Commodity Traders Club Newsô

Commodity Traders Club News

Commodity Traders Club News "The Commodity Futures Knowledge Network" PO Box 1888, Sedona, AZ 86339 Phone 520-203-1777 Fax 520-204-1717 e-mail [email protected] web site www.webtrading.com Copyright© 1999 by Webtrading Co. Issue 50 - Vol. 7 No. 3 - Summer 1999

Victory!! Court to Government: Hands-off software and the Internet. Urbina drew no Software and The Internet distinctions between 1st Amendment protections John Keppler of The Institute for Justice afforded to traditional media like books and newsletters and those afforded to new media st As The Wall Street Journal leads off in its like software and the Internet. 1 Amendment is editorial this morning, "Hardly a week passes valid across the board. these days without some regulator, federal or This is key: The law on technology is state, making a grab at controlling the Internet. being made right now and our case halted an So it's good to be able to report that the alarming trend. The government argued that Commodity Futures Trading Commission's because of the interactive nature of software (CFTC) latest attempt to carve out some turf from programs, websites and the Internet, these new the cyber-world for itself came to naught media required a scrutiny and regulation to yesterday in Washington courtroom of Judge "protect the public." Ricardo Urbina.” You might remember in Texas, a federal Urbina's ruling: First Amendment free judge banned the sale of Quicken Family speech rights extend to the Internet and software. Lawyer software package to protect "the This is great news for Institute For Justice uninformed and unwary from overly simplistic (IJ) clients - publishers of online content, legal advice." websites, software, books, and newsletters Other states and federal agencies designed to assist people in analyzing the watched the outcome of that case and could commodity and futures markets, and consumers have used it to require the licensing and who subscribe to the sites, on-line services, and regulation of software and online content in a publications to find information and make their wide variety of fields. own decisions. Traditional "guilds" like the attorney bar You may recall that our plaintiffs were and medical establishment, as well as federal threatened with five years of jail time, $500,000 in agencies like the Food and Drug fines, and of course, unending harassment if they Administration, the Securities and Exchange didn't cede to the federal government and subject Commission, and others also have a strong themselves to fingerprinting, random audits and interest in using that precedent to expand their requirements that they share their subscriber lists regulatory authority to the Internet. with the agency - each a criterion for the license Investor's Business Daily ominously the CFTC demanded. foreshadowed this noting, "Feds Target In his decision, Federal Judge Ricardo Financial Software, Can Regulators Outlaw Urbina pinpointed what's at stake "There comes Quicken and TurboTax?” and went on to warn a point, however, where government legislation "websites that offer medical information could crosses the line between the regulation of a be targeted next." profession and the regulation of speech.” That's Our victory, however, could put a stop to unconstitutional and that's exactly what his that and starkly remove government as 27-page opinion outlined. software and the Internet's gatekeeper. It's also great news for the burgeoning Judge Urbina outlined his reasoning: high-tech industry and evolving media like (Citing Thomas vs. Collins) The very

Copyright © 1999 by Webtrading Co. 1 Summer 99 – Volume 7 No. 3 Commodity Traders Club News purpose of the First Amendment is to foreclose system; but the system is just like public authority from assuming a guardianship of Michelangelo’s paintbrushes - essential, yet a the public mind through regulating the press, relatively minor element of his success. It is speech, and religion. In this field every person developing the winning personality that is the must be his own watchman for truth, because the key. forefathers did not trust any government to The book provides a framework - Trading separate the true from the false for us … Very Pyramid - to help traders understand the many are the interests which the state may different aspects, which build trading success. protect against the practice of an occupation, It focuses trader’s attention to their own levels very few are those it may assume to protect of competence at the different levels of the against the practice of propagandizing by speech Pyramid. The aspects that contribute to trading or by press. These are thereby left great range success such as Money Management, of freedom." Methodology, Risk Control, Psychology, etc., He went on to note that in our case, "The are all covered. CFTC is attempting to act as 'the watchman for More importantly, book shows how truth, for the public" - an assertion the First readers may develop their strengths further and Amendment flatly rejects, whether its form is address their weaknesses. A questionnaire at books, newsletters, software or the Internet. the end of the book will certainly help traders The CFTC has 30 days to appeal, and acknowledge and confront their weaknesses. there's no word yet on what they will do. We'll Indeed, I should point out that he is remarkably keep you posted and in the meantime, thank you accessible (details of phone, fax and e-mail so very much for your support. provided in the book) responding promptly to John K. Keppler, Managing Vice President the questionnaire I filled with useful and Institute for Justice - phone: 202-955-1300 - fax: constructive comments. 202- 955-1329 - e-mail: [email protected] His advice on what constitutes low risk website: http://www.ij.org and the importance of assuming a low risk stance is well worth reading. As part of a low risk strategy he says, "Trade at or enter at a "Book Review" - The Way To Trade: By John price which is only briefly available," I was Piper - Ashwin Joshi subconsciously aware of this, but it is nice to see it in print. In the last decade alone, the number of I would personally have appreciated a books on trading has multiplied significantly, more scientific approach to the book, specifying including numerous technical titles, some details about the relationship between focusing on the fundamentals and others purely methodology, system, system parameters, etc. on psychology. This is why The Way To Trade, This perhaps would go against the spirit of the published in the early part of this year, is like a book, however, which is an easy going breath of fresh air since it focuses on the end monologue with the reader. In Chapter 24 the result all traders are after - how to become a author talks about Trading Systems with some success at trading. The book's author, John good advice on how to make a fortune trading Piper, trades full-time and also manages a small futures. He refers to nine systems in all, but fund for clients at Berkeley Futures Ltd. only eight are explained. As for the ninth, we The most provocative premise of his book are simply told that he has sold the system and is - "Yes, there is a holy grail to trading, and it is agreed not reveal the rules. For my money, I what you see when you look at the mirror." In would this lucidly written 280-page hardback, he sets like to have seen this space better occupied about teaching you how to discover your with what the author wants to reveal. Like most successful trading personality. There are many authors, this author has also succumbed to the books, which expound on market analysis and temptation to advertise his other wares (e.g., technical analysis and even money management, newsletter, consultancy, trading systems, etc.). but here you do get a feel that you are in dialog The author’s personal journey - outlined with a man who knows what it is like to be in the in 55 steps should bring a smile to the most heat of trading battle. discerning reader. Any reader whether at The author’s main point is that the trader kindergarten stage or advanced will be able to should feel free to arm himself with a wide array relate to items in this list, e.g., "30. We are of technical tools and create the most fancy plagued with fear and have no clear methodology . . . 32. We start to look for a

Copyright © 1999 by Webtrading Co. 2 Summer 99 – Volume 7 No. 3 Commodity Traders Club News suitable methodology . . . 36. We realize that the prices exceed the Hi of Day 1 and close in key element in trading is our own mentality . . . Lower half of Day 2's Range. Sell Day 3 on 50. We begin to make money with consistency." Open with a stop just above Day 2's Hi. If Day The message of this book is that there are 2’s low is exceeded it becomes a Pivot Day and no right or wrong ways to trade. It is a craft, and the Stop order becomes a Stop and Reverse just like any craft you have to serve the (remember the horizontal line?) It's always apprenticeship. The book will assist you through neat to wait for a modest Range Day 2 to keep your apprenticeship and help you discover your prospective risk low. It's also neater, if you're trading personality. The Way To Trade will prove not reversing, to wait to see Day 3's open, so a beneficial read, both for a hardened city trader that if it gaps down your order becomes a Day or a novice groping to find his niche. Indeed it is 2's Lo-1 Limit order. a book, which needs to be read more than once Pattern # 2 Larry Williams calls "Scoops.” as the trader carves his own trading path to (For a sell), prices exceed the Hi of Day 1 and success in the derivatives markets. close in Upper half of Day 2's range. Sell Day The Way To Trade by John Piper, 282pp, 3 one tick below Day 2’s Lo making Day 2 the hardback, published by Financial Times Pivot day. PD means the same Stop-Reverse Management. The book is available from the above its Hi. The same “wait and see" trick as global-investor.com web site and Amazon.com above will work again on new orders, just in case. This is going to be too simple for most Editor’s Note: CTCN and TradersAuction readers, so you can "spice” up your trading division is now an Affiliate of amazon.com - We (and your losses) by continually moving the PD would appreciate you ordering books using our as per these same rules. link And further, here's a filter that's working http://www.amazon.com/exec/obidos/subst/home for me. How often have we tried to predict /home.html/002-8512896-9813811 or by clicking direction changes with lagging indicators? It's on the Amazon Banner located on the sort of like pushing a cart with a rope. Ask TradersAuction website yourself what is the first chart indication of a http://www.tradersauction.com/ possible trend change. Voila! Taking out the Lo of a day in an up-trend may be the first alert. Make that day a PD and you "almost can't Wisdom - Right Under Our Noses and Far lose!” Instead of building a strategy on what too Simple - J. L. from Wimauma should happen, build it on what shouldn't happen! Here's that filter: for the “Scoops." I'll By George, I believe I've GOT IT! The sell the Lo-1 only if the Sto 14 SloK line is rising "key” to Wisdom (i.e., the Truth) is to accept that (all vice versa for a buy, of course). I’ll keep the mankind in its collective egotism and vain same PD until the Sto is falling because I'm still presumption has succeeded in making life much getting Sell alerts! The “Classic” ignores the more complex than it really is. The answers are Sto. "right under our noses and are far too simple for If you want to get simpler yet try this. most of us to admit! With energies, cocoa, sugar, the Canadian Boy, is this true of commodities, health Dollar, and just last Friday, probably copper issues (my other passion), and any other aspect seemingly bottomed and still cheap, I’ll do only of life as well! Re: commodities: draw a Buys as per above and Stop out as above horizontal line thru any active chart. Now tell me rather than reverse. With the grains also that you couldn't go "long" above it and “short" bottoming soon, with very few “misses,” I will be below it. Tell me that you couldn't decide to take positioned in all of these markets if I’m willing to a profit now and then. Is that just too simple for put my trades "in the drawer” and go to us? Bermuda. After all, most “misses” will be re- Having realized this truism years ago, I covered by the opportunity to buy still cheaper. certainly count myself in your numbers. My It doesn’t get any simpler than that! personal “cop-out” was to continually look for the Space precludes anything more than the “perfect” PD (Pivot Day) or PR (Pivot Range). "bare-bones” of this. But you sharpies out there Even after I realized that prices had to do one of must adapt these ideas to your own tastes two patterns in order to reverse direction, I anyhow. Just a word on the trend-friend couldn't (or wouldn't) put it together. analogy. Pattern #1 - I call the "Classic:" (for a sell), It's excellent except you don't know exactly when a friend actually becomes a friend

Copyright © 1999 by Webtrading Co. 3 Summer 99 – Volume 7 No. 3 Commodity Traders Club News nor do you know when he (or she) might stab you Even now (mid-August), there are still in the back. So much for the trend. A PD some problems such as if for some reason you resolves that question right now! go offline, such as a the ISP telephone And as usual, thanks to Dave for letting connection breaking, frequently the only way to contributors "thrash” out their ideas in his venue. get the data feed and TradeStation chart Good trading! working again is to shut down everything and reboot the computer. Perhaps you could call Rita Karpel at e-Signal Difficulties - John Roche ZAP Futures in Chicago (800) 257-6842 x 1852 and ask her what she recommends. You should I only recently found your site and wish I also consider trading there. had a month ago. I have had problems with ZAP Futures offer so-called "instant fills" Signal. I wasn't sure if it was Signal or my and CTCN's feedback on them has been very Internet provider. I just assumed it was my good overall. Be sure to mention you were provider because I have had problems with them referred by CTCN to qualify for Special Offers before. and a discounted commission rate. ZAP Here is what happened: I was trading the Futures is CTCN’s “Recommended Broker.” e-mini S&P. I put in an order to buy at the market By the way, there is lots of free over my broker’s electronic trading desk (Jack daytrading knowledge located on our Real Carl Futures). The price that I was filled at Success website http://www.traders.org - versus what my screen showed was way off. A Check it out! We are working on an updated trade, which should have made me $600, cost edition to the tapes currently offered. Also, a me $300. new Trader Training Service will be available I complained to Jack Carl Futures, the soon. Visit our sister website for more details: broker, but they insisted on the price I was filled http://www.traders.org at. I had the CME fax the time and sales data for the time in question and sure enough my data was inaccurate. It turns out that the data on my Market Symmetry screen was almost 5-minutes old! Rick J. Ratchford I wrote letters to both Signal and my ISP. All Signal was willing to offer me was a credit for the one day’s trading. I pay almost $300/month There are several books on the subject of for a live feed and they were offering me $10! I Cycles, Geometry, Formations and so-forth that argued that the service was for (real-time data) relate to the markets. All these fall under what live-feed and they failed to deliver, but to no avail. is called Market Symmetry. The markets follow a natural order or law. My question: What can I do? Internet data Nothing in the universe can escape the laws feed is the most cost effective. What are my that surround us. Plants, animals, people & other options? Would a cable modem help? If I geography all play to tunes of the natural sound am having difficulty getting filled and I pay for track. quotes, what is happening to people that are Since so much has been written on this trading stocks on-line with Ameritrade and subject, I'm not going to get into detail as to E-Trade? how each are affected by the laws of nature. What I'm going to deal with in this article is Editor’s Note: I am not sure a Cable simply the symmetry found in the markets and Modem would help. It very well could be a delay how they can be useful in determining a trade. by Signal in transmitting or a broken telephone Market geometry flys in the face of connection. Likely, it was not a delay caused by random market action. There are some who a slower Modem. A delay would likely be very believe that the movements you see on the slight, a fraction of a second or a few seconds at price charts are the result of random action. most. However, enough information is available for At this time, we are using PC Quote’s the astute reader to come to the realization that Omega HyperFeed real-time market data. It has the patterns you see on a price chart simply been unbelievably lengthy and difficult to set up could not happen randomly. The ratios within and get working properly! I encountered many the patterns are mathematically related to each bugs getting it working reasonably well, took over other to form geometric shapes, which upon 3-months since we signed-up in May. discovery can lead you to locating major market

Copyright © 1999 by Webtrading Co. 4 Summer 99 – Volume 7 No. 3 Commodity Traders Club News turns. that right triangle would equal 1.618. Also, if I recommend for those new to this subject you take a right triangle with a base of (.618) to consider the study of Fibonacci. As a and a right side of (.786), the hypotenuse would beginning trader back in the summer of 1990, just equal 1.00. prior to the Desert Storm war, the markets So now you can see how they are all appeared to be a jumbled mess of lines moving related. up and down without any clues of where it might Now it would be very difficult to go into go next. every ratio, and all the applications there are in Indicators such as Stochastics were using them. I can however encourage you to brought to my attention, and I soon discovered buy all the books on the subject if you so desire how easy it was to lose a few thousand to to learn this fascinating field of market study. something that lagged market action. It was But for now, let us consider a real life example early 1991 when I learned about Fibonacci, and using the daily June 99 T-Bonds chart (all that jumbled mess didn't look so jumbled to me values are in decimal to make the math easier.) anymore. On January 11, 1999 a low was formed at There are many traders who like to look for 123.53. The next major top was on January 50% retracements, or for support and resistance 28th at 127.69. By taking the range of this by noting previous support and resistance that climb, we can derive expanding support and formed those market tops and bottoms. The resistance levels using those ratios shown in reason this actually works to some degree is this article. because those fall into a geometric pattern. The top refers to January 28, 1999. The When you bought your first book on market bottom refers to January 11, 1999. analysis, what were you quickly introduced to? (1.00) ratio from the top provided us with That's right, triangle patterns, flag patterns, the reversal bottom on February 8th (.382) from rounded bottoms and tops, channels, etc. What the bottom provided the support for Feb 12th. do you think those are? Triangles, squares, (1.00) from the bottom provided the March 4th circles and rectangles. Right? bottom. (.272) from the bottom provided the top You are being taught to recognize the on March 17th.. (1.00) from the top provided shapes of these geometric patterns without being resistance to form the top of April 9th. (.272) given a reason why they form, or how you can from the bottom provided the resistance that determine where one will start and another will formed the double top on April 21st and April end. The only clue you are given is to watch for 30th. (.786) from the bottom provided the a “break-out.” support to form the April 26th, bottom. (1.382) In going back to the subject of Fibonacci, from the bottom provided the support for the there are a few geometric ratios I would like to recent May 12th bottom. share with you now. Those would be the Coincidence? Random? You decide. following: (.382) (.618) (.786) (1.00) (1.272) But to this market analyst, this is purely market (1.618) symmetry. These are just some of the related ratios of Now, I'm going to use market geometry to Market Geometry. I'll briefly demonstrate how determine the likely bottom in the T-Bond they are related. market, which has yet to happen. On May 16, First off, 1.618 is called the Golden Mean. 1999 and the current bottom in the T-Bond It appears in the growth patterns of plants, the market is 116.90 made last Friday. human body, seashells and many other things I'm going to use this time the weekly found in nature. Even the planets follow a charts because I'm expecting a weekly bottom pattern based on the Golden Mean. For to occur during week ending 5/21. This is based example, for every time the earth orbits’ the sun, on a geometric mathematical algorithm that I Venus orbits the sun 1.618 times. The use to help determine weekly and daily reversal relationship between Venus and the Earth is dates called Wdates and Fdates. The algorithm 1.618:1.00. is not available to the public, although the dates are. If you are interested, our website address (.618) is the reciprocal of 1.618 is http://fsoftpublishing.com. (1.272) is the square root of 1.618 On the weekly charts, note the weekly top (.786) is the square root of (.618) made week ending April 9th. The previous (.382) is (.618) squared major weekly bottom was made week ending If you take a right triangle with a base of March 5th. And most recent weekly bottom was 1.00 and a right side of 1.272, the hypotenuse of made a week earlier from the top, during week

Copyright © 1999 by Webtrading Co. 5 Summer 99 – Volume 7 No. 3 Commodity Traders Club News ending April 2nd. Grail system to every trader and most will not The range from the April 9th top to the do anything with it. Some because of a level of March 5th bottom is 4.31. (.618) of that is 2.66. skepticism, others because they do not wish to Expand 2.66 downwards from the March 5th do the work. bottom and we arrive at 116.62 or 116:20 in 3. These geometric patterns occur due to 32nds. (T-Bonds are quoted in 32nds.) natural laws. Nothing we do will ever change Now, take the range from the April 9th top that. to the April 2nd bottom and we get 3.908. (.786) Take the time and work these out on of that is 3.07. Expand down from the April 2nd some of your other price charts. See if you can bottom and we arrive at 116.62 or 116:20 in note the mathematical geometric relationship 32nds. within the patterns. Some markets will show Do I have your attention now? different types of ratio patterns as opposed to But here is something else. If you take other markets. Get to know your market. As those same two ranges and expand them out you see, the T-Bond chart is one that I've found (.786) and (1.00) respectively, they both intersect to have a nice symmetry to it. around the 115:25 to 116:00 area. And to further So the next time someone tells you the this geometric picture, if you take the bottom markets are random, simply hand them some made week ending November 6, 1998 and draw darts and wish them a good day. a trend line from there underneath the March 5, 1999 bottom and into the future, it intersects the 115:25 - 116:00 price area for week ending 5/21. The Secrets of Slippage and Fibonacci That happens to be the same week we are Price Analysis for Placing Stops expecting a weekly bottom to occur based on our Barry Rosen – Fortucast - CTA date algorithm. And since we are still on this chart, if you How many times have you placed your take the top made week ending December 11, stop at a key Fibonacci retracement target and th 1998 to the November 6 bottom and expand it gotten hit by the locals and stopped out? With out by (1.382) from the bottom, we again arrive at everyone using Fibonacci numbers, you have to the 115:25 - 116:00 support area. And if we take be one step ahead to win the race. Here are this same range and expand down from the some tips. bottom by (.786), we get the support price that Fibonacci numbers work because crowds th formed the March 5 bottom! - including crowds of numbers - are dynamic Okay, I think you get the picture by now. systems that conform to mathematical laws. If Nothing random about any of this. Purely a you have ever been to Museum of Science & mathematical way of exposing the geometric Industry in Chicago, you may have seen the picture of the markets. We have discovered that machine there that sorts balls randomly into major and minor market tops and bottoms are eight slots and at the end of the run, the balls related to each other in some geometric form, form a bell curve. which may not be clearly visible to the eye Likewise, the Fibonacci numbers of . (geometric shapes are actually 3 dimensional, 362, .500, .618, 1.618 and 2.168 etc., create whereas the charts are only 2 dimensions). Try important, predictable price values - even in the to visualize the market forming a cube on a 2 wild chaos of 400,000 T-Bond contracts traded dimensional chart. Get the picture? However, daily in the pits. by simply exposing the ratio relationship of A bull market is likely to have a minimum previous market action, we can determine retracement of .236 or .382, and if you are probable market behavior to a point. As traders, looking to get in an entry from the top that will we deal with probability. This is certainly not the get you filled, then a safe, tight stop may be the Holy Grail by any measure. only slippage factor below the 38% Some may ask why would I share such retracement. information. Isn't there the chance that it could Knowing Elliott Wave principles can also affect future market behavior? aid in choosing proper stops. We recommend There are a few reasons why I do not the basic Elliott Wave books to guide you in this believe this will happen. area. 1. This is nothing new. I'm sharing things On double-tops and double-bottoms, I've learned from other sources that are available locals will usually pick-off a stop 1 or 2 ticks to the public. above or below the market, but a real breakout 2. You could actually expose the Holy

Copyright © 1999 by Webtrading Co. 6 Summer 99 – Volume 7 No. 3 Commodity Traders Club News or breakdown will be occurring if the market has I waited three weeks for my refund. When slippage. While each market has its own I still hadn't received it, I called Mr. W and behavior patterns, the following slippage asked him when I would be receiving it. He numbers can keep you out of trouble and prevent stated that he never received the program and the locals from gunning you down. Barry can be that until he did; it was against company policy reached at 1-800-788-2796. to give refund until he received the program The following list shows the slippage factor back. He then said if I would give him the for the most actively traded commodities: tracking number, he would check with the Post S & P - .65 T-Bonds - 7 ticks Office and if they said they delivered it, he DM - 20 ticks SF & Yen - 25 ticks would send me my refund. Unfortunately, I had Gold - $1.10 Silver - 2 cents misplaced the Express Mail receipt and was not Copper- .60 Crude - .09 able to provide it. Beans- 5 cents Corn - 2 cents Then in April, while cleaning behind my Wheat - 2.5 cents Live cattle - .35 desk, I found the Express Mail receipt and cents called the Post Office and inquired about the Hogs- .35 Bellies - .55 status of the delivery. Cocoa- .10 Sugar- .08 Coffee- .55 They said it had been delivered the next Samarai? - l Don't Think So - Eric Lippert day (October 26) at 2 PM. I called Mr. W and told him that I had found it and would fax him a I have been purchasing trading software copy of it. He said he didn't have a fax machine from many vendors since 1986 and I have never and to mail it. I wanted to overnight it so I would had to question the integrity of any of them until I have proof of delivery, he would not give me his dealt with a trading system vendor last October. new residence address (he is using a post I had originally purchased their method office box for mail) and to use his old address. several years ago. I hadn't used it in a while and when I tried to use it again last October, I found I called back several days later and the password for the program had expired and I asked him if he received my overnight package would have to call the company to get a new one. and he said he hadn't --- I offered to give him Mr. W., the owner informed me the the tracking number and the phone number of program was upgraded and it would cost me the Post Office and their website address so he $499 to receive a new password and the could check it. obligatory upgrade. I balked about the price and He said to call back when the office was Mr. W proceeded to give me a sales pitch that open (this was at 9:30AM Pacific Time) and any used car salesman would have been proud hung up on me. I have since called back of. several times and left messages for him to call I agreed after he said he would throw in the me back and have not heard from him. TradeStation module for free and would give a I find very ironic that someone who sells 30-day money back guarantee if I weren’t a program called the Samurai lacks honor and satisfied. courage, which characterized the true Samurai, After I received the program and installed lacks honor and courage. He is also listed on it, I tried to go through the copy protection an All-star Trader Hotline and occasionally procedure, which would provide me with a gives seminars on trading. I don't think a trader computer identification number, which then would who has to stoop to stealing from customers be forwarded to IPTC, and a password based on can be much of trader either and I would the number would be given so I could use the strongly recommend readers not to do business program. with him. However, before I was able to generate my computer identification, I kept getting an error Editor’s Note: We received your article message and was unable to finish the copy about the Vendor you are unhappy with. Due to protection procedure. I spent a week with Mr. W the controversial nature of your letter and the on the phone trying to solve the problem and we fact you said he "steals," are grounds for a libel were unable to. The Omega Tradestation lawsuit against you and possibly CTCN. module also did not work. I then over-nighted the Therefore, we hesitate printing his name and program back to him and purchased a competing need to contact him for his side of the story and candlestick program from his ex-partner, which ask about the facts involved. There are usually works fine. two sides to a story. Also, CTCN recently moved and we are

Copyright © 1999 by Webtrading Co. 7 Summer 99 – Volume 7 No. 3 Commodity Traders Club News now using a PO Box ourselves (PO Box 1888, Dave, thank you for e-mailing me. Yes Sedona, AZ 86339). You mentioned in a Eric Lippert and I have had a misunderstanding. negative sense that Mr. W uses a PO Box and He paid and received the program. After 2- would not give his home address. This is months he asked for a refund without returning actually quite common. Many Vendors use a PO the product. Box or sometimes a street address, which looks Please ask Eric how many years he used like a real address, but frequently, is a place like and loved the program. He wishes to slander Pak-Mail or Mail Boxes. In addition to vendors, me because I will not bend to his unrealistic many individuals do this, as they don’t want to demands of having the program and getting a reveal their home address. refund. I asked him to provide documentation There is nothing wrong with a vendor not showing he sent the program back “he said he giving out his home address to the public. This is did not have it.” a weird business and there are always some Then 1-year later he said he had the angry people who sometimes threaten and do document I asked for a year previously. Please odd things when they are angry. For example, in note that we have 4000 happy end users, and the past we’ve been threatened by a Commodity we do honor our refund policy for any new Broker on the East Coast who said he was purchase. We even honor it for exciting clients planning to come to Arizona and "kick my ass" upgrading within 30-days. (Over his default on paying CTCN fees he owed). But in Eric’s case two things raised flags. Also, we recently saw an Internet User First he did not provide us with the product, and Group posting about a Trading Product Vendor could not remit paperwork showing he returned we know named Kent Calhoun of KCI Seminars. it. Then a year later he wanted me to look at The News Group Posting actually seemed what he claims was the lost paperwork. to threaten Kent's life as the poster said he was Second, he stated his return was not due going to find out where Kent lived so “he better to him being unhappy with the software, rather watch where he is walking or he may get run because he wished to buy it from my ex-partner down by his truck.” Some other members of the offering a similar product. User Group also wanted Kent's home phone Sir, in the spirit of free enterprise, I number so they seemingly could somehow welcome him to choose between mine and my harass him at home. ex-partner’s software, and choose whichever program he wishes. But I felt that he was trying There was also similar threatening to have his cake and eat it to, by asking for the postings about other vendors, one of whom used program and a refund - all I asked was its extreme obscenities and seemed to threaten return, which I never got. Larry Williams with harm. Now he thinks by threatening to slander This is a tough business, especially when me, I will bend rather that act with honor and you consider over 90% of traders lose their justly. I will not bend. Had he returned the money. They are naturally hostile toward vendors program, he would have received a full refund. who were involved in their losing trading, even if BTW his last phone call was one in which the vendor’s product was "good." They he threatened to strong-arm me by showing up sometimes tend to blame the product vendor, at my office with other friends of his. His actions either directly or indirectly lack honor and truth, I know I have acted fairly. Do you think Presidents or Chairmen of the Lastly, I am most sorry for his bad Boards of large Corporations like Ford or GM or feelings, however, I think the motivation is to IBM, etc., would reveal their home addresses to cheat our firm, a far cry from his letter. buyers of their products, of course not! If you print his article, you act justly as the Per your suggestion we have also asked feeling of a very old and dear client, I feel bad other club members for either positive or that a client who himself told me that he has negative feedback on the vendor you are earned 10 times the cost of the program, after complaining about. using it for 5- years would act as he had. In closing, to refund the money is no big deal. To act to please a client that we fell acts The Other Side of the Story - He Earned 10- to dishonor his commitment to pay for a product times the Cost of The Program, After Using it he has used for 5-years, because he thinks that for 5-years! – Gary Wagner, IPTC I will wield to a squeaky wheel just because it squeaks, I’ll oil the wheel, but not yield to threats.

done over wailing and gnashing of teeth of those caught in the trap! 5-Ways to Make Money with Spread Trading When it is difficult to determine whether a vs. Only 2-Ways with Open Position Trading particular market is changing trend, comparing – Bob McGovern the back month's price action with front month price action may be a good indicator of whether the market is a bull or bear market. Chances Commodity futures spread trading is fast are if the back months are performing better becoming a lost art among average traders. Most than the front months, you are in a bear market. Account Executives (Commission Sales People) The reverse could indicate a bull market seem not able to comprehend or really want to be environment. Spreading action may be justified bothered with spreads, as open position trades in such cases to the trader's benefit. It's normally generate commissions faster. With one amazing how few traders pay attention to this eye on the Lexus in the parking lot and another rather obvious and readily discernable activity. on the alimony payment to ex-wife, the last thing The basic knowledge of seasonal trends the average salesman wants is a slow trading can give the spreader immense advantage at spread. times. We know that Wheat is harvested in However, much can be said for spreads. June and July. Corn is harvested in the Fall. Let's compare spreading advantages with open Isn't it possible to determine with the help of position trading. charts to go long the last month of old crop In a naked long trade, the market has only Corn and Short the first month of new crop one way to go to make money, and that is up. In Wheat sometime in the spring to take a naked short position, to make money, the advantage of this natural process? Of course, market must go down. Any other movement other factors may enter the picture, such as means a loss, even a "wash" trade, because planting intentions, supply/demand, etc., but the commissions still have to be paid. simple knowledge of this spread possibility In an average spread, with one sidelong should be profitable each year. and the other side short, the market can produce Wouldn't it be a good idea to also look at a profit under the following conditions: the relationship between different months in the 1. One side can move up and the other stay same crop to weigh carrying charge premiums? unchanged. Much profit has been made in spreads that 2. One side can move down and the other were at full carry by buying the front month and stay unchanged. shorting the back month in cases where carry is 3. Both sides move up, but one side moves unusually wide. up more than the other. The relationship between different 4. Both sides move down, but one side currencies, bonds and notes, gold and silver, moves down more than the other. heating oil and unleaded gas, hogs and cattle, 5. One side moves up and the other side and many other commodity futures contracts is moves down at the same time. a fascinating study! It's much more interesting Most of the time, the margin requirements and much more profitable in relation to risk at for spreads are much less than the margin times compared to open position trading. requirements for outright long or short positions, Once the trader gets involved in and sometimes, because of the nature of the spreading and becomes familiar with order spread and the seasonal factors involved, certain placement and fundamental seasonal factors, spreads are marked-to -the-market, which means he should find that perhaps his open position that margin is only required to makeup paper trading improves. He is more aware of the losses if they occur in the spread. fundamentals and charts have more meaning. Intra-market Spreads are a blessing when His thought process is now expanded markets go lock-limit up or down in that you are past the simplicity of deciding whether to go able to exit if you wish. Naked longs cannot long or short. His timing, because of his new escape a lock-limit down market, as there are no knowledge of seasonal spread factors is more bids. Naked shorts cannot exit a lock-limit up precise. His ability to determine trends is market since there are no offers. The relationship enhanced, and best of all; his bottom line between the legs of the spread is the only factor performance in terms of net profits in all his considered by the floor when you're entering and trading activities should show marked exiting during lock-limit days, so the trade, though improvement! not necessarily the best fill in the world, can be I've covered only a few considerations in

Copyright © 1999 by Webtrading Co. 9 Summer 99 – Volume 7 No. 3 Commodity Traders Club News the preceding paragraphs. There are many more, statistics. The MMA is a mechanism such as the consideration of the "personalities" of economists might employ to uncover the market the various trading pits, delivery points for forces that produce the most favored trading different commodities and their impact on prices, opportunities -- the kind that do not involve differences between contract sizes in inter- excessive risk, Adopting market positions market spreading, and whether a market is cash where the odds favor a profitable outcome is settled or subject to delivery. All these factors much preferred over the routine 50:50 (or influence spreading. worse) prospects one might obtain from less Learn as much as you can about spreads. I sophisticated trend-following procedures. consider them to be the secret to my longevity as The MMA has been enhanced during the a commodity futures trader! Good trading! last month through the inclusion of still another Bob McGovern publishes a nightly indicator called the Davis Elasticity Index. It spreading letter and biweekly letter on a identifies the effective percentage level that any subscription basis. His latest hardback 247-pg one market is out of step with all others, making Spreader's Handbook in combination with a it readily apparent which market is most one-year subscription to Bob McGovern's overpriced and which is simultaneously most Commodity Futures Spreads biweekly letter is under priced, given their respective historical available at a special discount for a limited time norms. This added indicator simplifies the task to subscribers of Dave Green's letter. You may of selecting the market pairs that offer the best wish to check Bob's website, opportunity for profits in spread trading. www.spreading.com or contact Bob via e-mail at: I cannot over-emphasize the potential for [email protected] or phone 949- market insight one might derive from making full 363-6667 for more information on spreading. and complete use of the MMA tool. It is highly unlikely that you will find such sophisticated analytical power in the pricey, though Capturing Intermarket Trading Opportunities uninspired, products offered by our competitors. – Bob Pelletier - CSI Unfair Advantage's newest release - version 1.76.0 contains an altogether new Trend Following Versus the charting/portfolio facility. It permits the display Multi-Market Approach of chart pairs, together with a tabular display of the user's portfolio. Appropriately scaled pricing A great many traders jump on the information on both charts facilitates the study long-term trend with plans to hop off before the of spread trading opportunities between ride takes a turn in the opposite direction. markets, even when they possess differing Although the exact turning point is difficult (if not conversion factor properties. impossible) to call in advance, the routine of The MultiMarket Analyzer supports following trends and capitalizing on market analysis of the many opportunities one might movement is worthwhile. find in the futures/commodity domain for That is, provided sufficient trading capital is intermarket spreads. Below is an overview of a available to take and maintain positions in few of the market pairs that might present various markets. There is certainly abundant opportunities for intermarket analysis. Some room for profit in following trends, so long as you have been expansively exploited by traders and follow time-proven methods that can balance the technical writers; others may not be widely inevitable risk of loss with the potential for known, and many others may be awaiting your reward. discovery before they can be mined for profits. Trend-following procedures have wide appeal, but they are not necessarily preferred as The Crude Oil Spreads a method of capturing profits from trading. Last month we presented material on CSI's new Crude oil (traded as Light Crude and MultiMarket Analyzer (MMA), which was Brent Crude) has a very prominent influence developed by staff Mathematician Steven Davis over the world economy. The abundance or as part of the Unfair Advantage®(UA) scarcity of energy products has made this database/analysis system. commodity a very important contributor to MMA's systematic trading procedure is market forces around the world. Intermarket much more than just a typical market study analysis has readily and regularly benefited because it delves deeply into mathematical from the crude oil influence, which has long been an intermarket participant. It has been

Copyright © 1999 by Webtrading Co. 10 Summer 99 – Volume 7 No. 3 Commodity Traders Club News paired with gold, T. Bonds, the CRB Index, and futures market on earth is widely aluminum, the grain complex, electrical energy represented in the UA database. The U.S. Dow futures and many other products. Look for Jones Index, the S&P 500 Index, the NASDAQ numerous opportunities in positively or negatively Index, the FT-30 Index, the Hang Seng Index, correlated markets paired with this resource. the All Ordinaries in Australia, the PSE Why was aluminum included in the above Technology Index, the DAX MidCap Index, the list? In case you may have forgotten, 95% of the JSE Industrial Index, the Russian Index, the value of aluminum comes from the electrical Czech Index, etc., etc., are all part of the needed to produce it. (Crude oil and coal are immaculately precise UA database presented used around the world to fuel electrical power for daily review. plants.) The residual balance of the price value They give the trader the opportunity to of aluminum comes from bauxite and balance multiple economies within a single transportation, the latter of which depends portfolio. UA gives the trader the unparalleled heavily upon the crude oil needed to move the ability to effectively analyze this abundance of product market. Spread relationships between data with surprisingly little effort. The many and crude oil and lumber, orange juice, sugar, cotton, varied interrelationships between the markets other precious metals and coffee might also be become very apparent to the initiated observer explored. using UA's MultiMarket Analyzer or the dual scale charting facility found in the most recent Treasury Bonds, Bills and Interest Rate release of Unfair Advantage. Spreads Versus Stocks, etc. The spread trader must recognize and be prepared to act on the simple fact that raw The CRB Index, gold prices and other materials are the building blocks of the world forms of interest rate products move together or economy. As the cost of raw materials goes up inversely with the cost of money. I would urge all or down, the stock market often reacts readers to explore the opportunities in these inversely. A high cost of raw materials is areas when searching for market opportunities. considered bad for stocks, which often depend The UA database and the vast data resources upon low priced and readily available raw available to users of QuickTrieve® offer a depth materials for optimal production. Capturing the of market resources. Prospective traders are effects of price relationships and misalignments likely to find fruitful opportunities for profit among in raw materials through MMA analysis can help one or more of these spread pairs on a daily or the trader capitalize on lucrative spread trading weekly frequency. opportunities. We hope this article gives you food for Currency Spread Opportunities thought on your trading as well as worthwhile information to help you get the most from CSI's Given the slow reaction of governments to products. Feel free to check our website at the valuation of their respective currencies versus http://www.csidata.com for past issues of this the balance of the world or with any given journal discussing related topics. country, the currency spread or outright naked currency position has regularly been a winner for many traders. When a government finds its currency suffering versus the dollar (or the reverse), it is typically very slow to react to the conditions at hand, thereby awarding the trader with an abundant opportunity to benefit. Countries are slow to react because of the red tape, the internal legislative delays and their reluctance to admit that their currency is in jeopardy or subject to official devaluation. For all of these reasons, the currency trader has been seen to excel in the markets by using fairly simple trading approaches.

A World of Interrelationships

Just about every major stock, commodity

an actual account statement. That statement would look like any successful trader's Chart Caption: A new facility in Unfair statement, more profitable trades than Advantage version 1.76.0 permits the creation of unprofitable trades. “Ratboy” (Rick Ratchford) intermarket charts displaying two markets has turned the MIF News Group into his simultaneously, each with its own scale. The personal advertising group. He has failed to do above chart illustrates the S&P Index (the right the simplest of the simple to convince anyone scale) vs. the CRB index (the left scale). he has a successful and Win big methodology. The combined chart exhibits the inverse relationship between these two markets. UA John Lothian - I know a second hand software uses pixel color-coding to distinguish story about a vendor, who made up quotes from one chart from the other. The volume respected industry sources about his product, relationship, not so evident in black and white, is including one supposedly from one of his also in color for a clear on-screen view. brokers. The statements were totally fabricated See the Unfair Advantage and/or and false. The quoted sources never made QuickTrieve® User Manuals or contact CSI those statements and never gave permission to marketing at (800) 274-4727 for more information be used in a promotional piece. on CSI's Perpetual Contract Data. The vendor would just find new people to For a very substantive presentation of "quote" when confronted. This was in the days intermarket trading opportunities, may I suggest before the widespread use of the Internet and you consult John J Murphy's book, "Intermarket newsgroups. Yes, testimonials as a Technical Analysis " published by John Wiley & replacement for a track record and disclosure Sons, Inc., copyright 1991. document are pretty lame. The charts shown in that book go through early 1990. Use Unfair Advantage to carry the Gary Smith - I always tell traders to many candidate intermarket relationships forward “never” buy a trading related product based on through 1999 to see how well his predictions a testimonial or reference given by the vendor. have held up. Uncover your own references such as through newsgroups. Some vendors are masters of the Editor’s Note: The trading book art of testimonial ship. I’ve known references mentioned above and others can be ordered that were put on the payroll of the vendor to say online via the amazon.com link on our great things about the product. TradersAuction website http://www.tradersauction.com/ Editor’s Comment: As you know, Gary, By the way, CSI is CTCN’s recommended I have great respect for your overall knowledge source for futures and stock market data. We and put great value in most of your comments. have dealt with CSI since 1982 and have found In addition, for many years your personal them to be excellent. The depth and quality of trading track record appears to be significantly their data is incredibly good. In addition, Bob better than average. Pelletier and his staff are very nice and helpful However, I think you and some other and offer superb service. You may also visit News Group Posters are grossly exaggerating CSI’s website via a link this link the usage of false testimonials by trading http://www.webtrading.com/links/data.htm system vendors. For sure, there have been You may also order CSI’s Unfair some occasional false ones in the past, but Advantage (UA) by calling CSI Marketing at 1- why would a typical vendor bother to use 800- 274-4727 or from other countries at 561- fraudulent ones when it's real easy for most all 392-8663. Please tell them you were referred by Vendor's to get legitimate ones? CTCN. The majority of trading system buyers will write good testimonial letters if asked to do so by the vendor (if requested very soon after Various Opinions on Testimonials purchase), sometimes doing it on their own, with no prodding. Rick Harle - It seems to me that if one had This is because immediately after buying an actual successful trading method/program and a system, the buyer is usually pumped-up and for whatever reasons decided to sell it, that the extremely positive and thinks (at first) the newly easiest thing on the planet to produce would be acquired trading methodology is great and perhaps may be the Holy Grail.

After all, they just spent lots of money and software packages that make the process quick naturally want to have a real positive mental and easy. Anyone with a little money and time attitude about it! However, often they will change can now create a "profitable" trading system their mind later, but only after they have already that shows fantastic hypothetical results over written a positive testimonial for the vendor. historical data. If you want to blame someone, blame the Almost all of the trading systems sold for individual traders who write the great testimonials large sums over the past 20-years or so have you see advertised. For the most part, they are been created by this method. Unfortunately, as 100% legitimate. Very few are fraudulent in thousands of disappointed investors can testify, nature, a minor and fairly insignificant commercial "black box" systems rarely if ever percentage. However, due to its nature, the work as expected. number of false testimonials is likely higher than As far as we know, the same can be said average posted via the Newsgroup channel than of the great majority of trading systems other media sources. generated by the use of testing software. The Sorry, but saying fraudulent testimonials reasons for this apparent lack of success don’t are a big problem (as you and others have said lie in the testing software, but in the testing and or implied many times in the past) seems to be evaluation methods used by the testers. seriously twisting the facts and probably We use Omega SystemWriter Plus and misleading the Newsgroup Members, and Computrac-SNAP, and both are excellent causing unwarranted negative attitudes. programs, which we can recommend without hesitation. Neither of them shows any bias or CFTC Initial Decisions & Press Release re: lack of flexibility that might tempt a researcher Ken Roberts Co., et al to adopt inadequate testing methods. The problem is, as we pointed out, the testing Emad Masadeh v. Sukhmeet Dhillon a/k/a methodology itself and not the software. Micky Dhillon, Main Street Trading Company, Newhall Discount Futures & Options, Inc., The The somewhat misguided objective of Ken Roberts Company, and Alan David Yee. most testing projects has been to develop Filed June 9, 1999. After a careful review of the trading strategies that squeeze the greatest record it was determined that complainant had possible profit out of the historical data. The established that respondents: The Ken Roberts assumption is that if it worked in the past, it will Company, Newhall Discount Futures and work in the future. Options, and Alan David Yee had violated the To carry that logic one step further: the CEA Act. Further, respondent Dhillon was found better it worked in the past, the better it will liable as a principal of Newhall under the CEAct. work in the future. If this were true, everyone Accordingly, respondents The Ken Roberts who designed a historical model that worked in Company, Sukhmeet Dhillon, Newhall Discount the past (meaning essentially everyone who Futures & Options, Inc., and Alan David Yee has ever used system testing software) would were ordered to pay reparations to complainant be very wealthy by now. Obviously this hasn't Masadeh in the amount of $50,483.73, plus a happened to majority of system testers. filing fee of $50. Complainant was not able to Most testing we've seen follows a standard demonstrate any violations of the CEA Act by scenario. A trader buys the latest software Main Street Trading Co. and, therefore, the package and some back data. He puts together complaint against Main Street was dismissed. a few of his favorite technical studies, adds Joel E. Maillie, Judgment Officer. CFTC Docket # some chart patterns that seem to have marked 99-R019. market turning points for him in the past, and optimizes to find the values for each parameter that produces the most profit. Greed takes hold and he starts trading System Testing: "Black Box" Systems right away. Inevitably, he runs into a series of Rarely, if Ever “Work” - Reprinted with permission losses. Two months later he decides that of Technical Traders Bulletin something is wrong with his system and that the best thing to do is optimize again and to get rid Computer testing of mechanical trading of the losing components of his system. systems has been around for over 20-years, but He re-optimizes, and is grateful to see has only become popular in the last several years that his work has, in hindsight, eliminated his with the introduction of user-friendly PC based losing trades. Confident again in spite of

Copyright © 1999 by Webtrading Co. 13 Summer 99 – Volume 7 No. 3 Commodity Traders Club News previous losses, he resumes trading, only to curve-fitted to the N-th degree. As good as it suffer another series of losses. He repeats the looks on paper, the odds against it working in process until his money, his patience, or his wife the future have become astronomical. In fact, runs out. Usually, it's his money that gives out, the better it looks and the more complete and leading him to believe that he would surely complex the system is, the less likely it is to succeed if only he could afford to optimize one succeed at all. more time. Robert Pelletier, of CSI (the data vendor), has provided the most rigorous explanation of A Series of Losses - What Went Wrong? why optimization and curve-fitting can go wrong. Frankly, it's such a simple and easily It is useful to dissect the above process and described concept that we can't believe that review what went wrong and why before more traders aren't paying more attention to it. exploring more correct procedures. First and Any statistician knows about the notion of most obvious, we are wary of optimization in freedom loss. In layman's terms, it means that almost any form. each parameter that is added to a trading Literally any technical indicator or set of system represents a degree of control lost over indicators will show tremendous profits when the final outcome of the testing procedure. The optimized for the best combination of parameters, more technical studies or trading rules or even over a random data set. The computer is variations of trading rules that you introduce, analyzing millions of combinations, so the the less robust and reliable the results. probabilities are very good that some of these Bob Pelletier recommends a low number will, at least in hindsight, make money. of variables, two to five at the most. The fewer Faced with the lure of almost instant riches, variables, the more reliable the results. An as indicated by the optimized results, the interesting corollary of this is that it allows you temptation to begin trading immediately is to look at your own past work and that of others overwhelming. The belief in this optimization and quickly decide if any of it is curve fitted. process is so strong that traders will optimize The likelihood of the system being curve again and again, even though the status of their fitted varies directly with the number of trading accounts should be telling them that they variables used to test the system. The greater are doing something wrong. the number of technical studies and rules This is exactly what has happened to the (especially exceptions to rules) the more trader in our previous example. You can hear him curve-fitted the model is. saying, "Just one more optimization, and I'll have Another way to avoid curve-fitting is to it made." Unfortunately, one more optimization avoid creating systems that are custom tailored will never solve the problem. to specific markets. This is an easy trap to fall into, but it is the ultimate in curve fitting. How to Avoid Curve-Fitting A good trading system does not have to work historically in all markets to be successful, Some curve-fitting is unavoidable. It would but should work in most markets with few if any be difficult and undesirable to design a technical changes from market to market. If you have to study without it. When a trader "eyeballs" a chart change the system to make it adapt to each and sees that a 9-day RSI seems to fit that market-something is wrong with basic system. particular market better than the standard 14-day RSI, he is curve-fitting. Because that seems so Testing Period simple and effective, it is only a small step to test every possible RSI parameter. From there it is Another critical area that is often only a small step to test every possible value of a overlooked is the test data itself At the barest simple moving average, for example. Once this minimum, the test period should be long process begins producing profitable results, the enough to generate at least thirty trades in each permutations become almost endless. market. Having less than thirty trades violates We'd better add a few more technical one of the basic rules of sampling theory, which studies to make sure we don't miss anything. dictates that at least 30 data points must exist While we're at it, let's optimize for the correct for a data set to indicate a normal distribution. initial risk and best trailing stops so our system is Note that this doesn't refer to days, weeks, or as complete as we can make it. months of data, but actual trades. Anything less The ultimate product is a system contrived than thirty will generate statistically unreliable with all the best intentions that has been results.

Just as importantly, the market periods you coincidence, is the generally accepted are testing must contain as many occurrences of minimum. each possible market condition as possible. Up, Add more time if the market has been only down, and sideways are the simplest (albeit one or two-dimensional during the period subjective) definitions of possible market studied. You will want to include as many conditions; your study period should contain as different market conditions as possible in your many of each as possible. study. The intent is to simulate potential future conditions by including as much of the past as What to Test For possible. Measuring this only in years can create problems. For example, the stock market has not The most obvious testing goal is had a serious down period since stock index profitability. How much money did my model futures were introduced. The full life of the market make? A better way to calculate this might be doesn't really contain enough data to reflect percent return, which is the annualized return potential future market conditions. based on the amount of money needed to trade The petroleum complex, on the other hand, the account. The percent return should be has shown us a great deal more variability and looked at over the entire testing period and then might be expected to produce a more robust broken down into small segments so that trading system as a result. negative periods can be isolated. To explain it another way, the results of a Keep in mind that percent return is a short time period of testing in the crude oil market function of the amount of capital used. You can might give truer results than a longer period of double the percent return by starting with only testing in the stock indexes because the stock half as much capital but you have not improved index data contains an obvious upward bias so the system. You may actually improve a system far. A buy only system in the stock index market by starting with more capital, but percent return would have been likely to produce much better will suffer accordingly. results than a sell only system. Frivolous and meaningless trading An interesting corollary of this is that, as contests are always won by making big returns tempting as it might seem at times, a system with small amounts of capital. This seldom should never be biased towards one side of the results in a viable or sustainable track record, market. Obviously, with a few notable exceptions, as evidenced by the dismal performance of the most of the profits in the stock indexes will have commodity funds managed by some well- been on the long side. This doesn't mean that a known contest winners. trading system should favor that side of the A derivative of the percent return is the market. Sharpe Ratio, which is defined as the The system should have no opinion or bias annualized return (a profitability measure) toward one side or the other. If this seems divided by the annualized standard deviation of obvious, recall that in the 1970's most of the return (a volatility measure). The higher the profits made in the commodity markets were on Sharpe ratio, the higher the return and the the long side. lower the volatility. The industry standard for CTA’s is to Many of the trading systems devised calculate the Sharpe ratio based on monthly became essentially bull market systems. The data. We realize that the Sharpe ratio has easiest way to improve your system was to limitations (for example, increased upside restrict or eliminate short sales. We recall that volatility will result in a lower Sharpe ratio) but it this bullish bias was a principal reason for the is still the most common index of its type. poor performance of many commodity advisors in We suggest you use it to compare the the early 1980's. results of one system versus another and to Our conclusion is that there is no static compare your results with those of professional definition of how much data a test should include. advisors. The best system for you may not be If we assume that the average trend-following the one that makes the most money, but the system trades about once a month per market, at one with the highest Sharpe ratio. least three years would seem to be a minimum, A very important yet commonly at least for an initial test which will produce the 30 overlooked statistic is Percentage (%) equity trade minimum mentioned earlier. Then add two drawdown, measured peak-to-valley. A trading or more years for forward testing (we'll explain system which generates an annualized percent this later) and you have five years; which, only by return of 100% over five-years will be difficult to

Copyright © 1999 by Webtrading Co. 15 Summer 99 – Volume 7 No. 3 Commodity Traders Club News follow if it has allowed peak-to-valley drawdowns heads/tails ratio of 1:1, but approximately every of 50% several times during the five years. 1,024 coin flips either heads or tails will show It would take a strong stomach and deep up 10 times in a row. pockets to trade such a system with confidence. Every trading system therefore lives with In our experience, a smooth equity curve is much the possibility that, independent of changing more desirable and harder to obtain than a high market conditions, it will to some extent annualized return. self-destruct. POR is the probability of that Other worthwhile measures of system self-destruction. The extent to which we can testing results include % profitable trades vs. % control % winners and the profit/loss ratio losing trades, average profitable trade (in dictates the degree of control we have over our dollars), average losing trade (also in dollars), trading system. We may not be able to control ratio of average win to average loss, the largest changing market conditions, but we can at least profit or loss, and the % of long or short trades make sure that our trading system won't that were profitable. self-destruct of its own accord. This last measure can give you some idea The following table shows POR figures of whether your test period or system is biased for a representative variety of winning towards one side of the market. Both of the percentages and average profit to average loss testing systems we use will generate these ratios. Just to keep the numbers simple we've statistics. assumed initial account equity of $10,000, a We want to stress that a trading system profit target of $15,000, and a loss level (ruin) of should be designed from the beginning to $5,000. achieve a predetermined set of performance measures. For example, you may set out to design a trading system that has at least 45% winning trades with average profits that are more than 2.5 times losses.

Volatility and The Probability of Ruin

Calculating two key figures will give you some idea of how reliable your trading system will be in real time. The first figure to calculate is the standard deviation of your trading results. The higher the standard deviation the more volatile your trading results will be. The lower the standard deviation the less volatile your results will be. All other things being equal choose the system that has the least volatility (lowest standard deviation) in terms of individual trading results. This should help ensure the highly As you can see, the POR changes desirable smooth equity curve. drastically as the winning percentage and The second key figure is Probability of Ruin profit/loss ratios change. A small system (POR). POR gives the trader the exact adjustment that results in a positive change in probability, expressed as a percentage, that his either ratio can make an enormous difference in or her account equity will decline to a specified our confidence in the system's future point before rising to a specified higher point. capabilities. Six figures go into the calculation: % POR can be very revealing. For example, the winners, average profitable trade in dollars, average CTA managing public fund today average loss in dollars, initial account equity, probably has a winning percentage of from 35% level at which an account can be said to be at to 45%, with most of them under 40%. A 35% ruin, and level at which account can be said to be winning percentage demands a high average successful. profit to average loss ratio to be successful, as The POR is based on the notion that within any you can see trading system, events will routinely occur that This is fine and readily attainable when the may appear abnormal but that are really within markets are trending, but if they get choppy the the realm of probability. For instance, a coin profit/loss ratio will quickly drop and the POR flipped an infinite number of times will have a will increase to frightening levels. Monitoring

Copyright © 1999 by Webtrading Co. 16 Summer 99 – Volume 7 No. 3 Commodity Traders Club News these two statistics closely and perhaps altering At the risk of being redundant, we'd like your trading system to take into account non- to cover the attributes that a trading system trending markets may be necessary to ensure must possess if it is to be successfully tested. survival. Some (or all) of these things may seem The Mechanics of Testing obvious, but we have spoken to literally thousands of traders over the past year and a half and we can say with some confidence that Earlier, we mentioned forward testing as a many people don't fully understand what a means of weeding out the elements of a trading trading system should or should not do. system that have crept in as a result of The first prerequisite of a trading system curve-fitting. Another term for forward testing is that is to be seriously tested is that it must be blind simulation. In practice, it means creating purely mechanical. The only discretionary and testing a trading system over a data series, component should be the decision to trade the for example the back three years of a 5-year data system fully or not. All other decisions must be set, and then testing the completed system over built into system. the remaining data, in this case two years. We realize many, if not most readers are Remember you need enough data to create at currently using trading systems that are at least least 30 trades in each test. partly discretionary. We're also aware that most Whether you optimize or not in the first truly successful traders consider some degree phase of testing is not as important as keeping of discretion a necessary component of their the number of variables low, as we discussed. trading. We have no quarrel with this, but it's The testing will eliminate a very high percentage impossible to test because it's hopelessly of "winning" systems. subjective. Discretionary elements have no We've seen a number of different schemes place in a mechanical trading system that is for optimizing, re-optimizing and forward testing. being prepared for testing. By far the most important point is that Expect the Worst! any trading system that is subjected to simple testing or The trading system you design for testing optimization without forward testing and a careful should attempt to anticipate all contingencies. It analysis of its volatility and probability of ruin is is very common for us to hear a trader most likely doomed to failure. downplay a missing element of a favorite trading system. The typical response to a polite Trading System Creation & Testing comment is "it's never happened to me, so why plan for it? Why should I use stops if my system We realize that not everyone has system always seems to catch tops and bottoms, and testing software. It is expensive and complex, there's never been a drawdown that I couldn't with a steep learning curve. It is not necessary to handle?" possess it to create a viable trading system. This is not only naive, but also The elements of any system should be the dangerous. What can happen will happen. A same whether you have expensive testing system must always expect the worst, and be software or are doing your own programming, as prepared to cope with it. You must always use some of our subscribers do. It’s even possible to complete risk control. Don't assume that test a system without expensive software, simply because it hasn't happened in the past it won't by sitting in front of a computer screen and happen in the future. objectively trading your system over back-data. In Here is a typical example: Many traders fact, there are certain advantages to doing it this prefer to use close-only stops. The rationale is way. that intraday price movement is inconsequential One advantage is that without the and that only the close is significant. extensive optimization capability of the software A deeper motive might be that the trader packages, your system won't be over-optimized. is trying to avoid taking whipsaw type losses. However, the pros of the testing packages far (They probably got stopped-out of a potentially outweigh the cons. We strongly recommend that profitable trade once and they're making sure you obtain some system testing software. that it won't happen again.) It only takes a few of these to convince Elements of a Trading System anyone that it's better to have an ordinary stop

Copyright © 1999 by Webtrading Co. 17 Summer 99 – Volume 7 No. 3 Commodity Traders Club News and a re-entry strategy. Anticipate the awful; then statistically significant results. Even if you you won't be quite as surprised and unprepared tested 25 years of data, if you didn't have at when it happens. least 30 trades, the results would be highly Note that it is entirely acceptable for your suspect. We once heard a lecture about the trading system to be profitable in most of the validity of a stock market indicator that markets you're testing and a loser in a few of averaged one trade every 40 years. We would them. One successful CTA of our acquaintance have wanted to see 1200 years of results to be trades in all the markets he has tested (winners impressed. and losers), and claims that his equity curve is smoother as a result of this diversification. Largest Winning and Largest Losing He deliberately seeks some negative Trade: Largest winner is important if it has correlation between commodities in the portfolio. skewed Net Profit unreasonably. Many He has found that the profitable periods in his conservative system testers will throw out the "losing" markets usually coincide with losing largest winner in each commodity and periods in the "winning" markets. reevaluate the results. The largest loser can be especially important if it exceeds your normal A trading system will not be profitable in all risk control measures. markets all the time. If you have designed it Perhaps there is some problem or correctly, the drawdowns will be minimal in the contingency you've overlooked. Be careful of losing markets, and they will eventually have measures to eliminate the biggest losers; this is profitable periods. where most traders stumble into curve fitting. Be careful about testing lots of Don't make special rules that skip the big commodities and then constructing a portfolio of losers, just review your stop and risk control only the winning contracts. This is a popular procedures. device of system vendor and is pure fantasy. (Though it sure produces a heck of a track Maximum Consecutive Winners and record.) Losers: Maximum consecutive losers could be useful. It gives you an idea of how much Test for Specific Results emotional pain you g might have to endure while trading your system. A forecast of this We previously stressed the need to test number could help prevent panic. with specific goals in mind. As we mention and the most important of these are % winners and Peak-to-valley Drawdown: This is very the ratio of average win to average loss. important as a measure of how practical your These can be used to calculate Probability trading system will be with real money on the of Ruin, giving you some idea of the robustness line. Most often, the systems that give the of your system. The testing software gives other largest net profits have the largest drawdown. useful data also. Here is a list, with comments. Combine a large drawdown with a string of Net Profit: A very overrated measure of losses and you have the reasons most people success for several reasons. First, check to make prematurely abandon a potentially good trading sure that a few large trades haven't skewed your system. results. You don't want to use a system whose You've heard us stress before that a success depends on nonrecurring events (Like system must be designed within r the personal the Hunt's comer of the silver market or sugar stress tolerance of each individual trader. Much futures going back to 63 cents). like the anticipation of consecutive losses, Next, don't assume that, in real time, your anticipation of the potential drawdown that we system will reproduce anything like the net profits must endure can generate a vital element of from your tests. Future results depend on the confidence, which will allow us to trust the markets performing as they did in the past and system and survive inevitable losing periods. we know that they won't. For professional money-managers there You cannot predict what the markets will is another reason for calculating Maximum do in the future. You can only try your best to Drawdown. CTA’s and the people who market make sure your system is prepared to deal with CTA’s tell us that the public is getting smarter most of the foreseeable future market conditions. (about time) and is more interested in those rare CTA’s whose record shows steady growth Number of Trades in the Test Sample: and small drawdowns rather than in the The total must be over 30 to be sure of high-fliers who show big short-term gains with

Copyright © 1999 by Webtrading Co. 18 Summer 99 – Volume 7 No. 3 Commodity Traders Club News large peak-to-valley drawdowns. seldom-mentioned perils of testing in general Those of you who are interested in and optimization in particular. When you test for becoming CTA’s and managing public money only one result (usually total return) you are would do well to create a system whose largest probably ignoring other, more important data. portfolio drawdown is in the 20-25% area, We recommend that you test for the measured month-end to month-end. This really above matrix of attributes, rather than just for requires a combination of good money one. We realize that this complicates the management (including proper capitalization) and procedure, and may in many ways make it a sound, risk-controlled trading system. subjective, but testing only for total return is Don't throw away your testing results. They misleading and can be harmful to your financial provide an early warning system to alert you if health. your system is beginning to self-destruct in real Here are some guidelines that will help trading. Any results approaching the maximum focus your testing goals: drawdown, or maximum consecutive losers, should be viewed with caution, as should any Percentage (%) Winners: Try for at downtrend in winning percentage or win/loss least 40% to 45% winners. However, be ratio. suspicious if a winning percentage is much over 50%. It is probably not sustainable, and most Testing - What to Look For likely represents inadvertent curve-fitting or a very low profit per trade as a result of large We like to use lots of data, and to test over losses and small profits. It can also mean that varying time periods. Unless you've done this, your risk-control stops are too far away. you can never fully appreciate how elusive a profitable trading system can be, and how Ratio of Average Win to Average time-dependent the testing results are. We are Loss: This should be well over 1: 1 very wary of systems that have not been tested (break-even). Obviously, a ratio of 3:1 or 4:1 is through time periods that reflect as many nice but, given a decent percentage of winners, different market conditions as possible. even 2:1 will make you more money than you Notice how in the following table the results can spend. are affected by changing the time frame, Total Return and Maximum especially with regard to drawdowns. The return Drawdown: These are both contract-specific is similar, which brings up an interesting point. measurements expressed in dollars. For Just about all example, the total return on S&P contracts should only be compared with the maximum 20-Day Channel Breakout System, Crude Oil drawdown on S&P contracts. Total return and 1/87-1/90 1/86-1/90 maximum drawdown are the ultimate Total Return 16,255 19,690 expression of risk/reward. % Winners 41 38 Of the two, drawdown is more important. Ratio Avg. Win/ It is possible to express both as a % of margin, Avg. Loss 4.96 3.31 but margin is a moving target related to contract Maximum -3,090 -10,595 months and can change frequently and abruptly Drawdown so it doesn't always give a precise measurement. of the optimization/testing procedures we've seen Test Data focus on total return as the sole criterion for choosing the most optimal parameters to use in As far as we know, there is no existing subsequent tests or in real-time trading. In our testing software that incorporates the ability to simple example above, the returns seem to be in roll a trade from one contract month to another line with one another. without causing a break in the values of any The drawdowns, however, are vastly technical study it is calculating at the time. The different. How many traders would be willing to break invalidates the study and therefore the ride out a $10,000 drawdown while trading a test. contract with an average margin of only about It is possible to feed the computer a $2,500? That's asking a great deal. series of contract months for a given The example above illustrates one of the commodity, test each month separately, and then consolidate the results, but we can't

Copyright © 1999 by Webtrading Co. 19 Summer 99 – Volume 7 No. 3 Commodity Traders Club News imagine a more tedious and error-prone Technical Trading Systems" by Louis B. Lukac procedure. and B. Wade Brorsen, in The Journal of Futures The solution is to arrange your data into a Markets, Vol. 9 (1989), No. 1, pp. 55-65. continuous stream that has no breaks and Their work is systematic and complete. therefore allows continuous testing. We won't go They tested two trend-following systems, into detail about the calculations to ensure a Channel Breakout & Wilder's Directional smooth transition from one contract to the next, Movement System, using 20-years of data. The but we are satisfied that, given that any testing is only variable that was optimized was the hypothetical, the results are reasonably accurate. number of days used in each calculation. That We have data from 3-sources: parameter was stepped through a time period FutureSource, Technical Tools and Omega of 5 to 60-days, in 5-day increments. Research. The latter arrives as continuous They compared three different contracts. The Technical Tools data comes with optimization schemes with a random test, which software to create your own continuous (or other) used parameter values randomly chosen from contracts. the 5 to 60-day set. The most significant finding If you have a number of different analytical was that the re-optimization strategies did software packages (as we do), Quote Butler, nothing to increase system performance. Each from Technical Tools, is an excellent way to optimization method produced results not switch data from one to another without having to significantly different from the random test. buy data for each specific application. We have With or without optimization, profits were no recent experience with any other data on the order of 50 to 65% for the Channel vendors. Breakout System, and 30 to 54% for Wilder's Directional Movement System. They stated, Slippage and Commissions "The results of all tests suggest the forecasting ability of optimization is limited. Optimization Don't trust any testing results that don't was not able to forecast parameter sets which include a liberal allowance for slippage and would produce portfolio profits better than a commissions. They make an incredible difference random selection strategy.” in your results. Let us stress that this was a rigorously There are a lot of trading systems that formal test done with great attention to detail. make small steady profits when tested without Anyone who claims that full optimization works allowing for slippage and commissions, and turn better than a simple blind simulation will have to into steady losers when transaction costs are produce contrary results that are just as factored in. This is especially true of short-term or rigorously attained. daytrading systems. The more trades a system has, the more critical transaction costs become. Testing Protocols There was a particularly glaring example in a recent national publication. The article We'll explain a few of the most common explained an indicator that purported to call intra- optimization and testing schemes. day turns in stock index futures. Although the volume of trades was high, there was no Simple Optimization: This is as easy as allowance for transaction costs. We calculated it sounds. You create a trading system, then that, given very discounted commissions and optimize it over a comprehensive set of only occasional slippage, the system was at best parameter values until you find the ones that a break-even method, at worst a steady loser. yield the best return. In our testing opinion this Everyone has their favorite numbers for is the least productive system t method. It is transaction costs. We allow $75 for slippage and curve-fitting of the worst kind. $50 for commission per round turn, for a total of $125 per trade. This number may seem high, but Cumulative Forward Testing: This we prefer to err on the conservative side. requires that you optimize a system over a period at the beginning of your data, and then To Optimize or Not To Optimize test the results over a relatively short subsequent period. You then re-optimize over a Anyone who believes that full optimization period that includes both data sets, and works as well as touted by some system vendors continue the cycle. For example, if you have 10- would do well to read "The Usefulness of years of T-Bond data, you might optimize over Historical Data in Selecting Parameters for the first 3-years, then test over the next one. If

Copyright © 1999 by Webtrading Co. 20 Summer 99 – Volume 7 No. 3 Commodity Traders Club News the results are still good, you then optimize over Paper-trading results were done in the full four years, then test the fifth year, and so February 1999. Here's the strategy I'm using to on. paper-trade the system: 1. Each Monday morning, I pick up a copy Simple Forward Testing: This is also of Investors Business Daily. called blind simulation. You optimize for the 2. I use options on the OEX (which is the beginning of your data (say for the first five years SP- 100) for all my trades. of a 10-year data set), and then test the results of 3. I perform the Don Fishback analysis to your optimization over the more recent time find my 90% trade. Note: depending period, with no modification. If it doesn't work, it's upon where the option strike prices fall, back to the drawing board. some trades may have less than a 90% Forward testing is the most elegant chance of winning, i.e., 85%, but all solution to the system-testing muddle. It offers should be in the range of 85-90%. some of the advantages of optimization with none 4. If the OEX options have less than a of the disadvantages. If your system doesn't week to expiration, I use the next prove profitable with this forward testing month’s options. procedure, throw it out. It will probably be only 5. I will perform this analysis for 3-months sporadically effective in real-time. to evaluate the system.

TRADE #1 - 2/1/1999: Review of Don Fishback's Products Jerry  Sell the Feb 595 OEX Put for a credit of 3.125 or $312.50 Woolston  Buy the Feb 590 OEX Put for a debit of 2.75 or $275.00 The following comments represent my  This creates a net credit in my account opinions and/or experiences. of $37.50 for each spread trade. "Options Wizardry From A To Z”  As long as the OEX stays above 595 This system is priced at $195. It consists of until the 3rd Friday in February, I will 4 video tapes (approximately 5-hours of get to keep the $37.50 for each spread instruction), a manual and a few other tidbits. trade. Probability of this happening is This system does a very good job of 88.7% explaining various option trading strategies. Don  Max Loss potential is $462.50 per does a good job of explaining each type of spread (calculated by subtracting the strategy and when they should be implemented. credit amount received from the Approximately 3.5 to 4-hours of the video difference between the 2 strike. prices, instruction covers: i.e., 500 minus 37.5). Probability of  What options are and how they work Max Loss Occurring 11.3%  Puts  Calls  How Did The Trade Work Out? This  Debit Spreads trade worked out! I would have made  Credit Spreads $37.50 per spread.  Straddles and Strangles  Back-spreads TRADE #2 - 2/8/1999:  Put Selling  Sell the Feb 575 OEX Put for a credit of  Calendar Spreads 2.5 or $250.00 The remainder of the video instruction  Buy the Feb 570 OEX Put for a debit of covers Don's strategy of implementing trades that 2.00 or $200.00 are he says will be successful 90% of the time.  This creates a net credit in my account This involves an understanding of standard of $50.00 for each spread trade deviations and a few other statistical principles.  As long as the OEX stays above 575 Overall, I enjoyed the course. I think the until the 3rd Friday in February, I will material would be beneficial particularly to get to keep the $50.00 for each spread someone who has very little knowledge of trade. Probability of this happening is options and is looking for a system to teach them 90.2%. the principles of option investing. The price may  Max loss potential is $450.00 per be a little steep at $195 but, if it works, it may be spread (calculated by subtracting credit worth the price. amount received from the difference

between the 2 strike prices, i.e., 500 LOSS side! Oh well! We'll keep tracking our minus 50.0). Probability of Max Loss progress! Occurring 9.8% The major problems I see with 90% of the  How Did The Trade Work Out? This Systems are: trade worked out! I would have made 1. High probability of success on each $50.50 per spread. trade, but VERY small profit on each trade. TRADE #3 - 2/16/1999 2. Even though the risk of loss is 10%, it  Sell the March 550 OEX Put for a credit would only take 1 of those situations to of 4.5 or $450.00 WIPE OUT all the gains you had  Buy the March 540 OEX Put for a debit accumulated with the 90% of 3.625 or $362.50 3. Commissions will eat you alive!  This creates a net credit in my account of $87.50 for each spread trade There’s more information on my website  As long as the OEX stays above 550 http://www.bluechipvalue.com until the 3rd Friday in March, I will get to keep the $87.50 for each spread trade. Probability of this happening is 88.9% There’s No Holy Grail - However, your  Max loss potential is $912.50 per spread (CTCN’s Real Success Video Course) (calculated by subtracting the credit Work Spells Out a Good Solid Road Map amount received from the difference for S&P Daytrading - Buz Cook between the 2 strike prices, i.e., 1000 minus 87.50). Probability of Max Loss I have been living with your Real Success Occurring 11.1% video course over the last 48-hours. I am on my  How Did The Trade Work Out? This second viewing. Like I mentioned to you on the trade worked out! I would have made phone (though we all would like one) there is no $87.50 per spread. holy grail for trading. However your work spells out a good solid road map for day trading the TRADE #4 - 2/22/1999 S&P's.  Sell the March 560 OEX Put for a credit It's funny that over my many years of of 4.125 or $412.50 trading I have seen all the concepts in your  Buy the March 550 OEX Put for a debit tapes. I just have not seen them spelled out of 3.125 or $312.50 with such a clear-cut plan on how to get from A  This creates a net credit in my account of to B to C. Bravo! $100.50 for each spread trade. Dave, what do you now suggest for a stop  As long as the OEX stays above 560 loss? With $250.00 vs. $500.00 a point when until the 3rd Friday in March, I will get to you taped the course and with the higher levels, keep the $100.00 for each spread trade. is 2 to 2.5 points about right? Also does general Probability of this happening is 89.7%. profit targets between 2 and 5 points seem  Max loss potential is $900.00 per spread about right? Also do you still use mental stops (calculated by subtracting the credit in your trading as opposed to a resting stop loss amount received from the difference order? between the 2 strike prices, i.e., 1000 I have figured out what was wrong with the minus 100.00). Probability of Max Loss Keltner formula in your course material (very Occurring 10.2% minor correction) and now have the Keltner  How Did The Trade Work Out? This bands up and running. Thanks for a great trade worked out! I would have made course. $100.50 per spread. Editor’s Comment: Yes, I think the 2 to Comments: So far, I'm very 2.5 stops and 2 to 5 profit targets you referred under-whelmed at the potential in this system. to above are very good. With the contract size Don's flyer for this system kept talking about being different and the volatility being much making $1,000 to $2,000 per week! So far, I don't greater, these make sense. see how that's possible when your only making $30 - $100 per spread trade. Also, the risk/reward ratio seems skewed heavily to the

aids, voluminous charts and mathematics. Yet practically everybody falls into abysses between red and black squares. Private Fort Knox’s remain dusty blueprints. OPTIONS & SPREADS: The Biggest Since stock options, futures and futures Difference in the World, or, Profiting off of options are zero sum games, Peter perpetually Cannibalism & Quicksand - Greg Donio plunders Paul and the reverse. Someone must lose a dollar for every person who gains a dollar; one pocket must be picked for every Chamfort wrote, "Bachelors' wives and old pocket that bulges. Financial reality must shoot maids' children are always perfect." Sure. For a thousand traders to deliver a profit to another sports fishermen, the one that got away is always thousand. About half the winning thousand huge. The book that the would-be author plans to face the firing squad next time. write but never does--always a literary Andrew Tobias told of people he knew masterpiece. The architectural blueprint that who made a bundle buying a batch of options never left the drawer "would have been" another or "playing them long," then lost it all trying to Taj Mahal. repeat that success. If you have a 50-50 We arrive at traders' millions, the strongbox chance of winning and not losing once, you that should have come on the noon stagecoach. have only one chance in four of doing it twice in That stock should have been the new Resorts a row, and just one in eight of three consecutive International. Skyscrapers were supposed to wins. Thus the third try is Russian roulette with replace the weeds on that real estate tract. Why seven of eight chambers loaded. 10 doublings does cash not cascade in from the chain letter or in a row increase the money a thousand-fold pyramid scheme? Those "newly-minted but you have only one chance in a thousand of collectible" coins have dropped 40% on the doing it 10 times in a row. resale market. Think of brokerage commissions as a sad Stock options. Futures contracts. Futures story riding the coattails of another sad story. If options. Countless thousands of traders read you keep repeatedly tossing a silver dollar, it yachting magazines hopefully and cry in their will come up heads approximately half the time lager on dry land afterward. On the sea of and tails approximately half. Venture money on dreams, the bachelor's wife and the spinster's it and losses will approximately cancel out wins. child ride the trader's brigantine. Take a lesson Now imagine brokerage commissions chopping from the checkerboard in the sea chest. If you a nickel or half-nickel off the silver dollar on ever tried that old experiment, you did not get far. each toss. Will the game last long? You place one penny on the first square of Commodities that underlie futures the checkerboard, two cents on the second, four contracts can only go up or down. Stocks and on the third and keep doubling. The surprise is futures that underlie options can only go up or that the figures become astronomical rather down. Heads or tails. With options, 50-50 odds quickly. You pass the thousand-dollar mark on are too generous an estimate because the 18th square, the million-dollar mark on the time-decay eats up their value in bigger and 28th square, the billion-dollar on the 38th, and so bigger bites as the calendar progresses. Also, on through trillion and quadrillion. commissions make the zero sum game a minus "What has this to do with financial trading?” sum game. you ask. Plenty. Becoming wealthy should be the All this helps to explain how "zero sum" easiest thing in the world when you consider that and "minus sum" shoot and rob traders, why a thousand dollars has to double only 10 times to every barfly is not a millionaire, and how come become a million. No flight to the moon, just 10 crying towels far outnumber limousines. The squares on the checkerboard. Yet how many double doors at which all this arrives are what I have done it? call The Biggest Difference In The World: The Dalton's Bookstore near Wall Street has an Difference between winning once and winning array of tall bookcases, shelves and shelves with anything resembling consistency. allegedly telling you how to increase and Practically every speculative trader and horse- re-increase your money. Yet how many venturers player has done the former. Those who have who started out with more than a thousand done the latter are slightly more numerous than dollars have managed to traverse those 10 blue-coat survivors at Little Big Horn. simple squares? Plenty of brilliant minds, ideas, I took up option spreads because they degrees in engineering and physics, micro-chip contained that consistency. Not risk-free, not

Copyright © 1999 by Webtrading Co. 23 Summer 99 – Volume 7 No. 3 Commodity Traders Club News instant millions, but repeat profits in the manner of $460. Nearly a 33% gain annualizing to over of a successful business enterprise. Spreading 230%. A small negative -- it took longer than does require a certain psychology or mind-set. It usual since as a spread strategist I tend to think is too venturesome for financial conservatives in terms of three to five weeks. Yet bond such as bond investors or investors are satisfied to wait far longer for far buy-‘em-and-hold-‘em-for-years stock investors. less. Many I'm-in-a-hurry futures and options Yet it is too conservative for crap-shoot players are too badly shot up to look at clock or speculators who pursue what promises vast calendar. wealth and delivers a massacre. Icebergs test navigator and helmsman. That happy medium between those two Three investment specialists have left George intransigencies is business, profitable enterprise. Soros' group of managed funds to form their I am used to collecting markedly more gains in own company due to multiple "disappointing markedly less time than the coupon-clippers. I results" plaguing their former boss lately. Mario am also used to climbing over the corpses of Gabelli of Gabelli Asset Management was speculative traders to gather my profits. I am also razzed recently according to the Wall Street used to the month-after-month returns of a Journal (May 25, 1999) for "creative landlord or a kitchen appliances dealer or a accounting" in issuing a quarterly earnings gems-in-a-satchel entrepreneur. Business report that camouflaged the bottom line -- a constitutes the middle ground west of the bond 17.9 million dollar loss. Non-giant though I am, I coupon and east of the paper dice, and I know I am doing something right when red ink discovered it with spreads. splashes on their boats but not mine. In the previous issue of CTCN, I wrote of Can an independent trader surpass the opening a "horizontal calendar" spread position big boys? I have not found it all that difficult. with Wal-Mart put options. "Horizontal" meant Nor does it require formulae abstracted from that the batch of options bought and the batch physics or engineering or cyber-science. As sold had the same strike-price. "Calendar" meant with many one-person businesses, the that the two batches each had a different foundational game-plan is not complicated and expiration month. In this type of spread, one buys can be etched on a hard boilerplate: Do a far-in-time options and sells near-in-time ones. horizontal calendar spread, buying the The near-in-time ones are worth fewer dollars far-in-time options and selling the near-in-time because of less time-value. ones. Secondly, be sure that the near-in-time The price difference between these two sold options have a market value of at least 3 batches is a debit or minus-figure, which the points and preferably more. Finally, be sure that trader pays out of his capital. In other words, that the "spread" or gap between the bought and the difference forms the “spread,” the gap which his sold is less than 1½ points -- as much less as money fills in. In this instance, I bought 10 possible. Wal-Mart put options with an expiration date of Look to the already-described Wal-Mart June and a strike-price of 90, purchased them at put spread as an example. The nearer-in-time a price of 4¼ points -- $425 for each or $4,250 Mays were sold for 3 and the farther-in-time for 10. I sold 10 other Wal-Mart put options with Junes were bought for 4¼. What if the Mays the same strike-price of 90 but a nearer-in-time traded for 2½ and the Junes for 3¾? The expiration date of May. My selling price: 3 points spread between them is still 1¼, less than 1½ or $300 each, 10 for $3,000. and okay. However, the value of the The $3,000 I took in from the sale of the near-in-time options is only 2½, below the Mays paid for most of the $4,250 cost of the minimum of 3. What if May traded for 3¼ and Junes I bought. In the trader's brokerage June for 5¼? The near-in-time now meets the account, the money received from the sell is requirement but the spread or gap stands at 2 automatically credited toward the cost of the buy points, certainly in excess of the mandatory when both transactions are executed on the "less than 1½." No deal. same day, as is customary with option spreads. A couple of solid second-tier rules. Look My investment capital paid the difference beyond the expiration date immediately ahead between or "filled in the gap between" these two for both ends of the spread. At the time of this figures -- the "spread" of $1,250 -- plus discount writing (June 2, 1999) the June options brokerage commissions. scheduled to expire later this month are Less than seven weeks later, an scrawny and depressed in value due to investment of approximately $1,400 with advanced time-decay. Almost no, 3-pointers commissions brought an after-commissions profit among the out-of-the-money puts & calls. More

Copyright © 1999 by Webtrading Co. 24 Summer 99 – Volume 7 No. 3 Commodity Traders Club News like ¾of a point or 1¼ point. The months beyond and wool. that are meatier and offer the possibilities, like He who buys stock shares anticipates selling Julys and buying Augusts. their doing well. Whoever sells them expects Another rule: Patience. Although I took otherwise. One of them has to be wrong. profit a couple of weeks ago on May 17, I have Occasionally long-players in stocks "squeeze" not yet launched another spread position. This is short-sellers, a merciless slaughterhouse because I have not yet found a situation that maneuver. Short-sellers are often branded meets my already-stated criteria -- the 3 points or "traitors" and "jinxers" for betting on shares to better near-in-time, the gap of less than 1½. drop while most investors root for a rise. Yet Lack of August options in many stocks is causing Bank of Boston common shares have paid a an impediment. Nevertheless, I shall not plunge cash dividend every year since 1784. The in again until my requirements are met. certificates fit nicely in granny's knitting basket Patience may sound like a difficult tenet to until her grandkids inherit them. preach in the realm of speculative trading. Speed Are stock options, futures contracts or means so much here, the quest for rapid profits futures options this warm-hearted? They fall as opposed to 10-year debentures. It could even within the category of "wasting assets,” be said that trading is impatience in work clothes, meaning they have expiration dates and or impatience with guns mounted or whatever. eventually become worthless. Stated more Still, smart trading demands good timing, and bluntly, they are gladiatorial. Profits or death. A good timing often requires patience. horizontal calendar spreader handles only One of Aesop's most famous fables may out-of-the-money options, the calls above the be played both ways timing-wise. With over a stock price or the puts under it. Over 90% of all 30% profit in less than seven weeks, I the spread out-of-the-money options expire worthless. strategist could be the hare in contrast to the What sterile terminology calls "high turn-over tortoise bond investors and hold-them-for-years rates" among futures and options players stock investors, respectively aiming for 5 or 6% financially resembles “high turn-over rates” and 10 or 20% annually. Yet everything being among small-shield combatants in the relative, I may count as the tortoise in contrast to Roman-arena. the frenzied futures & options traders who expect Rob Peter. Pay Paul. Traders scurry to double and redouble their cash with jackrabbit around, trying to share in Paul's bounty and not speed. Better a profit-gathering turtle than a Peter's bankruptcy. Half will fail. Half the butchered bunny. successes will fail next time. "Et cetera" with A lesser-known, sadder Aesop's fable blood dripping off it. I thank spread strategy for comes to mind. A lion and a lamb both stopped to enabling my brokerage account to age drink at a stream at points a short distance from gracefully and with full pockets in a die-young each other. The lion said to the lamb, “How dare world. Both the longevity and the money belt you muddy the water where I drink!” The lamb can be attributed to that perennial replied, "That cannot be. I am drinking pot-sweetener: Other people's cash. downstream from you." Then the lion asked, In the example of the Wal-Mart puts, the "Why did you insult me a year ago?" The lamb $3,000 that other folks spent for the Mays I sold responded, "That cannot be. I am only six paid for most of the $4,250 worth of Junes I months old." The predator declared, "If it was not bought. My investment? $1,400 including you, then it was your brother. My wrath upon his commissions. A bottom line of $1,860 means a whole clan!" Then he pounced on the crying lamb loss if you risked either of the first two amounts and devoured it. but a prime-cut rack of lamb profit if you ven- The Moral of the Story: "Any excuse will tured the third. The poker game carries risk and suit a tyrant." Is anything more predatory than does not guarantee gains. Yet it is not too financial risk trading? Every joy is a sorrow to difficult to come out ahead repeatedly when you somebody else and vice-versa. You have to gore can buy 30 or 40 dollars worth of chips for 14 somebody's ox to fill your meat locker, while dollars. At the conclusion, 20 or 25-dollars wins protecting your locker. Zero sum games produce -- with that discount. nothing. A pocket picked, another pocket filled. Several months ago one CTCN The lamb's loss, the lion's gain. Those who subscriber, a young man in Hawaii, wrote to me bought the near-in-time options I sold, and those and asked how I decided or chose between who bought far-in-time options identical to mine puts and calls. I replied that I looked to call but without spreading, usually went through the options if the underlying stock was gradually meat grinder. As a spreader, I collected mutton rising and had a conservative price/earnings

Copyright © 1999 by Webtrading Co. 25 Summer 99 – Volume 7 No. 3 Commodity Traders Club News ratio, and puts if the shares gradually declined regularly enough to be called a business. It and had an inflated P/E. "How do you narrow the certainly qualifies as a business more than do list of stocks?" he also asked. Quite easily. the activities of all the speculative trading Among out-of-the-money options having would-be millionaires who play Russian roulette expiration dates within the next 3 or 4-months with seven of eight chambers loaded. (June-July-August if it's late May, for example), A trader's dream-profits multiply relatively few trade at prices of 3 points or more. astronomically with the perfection of a That eliminates something like 95%. bachelor's dream-wife and a spinster's Among shares whose options do carry dream-child. Perhaps I am the party-pooper for hefty near-in-time prices are some crazy mentioning cellulite and measles, real business large-swing stocks as opposed to gradual risers and realistic gains. Yet 30% hard wampum in a and decliners. No good. I would not touch few weeks buys far more than 1,000% at the Amazon or AOL options, for example. That imaginary level and bankrupt teepee at the eliminates several more. On whether to choose beads & shells reality level. puts or calls, one other factor emerges in addition In past articles, I have shown curiosity re to a share's chart direction and P/E. Generally, bad investments and scams and a fascination put options with the same strike-prices but with investment history. You can emerge alive different months tend to have narrower gaps or and profit-laden from a jungle diamond mine but spreads from month to month than calls. what do you need to do so? A knowledge of Let us say that today is late September or gems and mining techniques, yes, but also the start of October. If you are considering a knowledge of leopards and snakes, cannibals spread, your attention should be on November and quicksand. Otherwise you end up like and December options in the newspaper's countless other traders roasting over the financial section. You look to calls with financial coals. As for investment history, it is strike-prices more than five points above the remarkable how slightly quicksand changes underlying stock's price and puts with over the centuries. strike-prices more than five points below, to One unsavory institution that proliferated lessen the chance of a slight fluctuation in share in the late 1800s and early 1900s was the price putting an option "in the money." You bucket shop. In these "investment companies,” eliminate all the options selling for less than three no actual securities were bought or sold. They points and all the options in insane- volatility were gambling dens that used stock zigzag stocks, high-priced though those options fluctuations as a basis for wagering. You bet are. against the house cashbox on whether a share Among the handful that remain, let us say price would rise or fall. They were so-called that a stock fluctuates between 92 and 94 & a because your written order was "bucketed" or fraction. You would look at November and tossed in a receptacle rather than forwarded to December call options with a strike-price of 100 an exchange. and put options for those same months with a Some bucket shops were one-or two-man strike-price of 85. Often but not always, the storefront operations. Others resembled spread or gap between the two calls of different miniature stock exchanges, with ticker-tape ma- months will be around 1¾ or 2 and between the chines and clerks writing share prices on two puts something like 1¼ or 1⅜, i.e. a smaller chalkboards before rows of spectator seats. difference. Typically, a customer put up "margin" of one% For example, November calls may trade at of a stock's price and could play it short or long. 3½, the December calls 5½, while the November A fluctuation of a percent in one direction puts trade at 3⅛, the December puts 4⅜. doubled his money, in the other direction wiped Investor optimism swells the upside (calls) and him out. Bucket shop owners occasionally man- more so the farther-in-time upside. Since spreads ipulated prices behind the scene and of less than 1½ flash a green light when I drive, I sometimes disappeared with a satchel of cash steer toward puts a little more often than toward between days, never to reappear. calls. Yet a stock's direction also figures crucially. A whole other era, you say? The Wall A major rise in share price can hurt a put position Street Journal for June 1, 1999 carried a piece and a major fall damage a call one. headed "Some Day Traders, in a Shift of Focus, Spread strategy means devouring Look for a Profit in Foreign Currencies." Texas option-playing lambs. It involves chopping chunks Securities Commissioner Denise Voight of silver off of other optioneers' coin-tosses. Not Crawford said, "This is one of those areas we guaranteed, it nevertheless produces profits advise Main Street investors to avoid

Copyright © 1999 by Webtrading Co. 26 Summer 99 – Volume 7 No. 3 Commodity Traders Club News completely." Yet growing numbers of day traders York Times: and Web traders are playing fast fluctuations in the Swiss franc, the Japanese yen and other To the Editor: currencies. Lori Aks Rosenberg (letter, May 7) writes The next boom, some predict. According to that thanks to Internet trading, “the brokerages the Journal "Discipline is crucial. At most sites, have finally eschewed snobbery and embraced customer accounts are 100-times leveraged. the ordinary guy as a customer.” Her “olden That means if a currency moves just one percent days" image of the millionaire tycoon at the in either direction, a customer's $1,000 tickertape machine is only partly true. investment in an open $100,000 position would Published in 1873, William Worthington either double or be wiped out." Again the old Fowler's book "10 Years in Wall Street" told of bucket shop arithmetic. Again the speculative the hard-sell efforts of stock promoters to push silver dollar coin-toss with the commission broker shaky oil and gold companies on working cutting himself a chunk on each toss. people. Investors would troop to brokerage The Journal also quotes Midland Euro's offices on their lunch hours to collect dividends, director of operations Dennis Hannan on only to hear that none existed. Brokers, stock leveraged currency's lack of regulation: "You promoters, mining and drilling executives all don't have the restrictions like other markets, but made plenty even if the ground yielded nothing. at the same time you have a lot of fraud, and it's Today, regardless of innovations in law or giving reputable businesses a bad name.” Again the World Wide Web, the hard sell continues to the numbers juggler and fly-by-nighter with scream the profit potential while whispering the satchel. Do not expect new recipes at a cannibal risk. Internet trading can be like having a banquet. Nor do venomous vipers change their bookmaker or a croupier in your living room. By methods much. Greg Donio Recently, SEC chairman Arthur Levitt In 1873 as today, $1,000 had to double made statements faulting numerous on-line only 10 times to become that $1,000,000 figure. brokers for using "get rich quick" come-ons to Then as now, abysses abounded between lure potential investors who lack training and lack those red and black squares. Then as now, awareness of the risks in fast-at-the-keyboard everyone claimed to be "at business" or trading. His remarks were prompted in part by "handling business capably” yet figuratively those TV commercials showing a truck driver speaking many men tossed dice with palsied buying an island with his profits and a teen-age hands. Though written while Grant occupied the Web investor owning a helicopter. What he said White House, Fowler's description of provoked a letter to New York Times editor from speculation fever in 10-Years in Wall Street a Ms. Rosenberg. could have been Cleveland or Coolidge or In effect, she cheered that on-line Clinton Era: brokering hailed a new era of stock market Gambling in stocks, after following a investing for the common man, not just the upper legitimate business, is like quaffing brandy after set anymore. I realized that her vision of the sipping claret. When once a man has fairly financial past was skewed, stereotypical and committed himself to speculation, his ho-hum about the hazards then and now. I fired imagination soon grows to lend a hideous off a written rebuttal. Subsequently the New York fascination to the objects of his pursuit. An evil Times phoned me and said they wanted to use genius seems to hold possession of him. the piece. The woman assistant editor added, He takes no note of time, save as an "You cite a book by William Worthington Fowler interval between his gains and losses; the thrill although you don't quote him directly. Could you of the one and the pain of the other, grow duller fax us a copy of that page as documentation for as the years wear away, until at length he our files?" becomes the opium eater of finance, living in a I explained that I had borrowed that book world peopled by phantoms which haunt his from the New York University library and did not waking hours, and flit through his dreams. The have it at hand right now. However, it was unsubstantial pageant vanishes as the alarm quoted verbatim in a financial newsletter I write bell of his ruin peals out, and he awakes to the for. Would a copy of that printed page be desolation of reality. sufficient documentation? Fine, she replied. So I Can you fit the phrase or notion "sound faxed a copy of page 15 from Dave Green's business practices" into the above? Fit it in CTCN, the May-June 1998 issue. On 5-11-1999 anywhere even with a crowbar? Some things the following appeared on page A-22 of the New have changed over the centuries, such as

Copyright © 1999 by Webtrading Co. 27 Summer 99 – Volume 7 No. 3 Commodity Traders Club News whether a person invests via horse messenger, giants' egg-cups, with the profiles of Roman 1870s Western Union, telephone or the Internet. emperors clear on the ground glass. Long Yet a few things remain the same -- the zero sum mirrors reflected over and over again the fire game and the addict's "hideous fascination." screen of terra-cotta silk embroidered with You may have heard those semantic bulrushes, the marble lady looking down at a labeling tricks: "I am firm. You are stubborn. He is butterfly perched on her shoulder, Mrs. pig-headed.” Or "I am a Renaissance Man. You Hawthorn's violet draperies, and his own best are a jack-of-all-trades. He is having an identity gray suit and flaming face. crisis.” To these has been added a financial Would it be all right to go now? He didn't equivalent variously attributed: "I invest. You know how late you could get supper at the speculate. He gambles.” To fog the lens even hotel, and he felt as if he had been sitting there more, everybody purports to be "doing business." for hours. There was a clock on the To trade as a business means -- as with a mantelpiece, but it was so fancy, its hands were clothing store or a luggage shop or a radio station such delicate traceries of golden frost-work -- to gain with something resembling consistency, against a golden moon of background that he that Biggest Difference in the World. Spreading couldn't read it at all. has enabled me to do precisely that. The reasons After he left without seeing her, Lucy, for the repeat profits are several; one being that rosy with sleep, came trailing down, wrapped in spread strategy uses mostly quantities of other a dressing gown of pale blue silk trimmed with people's cash. This includes dupe's money, swans down, like fluffy white clouds in a addict's money, untrained financial flier's money, summer sky, and helped herself to a glace pear easy-millions excessive optimist's money, and from a dish on table. Web numbers-chaser's money. All-buy options. “ Your rustic admirer has been here," Another reason is knowing what said her mother. Roman emperor, ornate clocks techniques to avoid. In an earlier era, the larger and crystals, the tendency to see the classical urban bucket shops had branches in mill towns naiad in a woman, these would not be bad where workers could hazard their pay. additions to the mind-sets of many people Wage-earners tied their brains in a knot involved in finance. As already indicated, many searching out "causes” and “patterns" behind old-time investors were not carriage-trade one-percent twitches in both directions, and classicists. Yet the stereotype deserves argued about it frequently over malt beer and preserving and remains worth aspiring to, when moustache wax. Today, barstools near bucket you see what is happening without it. shops have been replaced by day trading centers In Italy in 1895, the great tenor Enrico and Internet "chat rooms" where any zodiac Caruso made his operatic debut in Mascagni's devotee can hand down guidance. What remains Cavalleria Rusticana. He played the role of unchanged: The rapid emptying of pockets. Turiddu, the seducer and adulterer with the The Zero Sum Jungle. For every explorer busiest roll of salami in all of Sicily. At the who brings back ivory, another has to roast over opera's conclusion, the character meets fatal a tribal fire. Also, the successful ivory-hunter's justice via the old one-two-a jealous husband next expedition or foray is another question, a and a sharp knife. Old music was not all second heads-or-tails risk. For me, thankfully, "Stardust" or “Sweet Rosie O’Grady” but even spreading has meant repeat ivory and fewer the financial newspapers seem to forget that burns. It also enables me to buy among other sometimes. Anything darker than Rodgers & things some cultural artifact such as a bronze Hammerstein? Cultural poison! medallion or an Olde Coventry ale tankard or a After the Colorado school shootings, ticket to the opera or an item of literature. The millions of people blamed “the culture” -- the "old money" preferred more fine arts, few dice movies, video games, rock and rap songs to games. which young people are subjected. Yet it may I have a fondness for books brown with surprise many that the vehement denouncers of age. Anne Parrish's 1925 novel The Perennial rock & roll are, with few exceptions, not lovers Bachelor is set in the late 1800s. A swain pays a of grand opera or symphony. They are people call on a young lady at her parents' town house whose "dawn of time" was Tin Pan Alley (the opposite moonlight and roses. The "nicer times" they Of a-country estate) but arrives a bit too early: want to bring back are canned grape juice, not He had never seen such a grand parlor. vintage Mozart or Verdi. Their cotton-candy The high sky-blue ceiling was painted with clouds taste buds gag on new hash or old venison. and cupids, and from it hung gas globes like In past articles, I have critiqued Right

Wing reactionaries whose "good old days" map “I'm a businessman, not a gambler," make sure stops at Shirley Temple and who are offended by that description fits you although it probably anything stronger than the song "Good Ship does not fit them. Increase your gains while Lollipop.” I have vented Italian anger at their holdings sink between the red and black self-declared "traditionalists" who think Bernini squares. and Tintoretto shared a jail cell with Vito Genovese. Now as if adding a slapstick, millions of people never before heard to utter the word When the Computer is Your Broker "culture" now blame everything on “the culture" C. Brown (reprinted with permission of The Wall that uses not Spanky and Alfalfa as compass Street Journal – 6-28-99) points. Why did I mention the financial Just how much money can a person re- newspapers a moment ago? In the Wall Street ally make as a day trader? A thousand dollars a Journal for May 21, 1999, the middle of the front day. . . ten thousand? How about ten thousand pages goes to Dan Qayle's presidential a minute? When Barbara Streisand starts campaign. He is your man if your “dawn of turning up in the news declaiming how much civilization stretches back to Roy Rogers never she's made as a day trader, well, clearly we kissing Dale Evans on-screen because he was a have reached an epiphany of sorts. role-model for kids, or the Lone Ranger never Put slightly differently: Is there enough shooting to kill. Yet that piece was not the time left in the current bull market for me to quit issue's reactionary high point. my job, become a day trader and haul off a That issue's next-to-last page was the small fortune before the whole thing blows up? Friday “Tastes” page -frequently a soap-box for Out of such concerns are multitudes of the religious Right. Supermodel Cindy Crawford Americans now framing their hopes and appears nude while pregnant on the cover of W dreams. And, not surprisingly, every week Magazine on display at thousands of newsstands seems to bring a new crop of books to cash in across the nation -- actually a half-shadow on the euphoria. We have, for example, "Day near-nude. Wendy Shalit, author of the book A Trade Online" by Christopher A. Farrell (Wiley, Return to Modesty, disapproved of this on the 240 pages, $29.95), which purports to take the Journal's May 21 “Tastes” page. Her article reader "from your first trade to your first denounced "the cultural messages" of $100,000. " "promiscuity and exhibitionism" and stated "there Or you may wish to try "How to Get is good reason to protect the private realm and Started in Electronic Day Trading" by David S. keep sex sacred" because "you want to reveal Nassar (McGraw-Hill, 233 pages, $24.95), yourself only to one who loves you." which tells you what computer to buy for your No, that issue of the Wall Street Journal den, then how to use them to buy and sell does not contain any pieces on Italian stock, and thereby grow rich, without ever Renaissance artworks by Titian or Correggio -- getting out of your bathrobe. the Dianas and Ledas and Aphrodites who bared What these books, and the many others more than Cindy did. Nor is there anything on like them, don't tell you is that you can also the mogul art collections of J.P. Morgan or Henry grow poor in exactly the same way. On Wall Clay Frick. While people shout "culture" and Street as everywhere else in life, reward is the "tradition," values based on Debbie Reynolds flip-side of risk, and the more of one that you movies over layer the art treasures, even in that have in a deal, the more of the other lurks just non-grandmotherly publication. behind the curtain. On one wall in the Metropolitan Museum of That's why a stock like on-line auctioneer Art, the Roman hunter-goddess Diana is clad in u-Bid Inc. went public in December at $15 and only a bowstring. Beside her hangs a graphic and began trading in the after-market at fully $40 colorful painting of John the Baptist's severed per share. Thereafter it climbed within three head on a silver platter. As far as is known, weeks to $189.50 -- then crashed all the way viewing that painting has not caused anyone to back to less than $30, which is where it is chop off people's heads. Nor did Caruso's arias trading now. provoke seductions or stabbings. Please cultivate The special conceit of day trading is that within yourself a golden tracery of Morgan or you can avoid that very fate. By cleverly Frick, regarding both “the profits and "the sweeping your winnings from the table at the culture." end of each trading day, you put nothing at risk Also, when I you hear other traders remark,

Copyright © 1999 by Webtrading Co. 29 Summer 99 – Volume 7 No. 3 Commodity Traders Club News if the market turns against you overnight. Burnham & Co. at 50 Broad Street in To its ecclesiastical purists, day trading Manhattan. Mr. Friedfertig is still there, but Mr. boils down to the practice of scalping profits from West has now opened an Internet chat room one-eighth and one-fourth point swings in the and school for day traders -- obvious enough minute-by-minute intraday movements of testimony that you can make more selling day NASDAQ stocks. It is a business that has been trading advice than by being, an actual day made possible by (a) the advent of deeply trader. Their book contains interviews with 13 discounted commission rates of as little as $5 per different “leading day traders" who mainly agree trade at some brokerage firms and (b) the that, yes, you can make money at it, but that it’s proliferation of "real time" trading data over the hard work and the main thing to try to avoid is Internet. losing everything. With a home computer and an on-line trading account, you can, for example, buy 1,000 shares of a $10 stock like Cyberian Outpost Inc., About Bill William’s Trading Course hold it until the stock nudges up to $10.125, and Mike Hermanson then sell it. At a place that charges as little as $5 per trade, you'll walk off with $115 pre-tax. I called you more than a year ago to ask Do that all day long and, if you don't go about Bill William's trading course. Just thought crazy in the process, you can make a living at I'd let you know that my tutorial was last it . . . provided, of course, that your stocks August, and I’d like to add a few thoughts. The actually go up. If, on the other hand, they go system he teaches is a variant of a breakout down ... well, do the same arithmetic as before, system. I've since found that it didn't suit me. only put minus signs in front of everything. You're always buying high and selling low And don't assume it is all that easy to on the entry. Bill acknowledges this. There are escape with only a one-eighth or a one-fourth several examples of commodities that would point loss when a stock that you thought would have made money over x time period, and go up starts going down instead. When a darling many whipsaws as well. I'm now trading trend stock for day traders reverses direction and starts retracements, and am much more comfortable going down hundreds and even thousands of and happier with trading. I may consider writing traders start trying to sell all at once. And most about this for CTCN, but only after I've sorted sell orders don't get filled at anywhere near the some more things out. price that had been quoted when the order was Thanks for the forum you've put together. placed. In this way, a hoped-for 1/8-point profit can turn into a three or even four-point loss-something that day traders have been learning the hard way since NASDAQ prices Paper Trading vs. Real Trading began to weaken this spring. Thus CMGI Inc., an Rick J. Ratchford Internet holding company that has long been a never-goes-down favorite of day traders, has lost This article is obviously an opinion piece. almost exactly 50% of its value in the past eight Each trader will likely have their own opinion, weeks. NetB@nk, Inc., Excite, iVillage and u-Bid and therefore the contents of this article do not are all off nearly as much -- in just the past 4- necessarily reflect hard and fast rule or weeks. consensus. Given all that, anyone who still wants to Paper trading serves a purpose. What daytrade should probably buy "Electronic Day might that purpose be? If you have an idea or Traders' Secrets" by Marc Friedfertig and George concept you wish to try out on market prices, West (McGraw-Hill, 249 pages, $29.95). It is not and want to see how well it works in real time well-written (none of these books are), but at today rather than using past data, paper trading least it has the virtue of honesty, telling readers: may be the way to go. It allows you to test the "The idea of quitting your job & making more mechanics of your trading method without any money in a day than most make in a year by interference of emotion. For testing just the trading stocks sounds tempting, but it's too good mechanics, this will work. However, mechanics to be true." alone is far detached from reality, which will Messrs. Friedfertig and West know from definitely provide a completely different result. experience. Both ran a day trading room in some Emotion plays a much bigger part in vacant office space once occupied by Drexel

Copyright © 1999 by Webtrading Co. 30 Summer 99 – Volume 7 No. 3 Commodity Traders Club News trading than the actual mechanics. Fear and to this rule, or whether your emotion of greed greed weigh heavy on most traders, providing the gets in the way and you start to fudge an extra initial reason for trading in the first place. Think contract or two. about it. Why are you trading? Is it for money? Not until you have good control over Is it for fun? Is it for the challenge? these emotions should you even think about No matter the reasons, it will have a human trading full contracts. If you are honest with emotion that was behind the purpose. You simply yourself and truly want to do well in this cannot completely remove it. Paper trading has business, you won't trade full contracts until you the side effect of allowing you to stay in a position can stick to such simple rules. that is going against you, whereas you might Trading Mid-Am contracts is a nice have exited out of fear if it were real money. compromise between paper trading and trading Paper trading is likely to see more over trading; full contracts. You can test your approach with taking bigger positions that you would not minimal exposure due to the small contract normally take in the real world. These and other sizes the Mid-Am provides. Ordering a Mid-Am actions that paper trading affords skews the contract is no different than ordering its bigger results, providing many times a false sense of sibling. You simply let your broker know that confidence that you might blindly take into real you want to buy or sell a Mid-Am contract when world trading. ordering. The only real way to know if your approach Don't spend too much time on paper is going to hold water is in real trading. How do I trading. Just get the mechanics down, which define this? Simply, if you make real trades should only take a few days at the most. Then using real money, and your gains and losses are jump right in there and test your newfound skills real. using real money and Mid-Am contracts. Stick Of course, this presents a problem to the with this smaller contract until you find your new trader. Emotions will be higher than normal approach is profitable while maintaining good for the first dozen or so trades, as the new trader money management practices. is filled with great expectations of making great As time goes by, and you find your profits, as well as somewhat intimidated by the account is appreciating nicely without breaking format of trade placement, the broker’s opinion, good money management guidelines (no over the speed in which money flows in and out of the trading), then you may want to go to the full size account, and so forth. By the time the new trader contracts which offer better liquidity. But when starts to warm up to this business, their account you do, don't stop using those money may be drained. management skills you worked so hard to hone It is my opinion that paper trading should while in the Mid-Am pits. Start off slow, and be brief. Just get the hang of how you would trade one contract for every $5,000, even place the orders, and whether you would have though they are full size now. That simple been filled or not. Learn to keep a log during this guideline will work even with the regular period and when you start trading with real contracts. money. Do not be concerned or focus on how If at anytime you find yourself slipping much you think you would have made in dollars. backwards due to your emotions or poor money Get that out of your head. Just note how management, go back to the Mid-Am. Don't go effective your method got you in and out of a back to paper trading unless you are looking to trade, and if you usually exited with much more change your method of trading. points than you were used as a stop-loss, and what percentage of the time you did so. Stick with thinking in points, not dollars. Then when you are reading to test it in the real world, do not go to the full size contracts. I highly recommend that you trade the MID-AM contracts instead, which is a real money environment, but the size of each contract is More on Real Success Trading small enough to help you preserve capital while The Methodology Is Very Comfortable you test your trading method. Joe Murdock Stick to a rule of sound money management, especially early in your trading What a nice surprise (your email career. For every $5,000 in your account, only message) -- Thanks, you never let me down . . . trade one Mid-Am contract. See if you can stick

I started trading the Mini S&P. I'm finding it a Letter-writer S.H. ("don't identify my little different. Mostly the tic value. Watching the city") called Greg Donio’s writing Real Success Tapes, we were using tic values of pseudo-intellectual, demagoguery, claptrap. 5-points. This is what I got use to thinking in Mr. Donio’s intellect appears quite genuine terms of. The mini tics are 25-pts, it took some except when he naively tries to clean a dirt getting used to. floor. However, letter-writer S.H. is more My “tuition” actually was $215.00. genuinely representative of the speculator ilk. Yesterday I was long, and had a profit target of He is the opinionated tinhorn gambler, the grip $1,327.00. It got to $1,326.50 and my little pea ester between the Curb and the spittoon. The brain told me I was still 10 tics away (50 pts.) No, "boys in the backroom" ilk is set in concrete. I was two tics away (25 x 2) it never got there and You cannot bring business methods or culture dropped like a stone. Education costs. to suckers and cardsharps in backroom. As far as the stops, I figured that 60 pt The electronics and the computers are stops on the full contract equaled 12 tics at 5 pts just a scientific face on a shabby bottom-deal. (as on the tapes) each. To convert that to the Greg Donio asked "traders and investors cast mini, 12 tics would be 300 pts., which is still only themselves in the role of the old-order tycoon $150.00 risk. I can live with that. who was also a lover of culture and the fine The challenge is with the tics so large the arts." market has tended to get away quickly resulting However, the essence of speculating is in fewer trades. I'm doing really well considering closer to marked cards and watered whiskey. I'm still a rookie. His writings about the gas-lit opera house and The methodology is very comfortable; the the candle-lit Paris salon are elegant but rest is up to me. Right now I'm looking for lower off-target. The wheel of fortune and the carnival swing highs thinking about going short, but I shill would capture the essence better. Please, would like to see a penetration of today's low. editor Green and writer Donio, stop trying to We'll see, I'll end up doing whatever the charts make a “class act" out of it. Carnival ballyhoo tell me. I see the lunch hour is here, volume and three-card monte do not lend themselves to down. Thanks again. upgrading, even under a Wall Street street-sign.

Donio’s View of Trading TradersAuction is Free to CTCN Members Patrician Morgan (Why aren’t they using it?) Mike Murphy

I am not sure whether a "stodgy" blue chip I am in the midst of reviewing "SAT’s investor like me should have a voice in an articles and charts, preparatory to becoming a "adventurous" newsletter like yours but please daytrader. I have read the two books "SAT let me speak my mind. Greg Donio still seems mentioned in his writings. I really think Joe determined to make speculating "business-like" Ross has a handle on the situation for the small and "cultured." My advice is "Forget it." trader. Time will tell, I guess. Anyway, I am Fast-buck speculators I have known from keeping a journal on this experience that I hope time to time always tell me I am "unwise" to present, in pieces, as my daytrading (translate "stupid female") to settle for dividend progresses. checks and interest checks instead of grabbing Is there any way that I can be alerted via for bigger money faster. Weeks later I see them e-mail if any of Joe Ross' books become again and they look hurt and would rather not available through TradersAuction? Just curious, talk about it. Then I know they lost a pound of I realize that is an enormous request. flesh in dollars. Count me in Dave, another great People have tried to "clean up" or advance from CTCN. You are really doing a "upgrade" speculating for years, ages. Fast-buck helluva job. Now, as well as submitting articles speculating is a tacky game of billiards on a large online, we can receive them the same way. scale. At-home computers are just a fast That's great. streetcar to the pool parlor. Neither Mr. Donio Was it a misprint or did you really shut nor anyone else will turn this into a "business." down all the costs for using Neither he nor anyone else will turn this into a tradersauction.com? How do you pay for Banker’s Club with wall paintings and Chopin something like that if there is no charge? On piano music. your way to Amazon.dave huh?

The Basics – Volume Editor’s Comment: Unfortunately, at this time TradersAuction is a money losing operation, Volume is the sum of the contracts traded but will still be available as a free benefit to over any given time period. It is usually plotted CTCN members. When we were asking for on a daily' basis which is how it is reported in commissions, we hardly made any money based the media. on the low fees and costly overhead involved and Volume analysis has more than its share actually lost lots of money. We believe it’s best to of operational difficulties. Volume figures are offer this service not released until near the end of trading on the free to members as a valuable benefit and a way day following the reporting day. This means that to attract new club members. Plus there doesn’t for the trader the information is a day late. It is seem to be much interest with club members two days late if you don't get on-line information listing their unused or unwanted trading products. and must wait for the next morning's paper. Amazon.com and eBay have the market Another obvious problem is the possible dominated and have most of the business. distortion of volume created by limit days. There’s no room for anyone else to be successful Volume on lock-limit days is usually negligible, in these fields. yet this is when a market has its strongest or weakest price action. Here we have a clear case of an obvious preponderance of buyers or Volume and Open Interest – C.B. sellers, yet we are unable to measure it.

Trading With Volume Anyone who has plotted volume and/or open interest has observed that they frequently Volume analysis normally begins with the coincide with or lead price action. Volume often assumption that volume will expand as a increases when a market breaks out in either market continues to trend, and will contract as direction. A drop in open interest during a bull the market corrects. In a sideways market, market will sometimes signal a near-term market volume will tend to be light. Volume will spike if top. the market breaks out (in either direction) and It is tempting to assume that a trading rise and fall as the market trends. The heaviest system based on volume and open interest would volume will be on breakouts and in the areas be workable. There are plenty of technical where the market is trending. studies that often seem to predict future price Since these volume patterns are action; it seems only logical that buying or selling considered to be normal, any deviation from pressure as indicated by volume and open normal behavior can be considered a interest should be at least as effective as divergence, giving rise to suspicion that the techniques based on price alone. We fear that trend is not as strong as it appears and that this is an illusion. If such a system is being perhaps it should not be followed. If, for successfully traded we are not aware of it. example, a breakout occurs on light volume Having said this, we will concede that there many traders would not enter the market unless may be some value in studying the relationship volume increased to confirm the breakout. Later between price, volume, and open interest. in the trend, other traders might want to cover Volume and open interest can serve to bolster their positions if volume began decreasing as our opinions about the strength of a market prices continued to move in the trend direction. breakout and warn us about the proximity of a The overall assumption is volume precedes market bottom or top. We don't believe that they price action (a highly questionable assumption), can serve as the basis, of a trading system, but and that price action should be confirmed by they have limited use as a confirmation or volume changes. warning device. We see serious flaws in this A note before we start. A few readers have methodology. First and foremost, we are trading commented that we tend to look at indicators price, not volume. If a market is trending, and through rose-colored glasses by writing about we are making profits, what does it matter if how well they work. This article will help balance volume does not confirm? Prices are moving, the scales. Our comments refer only to futures and that is the important thing. If volume signals volume not stock market volume. Volume in the we are near a top or bottom, but the market two types of markets is very different. continues on its path, there is no reason to exit and give up potential profits. The volume

Copyright © 1999 by Webtrading Co. 33 Summer 99 – Volume 7 No. 3 Commodity Traders Club News indications are not reliable enough in our opinion Open interest in many markets, to warrant an exit from a profitable position. especially the agriculturals, varies seasonally. Reasonable risk control and carefully chosen Hedging activities tend to be heaviest at harvest trailing stops will take you out of the market in at time, increasing open interest. The rise in open least as timely a fashion as will volume analysis. interest may be meaningful only if it differs As we noted, we are not at all sure about significantly from the normal seasonal the basic assumption that volume precedes tendency. Commodity Research Bureau (CRB) price. It is just as logical to assume that price charts plot a five-year average of open interest action attracts volume. Nothing gets the public's to make these comparisons easy. attention like an upside breakout. And Open interest will change as speculative remember, this is futures trading and not the interest moves from one contract to another in stock market. For every buyer there must be a the same commodity. If you are following open seller. There is no upside/downside volume interest only in the nearby contract, this can breakdown as there is in the stock market. give false readings in a number of ways. For Every buyer thinks he or she is correct, as does example, a drop in open interest in a rising every seller. Volume by itself cannot push the market that is getting close to deliveries or market, because there cannot be more volume expiration may not mean that speculators are on one side of the market than the other. It is abandoning the market and that the top is near. always exactly equal. The drop in open interest may simply mean that they believe the market is strong and want to We have also observed that there is a roll into a contract that will give them longer great deal of hindsight involved in volume staying power. (We suggest that watchers of analysis. If volume spikes during a breakout and open interest should follow total open interest the market continues to trend, everyone says rather than month by month.) Inter-market or that volume leads price and that the volume intra-market spreading can also affect open spike confirmed the beginning of a trend. If the interest on particular contracts, so be careful of trend doesn't continue, everyone says that the reading too much into this data. In our opinion, breakout was a blow off or buying climax, the ideal chart for open interest would be a confirmed by the spike in volume. Hindsight is perpetual or continuous chart showing the total always 20/20 and volume will confirm either combined open interest plus the five-year outcome. average.

The Basics - Open Interest Volume and Open Interest Interaction Price Volume Open Interest Market Analysis As our readers are well aware, open Up Up Up Strong interest is the total number of outstanding Up Down Down Weak contracts in the market at the end of the trading Down Up Up Weak day. Because there is a buyer for every seller, Down Down Down Strong and vice versa, total open interest also tells you the number of contracts long and the number of The simplest way to show the commonly contracts short in the market. That number must accepted interrelationships between volume, always be equal. open interest and price action is to construct a Open interest is usually plotted as a line table like the one above. chart just above the volume chart. Open interest figures are calculated by the clearinghouse in the Interpreting Open Interest same manner as the volume figures and are therefore also late. Open interest, in a general As you can see from the table, traditional sense, measures the amount of money moving open interest interpretation includes four into or out of a futures market. If both sides of a possibilities: trade are new to the market, open interest will 1. Prices are going up, and open interest increase. If one side is new and the other an old is going up. This means that new money is position closing out, open interest will remain the flowing into the market and that there is buying same. If both sides are close outs, open interest pressure (Do not falsely assume that there are will decrease. If these were the only possible more buyers than sellers, because there are variables, open interest interpretation would be not. The price rise indicates that the buyers are much simpler than it is. The picture is clouded, willing to pay higher prices and of course, the however.

Copyright © 1999 by Webtrading Co. 34 Summer 99 – Volume 7 No. 3 Commodity Traders Club News sellers are willing to cooperate.) This situation is move. The "insider" mentality runs throughout considered bullish. volume and open interest studies. 2. Prices are going up, and open interest It is difficult to believe that anyone, no is declining. There are relatively few new buyers, matter how prominent, knows which way any and money is leaving the market. The rally is futures market is heading. In fact, contrary to most likely caused by shorts who are giving up popular belief, large commercials trade futures the ghost and covering their positions, thereby because they don't know which way their exiting the market. This is often bullish for the markets are going, not because they do. If short term because the shorts will normally pay anyone knew much of anything with any any price to get out because they cannot afford to certainty, the futures markets would be non- stay in and accept further losses. This action is existent in a matter of months. ultimately bearish. Without new money coming A more likely explanation for an open into the market, the rally will fail as soon as the interest drop before a rally is a lack of short covering is finished. However, short conviction about market direction on the part of covering gets to be self-perpetuating and can last all traders. The shorts are not interested in the longer than one might suspect. market because of the low prices. The longs According to our friend George Lane, who are not interested in a market, which appears to is a very experienced trader, total open interest be in a prolonged downtrend. However, rallies (meaning the open interest of all contracts often seem to begin with very negative combined) always declines 5 to 8 days before the sentiment in a market, which is already at low final top. levels. In a situation like this, a sentiment 3. Prices are falling, and open interest is indicator like Earl Hadady's "Bullish rising. New money is coming into market, and Consensus" would probably be a better there is selling pressure. This is considered indicator than volume or open interest. bearish. 4. Prices are falling, and open interest is Volume and Open Interest Studies falling. This is the opposite of situation 2. Now the short sellers are making money and can afford to The best-known readily available stay in the market. Much of the price drop is computer generated technical study involving caused by discouraged longs closing out their volume is on balance volume or OBV, positions. popularized in the early 1960's by Joseph Granville. The calculation is simple. Each day's 5. There is little new money coming into volume is assigned a plus or minus depending the market. This is initially bearish, but the market on whether the day's close was up or down. is considered ripe for a rally once the The resulting figures are added in a running discouraged long liquidation is finished. The short total to become an OBV line. sellers are generally notorious for their lack of The actual value of the OBV line is not patience and are likely to start covering as soon really important, but the formations it makes as the downward momentum subsides. may be significant. Traditional volume/ price While we see nothing incorrect about these logic applies to the OBV line, especially with interpretations, we question their value. If your regard to divergences between the OBV line market opinion needs bolstering, they may be and prices. useful as a method of confirmation. We don't We have our doubts as to the validity of think trading on open interest analysis will prove applying this stock market tool to the futures fruitful. markets. There is no reason for all the volume Having said open interest changes do not for one day to be assigned to one sign. appear to lead price changes, we must mention a Obviously, volume is always 50/50 in the significant observation about open interest that futures markets. was pointed out to us many years ago. In a sideways or slightly downward market, a sudden drop in open interest is often followed by a Member Comments & Requests market rally. The conventional wisdom is large market Roy Kaylor – Don’t renew my CTCN participants are lifting their hedges in anticipation subscription when it expires. I am not trading of an expected rally. The feeling is that "insiders" as I ran out of funds and lost money in 1998. know which way the markets are going and Keep CTCN going – I will come back another position themselves in front of the anticipated day. Thanks for all your help. Better money

Copyright © 1999 by Webtrading Co. 35 Summer 99 – Volume 7 No. 3 Commodity Traders Club News management and better decision making on my Manuscripts he has recently made available. part would have changed the outcome. David R Bohlke - When I first subscribed Roy Moore – Thanks for such an to Commodity Traders Club News and started outstanding newsletter. As I am very new to reading through the back issues, I was among futures/options, (never traded in my life, as yet). I those who thought Greg Donio was a pompous am finding all of the articles very informative and I windbag. But the more I read his articles, the have learned so much from them. more I came to appreciate his insightful As for Greg Donio’s articles, I vote for more comments about life in general and the richness of his articles. Unfortunately I may be in the rare of his varied interests. Now they are among the minority of those who do not own a computer. highpoints of CTCN. This may change in the future, but for now I am When people write in to complain about willing to pay higher cost from the printed version either the frequency or length of Greg's of the newsletter and mailings. contributions to CTCN, I feel they are being narrow-minded. Anyone who would consider Vern Tyler - Great issue (last issue), BTW. canceling his or her CTCN membership over Of course I read every word of St. Greg. I can't this issue is rather immature. understand why the detractors can't see he is The solution is obvious. If you don't like spoon-feeding a system that works. Contrast, a Greg's articles, DON'T READ THEM. They are slick promoter would send a flyer to "only 50" of easy to spot. Just below the title of the article, us about an upcoming seminar, includes there's a line that says "By Greg Donio." When videotapes and workbook, for only $2,800 (or you see that, skip reading until you see the next whatever). article title, then start reading again. There are parts of my local newspaper that I have no A New Subscriber - The main reason I interest in. When I see them, I don't read them, subscribe to CTCN is due to the fact that it is an but I don't cancel my subscription to the unedited forum. newspaper. To limit either the size or frequency of a If the issue is you think Greg's articles member’s contributions is the first step toward full are crowding out other, more worthwhile censorship. If this offends a blow-hard, he can contributions, I think you should give our editor just turn the page. I noticed that you are planning more credit than that. Also, now that Dave is on putting the newsletter online. This same going to be delivering CTCN by e-mail, the size person can just press the page down button. Isn't of the articles will be much less of an issue than it about time that we "censor" ourselves, instead before. of letting someone else do it? Time and time again, an individual builds Carl King - Greg Donio is a great writer. the best trading systems. One of the main Voluminous, to be sure, but if anyone doesn't components of a successful trading methodology like the volume they cannot read it. Or you can is that the system is "customized" for that cut his articles and make your newsletter individual. Isn't this same individual basically smaller and of less value. saying, "This is my contribution to myself"? Why I found your web site browsing. I found should we impose some arbitrary guidelines? the articles by Mr. Donio most interesting and Also, won't this censorship be more time also beautiful writing. I subscribed and bought consuming for you? all of the back-issues because of Mr. Donio's Ross Campbell - Also, I vote to limit Greg articles. His writings teach a lesson that most Donio's articles to two pages or so. I know that need to reread every month. If he goes, I go. you are always seeking material for the newsletter, but if 50% of your readers are Larry H. Joyce - I have no doubt that providing negative feedback, is it prudent for a one day in the near future, I will be trading for a publication to offend half of its readers, even if living. I'm smart enough to know that it won't the other half likes the material? Maybe the latter happen overnight and that there will be some should buy Greg's book -- perhaps 90% of which more "tuition" to pay. was hot air but 10% was a brief summary of how I think one of the best things I've got he actually trades options. (I considered it $70 going for me is that I view trading as a business wasted) and not a game. I'm very fortunate in that I have Editor’s Note: Ross is referring to Greg’s a very supportive wife who believes in me. I've Book, not the higher priced Options Trading been self-employed for eight successful years,

Copyright © 1999 by Webtrading Co. 36 Summer 99 – Volume 7 No. 3 Commodity Traders Club News so I know I can make it on my own. members will end-up getting the same or even Thank you for your offer of (the Real greater and more in-depth information. Success Video Trading) Course. I have no doubt This Issue, Issue-50, the 1999 Summer that this is the Trading Course I want to use to Issue, is the first issue using the revised get serious about trading. I say it because just schedule. using the ideas that S.A.T. wrote about, I have This letter was also sent to members of made several successful trades, getting one to our free e-mail communications list in July. three points out of the market. I'm using a free trial real-time quote About all the requests we get for package that my broker sent me. I come home daytrading knowledge. If you haven’t already for lunch and try to catch the afternoon trend in done so, please visit our sister website the S&P. It's amazing how many times you will http://www.traders.org/ for lots of free day- have a morning and afternoon move. I'm not trading knowledge and free daytrading using (real) money, but believe me I know what it information. Visit for a long time so you can feels like to use real money! S.A.T's articles are read all the online knowledge available there. just what I needed to become focused again and push on until I achieve my goals. Many of our Club Members have not yet signed-up for our free opt-in e-mail A club member is looking for feedback on communications list. It’s an additional free Gary Wagner of International Pacific Trading member benefit for you. Company and their Candlestick Forecaster - If you have not already done so we would Samurai Edition. appreciate you adding your name to our e-mail communications list. It’s an additional free A club member is asking for feedback from member benefit. Simply send a blank e-mail users of the Aberration System. to [email protected] to We are also seeking feedback from automatically subscribe. You will be sent an attendees of recent Larry Williams Seminars. immediate verification message reply. Also, TCI Trading Seminar attendees. Alternatively, click-on the “Join Free Mailing List” Button from our website Home Page Please reply to these requests by sending http://www.webtrading.com/ e-mail or letter to CTCN. By the way, your e-mail address and other personal information is totally confidential. Editor Comments - Recent News from CTCN CTCN does not sell or reveal your information & New Quarterly (Seasonal) Publishing to anyone. Schedule Upon registration, please also complete your online Member Profile (if you haven't already done so). You may also communicate As you may be aware of, we have had with other members of this list at anytime via e- incredible computer problems starting mid-June, mail. which involved all 3 of our PC's and by coincidence started at about the time we were getting ready for press with our May/June 1999 Editor Comments - Latest News from Issue. CTCN & The Answer to Question: What is Finally, all three of our PC's are working the "Best" Way to Learn How to Trade? well. However, it's too late to publish the last scheduled issue. By coincidence, we had been This is CTCN’s Summer Issue, Issue-50. thinking about possibly going to a new Seasonal It's one of our largest issues ever jam-packed publishing schedule, i.e., Spring, Summer, Fall with 40-pages of trading knowledge. and Winter. In our last issue of CTCN we mentioned Therefore, as a result of the long delay with the plan to do electronic distribution via the the past issue, we are switching to this schedule Internet and/or E-Mail starting with the next effective immediately, rather than at a later date. issue. We asked everyone to let us know if this Our new schedule will not detract from our was OK and also give their e-mail address. knowledge, as we will be expanding our trading Unfortunately, many club members did not reply coverage with the Seasonal Issues so our or contact us.

Therefore, we are sending the print CTCN “ best” way to learn how to trade successfully, via the mail as in the past. Perhaps with our next and at low cost. issue we can do a combination of electronic and Probably the best answer is to use our postal mail distribution, assuming we can get free Search Engine extensively. You may do most of our club members to reply with their hours and hours of free investment research acknowledgement and e-mail addresses. using CTCN’s Knowledge Base on most any Things are progressing well with our Real- trading related subject, trading concepts, Time Commodity Daytrading Training we are methods, systems, techniques, product names, offering via E-Mail and our new Traders company vendor names, individuals, technical Webcam. We are now accepting advanced analysis terms, etc. reservations and clients for training. Our live real- Also, you may enter technical indicator time Webcam is not quite ready but will be words or phrases like stochastics, keltner, operational soon. curve-fitting, moving averages, cycles, elliott Our Omega TradeStation 2000i and PC wave, Gann, daytrading, stock market, Omega, Quote Omega HyperFeed are finally working well tradestation, real time data, internet data, PC after some very lengthy and difficult times getting Quote, etc. them up and running. There is still a concern with Or even questions like “how to daytrade an ongoing problem with our ISP telephone successfully, the best software programs, how connection suddenly disconnecting during the to use Fibonacci, etc. Or trading product trading day for no apparent reason. After a vendors names, like Larry Williams, Jake disconnect it’s hard to reconnect the Omega Bernstein, Ken Roberts, Robert Miner, etc. HyperFeed unless the computer is rebooted. Our Knowledge Base contains thousands The connection dropping is much more a of pages of content, including forty-seven problem when connected at 56K. It’s a much less CTCN Back-Issues, Archives, Special Reports frequent occurrence when connected at 28K. It and other content. It’s all automatically retrieved may be attributable to the telephone company by our Search Engine in a few seconds and lines and so called “noise” on the line. ranked by Relevancy or other ranking criteria However, no one seems to know for sure you may select. It uses the same software used what causes it or how to correct it. PC Quote and by the excellent InfoSeek - Go Network Search Omega are working on this problem as they have Engine company. received numerous report of the connection We purchased it from the InfoSeek/Go disconnecting from all parts of the country, Network at considerable cost for your free use, especially with 56K Lines. 24-hrs A temporary solution may be to connect at http://www.webtrading.com/searchengine.htm 28K rather than 56K. Since we started It can also be accessed from the link on connecting at 28K we noticed the connection our home page http://www.webtrading.com rarely disconnects anymore. We have also Also, please visit our Personal Training noticed no noticeable difference in speed of Link area http://www.traders.org/training.htm quotes received. for more details on Commodity Daytrading Perhaps it makes no difference at all. No Training. one seems to know the answer for sure. The The above letter was also recently sent ISP’s have both 28K and 56K Lines. To avoid this to members of our free e-mail communication problem ask your Internet Service Provider what list. his 28K phone number is and use it in place of the 56K number, at least for now until the problem can be solved. Advertisements After a long down-time due to a problem caused by our Server we are happy to report our Web-O-Rama Designs – Need a website CTCN Trading Knowledge Search Engine is up designed or a facelift for your present website? and running well. In fact, it’s actually better than Your job is not complete until your satisfied with ever since it’s been upgraded and even more our work – low rates – great service and design. powerful. We recently spoke to a CTA who We get many questions from both our paid mentioned how he had just spent $12,000 for club members and the free participants of our his website. It wasn’t real elaborate or involved opt-in ListBot e-mail communications list about and the CTA said the high price was actually the

Copyright © 1999 by Webtrading Co. 38 Summer 99 – Volume 7 No. 3 Commodity Traders Club News low by comparison to the other even higher price beyond that permitted by Section 107 or 108 of the United States Copyright Act, and also World-Wide International Treaty quotes he received. Provisions, is unlawful. ALL RIGHTS RESERVED. Written Why pay tens of thousands of dollars, permission from the Publisher/Editor is required for when for only $500 for 6-pages (each additional reproduction in any form (with proper credit to CTCN, including our address and phone number being required), and may be page only $75) get a professional designed withdrawn at any time. Commodity Traders Club News (CTCN) website to promote your business successful. For is a 'Clearing House' or 'Information Exchange' for members more information please call Denise at 520-203- only. We do not verify, (and we have not) verified the accuracy of the mathematics or numbers published herein, or accuracy of 1777. comments and remarks made by the authors. All information and remarks in the contributions are the opinions of the author or contributor, not the Editor or CTCN. You should be aware that P&L reports and advertisements are frequently based on SPREAD TRADERS: Win An Award! Greg hypothetical (not real-time/actual) trades. Article headlines or Donio offers a $100 US Savings Bond as prize Sub-Headlines sometimes may be changed or written solely by for best writing on spreads (futures or options) the Editor, using verbiage the Editor believes highlights important points being made by the contributor. CTCN printed in CTCN’s next issue. Tell your Membership, which includes our bi-monthly CTCN newsletter is experiences, good or bad, and send to Dave "Your Guide To Profitable Trading and How To Save Money Green at CTCN. Along The Way." It's regularly priced at $97 (US) for 1-year. . . and includes free postage within USA & Canada (add $20 for Overseas Air Mail). Publisher: Webtrading Co., D.B.A. Advertising in CTCN is reasonably priced. Commodity Traders Club News, PO Box 1888, Sedona, AZ Minimum Display ad size is ¼ page. Classified USA 86339. Phone 520-203-1777. Fax 520-204-1717 (Note: Please call or e-mail first to let us know you are sending a Fax). ads: $50 minimum $1.50 per word Our E-mail address is: [email protected] Our Website 1/4 page display ad = $150.00 address is www.webtrading.com Editor is Dave Green. The 1/2 page display ad = $275.00 opinions and recommendations are those of our writers and not those of Webtrading Co., CTCN, or its editor. (Note: There is Full page display ad = $500.00 high risk of loss in futures trading and past results may be Clickable Banner Ad, including an accompanying difficult to achieve in the future and also may be based on text Link on www.webtrading.com $167/mo. hypothetical trading, with benefit of hindsight, and not actual trades) About our sister auctions website for buying and selling both new and pre-owned (used) trading products, http://www.tradersauction.com As mentioned before, TradersAuction is now a totally free service to club members only. You may now list, buy and sell trading related new and used products at no cost at all as a great new club membership benefit. Please check out - http://www.tradersauction.com and http://www.webtrading.com for additional details on this new member benefit.

P.S.: If you have any trading products you no longer use or find useful, please consider listing them for re-sale on our TradersAuction website. This service is Free for CTCN members. Why not recoup some funds from your investment in these items rather than have them sitting on your shelf gathering dust?

Thanks to everyone who has contributed knowledge to this issue of Commodity Traders Club News. Without you it would not be possible. P.S. - Remember, as a special reward for making just one contribution/submission per year, you'll receive an automatic 50% price reduction on your renewal. Submissions can be any length, long or short; typed, handwritten or submitted on a disk. Formal or informal. Please participate by sharing your information and knowledge with other traders. Please make a contribution about your experiences, both good & bad with systems, services, advisors, data vendors, and other trading related product. The reproduction, copying or publication of any part of this work