high level of confidence in its ability to produce favorable results over time? Hopefully the latter.
Once you know 'why' you are taking the trade, based on some sound reasoning, then you need to determine the 'when'. Timing is essential for risk management. Too early or late can be costly. Knowing the 'when' also requires proper planning. Should you enter today, or tomorrow? Should you wait for a particular pattern, or for price to reach and hold at a certain level?
You need to plan for the 'where'. Should your order be at the market, a stop below or above some moving average or price bar?
Planning also requires you to plan the 'what'. The 'what' in "what will have to happen for me to get out of this trade?"
Entering a trade without an exit plan is like taking a trip without knowing how you are going to get home. Trying to figure this out after you have entered the trade will likely cost you greatly in losses. The plan should spell out 'what' must happen that would have you exit with profit or loss. There should be no question as to 'what' you must do when the scenario earlier planned occurs.
Planning out your trade for entry or exit will help you remain consistent, and provide you with the means to evaluate your approach. Improvements can be taken systematically with a way to revert back if necessary if the results prove unfavorable. Planning builds extreme confidence and helps with trading discipline issues.
On Trading - Bobby Ullman
Human emotions can be very subtle. Before you know it, it has you surrounded, and you're stagnated, and don't know what to do. What happens then? Invariably, people start looking elsewhere for the answer. Maybe a better system, or indicator. If they do have some inkling that they are the problem, then they're sitting in the middle of the room, chanting, with incense and candles burning.
How many of you have had on a trade that went against you, so you said when it came back to the entry, you'd take it off. If it did make it back to the entry, your first thought was I bet this is the one, only to have it return to where it previously was. So you say, next time it makes it back to my opening price, I'm done. Then it goes down more, so you say, well, when it gets back to the 2nd price, then I'll take it off.
The next morning you wake up to find your position continually moving against you. Each time saying that as soon as it retraces, you'll get out. Sooner or later, the pain becomes unbearable and you finally do what you should have done all along. Get out of the trade and move on to another.
At this point, you've probably lost thousands on a trade that should've only cost you hundreds. Maybe you blame the system, advisory service, or if your honest with yourself, you just realize that you've learned your fist lesson. Take losses when it hits your loss parameter, and if you don't have a loss parameter, you'd better get one before you trade again.
Most business owners spent considerable time, and money into research to make sure that their product is marketable. They know who the consumer is, how they spend their time, average income, job type, age, etc. Yet, once you bring up futures markets, people will through money in, on a whim. They read a book, take a course, talk to someone they don't know from Adam, and all of the sudden, they're throwing thousands of dollars at something, they really know little about. It's amazing, but it's true.
Society has made great strides in the way of technology. We can send or retrieve information at the push of a button. We go to buy a car, and we're armed with facts. We know what we want, what kind of track record it has, and what we should be paying for it. When we walk out of this transaction, more often than not, we've paid more than we originally planned to. Do you know why? It's on account of what we thought the car could do for us. Lets face it, we're looking at transportation from point A to B and back, nothing more. I look good in this one. I just have to have it. When people see me in this, they'll know I'm living large. Let me ask, and this may seem a little unfeeling, but the majority of people can't see past their own noses. On account of this, they don't care what you drive, not really. So why do you think this new toy is going to make a difference?
The truth is, you're either OK with who you are, or you aren't. If you are, invariably you'll be a much better trader. Most people have the following image when they think of trading, Armani suits, a Porsche, living life on the edge, and making huge financial decisions on a whim. This is way of base. If you're a profitable trader, you're doing the same boring thing day in and day out. No deviations, no fly by the seat of your pants. Same stuff, new day.
The only reason to trade is to try to make money. Thats it. Theres no other reason.
If you want to impress people with how right you are, go on a game show, this is not the place for it. In the markets, you can be right, or you can make money, but you can't be both.
Trends and Corrections - Rick Ratchford
It is said that "the trend is your friend" in numerous articles and books on the subject of trading. For the most part, this is absolutely correct. However, even the trend can fail to be your friend if you do not realize when it has likely come to an end.
Although most traders realize that catching a strong trend can mean a great deal of profits, many still try to trade against it. Why is that? I believe that it is safe to say that most feel that once they try to enter that trend, it WILL end. They try to trade against the trend because they feel that it has run its course, and they want to get a jump on the new opposing trend (sell the very top, buy the very bottom). And of course, most are unable to determine when it has actually ended, finding themselves just another victim of the forces of the trend at hand.
In an attempt to minimize the hazard of entering a new trend as it may be ending, some have turned to Elliott Wave analysis. EW analysis is based on counting the waves that form within a trend. For instance, the basic teaching of Elliott is that a trend will have at least 5 waves. Three of these waves will be with the trend, and two of them will be counter-trend, or a 'correction' of the trend. Each correction is expected not to exceed 800 of the original thrust or wave leading to the beginning of that correction wave.
For example, if price starts a trend up by making 100 points (wave 1), when it starts to drop again (correction wave 2), it is expected to drop less than 100 points if the up trend is indeed valid. When it does end, the original trend resumes what is called Wave 3, which must exceed the end of Wave 1 (beginning of Wave 2) and move higher before it too corrects into Wave 4, and so on.
With EW, some figure that if they do not count 5 waves, then the trend must not be over yet. However, it has been found that EW can be quite subjective. Getting every EW Analyst to agree on the count is futile.
Examining thousands of price charts over the years, I have noted that price tends to trend at certain angles. A strong bull trend will usually start at some angle of ascent, and either increases its angle as it nears its end (a rush to buy from those just realizing the bullishness of the market), or simply maintains the original angle.
Trend lines have proven to be an indispensable time tested tool when it comes to highlighting a trend and its angle of support. Though it may be said that drawing a trend line is also subjective, I have found that with experience the trader/analyst can become quite consistent in its proper application.
When a new trend begins, it may not be so readily apparent for many. Yet, a new bull trend may appear at first to simply be a bear trend correction, but then exceeds a prior bear trend correction's bottom and top. Alone this would not be enough to suggest the bear trend is over, but when that new bull trend corrects for the first time and fails to take out the very bottom of that trend, but rather starts up again, this higher swing bottom is yet another clue that a bottom is in and the bull has arrived. Further rise in price that then exceeds the last swing top formed (the start of the last correction down) continues to suggest that the bull is in force.
Suppose we number the beginning of each wave for discussion sake. The new bull move starts from the very bottom that we call (1). When price tops, and then corrects (moves down), we call this top (2). When price stops dropping, and if this is a bull trend we expect it to do so before reaching the low of (1), it will start up again. The beginning of this move up we'll call (3).
A simple way to draw a trend line is to place the line below bottoms (1) and (3) out into the future. This gives us our first angle of ascent to watch for. It is advisable that the move from (2) to (3) be at least 38% of the move from (1) to (2) before you consider that correction low of (3) for your trend line reference. Less than 38% suggests that you may not have seen the (2) to (3) correction just yet.
A good bull trend will usually operate above this trend line. As a matter of fact, that trend line will often serve as a good support reference line, where price that corrects later on may start to resume the trend once again. Always be mindful to note whether price starts to become parabolic (starts moving more vertical at a sharper angle). If it does, you may not see price correct again to your trend line, and a new one may need to be put into place once price corrects again to give you a reference bottom to do so.
The standard definition of a Bull Trend is that price will make higher swing bottoms (the end of each correction). At some point, a correction bottom may drop below a previous correction bottom. This may suggest the bull is weakening, though not necessarily over, though it could be. If price were to drop below two prior swing bottoms, the bull trend is considered over. This is one way to note that a bull trend is coming to an end. The best time to consider trading short the end of a bull trend is not necessarily the very top. Rather, it is when price fails to move price above the prior swing top (the current bull top) and starts correcting down again. This is because the standard definition of a Bear Trend is that price will make lower swing bottoms and lower swing tops. So when you see a bull trend make a lower swing bottom rather than a higher one, be on the lookout for the possibility of a lower swing top following.
The trend line again can be quite useful here. When the bull trend is correcting and you note that it just made a lower swing bottom rather than a higher one (it went lower than the last swing or correction bottom), see if it also did so below the trend line you have established as valid on your chart. If it did not, then be careful to assume the bull is over. However, if it also moved below the trend line, the bull may be over.
Understanding the relationship of trends and corrections can go a long way in helping the trader/analyst trade with the trend rather than trying to guess its end and trading against it. It can help the trader stay in the trade longer while the trend is still intact. In addition, noting when a correction is greater than expected can help the trader make plans to be more aggressive with the stop-loss management, preparing for the end of the trend likely due shortly.
Sukhen Mitra is looking for answers to his trading questions. "I am learning and want to start futures trading as soon as possible." Questions are:
- How can I avoid the whipsawing? This seems to have enough potential in a chart to kill me.
- How can I distinguish between a reversal and a pullback?
- Where can I get free real time charts and preferably paper trade before I put my real money in to it?
Brent's Margin question: If I had a $3000 account balance and wanted to write a naked call on T-Notes a margin usually of $1890 for open ended contracts ... how many naked calls would the CBOT exchange allow for this account seeing that I would receive a credit of say $2400 on selling a far month call or put usual value?
(You see ... that would boost my account to $5400. ) I could just keep adding premiums infinity selling calls and there would never be a question of margin. There must be a limit per account on this subject matter ?
Strategy question: Is it OK to Sell a far month call ... say November soybeans ... and then buy a near month call to protect the upside risk much like a covered call? You see ... Instead of buying the futures contract ... the near month call could be exercised to offset the upside risk on the far month you sold. My reason for this is that I do not want to face a downside problem so that is why I prefer a call to protect the upside instead of a contract long with unlimited downside risk whereas a call can only face a premium loss. I know you could not do this in the same month as both sides would offset immediately but different months? How about that?
My objective here is to collect the premium only ... I'm not interested in making money in a futures contract.
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