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Trade Dow Jones Futures Trade Smart - Bill Seideman

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

For example, if price were currently moving down from a top, then the most recent range would be from that top down to the last bottom. If current price is already lower than the last bottom, then price has already exceeded 100% of the recent range and you will need to use the next range prior. Defining which tops and bottoms constitute a range is a completely different subject altogether, as you need to get into “scope” and “waves.” I will leave that for another time.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

“Plan Your Trade, Trade Your Plan” Mark Pennings

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

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

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

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

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

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

Real Success Daytrading Video Course Questions - Randall Small

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

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

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

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

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

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

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

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

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

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

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

Answer:    If you want to look at other markets and employ good stops and targets, I suggest you use Drawdown Minimizer Logic (free report is at http://www.webtrading.com/specrpt2.htm

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

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

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

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

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

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

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

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

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

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

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

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

125pts=$62.50
200pts=$100.00, and
400pts=$200; as well targets of
125pts=$62.50
225pts=$112.50, and
550pts=$275.00: conservative, moderate & aggressive respectively.

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

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

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

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

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

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

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

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

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

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

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

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

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

Vendor Problems – Phil Borsook

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

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

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

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

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

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

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

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

Has Hell Frozen Over? – Mike Nagel

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

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

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

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

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

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

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

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

Online Futures Trading – AHnalyst

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

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

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

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

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

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

The story behind the news is what she told me got all this started. They wanted to put together a package that small size traders could use at the cost of less than one TICK. The e-mini S&P trades in 1/4 points, and is worth $50/pt, so one tick is $12.50. At a total round turn plus fees cost of only $10, you are already PAST the break-even point on the first tick the market makes in your direction. I can't tell you what a revelation this makes psychologically for trading real-time. I had my first ever week of 100% winning trades. I profited on every single one, averaging 4 positions a day. This will transform your trading more than any system; self help trading book, or broker/online high tech order entry system.

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

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

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

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

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

Broker With Reasonable Commissions - T. S. Bollmann

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

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

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

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

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

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

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

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

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

Keeping an Open Mind - Rick Ratchford

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Getting the Swing of It

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

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

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

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

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

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

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

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

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

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

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

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

Stacking the Odds in Your Favor

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

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

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

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

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

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

See The Big Picture

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

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

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

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

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

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

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

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

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

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

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

CFTC Proposes to Exempt Some Commodity
Trading Advisors from Registration

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

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

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

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

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

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

Looking for Profits - Ernest Goldstein

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

About eSignal - Todd Sprinkmann

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

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

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

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

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

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

Squaring the Circle

Reprinted w/permission of Asimov On Numbers

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

There are several ways of doing this.

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

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

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

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

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

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

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

Next, slowly turn the circle so it moves along the line (with―out slipping) until the point you have marked makes a complete circuit and once again touches the line. Make another mark where it again touches. Thus, you have marked off the circle circumference on a straight line and the distance between the two marks is twice.

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

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

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

All About Volatility

Reprinted w/permission of Technical Traders Bulletin

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

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

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

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

Popular Volatility Trading Systems

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

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

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

The Basics - Measuring Volatility

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

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

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

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

Chart in Printed Copy

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

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

How the Volatility Systems Work

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

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

The two variables of the system are:

1. The number of days used to find ATR

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

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

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

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

Chart in Printed Copy

Comments and Variations

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

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

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

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

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

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

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

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

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

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

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

Suggestions on Making It Work - Filters

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

However, do

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Commodity Traders Club NewsÔ

"The Commodity Futures Trading Knowledge Network"

Trade Dow Jones Futures Trade Smart - Bill Seideman

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

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

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

“Plan Your Trade, Trade Your Plan” Mark Pennings

Real Success Daytrading Video Course Questions - Randall Small

Vendor Problems – Phil Borsook

Has Hell Frozen Over? – Mike Nagel

Online Futures Trading – AHnalyst

Broker With Reasonable Commissions - T. S. Bollmann

Keeping an Open Mind - Rick Ratchford

Getting the Swing of It

Stacking the Odds in Your Favor

See The Big Picture

CFTC Proposes to Exempt Some Commodity Trading Advisors from Registration

Looking for Profits - Ernest Goldstein

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

About eSignal - Todd Sprinkmann

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Reprinted w/permission of Asimov On Numbers

All About Volatility

Popular Volatility Trading Systems

The Basics - Measuring Volatility

How the Volatility Systems Work

Comments and Variations

Suggestions on Making It Work - Filters

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

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Reprinted w/permission of Asimov On Numbers

CFTC Proposes to Exempt Some Commodity
Trading Advisors from Registration