HOW TO MAKE MONEY IN THE FUTURES MARKET
...AND LOTS OF IT by Charles Drummond Ted Hearne and Associates, Inc. 5520 North Magnolia Chicago, IL 60640 USA
How to Make Money in the Futures and... - Drummond, Charles
How to Make Money in the Futures and Lots of It By: Drummond, Charles
http://www.traderslibrary.com/moreinfo.asp?item=2453...D%26sort%3D%26lc%3DQuickSearch%26submit%3Dyes%23245330/01/2004 13.48.29
This item is currently unavailable from the publisher. Item #: 2453 Pages: 583 Type: Book - Hard Cover Publish Date: 1/1/1979
FIRST EDITION
Copyright © 1979 by Charles Drummond
All rights reserved. No part of this book may be reproduced in any form or by any electronic or mechanical means including information storage and retrieval systems without permission in writing from the author, except by a reviewer who may quote brief passages in a review.
PUBLISHED BY CHARLES DRUMMOND; WRITER PUBLISHER For information contact: Ted Hearne Ted Hearne and Associates, Inc. 5520 North Magnolia Chicago, IL 60640 Phone: 773-728-6996 Fax:773-728-6886
[email protected] Or visit the P&L Dot website at www.pldot.com
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This publication is designed to provide the Author's opinion in regard to the subject matter covered. It is sold with the undertaking that the Author is not engaged in rendering legal, accounting or other professional service. The Author specifically disclaims any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any advice or information presented herein.
The formula on page 573 is copyrighted and permission is granted only to the individual purchaser of this book for use in personal trading activity only. Use of this formula in any commercial venture for profit is prohibited.
acknowledgements
Needle~s
to sa¥, I ain't the first one, to give thoughts towards commodities. There's plenty before me. Thousands. Everything that is herein is plagarism, one way or another. All the thoughts of hundreds of writers have somehow gotten to these pages from my years of reading and involvement with commodity markets. Pure plagarism. Except no more than the musical composer, painter, architect, scientist, whose works express the past with an inherent individual creativity, all their own. So it is with mine. Bearing this in mind, I give special recognition to Tewells, Harlow, Stone who wrote ' Commodity Futures Game, Who Wins, Who Loses, Why! ' and Robert Vichas, in ' Getting Rich in commodities, Currencies, or Coins, before or During the Next Depression', all of whom gave me a special expanded knowledge of human nature and market psychology, which display the realities of the market place phenomenon. I appreciate and respect the book selection of the 'bibliography' , too numerous to mention here, but without which the trader would never create a responsible library. These works, added to that of my own, would give the reader all the information he or she needed to consistently make lots of money, in this the most fascinating of all free-market activities. I also wish to thank my ten doing the typing myself,,, Tobacco Company of Holland, Troost Special, Van Rossems
little pinkies, because I insisted on and my 'behind', ,,, and the Royal for pounds and pounds of their odourless pipe tobacco.
Being a private person, I am embarrassed not to mention the unfailing support of a few personal friends, who knowing my obsession with privacy, would be offended if I acknowledge our association in public, because we view our relationship as something special. Without these people, my knowledge would have gone to the grave with me, and if this book should make any contribution to the knowledge of market movements and a trader's successful handling thereof, then i~ is to these friends that we should all be grateful. To friends, I wish to say thank you, for what has turned out to be quite an experience.
I
BIBLIOGRAPHY A
Commodity Futures Game Who Wins, Who Loses, Why ! I974 Richard J. Tewels, Charles Harlow, Herbert L. Stone McGraw Hill
B
Commodity Trading Manual I973 Chicago Board of Trade
C
Charting Commodity Market Price Behaviour 1969 L.D. Belveal Commodities Press Wilmette. Illinois 60091
D
Economics of Futures Trading for Commercial and Personal Profit I97I Thomas Hieronymus Commodity Research Bureau Inc. 140 Broadway N.Y.N.Y. IOOOS
E
Forecasting Commodity Prices - How the Experts Analyze the Market 1975 ( 14 authors ) Commodity Research Bureau
F
Dow-Jones Irwin Guide to Commodity Trading 1973 Bruce Gould
G
Getting Rich in Commodities, Currencies or Coins, before or During the Next Depression I975 Robert Vichas Arlington House Publishers I65 Huguenot St. New Rochelle N.Y. IOBOI
H
How I Made One Million Dollars Last Year Trading Commodities I973 Larry R. Williams Conceptual Management Carmel Valley Ca.
I
Making Money in Commodities I976 Eugene Epstein Braeger Publ. Inc. 200 Park Ave. N.Y. N.Y. IOOI7
J
Modern Commodity Futures Trading I975 Gerald Gold Commodity Research Bureau I Liberty Plaza N.Y. !0006
K
Sensible Speculating in Commodities or How to Profit in the Bellies, Bushels & Bales Market I972 Stanley Angrist Symond & Schuster Rockefeller Centre 630 5th. Ave. N.Y. N.Y. I0020
1 L
Speculation, Hedging & Commodity Price Forecasts 1970 Walter c. Labys , L.C.W.J. Granger Heath Lexington Books, Lexington Massetucists
M
Successful Commodity Futures Trading or How You Can Make Money in the Commodity Markets 1974 T. Watling J. Morley Redwood Burn Ltd. IIO Fleet St. London EC4A 2JL
N
The Commodity Futures Market Guide I973 Stanley Kroll, Irwin Shishko Harper & Row Publ. IO East 53rd St. N.Y N.Y. I0022
0
The Fastest Game in Town I973 Anthony M. Reinach Random House
p
Trading in Commodities An Investor's Chronicle Guide IS74 c.w. Grainger Woodhead - Faulkner Publ. Ltd. 7 Rose Cres. Cambridge England CB2 3LL
Trading Commodity Futures
DEDICATION
to self-aware people & all commodity traders & the holy grail
& to all those who I have met, and will meet, who have anything to do with commodity futures trading & to the ultimate art,
commodity trading.
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I
introduction Anyone can make millions of dollars in the futures market, if they know the rules of the game, the game itself that is being played, and why the rules of the game are as they are. The rules of the game are simplistic and factual, and ~t is up to the reader to learn the rules of the game and to play by those rules. The futures business is one of the toughest in the world, both for the trader and his broker, as well as the people that handle all the machinations of an executed contract order. Be that as it may, if we are serious about the matter, the concept of futures trading can be one of the most stimulating of all experiences, and to some, more so than sex. The fact of the matter is, is that it is as it is and that accordingly U must ask U'reself some questions and determine if it is all worthwhile. Do U enjoy success, and money. And, can U handle it. Do U want to make millions of dollars, maybe twelve million in eight years, or achieve my goal of IOO. The opportunity is there, and nothing will stop the trader from achieving that goal, except his or her capability in appreciating the facts of life as they relate to the market place, and being aware of these capabilities, why they are as they are, and what to do about them, and then what shud be done in relation to executing a market decision, with which this book will be of some assistance. Take some time, maybe one year, if U are not that much of a seasoned trader, to becum a student and a pro of what we call the 'basics' of commodity trading. ( Maybe U will becurn a seasoned trader in that period, as opposed to our other fellow, the 'blown out of the box' trader who will most likely read a few pages and quickly go to the market, excited with his new found wisdom,- the flippant pro that he is. ) Then,U can also, and add it to the above, possibly becum a student and a pro of ~&L (Point and Line) Charting, of which this writer is the author. U cannot becum a pro of P&L unless U have passed the 'basics' course. Why ? Because I said so. ( The book will explain. ) ( something about forests and trees. ) U cannot be a pro in P&L trading without qualifying as a knowledgeable graduate in acceptable basic training. So there. With this in mind, we have geared our approach to the 'just after beginner' trader, who maybe has been bombed out of the market with a few dozen trades and wants something to grapple the problem with. Also, it's for the trader who has a little stature with experience, yet who needs rounding out. But, please note that this author does not wish to mess around with the mind of someone who has a winning technique, but only to instruct him/her to stick with it, maybe with some practical guidance from this book and to broaden his/her knowledge base, all to support that winning technique. As for the real pro, might I say, have a good laugh with this book. Who needs it. Right ? Right. U've already achieved 'consistent winner' status, (altho' U're probably curious about anything to do with commodities.) There is nothing in this book to explain what a futures contract is, or what a 'fill' is and so forth. The beginning trader can obtain that information from any large brokerage firm or any commodity exchange, and after doing so, he or she mite study a book like this, maybe ·for a few months, - I suggest six months to a year, - before trading; all to the avail of encouraging u to the principles which, someday, maybe in eight years, wud entitle U, if I may be so provocative, to have that twelve million.
1
I have tried not to be academic with writing style. Who needs it ? The only thing we wish to be academic about is knowledge and ability. The prose is informal and friendly, perhaps too friendly and uses the modern dictum, when opportune, - such as 'U' for 'you', 'shud' for 'should', 'becum' for 'become' and so forth. And why not ! It makes for more st~ulative reading. Also, we tend to repeat certain sentences, phrases and ideas, so that the trader mite unconciously becum aware of their imput, and since I place certain relevance on them, the reader will, consequently, incorporate them automatically into their thinking processes when he/she evolves and employs a trading plan. Some sections will be too ponderous, (like this introduction) some too flippant, -maybe haranguing, maybe too presumptive, possibly parading propinquity, but at all times prodding, and for a purpose. ( Sorry to be so eloquent. ) The sections on philosophy, technical analysis, and psychology all are woven one to the other, because U cannot have one without the other, if U are to respect this book. I am serious about that. ( I want U to have that I2 million. ) Accordingly, the section on philosophy is·meant to be instructive and didactic; psychology throngs into the pedantic and the areas of basic technical format, including P&L Charting involve actuality, and are meant to be realistic. If the reader wishes to becum an involved student of P&L, I have provided plenty of material and comments in the section on_P&L (Point and Line) Charting. Hopefully, he/she will experiment and delve deeper into its concepts. For U cheaters out there who do not wish to put in the effort, I'm sure U're target of interest will be in chapter I3, where we parlay .an investment of $3,400 into $220,050 in fifteen weeks. For the serious student, however, the rewards will be an awareness that P&L can be phenomenal in its application to market analysis, and accordingly its concomitant financial success, and also that it is not applicable when not tied into the 'basics' of technical and fundamental analysis, which will be presented in this book. P&L can be an earthquake of an experience. It can change U're life, possibly much too fast, since U may have an over-assumption of U're ability to master the project. It's a big world out there, and it's the nature of the market to reward U're sudden success with the opposing debilitation of unexpected, adverse, returning of monies to the market place. Be careful of assuming that U are a pro of P&L Charting, especially after a succession of positive market applications. If U sit and take it easy and quietly trade \-'i th a plan at hand, -.·a well formulated plan, explained in this book, the trader will find that there's no end to the enjoyment of what success in the futures market has to offer, and what it can do for the trader and his circle of influence. U are going to get U' re money' s worth out of this book.• So, don't be in such a hurry that U blow U'reself out of the box. One more thing. P&L cannot be computerized. So U are at the distinct advantage of n~t being succombed by the computer markets that exist to-day. u will be acting long before they do. It's rather a smug feeling to have nothing but the parameters of your brain with which to operate. Man will survive Now, make money in the futures market ..•.. and lots of i t ! ( Sorry to be so corny, but I'm serious. ) One hope •...•• the lord above, preserve the futures market, for us all, the trader, the hedger, the market place.
contents
PART
A
THIS IS THE FUN PART
CHAPTER 1
C
TECHNICAL )
JUMPING INTO THE FORAY .......
pq.I
the who's, where's, why's & a few how's introduction;charting;chartists; fundamentals vs. charting
CHAPTER
2
METHODS OF FORECASTING PRICES ... pg.I4 discussion;moving averages;weighted moving averages;oscillators;volume oscillators; balanced volume;resistance index;index numbers;structural theories;understanding general econo~cs;correlation analysis; market theories;fundamental analysis;trend analysis;congestion analysis;volume;open interest;cash;basis;odds;SO% retracement; chart formations;period of time price reversal;support and resistance;contrarian ~~J opinion;committment of traders report;news; /-1 point and figure;~the.matical trend analysisf f_({( ~ J pre~ums;registered warehouse receipts. H
CHAPTER
f\JO
3
I WANT U TO MEET THE MARKET PLACE
. . . pg. 3 8
the commodity market-opportunity knocks; why invest in commodities;stocks vs. commodities;what the market place is like; \7 speculative activity;conspiracy theory; /-(dishonesty of floor brokers;brokerage / a business people;the mish-mash of traders; market emotions;what does the future hold for co.mmodities;further information •
...
CHAPTER
q
VOLUME
pg.54
secret of the pros critique;classification;volume in congestion analysis;volume in congestion breakout analysis; volume in trend anal sis·volume in reversal analysis;~·n,t~r~a~-~d=a~~-===-=~~~~
summary.
(.;.:;'" *
"\'
r 5
CHAPTER
OPEN INTEREST
.. • . . . . . · . . . • • • pg • 7 I
what it is;rules;further information: criticism;O.I. in trend analysis;O.I. in congestion analysis;O.I. in market top analysis;O.I. in market bottom analysis;seasonal tendencies in 0.1.; O.I. and volume;O.I. and commdttment of traders
CONTRARIAN OPINION COMMITTMENT OF TRADERS REPORT ... "CASH" THE "BASIS" THE "oDDS" CHAPTER
6
TRENDS
pg.98 pg.98 pg.IOO pg.II3 pg.!I4
.•••.•••••••••• pg.IIB
how to make a fortune overnite ( more later
characteristics ;trend_action;types of trends;trend lines;trend channels;trend validity;trend and O.I.,volume;fundamentals and trend;using trend action;breakaways; gaps;straightaways;when a trend still has strength ·;trend weakening;trend bucking; profit taking;what systems work best in trending markets.
CHAPTER 7
CONGESTIONS
· · • · • · · . . . • . . . . . pg . I 4 5
where most of U're money will be made ( more later
argument;advantages;characteristics of; categories;congestion action;analysing congestions;congestion O.I. and volume; mid-way congestion patterns;end-runs; anticipating the direction of breakout; antici atin the extent of t e br a o t mov • u port K.
£;,~~
\>ol.J.«J
o\,
~--~~}low
/
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CHAPTER
8
TREND REVERSAL
. . . . . . . . pg . I 7 8
this is where U take U're money and ruri ( more later anticipating a trend reversal ;!comments/ patterns of trend reversal;fundamentals and trend reversal;volume,O.I.~ontrarian opinion,committment of traders during trend reversal;trend reversals and 50% retracements;bottoms;tops.
CHAPTER
9
POINT AND LINE CHARTING
. . . . . . pg . 2 0 5
( the more later ) how it developed;historical basis;philosopPy behind it;what it is;direction~how to apply it;dot~direction;dot distance;distance from dots;dot swinging;dot turned up/down;crests; channel system;T.R.'s;hitting/digging;blocking; normal tops/bottoms;secondary keys;application to trends,congestions.
PART
B
NOW IT'S TIME FOR A CHIT-CHAT
CHAPTER 10
PRICE MAKING INFLUENCES
C
PHILOSOPHIC ) . . . . . . pg.267
and how to use them prelude;news;weather;seasonal influences, and cycles;fundarnentals;price level influences; trend;spot prices;who trades;chart patterns; market psychology;inertia;general business conditions;money-devaluation;changing gov~nrnent policy;the biggest factor influencing prices to-day and worldwide:-socialism.
CHAPTER II
MARKET THEORIES
• . . . . • • . pg . 2 9 5
I hope U get thru this one ...S.
\vtk'
_w\\d \'"' ~~ t-
prelude;historical;hypothesis of price fluctuations,expectations,supply and demand,elasticity,price and price level, market psychology hypothesis,gaming hypothesis.
CHAPTER 12
SYSTEMS AND SERVICES
. . . . . .
pg. 3 I 4
a criticism models;model building;a chit-chat; discounting of systems by individuals; discounting of systems by the market place;services.
CHAPTER 13
PLANNING
. •••• .
pg. 3 3 2
the ultimate key to making . . . . . . lots of money herein we try to tie everything together.
CHAPTER
14 MONEY MANAGEMENT
. . . •. .
pg. '3 8 6
how to make sure the ultimate key works socialism;objectives and criteria;asset preservation;making $I00,000;30% equity rule;accept only IO% equity loss per trade;four basic elements of money management;sitting on cash;risk;pyramiding; congestions;day-trading;and lots more.
CHAPTER 15
MAXIMS
. •. . . .
pg . 3 9 7
a critique
criticism;some essential rnaxims;maxims for the pessimis=;fussy maxims.
PART C N0\'1 WE'RE GETTING DOWN TO SERIOUS) SERIOOS BUSINESS C PSYCHOLOGICAL ) CHAPTER 16
WINNERS AND LOSERS
...••• pg.403
who are they ? how the loser thinks·; how the winner thinks; portrait of a winner;portrait of a loser; what success and failure means;table of what winners,losers do.
CHAPTER 17
EFFORT AND DISCIPLINE
. . . . . . pg. 4 2 5
what the winners have discipline: what is required,what to do, some disciplinary rules;effort:what is required,results.
CHAPTER 18
SELF-AWARENESS
pg.435
the 'holy grail' and the most important part of this book successful speculation requires;what impairs the decision making process; what self-examination will reveal; trans-actional analysis;behavioural skills;fear.
CHAPTER 19
NECESSARY PERSONALITY TRAITS .... U
CHAPTER
20
pg.448
may not like this .
WHO TRADES AND HOW
. . . . . . pg. 4 56
know U're fellow traders kettle of fish;classification,general, specific;short-term trader;day trader; scalper;floor trader;long term trader; large trader;experienced,successf~l trader;protessional trader;technical trader;trend bucker; 'gap' man;the trade; exchange member;female trader;small trader; average trader;public trader;beginning trader. /
APPENDIX
A
CHAPTER 2I
ADVICE FOR THE INDIVIDUAL
pg.487
CHAPTER 22
PRACTICAL TRADING HINTS
pq.498
CHAPTER 23
CHART PATTERNS
pg.SOS
CHAPTER 24
SEASONAL AND CYCLICAL
pg.554
25 THOUGHTS CHAPTER 26 TAKE A LOOK
CHAPTER
pg.568 pg.573
.PART
A
t hi s is the fun part
the technical part
I
CHAPTER
ONE
JUMPING INTO THE FORAY I n:t:Jz..o du.c..;ti_o n. Cha.Jttin.g
pW.O~.>oph.y
a.pp11..oa.c.h wea.kn.e~.>-6 ~.>Vt.eng:th
of, c.ha.!7..ting of, c.ha.!7..ting
.{.n.c.1..u.din.g .6 UC.C.e-6 .6 6uf. C.h.a.J7..:ti..6 U a.nd un.6 uc.c. e-6.6 6uJ!.. c.ha.Jtli.o :t.6 Funda.me~ v~.>.
Cha.17..:ting
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6und.ame~
.6:tl7..eng:th o 6 f,undamen.t.a...e.ll U.6 a.g e
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INTRODUCTION In the reao~ng of any chart formation, it is important that the underlying explanation of what is happening is held in mind. Random Walk - Trending - Discounting - Congestions - possible Reverse Formations - Fundamentals - "floors" and "ceilings" -/ for each commodity all help in the interpretation of charts and help prevent some of the more spurious reasoning that can cum from technical studies. My advice is not to lean too heavily on mechanical approaches to market analysis, for example, relying solely on when moving average lines criss-cross or any other of those "silly" little lines. This removes the trader from the human elements, which make up so much of the correct analysis of price movements. If the mechanical approaches really performed all that well, profits wud disappear, because everyone wud apply sirnliar analytic procedures.
T 2
':HE FORAY
Technical analysis is for the short term. While technical indicators do not meet the test for medium or long term price projections, they are priceless when used in combination as consistent warning signs to alert U against short-term hazards. The entire objective of technical analysis is to anable U to position U'reself in the market under favourable terms. Technical analysis must be short-term enough to enable U to exit the market when the trend to which U have committed U'reself develops an increasing potential for reversal. To buy/sell based on price level analysis, as opposed to price movement analysis takes no account of the short-term movements of prices. To buy a certain commodity just because a price is $2.00 or looks like a convenient place on the chart, is not taking into account price momentum - price movement. In order to ascertain price movement - momentum, one must apply technical analysis, and this technical analysis must be short term oriented. That is why I am delighted with the application of Point & Line Charting expressed further on in this book. There are myriads of approaches available to the trader. In the following section I will be listing but a few. The trader must accept those to which he is obliged to commit hinself, based on his/her acceptence of them. His/her acceptence must flow from knowledge, experience and awareness. The fewer technjques
u
employ, the happier U will be.
u will find however, Point & Line ( P&L ~ Charting flows very well with any or all of these methods, because P&L charting is the penultimate in short-term day to day and intra-day analysis. I know of no system wherein that particular system analyzes market momentum, by taking into account the high/low/close of the specific day U wish to execute prices. However, the general medium to long term approaches, which includes fundamental analysis, enable the trader to be aware of price movements and identifying the broad picture. It is very impor~ant to be able to identify the " picture " in chart formation analysis.
CHARTING Ph.Ltol>ophy A study of market action is an investigation of people interreacting with the market. Since we cannot insert people into test-tubes ( at least not yet ) to research their psychological
THE FORAY
make-up, we can only use proxies prices , which provide a means to measure the results of people's reactions. Whatever one believes is being measured, the entire approach is being based on the assumption that certain repetitive patterns of price and action will re-occur, either before, during or after a significant price movement. To my mind, u shud have charts which clearly tell U the tale of the market and which wud be the most helpful to u in U're forecasting ability. U're chart is meant to be a road-map on the path to fortune. If it is too detailed, or pretends to do this, U mite as well frame it and hang it on the wall. Most charting systems contain the basic selling/buying pressure studies.
App!t.oa.c.h The chartist is always concerned with his ability to recognize the commencement of either a congestion area, a trend, or a trend reversal. So long as the trend line remains valid the market continues to parade in a succession of highs and lows. And, the prevailing trend is assumed to be intact. The penetration of a trendline cud raise the possibility of a reversal. The downside penetration of an uptrendline cud carry a bearish implication. In the reading of any chart formation, it is important that the underlying explanation of what is happening is held in mind. The "::loor","ceiling","random walk","trending","discounting", all help in the interpretation of charts. The speculator need not be a statistician to trade in commodities successfully. In fact, more than one statistician has failed miserably in these markets when he attempted to apply his favo~rite model. The most expensive model in the world will not improve the actual, correct interpretation of the market. No system is that finite. The best systems always involve the writing down of the reasons why that system is applied, at a given time. The written statement must answer the statement " Do U want to buy or sell this commodity", reducing U're reasoning to a simple statement or two, encompassing maybe the fundamental, technical and outside opinions, containing the outside opinion last in waying them least. Essentially however, market fundamentals underpin trend direction, while charts, volume waves, wiggle-waggles portray the market activity.
3
4
THE FORAY
There are two categories of analysis. I ) academic research
- whether the markets are non - random or random etc.
2 ) practical market analysis. To be perfectly candid, there is very little objective, explicit evidence available to support the commonly accepted rules of chart analysis, yet the rules are widely accepted as valid and in many instances seem to produce worthwhile results. Chart signals are given by patterns built on many days' price activity, which are often extremely difficult to define mathematically. This means that the chartist is essentially performing a highly complicated and subjective multiple correlation analysis in his mind as he examines his chart. When technicians attempt to focus attention on short-term fluctuations they leave themselves open to criticism. However, nearly all market analysis is based on short-term analysis, as an attempt·is made to find the appropriate moment to execute prices. The use of medium to long term price analysis will not take into account a random walk of a market on a medium to long term basis and the unpredictability of prices. Price is a result of a cause/effect relationship and occur at the wiggle of fingers in a trading pit. To assume an execution of a trading position based on medium to long term chart analysis does not take into account the effective impact of the character of the market as it relates to news events, trader's committments (who's buying/selling), market psychology and other short term, small time-span factors. Fundamental analysis is the only justifyable approach to long term price analysis. As an introduction to some of the more commonly accepted approaches in identification as an approach to technical analysis, look at the following. identification. a) identify both the major and minor price trends. b) identify the major and minor support and resistance levels. c) identify the "trend channel" if there is one. e) identify both the short and long term price objectives based on,
.I
TP.E FORAY I) support and resistance levels. 2) pattern count o~ other ~hart projection 3) 40 - 50 % retracement and other chart patterns. 4) long term continuation chart analysis.
This above all is true: any approach must be regarded as unprofitable until it has been proved otherwise.
We.a.lz.ne6.6 o 6 c.ha.Jt.ting
It must be pointed out that as more and more market participants attempt to predicate every action on chart rules, the accummulative effect of those similiar actions self-creates price fluctuations which might destroy much of the validity of all chart techniques. As a chartist , U have lots of company. There are literally thousands of people charting exactly the same movements as U are. Thus when a major move is signaled, U are liable to have a lot of the same orders as yours hitting the trading pits. In particular, the placing of stop-loss orders at identical points by hun~eds of chartists, may create false penetrations of trend lines and other formations.Charting is inevitably to some extent an inexact science. It is a matte~ of choice what scale the chart is on and whether the mid-price or closing price is used. To plot price movements, both can be distorted. The latter is the most often used, bu~as it cums at the end of the day it is associated with a lot of profit-taking etc. Moreover, dynamic and unforeseeable events may play havoc with charts. Charting is to some extent a lazy approach. The neat clinical look of a sheet of paper appeals to the many weaker bretr~en .. who have no time or inclination to delve deeper. Most people like to think it is more productive to look at all the wiggle-waggles. As technical analysis spreads, it will commence to defeat its own purpose,
5
l 6
THE FORAY
particularily in a " thin " market. It is important to realize that if enough traders are using the usual chart interpretations to trade a given commodity, it will influence the price of that commodity in the direction chartists expect prices to move. Chart followers can prove their own theories right. While a pure chartist does not wish to know a thing about fundamentals, a wise trader will try to combine futures trading from both stategies. No chart formation is completely reliable. One must seek confirmation from other indicators, such as changes in production from year to year, variation in business cycles, and deviation in commodity prices or any other quantifiable sum, reduced to a single summary figure to register all diverse activities. ( Commodities Index ? ) Often the commodity goes completely contrary to fundamental considerations due to technical and other factors. To succeed the chartist must be ready for thorough study and hard work and develop experience. It is an art because of its skill and the finesse and experience of the technician. These are without doubt the essential ingredients of profitable trading. The technician must constantly check and re-check~ Another weakness from charting stems from the belief that altho' all the facts of a commodity situation are known to the speculator these facts are also known by large trading houses and other professionals. In reality, however, certain events can occur unexpectedly and affect all traders. Prices may not have completely discounted these occurences, in which case the chartist may be caught offguard and there is very little left that can be done to protect a position in such a situation except to be alert to recognize sudden change in the market trend and to be quick to act. ( How about a hurricane carrying all the oranges into the Atlantic. Technicians are famous for making spectacular profits one week and enormous losses the next. It is a fact of life that prices wi~l not fluctuate according to what their past performance dictates, altho' U do get some idea on a day to day basis with P&L charting. The advisability of most systems is indictable because of the absence of a track record. Any approach must be regarded as unprofitable until it has proved otherwise. To be perfectly candid, there is very little objective explicit evidence available to support the commonly accepted rules of chart analysis. Many chartists
THE FORAY
tend to anticipate trends. This is a fallacy. One cannot asume or ~ecognize a trend that does not exist. In attempting to utilize a trend following method, one must wait until the trend has demonstrated itself. Even then, the chartist's motto with regards to a trend is that a trend continues until it stops. Once again, he attempts to anticipate the direction of a trend reversal as it evolves. This is impossible. One can only be aware of the new trend evolving as it occurs. Most technical systems cannot anticipate an trend or trend reversal. It can anticipate the likelihood of a trend developing, but only until the trend has evolved does one exist. ( Am I rite or wrong - think about it ! If unexpected moves happen, many technicians have to start all over again. After a series of discouraging losses, many traders have abandoned their technical studies because they just don't work. As it is a fairly common phenomenon, is further proof that there are no short cuts to trading success and no substitutes for experience, knowledge and hard work. All we know for sure is that. prices will fluctuate, but not how much. Only in congestion areas are U protected because the congestion area defines U're projection of losses. Prices fluctuate in congestions. Any technical approach that attempts to analyze congestion areas, and evolves a trading method therein, will provide the trader ( and his broker th+u lots of commissions glorious profits, as commodity prices are in congestion, one form or another 85 % of the time. The universal problem known to the professional and novice alike is when to get in and out of the market. On this basis, technical analysis must encompass to a considerable degree the short term price fluctuations ( Another plug for P&L charting ) .
S:ttte.ngt.h o -6 c.h.a..Jt.:t<.ng If U can survive and live thru I-2-3-4 years of commodity trading U will see every price pattern U will ever see ( read that again ), and the rest is simply a repeat over and over again of the various patterns. One of the interesting things about trading in commodities is that as U watch markets move up, and U see other markets which are resting down at the bottom, ( the end of bear markets ) u can say to U'reself " O.K. is it their turn to move up next ? " • Sure enough, one by one, they eventually start the cycle
7
l 8
THE FORAY over, from the bottom up to the top and of course, from the top down to the bottorr.. All markets will one day cease to move down in price and then each will move sideways for a while and then advance in price. One day there is always an end to bear markets in commodities, and there's always an end to bull markets. What I have just gone thru represents a philosophical long term approach to the analysis of market prices. In other words, if market prices have cum down the last year or two, the end of the bear market is in site, and eventually all commodities will start to rise again. This can be realized almost without looking at a chart. But in analyzing the chart, one becums aware of the termination of the bear trend and the trader can take a position. It is impossible to trade on the assumption that by being aware of general movements of prices by reading newspapers, or "thinking" about it, that this may enable u on the medium to long term basis to assume price movements. More often than not such an approach will not restrict the limits on losses once the market has been entered, due to an adverse price movement or once profits have acoummulated. Most individuals who do not use chart methods in an up market, for example, are caught by surprise by a bear crack &/or a major bear trend evolving. Chart analysis is absolutely essential to protection against losses and protection of profits !
CHARTISTS The argument used by the chartist is" follow the other fellow •.. He probably knows more about the fundamentals than I do. " The basic tenet of the chartist is " the trend continues until it stops." Most chartists attempt to anticipate a trend move. Chartists are famous for making spectacular profits one week and enormous losses the next. The chartist is always concerned with his ability to / recognize the commencement of either a congestion area or a trend reversal. So long as the trend continues the chartist is happy. In analyzing the likelihood or the occurence of a trend reversal, or the activity of a congestion area, or something is wrong with his trend, the chartist becums very unhappy. The chartist is quite a species. He really gets off on all the wiggle-waggles. What usually happens to the chartist is that he/she does not see the forest but for the trees. And, the chartist's bag of tools is never over-filled until that final moment when the noise of the information and systems clogs the channel of clear cogitation.
THE FORAY He stares in blank, hypnotic, unreceptivity for hours on end at the chart, not knowing what his chart is telling him. His major fault here is that he/she looks towards the charts to tell him what prices are doing, rather than he telling the charts what he requires lf it. A suggestion: When the chartist evolves into the fog-like state, he must sit down and write on paper his/her written request from the chart. The chart is none other than the computer of facts and information, and as with a computer, one must punch in what one wishes the computer to start to tell him, and by what criteria, and, this can only be done by a pre-programmed trading plan. The first pre-requisite of the chartist is that he have a trading plan and exterpolates from the chart a criteria which is palateable to his plan. Most successful chartists
are
a) less likely to take long positions b) they are more likely to close out positions before receiving a margin call. c) less likely to put up additional margin if they do receive a margin call d) more likely to trade in a larger number of commodities and to pyramid their profits. The unsuccessful chartist a) has a clear tendency to cut their profits short while letting their losses run b) more likely to be long than to be short c) has a clear tendency to buy on days of price declines and to sell on price rises. This action indicates that these chartists are predominantly price level traders. There is no track record possible on chart readers in general, but a track record is certainly feasible on the performance of any particular chartist. Until chartists are willing to subject themselves to one kind or another of track record, it is impossible to take their claims seriously. Few chart readers wud have doubted
9
l IO
THE F8RAY
the existence of the "head and shoulder" formation. However, one mar.'s reversal signal will be another's flag continuation pattern. More often than not, if a chartist is vindicated his market decisions were more often than not, a result of luck. The trader is more painfully aware that technical competence does not insure competent trading. Chartists who lose money do so not always because of bad analysis but because of the inability to transform their analysis into sound practise. Bridging the vital gap between analysis and action requires overcoming the threat of greed, hope, and fear. May I suggest that it means controlling impatience and the desire to stray away from a sound method to something new, especially during time- of temporary adversity.
FUNDAMENTALS VS. CHARTING
we.a.kn.e..o .6 The \·Jeakness of fundamental analysis is that U can never be sure if the facts known to U are all the relevant facts. The best analysis can be overthrown by changes in government policy or essentially speculative decisions on the part of other investors. Often the market goes completely contrary to fundamental considerations due to technical and other factors. The fundamental trader is interested in the long range price movements and must be prepared to wait it out. Fundamentalists may deny it but there are too many external factors to be taken into consideration. The natural response to fundamental influences reflected in the day by day fluctuations means that there is no need to seek them out for analysis. The same holds true , if acts pertinent to fundamental analysis are subject to statistical errors and to subject evaluation. Unfortunately the trader often learns of changes in fundamentals gradually or belate~.It often occurs that before the fundamental analyst can say for certain just what has changed, futures prices will have anticipated the changes which will eventually appear. Personally I find fundamentals at times simply too much to cope with. I suggest U look at the following illustration, to see if U can cope with all the fundamental manifestations surrounding 11 wheat 11 •
THL FORAY
MAJOFI RELATIONSHI!'S IN THE WH:Ai ECONOMY
PRICE IN PRECEDING '\'VIR
CONIUM~
TM~jt)
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TOT AI. DOMESTIC SUPPL'f Sa
u.s.
FINANCING
,--SV"Pi.IES 0' Rvt. RIC£. ETC
--,
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,
PROGRA""S
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1
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U.S.-OATS
..ll. GOOOS AHO SEFMCES
. . · • (Courtesy of The Demand and Price Structure tor WHEAT, Tet:hnit:al Bulletin 1136, U.S. Department of Agrit:ulture, 1955, p. 12.)
Il
l I2
THE FORAY
Most traders recognize that fundamental analysis provides some indications of price levels, justified by known facts. A trader who finds some limitations in fundamental analysis will treat fundamental data as background information, which may influence his general attitude toward whether prices are high or low, relative to the over-all supply/demand environment he foresees in the months ahead. Such a trader may view futures markets as distinct entities having a character of their own. Fundamentals underpin trend direction. And, taking into account the fundamentals of a given commodity enables the trader to anticipate a) the continuation of the trend b) the likelihood of a price reversal or top/bottom formation. One ultimate key to the employment of fundamentals to the market place is that prices usually discount fundamentals. Being aware of the fact that by the time one receives news, particularily after an extended price move, that this news has in effect already been discounted by the days, weeks, or months previous by the price movement itself. ( If
u don't know what "discounting" is, call U're broker. )
As soon as u see the people filling their shopping carts full of bags of coffee or hoarding sugar, one shud be aware that the high price and the transmission of news of the "shortage" to the general public means that the price has already been transmitted to the futures market and that a price top in the futures market is wiL~in days to weeks of topping.
U.oa.g e. While a pure chartist does not wish to know anything about fundamentals , the wise trader will try to combine futures trading from both technical and fundamental strategies. U shud be able to develop some idea what the market is doing without the formal framework of a technical model. The beautiful advantage of usage for the fundamental trader is that it involves long-range movements. At one end of the spectrum u have the appropriate technical analysis which is based on short term price fluctuations and at the other end, fundamental analysis which enables the trader to adopt a long term approach.
THE FORAY
Acknowledging the importance of fundamental analysis, major technical indicators which run counter to fundamentals oriented conclusions shud be seriously heeded. Experience has shown that significant fundamental market changes frequently obscure until after the market price has already discounted the change. Stubbornly maintaining a position based on a fundamental analysis in the face of adverse technical indicators and an adverse price trend constitutes a quick method of running up substantial trading losses. In short, do not ignore the technical action of the market no matter how fundamentally oriented a trader U cud be.
!3
2 I4
~.ETHODS
CHAPTER TWO METHODS OF FORECASTING PRICES
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1
2
METHODS
DISCUSSION Never in my life have I seen anything like the plethora of methods which are coming on stream for the use in forecasting commodity prices. There are literally hundreds of techniques and approaches. This chapter will present rather briefly, but a few. Some of them are rather conventional and this author will place an asterick beside the ones which he personally uses. Listed in this chapter there are approximately thirty-six ways and means of forecasting prices. This does not take into consideration all the wonderful glorious little tidbits that cum thru the revelation of P&L charting. ( This author is very happy with P&L charting, for it enables this trader to quantify price action on a daily and intra-day basis. I know of no other systen wherein each day's specific activity means more than the trend or congestion in which prices are trading. Each day's activity thru the use of P&L charting portrays the evolution of a trend or congestion, sometimes within one day. ) However, this author is most irritated by those traders who are convinced that their moving average, point and figure,re~istance index, volume oscillator, balance volume, weighted moving averages, god knows what else, - basis, cash, - are the only sytem which is effective. And, that the system that they are using is the only one that will ever be effective and that they have no use for volume, open interest, seasonals, fundamentals, contrarian opinion, wave theories, point and figure, moving averages, oscillators, chart patterns, momentum indices, whatever, and are blindfolded to the evolution of anyone else's approach. ( There. I got that off my chest. ) Often these traders do not even use their own systems and seem to me, at least, to be continually fighting the market. If a trader has a trading plan incorporating several methods of forecasting prices and combines them in a way which he can continually trade profits from the market, then this trader is worth listening In the section on planning, this author will succinctly portray his approaches to the market place and U will be surprised how flexible he is.
>o·
IS
1 METHODS
There are three basic methods to analyze the market behaviour of commodity prices. I) fundamental 2) mechanical 3) technical
FUNDN'...ENTAL Often the market goes completely contrary to fundamental considerations due to technical and other factors. The fundamental trader is interested in long range price movements and must be prepared to wait it out. Fundamentalists may deny it, but there are ju~t too many external factors to be taken into account, such as the natural response to fundamental influences, reflected in the day by day fluctuations. So there's no need to seek them out for analysis. HOwever, fundamentals underpin trend direction. MECHANICAL Mechanical methods use price and price alone to determine what action to take and this action does not require any decision on the part of the trader. There are three mechanical methods. I) chart 2) computer summaries 3) moving averages These are rigid trading rules to be followed faithfully and it is usually based on some mathematical formula to predict the right time to trade. The computer tells U what a mathematical formula thinks u shud do. One of the beauties of the mechanical method is they can be back checked. Computer oriented methods usually bias themselves towards mathematical trend analysis, using moving averages and other trading systems. The computer can be used as a chart reader and it can formulate and test any and all deci~on rules. TECHNICAL In the last several decades, a vast amount of work has been done to erect a means of technical tools, - all with the aim of anticipating futures prices from trading statistics. e.g. price, volurne,O.I.
2
METHODS
I7
The technical approach from the simplest to the most complex and esoteric falls into four broad areas. I) 2) 3) 4)
patterns on price charts trend following methods character of market analysis structural theories.
There are many different methods for charting. The most popular are a. daily high/low/close bar charts b. point and figure method c. moving average of closing prices
The lists of approaches taken to technical analysis can be cateloged by the following technical approaches. I) tape or board reading 2) price chart analysis - which consists of a. price trends b. support and resistance c. consolidation ( continuation and reversal ) d. price formations and patterns e. meaurement rules f. wave theory 3) volume and open interest analysis 4) other technical indicators which are a. measures of relative performance b. study of periodic price performance c. opinion survey and contrary opinion There will be more of this later. Now, some methods,
MOVING AVERAGES The majority of models are founded on a system of moving averages. Some of them are sophisticated and ingest large numbers of variables. Essentially all models draw a bead on the direction of a trend after it is manifested and will keep U in the market as long as the trend is unchanged. Some moving averages attempt to anticipate changes in trend. These types are profitable to the properly capitalized trader who can initiate a recommended position and can underlie
18
1
METHODS
more losing than winning trades. The rationale behind the moving average is in determining when price direction deviates from recent average prices. As long as the current price remains above the average price of say the last ten, twenty or one hundred days the trend spins onwards. The most ordinarily observed average is the ten day moving average of closing prices. The advantage to this method is that it gives equal weight to each day's price. The moving average assumes that the trader bestows as much importance on last week's prices as he does on yesterday's. This does not conform to reality. A short term trader's horizon is extremely limited. Commodity prices do vibrate more rapidly than the prices of most other investment forms, therefore, a shorter series of moving averages usually performs best. An ideal moving average shud I) shud be able to observe a major turn of a price trend at once and not several days after the turn 2) we do not want the plot of a moving average so close to the plots of the daily prices that we wud be whip-sawed in consolidation and minor swings. 3) the moving average must be adaptable to the volatility of the particular commodity. 4) we want responsiveness in the moving average i f the commodity locks limit. The short comings to this approach is that moving average lines may be too langrid to use as a reversal indicator. More often, moving average technicians tend to be guided in their trading decisions by changes in the price market relative to the moving average line. The more sensitive the moving average the smaller the amount and degree of the advance differential and the greater will be the number of buy and sell points, resulting in much / whip-saw and consequent small losses. However, the shorter the time span, the more sensitive is the moving average to a trend termination of a reversal. New trends will be acted on earlier and do not need much time to establish themselves. However,the trader pays for this sensitivity more often than not because, and to repeat, the shorter the moving average the greater is the number of trades that will be made with greater commissions added to whip-saw losses. Therefore, there is a delay with moving averages in the indication of the turn of the price trend. Many times the delay is much greater than wud be the case utilizing either simple charts and point and figure charting and most
2
METHODS
certainly P&L charting. However, the chief advantage of the average position is that it automatically puts ~~e user aboard every trend of substance ( as do all trend following systems. )
~oving
One moving average system which has some tradition behind it, but which does not make big money is the " lagged seven week moving average method " developed by Vunn & H~g~ett'6,Financial Service, LaFayette, Indianna. U take the closing price on a given Thursday and then beginning with a period two weeks to that, write down the closing price of seven previous Thursday's. Compute a simple average of the seven no's • If U're present Thurs. price is above this average U go long and if the Thurs. price is below this average U go short on the close ( on Thurs. ) . The action rule states that once U have initiated a position U hold on to that position until the following Thursday.
WEIGHTED MOVING AVERAGES Typical models nuture two or three moving averages - daily high/low/close ranges, volume, O.I. % change of tops, or closing price or even a psychological factor based on contrarian opinion. The weighted moving average is a superior device but it also retains the same short comings as any historical series of data. Various weights are largely discretionary depending upon the propensities of the speculator. I refer u to books 'Commodity Trading Systems and Methods' by P.J .. Kaufman and 'Stock & Commodity Market Trend Trading by Advanced Technical Analysis' by J.R. Hill, available from Lambert-Gann Publishing Co. Inc. Box 0 Pomeroy,Washington 99347.
OSCILLATORS The oscillator takes a moving average to the current price the moving average to a weighted moving average. The drawback of this system, as of most others, is that it functions best in a strongly trending market. One point to observe is the momentum of the move. While the uptrend is intact, the oscillator will be above the zero line.
I9
20
l
METHODS If in each wave of the oscillator, lower highs anc lower lows above zero have been recorded, this action suggests a weakening o: the uptrend. If employing a ten and a twenty day moving average one strategy is to take profits when the oscillator indicates a weakening.
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2
METHODS
But do not initiate a short position until the twenty day oscillator penetrates the zero line. This system will not put U in the market as often but may put more profits in U're pocket when U do trade. The major shortcoming to any historical series is that it looks backwards. As an oscillator moves from large positive numbers to small positive numbers, this oscillator is a tool used to measure exhaustion of a price trend. History is replete with examples of trends that peaked or troughed, whereas accompanying rate of change oscillators showed a clear loss of momentum well in advance. The disadvantage in using oscillator signals is that during a powerful bull or bear swing, oscillators will repeatedly move into overextended territory and will stay there for a long time. Loss of momentum before key tops and bottoms are reached is well documented, but this phenomenon is much easier to see in retrospect. In practice, declining momentum will indicate a pause in the price trend or a reversal, and there is no way to tell which. Using this technique the analyst can often explain past price action but he cannot easily predict future price changes. The term oscillator is given to a family of technical indicators based on measurement of price changes rather than price levels, the simplest being based on the distance the price has travelled for a given period of time. There's two contentions on which the oscillator approach rests I ) the price can becum overextended and gathers too much volicity. If the price enjoys an unusual gain, compacted into a short time's period, the presumption is that buying is temporarily exhausted, and part of the gain will be retracted. 2 ) a price trend can simply peter out as it steadily looses momentum. In this, the price trend continues but generates less and less energy until it d~es. The top is signaled when the price continues to make new highs, but the oscillator moves from a large positive number to a small positive number.
2I
l
22
METHODS
VOLUME OSCILLATOR In a faster moving commodity construct a fifteen day moving average of the high daily trading volume. In a slower use a thirty day or six week moving average. Experiment with both moving averages simultaneously for a while. Similiar to an average curve, the moving average volume curve smooths out the daily and weekly fluctuations of volume data. With acrescent prices, volume meters activities of buyers and with decrescent prices, volume gauges activities of sellers. On the same chart plot also a fifteen day moving average of prices for quick comparison to make the moving average more sensitive to short term changes. Add to U're chart a five day weighted moving average of volume. Notice when and how it penetrates the fifteen day volume curve. After an interval of observations U will be in a position to formulate U're own rules and adapt them to U're own trading plan.
BALANCED VOLUME * The dominant theory behind balanced volume will be that the trader assumes that large scale accummulation or distribution can take place in the market because the.activity wud have been done quietly. It is further assumed that it is carried out with small or deceptive ranges. The balance volume curve is used to illustrate the true state of affairs by showing whether volume is greatest during periods of rising or falling prices. When the bias of volume deviates significantly from the price curve, unusual activity is presumed to be taking place. Under normal circumstances, the balance curve moves parallel to price. However, when the curve begins to diverge from price, this divergence indicates accurnmulation or distribution. The bulk of the character of market analysis originates from the belief that " big-moneyed " traders consistently take positions prior to substantial price moves in any commodity. It is an old approach to measuring accummulation and distribution by the action of price and volume. Each day's closing prices is compared with the closing price of the preceding day. If the latest date has a higher closing price, all the volume of trading that day is asigned a plus sign. If the latest day's closing was lower than that of the preceding day, all the volume is subtracted to the accummulated running total.
2 !1ETHO:JS
23
COMrtrrATlOS OF Ol'.·i.iAl.A.'I:CE VOI.U!\11!
Date March 1
2 3 4
5 8
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May coco~ d:!ily closing pric:c
Volume (number of contr:tcts)
(cumulative volume)
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+3.000 +2,500 - 800 -1,200 +2.500
+3.000 +5,500 +4,700 +3,500 +6,000
Source: Forecasting Col"UTTodi ty Price.s Commodity Resc~rch Bureau The
accummulated total is the OBV.
The absolute level of the OBV curve is of no significance. The technician is only interested in the contour of the curve, when it is compared with tDe contour of price. Under normal circumstances the OBV curve will be parallel to the price. As long as this relationship remains, using OBV has noparticular intere Stt:l:fowever, when the OBV curve begins to diverge from price, notice is taken because many analysts believe that this divergence indicates accummulation or distribution. However, research to-day indicates that the profit-making ability of the large trader is impressive, but these studies have shown that large traders succeed mainly by trading short run price fluctuations. Such conclusions do not support the relatively longer term accummulation, distribution thesis on which much of OBV analysis rests. However, the fact that the OBV curve deviates from price wud signal and substantiate an upcoming price move at least to this author.
See graph next page.
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RESISTANCE Each day the trader calculates a resistance index in the following way. the no. of contracts traded divided by (high price)minus(low price)
\
2 METHODS
This ~atio measures the number of cont~acts that changed hands in relation to the range for the day. If the ratio is unusually large, it may be presume~ that unusually large transactions were c~ossing the tape. High ratios do not occur often, but they do stand out as spikes on the chart. Here, the technician believes that large transactions, by their very nature represent important and fa~ seeing money. Note in the illustration to follow ~~at all three figures greater than sixty, meaning that sixty or more contracts change hands per point range in price that all three of these high index days came close to advantageous buying or selling areas. There is no question that this technique can only be subjective and cud not be used effectively without information from other sources or methods.
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I
410
20 0
I
I
I
I
Ill I II I ll II 11 I II December 1970
l
I
Ill
Jonuory 1971
June 1971 live bogs dally cloae venus dally resistance
index for December 197D-January 1971.
Source : 'Forecasting Commodity Prices' Commodity Research Bureau
25
26
METHODS
INDEX NUMBERS
*
Another useful statistical measure is the index number. It provides a system for recording comparative changes at different points in time. Index numbers can measure any comparative of data, such as changes in copper production from year to year or variations in business cycles - deviations in commodity prices or any other quantifiable sum, reduced to a single summary figure to register all diverse activities e.g. Consumer Price Index ( is the most popularized index ) . Such unific computations can quickly reduce relative price changes and puts it with consumption or anything else U may wish to compare. Indices are especially beneficial in analyzing seasonal patterns.
STRUCTURAL THEORIES
*
SEASONAL PRICE MOVEMENT see
Chapter 24
TIME CYCLE criticism : not all the evidence indicates that cycles are a real phenomenon. Extremely sophisticated mathematical techniques have not supported the contention that repeating time cycles of any length are present in commodity prices. All of this is very open to divergence of analysis
WAVE
see
Chapters II & 24
see
Chapter II
THEORY
e.g. stair step principle e.g. Elliott wave theory.
METHODS It is an ~aea that a trend typically moves in three succeeding waves in the direction of the major trend and two as part of a corrective reaction in the opposite direction •
, .i ;·" , n ' .14N.
I
FEB.
:-:.•
2) , ...- , ~-,. I MAR.
1 ., Tj .-.-.
u
,.
.1UL.Y
I
·soYBEANS JAIL 1978 • CHl: ·-· - t·
t
au
27
28
METHODS
UNDERSTANDING GENERAL ECONOMICS
*
Comprehending commodity markets draws on demand and supply relationships for greater profits and basic understanding of these rudimentary concepts will facilitate the use of these principles in U're trading analysis. If U intrinsically fathom fundamental forces within the general framework of the economy then efficacious application of technical tools can give U considerable success in commodity futures trading.
CORRELATION ANALYSIS e.g.
*
the unpredictable ingredient -the government
The
f~llowing
legacy was advised by John Mitchell. " U'd be better informed if instead of listening to what we say, U watch what we do".
This useful legacy,that will certainly go unheeded by most , focuses on the attitude assumed by the successful speculator, when interpreting official manifestations. "Cynics survive" - the cynic recognizes that additional rules can be introduced into the game and takes them into account. The commodity does not differ from other markets. It happens to be one of the last ones to be brought under the destructive wing of governments.
MARKET THEORIES
*
There are natural laws and principles which govern price activity in the market place. Altho' there are many complex factors affecting the market, in reality there are only a few basic principles in price movements. Price fluctuations are merely incidental to the movements themselves. If the trader understands the underlying principles, why the market does what it does, he can proceed to trade in rythym, instead of trading according to what he/she thinks the market will do. The only thing we really know about prices is this - they fluctuate.
2
METHODS The simplicity of natural laws governing the markets is indeed one of the fascinating aspects of the commodity market. Laws:
principle principle principle principle
of of of of
rally and reaction * market congestion * fundamental influences * random walk *
FUNDAMENTAL ANALYSIS What can I
say ?
One comment : - the weakness of fundamental analysis is that U can never be sure if the facts known to U are all the relevant facts. The best analysis can be overthrown by changes in government policy, or essentially speculative decisions on the part of other investors.
Now, some conventional methods of forec<'.sting prices:
TREND ANALYSIS
Chapter 6
*
CONGESTION ANALYSIS VOLUME
BASIS ODDS
Chapter 7 Chapter 4
*
OPEN INTEREST CASH
*
Chapter 5
*
Chapter 5
*
Chapter 5
*
Chapter 5
*
50 %RETRACEMENT
*
Chapter 2
CHART FORMATIONS
*
Chapter 23
PERIOD OF TIME PRICE REVERSAL
*
pg. 501,503
29
30
~£THODS
SUPPORT AND RESISTANCE LEVELS CONTRARIAN OPINION
*
see chapt.
7
*
In using the contrarian op~n~on approach, the first effort, of course is to observe U'reself and the majority from a disinterested or unattached position. That step in itself is the most difficult to accomplish. Remember, with this thought, everyone agrees ..... more profits are earned by those who can accept the emotional risk of going against universal opinion. The public is not always right and is usually wrong. ( Always wrong ! ) Who buys at the top of the market and who sells at the bottom of the market ? the greedy and follow the mass type of trader. That's who When the general public learns about an opportunity, becum a contrarian • The reasoning behind the theory of contrarian opinion is simple enough. A bull market cannot continue unless new bulls can be attracted to the market and at higher and higher prices. At some point during a bull market there will be no more new bulls to be found and it is at these prices the market will end. U will have a rally with a 20 % bullish factor, but it takes a 90 % bullish factor to indicate a decline. And the reason for this is that the public has normally a bullish cast to it. When the consensus of professional advisors is the neighbourhood of 55 %, anything can happen and contrarian opinion will not help. If U do not really understand contrarian opinion, then by all means talk it over with U're broker. He will explain it to U - as it is a renowned technique of assessing when markets are overbought and oversold. Criticism : - points of extreme mass psychology of any commodity are quite infrequent. Even the most adept contrarian may have to wait a long time between trades.
COMMITTMENT OF TRADERS REPORT
*
The theory goes that since most losers are small traders, the safest position is the opposite of the market. The comrnittment of traders bulletin gives a pretty fair view of the general tenure if a market. How much of the open interest is hedging ? How does my position compare with that of the large traders? What are the small traders doing ?
2
METHODS
31
Spe~ulators are more likely to exit the market i f prices move against them than are hedgers who are making money on their cash positions when the price moves against their futures position.
The committment bulletin, altho' lackina in Predictive value. orovides a timelv and honest view of who is usina the market and at a Particular time. See
page 98.
NEWS * News is published in the newspapers. But, experienced traders act on it when it is initially transmitted by the wire services. Information available to everyone has little or no value. The futures market has an uncanny ability to "discount" future events well before they are recognized by the very many. Someone,somewhere, of course, must know something and have acted on that knowledge. ( This does not mean to say someone can control a market - impossible -but they take advantage of news via price trend expectations ) . Futures reflect their actions. By the time the majority learns a piece of news it is already too late. It is after the fact. The majority is always wrong. Considering the enormous amount of news and information that is recieved, - one can place very little trust if any, in this and these data. Big money in the commodity market is almost always made by astute persons who take the information available to all, make their own interpretation of it, commit themselves to the market and sit back until the market curns to the moment of truth they have foreseen which is their moment to take profit. Do not distain and do not wholly believe any sources of information. The best U can do is to review all carefully and make an educated estimate of their accuracy and more important, as to their eventual effect on the market. / The more information the speculator is able to accurnmulate, the more likely it is known to large numbers of people and the more information he requests in rendering a trade decision, the lower the potential profit from a current decision. Generally, the investor's goal shud be to achieve a workable approximation of truthfulness. Don't listen to tips. Always look for rather unusual pressures on the market.
32
METHODS
The underlying principle affirms that the public is usually wrong ir. ~~eir assessment of ~~e ma~ke~. They are one of the last to be aware of the news and react slowly to it and they are reluctant to devo~e the necessary resources to do proper research. The public tends to buy and sell with the news rather than against it. ( The astute trader considers " buying rumour - selling news " ) As the public becurns more and more fascinated with well-publicized bullish events, they equally buy on the first reaction, or topping formation - it's cheaper. Give some consideration to news or rumours, recognizing them as factors that may affect the movement of prices. But the trader must not risk money because of a news item alone. The astute trader will take note whether there are some other factors, such as seasonal odds, basis etc. which might drive prices in the same direction. To be a successful trader, U must outguess the market. To-morrow's price changes depend on to-morrow's news or anticipated news. the change is the weather, the released crop estimate, unforeseen strike, the release of trader committment report, registered warehouse receipts. From the standpoint of most traders, it is a matter of pure chance whether to-morrow's news will be bullish or bearish. Since futures respond to such news, price changes have an important random effect. The trader might list hard news items such as registered warehouse receipts and committment traders report to his trading program. The use of hard news data is one of my secret tools, in that, I sniff around to find out if perhaps copper or soybeans, or silver, or cotton or whatever, are likely to explode next year or the year after. 1 spend a lot of time sniffing around for hard data which will portray L~e potential for an upcoming major bull or bear move.
POINT AND FIGURE Many successful traders are both bar chartists and point and figure chartists, using one to confirm the other. About 90 % of the exotic formations of bar charting are automatically eliminated with point and figure charting. To a great many chartists, point and figure charting makes no sense at all. To take this view is absolutely ridiculous as it is for many point and figure chartists to feel that volume or time has no importance at all, either.
METHODS The t=ader must, if he wishes, choose approaches which he deems appropriate for the market conditions in which he is trading. For e.g. this au~~or finds point and figure charting incredibly valuable, sometimes in analyzing l) market topping formation 2) an emergence from a bottom congestion area ( particularily a saucer ) 3) how far prices will emerge from a congestion area 4) for scalping in a fairly narrow but well dilineated channel ( which is fun and profitable ) • However, some traders may feel that if they're using other methods_of approach, that the use of point and figure charting involves too much of their time and/or confuses their capability in coping with all the technical approaches which are available to him. For e.g. the following are an example of the myriads of pattens of P&F charting. _]:~
Tops ...... ::~ u • II.:.!.
,--
•!::~
..
i~!t!rn
Inverse I ulcrum
'lol
uru•u,
J
..
:•:•,u• :1 ~:::!: . '
. f't."l'hl~'l f-" I i .. _dl~
:·
i ,.. Inverse compound I ulcrum t:
.. r= m. I 'I
I'
• ::·! ~h_t:~,l.\ ' ...... I 1 :: . I
Deloyed encllnQ
I !~au.tu.l
I
I
I ;.
tt:!tU, I
I
I
,
.. .... ,.,,, _.. .._~!
I
I
::.,,
..-1-41" ~i
l
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I
iiJII:~-Heod one sroouldersl'jh .. ::::~·..,.
'.
I h~ .h·'~ ·~h':'
I I
~!lll
l.L.~:?
ll•v
.,.,~
.... ,, ,I
'!.~''
..
I Inverted v
·~
'1
I
.ti.!l'n.' I •. l\t 1
J
n:;..,
I
•:::.·.~ :;.:·~
=·v
I
Inverted
v
:•t""'''l"l jl.. i
jn
I
Duple~
.'bt 1
I
tu• '
'l
extended
....
I
I
j:
horizontol
I
11'1.=··
I
:
I 'i. t.t.:,. ::.t: ~~u·: ..r.=' It::. , i·r· I I II
:::
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~II.
I
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a""
J
-c:oP'rRIG'"'T ·MORGAN, ROGERS ROBERTS, INC. t!>O BROADWAY, NEW YQRI(., N.Y. 10038
33
34
METHODS The ?&F chartist makes two assumptions that the bar chartists does not. I) he views the volume of trading as unimportant - a mere side effect of price action with no predictive significance. 2) he dismisses the importance of how much time has elapsed as the price moves from one level to the other. Only one thing matters and that is the direction of price change. Since the topic is rather complicated author respectfully suggests that the talk to his broker for an explanation the books, which are available on the
and quite an art, this reader, if he is interested or search out ( the library? topic.
I have a couple of comments: - for some strange reason, I do not know of any P&F chartists ( where are U ? ) who consistently make money from the market. It's like a religion- all involving. And I tend to feel that these chartists cannot see the forest but for the trees. At one point in my trading, I found that my "point and line" charting ( ?&L not P&F) had the same effect on me. That I was so engrossed with the evolution of the P&L charting that I forgot the basics of volume, O.I. patterns, trend lines, hard news data, basis odds, cash, trend-congestion characteristics etc. - all of which are absolutely essential in appreciating price movements. As a further aside comment, my major concern with P&L charting (the topic of which will be explained later) is that it will evolve like P&F (point and figure) and that the trader will becum bogged down in too many wiggle-waggles and by seeing too much with P&L (point and line). In fact, I am considering NOT publishing this book for that reason. Who needs the fuss ? Do U get my point ?
One last comment: I prefer Point and Figure charting for long term trades based on settlement prices only.
2
METHODS
(~_
"'''"'
MATHEMATICAL TREND
"~--~
......,,
35
-·----~
ANALYS-~
... , ........... __________ ~-------------~---------------------------···
Well gang, this is where I cum in. At least where I carne in. Such was the birth of Point and Line Charting. I'm delighted to =eel that I am not really breaking that much new territory and that point and line charting has some historical support. Poin:: and line charting is based on "mathematical trend analysis" and mathematical trend analysis goes something like this. ( See chapt. 7 for a further explanation how P&L evolved. Our description of a trend and the interpretation of its characteristics can be made more precise with the help of some simple mathematical .\tools. We can "fit" a tendline to the price data using the least s~data, described in ~ny introductory stat~st~cs text. \ Unlike the usual trendline, the mathematically fitted line will not pass through either the highs or lows of the observed price movement, but will move up or down the middle lane.
)'v\ck.\,[ ~
'fQ:':Sf~~~.o~I'L- ~+'>'L-
uV!
r-..,\..,O'r\.;o
1
l-
0
~~0 (c~ol/ f~~~oL-c.t)
The first conclusion here is simply that a trendline and parallel channel lines can be drawn using certain mathematical rules, thus giving us a method that can be repeated objectively in the same way at any time. The onl differ nee ha cha tin makes with the above P ·L uses !) is that an analysis the mathematica re and ~~::~~~~~~~~~-;~~~~~~~~~~~~~~.This
gone over
36
~THODS
A computer can be programmed to carry out this operation every day, every week, or whenever we deem it appropriate. The mathematical =ormula that creates P&L is easy to do and takes about one minute by the time U have shuffled pieces of paper around and lifted the pencil. age 573. With conventional mathematical trend analysis, a second observation has to do with measuring the kind of price formation which has evolved or expect to evolve as in P&L. This formation is completely described by two characteristics of the mathematically fitted trendline and its parallel channel lines.
~~~ \
I) the slope of the line 2) the scatter around the trendline as measured by vertical distance
some thoughts: in general, with mathematical trend analysis, a trend sca~ter low. When a breakout occurs from a mathematically defined trend channel, this breakout augurs a trend-reversal or deceleration of the existing trend or a sideways movement.
is more likely to endure if its slope is high and its
Enough of this ! U will see it in chapters nine and thirteen. u v.•ill very likely be astounded with P&L.
PREf'ld UMS Premiums exist whenever forward contracts trade at substantial premiums over nearbys (backwardation}. Then such premiums may appear to offer an extra incentive to sell.Whenever, forward contracts are at a sizeable discount to nearbys, then such discounts may appear to constitute an extra incentive to buy.
2
METHODS
REGISTERED WAREHOUSE RECEIPTS
*
( available each morning from wire services The receipts show how much is available for delivery at a given time. I= the producers of e.g. lumber have registered hundreds of contracts for delivery it means no one wants the cash product. If no one wants the cash product, why buy the futures contract ?
other methods of forecasting prices and their sources .•.•• Make a list and_search them out on your own. U must have some favourites somewhere. There are thousands of them, u know.
37
38
MARKET PLACE
CHAPTER THREE
I WANT U TO MEET THE MJ\RKET PLACE
:the c.ommocU:ty maJtlz.e;t -
oppott.tu.rU.:ty lz.noc.fu
why inveo.t in c.ommocii;tieo .o.toc.fu
v.~.
c.ommocii;tieo
.o pe.c.l.U.a:tiv e ac..tivi:ty c.oY!..6pinac.y
b~olze.Jtage.
.the.o~y
bu.Qineo.o pe.op.te.
.the. mi.oh-ma.oh o-6 :tlta.de.M maJtlz.e;t e.mo.tio JU
wlw...t doeo .the. t)u.:tu.Jte ho.td £otr. c.ommocii;tieo ?
THE COMMODITY MARKET
OPPORTUNITY KNOCKS
Year after year there is an opportunity in one or more of the commodities, as a minimum, for returns of hundreds of percentages in invested capital. These opportunities are not really that all exceptional and they continue to occur and re-occur year after year. ( What is exceptional is to have the patience to wait for them and when they do occur to have the patience to stay with it.).
3
MARKET PLACE The value of the commodities traded in 1973, in contract value reached 500 b-i...t.t-<..c 11 dcUa..rV-J, and in 1977, on.e. po-i..nt f-i..ve. TRILLION ,,,,,which was in I973 approximately one third of the entire gross national product of the United States, and more than the value of all securities traded on the New York Stock Exchange.
Now, ain't that sumthi'n
Yet, commodity futures have not touched ten percent of the number of traders who participate on the American Securities market. It is estimated there is a minimum - I repeat - a minimum ( maybe I shu d publish this book ) - of 500, 000 active commodity traders in the U.S. alone, and that there are as many as 2,000,000 Americans who actively and inactively i_nvest in the futures market. Half is contracted on the Chicago Board of Trade ( C.B.O.T. ) - between I/4 & I/3 on the Chicago Mercantile ( C.B.O.T is 25 yrs. old, Mere. is 54 ) - and the eleven other remaining commodity exchanges absorb the remainder. Commodity trading has been around since 1848. Nowadays, the over-all more than ten days. If approxiamately 98 % of when delivery is to be
average transaction probably spans no all traders are taken into account, contracts are offset prior to the time made.
The commodity market can elevate the trader to a high financial status , but it also possesses the power to humble the mightiest. The humbling power of the market can make U tremble and demands respect, even from the most successful trader.
v:i th all this fancy information U have just recieved, I suppose the question cums Wellllllllllll
11
Why bother trading in commodities ?
11
39
40
HAPJ\.ET PLACE Midamrr1CI Commodtry
Eachanqoe
!..o!!J!~"' Silwer ;l~er
a .:zos eo.eoo---09:?_______ -----------, 1
~3
cotn\
;;;.~~;-
~~.;-~-
~;;,"--------
12.2"79=----~.~------- ---2:132 _ __
totol
2J5,3si- - - - 11'~?-~--=
pork beUtes
2.294_ _ _ __ 119.168
MinMa_po_l••------~.,"heit Grarn Exch•nge
total
N~~.-..~Y~o-,~~-------~.=cc~o~•~---------~27~84i-~-----
-===~--------~27S.416--Coco• Exchan•j!CJO!__ _ ____:t:::otal _ _ _ _ _ _ _ _ _ _.;.: New York
~9''·
Coffee & Sugar
domentc sug•r. no. 10
bchanqe
coffee
no.11
87S:i7e 1~ ~4
7 .u60
total
902.48:;:2_ _ _ __ :65.372
New York Cotton
~tton
Exch1n9e.
froz~n conc~ntra&ed
Citrus Anoctates. Woof Auoc•ates.
~~9:!. ;uic_e __________;1c:2::,::3::.,.4~9::;3;----
lPG
AI\OCIIIts,
!!!!~~------------=-3"::.7:0::7~9----P•opane 925
Tomato !..0"'110 P•!•~n~·---------:-::,-.,li:-!00:::-----Producn As.•::oc:::::••:;•::••:.__ _ _,~o:.:.t•:;l_, _ _ _ _ _ _ _ _ _-:•~93,668,_ _ _ __
tnd
oo'!!!••:.:.•o::::•~•'--------"'-"4:-:5._6o3~----
New York
ma1nt
MercOJntilt
pl•unum
Exchange
siher co•l"'t plywood
imported frozen bonolou beef idaho potatoes apples total
1S9.272 26.~37
~ .020
954 489
0 437,7~
P.ciftc Commodrt1es
~onut oil
1 .812
Exchan9l.lnc.
toul
1,812
T~o~·~·~~----------------~·~ll~co~~~~·~··~----------_!1!8~.3~3~2~.0~5~5~-------
1973
,Soybean a Sliver
WI\U.t
lntemauona• Money ~•nOll
Pork Bellies Soybean Meal
Coopo• Uve Hogs Conon
Su;ar Eggs
Cocoa •~d
5113.14&.&59.000
ss.ua.•s 1 .eoo
Com Canlt
Broders
Colt.. Silver Cotns Lumtter
Potatoet Plywood Frozen Con. Orng Jca Piabnum
Oall Prooane Cocomll 011 Stud Lumoer Frozen Bone••• 8eef Wool
Gr••n Soronu,.. Plllllchum Sktnrwte H11r11 Butler Mercury TOTA~
5 ••,, •.039.500 •a.5t1 .•00.562 •1.077.600.200 36.830.000.000 25.Q60.600.00C 23.805.•, c. 190 11.•53.300,000 13.558.' 18,630 13.388.728.997 12.198.000.000 11 .617,398.530 8.266.058.247 7.221.251.865 5.071.500.000 • .•50.106,025 3.558.292.•60 2,753,502.815 2.85S.037 ,470 UH.700.000 1 .MO.oco.ooc 1,210,188,t40 1.144.251,000 250.000.000 118. t22.000 101.500.000 74.8'72.914 15.000.000 44.111.052 1•.365.250 268,118 263.114 7•.100 1520.131 •• $6.071
3
Ea ......,.
1117 1171 Z3.018.W 27.365.51111 7,871,247 15. 171.3&C
Cha"ff
U26,0112 U73.5oll 2.121,118 2.066.115 - . c . ec.mn-y Eact~anoe (MocWnJ 1.~1.20e 1204.&20 \'on: ConOft Eactla~~Qe (NYCE) 1,202.&07 \ ' - CoiiM anC Supat Eact~anoeiNYUSE) 1.215.162 127,052 684~ '1'- Metc.t- Elldiii~~Qe (NYME) 117,137 KaNU c.y iloatO Ill l . - (KCBT) 755,148 .......,.._ Gr..., £acllange (MGE) 111\,13-1 2&e.:n3 307.1111 222.732 .,._ c - Eact>anoe CNYC:OEl C,II0,211 11,477,111 T-IU.$.aa--t
+St.s•.• 2.7% +18.1%
ChcaOC iloatcl d T,_ !CST! a,w,....,... a-~ ICME)
O>cagc
- - - ......._... ___,---..- .-c Comtnoany E.achanoe ICatne•l
•ts.r• +82.1%
- 1.5%
+35.4% +22.5% .....h.
-27.ft. +MA%
----•The "'iop 10"' commodities traded - - - - • Aa•
1171 I
2
Aa'* 1117 1 2
• ' • • • ~
•5
7 I
10
5
6 1 I 10
Commoafty
-•tCBT) Wt>eaotKCBT) Wt>eao IMociMI) -IMGE) ComCCBT) GomCMICIAtft) Om (CST) Oats (MociA.m) S.O,.O.ano (CST) S.O,.O..na IMociA.m) So., OiiiCBT) S.O,.O.an meal tCBT) LhreiiDQ. proo-. L.NacaNe(CI.IE) LNa carua IMociA.ml " - CoiN& !CME) I.NaiiOQSICMEJ I.Ne , _ (MocWII)
&.161.0115
1.110t,78t 5.3C2,C»S 2.131.517 2,7110,40 2,535,(146 2.313.453 1,457,036 1.351,130
&.8&1,151 &.383. !21 5,&57,428 3,801.124 2.1011.2&-c U13,085 1,153,5&1
ews ICMEJ I-
Ftash
1171 2,5$&,11)1 7Ss.t•fi 20S.&28 2114.313 &.127,019 256.022 215,17• 1,423 1,417.277
2.&35.~6
!1194.832
- 10.0'10
2.90t.2fo< 2.413,086
.. 14.1%
$.603.375 !iof.Q5ot
•1122"4
2,373,.453
2.831.5'7 133.274 1.307,712
1511.32•
130,042
eon.. C (NYC&SE) 214,202 s..pat • 11 INYC&SEl 1 .055.11&0 15.&76 Supar • 12 INYC&SE) c-(NYCGE) 307.&28 " ' - (NYCoE) 53 IC:IIIlo ...,._. (CME)
561.181
~(CST)
Sla.770
281.483
"'-ICMEl
.a&,llll1
560,3158
1187
U72
Si..o-ICMEJ
a.n.
.
6.0".0
+116.2"4 .. 21.4'10
.
5.nr.
1.~
CMnr
.. 4.1% .. 11.7%
+241.h. + 20.4%
+114..5·· .. 36.4% .. 14.1% .. 5.1% •33.2% + 1.2%
......
,.77
1171
Clwoeo
Gold (CBT) 13,151 2.&50 Gold·-· 1 Kg) GoiCI CMICIAin. 33.2 a:.) Gold (IMM) 1101,1110 GoiCI (NYME. 1 Kg) 1,017 GoiCI(NYME. 400 a:.) 2.633 Gold (Comax) 881.5$1 5-.!CBT) 2.257~8
56.470 3.214 41,138 2.114,$72
•31o.5% .. 2\.3%
. s- (lollcWft)
..
35~
6.2% &.2"4 +111.2"4 .. 15.0"4
-Z3.5'lfo
3.1'10
.. 311.5% - 27.1%
5.1% .. 311.11% - 24.5%
- 21.1% .. 15.1%
378.~11
3&6.SSS
Zinc (Comax) GNMA COR ICBT) GNhiA CO ICBT)
CorM>eroao- (CST)
T~ICBT)
3.122.08S
m
1.123
45.227 405.552 1.070.210. 1,4011,188
FI""IICial lnctrvtnltfllt
-.
: ~.·
•ZC»A -38.1%
..
.. - 25.,.
- 36.ho +126.5'10 •Z28.t'lio .. 31.5%
677
422,421
153,181
3.553 32.101
18,7&7 555.350 7&&,352 5.512
(,3%
+211.2% +1'1..1\0 3.1% 7.0".0
'=' ... 120.0"4
&.532
T-Dills CCME, 1 3 - ) T-llilta ICME. !.,.at) :J-1 inanciaJ
321,103
.__
'7711.771
2.305.1174
71.701 1111,13f 134,3&1 2;112' 3,150 82.261
243,337
+2C».2%
20t,ll03
.. 2ll.t'lio
400.$oll 3.515
•1111.1'10 .. 27.5% .. 41.2% +3oiOA 6.3% •200.4'lr. •118.5%
-""
~a(aUIMM)
Canacloan oouar
o..•• ~
-
624 2.746 3,742.0111 2.551.133
Silwer (Conwl) 3.513.301 U . S . _ , - (CUE) 371 U.S ....., ...,,. (NYME) 1$,514 P-tNYMEJ 118.1171 Plalftlm (NYME) 122:124 ~r(Catne•)
•326.3%
-
,.
4!io4,11S 1.155,1101 215,405
;..a
-
• '1&3,11511 1,016,773 2U7S 222.732
478.558 826.3115 (NYCE) 317.821
..-a-(HYME)
.. 35.1"4
+ •e.s-.. .. 22.oo.;.
.... _.,..,.
80
Rooond-
• 40.•,., .. 22.5%
1,767.&34 115,827 1.442.3&2 5.170 74.&&oc 73.210
4,727
CoiSOftCNYCE)
a..,..
,.77
1.351,130 Peon< coetooes ICME) Bonelas.s -1 INYME) 2.&80 ....,-..s!CBT) &f,W
w-
11.472.21»
5.812,130
1,120,7ecl 617,122 151.433 111.134 5.021,1127 2110.25a 10U170 1,172 7,1111&,138 1,\04,7:!
Gralft&.ol-.sa
FC or-...
Total "'OuuM 1t71
1.100,102
1978's big volume gainers: Gold, currencies, cattle, Interest rates
......... "',...........
Foe<~.
Total ..,.._ 1177
o..tl DUIIcfer
..._,.., l'reriCIItranc
......
1'7.o211 105.11611
3&2.100 17.127 321.338
'fDiallloAI- 5U.428
1.5&3.De\
...._"_ Sooiu ~!frio
Source: Commodities Magazine 219 Parkade Cedar Falls 1A 50613
•134.2'1oo •1115.1"4_......
...
42
M.~RKET
PLACE
,gn Futures Tradins volume
E•chah9f
Chicll90 Board of Trade
ConlYIICII
-......
4.043.474 1.942.120 1.110.776 8!1!:1.813 813 ..192 630.916 217.63! 36.282 23.264 411 9.67•.179
froten ~rk bellies liYe cantt
1.370.471
tor beam cortl
.......
IOYbe•n oif
silwer mbean tnaal
P'V"""""'
iced broilen nud lumber
Cbicavo Morun1ilt bchonvo Oftd lrnemat.onal MDMtoiY Morket
li••
hop
''""tORS Junat.r
66.539
IWIII frMC
brrtisll oound
1~.790
di'U'Dcht tnartr:
meaac.n oeso iiwe feeDer cattit idMo CtOtltoes
tr•i" aorvhums italian
hr~
frozert eops fro~tn.skirlnecl-
tDUI
eo......odoty
sih•er
E-ltfO.IIOC.
copper
............,
fOUl
Comrnorcaat
clutch ouildtr iuhan hn
Exchan;t
fisttmeal
beltiaf'l irene
;..,.,.._veft I>OOPtr tWill franc dtu'IICI>t merit canadian dO&t11
british
DOUftd
conon...ctojJ
pork bellies frtiiCit mnc
....... IOta!
"-•City Boaftl of Trotlt
~3.257
47,.948 4:3.989 33.807 12.320 17.722
iaca.antM v•n cat\adtan dollar
tnnl'ftlttOf\al
2.0!17.~
rain aorthufftt total
9.717 7.423 6.137 1 .35<1 !:92 85
2 •.67%.218 81!:.166 251.219 1!:5 1.066.502 8.751 8.027 5.700 5.184 2.451 696 70 25 12 10 4 2 1 30.133 292.921
2 29Z.9Z3
3 MARKET PLACE
43
WHY INVEST IN COMMODITIES One reason is that ..... governmentintervention in our lives presents a strong case and only thru the ~utures market can u get ahead of ( let alone keep up to ) inflation and many other detrimental affects that government may have on U're life; without tying U'reself down to capital assets, like real estate, with the concomitant lack of liquidity and less potential for return on U're hard earned dollars. Being aware of government intervention in our economy makes U a more intelligent and perceptive investor. After a shot or government intervention markets energetically re-assert themselves. They always do, and thru the futures market U can go along for the ride. Also, for those of U who do not have the capital to purchase real estate, but may have - say, $5,000 - there is a chance just a chance, that with judicious application of technique, effort, discipline, and patience, knowledge, experience, U cud have one million dollars in five years. And, at all times U are liquid and u are U're own man. ( U can't do that with real estate.) ( Am I wrong-Ureal estate people out there ? ) . The amount of money required to earn substantial profits from futures trading, by necessity, in my opinion is minimal. I personally feel if U cannot turn $I,OOO into millions in U're lifetime then U do not have an effective plan. There is no reason for U to have a lot of money invested in the markets. To start with, a maximum $5,000 is all U need. When U are trading in the stock market U are working with 40,000 stocks and more choices. In commodities U're pract~cal choices are usually fewer than twenty. With commodities U are dealing with real things, real prices, real supply and demand forces. There is always a buyer for commoditites. The same can not be said for some stocks. I like the flexible nature of commodity trading. U can trade long
u can trade short, commissions are low. With astutue trading U can make money in any direction that the market takes.
/
If U are a young person, in a hurry, - U'll find that no other investment will return the profits in such a short period of time, as in commodities, and the sky is the limit as to how much money can be made. - huge sums in a week. - ( I have made $300,000 in one week. - in fact, I have day traded and made [lost] $90,000 in one day ) •
44
MARKET ?LACE
Satisfaction in trading commodities is incredible. ---- the excitement, ( U shudn't let it get to U, tho' ) , the involvement, ( why else do U think I write this book?,) the freedom of movement, the financial security that cums to those who are successful, the identity which U will have within U'reself, that U·re playing the game and winning, and shrewd enough to do so. U're dealing, basically, with many honest people. U're dealing with an honest thing. ---- the market price . - the harbinger of supply and demand. U get to know and understand people. ----- get to know and understand U'reself. U will never have such an insite into human nature as when U are successful. And, what characters inhabit a commodity broker's office U have statistics to work with. Historical stastistics with which to compare existing day to day statistics. Commodity prices to a considerable extent are predictable in their relation to cyclical and seasonal patterns. Commodities display distinct, general chart behaviour and-distinct day to day momentum rationale, especially with point and line charting. Commodities will see U thru a market crash and depression, if U are trading effectively and are in a net short position, and flowing with general market forces, - upwards, downwards and sideways, all with the potential of incredible profit. My personal goal is to make one hundred millions dollars in commodities futures trading and keep it. Why not join me
STOCKS VS, COMMODITIES Commodities are different from stocks - because commodities / usually return to a profitable price. What do we mean by that? We mean that if U were to buy or sell short, in an active commodity - sooner or later U wud make a profit on that trade or its accrues successors. So remember, commodities usually ( not always ) return to a profitable price. Commodities generally perform far, far better than most stocks. So much so that in fact I am always befuddled by the lack of public appreciation of the investment possibilities. It can be stated that commodity prices do vibrate more rapidly than the price of most other investment forms. But, this can be taken only as an opportunity to make money, ( with an effective trading plan ) .
3 !1..2iRKET PLACE
Here's some food for thought. - The commodity futures market is a contrast to the American Stock Exchanges in that - is not going long the futures trading contract tantamount to betting against the productivity of the American farmer ? Think about that for a moment. ( Not that one shud go short futures contracts just to be patriotic, but one shud certainly not distain the short side as to avoid the unjustified astigrna described to common stock short sellers ; completely the reverse is true for stocks, of course. ) It has been said that the beginning trader always moves from the stock market to commodities because I) he realizes that's where the action is 2) he no longer has enough money to maintain a stock account. And for this I say whoopeee ! All he/she needs is $I,OOO_to $5,000 for commodity trading. - i f he/she behaves himself/herself. When U trade in the stock market U're working with 40,000 choices. In commodities, choices are usually fewer than 20. Stock values are not real and tangible. They are arbitrary and emotional. They are set values by the traders themselves and not by outside supply and demand forces. Stock markets exists only by investor's dream of rising prices. They're hoping to find a greater fool who will buy their stock for a higher price than they paid. In commodities, half the traders want the price to rise and half want them to decline. They can make money either way. commissions ) of commodities ( which is less The execution costs than stocks gives U more flexibility in getting in and out of the market. The price of a commodity is set in a grocery store and not in an accountant's earning report. There's no board of directors to keep information to themselves and no watering of the stock. It means that commodity trading is basically more honest and fair. have specific statistics to work with, in.predicting pricesnot things like price earning ratios or the past history of a/ given company, of the fact that it has just merged - big deal !
u
Profits are super-abundant. - sometimes Stocks, some of which I still have, - u U break even. Commodity trading is more required to be on the right side of the but in common stock investing, everyone all will sink or swim together.
overnite, in commodities. hang on for years until fair - some skill is market, at the right time, is in the same boat, and
45
Some other ways inwhich -:.:,e markets have been found to diffe!iagree are as follows : The rando~ walk model has been found to not hold when considering price changes on the N.Y. stock exchange, but this exception cannot be confirmed by commodity prices. Both markets are active overnite. Both markets react to a flow of unexpected information which continues throughout both day and nite. It has been found that monthly price changes of company stocks in the same or related industries are clearly positively correlated. A similiar result has been found for inter-related commodities. The price for neither market seems to be significantly related to the general economy, except possibly in the very long run. A rough measure of excess speculation is possible for commodity markets, and an corresponding measure is practically impossible for stock markets. In commodity ·markets, there are real forces for supply/demand. Producers supply a real product to the market. Cons~~ers buy this product. Stock markets differ in that the supply of shares represents only a small proportion of total volume of trading. What trading does take place is of the supply/demand for existing shares and these shares constantly alternate between buyer and seller. Whereas a clear relationship between the volume transactions and price changes is found for stock markets, no such relationship is found for commodity markets. The commodity market is almost a perfect auction. While the stock market is less than a perfect auction.
3
The commodity market features trade in cash as well as in futures contracts, the former being influenced by the latter. In contrast, the stock market is traded primarily in stock certificates with futures trading relatively unimportant. So, remember. We're dealing with real things here, in commodities - not pieces of paper and u can and shud make all the money U ever dream about - but, I advise U to stop dreaming. Dreams are what fools are made of. I wud rather U think of it in practical terms of an eventuality, that will occur. The futures market is not for dreamers. Success is to be experienced, when U have that million dollars, two or three years down the road. There will be no dreaming then.
WHAT THE MARKET PRICE IS LIKE First of all, we've got things like - I) prices do not rise for ever. - 2) U've got one ultimate market top and bottom for a given contract life. 3) bull markets are similiar to most living things - it consists of a slow start - a gradual acceleration in growth that terminates at maturity. A study of market action is an investigation of people interreacting in the general market. Since we cannot insert people into test-tubes to research their psychological behaviour, we can only use proxies. - prices, which provide a means to measure the results of people's reactions. It has been said that all of this is like gambling. It has been said that people don't like to admit the truth - that commodity trading is gambling. - taking risks in the hope of making profits. As far as I'm concerned, U take a risk the moment U get in U're car. - but, U know that if U turn on the key and govern U'reself accordingly, the risk iS minimized and ~~e same with commodity trading. I do not see how in any manner of speaking, commodity trading can be considered gambling. If U drive recklessly, U will bomb out; if U drive responsibly, u will be on the road forever. All traders do not agree on the likely outcome of future events. There are buyers and sellers - equaling each other - in the commodity markets and the differences of opinion creates market liquidity. Boom or bust doesn't matter - both furnish opportunities to garner profits, as commodities are excellent vehicles to operate in, during any economic condition. Every sale, except
48
MARKET
?~ACE
those where a physical commodity is delivered consists of a buy order and a sell order at different times for the same trader. Every position must be offset. It matters not which side of the transaction is initiated first. For those who are squeamish to going short, I shud point out to U, that U go short more frequently than realized on many ordinary daily transactions. Credit purchases mean u are short cash, - long merchandize. Once we understand that either side of the transaction can be originated first, we open ourselves to many profitable opportunities and accordingly, recessions, depressions and booms offer many opportunities to scoop up profits.
SPECULATIVE ACTIVITY It has been said that it is debateable whether the amount of speculation, with all the associate effort involved is a worthwhile use of a nation's resources. It can certainly be argued that a certain amount of speculation is of value, but beyond a limit, speculation can be said to be excessive. However, if excessive speculation exists, it will be restricted to futures, not the cash product. Futures can influence cash, but cash is the ultimate judicator. While a rough measure of excess speculation is said to be possible for commodity markets, a corresponding measure is practically impossible for stock markets. So that the futures market offers the astute investor the ultimate vehicle to take advantage of a speculative fervor, when .it exists, which is not that often. When futures are speculated out of whack with cash, then the top or bottom of the speculative move is soon approaching, unless there is a genuine shortage or surplus. The word speculator has a nasty connotation these days. - that speculators drive prices up ( critics of speculators never seem to say anything how speculators drive prices down ) • All I can say to the critic of the speculator is "prove it" . - prove it, and, not to me, but to all the experienced knowledgeable, honest individuals in the commodity futures business. I am sure they wud be willing to agree with U, if it can be proved. Usually, the person who has this disquiet towards the speculator, will have the personality traits, and characteristics of the persons portrayed in the chapter on winners and losers.
3 MARKET PLACE
Remember, that it is the "cash" price, not the futures contract which is the ultimate determinate of prices. If the speculators have bid the futures out of context with cash, they will pay dearly for it . This is something that those not associated with futures do not understand.
CONSPIRACY THEORY I am not a believer in the conspiracy theory, that e"ileryone is out to get V. It is negative thinking, which is non-productive thinking ( and is contrary to "Drummond's Law" - cuming up later.). If U think that the brokers, hedgers, and large traders are out to get U, U're probably right, because if U think that way, it will probably happen. Whether it really happens or not is beside the point. It's that U think it happens, that it happens. Take U're "stops" for example ..•.. U will eventually get U'reself stopped out without their help if U put them in the wrong places. It's up to U, to place stops where normal market forces e.g. random walk, - won't grab U. ( Look in this book for suggestions on stops. I am convinced that the commodity market trading is more open, honest and above board than stock market investing; and that there are far, far less crooks in the commodity empire, than in the stock market and equity, capital markets. There are little devils all over the place, of course. But, there's no need to be paranoic about it. Just because u lose money, it's not these little devils U know. It's U ! Maybe the floor brokers, possibly U're broker is a little devil. Why don't U becum a little devil U'reself and find out about them. In this book I will tell U a few things about them and how to handle the situation.
DISHONEST FLOOR BROKERS As a result. of Hutchinson, Leiter and Patton in the years before the turn of the century, when they committed short term price distortions, the effectiveness of " cornering···~ the market has diminished. " In the spring of !977, three C.B.O.T. soybean floor traders, a broker and a customer, were charged with many offenses. The indictment charges that under the scheme, the three traders exploited public customers, executing orders to buy s~ybeans at the high end of the market's opening and closing price range and executing public sell orders at the low end of the opening, closing price ranges. Sources in the United State's Attorney's office asserted
49
5~
~~RKET
PLACE
that the three traders typically took their profits on the positions established thru the bucketed orders, by reversing them thru pre-arranged trades, at favourable prices that occured earlier in the day. According to Board of Trade insiders, prearranged trades are relatively easy for floor traders to pull off. That's because trades for their own accounts aren't time stamped and immediately reported as are those executed on behalf of the customers and commercial hedgers. Also, commodity exchange ticker-tapes report the price changes and not individual trades " - Wall Street Journal, Monday June 20th, I977. Personally, I have seen the unprofessional attitude of some floor brokers. I cud hardly see how some of them cud be considered winners. Many are at best, YaHoo's. ( I'd better keep my identity hidden, eh ? ) On one visit, to the C.B.O.T. floor, I commented to a broker that I understood it was illegal for one floor broker to examine another broker's order book. He approached the nearest broker and asked for his book. The second broker reached in his pocket and handed it to him. I am given to understand that this practise is not that all uncommon. What these brokers can do is, and how they can affect prices is presented elsewhere in this book. But what the hell, why not ! These poor dears can have a bastard of a time in there, in those pits, or whatever, and the more power to them if they can add a little bit of advantage to themselves because we know they cannot control market forces, they are just a part of it. How many of U out there in this wonderful, wonderful world have never done anything wrong. Personally, I luv it when I get twenty-five dollars change back on a twenty dollar bill at the bank. ( Actually it still bothers me that I didn't go back to the teller.) I personally feel that shady floor brokers are just a little drop in the bucket. And, don't forget that floor brokers are on both sides of every market. U do not have situations where everyone on the floor is long or short and so ganged up against the unsuspecting p~lic. I do not accept any conclusion that there are more crooks on the floor or elsewhere in commodities than there are in the stock market or other investment activities. - and I hold firm to this opinion, and that includes governments, in spite of what the socialist says. ( I have yet to meet an honest real estate broker, -pardon me, I just met one. ) ( For that matter, an honest president of a country. )
3
BROKERAGE BUSINESS PEOPLE IN GENERAL I have only one comment : - U will find that U're commodity broker will never, never, never, never, never, thank U for U're ~usiness which U give to him .
THE MISH - MASH OF TRADERS 7 5 % to 9 5 % of a 11 commodity traders lose money. U will hear this repeated tirne and time again - by the many aav~sory services and advertisements anq books and this book. It is true The large successful speculators constitute less than 2 % of the total futures trading population. I hope U becum one. The average speculator, however, - the 98 % - is 45 years old, earns S 35,000 per year, creates contracts in two's and three's more than likely resides in California, Illinois, Texas, Iowa, Ohio, New York, - two thirds are college graduates and therefore experts, -5 % are female - one third are professional (doctors) IS % are farmers, feeders and processors. I include farmers, feeders, and processors because they are not of the 2 % who win as speculators and are involved basically in hedging only. - whose purpose is not to take advantage of speculative runs, but to protect "cash" A lot of the successful commodity traders go underground or overseas to avoid taxation. It is sad to say that sorne of these successful people are forced to leave our country, and take their money with them ( it's called the Italian disease.) But that's one of the outcomes of taxation isn't it ? - to punish - and on a graduated scale, one way or another the harbinger of creativity, - success. The Riveria now houses some successful commodity plungers and their families. /
All public traders, as a group, hold 46 % of the value of all contracts, and their gross profits are zero. And, substantial losses occur when commissions are included. On average then, the small trader has the expectation of losing money, the losses over a reasonable period to equal commissions. The small trader usually will not require a history of profits in order to continue
32
!-!.:;RKE'!' ?:...;c::: tracing. '!'he explanation of this phenomenon is that !) the needs of the small trader appear to be
met by merely playing the game 2) they may continue to trade because they continue to believe they can forecast prices. 3) the small trader may continue because his group is amorphous and consists not of a crowd, but of a parade. 4) a small trader is forced to withdraw and is replaced by new blood. And, a successful small trader becums a large trader as a result of his competance, and in sticking to a well - conceived plan. To get a further idea who U're fellow - traders are - wait 'till U get to chapter I6
MARKET EMOTIONS " M.en do not t:!:"ip over mountains ..... they trip over mole-hills " - Confucious What I wud like to put overy every page is " Keep Things Simple " It is the small mole hills of managing our approach which causes the most problems, by way of not keeping things simple. Most technicians are not happy until they've cluttered their minds with every technical tool available. Comrnodi ty education is extremely worthwhile, s·ince it enables one to evaluate a great many things one reads, and also teaches patience, perserverance and control over other human emotion~ The difficulwis not really in obtaining, deciphering and analyzing information. Many analysts do well here. The problem centres on the trader's thinking processes, which are sometimes coloured and dominated by motivational factors that may have their roots in child-hood experiences. Thru self analysis U will discover the nutritive source ( see chapt. 18 ) of these adversaries and when U do, tea+ them out ruthlessly by their roots.
3 !1ARKET ?LACE
53
I' 11 tell U what nearly eve::::-y comrnodi ty trader does on a consistent basis. His mind sort of goes numb. Something happens when he/she has the slightest bit of success ---- seems to be a self-destructive process that immediately takes over, bringing forth many of the old, bad, behavioural patterns and bad approaches to the market, which was alleviated when he/she had his moment of success. A trader often gets into a market position and becums hypnotized by the event. U get sinking feelings. U feel the market is out to get u. U can't believe U're making money. U can't believe that U won't lose money. All of this is eliminated by an appropriate trading plan. ( see chapt. I3 The best advice I can give U is to take the care-free, easy-going almost bored approach. When I am trading, I ask myself one question.Are U bored? The next question I ask- "Are U trading according to the plan I " I like to sit back and say to myself, " Isn't this rather nice. " - " Now, how am I going to celebrate when I make that one hundred million dollars ? " . I suppose by the time that cums, I'll be bored with the one hundred million.
WHAT DOES THE FUTURE HOLD FOR COMMODITIES
I
suggest
?
U take a quick run back to pages 40 to 42.
Personally, I predict wider swings in market prices as they take off on major trend runs. ( Unless of course, we shutter down into a meaningless, protracted depression horror. ) This will occur over the next fifteen to twenty years, until Mother Nature has done her thing with sun spots,oil, population explosion, socialist debilitation - whatever. Chaotic times are ahead. However, we must remember that we do not careif markets are going up, downwards or sideways ! All we have to be concerned with is making and keep in our money ! if it' 5"" money U want. And, I predict that commodity futures trading will be recognized as a superior investment model as the years pass by, partly as a result of education of the public and the evolution in technical analysis and education that is now taking place, which is what we want- to increase liquidity. Unfortunately, however, I alse predict that the brokerage firms will not be able to efficiently handle the avalanche of business which will hit them, because too many commodity firms are commodity oriented and do not have sufficient ordinary business accumen in the higher ranks of their organizations, and many will go bust. Too much of a good thing. Stick with a large firm, and maybe spread U're business around, in case any one of them displays their ineompetancy.
54
CHAPTER FOUR VOLUME c..JvLt.i.qu.e
d.o.u,J.. Mca.:t<.o n
vol.u.me .<..n c.o ng v.. ti.o n vol.u.me .<..n t:Jtend vol.u.me J..n
b~eakou.t anaiy~J..¢
anal.y~~
p~c.e ~eve.Mal. anal.y~~
J..nt:Jta. - da.f! volume
a.na.l.y~J..¢
I respectfully give credit to Anthony M. Reinach, author of "The Fastest Game in Town - Trading Commodities" I973, Random House publishers, on whose work this section is based.
CRITIQUE Altho' technicians seem to sense the significance of volume, they have produced very little in the way of satisfactory studies on the subject. Perhaps they wish to keep the secret to themselves. Volume action can be vital in solving the market's otherwise unfathomable mysteries. There is a reason for everything. To locate a reason, one's best resource is his logic, and, this is particularily true with volume action, because so little has been
VOLUME
55
"'·:d 'tten about i 't. Clues generated by volume action are especially
valuable to those who are alert to them, because so few do perceive them when they occur. It is a rare head and shoulder that is overlooked by the fraternity of technicians. In contrast, volume action is seldom given more than casual notice by even the most diligent technicians. The greater the following, the less golden the opportunity. Conversely, the smaller the following the more golden the opportunity. So it holds true with volume watching.
" The economic facts of life are many. The grandfather of them all i:s the law of supply and demand. " Anthony M. Reiuach, The First Lew of Economics, Essays on Liberty, Volume IV, The Foundation for Economic Education, 1958, page 38.
This law is temporarily repealed during all the emotionally fueled markets. What signals the law's repeal ? Volume action. What signals the law of supply and demand as a potent market force ? Again, volume action. On the surface, volume action, like the temporary repeal of the law of supply anddemandmay seem ludicrous. It is not. Successful traders are invariably humble, astute volume watchers, especially those who scalp trade.
CLASSIFICATION Volume
may be classified as
I) attendant prognostic
.2)
attendant : is action that generally can be anticipated and· contains virtually no predictive value. prognostic
: constitutes a volume increase or decrease or generally unanticiPated substance. Such volume activity contains a decided predictive value. This action wherein a volume increase or decrease is expected but does not materialize, is definitely prognostic.
56
VOLUME
VOLUME IN CONGESTION ANALYSIS Volume generally figures most at the birth of a congestion area. After a substantial rise [or decline] in prices, fluctuations initially are apt to be wide and hectic in reflection of the market's struggle to adjust to a new price level and then gradually simmer down. The congestion areas are the terminal manifestations of substantial price rises or declines and because high volume is comitant of these wide hectic price fluctuations, volume accordingly is greatest at a congestion area's concept and then gradually will ebb towards the congestion area's potential breakout zone, as seen in the apex of triangles, wedges, pennants, flags and platform formations. As well as in these formations, a sirniliar declining tendency of volume is characteristic of multiple 11 v 11 shaped formations because if the peaks or inverted peaks are exclusively to be considered a top or bottom, there will be greater volume with the first peak, than with the second peak. In head and shoulder formations, the left shoulder will enjoy the most volume and the right shoulder the least, the volume at the head somewhere between the two. Volume between the peaks is customarily light and meaningless. The only exception to the declining volume rule are the saucer and scallop, wherein volume reaches its low ebb at the apex, or nader. All of this action is attendant, because its' predictability wud in no way help foresee the direction the market which will eventually emerge. However, if heavier volume tends to occur towards the lower level of a congestion area, in the latter stage of the formation, the implication is that important buy~ng support is being given to the market and that the next trend will be up and the volume action becums prognostic For e.g. - visualize a commodity which is fluctuating between/ 40 & 42 ¢ 1 and every time prices reach 40 ¢ 1 trading volume increases. Every time prices approach 42 ¢ , volume slows down considerably. The activity at the 40 ¢ constitutes an outward expression of support, and a price below W.hich the commodity is unlikely to go by reasoning of the buying support that exists. The lack of activity at 42 ¢ is prompted ~ a concern that aggressive buying will induce some ill-advised bears to grab tighter to their positions. Visualize the converse : - the commodity is fluctuating between 40 & 42 ¢ , but the activity accelerating each time 42 ¢ is
app~oacnec ~oes
t.~e:
and
slo~ins
a~ti~.:~-::~·
at:
~2
~o
c
a
c~a~l
:..~=ite
eac~ t~
in-=.o
time 42 c zone is belie\~ing
that
app~oac~ec.
~he
co:mmodi ty is about to be launched into an upv.·ard spiral '? Does that slow activity at 40 c seerr. encou~aging to a long position ? If these are U're ~eactions, t~en C are being in!luenced by emotions ~ather than by logic ! That high activity at 42 ¢ represents eage~ sellers ! "But," U ask, " How about all those 42 ¢ buyers ? " . They a~e ce~tainly outnurnbe~ed, or else the market wud not back away from that price, after all that competitive activity. Also, the bears' reluctance to sell as aggressively at 40 ¢ is prompted by I) the price isn't rite. 2) they don't want to scare away the buyers by chasing them as they retreat. All that activity at 42 ¢ may seem that prices are about to spiral upwards, and that the activity at 40 ¢ means that the selling activity is weakened. All that activity at 42 ¢ means there are more eager sellers whereupon as the buyers dry up, prices will drop once again. In :::ummary I) volume is greatest at the birth of a congestion area. 2) highest volume will occur at a congestion area's perameter which is opposite to the eventual breakout. 3) volume activity decreases as prices move to the apex of the congestion. except: saucer, and scallop for.ma~ions. Clues generated by such action are especially valuable to those who are alert to them. Because there are so few who do percei~ then when they occur.
58
VOLUME
IN BREAKOUT ANALYSIS Volume may generally figure most at the birth of a congestion area, but as the chart unfolds and a moveout occurs from the congestion, volume will run at a peak an the breakout. Volume may generally ebb towards the congesti~n area's termination, but on breakout volume sharply increases.
breakout -
( false ? because volume is attendant ?
congestion area
.1
h~gh
vol. on outset
t
l
deer. vol. as prices move to apex
may be higher volume on breakout.
4 VOLU:t>'..E
Breakouts constitute one of the most deceptive phases in market activity. One reason is that a breakout point cannot be objectively determined. Another reason is that so many breakoutsend up as being a trap the end-run As a consequence, to be of prognostic value ( and not attendant ) , at these junctures, volume action shud be considered together with congestion area analysis, ( and include in this the commodity's location in its historical price range. ) . 11
11
•
After a congestion area has prevailed long enough to be widely recognized by large numbers of buyers and sellers, who usually accummulate in one way or another in the wings, ready to jump into the market every time the congestion area's upper and lower limits are approached, either buying/selling using stops to protect- losses or using stops to initiate positions. For a downside breakout, many buyers will have to be satisfied in the lower limits of a congestion area and for an upside breakout many sellers will have to be satisfied on the upper limitof the congestion area. In either case, the result will be marked pick-up in activity as prices move thru the limit of the congestion area. This action denotes protective stops and activity designated by buying/selling new positions by the stop method " outside the congestion area, as new people jump on the bandwagon. 11
This volume action has no prognostic value and is labelled attendant, as this is customary market action. Since it has no prognostic value - ( it is expected on breakouts ) , the validity of the breakout is weakened somewhat. Pick-up in trading activity is part and parcel of breakouts. If the volume subsides and the trend proceeds on its way, then the breakout was indeed valid ! But, if the volume remains high and the trend promptly reverses itself, the breakout's validity will most certainly be left in doubt. If the trend materially penetrates the congestion area from which it has just emerged, the trend is thus invalid - at least for the time being. breakout
~ t~ congestion
~ rI ~ ~ r
re-enters congestion false?
------~------~---------breakout
59
60
VOLUME
On the other hand, if the trend reverses itself, smartly bouncing off the outer range of the congestion, then the trend cud be followed with enthusiasm
Please note this : - it is when the expected pick-up in volume does not materialize on breakout that the action becurns immediately prognostic. The volume shud be increasing on breakout and accordingly attendant. But if volume is not picking up on breakout the astute volume watcher will immediately label the activity as prognostic. It means something special, something unusual is happening. This infrequent circumstance occurs in a market which has temporarily lost its speculative following, and means something special. The "trade" is up to something ! Therefore, such a breakout may be followed with confidence and enthusiasm. I hope U understand by this time the difference between prognostic and attendant volume. If not, then please review the previous pages - it is a golden key to alert u to some of the golden opportunities in commodity trading )
VOLUME
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1966
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62
VOLU!·lE
Summary I) volume increases on breakout is attendant and norrnal.If the trend is to continue then volume shud subside. If volume remains high, and prices reverse, then the emergent trend is aborting. It may mean a trend is underway, or it may not 2) a breakout without good volume increases is prognostic and indicative of a trend to be followed. Special note : high volume with a breakaway gap is incredibly significant (see sections on "gaps" )
4 VOLU!'..E
63
VOLUME IN TREND ANALYSIS During trend action, volume is normally attendant. That is, it can be predicted and is to be expected. Prices shud move up or down witt fairly healthy volume. If the trend is up, and new buyers are corning into the market, volume will be rising. The market will advance then retreat a bit ( and volume dry up it will advance to a new high( on good volume ) then retreat again ( volume drying up ) . The market may decline on good volume, then retraces part of the decline ( lighter volume ) and prices decline further into new territory, ( good volume ) , and then partially retraces itself again ( volume slackenin~ Whatever the situation, the volume escorting the overall trend will be greater than the volume escorting the counter-trend. In the next section,we will delve more deeply into volume and reversals. At this juncture, it is worth mentioning that if the trend is up, and the volume is rising, new buyers are corning into the market. Near a top, higher prices and higher volume denote topping action. Higher volume is stimulated by those buyers who finally cross the psychological threshold, convinced that a bull market has at last been in·full swing. They are latecomers plus those who went short prematurely and are now covering their short positions. With this high volume is the concomitant wide price fluctuations, what I call the "pumping action " of market tops. This is the blow-off and is the final eruption for the death-knell. All aggressive bull blow-offs terminate in high volume and big market swings, on a day to day basis and a daily basis. So if prices have had a good run, either for seve+al days or weeks ( even months ) and volume is suddenly becuming incredible ( often at record levels ) and bullish news is cumig out of the woodwork, and there are staggering price swings, the market top for the year is fast approaching, probably within days. Summary I) volume goes with the trend and is thereby attendant and predictable 2) volume escorting the overall trends will be greater than the volume escorting the counter trend. 3) high volume escorting a counter-trend is prognostic of market topping action, and occurs in pumping fashion on a day to day basis in market top formations. 4) any deviation from the above labels the volume action as prognostic, and the opposite price acitivity is to be expected.
VOLUME IN PRICE REVERSAL ANALYSIS Within the context of overall trenc action there are four categories o= rrUnor turning points, or simply stated, minor reversals.
Overall uptrend reverts into counter downtrend. Counter downtrend reverts back into overall uptrend. 3· Overall downtrend reverts into counter uptrend. 4· Counter uptrend reverts back into overall downtrend. 1.
2.
by itself in value. Rather it is reversals. However, in volume at such a
Vol~~e
these minor reversals is of no prognostic attendant. Volume will dry up with these if there is a noticeable increase or decrease juncture, volume will have prognostic value.
On balance,_therefore, overall trend reversions into countertrends are attended by volume dry-ups, while counter-trend reversal~ back into the over-all trend are attended by volume pick-ups. The reason is that buyers in an upmarket dominate and are thereby more aggressive in over-all uptrends and duringaa over-all down-trend sellers dominate and therefore more aggressive during the downward move. Consequently, when buyers temporarily shift from aggressiveness to patience in the major uptrend, the volume will dry up as the market recedes. Conversely, in a major downtrend, sellers temporarily shift from aggressiveness to patience ~d volume will dry up and L~en the market rallies. Consequently also, when buyers recommence their aggressiveness in an over-all uptrend, volume will pick-up and the market will then resume its advance, and conversely when sellers re-commence their aggressiveness in an over-allpown trend volume will pck up and the market will then resume its decline. There are two types or market reversals. I) minor 2) major
4 VOLU!".E
The major reversal is the conversion of overall uptrend into an overall downtrend or vica versa. A minor reversal may constitute a part of an area of re-accummulation or an area of redistribution or maybe neither. ( see chapter on congestions '7' ) A major reversal on the other hand is always a bottom or top. The perception of volume action during major reversals is most crucial to trading success. Volume during major reversals forecasts two things. I) that the prevailing overall trend is nearing an end or has ended 2) that the next overall trend will be in the opposite direction. Because the duration of tops is normally so much briefer than that of bottoms, it is easier to be trapped into the wrong side of the market within a top region than within a bottom region. It takes far greater agility to go short a market at its top than to go long a market at its bottom. Market tops are potentially more treacherous than market bottoms for quite another reason: human nature is more bullish than bearishly inclined. After a commodity has enjoyed an extended price advance, there will be those who will be eager to get on the bandwagon before the parade is entirely over. The result will be abnormally high volume with wide hectic price fluctuations. The newly elevated price level may linger for a while or even go higher. Volume may stay high or gradually diminish. Regardless of the secondary characteristics, the initial message remains crystal clear. " The bull market is over. ". Abnormally high volume along "-'i th wide and hectic swings after an extended price advance exudes a bullish aura. This is diabolical. Remember that for each trade, one half the trade constitutes a sale ...... seasoned traders do not get fooled by such an aura : smart action is being unobtrusively taken by astute bears. High volume with large and hectic price fluctuations is know~ as an upside volume blow-off. A downside volume blow-off is as common but not usually as pronounced nor as easy to identify. By reason of the bullish inclination of human nature, downside volume blow-offs are frequently imagined long before they occur. Therefore, a series of alleged blow-offs will precede the valid downside volume blow-off that signals the end of a bear market. Volume blow-offs of less dramatic substance may also signal the termination of counter - trends ( just to confuse U ) after a counter down trend has run its course. There may cum for example, a period of time when trend action is so quiet that a pall seems to have settled on the market. Which means the selling pressure is off and wud-be buyers are exerting restraint. such restraint
65
66
VOLUY..E
is prompted by the knowledge that the market is so thin that bis bids will go largely unsatiated and aggressive competitive bids will send the price spiralling. An upside reversal within a bottom is virtually meaningless. An upside reversal within a prevailing uptrend may foreshadow a counter downtrend. An upside reversal within a counter uptrend er· an area of re-distribution likely foreshadows a continuation of the prevailing over-all downtrend. An upside reversal within a suspected top formation shud add confirmation to one's suspicians. An upside reversal attended by unusually high volume shud be taken more seriously than one attended by normal volume. The converse wud be true for downside reversals. U shud be thoroughly confused by now. Read it over again - it ain't that bad. )
Summary I) volume dries up in minor reversals and is attendant. 2) volume increases, sometimes at record levels in major reversals, and is accordingly attendant. 3) downside volume blow-offs are frequently imagined long before they occur.
The intra-day volume action of a commodity often conforms to a pattern for a commodity which has a sizeable speculativ~ following. The common volume pattern is heavier volume during the opening and closing minutes of trading with fairly uniform activity inbetween. This pattern offers scalping opportunities as well as opportune times for positioning in market trends. Volume study on an intra-day basis requires dedicating considerably more time and abtention to the market than most traders can spare. However, being aware of high volume activity on opening and closing and the market '·s wandering characteristics gives the trader who trades by telephone sum insite as to when entering the market wud be more advantageous.
4 VOLm.1E
Hea opening volume is reflective of the accummulation of overni te orders a generated by fac or nown. If the market does open higher on pretty ~e market will settle back for a spell. it opens lower on pretty heavy volume, intici_Eate that prices will r~~g the mid-morning session for a while. Taking into co~ideration volume act!on pattern on ~~ntra-day basis, and putting aside the accummulation of overnite news and activity ( since markets never sleep ) , we shall consider the act' n of the prices of the day before , ~n considering the an vo ume of thi a ~ng the kind of open.~jnuq¥-~~~~~~ ~-
I) a)
anticipating a higher opening. The price action during the day are beautifully constructive and steady, ~ rite up to the close . It is strong, steady and ~· Prices may have been under heavy accummulatio~ower atrile of the day's range n thru the cthr-f::!e rem a j n j ng c;zuartriles to cl 0 5 9 ~ Certainly expect an to higher opening the next day.
OR
tpening next day opening up next day
r111
f
steady progression all day
~
stayed
here
.JnOSt of
nri
the day good volume or activity.
spurted up during approx. last hour of trading.
67
=~
a lo~er opening may be anticipated the following cay o=: - prices contin~e to =all right up to the close in a steady erosion, - expect an unchanged to lower opel'!ing.
anticipating lower prices on opening after a rise in prices ~e day before:after an up-day with prices stalled in pretty heavy volume in the last half hour or so, supply has caught up with demand. Prices have been trading up on heavy volume. - they run into resistance during the closing hour of trading prices falter. ~1 of sellers exists and have s~~lled_prices even too' they may fluctuate curing the last two minutes of trading. Reckon on lower opening prices the next day. quatrile wall of sellers
)
market trenc up
trading in upper quatrile last hour of trading -vd th good volume
-
I
--
2
3
lower opening next cay
b)
-
4
--
higher opening after a day of steady decline : - after a downday of steady decline, and prices holding in pretty heavy volume, in lower guatrile of day's range, in last half hour or so, demand has caught up wi~~ supply, and higher prices c~n be anticipated the next day. Prices have subsided on heavy volume, but the downtrend is stalled the last hour or trading. Buyers have crossed swords with sellers towards the end of the trading session.
an~icipating
4
VOLC:·!E
~he relationship between unusually high volume and normal volume varies from commodity to commodity and varies from time to time. It's actually quite a mish-mash. However, the greater the continuous speculative following enjoyed by a commodity, the less will be the differential between its high and normal volume days. With pork belly contracts, for example, high volume days generally run no more than 50 % greater than normal days. With Hog contracts, however, which do not enjoy a continuous speculative following, high volume days will generally run at least IOO % greater than normal volume days.
Relying exclusively on volume may at times be confusing and misleading. Let us suppose that following a rally from 40 - 42 ¢ , a burst of 2,000 contracts within a day promptly sends the price of the commodity back to 40 ¢ • And, there it stays for two weeks at a 300 contract per day pace. The question is whether this action is bullish or bearish. The 2,000 contract burst at 42 ¢ is clearly bearish. The ability of the market to absorb a 3,000 contracts at 40 ¢ , altho' over a period of ten days must certainly be regarded as bullish to some extent. · The study of volume action is best applied in a context of I) whether it is attendant or prognostic
*****
2) in determining the breakout of congestion areas
\\
3) an alarm signal of market tops with its attendantfj high volume and wide swings 4) market bottom analysis 5) breakaway gaps and gaps with attendant high volume 6) end-runs and/or breakaways from congestion 7) the study of intra-day action to determine the opening of the following day.
Attendant volume is greatest at the birth of a congestion. Highest volume occurs .in congestion perameter opposite to breakout. " Volume decreases as prices move to congestion apex Volume increases on valid breakout and subsides somewhat Volume goes with the trend Volume dries up escorting counter trend Volume increases in major reversals.
69
7:)
VOLUY.£
?rosnostic e.g.
Volume decreases at the birth of a congestion '.'olume on breakout is light, or on high volume breakout, volume remains high with retraction in prices. High volume with a breakaway gap is incredibly significant. Volume decreases with trend Counter trend volume is hi-gh.
GOOD LUCK
•
volume:
5
7I
CHAPTER FIVE OPEN INTEREST
0.1. a.nd pJtice tte: pr~..oba.bili.U.eo
unclw.ng e.d 0 . 1 . of.d/ne.Lv buue!!..¢/.6eil.VL6 a.6t)e.ct 0110.1. gotde.n JtLLle 6WLthe.n in6otuna.tiOI'l
0. I . ..(..Y! tJte.nd a.lw.f.UI.:>i-6 0. I. in ccng eotion- a.na.f.y~.:>i-6 0. I. in ma.nk.e:t top a.na.f.y.oi-6 0. I. in ma.nk.et bottom a.nai.yr..i-6 .6 ea.r..ona.f.
te.nde.nU.eo in 0. I.
O.I. a.nd vof.ume. 0. I. a.nd commi.ttme.nt o £ ttz.a.dVL6
\~HAT
IT IS
Open interest ( O.I. ) is expressed as a numerical value and is always equal to half of the number of " open " contracts. " Open " contracts are bets ( contracts ) , both long and short, separate and not connected with each other in any way, that have not as yet been " closed " thru offsetting transactions or the making and taking of delivery. When there is no betting, both long and short, there are no open contracts, and the O.I. is of course, zero. For every unit of O.I. there are therefore, two open contracts. Let us say that "A" and "B" decide to bet on a particular contract's worth. "A" will take the long side, and "B" will take the short. We now have two contracts, one long and one short. Now we have "A" and "B" in the market. If either one of them decides to add to their number of contracts, then the 0.1. will increase accordingly.
72
O.I.
Let's say that some nev: people enter the market - "C" and "D" . "C" going long and "D" going short. These people will also increase the 0.1 . . ( "A" and "B" are still holding on to their positions - they're still in the ball game ) . But what happens if "A" somehow gets around to selling to "B" The result: - they have closed a contract. ( Each of their contracts was previously "open" . ) . Accordingly, 0.1. will decrease when these characters "A" & "B" , who are " old " longs sell to " old " shorts. ( "C" & "D" entered the market after "A" & "B" did, so "A" and "B" suddenly became " old " ) . But, 0.1. will remain the same, unchanged, if one of these old longs, say "A" decides to sell to a new guy who enters the picture. ( We will call him "E" - "E" has had no previous position in the market.) ((having fun?)) Now, "A" and "C" are "old" and they sell to a new long - perhaps "E" - so that the long open contract is now passed on to "E" . so there is no increase or decrease in O.I. Getting the picture ? Therefore, an open contract is one that has neither been liquidated by an offsetting transaction nor filled by delivery. O.I. equals all of these open committments, divided by two. That is, if at the close of business each day there is O.I. of 3,000 , this means that there are 3,000 longs and 3,000 shorts. It measures all the longs and all the shorts whose positions have not been liquidated, by new people entering the market. Heraclitus ( c. 500 B.C. ) may have been referring to O.I. when he wrote : " Men do not know how that which is drawn in different directions harmonizes with itself. The harmonious structure of the world depends upon opposite tension, like that of the ' bow and the lyre' " . In modern lingo that means " for every buyer, there is a seller." .
Bruce Goulc, in "Dow-Jones Irwin Guide to Commodity Trading" put it very nicely with his ring method.
O.I.
Tht Ring Method
Suooose that a
t:ro~er
re:eoved a new oroer from
a customer.
Jones. to
buy wnee:~t fut·.Hes contract~ The orok.er would execule rne ore•.!!' anc' h1s settternent Clerks record; wou1d >i'low that Jones bo"'g"t trom 1,1r St~nle-t
Later. Jones. real,z,ng a orof1t on a pr,ce 1ncrease. m'gl'lt de:,de to llou,date oy se111ng I"J~c< me owme numoer of wl'leat futt.:res conrr.1:ts ..:ones wou'o !;tve an oroer to tha' effe:t to h1s orok:er Jones· contracts were ofiered on :he mar~et ana oougtll ov a man named Lar$on. Suooose that Larson w1sned to uou1daie h•s obugaczon two oavs later be<:aus<.: of a pr,ce oec11ne ano tl'le oes"e to cut ,,s lo~'!!s H1s contracts wouio be offer~::t in the market Let ·s aosume :hat they wece bought by Sm1th. SuPPose that Smuh a flour m!IIP.r. wameo 10 rake delivery of the wheat when the contract reached matunry H1s broker would arrange for the delivery and payment between Sm1th and the or~g,nal seller of :l'le cor:rac:s. Sran1ey Any ooilgdtJon r~.a: had bee" undertaken bY Jones or Larson hao s1nce oeen oifset. JJQuJOated bv rhelf eoual ano oPPOSite futures transacuons O!te,~ tl'lJS I:Jnd of cl'lam of buyers and sellers 1nvolved as many as 50 or more parr,es
RULES 0 • I . and Price re
Probabilities
It is usual for analysts to consider four alternatives and their significance. These alternatives are:
73
74
0.!.
IF price and open interest change as follows: '
the main market influence is judged to be:
Price rises and open interest rises.
New buying.
Price rises and open interest declines.
Shan covering.
Price declines and open interest rises.
New selling.
Price declines and open interest declines.
Long liquidation.
caution
THEN
the rules regarding O.I. and price Qhanges do not follow a simple and inv~iant course. They change at different stages of a market move. See the following discussion on trends, tops, congestion, bottoms, and "criticism" • Also, it must be considered in relation to other factors, including an evaluation of prevailing market psychology.
Probability of 0.!. and price 0.1. increasing with prices rising 82 % probability that prices will rise, as new positions are being established. 0.1. decreasing with prices rising 78 \ probability that prices will decline as shorts are covering and no new buying, market is weak.
5 O.I.
O.I. increasing with prices falling 93 % probability that prices will decline, as bears are in control, and buils not strong enough, market is weak. O.I. decreasing with prices falling 88 % probability that prices will rise, as bulls are taking their profits or it is margin calls. The bears are reluctant to make additional sales at these lower prices. If this pattern holds during the last phase in a bear market, U can expect the formation of a double bottom, or an "A" type bottom. Market is technically strong. 0.1. is unchanged
with
prices rising
both bulls and bears are buying. Only thing useful about this is that everyone is bullish and sooner or later a correction will set in. The end of a bull market ends with great activity and large 0.1. and considerable volume. Generally, the quality of this O.I. will be poor and will reside in weak hands who have cum to the market late and will run with the first sign of trouble. 0.1. is unchanged
with
prices falling
the declining prices are due to the bulls and bears selling. This is of little usefulness except that it will lead to an oversold condition. Some help in this area can be obtained from volume data. A bear market usually begins or a bull market ~ill top out on pretty good volume.
O.I. is unchanged under the following conditions: old new new old
sellers purchase from new sellers sellers sell to old sellers buyers purchase from old buyers buyers sell to new buyers ( getting confused ?
75
76
Old/New Buyers/Sellers Affect on O.I. "Ole" buyers are those who still have a "long" position in the market, whereas "old" sellers are still short the market. They're still there at the close of the market.
"New" buyers/sellers , on the other hand have just entered the ball game. They've just entered, by the close of the market for that day, to take a long or short pos~tion. O.l. increases only when fresh new people enter the market, when new purchases are offset by new sales. O.l. decreases only when previous ( old ) purchases are sold in the same trading day, a previous (old) sold contract is bought, thereby eliminating all of the "old" positions. The old long is gotten rid of, and the old short is gone too, and by golly, since we've eliminate a long and short, whoopeee, the numerical contract is offSet and cancelled.
Since it is the effect on O.I. that is reported and not the type of transaction, the technician interested in this aspect of market behaviour must infer the latter from the former. further: Transaction
Purchases by old sellers from old buyers Purchases by old sellers from new sellers Purchases by new buyers from old buyers Purchases by new buyers from new sellers Sales by old buyers to new buyers Sales by old buyers to old sellers Sales by new sellers to old sellers Sales by new sellers to new buyers
Effect on open intere't
·Reduced Unchanged Unchanged Increased Unchanged Reduced Unchanged Increased
Golden Rule
When O.I. gets swollen, there is more potential for a price change - in either direction.
o. r.
FURTHER EXPLANATION When we explain the concept of O.I. in a more expanded manner, especially the concept of when 0.1. gets swollen, there's more potential for a price change, in either direction. The following quot:a~ion from" Making Money In Commodities", by Eugene Epst.ein, Braeger Publ. Inc. is presented.
The Dftly ioowble COIIMCUOn betwnn this rise JD 011011 iiiiCn:ll llllllbr !11'01• aasis lila! !be pncc will coalitluc to nsc is !be lllca Ulat we lhaii u .. 11101'1 of tile same. 10 That as. new loap will conlitluc to enter !be market, will COIIUIIUI to· be more awcum lllan lho~nd ut will conunuc to bid ap !be pnc:c. lluas. !be ,_llin& is, if you ro tonr tlOW, DC>tt wilt& you will be able to ICII your cci~~o uact to one of tile new lonp, wilo will pay you a premlllftl for n. llut !be morc-of·lbr- arrwneat is a"PDllcablc to aay 'IUI&IIt or c,., ifl. tcmt lbeory. 'Take a cwauon where !II'ICCS art rissnr-and CI'PCflllllerat , _ llnWtrf'*ti. If there u still some -.ol..,...-u then usually will be-lbr - = c open coatractl arc IIJII'Ply tllmlll& ower. At least onc.of !be followiii&IWO lhillp il~c:
l. New lonp are l&ian& coaaacu away frDm ol~ lollp. Since prica an ftlllll, it must mean Wt the aew lonp are bidclin& pncos 10 a bilb -.11 Inc! to mclucc old lonp to ftliDqllllh Uleu CODuactJ.
2. 01~ shorts an telinquiahillc thm conuacu 10 new shorts. SiN:a ~an nsift&. old shorts m111t be biddm& up !be pnc:c m order 10 iDGuct sboru "' co- il_lto 'tile lll&rkct. Why caa't lbcrc be a b&ndwatOft effect m this puUcu1ar cue! Ntw loDp are COfiWII mto the market bccaiiiC IIIey beline 'lllere u an 11!1UIII4 In tba otTIII& from the lewcl at which IIIey tab tlleir lonr poaitiON. Old lborts are tetliDI out or !be market bcca1110 they beline an UIIUCIId will oc:ur from the kMis at which they make then offset!IDJ uansacuon1. Old l011p are scllinc out to the new lonp pollibly because they feel they nupt u well rab Uleir 'PfOfiu. Of covrsc. Dew lboru arc comin& into !be market bcca1110 they beliew !lriCOS ue rome tO dedme from tile lncls at wnidt they ,.... made lilar sales. lut JO far the new lonp and old lboru are in ClwJc. Why caa't IIIey ccmun~~t to be' I n... arruea Ulat an ll!'tn:nd mipt conwnac on nsmc opeD mtanst and 011 Stcaliy open tnterest. To CO!ft!'ICJC tht 'Uili\'CTIO or poaillilibcJ. wbat &boulfirmsiiC an ~&ptrCDQ on cleclinlll& open illtercst' Our theory of dcdimD& opeD rntcrcst bu to aaume WI the clll:imc will CWIIItuall}' SID!I: if It tlidtl't, lbelllhc comrnDdtry will Cftlltll&lly lose aU bqui4lty. llcanllc dus modilicau011 m m•nc. our tlleOry wW to like this: Whea a r1JC in 11ncc OCCIIn on dccllnlllc open antcrnt, n meaN that both lonp and sbons arc lrqwda!IDJ. lt also lbCalll Ulat mons arc more •rcr to liqwdatc tlwllonphCIIco buymr p.......,. iJ Cl!CICdm& scillllc prasurc. The cledme 111 CI'PCfl in'ICI'IIt !lillY conuniiC for 1 wllilc, With lboru ,..., to place lUJh•r and luJher bids m onir. to set lonp to sell. Swentll&lly inc clecbnc wiU halt (altholllh the "!!U'Cftd Ill 'tile llftCO will conunue) once lonp wiU> remam dr:cade they art 101111 10 hol4 on to !bear ccmtncu. Unclcr those CUCIImStaJICCS, olC lboru wlao -ftt 10 liquidate will ,.... to nand then conuaeu to new sborts; 111 order to attnel !hac new lboru. 'IIIey will hi" to con'lltluc to bid Ull 'tile pnce. Soon moup OpeD rnterest may nae baci: to tts old leooel, once newlbons ancl newlonp ODme 11110 Ulemarkct. One or the IINqiiC features of a nsc m11ncc ma awl by 1 clac:line mopen itlteresl is WI Jl .. clearly 0\IC to only oac factor-the burml or ol~ lboru offsct'lin& thear positiOIIJ. The lbons are looltmc to cet out became they UJOCC' an Ulltrau1. 'This fact lw iftl!lu'ed one scbool or thoupt to .,... tbatan Ulluencl is in fact CODfiJmecl by a dedltlc in open illterat. Tbc -ms soa Ulat shorts tend to be tlleiiiWIIIIO!Ie,o-tht IIWCftlt, ilftOtmt apeculator llft{m 10 10 loos. So If tilt mons a!IICI an Ulluen4, it's lik.ely !bat they'll t11r11- to be npL The ida il. ;1111 &II hypotbait-lnltlt makaa - a & t IIIDft- shaD !be olber nypou.a. wc-.e beet! COillidailts'To 111111 Ull' We~ upcl for the Miotic" of beliftlnl tb&t &D lqllftlll!lllil
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77
78
0. I .
In some way we may state that
I)
when price and O.I. move together, the market is considered to be particularily strong and potentially bullish
2)
when price and O.I. diverge, the market is considered to be technically weak and either or actually potentially bearish.
3)
in an advancing market, rising O.I. seasonally adjusted on high volume confirm the validity of an·uptrend.
4)
a declining market and rising O.I. on high volume confirm the validity of a downtrend.
5)
declining 0.1. in a rising market represents strength primarily due to short-covering, but the market is considered technically weak, as no new buyers are entering the market.
6)
declining O.l. in a falling market represents price weakness, primarily due to long liquidation. The market is considered technically strengthening as the 0.!. is reduced.
CRITICISM The use of O.I. in analyzing the market is disadvantageous to a considerable extent. This analysis is replete with a number of ill-defined terms : "low volume" increase in O.I." , " decrease greater than seasonal expectations " and several others. To make use of O.I. , the technician must quantify his terms to avoid meaningless generalities. The general rules of O.I. are well publicized. Many traders memorize some rules with repect to 0.!. and then pretend they are rationalizing by parroting these / routinely learned principles. Obviously, not every trader is correct in his assessment. The application of these classical principlesl.eads to the problem of the " self-fulfilling .prophesy" which is one inherent disadvantage of using for example, another analytic tool price patterns. 0.1. behaviour which is clearly bullish or bearish can be discounted in any existing price level, as easily as any other familiar supply/demand factor. The validity of the standard principles of 0.1. rest on unproved assertions. No publically available studies using O.I. decision rules confirm their value in actual trading. The critics of the 0.1. theory point out that it has not been easy to validate it
r
5 0. I.
statistically. There is no available information on the study of "stupid money" This author feels that Q.I. becums prognostic, as apposed to attendant ( see chapt. on volume ) only when a sudden change in o.r. occurs, either up or down, especially in a congestion area. I am always looking for something unusual, unexplainable occuring in the market place on which to make an assertive market committment, and any deviation from the normal pattern of O.I. is one of them.
0. I. IN TREND ANALYSIS
In the early stages of an upmove, the combined rise of o. I. ( on high volume ) has bullish significance. But as the O.I. further increases, the trend is such that the speculative public assimilates all the bullish factors that fueled the advance, the bullish significance diminishes. In an advancing market, rising O.I. seasonally adjusted and good volume confirms the validity of the trend. In an declining market, rising o.r. and good volume confirm the validity of the downtrend. Therefore, rising O.I. and heavy trading volume appear to be more significant in confirming a trend in its emergent stage and of more doubtful meaning later on. In particular, when an uptrend is at a more mature stage, sharply diminished rate of O.I. expansion may be a harbinger of a bear crack. In an uptrend, the buyers enter the market at different points during the trend according to their psychological bias. Rising O.I. communicates that new positions are being initiated. When prices thrive, these conditions advertise that the long~have all the money and represent the aggressive group. At a market top, these conditions advertise that the shorts are in control - the market is about to crack. Sometimes, during a market rise, there will be a sudden reduction in O.I . . Under these circumstances, one may conclude that the market is generally considered technically weak, at least for the time being. The only exception I find to this rule, is during a congestion of some duration, and a sudden reduction in O.I. signals short covering by the trade, and fortells an explosive market. ( see congestion & o.r. cuming up. )
79
80
0. I.
0,!,
IN CONGESTION ANALYSIS
Afte~ a price rise a congestion area may be either an area of re-accummulation or a top. If the O.I. continues to shoot up while prices go sideways a top shud be suspected. The bulls are being effec-tively challenged by new sellers.
After a price decline, a congestion area cud be an area of re-distribution or a bottom. If O.I. continues to slide while prices are levelling off, a bottom is possible , - the bear's domination is successfully being challenged by new buying. In a congestion area, an inordinate decrease of 0.1. in a congestion area denotes an unusual happening. O.I. declines, if and only if, in congestion areas, short sellers are covering their shorts. ( Markets will rise, if and only if, short sellers, in congestion areas, are increasing their shorts - or new longs are entering the market ) . Since we know that the commercials are responsible for most of short selling ( re: hedging and spreading ) , a decrease of 0.1. indicates an attitude of bullishness on the part of the commercials. ( An increase of 0.!. indicates an attitude of bearishness on the part of commercials, when there's a congestion ) . During a price consolidation or congestion ( trading range ) , if the O.I. declines, we are being told that the commercials feel that prices will break out of the congestion on the upside. By the same token, a price consolidation during which 0.1. increases, tells us that commercials are shorting and are looking for prices to b~eak out of the consolidation on the downside.
Notice how in the following examples, the big price move came afte~ the second arrow. Yet in the build-up period between the first and second arrow, O.I. rose significantly. This increase in O.I. during a sideways or moderately advancing market foreshadowed the path for a further price advance after the second arrow.
5 C.!.
I
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82
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83
84
No~,
look at the following live cattle and rye contracts,
~he=ein O.I. rose substantially between the two arrows, YET, WP~~ HAPPENED ? The price declined significantly after ~~e
second arrow,
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5
O.I.
O,I. IN MARKET TOP ANALYSIS 0. I. ordinarily climbs during bull markets and falls during bear markets. If during a bull market there is an inordinate increase in open interest, the end of that bull market may well be at hand. Speculators most often trade on the long side of a commodity market. This infers that once O.I. builds up significantly, that the number of speculative longs in the market is generally high to a degree which technically weakens the market, increasing the market's vulnerability to sharp reactions. As long as speculators continue to buy, the potential for market reversal cud be obscured. But once the new speculative buying falters, weakness can develop suddenly, with prices declining often to a degree beyond any apparent fundamental justification. When O.I. stands at a particularily high level, the penetration of an established trend line, especially on high volume, shud be regarded as a possible warning of an impending price reversal. This warning is not infallible, but as experience suggests, it is significant and in some prohablistic sense. Moreover, a large O.I. may be particularily vulnerable if it's concentrated in a soon to expire contract. If the O.I. continues to climb and price level starts levelling off, a top shud be suspected, as this indicates that longs are liquidating profits, and new shorts ( commercials and astute· professionals ) are entering the market. The domination of the bulls is being effectively challenged by new sellers. Following a period of massive build-up in O.I. , in great price strength, a down trend occuring from a market top may well feed on long liquidation and an O.I. increase on the downturn is needed to validate a bearish signal. The astute speculator watches the O.I. as market prices rise. He takes action only when it has built up to three times its average size for the same date for the last five years. When this happens as i~ usually does near the top in a bull market, he executes well-margined short sales. This is where the hard-boiled speculator gets interested. Any time O.I. is three to three and one half/times the normal, it shows large and usually foolish participation bullish talk is everywhere, Everyone is buying, but, are they ? The fact that O.I. is still rising shows a lot of new contracts are being sold, but by hard-hatted men. Sooner or later, the inevitable happens - the market collapses. So, keep a weather eye on O.I. sharp build-ups, or sharp drops, which mean that inportant money is getting in or out of the market. It behooves U to go to the side that has the money.
85
86
Also ~o be ~aken in~o consideration in a~alyzing a top formation is ~hat , with p~ices up and O.I. down, means that the price rise is ~ot being supported by new buying, but by short covering. This adds to the technical weakness of a market. In this circumstance, the ~arket is only rising because, sooner or later, shorts admit thei~ errors and o=fset thei~ positions by buying, which strengthens the swing. In this instance, we do not have new buying entering the market - we have short covering, which lowers the open interest. The falling O.I. with prices rising, also exposes the profit taking longs who offset their positions. Once this buying activity and sho~t covering dries up, the market will decline. Even precipitously. Are U beginning to see how involved the study of O.I. becums ? Once understood, it provides an excellent key for U're market attack. )
O.I, IN MARKET BOTTOM ANALYSIS Bear markets end in dullness. The daily price range becums small - 0.!. declines - volume is at a low level. The O.I. at the end of a bear move and at the beginning of the bull move is normally considered to be in strong hands and of high quality. After a price decli~e and a congestion area has been entered, a bottom shud be suspected, if the O.I. continues to be liquidated while the prices are levelling off. Therefore, if during a bear market there is an inordinate decrease in o.r. the end of that bear market might well be at hand. Bow does the O.I. data unravel in a downtrend towards the bottoming formation ? The answer lies in that lower prices and higher O.I. at the commencement of the downtrend expose the shorts who flex ~~eir financial muscle and aggressively crowd the trend. How ~o we know that ? For what other technical reason are prices declining ? The longs are obviously losing money. Eventually they must cover their long positions by selling. Offsetting of these long positions adds to the selling pressure, further depressing prices and reducing O.I. When new sellers are no longer interested in entering the market from the short side and old sellers take profits, o.I. is further reduced, thereby signaling the bottom of the market, at which point ~~e market becums technically strong. At the commencement of the bear crack, remember, the downtrend feeds on long liquidation and that an O.I. increase on the do~~turn is needed to validate the bear signal. Similiar reasoning will apply to the market reversal from the downtrend to the uptrend
5 0. I.
87
- O.I. increase will occur at the commencement of the uptrend as new longs enter the market. The shorts have taken their ?ro:its, left the market completely, and gone to the sidelines. In this case, the uptrend from the bottom formation feeds on long accurnmulation.
SEASONAL TENDENCIES IN THE O.I, There is a generality in the O.I. on a seasonal basis. For example, O.I. usually builds up during the harvest season. The reason for this is that the producer wants to hedge to protect himself. Of course, if the public is greatly interested in the crop, at any time, U will almost invariably see a big O.I. buildup, usually with an eventual price collapse. As a speculator, U watch the O.I. and take action especially if it has built up to three times its average size for the last five years. The use of seasonal patterns of o.r. enables the speculator to note, I) any deviation thereof, which portrays a context of considerable significance, or 2) attendant ( to be expected ) build-up or decline in O.I. normally found for a particular day, week, or month, on a recent five year average for the given commodity. For instance, pork bellie O.I. normally peaks around the end of December and then diminishes as it approaches the end of its "crop" year, with the lowest O.I. during the final liquidation of the August contract, wherein O.I. climbs towards the end of the calender year once again. Hog and pork bellie seasonal O.I. patterns run roughly parallel. Potatoe O.I. climbs from the expiration of the May futures contract which signals the end of the potatoe crop year. It climbs until February of the following year and then cums under liquidation. With the grains and their allied products, O.I. is lowest in the spring and greatest during the fall harvesting season. Egg O.I. peaks at the end of summer and has a low ebb during winter. The O.I. seasonal patterns of cattle, sugar, are not subject to much change since they cum to market in fairly even quantities thruout the year. The O.I. seasonal patterns of cocoa, cotton and orange juice have a distorted pattern, due to sporadic speculative enthusiasm, altho' they are crop year products. Therefore, O.I. is of little significance
88
0.!.
seasonally. However, t~is is not a firm rule ( as most rules aren't ! ) ( cotton especially Cotton, especially, if it shud have a revival of speculation, sustained on a relatively continuous basis, its O.I. pattern . may eventually assume crop year characteristics. Plywood and.lurnber O.I. is difficult to ascertain seasonally. The o.I. of silver, copper, gold, and platinum, perceptively picks up in the three to four months prior to the calender year due to" tax staddles" • (Ask U're broker). However, the IRS needless to say is destroying the concept of the tax staddle, so O.I. patterns of the above will likely now change.
~
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5
••
NOV.
Here is the open interest for New York silver which makes interesting reading. At the end of 1976, 127,890 contracts were traded in a single day. After 1976 was over, trading immediately dropped. WHY ? ~ecause the silver market had become primarily a "tax deferring"
market used by high income individuals to defer or change the status of their taxes, ·and not for profit purposes. As you know, the IRS has now forbade this practice and has made a ruling which may retroactively do away with the tax advantages which many people thought existed.
r
o. I. The fcllowing g:aphs p:esent the seasonal trend characteristics o= 0.!. from 1955 to !964
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89
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0.1.
COTION SEAS~ TRENDS At
OF OPEN INTEREST AV~RAGEl I~ ··!
N.Y. COTTON EXCH. (10 YEAR 19 55-64 -1~_.-
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This is for the ten y~ar period of 1955 to 1964, in order t? portray the "normal" seasonal patterns during a period wherein inflation and present day sporadic speculation did not alter this pattern as significantly as it does to-day. Commodity Research Bureau, one Liberty Plaza, New York, has a chart service which includes in its service an update of seasonal O.I. patterns to which u can compare the above graphs.
0 I I
I
AND VOLUt'iE
I am not a great believer in spending much time in fooling around comparing volume to O.I. But, I will look at anything if I think I can make a buck from it in the market place. So, let's get to the fundamental rules of volume, plus 0.1. Rules: if prices are up and, !) volume and O.I. is up - the market is strong 2) volume and O.I. are down - the market is weak. if prices are down, l) volume and O.I. are up - the market is weak 2) volume and 0. I. are down - the ~narket is ~trong.
o.r. So, under the well known rules of volume and O.I. , when prices are up and volume and O.I. are up, the market is strong and shud go further. So, taking all this into consideration, it is suggested that in general, the combined rise of price and O.I. on high volume has bullish significance, particularily in the early stage of an upmove. But the bullish significance diminishes as the O.I. further increases and the speculative public assimmilates all the bullish factors that fueled the advance. A great many major bull markets start out where volume and 0.!. start building up and price moves up gradually- the " creeper". - volume creeping up, and O.I. creeping up, price creeping up. If the market has a nice base formation, prepare for a very successful trade. A great many bull markets occur when U have this type of situation
- - ·-··-- - ·tD
--.CD
In the advancing market from the base formation rising O.I. seasonally adjusted, on high volume confirm the validity of the uptrend, and the market is considered technically strong, due to the high volume and O.I.
93
94
0.!.
( A declining market and rising O.I. and high volume confirm the validity of the downtrend, and the market is considered technically v.•eak. ) Bull markets usually top out on usually pretty good volume. Bear markets end in dullness as the price range becums small. 0.1. declines, and volume is at low ebb. When o.r. seasonally adjusted, stands at a particularily high level, after an extended upward price move, a penetration of ·the established uptrend, especially on high volume shud be regarded as a possible warning of an impending price reversal. This warning is not infallible, :Cut as experience suggests, it is significant. Two special notes I) an increase in O.I. wud mean that increased volume for that day wud be considered normal. 2) it is sometimes advisable to appraise volume action, as it relates to 0.1. for instance, let us suppose that volume in a commodity with O.I. of 10,000 contracts normally runs 2,000 contracts a day. A 4,000 contract volume day wud then be considered a high volume day, but where the O.I. of that commodity were to climb to 2o, 000 cont·.racts over a period of time, then a 4,000 contract volume day wud be considered just normal. When there is more volume than usual, any, all, or two out of three of the following things are happening : 1. There is more liquidation than usual: Longs and shorts are settling their contracts (which leads to a decline in open interest). 2. There is more "turnover" than usual: Old longs are handing their contracts to new longs; old shorts are handing their contracts to new shorts (which brings no change in open interest). 3. There are more new contracts created than usual: New longs and new shorts are coming into the market (which leads to a rise in open i;terest).
In further explanation of the above, the following exerpt from "Making Money in Commodities" by Eugene Epstein, Braeger Publ. Inc. is noteworthy :-
0 .I.
" The rise in volume we are concerned with is accompanied by a rise in open interest. Therefore, the third tendency is dominating. Suppose we take the case where a rise in volume occurs simultaneously with a rise in price. lt must mean that new longs and liquidating shorts (buyers) are exerting more pressure than new shorts and liquidating longs (sellers), When Cox speaks of the trend catching on, he appears to be assuming that buying pressure will continue to exceed selling pressure. But as with open interest, there is no more reason to believe a trend will con· tinue if it is accompanied by rising volume than there is to believe it will eon· tinue if it is accompanied by either steady or declining volume. For example, if volum~ is steady, there is the ''usual" level of liquidation, turnover, and addi· tion to open interest. Not only can an uptrend happen on steady volume, it can continue on steady volume; all that is needed is for buying pressure to continue to exceed selling pressure. A similar argument can be made for declining volume. Say. that volume is declining but open interest is rising. Under these circumstances, there are less liquidation and less turnover than usual-longs are buying and hold· ing; shorts are selling and holding. Hence there is little or no volume from that quarter. What is happening is that new longs and new shorts are coming into the market, thereby creating the rise in open interest. Because there is a rise in the price, buying pressure of the longs must be exceeding the selling pressure of the shorts. Once again, there is a new bandwagon from which to extrapolate. "
O.I, AND CONTRARIAN OPINION When a bull marke~ is topping out on pretty good volume wi~~ concomitant high 0.1. , the contrarian opinion theory shud then be employed. It will be the harbinger of the eventuality of a bear crack. A bull market cannot continue unless new bulls can be attracted to the market and at higher and higher prices. A~ some point during a bull market, there will be no more new bulls to be found. And, it is at these prices that a market will end. It takes a 90 % bullish factor to indicate a decline. In cases of little 0.1. changes, contrarian opinion shud also be employed. Particularily when the volume is at low level and the 0.!. is low. At the end of a bear move, the contracts are normally considered to be moving into strong hands and of high quality when the bullish factor is 20 % , and O.I. is low.
95
96
O~
I
AND COMMITTMENT OF TRADERS REPORT
1
An o-=.:. e r way to measu:::-e what s going 0::1 i.n ~"le I:larke~ is 't:.he p:::-oposa:. maae by many technical analysts that ci::erentiates " sma:::-t money :rom stupid money re; Trader's Cornmi tt."nent Report. 1
11
11
11
;
-
Every month, the government ( at least at times it can be help:!:'..:.l provides a breakdown of the 0.!. of all regulated· commodities. Both long and short positions are tabulated into three groups: bona fide hedgers, large traders ..,,.i th legally reportable positions ( talk to U're broker ) and the remaining portion of 0.1. belo::1ging to the small trader who does not have to report his position to ~~e exchange. When large t:::-aders have short positions that a:::-e lo"'' on 0 .I. analysis, it might be ussumed that smart money is strongly biased to the bullish side and prices therefore shud rise. When the smart money 0. I. is high an important degree of pessimism wud be indicated and lower prices are soon to follow. It is possi~le to play the large traders off against small traders and isolate marked dichotomies of opinion when analyzing 0.1. and determining ~~e activities of large and small traders. A ratio of various large traders' positions to comparable small trader positions wud clearly pinpoint times of sharp cisagreement between the two groups. 11
11
11
11
11
11
11
11
v70W.
POW
!
This is a key tool in assessing where
11
smart
11
money
lies However, one word of caution: there is a disadvantage ( sorry to do this to U ) , of using 0.!. to reveal activities of large and small traders. Small traders, rather than acting consistently on the wrong side, are bette:::- describec as operating haphazardly. Large traders are consisten't:. winners, but are short term orientec as a group. Also, not all hedgers are truly hedgers. Many operators are sometime hedger, sometime speculator. Additionally, not all small traders lose. Finally, the report is involved with the eleventh of each month. By ~e time the report appears, trades may already have S\o.'i 't:.ched positions. Nevertheless, one can find some extremely significant use for these figures, particularily to confirming wherein a bottom or topping activity has some validity. U wish at all times to be with smart " money. If during an extended :market rise, the cornmitt:Inent report cums out showing large traders, smart money short position as high - watch out ! Market is topping pretty soon ( days to weeks - or prices may already have cracked. ) 11
0.!.
If U wish to read more about O.I.
read on
Fint, tair.e the rolauonshi~ between a nsc 111 ooer. Interest anc! a nst m the ;tncc. A.J we have notecL when o~cn mtcrest nses. 1 it means that nf'lt snons anc new ion~ arc coftun& tnto tile market. If tlus ha~ IWIIWWieously wath a nse tn the !>nee, 11 means tilat buytnE pressure oi tl\e new lonp has ex=eQed sellinc pressure of tlte nnr sham. In ot/ler worci1, new lonp were wtll:nc 10 place thetr betS at a 1\t~er and 1\tJher pncc 1n order 10 eel new altoru 10 bet au.anst them. •Whzt can we ptlttr from tltJS Sltuauon that woulc! uulicate that the uptfftld u likely to conunue~ The advocates of IISIIIJ open mtcrcst II\'C us 'OCry few dues. For r~ery new lone there IS a new alton. At !be current level to wllidl tltc pncc has nscn. there ts as muclt of a commianau to a clownll'enc! u there as to an u!>trend.. It is l.nlc to say that the ftCW shoru mtcltl not llaYC beet\ willinc 10 enter the market w1tltout a nse m pncc. llut of what pou~blc relc· vance is that? It u all iJ> the put. It would hnt been nice to eaaohalt a lana penman pnor 10 the pncc n10, but !be pnce wu not "-blc m adftllee. The qucsuon is whether to cssabhsh a lone poauon - · at a lcftl where the shons ~ willlnC to enter the market. So aU we havo arc more snons titan usual wilJin& to bet on a pncc clechnc and more lonp than usual willinc to bet on a price lise.' The fact that there ~re more beu on both 11lles of !be marltet docs dwtre !be lltuauon. but no: m sllclt a way as to mcllcatc the cluec:-.10n 111 11'111Cb the pncc will so. AI: it rnuns IS (I) if. for whatever fCUOII, the lltlii.DOII tums bcansh, there will probably be more lonp titan usual looltinc to relinqUISh tlteit conuacu. or (2) 1f for wl\atewr reason the snuauon \llms bllllish. there will probably be more shoru than USIW loolUnr to rellnowsh tltCJ1 conuaeu. COIISlcler thc IICanalt tum of r~enu: In ordor to offset tltcu pcmDon&. Iones will baYC to sell. llecausc there are more cf them titan ll&ual. the scllinr ~e will be srcatcr than USU&I. Th111. the cleollne 111 pncn lillY co fuur ad farther titan 1! there had been no pnor buildup of open mterest. On !be other lw>c!. rlus may nor happen: If new lonp ce>rne mto the market. their buylfll pres-
sure will offset lbc selllnc preaurc of old lonp. ad pncca may nnr decbAc much. COIISlcler the b•.•llish tum of eYitiU. The amc thml may ha!>pen, ucq~r In Shoru w•u look to offset their posauons. In order to do 10, !bey will have to buy. Because there are more of thtm titan usual. tha burin& pressure will be Jrcater than usual. anc the mu!1111r nsc m pncc pcaibly r..-per th2n usual. HoWCYcr, a Slmilar t:aftat applacs: If new allons come mto the market. the Ouytnl pressure of olcl allons wtll bt offset by the seiWI& prcuure of new shoru. fC"Cn&.
'II-•
111 c-_,. F,.,..
Co1. c - a . . , hoflrr ~llfl. , . . , _ . - . 1912. I ~IIUQI.cl IK'tiiiiCIUU WOUIG N&IOft&lly &0..,.1 .............. u of ftll: aad fall 1ft etten Ulleftlt. T1uu. OuniiJ ft'Nift ,..,.aa of lhC Y'Ul. 1IUhCU'II C01fttft0410CI tD &IIIRift 1 ""rto""af .. ll'ftOCftC'Y (or ooen tfttcnst 10 n~e. A I&UOMJiy achun.C rut llftUN o..r "'' n.t mort U..ft aorma.!.
IS
'Of courK. '".,., t:oUid sun be uu •"'c """'..., or ,....., ~uac; Utrt ll\llfll M" c-.panoed thctr ftOtCbnp..
11m~y
Source: Making Money In Commodities Epstein Publ. Braeger Publ. Inc.
If u are able to understand O.I. Because most people don't
then the more power to
u.
97
98
CONTRARIAN OPINION ETC.
" c.a.o ft "
the. , ba.o..V.. , the. " odd6 "
CONTRARIAN OPINION The reasoning behind the theory of contrarian opinion is simple enough. A bull market cannot continue unless new bulls can be attracted to the market and at higher and higher prices. At some point during a bull market there will be no more new bulls to be found. It is at these prices that a market will end. u will have a rally with a 20 % bullish factor, but it takes a 90 % bullish factor to indicate a decline. The theory of contrarian opinion is now widely recognized and an accepted format for judgment decisions. And, it is indeed an analytic tool used by all pros. Information pertaining to current contrarian op~n~on shud be available from U're broker and some chart services.
THE COMMITTMENT OF TRADERS REPORT The committment of traders in commodity futures is released by the USDA about the IOth of each month. The report breaks down the long and short positions held by the large and small traders. Small
99
traders as we know tend to be on the wrong side of the market and large traders tend to be on the rite side of the market. The purpose of the trader's report is to enable the trader to know where the large traders are and what they're doing.
LARGE TRADJ::RS SOYBEANS Speculative Long or short only Long and shOTt (sprending) Total-Hedging Total reported by l~rge traders SHALL TRADERS Speculative anJ heuging TOTAL OPEN INTEREST Percent held by:
Large traders
----------------------~Sm~a~l=l_trauers
(In thousand bushels)
84,690 172,370 257,060
20,865 66,195 87,060 155,040 2'•2,100
54,570
69,.530
3ll 1630
311,630
82.5 17.5
77.7 22.3
18,375 F~t.,
:
-
:ns
SOYBEAN OIL l..ARGE TRADERS Speculative Long or short only Long and short (sprertdlng) Total Hedging Total reported by large traJers SHALL TRADERS Speculo~Jtive and hedging TOTAL OPEN INTEREST Percent held by:
Large traders SmalJ traders
(rn
c.ars of
tan!~
~.761
10,532
9.,-!13
15,819 33,753
9,113 19,645 22,&76 42,521
13,493
4,725
47,246
47,246
71.4 28.6
90.0 10.0
17, S7~
SOYBEAN MEAL LARGE TRADERS SpeculDtivc Long or short only Long and short (spreading) Total Hedging Total rep6rted by large traders SZ.1ALL TRADERS Speculative and hedginA
3 t :.48 8,528
5,090 3,448 8,538
14,20:>
14,4~1
22,7J3
22,979
5,080
_ _4...:., :'!_2.2.__..!!.LQ:.B-..;;.3__
27,06:
TOTAL OPEN INTEREST Percent held by:
(In hundTcd tons)
LDrge traders Sruall traders
84-0 16.0
t
I
)
062
84.9
15.1
IOO
CASE
Criticism : - the theory goes that since most losers are small traders, the safest position is in the opposite of the market to them. There are disadvantages because hedging activity accounts for the largest share of the positions, but even then by nature of hedging, hedgers lose. In fact, these losses feed the financial pot in which speculators draw for their profits. On the other hand, not all hedgers are truly hedgers. Many operators are sometimes hedger and sometimes speculator. Additionally, not all small traders lose. Finally, the report is involved with the tenth of each month. By the time the report appears, traders may already have switched. positions. Nevertheless, one can find some use for these figures. This approach attempts to focus on data showing the activities of winning and losing groups of traders and then suggests the following action : I) initiate positions opposite those of the losing group when it shows a strong preference for one side of the market. 2) initiate positions in line with those of the winning group when it shows a strong preference for one side of the market. Both long and short positions are tabulated by three groups. - bona fide hedgers, large traders, with legally reportable positions and the remaining portion of open interest which consists of small traders with less than a reportable position. When large traders short positions are low, perhaps 6 % of total O.I. it might be assumed that they are strongly biased to the bullish side of the market, and prices therefore shud rise. When they are high, possibly 9 % or higher of O.I. , then an important degree of pessimism wud be indicated and lower prices expected to follow.
CASH The cash price is the price fixed in the wholesale and retail outlets of the country. ( While the futures price is the price at Chicago, New York, Kansas City etc. commodity exchanges. ) Cash price fluctuatesthruout the year. The futures price will fluctuate above and below the cash price, but will never vary too widely from it ! Cash price sets a ceiling on how high futures prices rise and a floor on how low futures prices fall. Futures prices will not fall so far below cash prices that cash " dealers " wud be better off by buying the futures contract.
CASt.<
( ( ( What happened to the last· ten pages. Don't ask I don't know. - Chas. Drummond ) ) and, taking delivery, than they wud be by buying the actual cash product. Futures prices will never rise so far above the cash that the exporters, merchandizers, farmers and millers wud be better off selling on the futures market than they wud be by selling on the cash market. The futures contract will never vary much from the current cash price. So it is rather important to watch the cash market closely. By utilizing " basis " charts ( coming up next ) a trader will know exactly by how much price variation exists. Also, it is very important to watch closely the relation of the present cash to the normal seasonal price patterns for cash as in th~ following illustrations:
Ll\'E nr::J:'!'" CJ\'M'Lt::
Sc:pt
Jnn
June
Nov
ICED BRCiiLr:;>_c;
July
1\pr
Nov
Dec:
--------~------------------~-----------------------------/ S<-pl
I!l
::::2
CASH
They will sho~ U which direction cash prices shud be trending, and any deviation from this is subject to analysis. When the cash price of a commodity fluctuates, the futures price will also fluctuate. (see also" seasonal patterns" , in appendix).
Nov
Sept
Apr.
Dec
/'
Oct
SOYJ1J.)\.'Il OIL
.Jul 11ug
.~~
Jan
/Pee
"'-....__/
Sept
Jnn
Apr
/ \
~
~c
\//
Oct
5
BASIS ~~ L~Portant disti~ction be~ween
cash and futures ma~kets is that only about IO % of the total volume of futures transactions is settled by delivery. Another difference is that in cash transactions, the precise grade and quality of the commodity, as specified in the futu~es transaction, the seller has the option of delivering any one of several tenderable grades. Commodity exchanges establish a base grade which is deliverable at contract price. Other grades of commodities may be delivered but at a specified premium or discount to the contract price.
THE
II
BASIS
II
At any given tilne, there exists various " basis " for each commodity, reflecting the following v~iable factors. I. cash price for the particular grade of actual commodity 2. price of the commodity future 3. time of shipment of delivery at commodity destination. It is quoted _as the number of points or cents which the actual cash commodity is trading above or below the price of a correspona~ng future and this price is determined by the above factors, as well as what U can derive from the following illustration.
J'U'IMG
nit
Baryo""' lhr •BeMJ ...
-aasrs..
F.-rahltsh "'~""._m
tN
an
or
,..,,en...
A chnet'lla•e
•c:cr-rvWt ti!ICftUftt
of •
tor
tpeet.
r...! r»
·a..su ....
Srlf Oft ller bahliVI an ~·~f' pt"eel'tigm or 6~rrt tOt" lh
ma~tuf•etur~r
Or,.., ,...._,I.,... 11><
tht menulacntrer .,ill
-
•• '"'
Mtv1 Cihau ftiCGI fOr Dtc:eMbef ddr.ct'y. at JOO poinu Whefo "'Cllllliden 11>< ,.._ ..,.,..,._ De=t'I'IM!' futures. thus fl-.inJ: ttn CID'It &.::1M for Gharl•
O.C:C..."'' '"'-·
r-•rc:h~
~ olthc o-w.~oer ·-· "'"' )0(1,..,..... /
A CIICIDa Oc.aler •lis a manuf•aun:r ac1ua1 COCDI for Dec:nnber tldMry at 200 fiDims JWior to Dc:cemba. he will be
ahttw the [)ccemt.er lutar&. hehewinJ thll. tomee~~M abk to f'Qrc.h.-. the Gh.... coc:o. tar left tb.ft
20(\,.........
r»
AD.IUS'ft...C •C"CDatWNG ,
_.,.,ill_..,-
A looeir:n _ , _ , IMkl• to 11;. lC fler ......,..S
t.M •Mr. lhe ,....._. is hftos·
. _...y
D"'Cf
Dec:elllihEr.
ltn-"" a
-lc-
..
...aTIC"'\ti.AI. ¥11."" OP TMl!. w••cn
I liPft:IIU....., I
AMtlf'irrr C,..,.,.., ·
A chocolate" m•'"'faeur,tf. wt.o tub ur- hft '""'· aclll lVI- • . _ - lhis ; , _ , . - ; irtdlen. _ , l t i i i i C I - - .
ea1:01
lhc
buta ;........,_,.
-•kco -
~
,nca
•- -
~
I'Cf
source: Commodity Futures Market Guide -Kroll,Shishko. Publ. Harper & Row Copyright I973 by Stanley Kroll & Irwin Shishko. Reprinted by permission of Harper & Row, Publishers, Inc.
II3
II4
ODDS One o: the more useful charts which can be used as a commodity trader is the basis chart. Few traders know what a basis chart is. Some traders follow basis charts more closely than they do actual price charts, because a change in the basis of a commodity will indicate much, much more. Keeping a basis chart is easy. First, record the cash price for any given commodity . ( Ask U're broker, or use the "Wall Street Journal" ) . Then take the contract price of the nearest expiring futures contract and compare that price with the cash price. If cash is above the futures, one plots on the positive side of a zero line. If the cash price is below the futures, U plot that on the negative side of the zero line. Some traders feel that it is unwise to take a long position unless the basis chart shows a strong positive and to take a short position unless the basis chart is strongly negative. The basis chart is often a key signal to an upcoming trend reversal. At the birth of a bull market, the basis often switches from a negative to a positive and a bear it often swings from a positive to a negative. Any sharp movement in basis *******--* - remember this, ( as well as in volume, O.I. or anything else that is sharply unusual as a market force ---- that suddenly hits the market ) indicates a dramatic change in upcoming futures prices.
THE
II
ODDS "
By having an idea of where cash prices will go in terms of odds, U will know where futures prices shud go, because the cash price of a commodity and the futures price of the commodity move in the same general direction. In the use of odds, we are asking questions, like - " How many times has the price of Dec. Silver advanced from July and December. How many times has it declined during the same period ? " On the following pages are tables showing monthly cash price odds. Each month's cash price is compared with the previOus month's price. For example, the odds of pork bellies being higher in January than in December is 75 % and a 50-50 chance of prices being higher or lower in February than in January. For heavy positioning, this author prefers odds of at least 65 % or higher in favour of a long or short position, after taking into consideration all other fundamental and technical factors, especially those brought forward in this chapter, and using my " flow " knowledge of trends, and congestions, and using P&L charting for a day by day ongoing blow by blow portrayal of market activity, ( maybe for the occasional scalping and trend bucking and pyramiding processes. ) .
5
ODDS
CMHI l'lHCr: onn!:.
n!':r.J• cr.rrLI: llighcr Jnnu;::;• FcL1·•.:::ry !·larch l'.pril tlay JU.."'C
7lt. 1.2\ 7lt ~4'1.
Jul~·
-<2'1. SOt 63t
llugu::\:
~8'1.
Sept:c1~!>:-r
SH 29t 3Ct.
Octc..!•c:::No"c~.?cr
Da:CC!l:,':"tc:-
,........
~~ llighcr
Lower
2H SBt 2!:'1. 116':. SBt SOt 37~
o;. ll6t
J:mu;::-y :F'<'bnl:;ry
7St
l-lil!"C'h
.(5:.
S~\
7~1.
l·iay
SS'l. BOt 7St 3St
20'1. 30t 20'1. 2St tiO'i
June
July 1\t•~u:.t:
fit'!t'tcmbcr October
t.O!:.
GO~
7l\
Ot
lCIO~
G~':. ~Ot
Novcmb~'r l>~c~:uJcr
30t 75t
25~
ICJ:D
lli9hc:-r
77t 72t 49;
Fcbrll~:y
LO".,Cr
l!ighcr
23~
Jnnuary
2llt
Februi't;'
Milrch 1'.prl.l
100~ 87~ so~
t.l\
49':. 59t
ll:~y
SH
li4\
Hl'l)'
75~
June July
~!It
4H 3lt 36'
Jcn~
69t
.lu)r August
56\.
s~"t(
75\ 8"/\ 13\ 2S\
Sep\:c,rocr Ocl;cl>c-r l~OV~l~~JC17
I>cecl:'~er
61,\ 4Jit 23t lOt Ht
. ;r.!l;r
77t
oci.obc:r
!)0'~.
No,•cln.?cr
54\
~ecn:~cr
lii9hcr
HOly
Juuc ·July Aucn:!'l: Scpt::n:~::=
4!~'1.
0\
37\ SOt
75t
sc-:.
G3t
3~'!.
2H 7~'1.
7H 96t 25\
9Gt "19\
H. 21:;
41.\
CJ,,
29;
l~o,•c:•o.'.:>cr
63~
lOt
Higher
LO\·~er
42~
October ~cc:n'bcl·
13':.
Lower
..
0\
l ....
SOt ~'7t 25~
?.5~
l3t
07\ 7S\ lOOt 63t SOt
PO'I'1'. TU!:~
I:C:GS
Ja.nu:u·y February Hilrc.h J.p:i:
70t
nno nr.r.s
Mnrc-.ll l'.pril
Aucn:~\:
1S' SOt
~0'1.
1\pr.il
!.!2£ Janunry
Lower
13t. 7lt 38t
set
Janun~•
3H
Fcb:r.unt;•
6H
Mnrc-.l'l AprH
G"" ~-
M~·
June July 1•ugm:t
G91i
~St !);it,
lSO. 3l\
L~ter
SH
23\ 31~
31'1.
1r•
"'" 46\ est
GH
lSt; 54\\
G9\
o~,.~~C":r Nov,~·.-. 'lbQ:r
69~
~~~·ocr
3Ct
3l\ G2l
Scj:;..c;r.·1'cT
~G\
Each month's cash price is compared with the previous month's price. The figures are not always balanced because some years are 'tied'
IIS
II6
O::>DS
~
~ HiCJh<.:r ~1ilnu:-:ry
Gilt
32~
J"cl.Jru:~:-y
37;. (•3t
I,'~
~\o:~rch
J,f>ril
7lt
Muy
7-H 39t
,,unc Jul)'
"~ .(2t
]\UQU!:t
37'i
nigher 63t
Lc•wcr Janunry rcl.>ru<'.:o.")'
7Jt. ~.~~
J\pril
SOt SC't ft4!t
l ~~~ lS'.. lH
H~~·
45~
47 ..
.1uJ~t::
32t.
~!;~
July
l C\:
47t 45'6 !l2t
JI.UCJ\lSt
45~
!:iS~
SEOJ:"ter•.ber October
6Ct 7H
26\. 26':. 26'.
39~
tlovmnbc:r
64 ~.
5!>t
en.
~ccml•c:-r
13~
DCCC'It.l.JI'!r
68'0
lli g!lcr
LOI•'l'Or
66';.
2\lt
February
37~
55\
Mllrch 7\pril !'.ay June .Ju)y
SO\
42'6
January
39\. 3:.! ..
S3t C,H
1St
7-1':.
,,~
SSt
!>t.
-'2\ 26\ 21'.
~U;TU!;t
~
Scpt.crr:'~:-:-
GGt 74t •7G";~
114~
ll\ ll\
.1 Oln\1ll%')' J"cl:l::-:m:;.:y •~arch J\pri~-
!'1ay June July
46t
~larch
I.G~
S1t
46~
50".
so ..
Pccmr,!)e:::-
"1i:ln\1f:l"J'
3&~
)'lzu:ch
rcbruo:~::y
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CHAPTER SIX
TRENDS ch.Mactell.M ti..cA
tlte.n.d actio •t type.¢
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6 TREN'DS
!!9
CHARACTERISTICS There are three types of trend. I. downtrend 2. uptrend 3. sideways
believe it or not )
On a price chart, a trend may be considered to exist between any two points on essentially different planes. A trend may also be considered to exist between any two points on essentially different planes, even when interupted by one or more congestion areas. Direction is the initial way of identifying trends. As can be expected, there are trends within trends. Contained within a maxiterm trend are one or ~ore long-term trends, ( of month's duration which in turn may contain one or more medium term trends of days to weeks to months, which in turn may contain one or more short term trends on a daily to week basis, which in turn may contain one or more mini-term trends on a intra-day to day basis. Trends are constantly being broken, either by counter-trends or by congestion areas. The shorter the trend, the less significant its termination to the over-all price structure. The point to remember is the possibility of being confronted with trends of such combinative characteristics as major, medium term and minor, maxi-term. Nominal price moves or trends are occuring all the time and can be found anywhere. Essentially, nominal trends constitute an area where congestions are made. Minor trends are sometimes found in congestion areas, and often connect them. Intermediate trends are almost always found in bottom or tops with consolidation areas, or directly connecting bottoms with tops. Major trends are nearly always found connecting bottoms with tops. A major trend usually emerges from a bottom, wherein the price has been unduly depressed for an extended period of time or in a top wherein the price has been unduly elevated, and not necessarily for an extended period of time. The steeper a trend's angle of ascent or descent, the sooner that trend will reach its ultimate price objective. An~, correspondingly, the shorter will be that trend's life. Just as there have been spectacular commodity price moves within brief periods of time, there have also been modest price moves over long term or maxi-term length. The basic tenant of the chartist is ..... "a trend continues until it stops. " Once a trend has commenced it tends to endure at least until a significant counter force intervenes. One important characteristic nature of price trends is that once established, they tend to persist for long periods of time. Prices tend to exhibit more sustained price trends than wud be expected on the basis of pure chance.
I20
TRENDS It is difficult at times to determine the trend direction of a given market. A study of markets clearly indicates that all bull markets are periodically interupted by minor downward reactions and that minor rallies are standard elements of bear markets. The extent of the minor counter-trend depends on the magnitude of the steepness of the existing major trend, and the price level and current technical condition of the market. The chartist must be aware of both the major and intermediate and minor trends and must at all times be able to distinguish between them. It is primarily the major market trend that provides the basis for an extended price move and this shud concern the serious market student. Some trends are straight, some are curved or irregular or poorly defined, as others are quite orderly and amazingly uniform. A trend's simple characteristic consists of highs and lows attaining levels above and below the previous highs and lows. Any major trend, up or down tends to start slowly and then accelerate sharply as the momentum of buying or selling accelerates. Trends almost invariably exceed one's wildest dreams or any chart prediction. However, there is one little factor, that must always be kept in mind and that is that some cursory studies ( Commodities Futures Game, Tewels, Harlow, Stone, HcGraw Hill publ. ) have indicated that commodities are without important trending characteristics as much as 85 % of the time, and this will be the subject of our next chapter, on congestions.
TREND ACTION A trend is a kind of stable disequilibrium, which has a stability of its own, which restricts the movements of the prrce within the boundaries of what's sometimes called a trend channel. Clearly, prices are unlikely to move in the same direction every day, day after day. There are always profit takers - or whatever which is why U get minor reactions. Long and maxi-term trends without congestive interuptions of major importance are virtually non-existent. ( Most traders sooner or later becum serious congestion area students - and U shud too . ) • This chapter is on the various aspects of trend action and it behooves the student to becum fully aware of all the ramifications of the different trend activities. We are involved with I) trend
~F..ENDS
channels, 2) trend lines , 3) run-away markets , 4) normal corrections e.g. 50 % retracernents , 5) coun~er trends , 6) maxi, major, medium, short, and mini-term trends, and, 7) trend moment~~What is very difficult is tc decide whether the uptrend, downtrend has stopped. It is by no means unusual for a major trend to be interupted by a substantial pause, as a new t~~porary equilibrium is established. This pause is quite likely to break the first steep uptrend line. But, until a new confirmed downtrend is established it is rash to assume that the previous trend is reversed, altho' it cud be prudent to adopt a neutral stance at any rate, until the equilibrium has been upset & a new trend has been confirmed. Confirmation of a major uptrend consists in a rise to point "a"in the following diagram, and a fall which is smaller than the preceding rise and a new rise to a point above "a" .
T
There are trends within trends. Contained within a maxi-trend may be one or more long term trends, which in turn may contain one or more medium term trends, which in turn may contain one or more short term trends, which in turn may contain one or more mini-term trends. Trends are constantly being broken, either by counter trend or by congestion areas. The shorter the trend, the less significant its termination to the over-all price structure.
trend liJle
:2!
I22
TREKJS
Some seasoned, veteran chartists will usually not oppose a trend unless it has gone thru three separate stages. First - an uptrend - the initial thrust, then a period of consolidation, - second, - a second upthrust and another pe~iod of consolidation and then finally the third upward movement which often marks the culmination of a major move. ( the Elliott Wave. ) This rule of three usually works better in bull markets than in bear markets. ( Bull markets actually ap_t>eaz. in this manner ..... a manner which is similiar to the pattern followed by nature for most living things. - it consists of a slow start - a gradual acceleration in growth that terminates at maturity. ) majo~
Following a very steep move, a normal correction may only serve to alert the sharp into a more moderate trend in the same direction. As a general rule, prices have a tendency to cruck 50 % foilowing an extended price move. A correction of less than 50 % is evidence of a powerful trend while a greater than 50 % correction is a possible form of a reversal. Furthermore, a 50 % correction from a steep move corresponds frequently to a strong important support area ( see congestions. )
and, it is very likely that the correction will be altered at that level.
A run-away market and a high moment~~ market will differ from the action that occurs in a trend channel, by its nature of consisting of multiple consecutive days in the same direction, occasionally broken in the opposite direction of the trend. / Because of the strong pressure of a run-away, two consecutive days in the opposite direction is rare. Therefore, two consecutive days closes in the opposite direction is U're first signal that the run-away is potentially over.
6
TYPES OF TRENDS There are three types
I. uptrend 2. downtrend 3. sideways trend
There are three kinds of trend movement I. trend channel 2. run-away, breakaway market 3. congestion movement trends The classification of trend movements are I. maxi-move 2. major move major counter-trend 3. medium ( intermediate ) trend medium counter-trend 4. minor trend minor counter trend. 5. mini-trend mini-counter trend The definition of an upward trend wud be : - successive isolated highs are higher and successive isolated lows are higher.
/(I
' --:'isolated lows
The reverse is true for a downward trend .
--/
/ \
..
·--·····-
------
------. ..
e.g. isolated low
e.g. isolated high
!24
TRENDS A t~e~d must be in existence for at least two months to signal a maJor trend. A medi~~ trend can last from days to weeks, minor trend a day or 2 or 3, and a mini-trend day to day. A maxi-move lasts months on end. Determining trend : - a trend's simple characteristics is successive highs and lows obtaining levels above and below previous highs and lows. When two or more lows, for example in an uptrend, can be connected by a straight line,
I
I
~ a trend is said to exist. This ideal trend action is rare. More typically, trend action will assimilate the irregular spurts and set-backs. Stated very simply, the market can move in only three possible directions - up - downsideways. Altho' this may sound obvious, the fact remains that it is actually difficult at times to determine the trend direction of a given market. A study of past markets clearly indicates that all bull markets are periodically interupted by minor downward reactions and that minor rallies are standard elements of bear markets. The extent of the counter minor trend depends on the magnitude of the existing major trend. The price level and the technical condition of the market can be taken into consideration. The chartist must be aware of all the trend types, and must at all times be able to distinguish between them. It is primarily the major market trend of a minimum of two month's duration, which provides the basis for the extended price moves, and which shud concern the serious market student, and be part of his/her trend analysis. ( Cursory studies reveal that markets are without significant trending action 85 % of the time and that the market is in congestion of one sort or another during that time.) In anticipating a major trend, one can only assume its evolu~on, and make use of break-aways, dead-runs ( next chapter ) , broken trendlines and modus operandi involved with trend reversal analysis. Experience will dictate the likelihood of a major trend evolution. Obviously, if prices have been presumably depressed a considerable length of time and bottoming formation appears evident, and fundamental factors attend an upward move, any movement away from the bottoming congestion is to be anticipated as a commencement of a major uptrend, and will remain so until validated or invalidated. Bull trends are always arrested in a significant pattern and this is dealt with in the chapter on trend reversal. So, inbetween the
6 TRE~DS
top and bottom of the price of a commodity for a given year, we have a trend, either going up or down, and inbetween those two prices we have various congestions and trends. In viewing prices on the broader spectrum enables the trader to assume the evolution of a major trend, taking into consideration and recognizing the characteristics of tre~d action and being familiar with all of the factors offered in this chapter. For example, a combined rise of price, O.I. on high volume has bullish significance in the early stages of a bull move. Each time a market finds unyielding support, an uptrend is gaining strength. Each time a market finds unyielding resistance, we have a downtrend. Support and resistance exists by varying degrees and each by itself provides the reality of maxi-major-medium-minor-and mini term trends and countertrends. The biggest problem for traders is when to buy and sell. It is not that difficult to predict the direction of a current trend, or that it may reverse in the near future. Riding a trend is relatively easy and one method this author respectfully suggests is the utilization of P&L charting.
TREND LINES When three or more isolated lows during an uptrend can be roughly connected by a straight line, an uptrend is said to exist. Such an ideal trend action is not too common. More typically, trend action will assimilate irregular spurts and set-backs. Internal trenc lines can be useful when trend action is so irregular. To draw a trend line requires concatenating at least two points. This shud be considered a provisional trend, then as the chart pattern develops, the technician shud be alert for either a confirmation or a rejection of the original trend projection. The interesting feature of this method is that the line drawn with the straight edge defines the support level of/ / / prices as they make upward headway. An ideal way is to extend the trend line one week forward, until they are technically justified.
I25
!26
':'RENDS
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I27
It is interesting to observe in particular the validity of the long run trend line and the frequency with which intervening price swings approach to a point of tangency and pary without penetrating it. ~he phenomenon appears so often that a correctly inscribed trend line is an extremely valuable tool. The more often bottoms re-occur along an uptrend line, the greater is its technical importance. By the same token, if a trend line is tested repeatedly the more likely the direction has apparently reversed after this trend line is ultimately penetrated. Once prices have taken a header thru a major uptrend line , the advance has temporarily expired. At an appropriate time, a down trend line can be drawn. Down trend lines are determined somewhat differently.
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A straight line more than likely harnesses price tops together, as opposed to an intervening rallies as the bear trend evolves.
Create a weekly high/low/close bar chart and take a look at those trend lines
\
There are three tests of trend line validity. I. number of times the trend line is approached 2. its steepness 3. length of time the trend line prevails When a trend line is drawn rather steeply, I tend to be skeptical of its validity. It can usually be retraced on a flatter plane. The steeper the trend line, the more easily sideways movement can
I28
TRENDS
honey-com it. On the other hand, if trading activity matcri~lizes considerably above this trend line, then prices must have a substantial distance downwards to reverse it. Penetration of a trend line attests to the need for examination of other technical tools. Directional turns of major movements are usually accompanied by deviations in trading activity. The penetration of a trend line shud raise the possibility of a reversal. A downside penetration of an uptrend line wud carry a bearish implication especially if the most recent isolated high fails to surpass the previous isolated high.
Create a monthly high/low/close bar chart and take a look at those trend lines!)
fails to go above "I" .
And, if the current action is carried below the former trading low, "2" it gives us the I-2-3 topping formation ( see chapt. 8 )
As a general rule of thumb, if closing prices violate a trend line, in the opposite direction to the trend, the trend is aborting. Once a trend line is convincingly broken and a rally to the trend line occurs or does not occur, the evolution of a major correction to the uptrend is evident and a bonafide topping formation can be considered. ( Topping formations are covered in chapt. 8 ) Suffice it here to mention that the breaking of a major trend line ( a trend line of two months' duration ) is the point at which some traders take profits or take positions against the previeus trend.
Trend lines are not necessarily straight lines. They may occur or may begin as a straight line and then curve. Chartists who recognize only straight trend lines are apt to miss many valid non-linear trend lines. However, this author feels that there are enough lines to be prolated to the chart page without getting into all sorts of circles or semi-circles. Trend lines are the simplest to utilize and shud be if possible, one of the few graphic technical
6 ~RENDS
!29
tools to which the trader shud restrict himself. In defining various trends, it is worthwhile to note that a minor trend may be defined as price flows ( advances, declines ) of 3 to IO % and medium term trend may be defined as Io to 50 % for advances and IO to 33 % for declines. A major trend may be defined as exceeding 50 % for advances and over 33 % for declines. For example, if the price of soybean oil advances from 30 ¢ to 45 ¢ , prices advance by 50 % , but a price decline from 45 ¢ to 30 ¢measures a decline of 33% . (a major trend). ( i f U're confuse with the above, read it again. )
TREND CHANNELS When a trend line exists and a parallel line can be drawn to roughly connect three or more highs, a trend channel is said to exist. Trend channels can be constructed with a little care, and common sense application. The upper limit may be subject to an occasional revision until it is clearly delineated. e.g.uptrend A derived trading channel possesses obvious benefits for the nimble short term trader. In the sense commodity prices are always running in a channel, - up - down - or sideways, and when prices trend well, that is, when they fluctuate within a fairly narrow but delineated channel, short term trading is to some traders fun and profitable. As prices oscillate upward within an upchannel, u assume they will reverse either before they reach the upper resistance line, or at the resistance line. There are two methods of interpreting price undulations within a trend channel, to the extent that if rallies fail to reach the upper limit, there is weakness in the trend. On the other hand, a sustained penetration of the upper limit suggests a trend acceleration which typifies the final stages, if it is an uptrend channel,/ of a bull market. Trend channels tend to indicate short term price objectives. Experience suggests that when an existing price trend is changed, and gains southern momentum by breaking, or northern momentum by increasing a channel momentum, that the accelerated market action will be the blow-off. Any price going thru the trend channel's limits is a call for action. A serious penetration of the outer wall denotes a danger signal to the over-all prevailing trend. In an uptrend channel, a serious penetration of the lower wall has obvious bearish implications, But
I30
TRENDS
a serious penetration of the upper wall also has a serious implication as it constitutes a trend acceleratio~ and signals the final stage of the move.
-- -- -;if /~I
Sometimes, lines connecting isolated highs and lows, 11 J J I.utilizing major trend lines create a major ~ channel, which indicates that the market is in a major uptrend or downtrend. Within these major channels, frequently, minor uptrend and downtrend lines and channels can also be contructed. Violation of the minor trend lines usually is not significant, whereas an important penetration of a major trend channel line is often followed by a substantial move in the direction of the penetration.
As in the following illustration of 'cattle' , a trend channel bottoming formation and breakout on the upside wud have _..-bullish implications which is the reverse of a top of a market and major downside trend line is penetrated, and prices may even go sideways ( they usually do ) for a while.
6 ':'RENDS
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TREND VALIDITY There are four hypothesis of trend validity. #!
Each time a market finds unyielding support, as an uptrend line, or as resistance along a downtrend line, a trend is gaining strength. That is partly because additional traders are becuming to recognize the power of the trend, apd to identify the line of operation. At the same time, counter trend positions are likely to be closed out or even reversed; - these points adding further momentum to the existing trend. The longer a trend persists, the greater the chance it will continue until some new force intervenes to precipitate a reversal.
#2
A trend has greater validity if it shows itself in actuals ( cash ) as well as in futures and in all delivery months, rather than a few.
!3!
I32
TPENDS
#3
A trend is more dependable when prices have moved in a relatively narrow, tight channel, rather than along a broad and more or less magnified path.
#4
A trend is more dependable when its' slope is deep rather than shallow
If a well established trend accelerates suddenly, this may represent the last wave of liquidation, indicating an impending reversal.
TRENDJ 0,1 AND VOLUME If prices thrive along with increasing volume and O.I., the market is technically strong. Rising O.I. indicates that new positions are being initiated. New buyers enter the market at different points during the trend according to their psychological bias. Sooner or later the shorts admit their errors and offset their positions by buying, which strengthens the swing. Liquidation of a contract reduces O.I .. Prices up and O.I. down means that the price rise is not being supported by new buying but by short covering, which adds to the technical weakness of a market. Falling O.I. in a rising market also exposes the profit taking longs who offset their positions. When buying activity dries up, the trend will be over, - even precipitously. In a downtrend, lower prices and higher O.I. expose the shorts who flex their financial muscle and long positions are covering their positions by selling. Offsetting adds to the selling pressure, further depresses prices and reduces O.I. when new sellers are no longer interested and old sellers start to take profits, O.I. is further reduced which marks the end of the downtrend. /
High volume is concomitant with a breakout, as well as the evolution of an uptrend and at its' termination and~is concomitant with the evolution of a downtrend. Volume sometimes is low. High volume can permeate a breakout of a congestion which is part and parcel of either trend.
6
TP.ENDS
:: 3 3
FUNDAMENTALS AND TRENDS We have three basic groups of commodities. I. industrial 2. agricultural 3. perishables
e.g. copper, lumber, silver e.g. pork bellies, soybeans e.g. eggs, potatoes
Industrial commodities tend to produce the longest trend cycles due to their relative stability of supply and demand. They are more subject to the longer term viscissitudes of rain, drought and spoilage. Agricultural commodities are next as to length of trend cycles. These tend to make seasonal lows around harvest time which appears around the same.time each year. Altho' current marketing activities may distort patterns, the above is generally valid. Perishable commodities tend to fluctuate in the shortest term cycle. Essentially, however, market fundamentals underpin trend direction, while charts, volume, waves and so forth portray market activity. And, don't forget this.
USING TREND ACTION Profits accrue by identifying a trend and staying with it as long as possible, and exiting when it has ended. There are many major and primary trends, and trends pulsate. Medium term trend and minor term trends rarely endure more than a few days before there is a small technical correction. The duration of longer swings vary widely. /
Traders can make money in commodity futures even if they cannot predict short term price swings consistently. All they have to do is follow the major-medium trend. Considerable success cums from quietly picking such markets. - quietly trading them and quietly waiting for the market to offer profits. Whereas a trend is an opportunity to realize one enormous profit simply by sitting tight, a congestion area is an opportunity to realize many small profi.ts by alert activity with the congestion area's life.
I34
TRE!\DS
There are only two ways to trade and that is using trend activity and using congestion activity. Most trends are by themselves actually congestions, in that they often retrict thaaselves to a trend channel, wherein several short term trades are possible. Most traders suggest restricting oneself to not overtrading in trend markets. However, because the professional scalper derives profits from trading dips and buldges of varying time lengths, it seems difficult to understand why the ability to recognize price trends is asserted by most professional advisors to be the most important requirement for successful trading. The adage: - cut your losses and let your profits run is heard by every trader alive and has been regarded as a basic rule of successful trading. Yet, the effort to comply with the directive is successful for the trader-who can consistently anticipate the continuation and alteration of price trends. The other extreme exists wherein one may be able to decipher that a long term trend is underway and holding and even adding to the position - not taking profits - until the trend has distinctly exhausted itself. However, when prices trend well, they do fluctuate within a fairly well but delineated channel and scalping and various approaches are fun and profitable. Most profits for professional traders are generated by bucking the trend and riding with it. Here, I am writing of action within the channel. Almost invariably, trends in commodities exceeds one's wildest dreams or a chart prediction. And, getting on board a major trend at its commencement involves knowing exactly what constitutes the evolution of a trend. One factor for example, is that in any major trend, up or down, it tends to start slowly then accelerates sharply as the momentum of buying or selling accelerates. If u do get a sharp upward momentum and a correction from this, this correction is natural and normally one must expect further momentum, and further momentum is either a continuation of the preceding major trend or it is part and/ parcel of the evolution of a topping or bottoming formation. O.I., volume, contrarian opinion, committment of traders and technical momentum indices enable the trader to quantify the validity of the trend. Small traders tend to rely on long run trend following methods for profits. Such trading theories result in strategies of buying strength and selling weakness which enable the small trader to reap high profits in years when such trends are in long duration. Unfortunately, the markets more often than not are trading markets rather than trending markets. That is, there is more of a chance
6
TRENDS
for ?rice reversal than for
p~ice
135
continuation.
Large traders use markets as trading markets rather than trending markets and rely more heavily on the presence of negative serial correlation for they tend to sell certain rallies and buy certain declines. It is the purpose of this book to enable the beginning trader to someday appreciate his ability to do exactly that.exactly what the large trader does. One cannot beat riding a major bull or bear and pyramiding; and within a few weeks and months creating a considerable fortune. Maybe, each commodity has one major run up and major run down each year. Even in these runs up and down, congestion areas are more frequent than infrequent and it behooves the trader to recognize I) when a market is strongly trending 2) when it is entering a congestion, and 3) is congested and 4) when the market breaks out and 5) being able to anticipate the breakout. In contrast to a $I.OO move in pork bellies, if prices move up and down five times in a IO¢ range, one has the same amount of profit as in the $1.00 run, and sometimes with less attendant risk. { However, it is very difficult to pyramid in congestions, - pyramiding wud give the trader a greater profit in a trend market ) .
The following is a list of some ways of using trend action. I. trend channel - each time a lower wall in an uptrend channel is touched or approached wud be a buy point and each time a upper wall is touched or approached wud be a sell point. 2. as a general rule of action, using a closing price that violates a channel line in the opposite direction to the trend - get out of the position or switch and reverse. Of course, there are false moves where the price returns to the channel, but there are not very many of them in proportion to the times the trend is actually broken by a move through major channel lines. Be aware that a move thru the upper wall in an uptrend channel constitutes a trend acceleration, which often signals the final stage of the bull { or bear ) market. The steeper a trend's angle of ascent or descent,
I36
TRENDS
the sooner the trend will reach its ultimate price objective and corresondingly, the shorter will be that trend's life. 3.
bucking a trend in anticipation of its reversal. - bucking a counter trend to a medium to major trend enables the trader to board L~e overall larger trend.
~~~){~ter
r
trend
trend bucking
Trend bucking, however, is mostly employed to profit from nominal price swings within congestion areas and trend channels.
Trading within the confines of a trend's channel walls, a trader may buck the then prevailing nominal trend, or counter nominal trend, on the premise that the price will continue to remain within its prior confines. Bucking any trend implies the anticipation of its termination in "v" or inverted "v" fashion, giving U isolated highs and lows.
Such sudden reversals rarely occur with major trends, sometimes occur with medium trends, and more often occur with minor trends and frequently occur with nominal ( mini ) trends. Also, "v" reversals terminate counter trends more often than they terminate trends heading in the same direction,
6 ~P..ENDS
as the overall trends. To sum up, a "v" or inverted "v" will tenninate in ~he ::allowing frequency nominal countertrend nominal trend minor countertrend minor trend intermediate ( medium ) countertrend medium trend major trend 4. boarding a trend during a period of consolidation in anticipation of the trend's subsequent continuance. The biggest danger here is that the anticipated move does not occur at all but consolidation evolves instead as a top or bottom. Sideways action that extends beyond three months shud be regarded with suspicion i f one is anticipating the consolidation area as a continuation formation. 5. buying during the fonnation of a bottom or selling during the formation of a top. The biggest danger here is that the anticipated bottom/top evolves instead as a continuation pattern. There are two principle advantages to positioning in bottom and top areas. First, one's risk is easier to calculate and limit. Taking a position after a trend emerges runs the greater risk of a nasty loss from a counter trend. Second, traders often believe it advantageous to take modest positions, in that he/she will have his feet wet by the time the trend emerges whereupon he is encouraged to more aggressively increase his position. However, more often than not, after a consolidation area breakout, the overall t~nd is sometimes followed by a brief counter trend and bucking this counter trend can be very lucrative and enables the trader to board the major trend , often with the previous congestion area providing support.
breakout
-l
~ congest~on
~,ounter trend
f
/-bucking support
I37
:38
TRENDS Often, before a trend finally emerges from a top or bottom, it will have a few false starts. Being able to distinguish between a false breakout and a valid one, requires judgment fueled by a great deal of knowledge and experience. Any 3 % breakout from the upper price of a bottom, or lower price of a top ( $1.50 on a $50.00 price ) shud be regarded as potentially important.
6. buying or selling upon the breaking of the first minor counter trend after a breakout from a bottom or top. 7. buying or selling immediately on perceiving an uptrend or downtrend. This can easily be perceived by the breakaway gap from a congestion bottom or top. These kinds of breakaways do not occur that often. Unfortunately, the memories of these breakaways often prompts many traders over the next few years to jump aboard other trends prematurely.
8. gap action positioning procedure when U get a sharp downtrend which remains for several months and u get a movement out of that downtrend into a sideways pattern, u shud a) start expecting a period of a month or two while prices continue to consolidate into sideways action. b) start looking for an accummulation procedure. c)expect a rally once the prices start to break out of the consolidation pattern to the upside. 9. positioning trends by the moving average method.
BREAKAWAYS After a congestion area has prevailed long enough to be widely recognized, buyers and sellers will usually have accummulated in the wings ready to jump into the market. And, on the breakout there will be marked pick-up in activity. This volume action has no prognostic value; the customary market pick-up and trading activity after a breakout tends to leave the validity of the
6 TRENDS
I39
breakout in doubt. If the volume subsides and the trend proceeds on its way then the breakout was indeed valid. But if the volume remains high and the trend promptly reverses itself, the breakout's validity will continue to be left in doubt. Many seasoned traders avoid positioning markets in anticipation of breakouts. They claim traders are better off waiting for markets to tell them what to do. There are some seasoned traders who position markets in anticipation, but profits in this type of positioning is only of minor attraction to these traders. What they consider important is the added confidence in markets they have operationally anticipated. It is now suggested that a combined rise of price, O.I. and high volume has bullish significance in the early stage of an upmove. And, it appears to be significant in confirming a trend at its emergent stage. Often, on the breakout, for example, the upside of a congestion area, is that a support area exists along the confines of the upper prior congestion, lending credance to the breakout. It must be pointed out that as more and more market participants attempt to predicate every action on chart rules, the accurnmulative affect of these similiar actions self-creates price fluctuations, which may destroy much of the validity of all chart technique. In particular, the placing of stop-loss orders at identical points by hundreds of traders may create false penetration of trend lines and congestions. When prices stall shortly following a breakout and congests, a trader is warned that the prior relationship between buyers and sellers may be in the process of major alteration. Most stop orders are placed just above or just below congestion areas and these breakout points frequently turn out to be traps. The user of stops in such occasions shud be aware that he has plenty of company which will often result in mangled executions. Occasionally, prices may break thru the top or bottom of the congestion and then reverse with two consecutive days action back into the congestion. If this happens, the new high or the new/low becums the upper and lower limit of what is now a new congestion period. Also, a sharp trader is not likely to short a market during a technical reaction following a major upside breakout. \ _ don't short
~#J\MMA /
here !
I40
':'RENCS
Happily, a breakout point is necessary to the birth of most trend action.
by all means refer to che chapter on congestion re: breakouts and end-runs )
GAPS
( refer to chapt. 23 ) The breakaway gap is useful in predicting the end of the consolidation phase of the market, and it can herald a dynamic move to follow. The ability of a market to jump price levels certainly signifies a powerful underlying trend, or it cud result from the purely coincidental fact that some significant development occured after the market has closed. A breakaway gap ia accompanied by a sharp increase in volume. Once a break-away gap occurs, prices on the chart shud not be filled in by trading on subsequent days, if the move is to be of major proportions. If the gap is subsequently filled, it may still prove to be significant, altho' somewhat more caution is necessary in attempting to evaluate the prospecti~e size of the anticipated price movement. The "common" gap is usually formed in a market trend with small volume and usually these gaps are subsequently filled. The common gap has no particular significance. Run-away gaps appear following an already substantial price move and some chartists believe that their appearance marks the mid-point of a major move.
6 TPZN~S
I4I
Exhaustion gaps are normally followed in a short time by a key market reversal and signifies usually the commencement of the topping formation. If u are a good 'gap man' u will make a considerable amount of money. Understanding the above four gaps will enable the trader to have a finger on the pulse of any major trend.
STRAIGHTAWAY A run-away, - straight -away market is made up of multiple consecutive days ot closing prices in the same direction, occasionally broken by one day in the opposite direction of its trend. Because of the strong pressure of a straight-away, two consecutive days in the opposite direction to the straight away is rare.
WHEN THE TREND STILL HAS STRENGTH As the trend evolves, the O.I. and volume will not rise inordinately and price swings will not be wide and prices will be moving within the trend channel. Counter trend corrections will be at most, 50 % retracernents and momentum will be moderate, or aggressively consistant. Following a very steep move, often the trend will still be valid as the correction will only serve to alter the sharp into a more moderate trend in the same direction. As a general rule, prices have a tendency to crack about 50 % following an extended priee move. A correction of less than 50 % is evidence of a powerful trend. So, if the SO % correction from a steep move corresponds to a strong support or resistance area, it is very likely that the correction will be altered or be arrested at that level and the trend will still have strength. Remember that trends tend to last longer than most people can anticipate and major topping formation of a major trend usually evolves with a considerable degree of dancing around. As prices commence their topping activity, it will give the trader ample opportunity to take profits and possibly commence shorting procedures.
I 42
'!'P.E~I)S
TREND
\~EAKEN
I NG
A greater than 50 % correction from a very steep move is a possible form of a reversal and the harbinger of reversing prices yet to cum. The trend is weakening. for example, if in an uptrend channel, prices fail to reach the upper limit of the channel, there is weakness developing in the trend.
Also, penetration of the upper limits of the trend channel is an acceleration which typifies the final stages ( how long ? ) of the bull market.
Further signs of weakness: e.g. upmove the uptrend itself is broad and not very steep the final stage of the upmove is accompanied by a reduction in O.I., indicating that the market strength is attributible to short covering the first rally to the preceding high fails the top of the preceding one, giving a I-2-3 formation. I
/'h a trend line is broken the decline penetrates recent support levels. O.I. is running high and activity expands on the decline also consider contrarian opinion committment of traders cash,basis,odds also see straightaway pg.
I4I
/
':'RENDS
TREND REVERSAL There's a whole chapter on this. See chapter
8 ·
TREND BUCKING The theory goes that since most losers are small traders, the safest position is opposite to the market. Also, hedging activity accounts for the largest share of the positions. Trend bucking is mostly employed to profit from nominal price swings within congestion areas and trend channels. By virtue of the customary narrowness of trend channels, lucrative trading therein requires a great deal of trend bucking. Bucking trend implies the anticipation of its "v" or inverted "v" fashion. Scout thru this book for scads of info on trend bucking. Make U're own list, but be aware of all the perarneters involved before U assume that U can buck trend effectively.
PROFIT TAKING There are two ways of taking profits within the confines of a trend move. First, one takes profits on the intermediate -medium term and intra-day swings that occur during the trend move, incurring many, many trades over possibly· several months. This aPProach is at best risky for the novice trader and maybe shud be left for the professional scalper. Second, a large trader will often utilize only the major price move and will have established a good market position at the beginning of the major price move and nearly all of these large traders take their profits long before the move has run its course. The large long-term trader cannot score a profit by buying and selling with the public. He very rarely takes profits at the end of the major move. Take profit @ target area pg.256,2-day line?pg.360. Develop U're own list as part of U're game-plan.
I43
::44
TP-ENDS
WHAT SYSTEMS WORK BEST IN TRENDING MARKETS :·lost models and systems work well in a strongly trending market. This author has a saying that ' any damn system will work in a run-away market. Any fool can make money . It's when a market commences to top that most of these systems start to short circuit and traders frequently lose the money they have accummulated during the market advance or decline. Take U're pick of any trend following system ( there's millions of them ) and U will find that it works very well in strongly trending markets. I repeat, all systems work well in strongly trending markets. If they're trend following methods. What U want is a 'system' ( putting the basics like O.I. volume contrarian opinion, committment of traders, fundamentals, conventional understanding of the character of trends, congestions, and reversals aside ) , - that handles markets when they are not strongly trending. If u do not have such a system, stay out of all markets that are not strongly trending. Remember that most technical signals becum false or mixed towards the end of a major move and when patterns are incompletely moulded.
145
CHAPTER SEVEN
CONGEST IONS Mgume.nt , pJU.l..o.oophy a.dva.11-t.a.g e1.> c.ha!ta.c:c~ :tJ..CA
on
c.a.-t. e.g 0 tU. el.> c.onge~.>tion
a.c.tion
a.na.ty zing c.o ng e1.> :tJ..o no c.onge~.>tion,
0.1. and volume.
rn-i.d-wa.y c.ong e~.>tion pati:Vtno e.nd- !ULYL6 a.n;t,i.cJ.pa.,ting .:the dbte.c.:tJ..o n o 6 bJtea.fwld: a.n:t.,i_cJ.pa.,tin.g the. e.xte.n.:t o 6 the. bJtea.k.ou;t move. .6 up po Jt.:t
a.nd Jt e1.> -i.-6 ta.nc. e.
50 % Jt e.:tJta. c. em e.n.:t-6
u.!l-i.ng c.o ng e1.> tic n a.c.tio n
prvi..c. e. Jt e. veMa.£. c.o ng e1.> tio n6 c.ong e~.>tion a.nd :Otend d.a.y c.o ng e1.> tio n
I46
CONGESTIONS
ARGUMENT
J
PHILOSOPHY
A price
at rest tends to stay at rest.- a price in motion stay in motion are the essential tenants of the sharp, s~arp trader. A price at rest exhibits an established floor or ceiling for itself which is merely the graphic representation of supply and demand conditions at the prevailing price level. ~ends
~o
Market congestion is the temporary occurence of price stability - a range defined by a specific high and low price, the duration of which lasts from one week to several months. All we really know about prices is that they fluctuate and that conges~ion areas are one expression representing price movement. Conges-tion areas have been said to exist 65 % - 85 % of the time. To this author's view, there are two categories of price congestion. I. horizontal, sideways congestion within
a
confined high and low price
Mf\N\ 2. congestion areas within a trend channel
If u accept this premise, one can readily see that prices are in congestion one way or another, almost 90-95 % of the time. The astute trader can make use of price movements within all conqestion patterns, if he/she has a reasonable plan approach. Accordingly, the trader will concomitantly and consistently garnish enormous profits almost on a day to day basis. This author prefers to designate the above congestion area #I - horizontal congestidfi as 'resting area' - that is, prices are banging around within distinct high/low prices for a considerable length of time, ( 4 - 20 days , to months to years ) . And, #2 , the more vertical congestion area of trend channels, this author designates as 'angular congestion' , the trend channels, or restriction of prices by trend lines. The argument on behalf of resting areas - congestion areas, - is that the market is fairly happy with prices, sometimes within a narrowly defined range. The argument on behalf of 'angular congestion'
7
CONGESTIONS
I47
is that the underlying fundamentals underpin the trend movement and prices are restricted by prices plotted on angular trend lines. Congestion areas have been submitted to considerably more exhaustive study than any other aspects of technical analysis. The objective being to determine the direction of the trend when it emerges and also to judge how long the congestion area is likely to last and possibly to judge how far the ensuing trend is likely to carry. In this context, all we need to realize is that sooner or later, a congestion area is fated to have one of its boundaries sundered and possibly a trend continued or a trend reversed. Since most studies utilize the analysis of congestion areas - resting areas to interpret and anticipate movements out of the resting area, then it behooves the trader to becum aware of all the acceptable technical format in that regard, by which this chapter is formulated. However, in the chapter on P&L charting, the author will attempt to lay some ground rules that will anable the trader to accept this author's hypothesis, for effective congestion trading, or to develop his own, using P&L charting as one format. The point can easily be made that a price movement of $I.OO in silver may take one year. ( sometimes in one week ) . On a trend price movement basis. However, if silver moves a IO¢ span, up and down,five times, we have that same $I.OO price move and it is fairly easy to pick a IO ¢ move in silver at least twice a month. So we have the same $1.00 price movement in one to three months. Needless to say, silver will move IO¢ in one week, and it is fairly easy for the experienced trader to make use of this small time span trade, if silver is not really strongly trending. This argument is readily presented by many authoritative traders in the commodity futures business. However, many effective professional advisors contradict the effectiveness of congestion area trading and to this, I wud agree, in that the novice to moderately experienced trader shud beware of the emotional traps and whip-lashes that evolve when the less experienced trader assumes that he/she can effectively handle resting area day to day trading. But, certainly, being aware of the possibilities of / recognizing effective trading within resting areas, enhances the trader's capacity to either do some trading in resting areas or to utilize this information as a supplement to the standard . technical indicators, as are presented in this chapter to board the trend as it evolves out of the resting area. Whatever one believes is being measured, this ~ntire approach is based on the assumption that certain repetitive patterns of price and action will often occur before significant price movement.
I48
CONGESTIONS
ADVANTAGES Wh er ea s a trend is an opportunity to utilize one enormous profit essentially by sitting tight, congestion area is an opportunity to realize many small profits by alert activity over the congestion area's life. During a congestion area, dozens of clear cut buying and selling opportunities present themselves. The moment one can identify a congestion area, these opportunities are there for the taking. The biggest problem for traders is when to buy and sell. It is not too difficult to predict the direction of a current trend, or that it may reverse in the near future. Anyone can follow a trend and all trend following systems work well in a consistent runaway price movement. We know for sure that prices will fluctuate, but not now much and because U trade only in a congestion period, U are protected from large losses by being aware of the congestion area's confines. This author isfirmly committed to the view that the successful commodity trader requires him to be both an astute trend and congestion area student. Let me explain ..••. small traders tend to rely on long run trend following methods for profits. Such trading theories result in strategies of buying strength and selling weakness, which enables the small trader to reap high profits in years when such trends are in long duration. Unfortunately, the markets are trading markets than long trending markets, and there is more of a chance of price reversal than for price continuation. However, please, please do not forget that astute knowledge of trend following can probably make U all the money U need with much less bother and stress, especially if U have another occupation than commodities. Great profits can be made by sitting and waiting for trends !!! Large traders, on the other hand, tend to use markets as trading markets than trending markets and rely more heavily on the presence of negative serial correlation, for they tend to sell certain rallies and buy certain declines. /
Ones' system must not be rigid but be flexible to status of the market.
~~e
current
Technicians are famous for making spectacular profits one week and enormous losses the next. It is a fact of life that prices will .: not fluctuate according to what their past performance dictates on a medium to long term action. In contrast, P&L charting enables me to expect the action on a day to day basis, based on the action of the last three days. When unexpected moves happen, these technicians must start all over again.
C~NSESTIONS
CHARACTERISTICS OF see also chapter on P&L charting ) (9) A congestion period is characterized by an abundance of two consecutive days' moves, for example, two days up, one day down, two days up, maybe two days down, one day up, two days down, two days up etc. etc.
Using this knowledge,. we have two basic categories. I) prices close two days in one direction, then close one day in the opposite direction
!II~\
\~~r
2) prices close two days in one direction, with one corrective day and then two days again in the one direction, but then expect two days in the opposite direction.
days down
I49
ISO
CONGES':'IONS A note: - in a runaway market, a consecutive two day period in the opposite direction to the runaway is the first signal that the market is congesting and possibly forming a top, or bottom and the runaway move is over.
Definition of market congestion : - when a high and low price is not broKen ~hru by s~s~quen~ closing prices and are both immediately followed by two consecutive closing prices in the opposite direction, a commodity is in congestion.
~
days
market is now in congestion
low The above sounds simple enough, doesn't it ? Take a look at some charts and see if U can find these two day patterns. This author leaves it to the reader to recognize all the other characteristics of congestion areas by recognizing that that is what this chapter is all about and the above two day format is offered as a supplement to it.
CATEGORIES Long and maxi-term trends without congestive interuptions of major importance are virtually non-existent. Most traders sooner or later becurn serious congestion area students. Congestions fall into four categories. I. area of distribution ( top ) 2. area of re-distribution ( downtrend resting area )
CDNGESTIOI~S
IS!
3. area of accummulation ( bottom l 4. area of re-accurnrnulation ( uptrend resting area Congestions may be the temporary interuption of a price trend or may be the final termination of a price trend. Where a congestion area is clearly established, its identity can be one of two choices:!. a top or area of re-accurnmulation 2. a bottom of area of re-distribution The trader must attempt to distinguish re-accurnrnulation areas from re-distribution areas which this chapter will attempt to do.
CONGESTION ACTION All medium term trends - days to weeks - are virtually without exception interupted by a resting period which alters the disequilibrium that exists in a trend move to a period of equilibrium during the congestion's life. A trend interuption, permanent or temporary, occurs as prices shoot past the prices at which the market at that time considers a more equal equivalent of the laws of supply and demand. And, accordingly, market movements will adjust until this price of equivalent equalization of the law of supply and demand has been reached. During this period of equilibrium rest, new forces, both technical and fundamental will enter the market, which will influence prices in the direction of disequilibrium from the period of resting equilibrium. This disequilibrium - trend - will continue with further periods of equilibrium - rest - until fi_nally for the contract for that year, we have distinct topping, bottoming equilibrium, from which a trend emerges in the opposite direction. Since, in trend, the law of supply and demand is out of balance, and since the trend will exist until either supply or dernand~s exhausted and prices rubber-band into equilibrium, the first snap of this rubber-band entails high activity. Volume is greatest at the resting area's conception and then as equilibrium is effected the volume will gradually ebb towards the resting area's termination and on the breakout from the congestion, the new forces of supply and demand and concomitant technical factors, snap to it, with high volume. Thus, high volume generally figures most at the birth of a area and as the chart unfolds, volume ebbs and then runs to a
I52
CONGES':'IO!~S
peak on the breakout. The longer the sideways movement lasts in a resting area, the more we can assume that old positions are being liquidated and new positions are being established, within the constricted price range. As soon as the resting area has prevailed long enough to be widely recognized, a large number of buyers and sellers usually will have accummulated in the wings, ready to jump into the market every time the resting area's upper and lower limits are approached. Consequently, a downside breakout for example, buyers will have to be satisfied. In either case, the result will be marked pick -up in activity and such wud be generally expected. Take a commodity which is trading for example, in a 20 ¢ range. Everytime it hits the lower area, U have a great deal of activity and it looks as tho' the bottom is about to drop out. This action wud be attendant with a resting area of re-accummulation. Most of the activity, in this example, occurs at the lower level of the congestion area; then when prices go up to the top, the market becums very quiet and it seems as if there's not a friend in the world for the bulls. This may seem illogical when one's actions are being influenced by emotions, rather than by logic. All that activity at the lower edge constitutes an outward expression of friendship in support of the commodity, at a price below which it is not likely to go, by reason of those friends waiting to buy it there. And that lack of activity 2 ¢ higher is in large part prompted by a concern that aggressive buying there will induce some ill-advised bears to grab tighter on to their dwindling supplies. Clues generated by such action are especially valuable to those who are alert to them, because there are so few who perceive them when they do occur. ( Therefore, it behooves U as a trader to go to someone and try to explain the above in order that thru teaching U will know this phenomenon inside out !!!! ) Looking at the reverse of our example : wherein we have a period of redistribution of a downtrend - a resting area - which we anticipate to be a continuation of the downtrend, and using tRe 2 ¢ range, the activity will be high at the upper edge of the resting area. The volume is high in this area, representing eager sellers and two cents lower, volume subsides and we have an exhaustion of buyers, which when finally satiated, prices continue lower. Summary: - using the congestion action , we realize that at the congestion's birth, activity is high, particularily in market tops and less so in continuation patterns ( flags, pennants, triangles, wedges ) and that during the resting area's life, the volume activity will gradually subside a~ the congestion area evolves and
I
.... J
CONGESTIONS
153
most of the activity tha~ does exist occurs at the opposite end of the resting area from the path in which the new trend is likely to emerge.
texl?ect lpr~c~s
to
i resting area
~
II ~!
I
I
I
I I
I I I
r~se
higher volume
And, of course, on the eruption from the resting area, activity will pick up as those who were wrong in the resting area cover to protect their losses and new buyers enter the picture in anticipation of getting aboard the new trend. These pull-backs, consolidations usually last around five days and up to twenty days. During this resting period, there is an abundance of two consecutive days' moves. After a two consecutive day move in one direction within the resting area, there is a high probability ( 75 % ) , that the third day will go in the reverse direction for one day, and sometimes will continue if the congestion area is broad, as opposed to restricted, that prices will continue in the same previous direction for another two days, upon which the probability is high that with a pattern similiar to this, that prices will move in the opposite direction two days in a row. Generally speaking, if prices close higher than the previous day's closing two days in a row, this means that on the third day there is a 75 % chance that the price will close lower than the second day's closing and that if prices close higher than the previous day's close two days in a row with the third day's close in the reverse position and a continuation of two more days in the same direction, that the prices will move in the opposite direction two ( as opposed to one) days in a row.
I54
CONGESTIONS Usually this two days forward or down and one day back ~ill continue thruout the life of the congestion area ( resting and 'angular' congestions ) . Utilization of P&L charting ( chapter nine ) will further enable the trader to first of all recognize congestion at its' onset, ( within a day or two ) and also using the factors presented in this chapter, enable the trader to either I) trade in congestions or 2) -accumrnulation ·in anticipation of the trend that will evolve, or 3) recognize the emerging trena and board it on breakout. This above action is particularily true of continuation patterns. ( triangles, wedges, flags, pennants, and platform formations ) However, market tops are different in that action is usually more hectic or incredibly constricted. Putting this all together, one shud be aware of the congestion action peculiar to bottoming formations, topping formations and continuation patterns. At the bottom of a cycle, buyers are accummulating positions in anticipation of an upswing. This period of aquisition may be protracted. In the case of a rounded bottom, further sufficient optimism to propel prices upwards is required and then a trend is born. After a rapid ascent, prices may retreat somewhat into a consolidation period. This plateau is an ordered sequence of re-accummulation. At the top of an advance, periods of distribution develop and on the way down, further regions of consolidation or redistribution spawns as the market adjusts to new prices. Thus, after a substantial rise or decline, fluctuations initially are apt to be wide and hectic in reflection of the market's struggle to adjust to the new price level and then will gradually simmer down. This is particularily true of triangles, wedges, pennants, platforms and flag formations. Sometimes, mid-platform breakouts are normally accompanied by temporary pcik-ups-in volume. A similiar declining is characteristic of volume action in multiple "v" shaped formations.
ANALYZING CONGESTIONS Some clues that are useful are I) location of congestion area· in recent historical price range
!55
CONGESTIO~S
2) breadth of congestion area
3) location of price change activity in latter stage of congestion area 4) location of volume action in the latter stage of the resting area 5) P&L charting With #I find a chart somewhere and talk about the specific chart wha~
can U find in the following chart .. -. ~~~~~~~---------------~~~~~.----~-------,-~ c..ft ,.,... CDIICIDZ,. CIWI:r SEJ!nCZ
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With clue #2 tops and bottoms a~ost always take longer to form than consolidation areas. ( except island tops ) . Bottoms usually take longer to form than tops. Consolidation areas rarely last more than a month - usually 5 - 20 days. Tops generally linger from one month to six months. However, tops such as island
I56
CONGESTIO~S
reversals and inverted "v"'s may last only 3 - 4 days. Bottoms may form from one month to several years. If the duration of the ~esting area approaches patience testing proportions, a trader shud be prepared for the emergence of a major price trend reve~sal - this patience testing is the hallmark of tops and bottoms.
With clue #3 in the initial stage of the congestion area, after a substantial rise or decline , fluctuations are apt to be wide and hectic, in reflection of the market's struggle to adapt to a new price level. Later, price fluctuations will assume more normal characteristics. If price activity tends to occur towards the lower level of the congestion, the implication is that important buying support is being given the market and that the next trend will be up. Conversely, if price activity is towards the upper level of the congestion area, the implication is that important selling pressure is being exerted on the market, and that the next trend will thus be down. With clue #4 altho' price volume and price change activity seldom supply clues concomitantly, there is a strong correlation in what their clues indicate and imply. Therefore, if a higher volume tends to occur towards the lower level of the congestion are in the latter stage of formation, the implication is that important buying support is being given the market and that the next trend will be up. If heavy volume occurs on the upper level, the implication is that important selling·pressure is being exerted on the market and that the next trend will be down. Special note: -because after a substantial rise or decline, price.fluctuations are apt to be wide and hectic in reflection of the market's struggle to adjust to the new price level, then will gradually simmer down,,,, triangular formations will occur with great frequency. In fact, the triangle is the only pattern that customarily turns up both as consolidation and price reversal patterns a symmetrical, equilateral triangle does not indicate the direction that is ultimately to be taken by the ultimately ~erging trend. An ascending or descending triangle does ( see chapters 8 & 23 ) With clue #5 the use of P&L charting in resting area analysis re: chapter 9
I_J
7
CONGESTIONS
!57
CONGESTION, O,I, AND VOLUME After a price rise,a congestion area may be either an area of re-accummulation or a top. If O.I. continues to climb while prices start levelling off, a top shud be suspected. After a price decline, a congestion area either can be an area of re-distribution or a bottom. If O.I. continues to be liquidated while prices are levelling off, a bottom shud be suspected. In the first instance, the bulls' domination is being effectively challenged by new sellers. Sometimes, in a topping formation, a falling O.I. as prices increase, signifies that there is weak buying and that the effective rise in price is occuring as a result of short covering. This is the final stage of a bull and usually exists prior to the top formation. If O.I. continues to rise and prices go sideways, within a congestion area, then a top shud be suspected. In this second instance, the bear's domination is effectively being challenged by new buying, for the moment. Because congestion areas are assumed to provide support and resistance, usually as a result of action taken by traders who initiated positions within the.area, it follows that the volume of activity within the congestion zone is an important indicator of the support and resistance of the congestion area. The more traders that have an invested interest in prices within the zone, the greater will be the expected buying or selling power shud a move occur out of the congestion or return move into the congestion. Congestion areas also give the trader the opportunity to analyze what commercial interests are doing in the markets. The commercials are always in the markets, spreading and hedging their actual posi~ions. They are the largest short sellers in any market. It is possible to keep track of how much short selling is taking place thru the use of O.I. within the context of short sellers. ·The O.I. figures will decline if, and only if, these short sellers are covering their shorts. It will rise if and only if short sellers are increasing their ahorts. Since we know that the commercials are responsible for the short selling, we can correctly say that an increase in O.I. implicates an attitude of beari~ness on the part of commercials if prices are in a congestion period. A decrease indicates an attitude of bullishness on the part of commercials. The only exception to this rule is during a bonified bottom formation, wherein very few shorts existed by the commercials to start with and volume is light and an increase in o.r. is due to the commercials actually going net long, which is an unusual move, because commercials generally speaking are net short. During price consolidation or resting areas, one wud make use of O.I. to see what the shorts are doing - what the commercials are doing re: their short positions, as they hedge against their
ISS
CONGESTIONS 'actuals' , - one wud analyze the p~ice and ~~e O.I. activity the resting a~ea, especially one of longer duration.
du~ing
Therefo~e, if during a resting area, 0.!. suddenly declines, we are being told that commercials are buying back their short positions and that they feel that prices will break out of the consolidation on the upside. By the same token, if p~ices are in a trading period and o.I. increases, it tells us that the commercials are adding to their charts and hedging their actuals and that they are looking for prices to break out of the consolidation on the downside.
The following is an example of O.I. increasing, as Cotton was consolidating, giving every indication that the commercials were going short and ~~at cotton was forming a top and that prices wud break out on the downside which is what happened.
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i
CONGESTIONS
This is a heavy, heavy chapter. - keep up the good work, if U're still with me.
MID-WAY PATTERNS After prices have travelled a considerable distance, a general feeling can develop that prices have gone up or down far enough. Call this a psychological quirk of traders if U wish but this type of thinking becums an important market factor with new buying and short covering, with new selling and with long liquidation developing on this assumption. During an up market and the prior trend is up, it favors the emergence of the trend in the same direction after the resting area has completed itself. A most common mid-way pattern are the flag/pennant, which form after rapid vertical moves. Note, however, that if after a gentle market move as opposed to a precipitous market move if what appears to be forming is as a pennant or flag, the orthodox technician shud obediently try to visualize another pattern. Flags and pennants usually occur after a rapid price move. The pennant and flag usually slope in the direction opposite the preceding fast move and they seldom persist longer than two weeks. Pullbacks and consolidations usually last from 5 - 20 days. Volume shud be smaller during the formation of the pennant or flag than during the move that preceded it. The fact that flags and pennants ( and wedges ) customarily slope against the prevailing trend makes sense when realized that a consolidation area is often simply an area of price corrective action caused by a market sprint which overran a price level that cud then be supported by the law of supply and demand. Corrective action is by implication trend countering. The next mid-way pattern to be considered are the triangles w~ich by the way can be either continuation pattern or a price reversal pattern. In the context of triangles being a continuation pattern one wud assess the development of what is called as ascending or descending triangle. ( see chapt. 23 ) . The ascending triangle is the most reliable to follow in an uptrend and conversely, the descending triangle is the most reliable to follow in a downtrend. Triangles more often than not are continuation patterns. The ascending triangle, for instance conveys a simple picture of what happens when a growing demand encounters a large offering at a particular price. The demand persists and the offering will
I59
160
CONGESTIONS
eventually be absorbed by buyers. After complete absorption of the offering, prices advance rapidly, but before this happens, old shorts and new shorts are lured into the picture. The shorts will have triggered a series of brief declines which will then have attracted new demand and which in turn stimulate the succession of rallies back up to where a large but gradually diminishing supply existed.Since the bullish forces pre-dominated each decline, it will be met with new demand at progressively higher prices. They appear when there are simultaneous short term uptrend and downtrend lines which intercept. large offering gradually diminishes
The conventional chart interpretation holds that triangles signal an impending large move, with the direction of the move likely to be in the direction of the steeper trend line. Volume will · decrease near the apex. Triangles appear to be fairly reliable indicators as mid-way patterns, especially when no more than 3 or 4 oscillations occur before the breakout. ( Price reversal triangles can consist of ten to twenty oscillations. ) Another form of triangle that will occur as mid-way pattern is the symmetrical - equilateral triangle. This mid-way pattern does not indicate the directipn to be taken by the ultimately emerging trend. However, if the prior trend is up, this favors the emergence of the trend in the same direction. A second weighty clue is the fact that there is not sufficient broadening in equilateral triangles to suggest a price reversal. U shud have a broadening of scope in symmetrical, equilateral triangles, ( ditto for ascending, descending ) , before taking seriously the possibili~y of a price
7
CONGESTIONS
I6I
reversal. Triangular formations occur with great frequency, since it reflects the market's struggle to adjust to the new price level, as it gradually simmers down. In fact, the triangle is the only formation that customarily turns up as both continuation and price reversal patterns. Also, it must be remembered that consolidation patterns far outnumber price reversal patterns. Take a look at any chart, if U will, to see this. In analyzing a mid-way pattern, use the general rules of SO % retracement. It follows that, after an extended price move, any correction-of less than 50% is evidence of a powerful trend and that the emergence of a trend shud be the same as the ·previous trend that exists prior to the mid-way pattern. A greater than 50 % correction cud possibly form a triangle and this greater than SO % correction is a possible form of price reversal. Note also that during the formation of flags, pennants of triangles as mid-way patterns, that if the correction corresponds to a previous support or resistance area re: former congestion area, a discussion of which is to follow, that the use of this support and resistance enhances the interpretation of the mid-way pattern as actually being a mid-way pattern and a continuation pattern format. In appreciating the emergence of a mid-way pattern, one must be aware of the phenomen known as volume blow-offs. As the prices enter the congestion area, these volume blow-offs signal the commencement of the flag, or pennant or triangle. Before one can have a price reversal, one will usually see a series of alleged volume blow-offs, and these precede the valid .volume blow-off as a signal to the end of a bull or bear market. Also, it is not uncommon to see in triangles, a volume blow-off of moderate substance which signals the termination of a lengthy counter-trend. A splendid opportunity to buy a market is a market wherein there is volume drie - up during the consolidation pattern at which times signal the termination of the countertrend. Being aware of the activity that occurs in mid-way patterns, one can assess the validity of the pattern as it signals an ensuing move or as the development of a reversal patterns.
Reviev.' o:: mid-way patterns
mid-way patterns
represe~:
prices that have travelled far enough
if prior trend is up or down, it favors similiar emergent trend mid-way patterns occur after rapid vertical moves a gentle market move negates mid-way pattern validity pennants,flags,wedges, slope opposite to the preceding fast move mid-ways seldom persist 2 weeks - usually 5 - 20 days an ascending triangle in up market denotes uptrend continuing a descending triangle in down market denotes downtrend continuing a symmetrical triangle may signal upmove in an up market or it may be a reversal of an up market ( reverse for down market ) triangles indicate mid-way action with 3 Or 4 oscillations IO - 20 oscillations signal potential reversal of triangles a broadening of scope is essential in determining all triangles as potential reversals triangles occur with great frequency consolidation
pat~erns
far outnumber price reversal patterns
validity of ned-way patterns is assessed by analyzing 50 % correction rules and their relation to nearby support/resistance a series of alleged volume blow-offs usually precede valid volume blow-off
Now, what U shud do, is do the above for every section in this book, and create U're own manual, appropriately labelled, page and topic for easy reference to this book and to U're manual ) How about it ? Afraid of a little work ?? ) Come on ! ! ! U want that 12 million dolla:s in eight years, don't
u
?
7 CONGESTIONS
END -
I63
RUNS
An end-run is a sudden trend reversal which soon fully pierces the congestion area from which the prior trend recently emerged.
back to congestion A congestion area is a stand-off between buyers and sellers which may last a short time or for several years. Congestion areas have been submitted to considerably more exhaustive study than any other aspect of technical analysis, the objective being to determine the direction of the trend when it emerges and also to judge how long the congestion area is likely to last and possibly to judge how far the ensuing trend is likely to carry. The longer the sideways movements last the more we can assume that old positions are being liquidated and new positions being established within the constricted price range. Therefore, when prices finally do break out of a congestion area and establish a new price trend, those who are on the wrong side of the market will be anxious to get out of their positions. Consequently, we have a continuation of the development of a new trend. In the case of an end-run, it is that prices sometimes have advanced or retreated out of the congestion too rapidly for its own good. This phenomenon is known as an end-run. The longer the congestion area has developed, the greater will be the number of traders with new positions who wud have losses in the development of prices against them out of the congestion, and the greater the number of orders will be placed in the market to cover, just outside· the congestion area and the greater shud be the emphasis to-the price move. Accordingly, end-runs can be rather dramatic. Actually an end-run can occur at any point. An end -run which occurs subsequent to break-outs from a congestion area that contains no top or bottom characteristics is fairly easy to foresee. End-runs occuring just above or just below top or bottom formations are more difficult to anticipate. When prices stall shortly following a breakout and congests, a trader is warned that a prior relationship between buyers and sellers may in fact be in the process of major alteration. Therefore, good action tends to develop out of long periods of congestion.
!64
CONGESTIONS However, durin; a p~ricd o~ re-accurnmulation or re-distribution, traders sometime expect prices to continue their ascendant or descendant course, but are deceived by the sudden trend reversal, which is the end-run. These are really traps. The market may adjust and suddenly turn again in the direction previously anticipated. For example, the market is re-adjusting to re-accummulation and prices suddenly flutter down briefly. The movement stalls, further congestion occurs. The price action will likely revert to follow the major trend.
ANTICIPATING THE DIRECTION OF THE BREAKOUT To start: I. Study the major market trend - if the major market trend is up then congestion areas at 50 % retracement in areas above or below previous congestion areas, andthe pattern of the congestion denotes that the congestion is but a pause or not a reversal in the major market trend, then the next trend will be up.
** ( Major trends are identified by fundamentals, major trend lines, market momentum, market psychology, and all other technical applications in this book ) . ( This author uses a high/low/close monthly bar chart) .+weekly. 2.Study of the medium term trend - the same approach is taken as in the analysis of the major market trend.
** ( This author uses a high/low/close weekly bar chart and applies the same technical rationale as if it were a daily high/low/close chart ) . 3. Look at the price level of the congestion area.- once again is it 50\ retr~cement,, has it anything to do with old congestions,, are the fundamentals still bullish bearish,,, what is the support/resistance and old support/resistance ( less effective ) and how are prices reacting to 'news', .odds, seasonal,probabilities. Do U're research.
CONGESTIONS ~.
I65
Hhen the preponderance of trading occurs near the bottom of a congestion area it indicates that offerings are being well absorbed and the market is likely to break on the upside and conversely, a market in which thepreponderance of trading activity appears near the upper level of the congestion area, prices are more likely to break out on the downside.
5. Breadth of congestion area - the wider the congestion area after an extended price move the more the likelihood of a price reversal 6. The pattern that evolves on the chart from the congestion - is it flag, pennant, wedges, triangle ?
The biggest danger in boarding a trend during its period of consolidation - resting area - in anticipation of the continuance of the trend is when the anticipated consolidation areas does not turn out to be one and evolves as a top or bottom instead. A long term consolidation area is a rarity, therefore, sideways action that extends beyond three months shud be regarded with suspicion. Tops and bottoms always take longer to form ( except islands and "V"'s ) than continuation- consolidation- resting areas. If the duration of resting areas reaches patience testing proportions, we shud be prepared for the emergence of a major price reversal. In the latter stage of a resting area, if ·a. hi.gher volume tends to occur towards the lower level of the congestion area, tO repeat, the implication is that important buying support is being given the market and that the next trend will be up. If very heavy volume occurs at the upper level towards the latter stage of the formation, the implication is that important selling pressure is exerted on the market and that the next trend will be down. Because after a substantial rise or decline, price fluctuations are apt to be wide and hectic in reflection of the market's struggle to adjust to the new market price level, then will / gradually simmer down. Triangular formations occur with great frequency. In fact, the triangle is the only formation that customarily turns up as both consolidation and price reversals. Of all consolidation patterns, the ascending triangle is the most reliable to follow in an uptrend and conversely, the descending triangle is the most reliable to follow in a downtrend. The wedge ( chapt. 23 ) is even more use~ul when spotted. It is frequently the final consolidation area prior to the formation of a major price reversal. Flags, pennants are by nature corrective action and by implication trend
I66
CONGESTIONS
countering, and accordingly, one can expect that with ~he formation of these patterns that the breakout from the pennant/flag will be in accordance with the prevailing trend which developed the pattern. The prior trend enhances the emergence of the trend in the same direction. ( In anticipation of a major breakout from a top or bottom formation, with regards to the pattern of head and shoulders, refer to chapts. 8 & 23 ) If the market still has basic strength, the congestion area will often just be about on an old one. This is usually a sign that the basically strong and that prices will break area to the upside.
bottom of a new par with the top of market is still out of the congestion
If the congestion area has prevailed long enough to be widely recognized, a large number of buyers and sellers will have accummulated in the wings, ready to jump in the market every time the congestion area's upper and lower limits are approached. Consequently, for example, a downside breakout, many buyers will have to be satisfied , but of course as soon as the buyers are satisfied the market will breakout towards the downside.
area of the activity congestion area quiet area
------------------------~--buyers
~
finally satiated
Most resting area trend aborting is done by those traders, who already enjoy sizeable profits in the market. New position takers tend to be scarce or are apt to view the market as one in which they have already missed the boat. Many seasoned traders avoid positioning markets in anticip~tion of breakouts. They claim traders are better off waiting for the markets to tell them what to do. There are some seasoned traders, however, who position markets in
CONGESTIONS
I67
anticipation of market breakouts, but profits in this type of positioning are of only minor attraction to these tBaders. What they consider important is the added confidence enjoyed in markets they have operationally anticipated. Most of these seasoned traders are trend following traders. This author feels that one shud be a seasoned trend following trader and a seasoned congestion area trader and a seasoned trend reversal trader .••••. there's just the three ..... and enjoy the marriage of the three.
Special note
- "gaps" , the rule here is that prices move out of trading areas in the direction of the most or largest gaps. ( Chapt. 23 )
There's more on this in chapt.9 re:
P&L!
ANTICIPATING THE EXTENT OF THE BREAKOUT MOVE The longer the sideways movement lasts the more we can assume that old positions are being liquidated and new positions established within the constricted price range. Therefore, when prices finally do break out of the resting area and the new price trend is established, those who were on the wrong side of the market are anxious to get out of their positions. The longer the congest~on area, the greater shud be the number of orders placed in the markets to cover and the greater shud be the emphasis to the renewed price move. If after a breakout, the volume subsides and the trend on its way, then the breakout was indeed valid. But if remains high, or close to what occured on the breakout and the trend promptly reverses itself, the breakout's will be left in doubt
proceeds the volume itself, validity
If in an uptrend consolidation area, the price of the commodity is on the rise but is currently stalled, some old longs will ~e replaced by new longs for a variety of reasons. Essentially, the new longs enjoy more confidence in the further market rise. Is it not logical to presume that the more such replacement activity goes on the higher will be that market rise ? In considering a bottoming formation, when the price of a commodity has gone thru, let's say, an extended decline, and is currently congested, this time the old longs were premature in taking their positions and are now saddled with paper losses. Most of those who perservered will be eagerly liquidating their positions as their get even points are approached, if the market shud rise. For this reason,
I68
CONGESTIONS these longs will be exerting a sobering influence on any subsequent market rise. During the formation of a bottom however, impatience, disenchantment, disgust and other factors will gradually prompt many of these l~ngs to give up the market, and as with either formations, is it not logical to presume the more such replacement activity goes on the higher will be the ultimate market rise ? The same holds for a topping formation. The top constitutes a price level which will ultimately prove to be unduly inflated. Unduly inflated or deflated prices exert a crucially powerful impact on producers and consumers alike. The longer such prices persist, the greater will be the resultant impact. See page 256 to get an idea how far market will go.
SUPPORT AND RESISTANCE If during an upside breakout, for example prices clearly establish that the trend is upwards, any subsequent reaction back into the trading area, wud be an opportunity for many short to cover where they sold , possibly at a small loss and for many former longs to re-establish or add to positions that had proved profitable. 1\ (\ (\ This combined buying pressure both from bulls and former bears may often f V covering stop the break in the previous congestion region. It is a typical effect of horizontal support areas. The more traders that have a vested interest at prices within the zone the greater will be the expected buying or selling power shud a return move occur. A related idea is that the recent congestion areas are more significant than older ones.
V
t2ing, 1Ti J~hort
Support and resistance are areas in which prices are expected to have difficulty moving beyond and they therefore deserve especially careful attention and consideratio~ in chart analysis. Support and resistance levels can be divided into three basic categories: I) congestion areas,
resistance
support
CONGESTIONS
I69
2) areas at which previous advances or declines were turned back
3) 'transformed' support or resistance levels a) e.g. former highs that have been penetrated and thereby turned into support levels ( see 'T.R.' chapt. 9 P&L charting )
rrr
high
reverse cud hold for an isolated · low )
lt b) old resistance becums new support old old support becums new resistance resistance
The basic idea behind support and resistance is simply that price levels that were significant in the past will have significant impact on price action in the future.
!70
CONGESTIONS
suooort area
area
( This author wishes to point out that when we speak of resistance and support, we generally talk of this price effect outside of the confines of a congestion area. However, certainly the price confines of a resting area and/or trend lines denotes that the confines of the congestion or trend line is by itself denoting resistance and support. However, for the purpose of our discussion on resistance and support, we exclude the support and resistance related to the identity of a congestion and trend lines from our discussion. We talk here of resistance and support occuring after the confines of the congestion or trend line are broken. )
The argument on behalf of the congestion area is that the market is fairly happy with prices within a narrowly defined range. A price at rest exhibits an established floor or ceiling for itself which is merely the graphic representation of supply and demand conditions which actually are too complex to be understood. But, the new information here is that on a breakout, that this congestion area which was really a resistance area, that this resistance region becums a support plateau, if the breakout is on the upside.
T
CONGESTIONS
I7I
resistance
support
resistance
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If the breakout support is on the downside the support layer of the congestion area now becums a belt of resistance., shud prices cum back up to it. e.g. in an upside move from a congestion area, the support area at the bottom becums a resistance and the resistance at the top becums a support area. And, if prices eventually cum back down to the old support area, it will act as a resistance and be able to withhold price declines. If prices cum back down to the old resistance , it will act as a support. ( This is part B of 'transformed' support and resistance. ) Markets have a tendency to respect the previous congestion· level, particularily one most recently formed. Traders who took action in the congestion area have a memory awareness of that activity at the time. And, if the market returns before too much introduction of new factors exert an influence on the market, then they are liable to act once again at support and resistance levels, increasing their validity. Also, be aware of the fact that if congestion area is at a target,pg.256 area, that the congestion area may be a trend reversal developing. In an up market, an old congestion area is usually a price level at which resistance to any decline will occur. Also, remember that sooner or later, nearly every congestion area is fated to have one of its' boundaries sundered. / Another concept of transformed resistance areas ( per part A of 'transformed' support and resistance ) is in the context of any given isolated high or low. It is not unusual for an isolated hi h/low, once penetrated ~o ~n effect at that time, to develop ~s ance, respective y.
I72
/---.. ('a'.· is an isolated high that is \...._./ penetrated and becurns a support price
(~
is a hidden, phantom high, ( see P&L charting, chapt. 9 ) that also cud becum a support price
This is a phenomenon that occurs with such frequency, that I am amazed not to have seen this concept yet to be committed to ink. This concept is articularily effective when appreciated in the contex of a) T.R's as expressed in e chapter n· eon P&L ~arting and b) strong y rending markets, wherein an isolated high/low becums a support/resistance once penetrated.
isolated high 'a' becums support 'b' in a strongly trending market.
A related idea is that recent congestion areas are more significant than older ones since the potential buying or selling pressure will have had a lesser chance to dissipate. The prices within the zone will have fresh significance in the traders' minds. Remember that support and resistance may exist at a particular price level whether for technical reasons ( that is, because heavy volume of trading occured at a particular level at some significant time in the past ) or for fundamental reasons ( i.e. a prescribed government support or price level ) . In this way, resistance/may be anticipated at a particular price level for fundamental or technical reasons.
50 % RETRACEMENTS Markets
are continually retracing 50 % • U can trace a 50
%
CONGESTIONS
I73
move almost on a day to day basis. This author feels that being a good '50 %man' is like being a good 'gap man' or 'resistance or suooort level man '. U can make a lot of money just by using 50 % retracement patterns. Why prices retrace 50 % I wilJ neyer know, but ~~ey are continually do~ng so at all times. using the SO % retracement gives the trader an indication of the 'market's momentum. For example, if prices do not retrace 50 %, then, in an upmarket, this wud lend credence that the market is still quite strong : however, if it retraces more than SO %, this is one of the first signals that it is weakening.
f
/f
Congestion area resistance/support areas all develop added significance if the retracement to that area represents a SO % retracement. This author uses as a tool isolated highs [a) as in the following illustration ,and lows, for calculation of price retracements
so
%
Prices, as a general rule, have a tendency to correct about 50 % following an extended price move.
b
If u don't believe what I say that markets are continually retracing 50 %, take apy chart U wish and take the nearest isolated high and low and see how often pr~ces are continually retracing 50 %. ;ven w~ congest~on areas, Rrices will often retrace 50 %, which is a signal that pri~are ::~~~~~~~~~~~~~~~~~==-~ strong. ( Another gem ~n assessing breakouts and extent of anticipated breakout. Put it on U're list of supplementary tools ) . (This use of 50 % within congestions is an indication of the direction of price breakouts and is presented here as a little surprise for the reader.)
I74
CONGESTIONS
USING CONGESTION ACTION 1\hereas a trend is an opportunity to realize one enormous profit, essentially by sitting sight, a congestion area is an opportunity to realize many small profits by alert activity over the congestion area's life. In well defined congestion areas, each decline to its lower limit constitutes a buy point, and each rise to its' ,upper limits const·i tute a sell point. In a congestion area that lasts several lengths of time, sometimes years, dozens of clear-cut buying and selling opportunities present themselves. Using the confines of the congestion areas as support or resistance against which one wud execute a position or utilizing P&L charting, these three approaches enable the trader to scalp in congestion areas with considerable confidence. Trend bucking constitutes mainly scalping, mostly employed by taking profits from nominal price swings within the congestion area and trend channels. By virtue of the customary narrowness of congestion areas and trend channels, lucrative trading therein requires a great deal of trend bucking. Also the trader must be reminded that risk is easier to calculate since one places a loss just outside the congestion area. However, as the congestion evolves, one wud becum more cautious in placing positions against the prior trend, because, utilizing the rules of interpretation, one shud have an idea by the time the congestion reaches its terminal, of the direction of the ensuing breakout, and one wud certainly not wish to go against this when one feels that it is about to occur. In this context, by taking a position at the top or bottom of a congestion area in anticipation of the breakout, by doing so, the trader will have his feet wet by the time the trend finally emerges and will be encouraged to add to his positions. Certainly, bucking the counter trend wud be more lucrative before the trend emerges.
buying the counter trend
accummulation in anticipation of breakout to upside buy 'scalps'
CONGESTIONS
I75
If t~e market is not in a major trend such as in bottoms, investors shud try to sell on strength and buy on weakness. Experience will show· v:hether the market is in a true trend or merely a trading range. Certainly, a sharp trader is not likely to short a market during a technical reaction during a major upside breakout. ~
\
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never short here i f U feel this is just a counter trend. Buy instead.
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( and, don't forget our little friend- 2/3 days up,2/3 days down.)pg.I53 One of the best utilizations of a congestion is in the bottom of a commodity contract. The longer the sideways movement lasts the more we can anticipate an extended price up-move. During this congestion, one can either scalp in it or take the easier route by buying andquietiy waiting and sitting back. Most big markets start this way. They develop very quietly. Some seasoned traders prefer to trade quiet markets, which are starting their moves than the widely fluctuating markets, wherein very few people know what will happen. Above all, the trader shud be aware of whether the resting area is a bottom, continuation pattern or a topping pattern and govern h~self/herself accordingly. Certainly, the manifestations of trend and congestion analysis as presented in this and thenext chapter shud be judiciously a part and parcel and framework of a trader's kit of tools. And, ~~is trader can only succinctly add that utilizing these tools will enable the trader to make money in the commodities futures market, ....... and lots of it.
PRICE REVERSAL CONGESTIONS The trader must be aware of the fact that if a congestion is at a target area ( see chapt. 9 ) then that congestion area may be a trend reversal developing. Finally, after prices have reacted for a considerable distance, a general feeling can develop that prices have gone far enough. Call this a psychological quirk of
!76
CONGESTIONS traders if U will, but this type of thinking becums an important factor. After a substantial rise or decline, price fluctuations are initially apt to be wild and hectic in relection of the market's struggle to adjust to the new price level and will gradually simmer down. The biggest danger in boarding a trend during its period of consolidation in anticipation of the continuance of the trend is that the anticipated consolidation area does not turn out to be one but evolves as a top or bottom. A long term consolidation continuation area, as opposed to a reversal area, is a rarity. A sideways action that exceeds beyond three months certainly must be regarded with suspicion. marke~
The following patterns are concomitant with price reversals: triangles, platform formations, 'v's , head & shoulder and saucers. Special note shud be made concerning wedges ( chapt. 23 ) . It is that the wedge is very useful when spotted because it is frequently the final consolidation prior to the formation of a major price reversal. In analyzing the potential for price reversal, of course, the trader will becum a student of volume, O.I. and contrarian opinion, as well as being a serious student of trend analysis. For the student of price reversal bottoms and tops, this author respectfully refers the reader to the next chapter on 'trend reversal' wherein great detail is given towards the evolution of tops and bottoms, in price reversals, within the context of congestions and non-congestions.
CONGESTION AND TREND 1t may seem contradictory that wedges, pennants, flags, ____ customaril:' slope against the prevailing trend. lt makes sense however, when realized that a consolidation area is often simply an area of price corrective action caused by a market sprint which over-ran the price level which cud then be supported by the law of supply and demand. Corrective action is by implication trend countering. Major trend reversal patterns fall into four general categories. I) triangles 2) saucer 3) "v" shape 4) platform
CONGF.STlO!\S
DAY CONGESTION
177
( NOISE )
In a random walk market refered to in chapter eleven, price will fluctuate daily in a narrow range as long as no new information or expectation of new information applies to the judgment of traders. This movement cud accurately be duplicated by the simple flip of a coin and is significant to many traders. These small random fluctuations are called "noise" . Any series of up-ticks wud give the trader no more information on a daily basis about his next position than wud a series of heads to the better on a coin flip. In large and efficient markets, such noise has been known to account for 75 % of all new prices corning across the ticker. It is a meaningles5 fluctuation that characterizes a market at rest. In a theoretically perfect market, all traders receive information at the same time and are equally talented in interpretation. Thus the price moves quickly and smoothly to its new level. There ought to be very little disagreement about the direction dictated by the new information. Unfortunately, no such thing exists. News is filtered to traders at different times, and all,acting according to their own idiosyncracies, bedevils the market into a very ragged, jagged course, as it shatters and shimmies its way to its new level.
( I am sorry to have made this chapter so long. The only chapters to exceed it, word-wise, are the chapters on P&L charting, (nine) and on planning (thirteen) wherein we attempt to tie everything in together,and make lots of money. 1£ U think U' re exhausted in reading it, can U think how exhausted I am in writing it . But, I wanted to do it for u. I want u to have almost everything u need to know about the basic principles of congestion areas. The same holds for trends,and trend reversals, cuming up next. If U understand trend, congestions and trend reversals, U've got it made. Maybe U don't even need P&L charting - but it will help. / Anyways, above and beyond all this I wish U good lu~k, and enjoy U'reself, there's lots cuming up. But, remember, to me, the most important part of this book is section· ' C ' . Take a look.,) .
I73
CHAPTER EIGHT TREND REVERSAl
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ANTICIPATING A TREND REVERSAL The chartist is always concerned with his ability to recognize the commencement of either a congestion area or a trend reversal, once a trend has commenced and is of some duration. / So long as the trend line remains valid, the market continues to trade in a succession of isolated highs/lows and the prevailing trend is assumed to be in tact. Prices may penetrate the trend line during this period, and then close back within it or may even penetrate the line for a day or two. The penetration of the trend line shud raise the possibility of a reversal. A downside penetration of an uptrend line., for example, wud carry a bearish implication, especially if the most recent ( 'c' in following
rtEVERSALS
I79
illustration) isolated high failed to surpass the previous high 'a', and if the current reaction is carried below the former trading low 'b'.
The other delivery months within the same crop year, where applicable shud exhibit the same trend line breaking action. The presence of unusually high volume accompanied by significant increase in total O.I. irian uptrend adds credance to an impending trend reversal. A particularily steep down trend line when encountered may have a penetration to the upside. This is a normal correction in following a very steep move. ( Same holds true for a steep uptrend line ) , and may only serve to alter a sharp into a more moderate trend direction. To further explain the importance of trendlines for the assumption of potential trend reversal, is that it is interesting to observe the validity of a long run trend line, and the frequency with which the intervening price swings approach to a point of tangency and then pary without penetrating it. This phenomenon appears so often that a correctly enscribed trend line is an extremely valuable technical tool. The more often the bottoms re-occur along a long run uptrend line, for example, the greater is its' technical importance. If the trend line is tested repeatedly, the more rikely the direction has permanently reversed after this trend line is ultimately penetrated. If a trend line'is drawn rather steeply, one must be sceptical of its validity and be aware of the fact that penetration of this steep trend line may manifest only a temporary market reversal and only a possible 50 % retracement. And, the steeper the trend line, more easily sideways movement can honeycomb it. Hopefully, the following illustration gives u sum idea.
IBO
REVEP~ALS
Also, the placing of stop-loss orders at identical points, by hundreds of traders who attempt to predicate every action on chart rules, self-creates price fluctuations which destroy much of the validity of some chart patterns. Many penetrations of trend lines and other formations are false, because of this factor. In anticipating a trend reversal, we have one ultimate dictum prices do not rise forever or fall forever. Most traders forget this. Most traders riding a booming bull have the sensation that the prices-will continue upwards for ever. They fail to even attempt to analyze the potential for the evolution of a trend reversal. Material manifestations which anticipate a trend reversal are explained in the following pages, which include the above and the following: I) trend lines 2) chart patterns 3) fundamentals 4) volume, O.I. contrarian opinion, committment of traders 5) 50 % retracements 6) analysis of bottom and tops 7) other commodities in the group 8) I-2-3 's
9) T.R. 's ( P&L charting )
8
REVE?..SALS
I8I
IO) cash analysis II) basis analysis I2) seasonal odds I3) seasonal price and O.I. I4) P&L charting ( chapt. nine
Of course, in chapter nine, re: the application of P&L charting to the anticipation of a trend reversal, we will illustrate the phenomenal capability of this approach to quite often pick a top within a day or two. Another tool which is useful re: anticipating a trend reversal is the comparison of one commodity to others within a group. For example, let's say soybeans and soybean meal have "topped" , but soybean oil has not. The oil will be 'cracking' fairly soon. Hogs have cracked, bellies may be soon to follow. It is easier to anticipate a trend reversal from a bottom formation since bottoming action is usually of longer duration. Even with tops, U usually have plenty of time before the reversal actually comes. There will be a great deal of dancing around as the prices are topping. u usually have 2-3 days, perhaps 2-3 weeks, before prices commence a significant downtrend move. One of the more easily identifiable medium term identification tools to anticipate a trend reversal is the following : -point '3' represents a challenge to a previous high , 'I' , and a fall-off from this area cud be the top price for the commodity for that year. Remember that U only have one top price per year for each commodity contr~ct. One must be aware of the entire picture of a given commodity to assess whether this I-2-3 top is in effect a good time for the topping formation to occur. ( How about 'odds', 'basis' , 'O.I.' , 'contrarian opinion' etc ? ) I
The I-2-3 formation is an excellent tool in anticipating and/or verifying a trend reversal from a downtrend. If U just waited for one of these I-2-3's , especially off a bottoming formation, U wud reap enormous profits perhaps twice a year. from each commodity, one from the bottom, one from the top.
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COMMENTS ~.ecause the du,..ation of toos is nonnally so much hrj efer than the durat~an of bottoms, it is far easier to be trapped into the~ wrong side of a market within its top region than within its' botto~ region. For this reason, it is easier to trade in bottoming congestion areas than in toppin~conqestion areas. It takes far greater mental agility to short·a market at ~ts top than to go long a market at its' bottom. Market tops are potentially more treacherous than market bottoms because human nature is more bullish than bearishly inclined, and bull markets never seem to give up until they have their last final gasp and then they expire abruptly. At this point, a market - top - picker is a winner - a real winner.
Bucking any trend usually implies the anticipation of market tennina tion j n a 'v' or inverted 'v' ..f-ashion
Such sudden reversals rarely occur with major trends, sometimes occur with intermediate trends, and more often occur with minor trends, and frequently occur with nominal trends. Also, sudden reversals terminate counter-trends slightly more often than they terminate trends heading in the same direction as the over-all trend. To wum up, a 'v' or inverted 'v' formation will tenninate in this order of frequency : nominal counter trend nominal trend minor counter trend minor trend intermediate counter trend intermediate trend major trend
v-
An upside reversal within a bottom is virtually meaningless.
forget it !
I 84
REVERSALS
An ups~ae reversal within a prevailing uptrend may foreshadow a counter downtrend.
r-O.K.
An upside reversal within a counter uptrend, quite likely foreshadows a continuation of the prevailing overall downtrend.
An uoside reversal within a suspected top formation shud add
confirmation to one's suspicions.
~-good? Lastly, bu~ most importantly, an upside revers 1 attended bv unusually high vo ume shud be taken very seriously as a topping formation.
,._______...
Buying in a bottom·area can tie up one's money for a considerable length of time. Positioning in a top area is also apt to tie up one's money bu~ not for as long a time. There are two principle advantages to positioning in a bottom and/or top area. First, one's risk is easier to calculate and limit. Taking a position after a trend emerges runs the risk of a nast- 1 s owf:ng ~o a bre~out failure ora s fr
the time the trend finally emerges, his initial position will give ==~~~-=~~~~~~~~~~~~~i=n~c=r~e=a:s~e~t=h~a~t~DQ~s~i,~ion.
Most fortunes appear to be lost at the top of swings primarily, and secondarily at the bottom of a trend. While patterns are being formed, previously accummulated funds tend to dissipate as the trader fails to recognize that the ride is over. Most models and systems work well in a strongly trending market. Signals are mixed or false at the end of a major move, when patterns are incompletely moulded. Long term charts can be useful in these matters.
PATTERNS OF TREND REYERSAL Basically , there are two types of reversal patterns. I)
'spearhead' the 'v' or inverted 'v' the island tops and bottoms the I-2-3 's the double tops, bottoms the triple tops, bottoms
2) formal patterns the rounded tops, rounded, scallop,saucer bottoms the head and shoulder formation the triangle the wedge the flag, pennant the diamond the rectangle the box, platform the low sloping trend channel
SPEARHEAD A spearhead is abruptly reversed in one day, whereas formal patterns tend to occur in equilibrium situations. By spearhead we mean the situation wherein a previous trend, which probably had been steepening as the trend evolved is abruptly reversed on one day. Often this is accompanied by a gap ( sometimes large on ei~her side of the reversal day ) - the day's trading did not overlap at any point the previous day's trading, as enthusiasm turned to hectic speculation and was followed by determined profit taking turning to panic. Spearhead bottoms are also seen in spectacular form. ( see chapt. 23 for some illustrations ) /
Of all the major price reversals, the 'v' pattern is by far the most hazardous for traders because it constitutes an irrevocable about face with virtually no warning. Also, a presumed trend emerging from a 'v' is the most difficult to board since the spectre of a double pattern remains a distinct possibility until the new trend has been in existence long enough to justify ?~??.. the intermediate and perhaps important price correction. The 'v' is characteristic of prices that have been emotionally fueled far beyond the bounds of reason. Since sellers are habitually more
I 36
REVERSALS
impatient than buyers and optimism is limited only by the sky, pessimism is necessa::::-yily exhausted somewhere along the line and the 'v' formation occurs more often as a top than as a bottom. The double and triple patterns alsc occur more often a~ tops. The intra-day actj.vity implicit at the apices of such patterns are customarily characterized by hectic activity. Being able to identify potential top formation on the basis of the spearhead enables the trader to be aware that a potential price reversal is in the making. Do not forget that the spearhead apex itself is an expression of total exhaustion of bulls and just the beginning of the bears taking control. In the case of the formal patterns which herein follow, the bears provide resistance to the bulls and the resistance is formidable and the bears in this case actually wear out the bulls. \ I \ \ .Y t ~- resistance of the bears
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e.g. scallop
Whereas in the spearhead formation the bull simply becums exhausted in one gulping gasp and can never regain their ground to effectively assault the spearhead itself.
P&L charting will enable u to pin-point these exhaustion apices, whereas in formal patterns u will find that P&L charting is more dubious and expresses only a manifestation of the bears gaining control of the market. Spearhead formations which I like for identification of an uptrend reversal are : the 'v', island top, and I-2-3 's . Double, triple tops can be rather trying as they wave their way thru the parameters of everyone's psychic. By the same token, I prefer inverted 'v' bottoms, I-2-3 bottoms, and double, triple bottoms for determining bottoming formation.
FORMAL PATTERNS The round top, saucer top, scallop top is illustated on the next page.
8 R:."'"VERSALS
I87
This formation, as the name suggests is a gradual reversal of a trend. The upward price movement gradually reverses as selling pressure gradually overcums new buying and prices slowly work into a downward trend. Just turn the pattern upside down and it is a picture of a rounded saucer, scallop bottom - i.e. a gradual reversal from a downtrend to an uptrend. This type of formation is occasionally accompanied by minor price swings creating the scalloped effect. One advantage to this formation is that the rounded top, bottom becums obvious before the pattern is complete. Traders often use the establishment of new positions close enough to the fulcrum to utilize it as a stop-loss point. A rounded top is usually formed by a commodity whose daily range is rather small. With this type of chart, the picture is usually followed by a major move. Large saucers constitute a gentle major price reversal action. Consequently, they occur far more frequently as bottoms than tops. Sideways action immediately upon breakout from a major saucer is a common patience - testing occurence, per 'a' and 'b' in}
Sometimes, small saucer consolidations punctuate the trend emerging from a saucer price reversal. Of all major price reversal patterns, the saucer is the most reliable to follow.
The ~e~d_a~d_S~o~l~e~ formation cud be categorized as a spearhead pattern. However, because of it's formidable ability, the length of time required for its evolvement,it is placed as a recognized formal pattern ( ditto for the I-2-3 above ) . I refer u to chapter 23 for detailed explanation of the head and shoulders pattern. However, of all the major price reversal patterns, the most renowned is the head and shoulder. - a top when uprite and a bottom when inverted. A H&S can almost always be envisioned when the high point
of a broad top or a low point of a broad bottom occurs somewhere near the middle of a formation. In other words, more H&S are products of imagination than reality. ( Someone even came up with 32 different H&S formation ! )
- see chapt. 23 for a formal discussion. In an upmarket, a descending triangles is normally bearish. Watch volume activity.
REVE ?..SJ..:...S
A sym."Tlet.rical triangle, the equilateral triangle is not conducive to any analysis of price reversal, nor wud an ascending triangle appear to be a precursor of a price reversal in an up market.
t
In a down market, a descending triangle wud not be indicative of a price reversal,
but, an ascending wud.
:: 8 9
I90
REVERSALS
Because consolidation areas far outnumber price reversals, a dominating clue that shud forstall an error to prediction is the prior trend. If the prior trend is up, this by itself favors the emergence of a trend in the same direction. With the use of symmetrical and equilateral triangles re: above, it is usually the case that they have not broadened sufficiently to suggest a major price reversal. Altho' it cud not be known in advance, that this wud not occur, a broadening of scope shud be allowed to evolve before taking seriously the possibility of a major price reversal in analyzing symmetrical and equilateral triangles. This broadening concept evolves itself more effectively in the ascending or descending triangles.
broadening
Pennant
Flag
These are not unnaturally, at the end of poles. This is supposed to ~ean that they occur only after precipitous market moves. When they occur after a gentle market advance or decline, the technician shudtry to visualize another pattern fo~ identification purposes. Note that the pennant is nothing more than a form of triangle. To qualify as a pennent, a triangle must not only be masted, it must
R....'MJERSALS
have two of
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Normally, flags and pennants are continuation patterns and not reversal patterns.
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I The wedge is perhaps even more useful when spotted than the pennant or flag, for it is frequently the final consolidation area prior to the formation of a major price reversal. The fact that pennants, wedges, flags customarily slope against the prevailing trend makes sense when realized that a consolidation is often simply an area of price corrective action, caused by a market sprint which over-ran a price level that cud then be supported by the law of supply and demand. Plainly speaking, corrective action is by implication trend countering.
The Diamond
----see chapt. 23.
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REVERSALS
see chapter 23
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The Platform
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- 'B' is a platform or a saucer-handle. Sideways action immediately upon the breakout of a major saucer is a common patience testing occurence. Whereas tops are customarily characterized by hectic activity, bottoms are customarily characterized by moderating activity. For this reason, platform major price reversals are more often located at the terminals of downtrends. e.g.'s
simple platform bottom
compound platform bottom
delayed ending platform bottom
duplex horizontal platform bottom
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8 REVERSALS ~1id-~latform rallies of s~bstance are a common feature of complex platform patterns. The saucer - handle major price reversal, where the handle ·resembles a platform, might be said to be a hybrid pattern - a pattern that is merely the combination of a saucer and simple platform It is also a delayed 'v' ending platform,
and, the extended bottom.
All of these obviously are a combination of a simple platform and in some cases, the 'v' spearhead.
Are we getting too detailed for U ? Are U getting bored ? )
Herein, a major trend channel and trend line is finally evacuated and in the case of an upchannel, a major bear move commences. In the case of a low sloping down channel, a handle away from it, or some other form of consolidation cud be expected.
In the case of a high sloping trend channel, an evacuation from it, altho' rapid, cud be considered a
!93
I94
REVERSALS
technical correction to possibly 50 % retracement. These prices cannot,on exit be considered a valid trend reversal, at least for the time being.
FUNDAMENTALS AND TREND REVERSAL The fundamental economic factors play their most important roles at the tops and bottoms of market p~ice swings. A top constitutes a price level which will ultimately prove to be unduly inflated. A bottom constitutes a price level which will ultimately prove to be unduly deflated. Unduly inflated and deflated prices exert a powerful impact on producers and consumers alike. The longer such prices persist, the greater the entrance into the economy of facilities to produce that commodity and the greater the exit from the economy of consumer preference for that commodity. The longer an unduly inflated commodity price persists the further will be its ultimate decline. The longer an unduly deflated commodity price persists, the further will be its ultimate rise. This is supported by fundamental economic factors as well as by technical ones. Deflated prices usually stay down longer than inflated prices stay up, as it usually takes longer to absorb an oversupply than it takes to sate an over-demand. When an inverted 'v' or a 'v' bottom occurs at an immensely inflated or an immensely deflated price level, the ensuing price move may logically be expected to be far greater than it wud have been if price halted at less an ex~reme level.
F.EVERSl;LS
_ _:_ _ ~--·-IMMENSELY'
·INFLATED
1---.;__.;_..__IMMEN!>ELV !DEFLATED
:
G I
K
I
Source: - The Fastest Game in Town Trading Commodity Futures I973 Anthony M. Reinach Random House
VOLUME DURING TREND REVERSAL PLUS 0.1. CONTRARIAN OPINION) COMMITTMENT OF TRADERS For further information on other factors used to trend reversal, I refer U to : volume chapt. 0. I. chapt. ::::on~ra:?:ian o?inion chapt. t commi ttment · of traders -:hapt. Vol~~e
anticipate 4
5 5 5
action during major reversals forecasts two things: I) that the prevailing over-all trend is nearing an end or has ended. 2) that the next overall trend will be in the / opposite direction.
After a commodity has enjoyed an extended price advance, with steady or steadily increasing volume, a point of time will cum when a final contingent of obstinate shorts will rush to the exits at a panic rate of intensity. They will be joined by others eager to get on the long side. The result will be an abnormally high volume along with wide and hectic price swings. The newly elevated price level may linger for a while or may even qo higher.
I 95
_ _,o
TO~
REVERSALS
Volu.'Tle may sta·y high or may gradually diminish. Regardless of secondary cha~acteristics, the message remains crystal clear. The bull market is over.
t..~e
The phenomenon is known as an upside volume blow-off. Downside volume blow-offs are as common, but not as usually pronounced, or as easily identified. A series of alleged downside volume blow-offs will precede the final volume blow-off that signals the end of a bear market. Volume blow-offs of less dramatic substance may also signal the termination of lengthy counter-trends. As well, however, volume dry-ups at times signals the termination of counter trends, but of shorter counter-trends. When the volume action is so quiet that a pall seems to settle over the market - such restraint is usually prompted by the knowledge of offerings so thin that big bids cud send prices spiralling. Therefore, it is a proper hypothesis that after a sustained price advance, a period of exceptionally high volume, accompanied by an inability to advance, followed soon afterwards by a price reverse with high volume will often portend a significant trend reversal. U must relate O.I. to volume. Most O.I. decreases or increases are nominal. When O.I. climbs or falls sharply, however, then it becurns prognostic, as opposed to attendant, and important to consider it a clue by itself. If during a bull there is an inordinate increase in O.I. , then the end of that bull market may well be at hand. If O.I. continues to climb, and the price level starts levelling off, a top shud be suspected. If after, a price decline a congestion area is entered and if the O.I. continues to be liquidated and prices are levelling off, a bottom shud be suspected. Sometimes during a market rise, there will be a sudden reduction in O.I . . Under the circumstances, one may conclude that the market is being dominated by short covering. Such a market is generally considered as technically weak, at least for ·the time being. Taking all this into consideration, it is now suggested that in general, a combined rise of price and O.I. on high volume has bullish significance in the early stage of an upmove, but the/ bullish significance diminishes a~ the O.I. further increases and the speculative public assimilates all the bullish factors that fueled the advance. Rising O.I. and heavy trading volume appear to be more significant when confirming a trend at its emergent stage and more of doubtful meaning later on : - in particular, when an uptrend is at a more mature stage. In particular, if during the mature stage, there is a sharply diminished rate of O.I. occuring, expansion of prices may be a harbinger of market reversal. ( short covering)
8
REVE?$ALS
TREND REVERSALS AND 50
197
% RETRACEMENTS
For example, if price shud pass thru a steep down 'trend line', to the upside, this is a normal correction in following a very steep move, and may only serve to alter the sharp into a more moderate trend in the same direction.
As a general rule, prices have a tendency to_crack about 50% following an extensive price uprnove. A correction of-less than 50% is evident of a powerful trend or a greater than a 50% correction is a possible reversal. Furthermore, if a 50% correction from a steep move corresponds to a strong support or res~stance area, it is a likelihood that the correction will be arrested at that level.
BOTTOMS Bottoms are customarily characterized by moderating activity. For this reason, pla:tform major price reversals and rounded-, scallop major reversals are more often located at the terminals of down trends than uptrends. This includes the H&S formation. In the consideration of a bottom, the price of a commodity has suffered an extended decline and is currently congesting in preparation for major reversal. This time the old longs were premature in taking their positions and are now saddled with paper losses. Most of those who persevere will be eagerly liquidating their positions as their get-even points are approached or reached, shud prices rise. For this reason, these longs will be exerting a sobering influence on a subsequent market rise. During the formation of the bottom, however, impatience, disenchantment, disgust and other factors will gradually prompt many of these longs to give up in the market and give up their positions. Their replacements will be longs who do not only enjoy greater confidence, but who are also unbroiled by disheartening paper losses. It is not logical to presume that the more such replacement activity goes on, the higher will be the ultimate market rise ? The biggest danger in buying during the formation of a bottom is that the anticipated bottom evolves instead as a consolidation area. Also, even barring such an unpleasant event, buying at a bottom area can tie up one's money for a considerable length of time.
I93
REVERSALS
However, one's risk is easier to calculate and limit, and, many traders believe it advantageous to take modest positions in bottom formations and as a result will have their feet wet by the time the trend finally emerges. Meaning, that the paper profit from his initial position will enable him to more aggressively increase that position as the uptrend emerges. When u think of bottoming formations, think of also, and please scout thru this book for pertinent commentaries, for, a) volume and bottom formation and potential for rising prices b) O.I. and bottom and potential for rising prices c) analysis of a potential day re: intra-day time reversal of prices, in that the downtrend is stalled in the last hour of trading as buyers cross swords with sellers and the market possibly at that very moment formed the penultimate bottom or at least close to it. A discussion of bottoming patterns has been amply discussed in the preceding pages. Bottoming formations can be categorized to three sections I) short term - spearheads medi urn term - I-2-3's 3) long term - rounded bottoms 2)
Inherent in bottoming formations is the concept of congestion, ( except spearhead ) and the commodity may stay in category "2" or "3" above for weeks to months to years. Many a breakout from the medium to long term formations to the upside will prove to be abortive. There will be many platform formations. Above all, we must be aware that, ( except in the case of the spearhead which by itself cud only be a correction to the upside ) that most bottoming formations after an extended bear market, usually takes a long, long, time for the fundamentals to change s.ufficiently to warrant a strong new trend to the upside. Much of this book is involved with bottoming formations and one shud be aware of all the parameters that are involved in order to either trade in congestion, accummulating capital and/or getting a fair start on the emergent·stage of a long term uptrend. Personally, I like bottom formations because they are in congestions so often, and on this U can rely. It is an excellent area to take a few bites out of the market, possibly week after week, as the commodity slithers here and there, but in a confined range.
c
RevERSALS
I 99
And, don't forqet ~~at ~he twO-day reversal pattern arises at the end of a trend. Prices finish at the low end of the range in a two-day reversal. During the next day's trading, 'b' the highest price is tested again and the prices close up_at the opposite of the range. In a two-day reversal, the second day's closing price will be at the top of the range. ( more on this in chapter 23 )
TOPS A top constitutes a price level which will ultimately prove to have been unduly inflated. Unduly inflated prices exert a crucially powerful impact on producers and consumers. The longer such prices persist the greater the resultant impact.The chartist is always concerned with his ability to recognize the commencement of a trend reversal. What always occurs at market tops is that there are no longer any buyers and prices collapse ; when all the bulls decide concurrently to take profits and suddenly sellers are without buyers. Because the duration of tops is normally so much briefer than the duration of bottoms, it is far easier to be trapped into the wrong side of the market within its top region than within its bottom region. Market tops are potentially more treacherous than market bottoms because human nature is more bullishly than bearishly inclined and, sometimes it takes an extended price advance for the bulls to/be satiated. The point of time will cum during the bull rise when a final contingent of obstinate shorts will hasten towards the exit at a panic rate of intensity and they will be joined by others getting on the long side of the bandwagon before the parade is over. The result is abnormally high volume and wide hectic price swings. The volume may stay high or may diminish. The price level may linger or may go higher. Regardless of the secondary characteristics, the message is clear. "The bull market is over " . This high volume with wide price fluctuations is known as an upside volume blow-off. However, it is by no means unusual for a major trend to be interupted by a substantial pause as a new temporary equilibrium is established. This pause is quite likely to break
200
REVERS~S
the first steep up-trend. But, until a new downtrend is established, it is rash to assume that the previous trend is reversed. By the same token, shud a trend channel with moderate upward momentum experience a price trend change of greater momentum, and breaking the northern confines of the moderate trend channel, that the increasing channel momentum that accelerated the market, that this action may also be a blow-off. However, shud an uptrend channel have a serious penetration of the lower wall, this has obvious bearish implications. But a serious penetration of the upper wall also has a bearish implication as it constitutes a trend acceleration that often signals the final stage of the move. It is a proper hypothesis that after a sustained price advance, a period of exceptionally high volume marked by an inability to advance, followed soon afterwards by a price reversal with high volume will often portend a significant trend reversal. There is one principle to be kept in mind and it is that once a market starts to make its' move, it continues to move for some time in that direction and if U are long, U do not have to panic about a sharp reversal in price. When a reversal cums, there will be a great deal of dancing around before it is all over, ( even with an island reversal ) and during the dancing period, U can start considering whether U wish to take profits and/or look for a short position. All markets have only one top per year. In looking for the top, give the market plenty of time to do its dancing or possibly look for a sharp break in an uptrend line, followed by a rise so that we get a I-2-3 consolidation top pattern. I
#I cud be a spearhead ~2 is the reaction #3 is the last rally N.B. re #I - see chapt. on P&L charting re: reversals.
It must be kept in mind that the more prices rise the more likely they are to continue to rise. One must be aware that once markets move, there's usually plenty of time to get out and a trader does not have to panic about a sudden decline unless, of course, he/she bought in the topping formation. Markets do not simply rise over
c R-~ERSALS
20I
nite or collapse over-nite. Time is required for the initial move and to repeat, time is required for prices to reverse their direction. If u play U're hand correctly with a plan, U are more likely to end up with more profits than U anticipated. So long as the trend line remains valid, the market will continue to trade in the uptrend channel in a succession of isolated highs and lows and the prevailing trend is assumed to be intact. Prices may penetrate the trend line in a session and then close back for a day or two. However, the penetration of the trend line shud raise the possibility of a trend reversal.
The downside penetration of an uptrend line cud carry a bearish implication if the most recent isolated high 'b', in a the I-2-3 configuration, b ( on a medium term basis ) failed to pass the previous high 'a' and if the current reaction is carried below the former trading low 'c'.
~t
11
Broader spectrum formations to be on the lookout for are the: descending triangle wedge flag pennant island reversal inverted 'v' trend lines that are broken. In assessing an inverted 'v' , recognition of the two-day reversal pattern ( chapt. 23 ) which arises at the end of a trend must be taken. This is different from the one day reversal - which is also a 'v' .
~~eversal
L
closes down
·202
REVERSALS
The two-day reversal originates as a key reversal, wherein, instead of closing near the bottom end of the range for the day ( per one day reversal ) , prices settle at the high of the range in a two-day reversal top. a
r~l}
During the next day's trading 'b' , the highest price is tested again in a top, but prices close at the opposite end of the range for the day. That is, in a two-day reversal top, the second day's concluding price will be at the bottom of the range. Often it will be found that during the closing hour of trading, prices will falter at the 'v' apices of day 'a' and the following day is possibly a lower opening, with a rally that day but the twoday reversal pattern states that the closing on the second day will be lower. Under these conditions, one can't anticipate the day a two-day reversal pattern will evolve. Remember also that during a bull market, there is an inordinate increase in O.I. and the end of that bull market may well be at hand. If O.I. continues to climb while the price level starts levelling off, a top shud be suspected. Sometimes, during a market rise there will be a sudden reduction in O.I. Under the circumstances, we conclude that the market is being dominated by short covering. Such a market is generally considered technically weak, at least for the time being.
Here is a list of some of the elements in the reversal of an uptrend. I. the uptrend itself is broad and not very steep. 2. the final stage of the upmove is created by a reduction in O.I. ,indicating that the market's strength may be / attribitable to short covering. 3. O.I. is running high and volume activity expands, with wide, hectic market swings and on the decline volume is high. 4. final stage of the uptrend occurs when the parameters of either side of the uptrend channel is broken. A break-out on the upside is the last dying gasps of the bull and if the major uptrend line is broken on the downside, the trend can be considered as almost over.
8
REVEP.SALS
203
S. a high which occurs after a broken trend line or inverted 'v' has formed, fails to top the preceding one, the market top is forming and we have a I-2-3 . 6. the decline penetrates the recent support levels 7. contrarian opinion is over 85% 8. cornmittment of traders show large traders predominantly short.
Most fortunes appear to be lost at the top of market swings. While the topping pattern is being formed, previously accummulated funds tend to dissipate as the trader fails to recognize that the ride is over. Don't forget that most models and systems work well in a strongly trending market and that signals becum mixed or false towards the end of a major move, where patterns are incompletely moulded. In perspective, topping patterns are easily recognized and if U understand the parameters of what is involved in market topping, it shud be the rare occasion when U are caught off guard. Our only concern is that u becum confused as the market is topping. If anything, stand aside. - possibly go short - but under no circumstances if U suspect a top is forming, do U go long. The bear crack can be brutal. I strongly suggest that U make U'reself familiar with all the aspects of market momentum, trends, congestions, and reversal patterns, using all conventional analytic tools as well as what will be taught to U in P&L charting, coming up next. What a powerhouse that last sentence was! If U were ever able to do that and employ a good trading plan, do U realize the amount of money U can make ?
To review: -
1. volume. 2. 0. I.
3. c..o w~n op-<.ru..on 4. c.ommatme.n:t on aa.de!L6 5. c.Mh 6. ba.o-U 7. odd6
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4 5 5 5 5 5 5
204
REVERS&..S
8 • :tJi.. e..nd!J 9 . c.o 1ta C-!> :tic n
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11. I 2•
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c.ha.pt. 14 c.ha.pt. 13
a.6teJt, U
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c.ha:pt. 17 c.ha.pt. 18
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c.ha.pt. 16 c.ha.pt. 19 c.ha.pt. 20
a.nd, £or..
tho~ e. o6 u who like. 6ood 6oJt thought, theJte. r .6 c.ha.pte.M 1 , 2 , 3 , 1 0 , 11 , I 2 , 1 5 , 2 7 , 22 , 2 5 , to tto und th<.ng~ o 66 a. bd,
a.nd, the..n, the. p e..nui.;t.,i,ma.t e., ' Po-int a.nd L-ine.. ( P&L ) c.ha.Jt.ti.ng, ne..xt c.ha.pteJt.
'10 U
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~
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)
205
CHAPTER NINE
{ioint &line chartini)
Wel.c.ome. :to :the. wu11.deJL6u.l, wun.dvz.6u.£. wo!Lld o6 Po..Ln.:t a.11.d L..ln.e.
cha.J!.til'l.g
Now, i f U are a futures trader who has been trading for some time,
u are probably perplexed by the special activity that relates to each trading day. I mean, really, what is each day's activity all about ? Sure enough, prices will crash/rise thru trend lines, bounce out of congestions and do all sorts of things. Now I ask U - how many times does a commodity break thru a trend line ? How many times does it bounce out of a congestion ? Not very many. Even then, these exits and bounces can and do abort. Sure, U can use pressure indicators to get an idea when a market is overbought or oversold. Sure U can get the same thing that such a market is correcting by moving average lines criss-crossing over and around each other, or whatever. Sure, U can get complicated computerized formulas entailing all sorts of technical data, each 'weighted' against each other or others, verified on an historical basis and with maybe 'odds' to give the player some return on his capital. sure, U can havP the soothsayers, - technical and fundamental analysts of the big brokerage houses who presumably know when prices are turning or turned or one can turn U're $5,000 into $20,000 in a year or two, now and then, and sometimes they don't. su.:e, there are winners in the futures and plenty of them.
Perhaps some of these winners change their style to the market in which they trade, - for that matter, to their mood. ( As I do ) . Sure, U have professional advisors who very astutely recommend waiting for the good markets, but how many discipline themselves so they can accept a protracted rationale that seems to work, and have the conviction and faith to employ it ? How many of these winners end up as professional advisors publishing
206
?&I..
newsletters, who consistently make profits, year afte:r- year, after year. How many of these winners turn out as portfolio managers ? How many of these winners make enough money so that they don't have to be bothered with managed accounts ? How many of these winners hold managed accounts merely as a means to further discipline for their trading and as a means of keeping themselves busy, either as a hobby or as an involvrnent to keep themselves out of the market, and wait for things like sure-thing trades ? What techniques do all these people use ? They are long term techniques --- very astute techniques and actually rather simplistic, both fundamentally and technically. Be that as it may, this trader has always been totally perplexed by so much of each day's specific trading activity. What the devil is the commodity doing to-day ? How can I anticipate what might happen to-morrow ? How am I supposed to know what's going to happen to-morrow ? How is anybody supposed to know what's going to happen to-morrow ? Is it 'random' or isn't it ? If it's random then why does it do what it does ? If it isn't random-walk, why is it doing what it's doing ? As I questioned each day's activity on a purely subjective level, I envisaged some very obvious realities. It seemed very logical that to-morrow's prices, in the first place, are going to do one of three things, - to be up, down or go sideways. ( How about that. Does that make sense ? ) And, I said to myself - "Oh, dear, isn't that interesting ! I've got 3 choices ..•••. there ain't forty . . . . • • just three " . Why are there just three, and I said to myself, " It's because there's just three and not forty ". It can·g~ north, east or south. It can't go west. My goodness, I said to myself,"! have something. - I have a thing called a C.On6.ta.nt ! Whoopeee. Big deal. But then again, I said to myself, Goodness, gracious me. I do have a thing called a ' constant' 11
11
11
-
Prices to-morrow are going to go either up, down or sideways, and that's all there is to that ! Surely there's something to work with here, since everything is so obvious ! What ? What ? To continue : Since prices are going up, down or sideways, we have exactly one thing - a constant. It's not that prices are going up, down or sideways, but it's the fact they can do nothing else- we have a thing called a 'constant' . That being the case, and being a person of somewhat simplistic nature , ••..• I said that since going up, down or sideways is a constant, rather than looking for prices to go up, down or sideways, how about looking for ..•.• u constants " CUd it be that this makes sense ? N ow what constant do we have
?&:.
207
besides up, down or sideways to-morrow ? And I sa~a, " We have a constant- we have a high/low/close to-morrow. 11 • Big deal. But then what I have just said is true. And this is where this author got stuck. Time passed and all sorts of things filtered thru this author's technical search. I tried to expose myself to everyone's viewpoint and then I became fascinated with 11 mathematical trend a.nalysjs " mentioned in chapter two. Thank the heavens that at least I have some historical precedence on which to base Point and Line charting ) .
****
Mathematical trend analysis gave me presumably a median trend line which now and then, generally speaking placed this trend line somewhat through the middle of a main trend ann so that action on either s~de o this cen a trend line cud be observed or tracked. Sounds simple enough ! So, experimenting with numbers, we were able to ascertain a figure, ( formula is on page 573 **** which, on a day to day basis tracked itself on an
absolutely straight line , not daily weaving and zigging and zagging all over the place, but was actually on a straight, straight line and this is the formula which I have used since that time ( years and years ago ) . Since first using this formula in conjunction with mathematical trend analysis, it seemed rather obvious to me that I had another constant. Now, ! had a constant, that prices were either going to go up, down or sideways. I had a constant that to-morrow·wud have a def~nite high/low/closeing price and now I had a constant which } was a simple mathematical formula which placed this mathematical data as a ' dot ' or " point 11 on my chart, thereby giving a constant with or without validity. Certainly, U cud take any calculation, or mathematical formul~, with the resultant numerical figure being represented as a dot. If ~~is dot ended up on the ceiling, it still obviously was a constant. Big deal. At least I was sticking to the path of having realities and constants. The sun will ~robably cum up to-morrow and go away to-morrow nite. ( At least where I'm living. ) But, at this juncture, this author was once again at a brick wall. Big deal So now I have another constant ! But, if I developed another constant once again, was not every thing becuming a bit too non-simplistic ?
\,
208
?&L
What more cud I ask for ? Than a mathematical constant which was an average of such and such. Where can I go from here ? Needless to say, at this point , .....•• drama unfolds. The Great Big Light strikes . . • . no more constants 0 Just use what U have . ....•.. look for variations away from, or around this mathematical dot. How do prices move around this dot, or what happens when this dot moves . The question to be asked was ----- ' Can the variations themselves be constant??? '. And, with succinct regularity, it became obvious that all of the imput for several days, weeks and months gave birth to each day's high/low/close in a constant manner and this expression when analyzed, signalled the ·story in relation to its past history the mathematical dot, and the movement of prices arqund it. Gracious me, there were constants all over the place.:::: - prices each day moved a maximum of "x" mm. away from the 'dot' line -prices each day, moved a maximum of "x" cents up or down from the dot itself prices eventually stop moving above the main line in an up market into an area or channel just under the line, and in an upmoving market·, prices are topping - the dots started to move closer and closer together in an upmarket and the market was topping - dots swung off the main dot line - bells ringing left and right ---- market is topping - the dot is swinging more, it's falling under or above. The dot didn't swing under or above. And sinceit didn't, and not doing what it's supposed to do, the opposite is happ~ning - instead of the dot going up exactly in a straight line, or down in a straight line, they are "snaking" very close to each other, horizontally - we're in a congestion. Often I can tell, two days into a congestion that we're into a congestion. The above is just for starters
Now .that I've taken u this far, I'm afraid I will have to take U thru lots and lots of explanation and slowly unfold and reveal / and illustrate the effectiveness, reality and constinancy of I what I call ' P&L Charting ". I've just told U what it is. The formula is on page 573 And, I've told U how it evolved.
9
P&L
209
D may w~sn to make U'reself a student of it, use it casually or reject it altogether. Certainly P&L charting is not for everyone. It gets U down there looking at the roots of the trees, and U can easily get to the point where u·cannot see the trees for the roots, let alone the forest but for the trees. In this context, it is absolutely essential that U know conventional technical analysis to know where major trend lines are, support and resistance, 50% retracements etc. etc. etc. u must look at the forest,U must look at the trees and now we can at long last, look at the roots of the trees.
If u are new to futures trading, I do not know what to say to u, except what is portrayed in the pages on 'planning' (chapt. I3) I do know P&L can give u birth to enormous profits. To those who have winning styles and techniques, possibly P&L charting cud enable U to more accurately pick a top within days and on many occasion on the very day that the market tops, bottoms. However,.when U've got a winning style- who needs P&L? U people who are into Point and 'Figure" charting may even throw it out altogether. I presume that even some of those who will use P&L charting will becum such avid enthusiasts that they in turn will start to throw out any other new, innovative, technical analysis. The fool that U are. But, why not? I know I'm hooked on it.
Now, let's get down to the nitty, gritty ....•. how it works ..... ..... we will go gently with U at first, and then try to expand some more realities v;i th U as the pages filter past. There will be plenty of applications and illustrations. ( Wait 'till U see ch
By way of qualification, it must be stated that pure technical analysis, no matter how effective, cannot be considered absolute. The nature of the commodity, the personality patterns of the trader, the environment and mood of the trader, the commercial hedger's activities, and the extent of public participation in the market, all manifest themselves in a peculiar technical manner that places a distinctive label on the technical patterns of each market and the trader's interpretation of it.
2!0
P&L Analysis of patterns or formations in price charts can be more of an art than science, allowing considerable room for interpretations. Not all chart formations keep their promises the charts are never wrong ...... only the traders. So Beware !
The subtects to be covered are -
-
dot direction dot distance distance from dots ( 2 dots on, 3 dots on ) dot swinging dot turned up/down crests channel system main channel outer channel main channel lines channel momentum T.R's hitting/digging blocking normal tops/bottoms abnormal dot movements secondary keys 50% retracements trend lines target projections openings closings
And, we will discuss P&L charting in terms of
trends congestions
DOTS AND DOT DIRECTION see page 573 on how to calculate the dot for each day's action. It takes me approximately 25 sec. to calculate and write down the two figures, not allowing for the time it takes to record the high/low/close for the day and going at it rather slowly. Allow another 30 sees. for fiddling around, shuffling peices of paper, and putting the dot and high/low/close on the chart. Approximately one min~te for th~ entire exercise.
P&L
2!!
Now, take ~·re char~ paper, - any size will do as long as it has parallel lines going horizontally and then vertically, crisscrossing each other. This is the chart pattern I use: ...
A full page sample is on page 572, which U cud use to make copies of.
Figure out how many horizontal lines U wish for each cent in the commodity u are charting. For e.g.
, I use:-
one line for each 'cent' in silver high 602 low .592 close 598-70
t,
'jo
2I2
?&L
one line for each 'dollar' in gold high $222.50 low I93 close 216
For commodities like cotton, bellies, cattle, hogs, soybean oil sugar, I use IO horizontal lines to equal one cent, so I can see clearly the fractions of the cent, because I¢ is a big move in these commodities, isn't it ?
cotton high lo~·
close
~5'
55.30 53.20 54.60
¢
f'-1 ~~
)l.
Got the picture ? If u don't, then trace the high/low/close on "U're" graph for the commodity u wish to trace and see if it is graphic enough to clearly show the high/low/close prices for the usual range in which it trades. I mean, U don't see pork bellies trading in dollars each day, do U ? But go~d does. Just try placing sugar's range between two horizontal lines - U'd never see i t no, U need ten horizontal lines so 0 can see each fraction of a cent on each line- in tenths ••••.• one tenth for each horizontal line.
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Now, place the dot, as calculated according to the formula on page 573 . on the appropriate horizontal line. Let•s say that the dot calculation is 594.80 for silver, then I place the dot one vertical line to the right of the high/low bar line on the chart for that day.
~CJtJ
silver
high 602 low 592 close 598
dot calculation
S7o
594.50
160
This author uses two horizontal lines to portray the closing price This gives me plenty of room in order to see the dot when it is placed on line #I
_ I
I most certainly wud be foolish to place it on the day's range, wudn't I ? I wudn't see it, and if I placed it on the vertical line two to the right of the day's range, then I wud be placing it on the vertical line on which I will be placing to-morrow's prices.
--·_......;
.
--
213
214
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So, he=e's how Dec. (Chicago) Silver Oct last seven trading days.
!6~~/78
looks for the
U see how the 'dots' were placed ?
Do
Now, looking at ~~is illustration in silver, do U see how closely related that 'dot' is to the high and low range for the day ? Pretty close isn't it. It's not a long way away is it ? ( In some run-away markets U do get the dots quite outside the range of the day). Knowing that these dots are near at hand to the daily range means that we have quite an orderly market. - just the kind of market that ~tot good trend channels, or congestion periods. Now, let's look at some other things. U notice how prices flitter about on one side of the dots and then swing to the other?
Do
And, that they tend to stay there for a few days ? And, that the highs are roughly parallel to s string of dots ? "'
We will be studying the movements of prices around these dots, later on, and there are going to be 'constants' all over the place. - l!_ighs and low~~~~!_ to the dots ••••
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in an upmarket, prices do move in a channel just to the left of the dots, and in a down market, prices will still be at the left of the string of dots, but, in a ~urning market, the prices will temporarily move to the right of the string of dots. All sorts of constants. Easily recognized. For the moment, let's look at the dots themselves We'll take out the high/low/closes . The first thing U see is that the dots are first moving up in a string, and then suddenly move down. Do U see how the distance between the dots changes ? n-:sy:.stance of dot '4' fro.m dot. '3' is ~er than diS;'jince d;:t :i to 2 ~possible e a stion c·it was!). Do u see ow dot '6' t~ ? Do U see how dots 5,6,7 are on a straight line, if a line is drawn thru them?
We will be studying how the dots move away and towards each other, ( 'dQt distance' ) and how they swing away from the line which can be drawn th.~ them ( 'dots swinging' ) and how dots move above and below each other and what the movements of these dots portray.
Suffice it for now, that we illustrate that in an upmarket, the dots go up, and in a down market, the dots go down. Silly, isn't it ? But it's true. The big thing that we're looking at is the fact we are tracking ultra-short term price trends l Not major trends, - short and medium term trends, depending on how long the dots stay in one direction on a straight line. So, there we have it. Dot direction gives the day by day trend of the commodity. If I'm lazy and if I wish to day trade, I trade only in the direction of the dots. If the dots are up, I look to buy. If the dots are down, I look to sell. If I feel bold, I will trade against the dots - outer channel line 2 dots on, 3 dots on more later I4 mmm away from dots
>
Here's a little tid-bit for ~ if dots don't go up or down, but snakes sideways, horizontally, U have a congestion. More later.
2I5
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IDOT DI STAf·KEI Now, let's look at how the dots move away and towards each other and what it can !ll~-~n.._ Let's take our Dec/78 silver illustration and tack on another four weeks of trading, and see what we can learn from dot distance.
First of all, I guess U can see that dot direction is up, except for short term congestions A , B , C , where dot direction sort of slithered sideways. ( the fact that A,B,C, did not 'dot:__down strongly meant a congestion existed ) . Now notice that in area 'D' , gats are quite amazingly equidistant from each other ! So are E and F area dots ! And so is G (B) , the five day contra-trend congestion ! This illustrates a perfectly happy harmonious market for those few days. Dots are equidistant apart ( amazing ? ) and in approximately an absolute straight line. ( amazing ? ) But look what happens on day #I, .the dot turns flat ! The market is temporarily losing upward steam. Look at the selling the next
9
P&L dav, #2, ...•.. it closes down to 564.50 . No way wud that market go higher or up strongly that day ! Too much selling pressure. But, good gracious, look what happened to the dot that day ( #2 ), .... it went up .... which meant that buying pressure was really there that day, and look what happened the next day. It opened 6¢ and closed IO¢ higher. And the dot moved away from #2's dot . And, the next day, and the next day. Dots equidistant. Good orderly momentum. But look at day #3 •.•••.•.. the dot flipped sideways again. O.K. No way on day #4 wud prices go up strongly. U wud look to sell, or take long profits, or whatever. Look what happened to the dot on day #4 . It moved down. But not very far. Certainly not as far apart as were dots of days between #2 and just before #3. This was the signal to me, that since the down dots were not far apart, that I shud be preparing to buy again and go long, and that some sort of flag, pennant was forming. And, sure enough, the days following #3 put the dots close together and in a straight line and finally on day #5, the dot moved slightly up off the line and I was a buyer ( more later ) . And suddenly on day 6 the dot moved strongly up and away we went. So u can see how, generally speaking, the dots tend to stay i~a straight line and that as the market is temporarily slowing down, ·the dot will pull back towards the previous day's dot, one way or another, and that when the dots·move apart, we have an expression of a renewed or new trend.
I
All terribly simplistic, but terribly effective.
Now, I want to mention something special about dot # 7 . Do U notice that it is further away from the previous day's dot than anything before it. It means that the day after day 7 , that the market is going to really have to explode to keep the dots that wide apart, or else the market is slowing or exhausted itself. I knew that the close at 604 was against a trend line and that there was a gap and that volume was not too high that day. Sure enough, it was a temporary (?) exhaustion gap and prices opened down and prices tumbled somewhat. When U get to realize how important the distance of the dots are from each other, U too will appreciate almost immediately what the market will do that day and possibly for the next few days. It is not the purpose of this book to teach U everything U need to know about dot distance, but once U see the dots unfold as they shud, or shudn't, U will know all that there is to know.
2I7
2!8
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~!STANCE FROM DOT~ Now, we'll swing a little away from looking at the dots (we'll cum back ) and start to look at what a high or low price in the day following a dot can portray. If during the course of events of the day following the day U have put a dot on the chart - prices move "x" mm ( millimeters ) away from that dot, U will find that given the normal momentum flow of the commodity for that general market period - weeks to months that the price will be very temporarily ( or permanently, a. top/ bottom ) , over bought or over sold, for that day. ( This enables u to be in on the very top price or bottom price of the commodity for that contract price, if u acted inothis range. ) What I am trying to say is. that if to-morrow's price goes "x" mm. from to-day's dot, then in an upmarket, I wud get out of my long position, and possibly go short and in a down market I wud get out of my short position, stand aside or go long. This is especially true if the dots are ..,.ide apart and momentmn channel uery steep more later ) which wud ·be an expression of a runaway market or a exhausting market.) ooor•oo::l·--··0~--- .. --...I'==~~ ;--.Jl""oor---....- - - - . :. : - --==t: =~:::::::: - f.• ::::::::: =--=.:~. :::-..::1. t1:::5:::- . . . ..; ...:=; ._,...:::. - P 0
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This is an actual working ·chart of soybean '77 market top • see if U can find the dot of the day before the day with the big blob on top, and notice blob it is over 50 mm. away from the dot the day before. The market was over-bougllt that day.
9
P&L
219
Let's look at silver ...•. I4 mm. seems to be the figure for silver at the moment,
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...... that when prices move approximately I4 mm from a dot, that silver is temporarily oversold/overbought ~ a correction of one sort or anQther is going to take place. ./
Let's ·take out section "A" from the above charting, and look at it at left. Count up I4 lines from dot fi and U get the high of 604 for the fol~owing day, day "A" • Even if U count up 14¢ from day #2, u get the high for the following day.
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At the moment ( silver is not really a run-away ) , silver goes a maximum of I4 ¢ from the previous day's dot. Last winter, ( all winter ) it was a maximum of 8 ¢ .... there are different market conditions this fall. Using this overbought condition @ I4¢ cud put me within a I¢ or 2¢ of the contract high of silver, if it were ever to actually top at these prices. Naturally, when silver is ma~ing one of these short term tops at I4¢ , I get out of my long positions, and may short slightly, but I look to buy aga~n, since the major trend is up. ( Remember the trees and the forests ? Take any commodity U like and if U have the patience, trace out the dots and high/lows and see if U can cum up with the "x" distance from dots at which U wud buy/sell, for that commodity for that 'season' . Look at the silver illustration again. Days B,C,D stopped at I4¢, and back a few weeks; it was stopping consistently at around 9¢ (days E,F,G,H,I,J,K,L, ). Since silver has opened to I4¢, does this mean it is opening up to commence a bull blow-off, or is it already topping. I'll tell U something, something is up!!! ---- .... do Usee how watching these dots and prices around them signals the market's mood ? There is one time that I am very cautious about taking action at I4¢ ( or *¢ or whatever ) and that is when prices break up through a congestion, as at #L , and E , especially if it closes in the area of the I4 ¢. -- it is a possible breakout of the congestion and no way do I act. Wait for the following day ? There's one other time wherein I am reluctant to act at I4¢, in silver at the moment, and that's in a bear crack, whether it be of a corrective nature, or a major bear trend. U know how ruthless those cracks are But these distance from dots are miraculous for medium and major trend bucking . Needless to say, these distance from dots are useless in a runaway market. No way wud I short orange juice last year when it was a run-away market. Silver at the moment is not in a runaway. The fact that prices dg pgt stop at "x" distance from dots is a first signal that U are in a run-away. Let's look at soybeans '77 again. They were in somewhat of a runaway, but not really ....• they were just bloody strong too much liquidity to give a genuine daily gapping market. Soybeans opened up to an unbelievable 7 0 rnm distance from dots, where it was continually stopping at 7 0 mm, both up and down. These 80 mmm caught the ultimate exhaustion within cents, both up and down, as it pumped away to form its' top. The dots were very wide apart (obviously topping ) and forming very steep channels ( more later ) signalling the bull blow-off. Do U see how we now have a criteria for recognizing bull blow-offs ? - dots incredibly wide apart, dots in a straight line but very, very steep, prices exhausting regularily around a 'constant 70 mm ( last winter it was 8 mrn ) . Feast U're eyes on this soybean chart. -
221
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222
P&L Now, let's look at this distance from dots another way, and that is from the criteria of two dots on, three dots on. The same thing really, but we're looking at it from a different direction and will express even further, some of the realities of Point and Line. Cgarting.
2
DOTS ON,
3
DOTS ON
Let's assume that we have an up market. The dots are pointing upwards and they're in a straight line, or they're not. ( It's just that if they're not in a straight line, it makes the "2dots on, 3 dots on' even m re valid. )
So, we draw a line through the dots,
and, here we are on
- that's to-day. Now, guess what ? Let's have a little snapperoo. Let's put on the line the dot that's going to be there two days from now, and, why not put on the line the dot that shud (will - three days from now be there 3 days - two days from now from now.
~t?)
(to-morrow's dot) A to-day
Well, on the line we've got to-morrow's dot (who cares .... to-morrow is going to happen anyways •.•. maybe the dot won't even be on the line to-morrow ..•. a crucial signal !!!!! . . . . more later)
So, what's going on? ..... if we already have the dot on the straight line two or three days from now, to-day, we have a \] calculated price i.e. the dot already before us, and somehow the prices of the day two days away, and three days away are already
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known. I guess a computer cud figure out a reasonable range of prices to put the dots on the line for those two days ( #2 & #3) Since we wud presume that we already know what the prices cud be in two or three days from now , in order to give the appropriate dots so they wud be on the line .... what the heck is one supposed to think if prices already move into that range, - to-morrow ? If prices to-morrow ( day #I) are already up to the price of the dot for the day after, or even better still, the day after that, i.e. day #3 , then prices to-morrow are already where they're going to be 2-3 days away ( or 1-2 days from to-morrow ) . Now, what are we going to do with this ? Well, if prices are already going to be ahead of th~selves and we're assuming that the market momentum will keep rather constant at least for the next few days, then why not take profits and maybe short alittle ? The rationale is similiar to the I4mm, I4¢ and Bmm, 8¢ described re: 'distance from dots' .
·1
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j
Think about it. It's a phenomenal concept ! If U had a diamond which U knew wud be worth "x" dollars in two weeks, and the price was already there to-day ..•. wby wajt for twO weeks to take profits and sell it ? Maybe U cud do something else with U're money during the coming two weeks, and then buy the diamond back again at the same price or most likely U wud be able to buy the diamond at a lower price the next week. I for one know that in the case of commodity futures that in the interim, the price will cum down. It has to in order for the market momentum to remain constant. And, here we get into the realm of the absolute beauty of P&L Charting. In order for the market to maintain its same momentum I know that the dots will be right on this main channel line. If the e
1'
•
I
dot suddenly moves up gff tbe ljpe I kpow that the momentum has increased that day, an~ I know bloody well that the market has to keep ~p that momentum, because, we now have a new momentum {_ new momentum line
t/ f/ ,/
"
'
/
a new momentum up and the dots : will have to be on this new line with this new momentum. If it doesn't then I know that this new expression of strength is nothing but upward exhaustion !
/
223
224
?&L ~i:- dot
What happens when ~~e dot doesn't move up but moves off the line ....•..•.• it is a further expression of an exhausting ( not yet exhausted, but exhausting ) market .
,"
'
•
shud be
here
"-market exhaust
I have interjected this-little seance on dots swinging to explain to u how interesting those dots can be, and how they express 'the momentum of the market [ much more later J • so , i~ w_e 're talking of dots, why not talk of dots where they shud be 2,3 days from now, and once again, if they're already there , why not take profits, or maybe go short a little.
Q N
X '0 N
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...
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Look at day '3' -its' prices ·stopped on the upside in the area of the dot two days away - '?' . Ditto for day D,E,F,G, . This /{ business cud go on for ever, and it does.
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225
We get an idea thru the section on channel momentum , cuming up later on, how we can relate prices thru placing on charts, the cha~~els and lines and consequent prices long before they occur and get to know how momentum is expressed in terms of how steeply the dots move or don't move. Let's take soybeans '77 for example. Now, this author was taking profits 2 & 3 dots on and going short as ~~e market was slowly starting to move up. But, guess what happened ? Well, this author was shorting about three dots up and I got nailed. The market was not correcting downwards and a more steep upward dot line was forming and being confirmed, because I got nailed two days in a row. I was immediately given the signal that new forces were entering the market and that if this momentum kept up, a big move was on the way. ( I switched to other techniques, see channel system - cuming up ) and I stayed long and pyramided. If 2 dots on, 3 dots on fails twice in a row ..••. thank U , but I will abandon it and adjust to the new market conditions. (And, I had been waiting for this moment for two years! )
~· then again, if all that was happening was that a new main channel line was developing and a steeper one, wud it not hold true that '2dots on,3 dots on' , or even better '4 dots on' wud work on this new main channel line ...••. .••. getting complicated? Don't worry about it. This is just a little extension of ?&L charting, as there are many and U will probably cum up with a few of U're own. I know I have some little special ones which I cannot put in print, because ~ don't want. everybody there exactly where 1 am going to be, since P&L charting allows me to fine tune so effectively.
•
/
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f
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/
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And, u wudn't either. And U won't when U cum across some of them U'reself. They're all right there. U have all the Fieces right before U're eyres, as 1 do. All U have to do is think about them.
226
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Here are a few examples of what I mean about finding out a few things. They are taken from my notes going back a few years ( wud U believe six ? ) Cum back to this page in a few months after U've studied P&L charting for a while and see is U can find out what I mean. - momentum of channel has great effect. Watch out in a relentless bear crack and also a raging bull - the first time U have a failure at 2-3 dots on, U have that bear or bull. This signal is one of the first and greatest signals for that bull or bear - there is something about the good sale, 2 dotsl:f forward, not being hit that day, but holding the next day ( incredible ) which is a signal of a topping market.
J
9
We're going to speed up a bit now. I've got a lot to cover and I will be talking to U in a less gentle style and will be more didactic. I will be stating realities and·presumably U will catch on to the significance of P&L charting and appreciate the significance of that 'dot' or point. There's all sorts of neat little tricks cuming up. I leave it to U to think about why they work. (Because, if I can get U to think .••• I know U will effectively employ P&L charting and make just scads and scads of money, and if U employ what's in the rest of this book, U will keep it! )
DoT
SWINGING
The day that dot swings off the main channel line, watch out !!! /
/\ •/ • dot swings off
/
•
/
•
/
P&L
The day that dot swings off the main channel line, U can always sell on that channel line. If a dot moves off the line, that line becums .I 'valid' and U use it to sell with• 1
227
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I
4.. U can
;·
sell
here
I
unless, as on rare occasions, a vibrant bull pushes thru.
I
The day following that day that the dot moves off the line, look to sell •
U
.· Just because the dot moves off the line doesn't mean market has topped - it's just topping, - maybe just entering a congestion, but, look to sell or take profits from long positions.
·sell in this area - look to sell this day. ( may be only good for one day )
In an upmarket, dot moving off the line means that market losing ( hasn't lost - just losing ) momentum. ( rPverse for down market To
pro~e
it, lookee here,
_______ ..
.
l •• '
Line 'A' and 'B' becum valid the moment the dot moves off ~t. U can use it to buy/sell with. Do U notice how prices go exactly to that line ...and not beyond ? ( incredible ( If~ don't see the light on this, some day U will ) ;
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228
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DOT TURNED UP, DOWN I
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'\-dot turned down from 'a'
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It's not a bad idea to go with the dot. If the dot turns down, go with it, look to short or stay short. [ I've already taken long profits, thanks, because dot swung off the line the day before ] This is not always a firm rule, because often by the time the dot has turned around, the market may already have made its corrective action if the action was just a contra-trend move. If the dot has already turned down, possibly u shud be looking to buy, at 2-3 dots down, if the main trend is up. - see what I mean about looking at the trees and the forest, besides the roots ?
Let's look at the silver chart again, and I will extend it further backwards to give U further illustrations. It's on the next page.
Days the dot turned up and U cud have gone with it are # ' s I , 2 , 3 , 4 , 5 , 6 , 7 , 8 , 9 , Days the dot turned up and U cud nor have gone with it. - #'s IO •.••. only one day- not bad ! and even then U cud have gone with it because even two days later, prices went up
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Days the dot turned down and u cud have gone with it are #'s II,I2, I3, I4 • Days the dot turned down and u cud not have gone with it are ( remember the major trend in silver is up ) - #'s IS, I6 - only two days ( remember what ·I said about 2-3 dots on and trees and forests ) / So, out of I6 days, only three days of dots turning didn't work •• the principle of dots turning up or down is BI % effective - not bad. [ By the way, I am applying all my illustrations to the silver chart, the same silver chart, - even in chapter on planning, so it's not a case of chqsing a chart that works to prove a point. All my points have to prove themselves on this one chart. It's the only chart I'm working on. I'm being very honest. I hope U realize that. J
230
P&L
Since we know that dots turning up/down is around 80 % effective, one cud concentrate on the conditions in which the 20 % fail. I suggest U look at a) T.R. 's ( cuming up in our discussion) b) normal tops/bottoms for the commodity in which U are trading ( cuming up ) c) are prices in congestion. important
What happens if the dot does not go up, or down ? This means congestion. - the dot goes absolutely sideways per x, y, z, z, z, in above illustration. And obviously, in a major uptrend, I wud look to buy at the base of the congestion . If the dot refuses to move down in an upmarket, obviously this means that there was support to the market. Silly ...••. simple ...• but true
Remember, if the dot isn't doing what it's supposed to do ( e.g. shud go down but moves flat ) , then the opposite is
happening •..... I suggest u write that sentence down in big letters.
One little thing. In an upmarket ( or down ) if prices suddenly cause the dot to immediately go flatt off the main
I I
1 0 - shud just swing off
J I
~
I
I
•
/
I
•-
goes flat
channel line, it means that an incredible alternate force has gone against the market. It cud be that the market is grossly oversold or in fact, the next day prices will go crashing on
9 F&L
23I
down. If prices don't go crashing on down the day after the dot goes flat o~f the l~ne, tSen pr~ces are oversold and Euy~ng support evolves.
One hint : - if the close on the day is down right to the bottom for that day and travelled to that point towards the close ( see time-price reversal chapt.23) then expect ( only expect ) prices to continue down.
To note here:::::::- the dot shud not move that quickly off the line. This fact is placed in this book, because u will cum across it in U're trading and u will have sum reference therein.
So, we.' ve. c..ovette.d the. bcu..i..CA ..<..n Point a.nd
L..<..~e.
Chaltting
1) dot d.Ute.c..tion
2 J dot futa.nc..e. 3) cU..ota.nc..e. t)Jtom dot ( 2, 3 do:U on ) 4) dot .ow..<..ng..i..ng 5) dot t~ne.d up/down /1
c..a.n nov: .6 ..<..ng ,
do e. ' !ta.lj' me.,
a.nd, U' ve. le.a.Jtne.d to look Nov:, le.t'.o .te.a.Jtn the.
a.;t
na.h
.6 0 ,
Une..o dJtallJn tlvw the. do:U.
.tauJ, tee, doe..o,
- "c..Jtut" a.c..tion - :the. c.ha.n.ne.l .o U.6 -tem
- .the. T. R. '.6 ( an ..i..nCJte.d..tbf.e. de.v.i..c.e. ) - :the. c.onc.e.p:U on IU.:t:t.<.ng, d..<..gg..i..ng a.nd , bloc.IU.ng, Then we. wil.l look a.:t noltma.l :top.6 I boUom6 a.nd .oome. a.bnoltma.l dot movemvU:o ·.Then .oome .oe.c.onda.Jty ke.y.o e.g. 50% JtetJta.c.eme.n:U, ta.Jt.get pJtoje.c.iloYL6 \ I a.nd .o:tut) t), WheAe.upon we. will. delve ..<..n:to :tJtend a.na.i.y.o..i...o a.nd c.onge..otion a.na.ly.o..<...o.
9
232
P&L so, to the first topic.
CREST ACTION Here's
a crest ,the 'crest'
•
• Taking the high/low/close bar lines off the silver chart makes the 'dots' look like this, and will reveal the crest
.
_
- ..... - -- -, ...... .-- . .
~--
:..~~:~ :~~r~=;~-
_J-:-:: -
. _:.--: ___ _
....
---- ~u
"'""'''
7' 111 1,
H
I'IIS~i
F
335·5011
20
x 20
Be
no,.,
, ..... ~. "........ -- - _z
w,.,,r•
"r>A J T~~-
For u avid enthusiasts, to be, of Point and Line Charting, do U notice how the distance between •a) crest# ! & 2 & 3 & 4 & 5 are approximately equal
A Q •""
oF-~ C"eco•S.S'. •1=V w •.114, 'wit • TE
'T"""'
,..,_
9
?&L
b) 5 & 6 is approximately double 4 to 5
c) 6 to 7 equals 8 to 9 d) distance 8 to 9 equals IO to II Do V notice how crest ¥ 3 & 4 challenged # I and how 5 challenged # 2 Do U notice how crest # I2 ( a flat one ) challenged and won over crest # 7 and, how crest # IO was a bad challenge to crest # I2 or 8 and prices consequently went a long way up ! So, for U avid enthusiasts of P&L charting ( I'm the only one so far ) ti will want to look at how the 'crests' challenge each other, how they go in segments of equal moves, and how they each provide support/resistance to the other. If anything, prices will congest at old crest areas ( if only for a day or two ) or congest at 50 % retracements, or congest a long way away from the last crest··showing a temporary top or a strong I weak market.
Do U see that crest #3 and 4 are a 50 % retracement from crest #2, and crest #7 is 50 % from 6 to 5, and 8 is 50 % from 7 to 6 . It's almost as if the market is unfolding as it shud, and it is frightfully spooky . Old crest levels have to be reckoned with, and that is that
Since prices create crest action, perhaps a look at the price action at the crest will shed some light on how we shud trade the markets. If a crest is rather valid, then prices will most certainly move away from it, either as a temporary correction or as a This is obvious ) new maier trend. Therefore, if we assume that a crest is valid, any challenge to
233
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P&L
it by prices must be considered a threat. ; most valid crest
I.
t-1.. GI Prices
..r
price challenges crest
+crack
This being the case, that a price challenge to the crest creates a threat, then the reverse holds true that if this challenge fails, then we indeed have a valid crest. We find that most cres~ are challenged, however, sooner or later, at least once. - if not within a day or two then most likely a week or two later. l leave it to U to find these crest challenges on our silver chart, here's an. example,
-
Ever, if ever in what appears to U as a topping market, a crest is challenged and fails ---- watch out ! The little baby bear has a grin that wud split a pumpkin ! Needless to say, if the price challenge one way or another proves effective, we cud, just cud have a continuation of the move to at least double the last move. ( Remember how the crests were equidistant from each other ? Also see the theory about target projections, coming up ) . Pg. 2 56 A hint : - if the close of any trading day's activity is above the crest per in the following illustrations, then u have a good idea that the crest will fail - don't U ? anc, if the close is behind
P&L
tbe crest then the crest stands a good chance to be valid. Well, anyways, let's illustrate
---
--
-
l-:-
~··--
crest challenged, - close above the crest and challenge is successful - days # I, 2, 3, 4,
close behind or under the crest, and crest is valid at least temporarily, -days# 5,6,7,8,9, IO, All we're trying to get at here is that the closing price of any day subsequent to the t~e a crest is formed can either represent a challenge, close is above
• or below ·,
.~.
235
236
P&L
and ~~d appear to be a successful challenge 80 % of the time and if the close is below this crest ' •
·~
then the crest is at
least temporarily valid. The key here is to use the challenge to the crest as a signal that prices may, just may go on thru, and if the trend is very strong, it will gap thru. ! leave it to U to develop rules of U're own on this topic. Just keep in mind that crest formations and their intereactions with each other, and crest price patterns are realities and do happen, and happen with incredible repetitiveness. They have to ! AS ! said before, the markets seem to unfold as they shud.
THE CHANNEL SYSTEM This is a
' biggy
'
I
Terminology
I) channel wall 2) main channel 3) main channel line (
thru dots
)
4) outer channel 5) outer channel line /
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237
What we're into here is creating channels on either side of ~e 'dot' line, and the walls of these channels are absolutely parallel to it and to each other,and are equidistant from it. Silver, for most of this year has been moving in a channel about 7 mm wide on either side of the dot line, the main channel line. A couple of years ago it was 8 mm. Soybeans travel in 8 mm channels. Each commodity has its' channel width for its particular season, and can be readily determined after U haye graphed a few weeks of the commodity U are interested in. For silver, we take the main channel line, and draw two lines
parallel to it, 7 mm ( mill~eters) on each side, creating two channels.
-~
.!. . .
--~---------~-------:-----.-----
. . . -..... ---.--- ·-:- ·-· ---------- -------
·r-~o --s--~o-
·- :· -. --··
--s70 :--se~-.!
.
.-
r- ___:_·. __ :~:~--. : -· L-·---~.. . -. .-=
. ~
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.
.
•
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__ -------- ___
:
. :
-
. •
•
0
•
-;_________
I
_,._
--
--.
.-
-·-
.... .. - _, .... -. ...... - .. --........ .. -. -.: . -- ~: .::.: -~-:: ~. : . :
. . . .
- t -- .. -
. ; .
•
.
--.---:---~~---:-.7"7."':-:-:-.-~.--.-:-·-:-----
<:. ...
---- - ....... . -- ........ LJ : : :.;-~··.:. .. ..J:I---···--------.·--'-=-:-:.:..-::-:~~ -~~: :._:..::.:_ . _----
:;::;- :
.
•
'·
~
--- - -.,._ ....... -. -------. ·--·-.... -. ·- ..
-----------------
.
•··-
;
----------
·------------ -·-- --
238
P&L
What can I say ? Just look at the above illustration of Dec. Chic. Silver '78 • Look at all those channels - ( each exactly 7 mm wide, drawn parallel out from the 'dot' line - the main channel line ) What can I say ? Look how prices each time are confined to the channel and look how more times t~an not, prices actually just "touched" the lines ! Talk about fine tuning ! I'm rather proud of my channel system. Use it as U will in U're trading. I leave it to u. Just look at all those opportunities to buy/sell ! Any kindergarten kid cud tell U that prices stopped right on the line. ADd even if it went outside of the line, it didn't mean much, unless the market was turning around. As I say, I leave it to U to do what U want with it, but I draw U're attention to the following observations, from above illustration
...
section 'A' in illust.
- each commodity has its own channel width. Do some tracings with P&L charting and U will find the width appropriate for the commodity U are trading in. - -·in the main channel, note how, ·channel wall caught high prices at 573 . Notice how two days later, the dot moves ofr main channel line and the next day prices are off.
section 'B'
note how in outer channel, prices il~!:~er up in outer channel for five days before falling thru and never enter back into the main channel
section 'C'
now the main channel in the down market - look how it catches low at 56I and then see how it slithers around for three days in outer channel 'D' before moving up.
section 'E'
very interesting. Once again catching the highs. Note how prices close one day outside main channel 'E' on the upside at 584. Rarely does a price do this - it means that the following day prices had to explode to keep up the same momentum, but it didn't and fell back into the main channel. What a day to 'short' . - the bull had evaporated. A typical bull blow-off. Look at that area again, reread the above and see what l mean look at the channels in sections F,G,H,I,J,K,L, , - all catching highs and lows. look at the congestion between 'G' and 'F' , when the dots are snaking almost horizontally, - even then the channel system was catching the highs at 558 and the lows at 545.
9
P&L
239
Regarding 'outer channels' we usually have three patterns in them.
prices go thru in almost one day e.g. in above chart,
"M', 'N' .
prices take 3 or 4 days ( very common before they fall out of outer channel e.g. in above chart, = 'D'
(3)')
\,__/
prices do what I call a 'slithering' along the outer channel for maybe one week ( o~ lo~ger ) befcre finally falling out and prices come off sharply or at least for a few days. whenever I see prices slithering, I know there is a nice correction curnjpg ~ ( Another criteria for a blow-off ) e.g. in above chart,
=
'B'
'0'
,
'L'
There is plenty to see with the channel system and it's all yours to use in U're trading plan, if U wish. ( Don't try selling it to others, because it is copyrighted, as is all of Point and Line Charting, per chapters nine and thirteen ) • It's a super tool for U day traders, if U have the patience to wait or stick to a trading planwhich U derive from it.
.
240
?&L Be t~at as it may, I do offer it to U, but with some caution, however. There's every chance in the world that U will get mired down with the channel system. u will begin looking at too many roots on the trees and not realize that the tree has been chopped down. It's a big world out there, and just because U feel super about becuming a 'channel expert', and start outguessing the market and let the channels tell U what the market's going to be doing, U're going to be fooled. Don't outguess the market or presume anything. Just realize that there are a few consistencies with the channels, and all it is meant to do is give U further confidence to strike, when U're trading plan says the moment is right. It's a very deadly weapon if used right and very messy if U let it whip-lash U're thinking capabilities.
some tricks: These channels have momentum graphics, usually three.
I) low momentum
MI
2) medium momentum M 2 e.g. in above chart, E, M, G, N, I, 0
3) steep momentum M 3 e.g. in above chart A, E •
•
II
u can get in advance, the usual degree of steepness of the commodity U are trading and record it. ( U have to do some work here. ) Note how momentum of scetions in our silver chart, E,M,G,N,I,O are roughly parallel Note how down channels C,D,H, are similiar momentums ( M ) and 2 'J' is similiar to 'P' ( M ) 1 Note how down channel 'F' is very steep i.e.
= M3
9
P&L
241
Note how up cha~nel A, B , is steep and is what l call M Blow-offs - another criteria for blow-offs - we've got 3 three now ! ) Well, i£ V wish, U can almost project in advance, maybe an M2 channel up or down from a congestion or top before it'even occurs and this wud give U a preconceived idea how far prices wud move out of the congestion the first day and at that time give U a probable channel wall for the commodity for the next few days or weeks. Take the congestion between 'G' and 'F'
/
-
phantom line
Project a line up thru dot of day 'X' , similiar to momentum M and 2 draw a line 7 mm. parallel to it on the upside. Now, I suggest u subtract about 2 mm. from 7 to give u '5' mm, because the dot for the next day more times than not will not fire rite up but be a l.ittle to the rite of the projected ( phantom ) main line. If U look closely, U will see that this 5 mrn. line turned out to be the 'channel wall ' . This is a reasonably interesting tool, and with a bit o= exposure U will cum to appreciate what market movements · are all about and how almost predictable they are. This trick belongs especially to market congestion and topping/bottoming analysis. Now, we're getting on to some more goodies, and believe me, the next one is a winner.
THE T,R,'S Now I'm going to revert a bit, and hold U' re hand again. I want to go thru this in same detail because of its relevance to Point and Line Charting.
242
?&L
At the end of the secrion,I will tell U what T.R. means. U will probably guess it by then ) . ( No peeking . ) The T.R. is one of the most incredible sign-posts, road-map -whatever - that U .cud use in future trading , whether by Point and Line criteria or otherwise. It is part of Point and Line because it is the key which makes everything click. Without the T.R.,- it almost seems as tho' the market wud have no energy. If a market is topping, hitting all sorts of lines just bang, bang down - everytime it rallies, it is hit hard it is not until a T.R. is hit on the downside that the market can resurge upwards and go thru all those lines, or indeed, the market does the other by 'cracking' once it goes thru the T.R. ( The only exception to the above is in a genuine runaway, which by all accounts defies most conventional technical analysis anyways. It doesn't have the time to wait for all the usual stop signs and roadblocks. ) T.R. 's are isolated lows/highs , but it is how these jsalated lows/highs are appreciated that matters. U know what a isolated high/low is don't U ? h
h
rj~~l
~
h = isolated high 1
isolated low
1
and, the phantom isolated high/low phantom high /
phantom low
There will be definitions cuming up, don't worry
P&L
Here's our friend the silver chart again, ....·ith with with with
isolated highs marked isolated lows marked phantom highs marked phantom lows marked
X
y A B
-·
.
~
... _
·----
=
.
··Definition time
'·-·
!
- of isolated highs/lows that is, because the definition:of T.R. 's is something else ( T.R. 's are made from isolate highs/lows. ) Isolated high
is any daily high that has a lower daily high the day before'it omd a lower daily high the day after it.
243
244
P&L
Isolated lev..·
is any daily low that has a higher daily low the day before it and a higher daily low the day after it.
Phantom high
occurs when there are not a daily high on either side, but the lows for that day have a daily low on either side.
phanto~
high
LJ
~
At lower/ than
'
lower than
A
See also page 584, 585!
A
A bit complicated maybe, but once U get used to the swings with T.R.'s U'll be glad to see them, and then U will know what phantom high/lows are. )
T.R. means - an uptrend begins when the last isolated/phantom high in a down market is penetrated on the upside and that at the uptrend stays in effect until prices fall below an isolated/or phantom low, whereuoon the new downtrend will stay in effect until an isolated or phantom high on the upside is passed thru, and so on and so forth. Prices swing from one T.R. ( the isolated and phantom high/lows to another, alternating from up, down. up. down llp, ciown up, down, - ip infinrite se~Je~c& Money can actually be made by acting on these T.R. 's in sequence. That is, everytime prices "o thru a T R u enter the market illSt a tick beyond the T.R. . The only thing with this is that T.R. 's sometimes fail and U have a loss before the market has moved sufficiently to give a profit before the opposite T.R. is hit in the opposite direction. But, there's one thing that stands out. It is that the more consecutive losses in a row U have, the closer
9
P&L
U are cuming to a big move. To take advantage of the fact that a high number of consecutive losses gives birth to a big move, is to increase( Martingale system ) the size of the positions each time u lose so that when the big move cums, u are fully loaded with contracts, as prices break out of congestion. Everytime U lose U add on to the number of contracts, and if U win, U lessen the number of contracts. U are actually pyramiding the losses. ( Sounds a bit crazy, doesn't it ? ) I've done quite a bit of work on the subject, and I've got two pyramiding formulas I - 2 - 7 - IS - 32
11
$35,000 is needed
I - 2 - 4 - 5 - 7
11
$10,000 is needed "
11
I did some calculations, ( I have never used this attack but the T.R. 's answer a low of questions in P&L charting re: hitting/digging, blocking •.. cuming up in our discussion) . I used the formula I-2-4-5-7 for the commodities in the following illustration for period June/75 to Dec. 30/75. ( They are from my private notes of I976 ) . If I had a loss I wud take on 2 cts. and if I had another loss, the next trade wud see me with 4 cts. If the trade won, then :i: wud. reveJ:t back to 2 cts. and I wud move up and down the pyramid formula, according to whether I loss or won. Anyways, in the following table U can see that not one commodity had a loss and only coffee put U at a loss ftom U're original capital, for the period mentioned. See
next
page.
No accommodation was made for bad fills or commissions. This was just a study I had made. U're 'stop buy/sell order' was placed just a tick above/below the T.R. with the appropriate number of contracts. I do not really suggest U actually use this approach, but it is interesting. Take any commodity U wish and experimep.t.
To review:
245
246
?&L
.--. i
[? t:-((1 oo .
-~.
eoP.FE£
r· :(!ace Pt l -------r~--+---~~r-~~~~~~~~--~~~~~~~~~~+--
: S UG !
i-~~~~~~~~~i7 '
f'L1t11WIII')
. ~••q-t $A "j'
..
. ..·· ....
•.
. . 0 JL.,.. Ct-rliL"E ffCJ'~
-~
-.
•,.
.... .
(' l."fWOOO ;:t ..;
,
ls>o~t>--~-~,_,.,1';,;:i>
$1~
VE:fl.
__ J
P&L An uptrend begins when the last peak of a rally from the down market is penetrated on the upside. This new trend stay in effect until prices fall below the most recent low. There is an absolute market with this concept. An uptrend can be reversed in only one fashion, and a down trend can be reversed in only one fashion.
We'll look at the above silver chart. Remember, U alternate from one T.R. to the other. Up then down, then up, then down etc. Note : T.R. 's A,B,D,E,F,H,K,L, are phantoms. Starting with position a - go long one contract, re: pyramiding formula I-2-4-5-7 and goshort with position T.R.'B', but still one contract because we have a profit. Position B turns out to be a loss as prices go thry T.R. 'C' and as we go thru 'C' we will be carrying two contracts. Running thru silver to Oct. I9th'78 ( Dec. Chic. contract ) , we end up with the following story.
247
248
P&L Position
A B
c D E
F G
H
I J K
take take take take take take take take take take take
I contract contract 2 contracts 4 contracts 2 contracts 4 contracts 2 contracts I contract 2 contracts I contract 2 contracts I
profit loss loss profit loss profit profit loss profit loss profit
2I
¢
II ¢
I ¢ I ¢ I ¢ I7 ¢ I ¢ IO ¢ I ¢ 7 ¢ IS ¢
Profit/loss I¢ = $50.00 Position
A
B
c D E
F G
H I
J K
2Ix50 IIxSO Ix50x2 ( cts.) Ix50x4 (cts.) Ix50x2 ( cts. ) I7x50x4 ( cts. ) Ix50x2 ( cts.) IOxSOxi (ct.) Ix50x2 ( cts.) 7xSOxi (ct. ) ISxSOx2(cts.)
= !050 profit = 550 loss = IOO loss = 200 profit = roo loss = 3400 profit = IOO profit = 500 loss = IOO profit = 300 loss + ISOO profit
profits = 6350 losses = ISSO net profit = $4,800 subtract commissions ($42.00 each ?) , 22 cts. total x $42.00 = $924 Net profit/loss after commissions is $3,876 profit. ( We are not taking into account bad fills. So, using $IO,OOO starting capital, I guess that's 38.76% return on U're money in I4 weeks. Not bad, I guess. It's quite an approach. Remember Murphy's Law ? - wherein, if anything can go wrong it will. Probably if U were to use this approach in actual market conditions, it wudn't work. Something wud go wrong. But, my goodness gracious me, it seems to work everytirne I see it on the charts.
9
P&L
249
T.R.'s can be a very powerful market force. If U were to keep it in mind, U wud in time see what I mean. It relates to support/ resistance classificatio~ as ' transformed support/resistance' per chapter 7 . I like to use these T.R. 's in knowing what has to happen with my point and line charting ( cuming up in 'hitting/digging' and blocking. ) Now, guess what T.R. means ! U guessed it .....••.••. trend reversal
HITTING / DIGGING Let's
assume an upmarket.
Prices are going up, dots are up, channels are up and everything appears happy and normal for the bulls. Now, we know that there are such things as trend lines, resistance lines and now with Point and Line charting, we have the 'channel wall' and the 'main channel ' . It may sound ridiculous, but I envisage the market hitting its head against these little lines on the upside. The market goes up and then hits its' head against a trend line, resistance, or the above two tines. /
Big deal U say. But what happens if prices continue to hit its' head in subsequent trading days and eact time within the same general area ? Wud U not say that there appears to be resistance ? Well, there is. Prices may hit a trend line and stop. Maybe it hit its' head hard enough so that one of the 'dots' moves off the main channel line and starts to swing and roll over.'Nine times out of ten when that dot starts to swing
250
P&L
off the main channel line, there's going to be a lot more head hitting. Are u starting to get the picture ? Altho' the market may continue to rally, it's going to hit its head on the next available line and keep hitting its head, sometimes 3 or 4 times -maybe 4-6 trading days .•.• resistance is incredible. No way is that market going to go up. not a firm rule, but firm enough )
~=a
'hit'
· Let's look at our silver chart again.
~~~~
.
•
-
'
- -- .--------;
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.
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• ••
!--- ...
-. •.. ;_;,·_._:_·.:_· · ___.;:;_;.. _.. --.:....;:..:..;__-_-- -· ------I
9
P&L
2SI
Let's take area 'A' prices start t0 hit the channel wall 'W' ~ 562 . No sweat - it doesn't mean market has stopped. It's just our first 'hit' . All it did was validate the chanpel wall line, because if a line is hit, the line becums valid and U can buy/sell on it ( in this case we sell. } Prices fiddle around for 2 more days between 558-564 while the dots caught up on the line. Remember 2-3 dots on ? Prices therein move up to trade for two days @ 563-569 , but, U know what ? They never got near the channel wall 'W' • This means to me that prices are not even strong enough to go back up to touch the 'W' wall. In fact, the prices were such that on day 'R' ( range 562-569 } , the dot swung off the main channel line -ever so slightly. But all the signals were there for me to consider taking profits and maybe shorting because a price correction was cuming up. On day 'S', prices hit their head again on a line drawn thru the last two dots. Getting complicated ? not really. All I'm trying to do is illustrate that my psychic starts to get ready for a price correction epee that 'hitting' occurs a few times, and each hit is on a different line
~J ~~
~,
as each line swings over.
And, of course, prices on day 'T' finally gave up and the correction was on its' way.
There's a good example of the opposite happening in section 'B' on our silver chart, where in this case, prices were digging in U've seen the bull digging in before it charges, haven't U ? That's why I call the opposite to hitting ..•.... digging • If U can appreciate the concept of hitting/digging , then U will be able to 'smell' when these things are going to happen. u know that that damn market is going to be t~~porarily ( or permanently topping/bottoming in 3-6 days.
Now, U know what ?
There's only one thing that will relieve all that 'hitting' or digging if it occurs. There's only one thing that will relieve all that pressure, if say, hitting has occured. And, it's the T.R. As soon as hitting occurs ( taking hitting as an example ) I start to look for the nearest T.R. on the downside, or for one developing.
252
P&L
Because I know that once the T.R. is passed thru on the downside (just approaching it in a runaway market is enough sometimes ) and especially if prices have just ticked thru or snuggled up to as in a runaway market, that the market can almost immediately shoot back upwards. Once that T.R. is snicked, then the market can do anything on the way up. All the old lines that evolved the 'hitting' are now invalid and prices can now shoot up thru them as i f they didn'texist. This rule is firm .• so firm that generally I consider it a firm one. It's so amazing. If there is a T.R. nearby, prices wills~ive to get there, one way or another once the hitting/digging gets underway. In area 'A' of our silver chart, there is that phantom down T.R. @ 559 on day 'X' and this T.R. price is passed thru on day 'T' , thus relieving the 'hitting' pressure, whereupon I look for digging in , which occurs on day 'T' , 'U' , 'V' . This may sound all very complicated at the moment, but don't worry, because if D shud get involved with P&L charting, U will cum to know it as a visual momentum barometer, and u won't be able to live without it. I cud make some more rules on the topic. ( Now don't groan. ) They're just refinements and not really necessary and cud serve only to fog clear cogitation.
In order to possibly make things a little clearer for U, we will express the concept of hitting/digging, T.R. 's in terms of
BLOCKING Blocking is a visual representation of a confined area that encompasses a hitting + T.R. or digging + T.R. ~~~
HITTING
T.'};~
DIGGING 17~
P&L
253
Prices seem to congregate into 'blocking' once digging/hitting occurs. I leave it to U what to do with this, but it's a fascinating phenomenon. And these blocks seem to be so close to each other in a non-runaway markets. In the above, blocks A and B are digging in blocks , blocks C, D, ans E are hitting bo~cks . If u notice that there is not an intervening digging block between 'D' and 'E' . All the digging was done right in the hitting box. This implies a rather strong market if prices do not even bother to correct, and in this case, silver did indeed continue on up after leaving 'D' to the upside. ! pray that U can begin to see the relevance of what I call P&L Charting . It is an interesting theory, in that by watchi~g the movements of the dot and prices around them, one can tell by their act;on whether prices in the short run, are continuing in the same trend or doing the opposite by deviating from the straight channel line, or whatever, indicating a weakening of the trend. If prices snake horizontally, we are in congestion.
P&L charting seems to be more consistent ( dots on straight line more often ) with some commodities than others. I guess it relates to market conditions. However, putting the thinly traded commodities aside ( even works there ) I find that silver, gold, copPer,soybeans, ~· meal, hogs, bellies, corn, wheat, sugar, cocoa, coffee, cotton are all incredibly map-able. Cattle wiggles too much - but still O.K.
254
?&L
NORMAL TOPS AND BOTTOMS Have u ever heard of anything so ridiculous ? - a normal top or bottom. How cud there ever be such a thing as a normal top ? All market conditions are different and there's no way one top can be so similiar to another. So u say ! A couple of years ago I did a P&L charting analysis of all the major term tops in silver. All I did was take the silver tops that seemed to be good for a long time. ( weeks to months ) Now, I suggest U do exactly that for the commodity U are interested in and keep ~t handy for r2ference. This is what I found for silver, of thirteen tops. a) I2 had a down T.R. squeezed up against the top ! b) it took only three days in all I3 to crack with the T.R. formed within those three days in nine out of I3 days !· c) all I3 congested and there were no wild swings, almost as if everything got quieter and quieter, until booom - down it went ! Analyse and listany common elements that appear in the tops for the commodity U like and keep it handy. Be rather suspicious if what appears to be a topping formation doesn't quite fit that 'normal' pattern. This is a very handy, handy tool for U big traders. If anything, use P&L charting for this approach. If U're commodity seems to be following its 'normal' topping,bottoffiing pattern, govern U'reself accordingly, especially if this approach fits U're trading style.
The theory underlying P&L charting states that if what is to~e expected is not happening then the opposite is true. If the market is not doing what it shud be doing. then the opposite is happening. If tbe dot does not stay on that straight channeL line, then the price momentum is giving up and if the dots don't keep acing in the same direction, then the opposite is happening. Always look for the norm and any deviation from it is abnormal. In our approach to futures trading, a deviation is a very, very early warning signal. ~have a computer which will aive me the approximate range of prices that have to occur to-morrgw for tbe dot to remain on
r
\r\~R'M•f
?&L
1_
strai~ht
255
\rthat channel line. I mean, to-morrow's Cot is alreoav known ! It's on the line ! And, since it is a numerical computation, then only certain figures can give it. Right ? Right ! So,
by golly, if to-morrow's prices are not going to give me that dot on the line - I'm ready The abnormal is happening. Prices shud be such and such to put that dot on the line. If I am handy to the market near closing time, I can calculate ( u don't need a computer ) from the day's range and the close at the high and mid-range and low ( three 'dot' calculations ) so that before the market closes, I know where the dot is going to be for that day. Is it on the line, or is it swinging, or is it turning up or down, and maybe, is it turning up or down too suddenly. In an u market, I am never too hap y when that dot suddenly • qoes flat o f e main \ channel line. The market s~~ng too fast oversold too fast. I'm too suspicious. The market wud have to gap down the following morning or I wud look for further up prices. - a further example of watching normal, abnormals, the corner-stone of Point and Line Charting.
SECONVARY KEYS One can have so many keys to keep a weather-eye on price movements. We don't want so many. We must know the fundamentals of market psychology, personal behavioural patterns, factors influencing prices, market theories and the such, and let's not forget O.I. and volume and the general behavioural activity of trends and congestions. ( That is why they are all included in this book/! But, there are a few items I keep handy as reference when I'm looking at the chart. And,
/''\ \
they are
.
I)\50% retracements 2)}trend lines, support & resistance 3 )j targ~t projections 4} opem.ngs 1 ) closings
IJ
256
?&L
I)
50% RETRACEMENTS
Every day, prices seem to almost be retracing 50 % , one way or another. If my dots are rolling over, and maybe the market is cracking, I want to have some idea where prices may stop. So, I look at 50 % retracement from the last isolated high to the last isolated low, and see if I can find a trend line or something there, or maybe just a 'projected' channel line. It is not the purpose of this book to explain in great detail the 50 % retracements , but look at the charts and U can see it for U'reself and because it seems to be happening all over the place, why not keep it in mind.
2)
TRENV LINES & SUPPORT ANV RESISTANCE
An absolute must ! Know everything U can about trend lines and support/resistance. Imbed it permanently in U're mind so that U're always on the look-out. Don't forget that most trend lines originate as prices which occur at channel walls and outer channel walls.
3)
TARGET PROJECTIONS
Now , this is interesting ! If ever prices shud be in target areas, expect hitting/digging, blocking, congesting, and T.R. development. My way of determining a target is by taking a straight line A -------------- B
Now, separate that straight line but keep its actual length / identical,
A------------------B
The distance between A and B is the same and who cares what goes on in between them as long as the distance from A to B remains constant. ( I like constants. )
9 P&L
To repeat, as prices move from A _ _ _ _ _ _....;;;.;... to _ _ _ _ _ _ _ _ _ B I
who cares what happens in between. 'A' is where it started out and 'B' is where they ended. 'A' is the starting point of prices and 'B' is the target. Now, follow me here, the sum of all the activity from to
A
T
will give the 'T'
target )
no longer 'B' for the sake of developing our argument
So, all of the activity of 'X' ~~x "'L A -"'-[._-""-~~----=:'>~--')_.__ _ T
will equal the distance 'A' to 'T' Now, don't panic. Let's say that price movement from • A' to 'B' and ..
A----------- B
c---------T
from 'C' to 'T' has to equal the 'T' , the constant, since it is a part of it. This being the case, then, A + B ) + ( 'A • to 'T'
c
+ T l equals the distance from___.
.
( All this is part of simple algebra We will now designate the distance A to B as simply "B" and, the distance C to T as "C" and we get
A
-------"~"----------------·~·~~~---------T
257
258
P&L
t-lhat we are saying here is that the distance that "B" travels plus the distance "C" travels is the same as the distance as the crow flies from A to T since it is part of the distance A to T, and that, that, "B" + "C"
A
toT
So, we have "B" + "C"
=A +
T
( Have faith, I know what I'm doing How's U're algebra ? We can take this and, turn it into
"B" + "C"
( "B" + "C" ) - A
A+ T
=T
and, let's mirror that and make it T
=(
"B" + "C" ) - A
WE GOT IT
~arget
equals ( "B" + "C" ) - A
I
and "B", "C" and A are all numerical numbers and, for the sake of our calculations they are highs and lows .
isolated
"B" , "C" , and A are prices that are the low or high for that particular day. /
So, now let's look at our silver chart and find some of these highs and lows that we can put into our formula and see if we can cum up with a target. Look at the chart on the next page. The trend is up, so we have two isolated lows ( A and c ) and one isolated high at 'B' . Let's see if we can find a target. Calculation
A=$5.7I B $5.92 c = $5.83
9
I
W~V<.
(5,~c-Si"t•) 'i"!>-~:::: o,~f ~S8J ..:it' 6.0it.
A.~C
J?,/c.
c.:: J..oo1 ·
<{"h c ~Wit,
A~
.----.-.
P&L
259
!
That being the case, then we take the T
=(B+
C ) - A
formula and, we get T
= ($5.92
+ $5.83)-$5.71
= II7.5 - 57! = 604
·-'-and,
....•. silver went exactly to 604
look what happened, •.••••• -astounded?
Don't forget that prices moved from 57I to 604, a distance of 33¢ and it didn't matter what happened in between, did it ? It still got there. The only problem was that at 'A' we didn't know that prices wud go up 33 ¢ • But we did at 'C' because we cud take (B+C) -A from our formula and by golly, if prices do go up to 604, the target area, I sure as heck want to be ready for a top, and as of this writing, it certainly is having a grand time up there - seven days of congesting- at least I'm ready for the bear crack correction if it occurs. I will now take the silver chart and put it back a bit to show U some more illustrations. I will designate the isolated highs and lows for U and lay out the calculations and I leave it to U to apply it to any commodity U wish. Have fun. For the chart on the next page, the calcualtions are: ( formula
(B+C)-A = T )
(B +CI) -AI= ( $5.73 + $5.59 ) - $5.36 =target of $5.96 1 didn't quite make the target of $5.96 , got to $5.89 - oh well ! ) CB +c > 2 2
-
A 2
=
(5.89 + 5.60) - 5.59
= target
of 5.90
( almost made it to target. Prices got to 5.87 )
( prices got to 5.72 @ 'B
4
I
260
-
P&L
·-
--t
-i
- - ...,._
·-l-
--
- -·-·~···-
·- -- --.:..;·:. :7 ~c;,.:
-~~===== ttt±'ll" ·-~
__,..__,
~ -~
--:::
==-=-
·-
::== . :;.:-; :-~-
.-l.
-
-
·-f--
_.,..,..,___ ~1
:::::!.:~-
~f-._-·--
prices got to 5.80 @ 'X' )
Suffice it to say that when prices got near 5.96, 5.90 , 5.75, 5.83, and 604 , ~ey congested or stopped Once aga1n, the market unfolds as it shud ! Isn't P&L charting fun Having fun ? Getting excited ?
P&L 3)
& 4)
26I
OPENINGS ANV CLOSINGS
are important to me because ! want to know where they are in relation to my lines. Are oPenings jumping a main channel line ? ·Are they already 2-3 dots uP and shug I sell ? Things like that. ! don't wish to place too many observations here because U may place too much emphasis on them. We want to keep things simple, - remember ? I merely wish to bring up this topic so that some day when U're more advanced into P&L that u may re-read this page and be stimulated to give some thought to openings and closing in relation to our lines. They can be bloody important. For example, Maybe on closing. I wud like to be shorting if its against a main channel line. I love this ! ( and put into u're bag of tricks )
fe."t:,i
-
-
-
-
·-
what a beautiful day to go short on close ..••• prices snug against the main channel line, andnno T.R. hit on tbe downside •••• lots of hitting ! Day 'A' was a problem, but I did not go short because when I did my calculations for the 'dot' that day as the market was closing (last l/2 hr. ), l saw that the dot had turned up suddenly, and remember what I said about tbings not doing what they shud ? That dot shud - have turned down that day because the dots had been swinging the two previous days, damn it. No~ wud I have shorted w}'le:Q__~ose dots w~:t::~~-·_t _doing what they
shud be doil}g. Such is ~~e beauty day before because channel wall, plus on trends, chapt.6
to me of P&L charting: Anyways, I had bought the( it was at 50 \ retracement plus the outer I luv to buck a counter-trend move. ( see chapt. )
(5.82 was about S-6 mm out from the main channel line - to the outer channel wall. The low of the next day just touched the outer channel wall. Also, I just luv to buy or sell the Ist day that prices ever enter an outer channel or the dot hasn't swung, up or down. This first day in outer channe1 bnylseJ1 is a firm rule. See if U get what I mean. )
CJ· (/
<~>
262
P&L
SOME NOTES ON CONGESTIONS This author can very often tell two to three days into a congestion, that we may be entering a congestion. The first day that a 'dot' moves off the straight channel line ~
the trend momentum is arresting aaa ~.e fi~st ~tage for a congestion is occurinq. either as a topping/bottoming congestion C resting area or a continuation congestion. Once that dot moves off the main channel line, I look for the more normal rolling .~
over of dots and the dot turning down and the 'dot distance' opening up on the downside for a downtrend or the dots as they move down, remain ~~ close together, representing support. Understand-? }JC Don't worry if U don't, .•• U will . -----
In the case of a topping market. if tbose dots tend to remain close together. and especially if they wiggle ( snake ) , then a congestion . is to me at least, clearly represented. Before we go to the silver chart to show U what I mean, I wish to bring up two other special items to look for in congestions, re: P&L Charting. I) the position of the 'closes' ( settlements ) to each day's dot gives an excellent clue as to the possible direction of the breakout from the congestion. ( not always a valid rule, but nearly every time it does work . ) If the closes are generally above the dots in a congestion, then the ultimate breakout will be up.
/
most closes are above dots and breakout will be up
most closes are below dots and breakout will be .down.
P&L
2)
hidden, phantom T.R. 's occur ~ith great =reouency in congestions, and if the market is to break out on the upside, these phantom T.R. 'swill be on the lower range of the congestion area and prices will just break thru, ( maybe just tick thru and sometimes in only one contract month ) , these downside phantom T.R. 's are relieving the 'hitting pressure '
~tt_,rr /
~hit
this day
phantom
O.K. let's look at the silver chart
263
'
264
P&L
Clea~ly, sections B,E,H,L,N,P,R, are congestions because dots are 'wiggling' or snaking sideways. Each has its' first day a daily range wherein the dot moves off the main channel lines. Each possessed the criteria of dots beinq mainly aboye the dOts and each had a breakout on the ups~de. A phantom T.R. existed ( 'X' ) and was hit 'H' on the downside in B, E, H, (just ticked thru ) L, ( just ticked thru ) . Phantom T.R. 's are just a handy guide in congestions. Isolated T.R. 's are just as effective e.g. 'N' .
Note the other side of the coin, in that the trends are clearly marked by straight line channels and dots wide apart, in A, c, D, F, G, I, J, K, M, 0, Q, . Do U see how readily distinguishable trends are from congestions, and how with P&L charting they are readily recognized ? At least, I for one know when I'm into a trend or congestion. Do U note also that in a normal ( talking about constants, once
again ) topping, bottoming that the trend reverses without going into congestion, without the dots wiggling, but rather neatly moving off the main channel line and then, usually the very next day ( maybe a day later as in 'J' ) the dot turns up or down. Trend section "c" in our silver illustration, swings rite into downtrend section "D" . Uptrend section "F" reverts immediately into downtrend "G" ( no congestion - or dots wiggling ) and up 'I" to down "J" .And there's a bottom from down "J" to up "K" . Need I say more? When those dots go wiggle-diggle as in "H", "N" .u are not in a trend U've got only three things no congestion).
congestion, trend, turn around(with
A word of caution: - do·not mistake the evolution of a trend as a major trend reversal. P&L charting only allows U to latch on to a minor trend reversal, which of course may turn into a major new trend. P&L charting will not let U look at the forest, or the trees, - just the roots. There's an old saying that "look after the little things and the big things will look after thenselves". Well, in commodity trading, more is involved than looking after all the wiggle-waggles. U must look after the big things too. That is why I have absolutely refused to write a book solely about P&L charting. P&L charting cannot be separated from conventional technical and fundamental approaches, otherwise U may not see that they have built a dam downstream and that the forest is about to be submerged & U're roots will drown.
I) enables U to recognize and stick 1+'ith a short term trend 2)allows U to buck that trend as it moves in the channel or tops/bottoms 3) allows u to pyramid within the main channel ( i f U're adventuresome, but have a plan ! ) 4) allows U to recognize and trade in congestions and in anticipation of breakout 5)
allows u to recognize a normal top/bottom and see one developing
GOOD LUCK
(u
shudn't need it. )
In chapter 13 , we will see how different applications of P&L charting do profit/loss wise in our silver chart. ( Now no cheating ! There's more to this book than this chapter and chapter I3 . )
tSUGGESTION
i
"' - MAKE A PRECIS OF THIS CHAPTER .
PART B
now it's time for a chit-chat
the philisophical
part
267
CHAPTER TEN PRICE
MAKING INFLUENCES
AND HOW TO USE THEM
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268
PRICE INFLUENCES
PRELUDE U might very well ask "Why bother with this and the next chapter?" . U may yawn U're way thru it, but U must realize that the time will cum when U are sitting there, watching the "box" of the charts, or the newspaper quotations and wondering .... "what the heck is going on?".---- with prices. I know, I have been thru it .••. U want to know why prices are moving as they are and what in heaven's name does "this price movement mean?". Maybe it's not really worthwhile to know why the prices are moving, - but, it cud be comforting to have an idea, and maybe relieve some anxiety in the process. Anxiety is one of our chief enemies. If U are at all perplexed at a given price move which seems to defy U're chart and technical predictions, it's going to be nice to know that a lot of the price movements are "noise", or that the market is not responding to news as it should or that the market just does not seem to be moving when the fundamentals are incredibly bullish - that U can expect a move based on historical patterns, or, that " Uncle Sam " is at it again. These subjects are worthwhile and basic like the abc's of learning,writing and arithematic, and they will be of some comfort on those bleak days when U want to know " WHAT'S GOING ON!!!".
NEWS In interpreting and understanding price movernents,if U see that the market will not act on bullish news, don't buy ! - and, if the market will not fall on bearish news - don't sell! It is all a matter of interpretation of the effect on the market of news items, in order to ascertain whether the news has already been discounted by market prices. News is published in newspapers and over the wire services. Experienced traders act on it when it is initially transmitted by the wire services. Information available to everyone is of little or no value as the futures market has an uncanny ability to discount future events before they are recognized by very many traders. By the time prices have moved someone, ,somewhere must have known something and have acted on that knowledge.
PRICE INFLUENCES It has been found that that it takes one week market. Remember, that of news, it is already
traders who react on broker's advice, for their effect to be felt on the by the time the majority learns a piece too late.
Also, the enormous amount of news and information that is received, - one can place very little trust in this and these data. If U read much at all, often conflicting news, the commodity letters and free advice just get in the way of listening to the voice of the market. U need to know what the market is saying, not the confusion of "babel". Big money in the commodity markets is almost always made by astute persons who take information available to all, make their own interpretation of it - manage their committments with a proven plan and sit back until the market cums to the moment of truth that they have seen, which is their moment to take profit. Do not distain and do not wholly believe any sources of information. The best u can do is to review all very carefully and make an educated estimate of their accuracy and more important, as to their eventual effect on the market. Try to learn what news is significant and what is not. Use a panic exodus, or entry as a trading opportunity, especially if it is against a strong trend. Know how to interpret major news items, either of an international or national influence. Certain news items profoundly affect price prospects for a particular commodity, while some tend to cum as a surprise and others develop over a period of time with its attendant heavy publicity. What cums to mind is for e.g. a declining hog market. A Hog Report cums out with bullish implications, & the market zooms up immediately following the report. However, the major trend is down and at most the market will go into a congestion giving U ample opportunity to decide whether the trend has changed and whether to interpret the hog report or any other news as bearish, based on U're technical analysis. The second example I wish to give U is what I call my most significant toO.l in the interpretationof news and it is that during a major bull move, I look for any hint of scandal. I watch the wire services e.g. bean mkt. '77,comment re C.B.O.T. 'investigation'- 2!/2 weeks before the market top. I can assure U that the big boys get out on the first hint of scandal, the market is near its' top.
269
270
PRICE INFLUENCES Another example:- the u.s. dollar is crashing, the fighting in the Middle East seems to be escalating and gold is not effectively moving upwards. I see technical signs, with my channel system (P&L charting) that gold is not doing what it shud and I immediately becum "not bullish" and watch for a decline in prices. Therefore, the effect of news on prices is a key, key, key, -I repeat,- key - element in anticipating market tops and the signal of a break-up from a market bottom. One more example:- Watch the headlines of your newspaper. There is something especially funny about our local paper. Everytime the headlines blare" high beef prices to continue",the futures market cracks the very next day- ( I'm not kidding! ) .It happened in I974 and just one month ago. Whenever U see it in the headlines or a prime news item on T.V. -take profits!!! This rule U never- never forget!!!
WEATHER This one is all very obvious. If it doesn't rai~ we have drought. u can't grow tomatoes in dry desert sand. What is important is being able to anticipate a drought, and, understanding what the rumours &/or actual facts of lack of rain have on the market prices, and, this sometimes includes price effects for a one particular day, as the floor traders watch for signs of precipitation on their local news facilities. These floor traders have a first impulse into the market prices for a particular day. Over the longer term, astute investors make use of significant news services who they recognize as being harbingers of / information on a particular commodity. Some services specialize on weather for the international commodities, such as coffee, sugar and cocoa. Such disaster effects on internationals relate to coffee trees blowing over in Brazil, or frozen, which is instant almost overnite. This information can be picked up very quickly thru U're broker.This kind of information sets out a major trend which cud last for years. Take note that one can anticipate , such as in orange juice, the likelihood of some type of weather scare for the autumn months.
PRICE INFLUENCES
The other approach is the more long term one, where by means of sunspots, or, as the way things happen, there is a drought in the Mid-West. This can have a profound effect on prices for North American grains. Sometimes, even a hint of drought can send the grains for a very nice medium term move. ( maybe even 50¢ to $I.OO on beans.) When u anticipate the effects of sunspots, it appears that we cud now just be into the first several years ef the chance of sunspots and drought. See what I mean about using a broad spectrum for fundamantal analysis? Knowing that there is a chance for drought will keep me sharply tuned next summer. I will be ready for it. At least I am aware. By the time the public learns of the drought I will be getting out and saying, "thank U very much, now where do I short?" I will be looking at the forest with this approach. Conventional technical analysis will enable me to look at the "trees", the trends etc, & P&L charting will enable me to look at the roots. Do u follow me? In analyzing the affect of weather on market prices, zero in on the technical approach to make certain that the market has the proper momentum, which suits the weather situation, as U see it. Always lOok for things unusual in U're technical analysis. If there is a dm.ught, then the momentum shud be high and a possible runaway occuring. If that is not happening then watch out. Something is wrong. In a bull market, and drought, watch out for distribution watch out for those huge, pumping days, - huge ranges and high volume. So, remember, if I was able to anticipate a potential drought I wuc move with the smart money - astute traders, and informed people who accummulate in a congestion, because of their access to information,- they know that damage to a crop is possible, - these people and I know I wud ----when that market does not seem to be moving --- I wud get out and take profitsr and stand aside and look to short, a month or two later.
One last little hint: - when V have V're broker telling V that so & so has flown over in an airplane such & such a field - my dear friend , I think U are being taken for a ride V'reself. I hate those fly-over reports. ( I like to watch the action of the market to the news as above or to the news of weather.)
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SEASONAL AND CYCLICAL I refer u to chapter 24 for the specifics in relation to knowing what to expect and what to do. The only comment I have here is that seasonal and cyclical pattens are one of the key tools in what we call " grand picture analysis". U take the basis, U take the cash price, U take U're non-scribbled, clear, chart bar patterns, (non-mutiliated) and apply the definitive tools of P&L charting. Big capital can be laid, and big capital can be made using seasonal & cyclical patterns as one·of these approaches to forecast price movements. Because of the peculiarities in the production of marketing in each calendar year, most commodities repeatedly tend to have the same periods of rising prices , as well as the same periods of declining prices. U can compare the price level for a specific commodity with the price level of a year ago ---is it rising or is it falling? U want to know when the high and low of this specific commodity usually occur and whether prices have been following this seasonal pattern. Also, u have the cyclical patterns of the meats and cyclical patterns of the sunbursts-- the sunspots, and,,,,, also U have cyclical patterns of general economic conditions, best applied on a world-wide basis. Don't forget that the economy doesn't go upwards forever, - it also has its cyclical moods and this is particularily effective in applying a criteria selection for the metals, - and for consumption of consurnptable consurnptables, ( grains, meat ) and, the purchasing capacity of the public to buy, - say, meat. [ Can u imagine North Americans paying $I6.00/lb. for beef as they do in Japan? No way! J
FUNDAMENTALS Needless to say, - "fundamentals" - supply and demand - is what it is all about, ( besides making money ) • When U assess the fact that prices have gone far out of kilter, that eventually, the forces of the fundamentals will play to create a correction of the price level.
PRICE INFLUENCES
Fundamentals are basic to what happens in commodity future prices, but U are a better man than I if U can figure them out. However, let's take a look at a few things. Why not ask the following questions:? - What are the figures of the U.S. production and stocks relative to a year ago ? What are the demand prospects domestically ? Better or worse than last year? How are the number of animal units if it's a grain feed, or the level of demand for the major industry for which the commodity is a raw material? What is the production like outside the u.s. ? Is it larger than a year ago and where ? Is it a normally exporting or importing country ? How do the export propects look ? Is it the production of a competitive society ? How about the government loan levels? Is it higher or lower than last year? Are there any other forms of government support - such as export subsidies - or import quotas ? My dear friend, the list can go on for ever. However, there's a couple of things I wish to say. The first is rather simple. - take note of things like the tight supply situation in the final months of a crop year. (This can cause the near months of the futures contracts that still hold the old crops to advance more sharply than the more distant months, where the new crops will advance only moderately if at all. The next is a little comment (about 6 million pages long) Look at the following box:
Population to double Mexico City - if current growth rates continue, Mexico's pop. of 63 million will double in 20 years
This tells me that we are going to see bull markets, possibly/ in the future that we have never seen in the past, or the future is going to crunch us all into the ground with decades of recession because the productive element of societies will be unable to cope what these herds of people will do to the world, negatively speaking. We cud be at the very beginning of a bull cycle. Imagine, in twenty years the population of mexico will double! In 20 years 63 million more people will live in Mexico. In 20 years, Mexico will be twice as large. Muliply that by all the nations of the world of growing populations and 0 have quite a figure!
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In 20 years, Mexico alone will need food for 63 million more mouths. Is the world going to be starving in 20 years? Where are we at? I for one cannot guess. But I shutter to think what effect all this will have on our personal liberties as the governments thrash to handle the problem. The political consequences are fodder for U're mind. - time for arm-chair philosophy, my friends. One thing for sure, the law of supply and demand is going to be vicious, no matter what the circumstances of individual and collective thought portray. I wonder what will happen when some wrought-up individual blows up the c.E.O.T. with a little nuclear bomb, protesting the sharks who are allegedly responsible for the problem of food shortage ? That shud be an interesting one. Next, consider this: - we are in year #2 of a drought. Cud this be year #2 of a 20 year cycle ? What will happen if California doesn't ge~ water next year and water in '79,80,8I, and 82 ? A tree cut down in the Lake Tahoe area found rings or cycles that many droughts do not simply last one or two years - they last for IO years or 20 years. Will there be a total ban of food exports to those countries without money, or let's say, they don't obey the u.s. request for zero population growth. Can U imagine telling the rest of the world - no hanky-panky! - or take the pill - or we want to make a little snip, surgically, here and there! Are we at the end of abundance and is this the start of a gigantic bull market and are we at the edge of the abyss of world political turmoil? Several prominent analysts overwhelmingly agree. My friend, I leave all of this to U to mull over. I suppose the only argument contrary to the above dismal picture is that all the experts agree that it will happen. And we all know that the experts are always wrong. Which means I guess, the opposite will happen. Things like feeding those countries who increase the birthrate to IO\ or more. A typical sort of thing a civil servant bureaucrat wud dream up.
PRICE INFLUENCES
PRICE LEVEL A price level, at a particular moment, can by itself influence prices. Obviously the horde of the public is going to be buying like crazy the higher prices go and most certainly near the top. They are influencing the price at this level by keeping it there. But, they are buying from strong hands and when the public is satisfied, this price level will by itself cause the market to crack, and potentially be the market top for that year. Certainly, smart money buys - especially if they can do their timing very well - at market bottoms. Price level assumes that a position is attractive to this smart money. Price levels occuring at trend lines, tops and bottoms of congestion areas can stop the market dead in its track. A price level which appears to the less astute trader as being cheap for a particular commodity can be a false price level. Beware of assuming that a commodity is over-priced or cheap. Note the following : - there is a clear tendency for speculators to buy on days of price declines ( cheap prices ) and for shorts to sell on price rises ( price level too high ) . This action indicates that traders are predominant price level than price movement traders. I repeat : - traders are predominant price level than price movement traders. THIS IS FOOLISH. Do not think in terms of price level. Think in terms of price movement.
The affinity for prices are cheap precept that the Whereas, the sky be a huge vacuum for being bulls.
the public and weak traders to assume that seems to be based on the psychological price cannot go below zero on the downside. is the limit on the upside. There seems to on the upside and the public has this affinity ( As well as full of bull. )
The public never seems to realize that prices do not rise forever, and they do not seem to realize that they cannot feel safer the lower ~he price gets towards zero in order to go long. However, in assessing price levels" on a purely technical basis, one can ascertain that a price level is too high or that a price level seems to be low enough to warrant bottoming formation. As far as market tops are concerned, after prices have risen a considerable distance, a general feeling in the market can develop that prices have gone far enough. Call this a psychological quirk of traders if U will, but this type of
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?RICE I:t-I'"'FLUENCES thinking becums an important market factor. It does not necessarily have anything to do with price level, but this "psychologicalquirk" becums an important market factor and can result in shorts covering and new buying developing on this assumption, particularily, if the reaction has carried 50% of the upward move. Take note here, that a SO\ correction price level, is a price influencing factor by itself. Note that price level attracts buying or selling re: trend and congestions and support and resistance levels. However, by all means do compare price level with previous years to define the odds (as in chapt.S) as it relates to a particular conunodi ty. far as the cheap price concept is concerned, consider further that in the commodity markets there is always a certain level below which U have very little risk on the downside. Take potatoes at 3¢ . U can always take a long position . ii,.i.-Jl+t: :-: PDT&TDES IU&IIiE) IIAL 1171·U. :7 , ~ s~ply on this theory. I mean,tnere are times. when something can be really cheap and I mean cheap! As
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TREND Trends by themselves can influence prices. Once a well-established trend is well under-way, it tends to perpetuate prices much longer than most traders wud anticipate. Most commodity advisors recommend trend following. Accordingly, this trend business feeds on itself. Unfortunately, these poor dear chaps don•t realize that prices are always going up, downwards amd sideways, that price direction will change.
r
PRICE INFLLTENCES
Without a firm market approach, trend following will enhance the destruction of U're profits inherent with the trend run. However, once a trend is established, it tends to continue. But, don't forget that towards the trend's end, U are becoming part of the mob and the trend itself is influencing the price until, of course other market factors take over.
SPOT PRICES The following table will illustrate what one can expect from a rise/fall in the cash price and its relation to futures and the concomitant results.
VAJUA'nONS IN CAINS OR LOSSES RES1JL'l1NC FROM DJFRRENCES IN CASH AND Ftl'nJilE PltJCE MOVEMENTS
Results
Price Movements
to one who is
Mshort~
to one who is "long" in the cash market
in the cash market
Unhedged
Hedged
Unhedged
Hedged
Falls by same amounts as cash Falls by greater amount than cash Falls by smaller amount than cash
Loss
Neither profit nor loss Profit
Profit
Neither profit nor loss Loss
Loss
Loss, but smaller than unbedged loss
Profit
Falls
Rises
Loss
Loss but greater than unheciged loss
Profit
Rises
Rises by same amount as cash Rises by greater amount than cash Rises by smaller amount than cash
Profit
Neither profit nor loss Loss
Loss
Loss
Loss. but smaller than anbedged loss
Falls
Profit
Profit, but smaller than unhedged profit Profit, but greater than unhedged profit
Loss
Loss, but
Cash price Falls Falls Falls
Rises Rises
Rises
Future price
Loss
Profit Profit
Profit
Loss
Profit, but smaller than unbedged profit Profit. but greater than unbedged profit Neither profit nor loss Profit
greater than unbedged loss
SOURCE: B.S. Yamey, "An Investigation of Hedging on an Organized Prociuce Exchange.-
Manchester Sehooll9 (1951), 308.
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WHO TRADES .Loc.a.£6 b-<.g boyJ.J LU:.ti. e 9u.yJ.J c.ha.Jz;t,U .:tA hedgeJr. "Who trades" is amply presented in chapter 20. They are presented here to illustrate a few ways how they influence market prices. U shud find some of the comments interesting .
.f..oc.a..£6 :- They account for much of the "noise" that cums across the ticker tape. They gobble up the gap openings, reversing themselves to close the gap and reversing again as the gap closes, taking their little bites out of price fluctuations all day long. They are unable to influence prices beyond a day or two, if at all. As U know, their main function is scalping for small profits. However, in moments of ecstacy, they can run prices thru "stops" and of course, reverse themselves as prices reverse back thru stops. They may check each other's "decks" (don't believe a word of anyone who says thay don't). They will run the market if they have the opportunity, and why not! This effect can be felt for a day or two. e.g. an end-run out of a congestion. In the process known as "gunning for stops" local traders, as the market is dull and listless, and the trading public is waiting to see which way the cat is going to jump, the floor traders sense and they know, ckecking each other's cards, that there are a number of stop-orders which can be activated by a good day's move in that direction. At this time, individual traders on the floor may attempt to force the situation to push the price to a point, where the stop-orders are activated, reverse their position, making a second profit on the rebound back away form the stops. Of course, in a particular commodity pit, if they know that stops are at a particular area and if prices shud get close to these stops, they cud add momentum / to the move as it flows towards the stops, and join in the genuine trend move for the day. On the trading floor, one day, I observed a fascinating game, which obliges us all to be very careful that we do not signal ourselves as an individual as something unusual, in the way of distinct behavioural patterns, time-wise or method-wise, hitting the floor. In this instance, I became aware of traders anticipating someone on close who rushed in with huge numbers of cattle contracts and they knew when this person acted. They waited with anticipation - right on close, in came the order
PRICE INFLUENCES and their faces after close were beaming -they somehow had taken advantage of this character and they had gotten a good one. Why not? If the cattle trader was stupid ecough to let his pattern known.
big boy~ :- They cannot create hanky-panky in the markets. Activity by such men as Hutchinson, Leiter, and Patten in the years just before the turn of the century resulted in short-term price distortions, frequently because of inadequate supplies of a grain in the delivery position. The effectiveness of such "corners" gradually diminished as competitive balance appeared in the market, aided by legislation that now rewards the manipulator with 5 years imprisonment, a $IO,OOO fine, or both. I have one word of advice - stay out of thin markets, when they are wildly trading . I hate potatoes! - except when U play them seasonally. Otherwise, the big-boys can not create hanky-panky. They do occasionally, thru deals, attempt to bias the prices to germinate, but these " tours de force " do not aim to turn the trend, but only to manipulate it to advantage. Their combined buying power can push prices up or down very dramatically, but they tend to get in and get out early. They get out on the first hint of scandal, - as they themselves have an aversion to scandal. When they leave the market, they give or take to/from the weak public, and re-enter against the public, creating tops and bottoms. We are all subject to the same rules. In fact, the big trader is watched more closely by the regulatory authorities. Remember, these big boys cannot manipulate the heavily travelled markets- just take advantage of price movement.
guy :- This is the one who has little effect on market tops and market bottoms, accept that his buying dries up, panics and causes prices to crack. He adds momentum to the price direction as he buys more and more as prices pass thru the mid-way point of its major run towards the contract high of the year. They place their little stops usually outside congeston areas, creating the price movement of the "dead-run". ~e
Also, it is recognized that those traders who do not rely
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heavily on brokers for news lag by as much as a week in the response to new information which hits the market. The small guy has a clear tendency to arrest prices, buying on days of price declines and selling on price rises.
These people create their own markets. They anticipate the breakouts. They take premature positions, knocking prices around on a day to day basis, creating a lot of the "noise" as prices zig-zag up and down thru channels and in congestion areas. Short term chartists are forever giving little shoves and pushes to prices - taking a strike at a move thru a trend line or out of a congestion. It is important to realize that if enough are using the usual chart interpretations commodity, it will influence the price of the direction the chartists expect prices followers prove their own theories right.
chartist-traders to trade a given that commodity in to move. Chart
hedgeA : - These are the cash merchandizers, the people who actually have something to do with the commodity themselves, - the millers, exporters, merchandizers, and farmers. They position themselves in markets, arresting price movements that move away from cash. The general rule is that futures prices will not decline far below cash prices, / and that the cash dealers wud be better off by buying the futures contract and taking delivery, than they wud by buying the actual cash product. Corn will never sell for $5.00 in cash and futures for $3.00 In the futures market, likewise, prices will not rise so far above cash that the cash merchandizers wud be better off by selling on the futures market, than they wud· be by selling the cash, thus arresting prices.
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Chart patterns have quite an impact on commodity futures prices. Certainly, in a trend channel, the momentum creates a market price in the direction of the channel, or a congestion strangles price movements until something happens. To recognize that a price trend is self-perpetuating and that a congestion is self-perpetuating, signals to U're brain's grey cell matter that indeed patterns do create price movements, and indeed, price movements create price patterns. We get price level influences. Markets are always stopping somewhere around a 50% retracement. So the answer is, indeed that chart patterns create prices - but then again how can prices be created without developing chart patterns? One thing we know is that patterns are self terminating and no longer affect prices. Why do prices never go to the apex of a triangle? All this I cannot figure out - whether the cart is before the horse or the horse before the cart. I do know that patterns create markets and these patterns re-occur and re-occur. so once prices are in a trend it will stay in a trend, and once prices are in a congestion, they will stay in a congestion by virtue of the pattern. Oh god, let's get on to the next one!
ma4ket
p~ychology
It has been claimed that commodity prices are primarily a psychological phenomenon. The psychology of the participants in the market place invariably have some effect on the way prices behave. This cud be said to be true. Let's look at four things. First, - a trend has increased bullish psychology as trend reaches its apex and manicdepressive panic selling aborts the ·trend. (see contrary opinion chapt.S). Second, - a congestion has high emotions at its commencement, with high daily ranges and then everyone settles down towards the termination of the congestion, with concomitant lower volume. Everyone has gone to sleep, waiting for the breakout and to really jump on that breakout, creating maybe a dead-run, or a new trend or the continuation of the trend. Maybe the new trend aborts and all the psychological factors of those who are wrong come into play and the price very quickly moves back into the congestion or trend line.
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PRICE INFLUENCES Thirdly, - a market bottom wherein everyone is psychologically bored. No movement. No interest. Low volume. Low O.I .. Fourthly, - a surprise bit of news and we get a whip reverse of market psychology, creating a devastating run - such as a genuine orange juice, coffee bean freeze. This aspects of psychological trading has its inherent characteristic of surprise, and to all traders. To understand the psychology of the market place is one of the most engrossing facets of commodity futures trading. To understand the psychology of all the traders in all markets is what encompasses two-thirds of this book.
This is well presented in chapter II. What we're talking of here is "noise" - the random walk of the market - those quiet days in congestions and those pauses during the day when prices are wondering where to go. To say that inertia does not affect prices is not being aware of potential moves when the inertia is lost. Markets on the short term are not random for ever.
Are we in a recession or inflationary period? Is unemployment rising or falling? How are retail sales holding up? Are the indices rising or falling? I think it's obvious to anyone who is aware of any of the laws of supply and demand that these fundamental factors of / the general business conditions can affect the consumption and demand of a commodity. I believe that one can anticipate general economic conditions by assessing them on the basis of what will follow between now and the end of this chapter. One can see the effect of government on the market place and one can easily determine the general outcome of commodity prices with a bit of thought. These factors affect commodity prices on the long term basis.
PRICE INFLUENCES men e.~:
- de. va..£.u.a.;U.o n
The government prints more money and more money gives more inflation. The end result is devaluation and international cuurency runs. If U're trading currencies, they tend to stick with the trend on a long term basis, and they also contradict any government statement. If a government states that they are not going to devalue their currency, it is a guarantee that the curr~ncy will be devalued. Whatever the government says- do the opposite! - ( It works every time. ) Don't forget that increased money supply has a profound affect on long term prices of everything we use. The more socialism we have, the more money we will have to print and, ultimately the more shortages of commodities we will have and the higher prices we will have. And, present day governments have no option but to print money, because to do otherwise wud be political suicide - crunching depression, street riots, economic chaos.
c.ha.nging govvz..nme.n-t policy The cynic recognizes that additional rules can be introduced into the market game and attempts to take them into account. What about the government loan level? What is the exact dollar and cent price - is it higher or lower than last year? Are there other forms of government support such as export subsidies import quotas? Prices are now affected by complex government regulation with regards to harvest time. Another predictable bias affecting prices is the influence of the government loan program. Futures prices in wheat for example, have regularily / risen toward the guaranteed loan price. And even tho that movement is predictable, it cannot take place until the movement into government hands has occured. As Grey and Rutledge observe " so long as movement into loan is anticipated, it would be an irrational price which reflected it, for such a price, incorporating the anticipation, would prevent the event". ( I have left this section choppy and uncorrelated, just to give U a "feeling" what government is like. Governments don't make sense, do they? )
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a.n.d wofl-tdvJ.<..de : - !.loc.<.a...e,.u.,m
socialism: - U have two cows. U give one to U're neighbour fascism: -
government takes both & gives
u milk nazism: -
government takes both, & sells
u the milk bureaucracy:- government takes both, shoots one milks the other & pours the milk down the drain communism:-
government takes both and shoots
u capitalism:- U sell one and buy a bull
Taxpayers earning more than $30,000 per year represent only 5% of the population, yet they pay 39 % of the total income taxes collected in !976. A shivering economic fact is that a government panacea is designed to cure or correct a condition but will, instead inevitably further the condition Acts of government do not create wealth, they redistribute wealth. There are real factors which determine the direction of growth and non-growth. When 40% of a country's gross national/ product is snapped up by governments, when almost !0% of the work force is in government, in non-productive jobs, then elected representatives have an enormous responsibility to maintain control of this leviathan monster. And most fail. Self-correction of ordinary spending, .investment decisions are always thwarted by government policies. They exaggerate the magnitude of booms and busts. Restate Emerson's words wheel of fortune."
" The government chains us to the
??..lCE INFLUENCES
The solution to government meddling is government control. !t is safe to say for example, that the major reason for the purpose of the office of International Audit & Inspection of the U.S.D.A. is the fact that " Uncle Sam" has moved from the role of referee to that of player in the market place. I repeat: - "UNCLE SA.~" HAS MOVED FROM THE ROLE OF REFEREE TO THAT OF PLAYER IN THE MARKET PLACE. A planned economy is not based on planning - it is that it aims simply to concentrate power in the hands of the state and that directed systems function ineffectively, causing shortages and misuse of resources, as controlled markets are simply less efficient. I don't think we have ever seen a completely free market. In the history of the world, for centuries, individuals attempted to manipulate the market for their own benefit. To-day, governments are attempting to manipulate our markets, and for their own benefit. U know what happened to Rome, well, more than 1900 years later, we still permit our lives to be governed by the whims of government. Those of us in the open market place are forced to operate on the basis of the economic use of resources, since we cannot call on taxpayers to pay for our mistakes. The controlled market operates on the basis of scare-headlines instead of the realities of resource availabilities and economy. If all the areas of individual creativity were pre-empted by the planned, collective society, our society wud face distinction. As the cartoonist suggested when he depicted one Russian bureaucrat speaking to another " When all the world is communistwhere will we get wheat? " Government intervention presents a strong case for investing in commodity markets. Being aware of government intervention and that it can influence prices, makes U a more intelligent and perceptive investor. The fascinating thing, is that afte~ a shot of government intervention, markets energetically re-assert themselves. U must realize that man's mind is limited only because he either prefers to deny himself the possibili~y of creating, of innovation, or of locating alternatives, or he is stymied by the burdensome bureaucracies that incinerate incentive, impale initiative and incubate incompetance.
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Remember John Mitchell ? Well, he said " You better be informed, instead of listening to what •e say. You watch what we do." This is a useful legacy that will certainly not go unheeded by the successful speculator. Remember, that when interpreting official manifestations, cynics survive ! The cynic recognizes that new rules can be introduced into the game and takes them into account. Commodity markets do not differ from other markets, except it happens to be one of the last ones to be brought under the destructive wing of government. Remember the big, big price swings of '73-75 -well, the really keen professional traders recognized the fact there was government interference. They quickly learned to discount official reports and proclamations made for general public consumption and devised alternate sources of information. Moreover, recognizing that the markets were overeacting they decided that the best strategy was to ride the trends and trade less frequently. That is, trading when risks appeared reasonably low, and they temporarily discarded some old concepts. They took a broader view of the market. - in fact, they took an international view. Both minds and trading plans were flexible enough to acquire profits even in those unusual and adverse times. Don't forget that we are in an age where we do not print our own money - the government does ! We're getting higher inflation causing the international value of currencies to deteriorate, resulting in "x" increase in exports, leading to higher domestic prices. Government mismanagement, accummulative taxes, and monetary manipulation cause shortages and surplus of long standing, and an improper use of resources, which ultimately leads to a depression. Of course, then the free market forces re-assert themselves to clean up the mess. I personally have cum to the point where I'm firmly convinced that governments exist, of and by and for the government and only for the government. It's a huge corporation. Imagine, they print their own money, they create their own laws, have/ their own board of directors ( even have a president) and we all work for the one company. And, if we don't really obey, I suppose we end up in their jails. Be that as it may, I suggest U filter thru the quotations of the next few pages. It shud give U a few laughs or make U cry or raise U're blood pressure a wee bit. And,,, most likely disgust U socialists out there. ( too bad. U know, those of us who are not socialists, like to be heard too.)
PRICE INFLUENCES
Most commodity traders are • not socialist". It is difficult in this day and age to criticize the socialist. I have some tripedation in revealing myself as not being a socialist. Can U imagine that !! I'm rather intimidated by saying I am not a socialist. However, I tend to feel that like the headlines in the paper that scream " beef prices to continue to soar", and wherein the following day the beef futures prices crack, that on this rule of thumb, that socialism is here there's no way of stopping it_- that on this rule of thumb that socialism is nearing its end. QUOTATIONS
A gov't that robs Peter to pay Paul can always depend on the support of Paul. - Bernard Shaw there is still the Russian mind-capturing threat, which moves from simple forms (e.g. social security benefits) into advanced forms (cradle-to-grave security,nationalized industries,transfer of wealth via taxation,fiat money to pure communism, state ownership ofeverything, with a loss of freedom increasing at every step. Monetary golden rule: He who has the gold makes the rules. (How about oil+gold?) wealth is transferred to gov'ts by means of monetary inflation. - Congressman Ron Paul the world asks not what a man knows, but what he can do with what he knows -Booker T. Washington
~
You don't make the poor richer by making the rich poorer. - Winston Churchill /
In all healthy societies, it must be the needs & values of the strong individual which shud obsess the popular imagination, & dominate the public mind, since only when these are satisfied will the weak receive their due. - Peregrine Worsthorne
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PRICE INFLUENCES
Modern demagogues curry favour with the people by consficating large amounts of property thru t1'le mediurr. of the lak' courts. - Aristotle Socialists always want to tinker with the only mechanism that works. They think gov't controls are the answer to everything, when in fact they are the answer to nothing and kill the human spirit. - H. Schultz When a man gets to be well-off & people find out about it, he will never again be free from attack by people who want to borrow a bit or "help U make more" by investing with them. Poor people don't get bugged like this & I demand equal rights with the poor to be left alone .... we demand equal rights .... to enjoy what we've earned without having to defend it daily. - Charles Drummond Socialism & communism are the failure to understand both human nature & economic law. They therefore create misery & frustration. Experience is not what happens to u. It is what u do with what happens to u. - Aldous Huxley What I do say is, that no man is good enough to govern another man without that other's consent. - Abraham Lincoln People do not emigrate from the communist ruled captive nations, they escape. - J. Kesner Kahn The worst :thing about history is that everytime / it repeats itself, the price goes up. - Pillar Nationalization always fails, for lack of responsibility. It is a principle method of undermining liberty, free enterprise & freedom of choice. Those who support nationalization are begging to be chained. - H. Schultz
r -"·------~
·----·-·------------
----------- --------------- --------·--
IO PRICE IXFLUENCES
The special nature of liberties is that they can be defended only as long as we s·till have them. So the very first signs of their erosion must be resisted. Eric Sevareid
Every nation has the government it deserves. - Joseph de Maitre
If communism had had a vacant country to experiment with then I suspect it wud have died very fast. As it is, all the follies of the communist system have been blamed on the old structures which they've not yet eliminated. If all men are born equal, let them prove it Jo McDonald
Once an inflationary socialist cycle has started, there is no way to stop it 'til it collapses. Gov't has no way of cutting its own bills exc. by cutting welfare. This cannot be done short of revolution. When the state is most corrupt, then laws are most multiplied. - Tacitus
Definition of a planned economy: - they do the planning, - U make the economics~£ _ John He~ erman I never had a hankerin to go away on vacation. When I loaf, I want some work handy to loaf from. - Burton Hillis A civil servant is like a broken cannon - it won't work & U can tt fire it. - Gen. Geo.s. Patton Jr. For every person who can't read, there are two who won't. Paper money eventually goes down to its intrinsic value -- zero. - Voltaire
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?RICE INFLUENCES
Any man who thinks he is going to be happy & prosperous by letting the gov't take care of him shud take a close look at the American Indian. The door to opportunity is heavy, but a strong push will open it. In a free country, there is much clamour with little suffering; in a despotic state there is little complaint but much suffering. - Caruot The state is a de:vice for taking money out of the pockets & putting it into another. - Voltaire The trade of governing has always been a monopoly of the most ignorant & the most vicious of mankind. - Thomas Paine The socialists persist in thinking a worker in a nationalized factory will feel be owns it & will joyously work harder. The opposite happens, for everybody's property is nobody's property, & is so treated. Their emphasis is on sharing wealth over producing wealth, on equality over liberty. The end of this is the loss of wealth and loss of liberty.
- Eric Sevareid They say people make laws, but then the laws make the people. Bad laws will in time make bad people. One can lead a so-called "normal" life or one can be successful. There is no such thing as a successful normal life.
H. Schultz Managing free enterprise people is much harder (bee. they're individualists) than organizing the robots that socialism creates •... & that's why socialism is expanding so fast.
L. Taylor
/
PRICE INFLUENCES
Socialism means a uniform 3rd rate standard for all. - H. Schultz When I make a joke, nobody's injured; when Congress makes a joke, it's a law. Will Rodgers The man who damns money has obtained it dishonorably. The man who respects it has earned it. - A. Rand The trouble with the world today is too many people are try ing to keep up with the Marxists. - J. McDonald The roots of education are bitter, but the fruit is sweet. - Aristotle Most socialists are not really socialists bee. of any humanitarian ideals or convictions, but simply bee. they lack the ability or initiative to be capitalists. J. McDonald People don't plan to fail. they fail to plan. He who is not a socialist at 20 is without heart. He who is still a socialist at 30 is without brains.
- Anon The history of liberty is the history o= the limitation of governmental power, not the increase o= it. - Woodrow Wilson People don't realize that the same men who got us into this economic mess are being trusted to get us out of it. They don't know how they got here, so how can they find their way out? - H. Shultz Freedom is not free, free men are not equal, & equal men are not free. - R. Cotten
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:::~~FLUENCES
When we must wait for Washington to tell us when to sow & when to reap, we shall soon want bread. - Jefferson A gov't which is big enough to give U everything is big enough to take it all away. All gov'ts are capitalistic. It's just a matter of who controls the capital - the people who earn it or the gov'ts who are always out to control or confiscate it. That is the basic difference between individual and state capitalism R. Emrich
Communism is public ownership of everything, including people. Capitalism is private ownership of everything including yourself. What all the current world strife boils down to is this: - competent people strongly tend to be capitalists. Incompetent people strongly tend to be socialist. The competents can fend for themselves & thus favour maximum individual liberty. The incompetent can't manage their lives so well, so they want to unite with other incompetents & nationalize & regulate everything, especially the competents. The socialists have yet to learn that victimization of the properous does not bring about uniform prosperity. When a man says money isn't everything, it is clear he doesn't have any ( or he inherited it.) Inflation is not public enemy no.I Government interference is. Socialism distributes wealth - other people's. ( U will never find a socialist redistributing his own wealth • ) We shud renounce as a moral obscenity the Socialist's demand that the individual sacrifice his own happiness for that of the tribe. Socialism is a primitive tribal conception - that the individuals only value is what he contributes to the tribe. All collectivist morality is based on human sacrifice. "A morality for cannibals". - J. Wheeler
lO
PRICE INFLUENCES The socialist cannibals will have us for dinner. Wealth is created by individuals, not groups. Resistance to capitalism is mostly pure resentment, jealousy. Socialists want to drag successful men down - they oppose success. Socialists avoid that word bee. it implies hardwork, dedication, solitary and voluntary effort. Socialism is theocracy. Calls for sacrifices to a god e.g. Lenin, Herrenvolk, the state, - and is based on violence. There is no such thing as voluntary socialism. If u don't contribute or agree, they take U over & put U in jail, or worse. Capitalism is based on trade & individual freedom of choice - & is the only system that allows for a plurality of practises. o will never meet a voluntary system socialist. The French Revolution symbolized a burst of liberty explosion that lasted IOO yrs. or so. Man gained ground in his battle for individual freedom of choice ---that peaked about 1900 & it's been shrinking ever since. If U want a tolerable standard of living, o must restrict your socialism to the amount capitalism can pay for. c. Brogan Luck is infatuated
wi~~
the efficient.
Chance favours only the prepared mind. Pasteur Socialism is merely the Euro aristocracy. Under was accepted that below like animals, that only of governing & enjoying
child of 18th century aristocratic gov't it a certain level men wer~ the chosen few were capable freedom.
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PRIC:S :NFLUENCES
The socialist fight is for more wages, more welfare payments, never for a fairer advancement system within the factory. The socialist's fight is the acceptance of mass man's inequality - they merely want to be unequal in more comfort, - for it is ingrained in the socialist's mind that the mass man's inability to rise to equality shud be subsidized. The socialist never scream , " Allow the masses equality of opportunity". Equality of man is based on capitalist opportunity -a national philosophy of American Capitalism in an age when belief in the individual never filtered down below the aristocratic few - as in Europe, the harbinger of socialism. A civilization is comparable to a living organism. Its longevity is a function of its metabolism. The higher the metabolism ( affluence ) , the shorter the life. Keynesian economics has allowed us as affluent but shortened lifespan. We have now run our course. - W. E. Davis •
295
CHAPTER ELEVEN market theories AND HOW TO USE THEM
Pnel.u.de.
Jta..ndom !ULUIJ, ne.a.c.t...Lon -ttte.nd, c.ongMtion WaVeA C.tj c...Uc.a.f e.xpe.c.tationo ~upp~j
hypo~hMi¢
and de.mand
hypo~heAi¢
e1..aJ., tic).;ty htjpO ~heA i¢
p!U.c.e. and p!U.c.e. te.vel. maJtk.U
htjpo~hMi¢
p~yc.ho.togy hypo~heAi¢
ga~ng hypo~hMi¢
PRELUDE Prices fluctuate up, down and sideways, and a lot of this fluctuation is nothing but "noise". U have these fluctuations at particular times of year and U have them sort of waving around almost in recognizeable patterns. I am not that all pleased with this chapter - it's going to be one big yawn. We don't want to know why prices are fiddling
296
~~RKE~
THEORIES
about- we don't want to know how "economics" peop:..e approach the understanding of market prices -we don't really want to know the esoteric methodology as to why prices do the things they do. We want t~ make money. We are traders. Theoriticians don't make money.They know more about theories of how to make money than how to make money. The Washington beaurocrat can theorize how the farmer shud grow wheat, but the farmer knows how to grow wheat. But, I tell U one thing - the farmer likes to sit back, and armchair philosophize to himself once in a while about why wheat grows. - he might even be interested to know what the beaurocrat thinks. So, I guess we'll sit back in our little 'ole rocking chairs and get to know a little about the why's and how's of market wiggles, and, maybe, at the end, I'll share a great big yawn with u.
HISTORICAL New concepts displace other and old concepts. Theoriticians will never give up. I suggest u join them. I argue fervently, for example, with the random walk theory. [~&L charting has ;;abled me to show that the very short term day to day fluctuations are constant, given specific momentum and ~•Y deviation suggests a weakening of momentum - the dots are swinging - the prices are not going during the day to the areas where they shud, and accordingly, the direction of prices prolate themselves in keeping with the new market. movement ] ( Or maybe, it's just that I am able to track the random with P&L charting. But, if it's trackeable, how can \ \ ~t be random-walk? I don't know.) ~alk
~ .~~· ~gh~f da~shud h~e 1
1
I 1 I
•
~
'
•
r
~1
~ t~sing price, to prevent dots swin~ng. (
Take my word for it,' it's true )
MARKET THEORIES
297
With medium term p=ices, however, I ag=ee with the random walk, which exis~s until f=esh fundamentals cause a play in prices. So, u see, even I, with an I.Q. of about two, can assume new concepts displacing old concepts. The following table illustrates that concepts do evolve! source: Speculation,Hedging,& Commodity Price Forecasts. Labys,Granger.
New Concepts Concerning Futures Markets and Prices New Concepua
I
Displaced Concepts
1. Open·Comract Concept: Futures markeu serve primarily to fa· cilitate contract holding (1922).
Futures markets serve primarily to facilitate buying and selling. (Disproved.)
2.. Hedging·M11rltet Ctmcept: Futures markcu ciepend for their exist· ence primarily on hedging (1935; 1946).
Futures markets depend for their existence primarily on speculation. (Disproved.)
3. M11/tip11rpose Concept of Hedging: Hedging is cione for a variety of different puposcs and must be ciefined as the use of futures contractS as a temporary sub· stitute for a merchandising contract, without specifying the purpose ( 19 S 3). 4. Pnce·of·Storage Concept; Storage of a commodity is a service sup· plied often at a price that is reflected in intencmporal price spreads, and because the holding of commodiry stoeks can af· ford also a "convenience yield," the price for storing small stocks is often negative (1933; 1949).
Hedging is done solely to avoid or reduce risk. (Disproved.)
Storage of a commodiry is a service that is supplied only in response to an assured or expected financial return equal to or greater than the cost, the lancr calculable ordinarily . without regard to the quantity of stocks to be stored. (Disproved,)
S. Concept of Reliably Anticipatory P>ricts: -
Futures prices tend to be highly reliable estimates of what should be expected on the basis of contemporlZ'Iily 1111aillZble in· forrnlZtion concerning present and prob· able future demand and supply; price changes arc mainly appropriate marker responses to changes in information on supply aAd ~d prospccn (19H; 1949). 6. Mnlttt·BIIlllnct Conctpt: A significant tendency for futures prices to rise during the life of each future is nor uniformly prt~ent in futures mar· kcu, and when it exists is to be attrib· utcd chiefly to lack of balance in the marker (1960).
aDares shown in parentheses arc years in which the conecpts may be said to have emerged. Where rwo dates are shown, the earlier one i~ the d"e of publication of ~dcnce recognized as chalicnging the older . concept; the later date, that of first· known
Futures prices arc highly unreliable estimates of what should be expected on the basis of existing information; their changes arc largely unwarranted. (A wholly unproved inference; accumulating ~dcnce mainly supports the new concept.?
Aversion to risk·taking, leading to risk premiums, produces a general tendency toward "normal backwardation" in futures markets, statistically measurable as a tendency for the: price of any future to be higher in the delivery month than several months earlier. publication of at least the substance of the new concept. Source: Holbrook Working, '.'New Concepts Concerning Futures Markeu and Prices," Americ1111 Economic R~il!1li, S2. (June 1962):
298
!-l.;RKET THEOP.IES
PRICE FLUCTUATIONS /ta.n.dom Jta.Lty
Jt ea. c.tio n
.t!ten.d c.o n.g eo :U..o n
wa.ve,o c.yc.L<..c.a1. The only thing we know about prices is this .•..••• •..•... they fluctuate ! The accumulative effect of all the market actions self-creates price fluctuations. The s~plicity of the natural laws governing the markets is indeed one of the fascinating aspects of the futures game. Altho' there are many complex factors affecting the market, - in reality, there are only a few basic principles in price movements. But, remember this - price fluctuations are very incidental to tbe movements themselves. If u understand the underlying principles why the market does what it does, U can proceed to trade effectively. But, U must realize that price fluctuations are only part and parcel of the basic movement itself.
RANVOM The random walk hypothesis is really a simple theory. It merely says - " Price changes are unpredictable, when only the previous price changes and not all available information are used. " Futures and cash price changes are uncorrelated with earlier price changes. This hypothesis has been largely confirmed aespite some evidence of seasonal components for monthly series,and,an occasional weekly cycle is also found. When technicians attempt to focus attention on short-term fluctuations, they leave themselves open to considerably more justifyable criticism as there is substantial evidence that short-term price changes are very nearly random. This means that the chartist is essentially performing a highly complicated and a subjective multiple correlation analysis in his mind as he examines his chart. According to Commodity Research
Bureau'~
excellent book,
MARKET THEORIES " Forecasting Commodity Prices - Hov.· the Experts Analyze the ,')arke-:", " there is very little objective explicit evidence
available to support the commonly accepted rules of chart analysis, yet the rules are '1\'idely accepted as valid and seem to produce worthwhile results". Chart signals are given by patterns built from many day's price activity and that are often extremely difficult to define mathematically. I wish to repeat here that I feel that P&L charting negates the theory of random walk on the very short-term, day-to-day basis. - for the random walk theory states that price changes are unpredictable using previous day's changes. P&L charting does just-that. It predicts to-morrow's prices, within the limits of a given momentum. ( see chapt. nine ) However, futures' prices do respond over the medium to longer term periods, weekly to monthly, as it reacts with an important random effect to seasonal cycles and responds to news items. I repeat, if one uses averaged monthly prices, then the hypothesis does not need to be amended. Accepting these limitations, the major implications of the model can be stated as follows: I) random walk provides an explanation of monthly price fluctuations in the middle-run frequencies 2) random walk is no longer fully appropriate in the long run frequencies ~) more than one force is necessary for explaining price fluctuations in this frequency range 4) these forces can be effectively aggregated to provide an explanation of price change. There is one thing that those who hold that the random walk model describes reality better than any other model; - they do not say the trader cannot make money. - the theory itself becurns fair game •... that it sets the tone for the game makes beating it a delicacy never expected with certainty, but always savored. The assumptions of its tenants sharpens the trader for the battle. He can win but only if he discovers the reality of the "random" theory. People like Tewells, Harlow and Stone put forward the likes of which are presented in the following statement: " Successive price changes are independant and that past prices are not a reliable indicator of future prices". I agree except that P&L charting suggests to me that there is a potential range for the next day's price - and not random. Picture the illustration on the next page. It is a formula given for one approach to the random walk theory. U will find it quite amazing.
299
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!I..ARKET THEORIES
1 - - [(Xz - €1-1) +(XI- 10 1-1 - 10 r-2) .,. · · ' m
which may be written y~m)
1
=- !(m- 1)e1 .,. 1 + m
(m-
2)e 1 _ 2 + ... (3A.4l
There is growing evidence that there exists underlying mathematical or statistical probability patterns that cannot be explained in any other way. That is to say, "they" are "laws". The "why" of these "laws" are into a whole other realm of life and I leave it to U to explore the reasons, if U so desire. Sometimes, in highly competitive, organized, markets, price changes can be so close to random that they are sometimes virtually indistinguishable from random, contradicting both fundamental and technical approaches to market analysis. Most o! the examination of this theory by statisticians and economists has been directed to the stock-securities market, rather than the commodities. Slight variations from this model can be found for both markets: a trend and long-run oscillation (periods of two years or more) for stock prices; and greater evidence for a seasonal somponent in some commodity prices. source: Labys, Granger "Speculation, Hedging & Commodity Price Forecasts" - Heath Lexington Books. There are several books that deal with this matter. Take a visit to U're library. Be that as it may, there are some hypothesis to the random walk theory which I like, besides the weekly and monthly activi~es.. If there is only a few things to be learned
V~RKET
~HEORIES
from ~~is book, one wud be to realize, basically speaking, most price fluc-::uations a:::e nothing but "noise". In a random market, the price will fluctuate daily in a narrow range for as long as no new information or expectation of new information applies to the judgment of traders. This movement cud be accurately duplicated by the simple flip of the coin, and is insignificant to the trader. These small random fluctuations are called "noise", I repeat, noise " and any series of up-ticks wud give the trader no more information about his position than wud a series of heads to the better on a coin flip. In large efficient markets, such noise has been found to account for as much as 75 % of all new prices coming across the ticker. It is a meaningless fluctuation that characterizes a market "at rest". For this reason, I luv to use the term "resting areas" for "congestion areas". Congestion areas to me are really weekly or monthly congestion - resting areas. "Gap openings" and "on close runs" are not random walks 75% of the time. A gap opening not closed, is not a random walk, and a run from one end of the price range for the day in the last few minutes to I/2 hour of trading to the other end of the trading range for the day is not a random walk. At least to me, & don't foLget, I'm not an expert It is trend directional and on a day-to-day basis - not random. On a daily basis, the first one and a half hours can be divided up into three I/@ hour segments, and here we have lots of "noise"- meaningless movements. Purchases made in the third half hour(if prices are up are not as likely to be correct as purchases made in the first two segments. ( Prices will usually wander back toward the first segment prices.) third day
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Y~RKE~
THEORIES
only the price level wit~ the time of day (see chapt.8&23) so that with experience G can anticipate price movements for the day on a straight line basis. (see chapt. 6,1,8) Even the price fluctuations within a trend channel cud be said to be random noise, as it wiggles back and forth thru the channel. So, remember that "noise" accounts for 75% of the price fluctuations that cum across the ticker-tape and that some studies have indicated that commodities are without important trending characteristics as much as 85% of the time. The cyclical component theory of random walk varies in importance from one commodity to another and some commodities claim to have a cyclical component of an identical nature, such as the crazy "moon theory". Wheat,corn,oats, and silver usually go down on the full moon. ( Now, isn't that crazy!) (But, I've seen it happen !) (So much for contradiction of theories.) ( And, so much for U out there who think P&L charting is full of ......• ) It's what use U make of theories that counts. Do U agree ? see pg.287
marked~
RALLY REACTION U must admit that not taking into account that prices may meander all over the place or how they meander, that in the end run all they do is meander and rally up or down in trends or rally up and down within sideways patterns. If all that prices do is fluctuate then all that prices do is go in three directions only - up, down, or sideways, - within all designated formations that are perceived by mankind. Such is the birth of P&L charting). The theory behind all this is:
Trend :- there is an old adage. - the law of momentum.- once a trend has commenced, it tends to indure until a significant counter-force intervenes. This means that trends exist in periods wherein fundamental factors and technical forces obviate a prevailing force which is sufficient to constrict prices from releasing sufficient energy to develop a compelling force of movement, unrestricted in one direction, portraying as an inherent factor in its characteristics, as
~..ARKE":'
THEORIES
one c£ movement and degree of movement, which manifests itself in what is termed - momentum. ( Goodness, gracious. ) An apple falling from a tree, obviously heading in one direction , develops a certain speed enhanced by i-ts own weight, which it develops to a full momentum as it hits the ground, and at the sround, which is the prevailing force against it- the apple stops dead in its track. We may know the distance the apple has travelled to the ground; that commodity prices tend to exhibit a sustained price trend, of which one cannot predict the extent, at its outset. Except, that we do know that the price trend continues longer than most wud expect - especially on the basis of pure chance. Also the faster the trend progresses and the steeper the trend's angle ·of ascent or descent, the sooner the trend will reach its ultimate objective, and correspondingly the shorter will be that trend's life. Price trends can have spectacular moves within brief periods of time. The strong correlation here is that - the higher momentum a trend has - (the momentum angle) - the shorter the time to reach its termination. Inherent in a trend's move is the continual replacement activity which goes on, as the various traders jocky about, take profits, re-enter, becurn impatient, disenchanted, disgusted, enthused, and this continues until trend is affected by becurning immensely inflated, deflated in its relation to the cash product, wherein, economic factors terminate the bull of bear move. Remember this one bull markets appear in a manner which is similiar to the pattern followed by nature for most living things - it consists of a slow start, a gradual acceleration in growth that terminates at maturity. Congestions :- there's a natural tug of war between bears and bulls. The market congestion is predictable. And, trading in these periods with a system that is based on its characteristic patterns, can reap enormous profits. (see chapt. 7).
It can be explained in terms of pressure, since in the confines of the congestion area there are sufficient prevailing forces to prevent movement. ~~~_rally reaction phenomenon is repeat~d continually in market congestion areas, such as two consecut~ve days of r~llowed by one day o£-react~on. S1Mply state~, . ~--~~--------------~~------and remember thl.s ru 1 e::_ days up - one down days down - one up
J/
303
3 04
!'-l.h.RKE': ':'HEORIES This occurs continually i::: congestions areas. Studies have revealed that co~~odities are without important trending characteristics 85% of the time. Whatever one believes is being measured, it can be ass~~ed that certain repetitive patterns of price will occur before significant price movements, and, here, we have tops and bottoms which portrays a congestion area as a pause or resting of market prices before the resumption or creation of a price move. - a period of static interest in the market. The more activity that occurs within a congestion, the greater will be the market move, especially in market bottoms. Unduly inflated and unduly deflated prices exert a crucially powerful impact on producers and consumers alike, and the longer such prices persist, the greater the resultant impact. Resting-congestion areas are areas of distribution, re-distribution, accummulation, and re-accummulation (see chapt. 7) A price, like an army, sometimes advances too rapidly for its own good, and unable to consolidate at its furthest point of advance, the price is forced to retreat a short distance for additional consolidation. The amazing thing about these static areas is that for most of the time, - a commodity seems to be in one. And, the theory here is that, sometime, somehow, there will be that beautiful release. Many commodity advisors recommend being part of that release. It certainly is an easy way to trade, if U can recognize the release and recognizing that the theory of resting areas forlays a future scurrying away from it.
/:A:;;~ lke •waves~~ecause it takes into account trends, congestions dament ~ technical foreplays of all traders and factors and shows the undulation of the market as it unfolds on your chart graphs. People,.like Elliott, have contributed immensely to this philosophy. One of the best long term trading tools in analyzing trends states that a trend will finally wave itself out of existence and set up a massive correction. Some others have cum forward with some beautiful complicated
YARY~T ~~OF~ES
theories o: "....-aves" . 'We presen-t here, a nice c:..rc1.:.lar graph ....-ith some nice presentations o: ....-aves:
But all this is not necessary. ~liott's simple wave ~ is the best and I resent it guic peru~l And, l think V shud memorize and refer to this presentation:-
The entire concept of the Elliott Wave Theory rests on counting "waves". He argues that complete price movements tend to occur in five waves ••... three in the direction of the trend ( major, inter-mediate & minor trends ) and two as part of a corrective re-action in the opposite direction. In Elliott's view, each of the larger (major) waves, can themselves be analyzed in sub-movements of five small waves each.
305
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YARKET
0
TrlEORIES
On the first segment of the up-move, of the first wave, L~ere occur three successive rr.inor upswings up to it, and then two small swings down from it,creating a minia~u=e five wave movement, and using L~is concept, one - first segment presumably has significant insite into a market's current phase and impending I . . m~nor swl.ngs move.
In connection with the wave theory, there is the frequent tendency for market corrections to retrace 40-50% of the preceding advance or decline as part of the wave. To review: - Elliott's theory in simple terms, is this: Once a trend has begun, within that trend you will find 8 price waves which repeat themselves. 5 waves will be in the direction of the major trend and 3 waves will be in the opposite direction. Once you are able to recognize this pattern, you will be able to profit by anticipating upcoming price movements.
There are a few things I wish to discuss about the wave theory. We will start with an observation about the length of each fluctuation or wave :- each successive wave tends to be of .\\ ecrual d ation, but don't oo or erfect fits. Wave mea urementJ\ does provide the trader with an idea of the magnitude o eac sw1.ng. (see target calculatl.on, c a_ • 9 • -------........ ,/ And, the veteran chartist often does not oppose a major trend unless it has gone thru three separate stages. First, an uptrend, - the initial thrust, - then a period of consolidation - then a second upthrust, - another period of consolidation, - finally the third upward movenment, which often marks the culmination of the major move. This rule of thumb usually works better in bull markets, than bears. some suggest that the first upswing in a bull market represents a stage of youthful discovery; the next one of mature recognition
!~RK.ET
THEORIES
and adaptation and the :ast one that mixes the belated zeal o= the latecomers witt the lagging strength of old age. Now, the next idea is that Elliott's wave counts are based on t::.e "Fibonacci Su."tlmation Series", a no. series with interesting properties. It has been confirmed that both living and inanimate objects obey a no of laws that revolve around the mathematical properties of this series. Using a "Fibonacci" suromation (!-2-3-5-8-I3-2I-34-55-89-I44-222 etc.) it is possible [ what do u think. ] for scientists to predict how the population of animals will multiply, how plants will grow, how crystalline structures will form naturally, and a great many other things. This series also yields the "golden mean" that is used in architecture. It is evident that study of this series discloses mathematical relationships that hold in real-life situations. It has been hypothesized that these relatiors.hips are so all-inclusive that they extend into the psychological arena as well. I wish, now, to be critical of the Elliott theory. The first is that the last wave of the major bull move often breaks up into many more than five sub-waves. And, the sub-waves shud not be counted. Next, prices generally speaking only move in tl]_e five wa~2-5% oD_§-e time. ana:; three- cyc~are m-:§"ecommon in futnres contracts than five cycles. The theory is so flexible that it is possible to get several radically different wave counts by using the same price data, and leading Elliott interpreters are almost in constant disagreement. It is not generally realized that Elliott was a mystic, who also believed in "numerology". He discussed how mathematical relationships in the "great pyramid of Gizeh", not only predicted future world events, but tied in with his own theo~y as well. I do not negate the Elliott wave theory. Anything that can explain what markets do, appreciating that markets can and do move in waves, enables the trade~ to have some feel of price/ movements. ( So there ! )
CYCLICAL I refer U to chapter 24 for a blow-by-blow
"
~tion
of
--...
3 07
what the cycles and seasonal moves are all about. --~~~~------------~here
must be some reasons and possibly why they vary in importance from one commocity to another. It has been suggested that purely speculative markets cannot produce price "series", having predictable components or patterns. If they did, components or patterns wud be traded out of existence. Why then do some commodity series contain these components? There seem to be several reasons. Commodity markets are not pure speculation markets, as goods are actually sold in them by producers and bought by consumers. The production of many commodities is very seasonal in nature and demand may also be seasonal. As the transactional cost is not negligible, due to storage, insurance, and commissions, one wud not necessarily expect all of the seasonal patterns to be played out - only enough of it for the use of this pattern for determining a buying or selling policy to be barely profitable. In fact, the seasonal components are of small importance in the actual price series in that they contribute- a proportion of the total variance of price. It has been argued that commodity markets are not sufficiently sophisticated to eliminate completely every predictable component. It is worth noting Houthakker's comment " that commodity price developments are watched by relatively few traders, most of them quite set in their ways: even in the most active markets. The volume of serio~s research by participants is often small. It is therefore possible that systemic patterns will remain largely unknown for a very long time". And, I certainly agree with this statement.
THE EXPECTATION HYPOTHESIS Futures prices represent an expectation of the cash price of/ a given commodity, at the time of the maturity of the futures contract. To test this hypothesis, relate it to the predictability of cash price fluctuations. I strongly suggest that cash price changes are not predictable. Therefore, the best predictor of a futures cash price is the current cash price and this being the case the expectations hypotheses wud lead one to expect a high degree of relatedness between current cash and futures prices. And, such a relationship, of course, is evident, and cash and futures prices are highly correlated and unlagged to each other. We know that the
.!-1ARY..E':' :'EEORIE.S
3 09
nearby futures :;?rices are more highly related to current cash ?rice than the more distant =utures and are found to be more highly related in the long run than in the short run. These results may not refute t~e expectation hypothesis but neither do they prove it, and, this cud be explained by the fact that both future and cash price series cud be influenced simultaneously by the same flow of unpredictable pieces of information in the market. The result of all this is that traders have been unable to predict and expect future or cash price changes.
SUPPLY ANV DEMAND HYPOTHESIS Holbrook-Working was the first in the commodity futures field
to offer the theory of expectations that result on a premise that futures reflect anticipated changes in supply and demand rather than on their immediate values. Prices are determined by quantity relatives such as supplydemand or volume of trading. Little direct relationship is found between price changes and changes in variables such as volume, O.I., supply and demand. Source :- Speculation,Hedging, & Commodity Price Forecasts" by Labys, Granger. But, evidence exists of a relationship between price changes and the levels of speculation and hedging. Stock market studies have indicated that the classical demand analysis is inappropriate for strongly speculative markets and this is confirmed with the consideration of commodity markets. The relationship between price change and quantity, therefore, is extremely complex. That is, both physical and speculative quantities influence price, but each affects price over a different range of frequencies, and with the realization that wi~~ both hedging and speculation, that both play a greater role in price formation than was previously recognized. Considerable/ difficulty remains in postulating a simple demand explanation for commodity prices. It is reasonable to believe that the activity of traders represents just one of many influences which serve to explain price fluctuations. That hedging and speculation shud influence price, apart from demand is reasonable when one recalls that the total value of contract trading in the futures market is often much greater than the value of physical supply and demand. Prices are less responsive to supply and demand where speculation is low. With high levels of speculation and no seasonal patterns one sees little or no
3IO
~ARKE~
THEORIES
co::::-relation between p::::-ices and supply-demand. ::onversely, lower levels of speculation shud coincide with slightly higher correlations between prices and supply-demand. Commodity prices fluctuate more frequently and widely. This appears to be a result of differences in inventory levels, or the gap between production and consumption. Manufacturing inventories rarely represent more than two month's consumption while agricultural inventories sometimes account for more than twelve month's consumption. Note also that the duration of even the shortest economic fluctuation, such as the business cycle, is much greater than the period of a future's contract. In the short run, only a limited relationship exists between price and quantity. Forces in the market and in the economy do help to explain long-run fluctuations in monthly commodity prices. According to the fundamentalist theory, the point where the quantity demanded and the quantity supplied are equal, this is called the equilibrium price. The equilibrium price in a commodity market in the short run is the current market price and in the longer run equilibrium price will be at a different level than the current market price.
THE ELASTICITY HYPOTHESIS The best explanation of price changes has arisen from what is called cross-elasticity of demand or commodity substitution. That is, price fluctuations tend to be related to indices reflecting the price movements of substitute commodities. The influence of the business cycle gives results in this way. However, only a few variables exert a reasonable influence on short-run price fluctuations and that the strength of the relationship from one commodity to another varies from stronger in the long-run to weaker in the short-run. Howeve!:"~ please note that futures prices are better explained by speculative influences and cash prices are better explained by physical influences. In our approach to the markets, remember that market fundamentals, of supply-demand, underpin trend direction. Please re-read the last sentence.
!J'..AFJ:::.E':'
T~EOR!ES
PRICE & PRICE LEVEL HYPOTHESIS Occasionally, a commodity price becums immensely i~:lated or immensely deflated and an immensely inflated price usually peaks and then turns down as precipitously as i t has risen and an immensely deflated price inadvertently stabs down and then turns up as precipitously as i t has declined. Prices tend to stay down longer than they tend to stay up. The fundamental economic factors that support the logic of prices, play their most important roles at tops and bottomes of market place swings. Unduly inflated and unduly defalted prices exert a crucially powerful impact on producers and consumers alike. The longer such prices persist the greater the resultant impact. Any commodity can be used for illustration. The details wud be different but the principles are the same. Accordingly, beware of prices which cud affect consumption and production. However, do not becum what is called "price level trader". Think in terms of price momentum and price movement. At a grossly inflated price, price momentum will be exhausting itself, and is chartable (see chapt. 9). The theory of price and price level will portray itself as market reactions. such as frantic contraction at peaks and inherent precipitous decline, - and what is called 50% retracement. Price level theorists say that something "is too expensive", or "too cheap". The question is, how do they know! However, the 50% area retracement rule is a useful tool in U're overall trading program. Accordingly, there is frequent tendency for market corrections to retrace 40-50%.
THE HYPOTHESIS OF MARKET PSYCHOLOGY Even the strongest powers of empathy in the world are not going to tell U what price is going to be, if the price is beyond the control of human will. DO NOT TRADE ON FEEL
3:: 2
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':':!EOR.IES
Such is the bag of tricks of the public speculator - who masses like lemmings to the sea to make the last purchases at a market top. Prices are only at a market top by virtue of the last buyer being around who is the most bullish making the last purchase to the first seller of the reverting downtrend. At the bottom contract price for the year of a given commodity, the least bullish person cud be selling to the most bullish purchaser. As more and more market participants attempt to predicate every action on chart rules, the accummulative effect of these similiar chart actions is that it self-creates price fluctuation. I repeat - the chartists and the buying public create their own markets and don't forget the simple rules of "who buys where". The public speculator is more likely to be long, than to be short, (He thinks that the only way to make money is for prices to go up) , and, has a clear tendency to buy on days of price declines and to sell on price rises, indicating that public traders are predominate price level than price movement traders, which is a disaster.
THE HYPOTHESIS OF GAMING Games can describe a competitive situation. Commodity markets include a large number of traders, leading to a minimax or a determinant solution and can be constructed to provide a scenerio of almost any market. The principle advantage is that the results of each period of play are fed back into the decision process for the following period of play. This approximation of reality is a draw-back for gaming. There are many adherents to this philosophy of commodity futures trading. They feel that market prices are no more than the flip of a coin. One prominant commodity advisor flipped a coin to determine a price movement of an imaginary commodity, to include a time period of one year, and found that it resembled an actual commodity chart almost to the "T". I have yet to talk to anyone who does not feel that commodity markets is a "game" and is gambling. I find nothing more preposterous than this assumption. No wonder people consistently lose money in commodity trading. They buy, sell, sit back, hope and pray that the game will go their way. This is a facetious
!1J..?.Y...E:"
T~ORIES
app~oach to con~odity ~~adi~g and is utterly abhorent to this trader and without reali~y, in any sense a= the wo~d.
I advise strongly committing U'reself to "game" rules, (at least knov; the game) and 1:se a disciplined plan and throw this "gambling" psychology somewhere where it belongs, - I can't think of a place good enough for it. How many species on this planet earth approximate existence with a gambling instinct? They approximate existence with a determinate approach and U shud join them in U're trading on the commodity futures market.
This chapter and the last one has been to some degree, one great big yawn! But, yet, has it? Actually, it's been fun. At least it's refreshing in its diversity, and shud prove to expand U're appreciation of the futures market, as being beyond solely a vehicle to make money, altho' either is a superb entity unto itself, and each by itself in conjunction with the other, wud enable the trader to appreciate that there's nothing quite so enjoyable and fruitful as expanding one's mind or one's pocket book. v~hich is better, I leave to U. )
3 I3
3I4
CHAPTER THELVE
• systems & servtces
Modw Mode£ BLUl.cU.ng A CYU;t- Cha-t
V-U c.oW'l.ting o ~ Sy.6.tem6 by I ncU..v.<..ei.u..a..e.6 V-Uc.ou.n.ti.ng o~ Sy.6.tem6 by .the MMk.e.t Pf.a.c.e.
r-"ODELS In the last several decades, a Yast amount of work has been done to erect a means of technical and fundamental tools, all with the aim of anticipating future prices from trading statistics or whatever. Every technical approach from the simplest to the most complex and esoteric falls into four broad areas. I. 2. 3. 4.
Patterns on price charts Trend following methods Character of market analysis Structural theories
Essentially, a trading guide prods U to proceed as if U knew what U were doing and which induces U to formulate a set of rules U can live with. Of course, if U know what U are doing, the Holy Grail is yours. However, it has been claimed that traders have not yet found a reliable system on which to trade their decisions - a system that is not merely a theory and that sounds logical but effectively works.
.!2 .SYS'!'EHS; SERVICES
3.!5
'!'here are rnyri.aas of systems available and many are effective priceless gems ..... often all too complicated or the terminology of ~hich is known only to the inventor. Usually, these little gems ao not work, because the trader does not stick to them. My friend, I wud say that the best model is a self-created one, rather than an aaopted tecr~ique. That is why, in this book I have attempted to give U plenty of meat to chew on, and to induce U to develop a style of trading which is yours, - which is constant and well planned, using various approaches as suggested or one that U may choose. See chapter I3, for an idea that if U choose perhaps one of the " attacks " and stick to it U might get the results as portrayed on those pages. Essentially, most models draw a bead on the direction of trend, but unfortunately only after the trend has been manifested, and these models will keep U in the market as long as the trend tenure is unchanged. These systems contain the basic selling/ buying pressure studies. Various forms of moving averages are utilized for this purpose. However, I feel that this approach is far too protracted. I prefer to look after the little things and let the big things look after themselves. I wish to know the daily price range in order to analyze " dot movements " , giving a more acute analysis of trend change, long before most pressure/trend following moving averages are activated. Some people even formulate trading plans on moon beams. Actually, a speculator need not be a statistician to trade commodities successfully. In fact, many a statistician has failed miserably when he tried to apply his favourite model. Notice the terms used in model building that U see all over the place, such as- "expected", "probable", and these words do not imply position taking. The most expensive model in the world will not improve upon correct estimates. In fundamental analysis, the first step in building any model is an analytical study of the relationships which are most important. At the early stage, one draws a kind of economic road-map to point up the main cause and effect relationships. l refer u to quite a road-map on page ll This model is much too much for me. This is something for the bureaucrats in Washington to play with. -- it wud probably keep about two buildings full of them happy.
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SYST:S!·~S:
SERVICES
MODEL BUILDING U are going to take this book and U are going to develop U're own model ( with lots of help from me ) , otherwise throw this book away rite now or add it to U're library and becum an expe~t. ( All experts have a nice big library. )
u will develop U're own approach, possibly taking suggestions from chapters 4 thru 9, and I3 & I4. U will assume that this will work. U possibly may paper trade in actual market conditions or U may, which is what I advise, run back thru any commodity U wish and see how U're chosen approach has worked and where it worked, and why it worked. Constants will evolve, I assure U, from which U will in the future garnish little piles of money from the "ticker-tape", when U actually get into trading. If u don't know what paper trading is, - talk to U're broker.
The biggest problem for most traders is when to buy and sell. It is not that all difficult to predict the direction of the cur~ent trend or that it may reverse someday - u must take correct action at the right time. U, of course, can do this. ( chapt. I3 ) . To my mind, U will have a chart or charts which will clearly tell U the tale of the market and which will help U in U're forecasting ability and U're chart is meant to be the roadmap on the path to fortune. If it is too detailed, please hang it on the wall and frame it. If U want a detailed map, make two charts for the given commodity - one with all U're little lines on it and the othe~ with just the high/low close and maybe the "dot". U will be simplifying U're trading to one type or pattern, with which U will have success. U will eventually trade only those markets which consistently make money fo~ u. I am open to the opinion that people are trading too many markets with too many different positions and thus becuming frustrated. I don't know the answer - I feel that there are times U are / psychologically adapteable to coping with several markets, but there are times during the year when one commodity will be enough for U to handle. Me I've walked away from the markets for months at a time. Like rite now. (Except for silver ) . I've been away from the markets for three months now to write this book. I knew some day that I would have to write it to get it out of my system. And, I'm having more fun than if I had a holiday - like a world trip. ( Also, I am snooping around various commodity offices and continuing roy study of the psychological make-up of traders and brokers. Great fun.)
!2 SYSTE~S:SERVICES
Do not be too rig~c ~r. developing U're moaeL, because U must be flexible to the current status of the market. If U choose to day-trade and U find U'reself with a runaway bull, my friend, I respectfully suggest U change U're approach and ride the bull.
Technicians are famous for making spectacular profits one week and enormous losses the next. Don't be one of them. Unexpected moves do happen, and if U are not flexible, don't anticipate that U will not have to start all over again. And remember that it is impossible to teach navigation in the middle of a storm, so it's impossible for u to build an optimum trading plan when u are in the middle of a bad loss. Walk away from the market for a week or two and be flexible enough to adopt a new model, tailor-made for the occasion. What should be placed at the top of every page in this book is : This applies to every aspect of trading. U're approach to the market, and research, U're timing, and price objective studies.
SIMPLE.
KEEP THINGS
If U have gotten thru the first week, after initiating a position,· ( if U are medium term trading ) , and U do not have a loss, consider U'reself on the rite side of the market. Otherwise after one week, shud U're plan not say - that if prices have not gone my way- get out ..... ?
Develop some ideas on what the market is doing without the formal framework of a model. Take a look at wh~t prices in supermarkets are doing and how people are buying. - if people are filling their buggies full of coffee, U know that the coffee market has reached it's peak. /
Remember that few can trade every day and emerge winners. Change U're style. A corollary here is to have several model approaches ( chapter I3 ? ) which u have developed and as I say, develop the flexibility to jump from one model to the other, and write down U're reasons on paper, each time u do. The most cautious approach I can give U is that U're model shud ferret out the big moves and to sit on them. Here I quote the penultimate advice - - it's just beautiful and perfect, from Mr. Stanley Kroll. The Professional Commodity Trader,
I974, Stanley Kroll )
2
3!8
SYSTEMS:SERviCES " After spending many years in Wall Street and after making and losing millions of dollars, I want to tell you this. It was never my thinking that made the big money for me. It was my sitting got that? My sitting tight. It's no trick at all to be right on the market. You can always find lots of early bulls and bears. Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after an operator has firmly grasped this fact that he can make big money. "
If u are going to paper trade, there is an argument against it. It states that the emotional pressure of real market action with real money is absent in paper trading. The argument continues that-many paper millionaires prove unsuccessful on the firing line. But this argument omits the benefits of papertrading. 1-:y belief is this: if a trader in training cannot perform successfully on paper, his chances of success under actual market conditions are questionable. If he cannot paper-trade or is unable to analyse the history of prices and he has not studied and practised the basics of his adopted approach well enough, or which is the most insulting of all, he/she is not serious about the undataking, then there is no hope for this trader. Can U imagine that one - "not serious" - probably gets a little serious when he/she loses money! ( Maybe not. Good sports die broke. ) Paper trade on historical data first. Apply P&L charting, if U wish, over a period of the last two months, in an active commodity. Take one or two weeks doing this. Select your approach, or for that matter, several approaches, and see what happens and then paper trade in actual markets for 2-3 months applying money management. Putting P&L charting aside, and for an over-all picture, entailing fundamental and technical factors, be aware of the following steps: -
SYSTEMS:SERVICES
For example. the steps invoived in developing a modei to forecast the price of a storable commodity might consist of: 1. gathering data indicating the components and levels of suppiy and demand for previous years. 2. comparing total supply and total demand to determine their net difference at the end of the year (the year-end carryover) for each of these previous years. 3. relating corresponding price levels to these historical total supply, tota! demand. and year-end carryover data. 4. forecasting the next year's total supply, total demand, and resulting carryover. and 5. using the forecast level of carryover and the historical relationship between prices and carryover to forecast future price levels.
source: Commodity Trading manual I973 C.B.O.T.
A CHIT-CHAT
No ~rack record is possible on chart reading in general. / Few chart readers wud doubt the eXistence of a head and shoulders formation, but in contrast, a one man's reversal signal cud be another man's flag continuation. But a track record, that is, applying U're model to an existing price run - is certainly feasible for the performance of a particular chartist. He cud look at a series of patterns and identify the limits from which a top can be identified, which can then be put into mathematical terms and then fed into a computer, and then the computer cud spit out a series of price data.
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The -c=ader wuc ":.hen be able to see whether t.."'le "V" :formation can make any reliable tracing signals. U may eventually becum sus-::ic.ious of computers, as I am, altho' I use a "home" computer to ~~ore data ~~d create some wiggle-waggles on its screen. If U wish to be as highly skeptical as I am of many chart reader's claims, either using computers or not, I suggest the following.
Present [the chart-reader J with an unfamiliar chart, first having covered over the title and prices which would enable him to identify same and also having placed a blank sheet of paper on the ri~t hand side, leaving clear just the left hand vertical lines up to any interesting point. Now ask him to identify the formation and predict the future price action. He will try his best to weasel out of it, but stick to your guns. With much qualification and equivocation he may eventually give it a try. Six times out of seven he will be wrong, and the other time he is probably cheating, having recognized the chan. 3
S Quentin Fields, unpublished manuscript.
source: Making Money in Commd. I976 Eugene Epstien. Un":..il model builders are willing to subject themselves to track record analysis, it is impossible to take their claims seriously. If they try to sell U their system, U shud require of them to give some adequate explanation of why their particular method works, - the philosophy behind it. I mentioned the Fibonnocci series in chapter eleven. Some traders fool around with these numbers. ( Elliot did. ) They do it so they can take any given price movement, draw a few golden triangles , golden pentagons, and rectangles, and so forth, and then predict where prices will be, based on all these littles squares and lines. U cannot accurately predict world events, simply by measuring angles and sub-angles and length of lines around a pyramid. ( Or can U ? I've got my doubts. ) I think U wud agree with me. However, wud U agree with me that
SYSTE~S:SERVICES
many of the com1nodi ty services such as those advertised in magazines claiming returns of ISO% to 2,000% on equity are a bunch of crap ? I tell U on the last page and those coming up how to question these people. But suffice it for the moment that many traders have been bewitched by the variety of services and models that may be subscribed to in fees ranging from several hundred annually to systems worth thousands .. Assuming that their originators are economically motivated, if the trading methods were successful, there wud be little need to broadcast their availability. ( I suppose my approach can be added to that group. ) The number of handsheets and methods and computer printouts detailing methods of trade selection can approach affinity and most will claim excellent results. In most cases, when U inquire about a technique, ( especially a commodity service ) , U may be told that the formula is propriety and therefore secret. Such a statement is probably calculated to increase the mystery of the particular system. Coming up with a successful trading formula is really no great trick. Never trust any formula no matter how good it looks, unless u U'reself feel that it has worked in the past and that U can run it in paper trading or feel that once U have entered the market that it is simple, and easy to use. And, don't forget that most models and systems work well in a strongly trending market, ( and sometimes do by themselves create trends. ) Almost any worthless system will work in a genuine run-away market, if it is a trend follower, but most of these "any" systems will create losses equal to profits, when the market has its reactions, spends some time reversing and retraces itself. Traders have been searching in vain for the perfect system. The idea is as intri_guing as it is illusive. As I say, perhaps thousands of trading systems have been proposed over the years. However, a fev> can have merit, and knov-'ledge of the principles on which they are based cud be an essential part of a trader's bag of tricks. Why are many technical all but worthless ? The most common reason is that the originator has a very limited amount of data and tised only that data to create his system. The system turns out to fit that contract experience and none other. Sometimes, originators of technical systems phrase their trading rules in such vague terms that there is really no way of knowing when U are really doing what U are supposed to do, in actual trading situations. When confronted with the fact that the system failed the originator can then claim that their user misinterpreted the rules. It has been said that a system shud be judged by two things.
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I. How well it has performed in past markets. 2. The extent it is based on sound principles. This has inherent in its criticism that a system is automatic. I suggest to U that U apply U'reself to an approach which U know works, .... period. And that the judgement element on U're part cums to play when U are about to act. U make U're decision based on technical and fundamental factors . Part of U're plan is to write down what U are doing and why. The only thing automatic with this approach is that U are writing down U're plan. U don't have some silly little computer, based on a historical past market telling U to buy/sell at such and such a price. Market judgement is essential, because in a non-trending market, nearly every trading system will fluctuate the computer/you to death. ( Am I wrong ? ) • Also, there is very little objective explicit evidence available to support the commonly accepted rules of chart analysis in the first place, such as chart formations. Yet these rules are widely accepted as valid and do seem to produce worthwhile results. ( Chapter 23. ) Signals are given by many day's price activities and ~rP extremely diffic:.1lt to define mathematica1ly. The chartist is simply performing a highly complicated and subjective multiple correlation analysis as he examines his chart.
u see, u cannot let the computer or a totally mechanical trading method guide U in extracting millions from the market. Judga~ent and a plan is involved. To succeed, the chartist must be ready for thorough study and work and to develop experience .. It is an art because of his skill and finesse and experience and discipline and committment to a trading plan and being aware of the various approaches and why markets are functioning and do function as they do. So, with all of these services, which are available, do be aware that any approach must be regarded as unprofitable until it has proved otherwise. Go back over existing markets and see that the approach U decide on works, and observe when it works and get to know when it works. However, please do not let me negate U're purchasing any trading plan which-is available. There are trading plans which I wud certainly not negate, and there are certainly lots of them. It is worthwhile to procur one of these methods as the approach to the market may be viable and it may be just a question of discipline or the desire to trade properly, or it may just fit in nicely with U're existing trading plan. The quality of the seller's research is not necessarily low. Another
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323
for buying a method may be that the method of trade selection is sound but the trading plan is incomplete, with no allowance made for t~ings like money management. Losses cud be due to poor money management and not because trade selection was inherently poor. Because the importance of the complete plan is usually over-looked, the chances are that many valid methods of trade selection which u might locate, are uneffective because of this reason. ~eason
However, ~~e disadvantage of securing private methods are clear, and the strange availability of these methods by itself call into question their efficacy. Remember, that if u basically, simply, isolate U're trading to good seasonals and to things like trend lines, odds, sideways patterns, 50% retracements, support & resistance, - just forget everything U cud learn about P&L charting, or whatever, - U wud have plenty of successful trades every year. ( It's just that I like to apply P&L to these trades! ) Also, u wud have more trades than U wud have time to handle with possibly very manageable risks and possibly make more money net than if U were to trade with the most complicated computerized system in the world. If U learn to discipline U'reself to watch for the markets developing, take a position and learn to sit quietly, until others panic over the fact that they're not in, whereupon U take profits, u might be just as far ahead in the end. However, the computer does tell u,with a mathematical formula what U shud do. One of its beauties, using this mechanical method is that it can be back checked. But, remember that all this seems to involve finding and following a trend. If all our trading procedures were programed by a computer, then just think of the fact that our role of speculators wud then be reduced to a clerk's function. And, the profits which we wud make, as well as the commodity market itself, wud disappear. Because, everybody, if a particular computer approach worked, wud be on it, and the effectiveness of any system is to some extent dependant on the degree to which it is followed. ( Even tho' the difficulty of everyone following a particular system is actually compounaed by the reality of human weakness. ) Psychological studies show that pressures, fear, seriously impair the decision making affect the trader emotionally. so, I guess the trader will eventually try to outguess
tensions, anxieties, skills and that markets that this means that the computer :
So what happens now that U have developed an approach which U are happy with I Well, I'll tell u. Too many traders, once they have developed a successful technique, tend to experiment and gamble too much on the first draft of the scheme. They begin to experiment. Once u have developed U're profitable approach, duplicate it. Be slow to change, as long as U're approach is fertile. Experiment cautiously.
32~
SYST~~S:S~RVICES
But, ~hen again U are really only interested in making money and not becuming totally enwebbed in the function and in the manipulation of mathematical equations, or whatever. Don '.t forget that the human mind is capable of infinitely more minute calculations and assumptions, as it perceives and records, and details and projects them into the future circumstances. The point here is that u shud not·.:becum entrapped with an ecstatic framework, and as previously mentioned, have some flexibilty in U're approach. U must discipline U're thinking to comprehend as many relationships as necessary to determine the direction of the market prices and market "flow" , and relate them to u•re trading plan. But, KEEP IT SIMPLE The most stultifying mistake that can befall the trader is the assumption that success can be certain~if he adopts a rationale trade selection strategy and intelligently follows the elements of a successful plan. There is the final obstacle to success. --- money management! If the trader lacks the discipline to set objectives and risk elements (chapt. I4 ) , to act when either is reached, he/she shud take a close look as to whether he/she shud be trading commodities. Remember, skillful trading is what counts, not skillful theoretical theorization. Develop U're model plan. Stick to it. Be flexible and let the infinite possibilities of U're mind guide U, in U're discipline and U're use of it. ( And, U will have that million bucks is five years. )
DISCOUNTING OF SYSTEMS BY INDIVIDUALS Theoretically, if any one rule was invariably correct, it wud be followed to such an extent as to eliminate its validity. The greater the following, the less golden opportunity. Can U imagine everyone deciding to sell Dec. Silver on an outer channel line? (chapt. 9) I just can't wait to see, if I shud decide to publish my book, if there's going to be any change in market patterns around these points, and in relation to the extension of a day's price range. I'll probably have to change my trading style that's O.K.; - I do anyways. · (And, I've got other tricks in my bag. l ( And, so will u. ) So, conversely, the smaller the following, the greater the opportunity. The greater the following, the more the profits will disappear, because everybody wud be
SYSTE!-!S :SERVICES
appyling similar analyti:::al procedures. Eowever, i:: everyone was supposed to act on a certain area, I know one thinq for sure. Prices wud go there. Human nature is such that all rules are eventually broken and with monotonous regularity .. Chart readers have embalmed in their brain usually 3 or 4 basic patterns. They may take break-outs of congestion areas, being trapped in an end-run. Myriad chartists anticipate directional moves, only to find that the market reacts swiftly in the opposite direction.Risk analysis is required for these people and judicious use of stops. Me, I don't like "stops" . U're quite frequently in the presence of lots of company and will get mangled in horrid executions, particularily, if u have heavy no's of contracts, &/or U're in thin markets. Remember, even using P&L charting, but certainly general chart approaches, that U will have lots of company. There are literally thousands, thousands, and thousands of people charting exactly the same movements U are. So, when a major move is signalled, or when u decide to put a stop in, U cud have a lot of the same orders as yours hitting the trading pits. As far as I'm concerned, a lot of the talk about commodities, ( and it runs into the zillions of words ) is only a repartee for chin-wags and don't forget that this book joins that group. Remember what I said a few times in this chapter? KEEP IT SIMPLE . Take it easy. Armchair philosophize if U will. There's lots of material in this book for that, but, KEEP IT SIMPLE, Have great fun with the dissertations, if U will, but, keep it simple, disciplined and well-planned, when U trade.
DISCOUNTING OF SYSTEMS BY THE MARKET PLACE News is published in the newspapers. Information available for everyone has little or no value, yet the futures market has an uncanny ability to discount future events well before before thay are recognized by the very many. By this time, most systems have clicked in, - especially if it has been a trend run. But once the majority have learned of the news, it is already too late, because the market has already discounted the news and probably will discount many, many systems.
·r -··
325
2 326
SYS':'::::!~S:
S:SRVICES
The random walk has an uncanny ability to discount many systems out of existence. In a theoretically perfect market, all traders receive the information at the same time, and are equally talented in interpretation and thus the price moves quickly and swiftly to its new level. There ought to be very little disagreement with the direction dictated by the new information. But, as U know, there's no such thing as a perfect market and the market discounts 90% of the "systems" into the ground, because, markets are not perfect and the reason the markets are not perfect is our little friend called - human nature. Of the 90\ of the systems which are discounted and fail, perhaps IOO% of them fail because of human nature. - bad application of technique. I am sure that U realize that as more and more market participants attempt to predicate every action on chart rules and they obeyed these chart rules, that the accummulative affect of those similiar actions, - self-creates price fluctuations by itself, destroying much of the validity of all chart technique. In particular, the placing of stop-loss orders at identical points by hundreds of traders may create false penetrations of trend lines. If any one market device earned profits effortlessly, it wud be used, returning profits until it was discounted by the speculators it was rewarding.
Please do not forget that altho' the market may have discounted t~e news that has entered the market, and that the facts are known by large trading houses and other profe~sio~als, but that in reality, certain events can occur unexpectantly. Prices may not have completely discounted these occurences in which case U might be caught off guard and very little can be done in these situations to protect U're position ( and that includes the professional ) except to be alert to recognize the event, especially in thin markets, such as orange juice, platinum, and potatoes. A sudden change in market trend can occur sporadically. That is why I stay from thin markets, except to trade them in anticipation of trend direction, such as when seasonal and odds are in my favour. (chapt. 5,24.) Buy orange juice in the summer in anticipation of a frost scare in the fall. (maybe.)
SERVICES Now let's think. - who services U ? ( I mean with trading advice.) There's the broker, - there's the brokerage house, - and there's the professional advisor. Our broker pal is covered in chapt. I2 and
SY S':':s!'!S : SERVI C:SS
Don't. forget , his only ::unction is ....... "not: to thank u. " and to grind out commissions. Don't be failed by this, and don't be fooled by this. Brokers grind out commissions ana are obliged to do so by their bosses and the necessity of paying for their living. We all have to make a living, U know. However, there is an avant-garde group of brokers, who are sincere and earnest and develop a long-standing and profiting clientele. I'm seeing more and more of these earnest, aware brokers nowadays, who tend to fight their bosses, building their clientele, on the premise that a continually profitable, unchurned, long-standing clientele, (maybe only I0-30 ) , is the only way to drive. They tend to be medium to long term trading brokers. Believe me, there are some honest, wonderful brokers around. But, I think_it takes experience to know one. That is difficult for U novice tradeEs out there. I guess the only advice I can give u is to ask a broker on what citeria he makes his trading decisions, and see what U think. Wud U buy a used car from him/her ? Also, maybe U shud write to Bruce Gould @ Box !6 Seattle, Washington 98II~,since he has a list of brokers who take it easy with their trading. But, u will probaly have to subscribe to Mr. Gould's service to get it. Not a bad investment, I think. I subscribe. The brokerage house, however, - the broker's bosses, can be a bunch of "twits" - they grind out meaningless informations and recommendations by way of weekly information to their clients, or to the various brokers who are set up like manikans, all a function of necessity, I'm sure, in their little offices or desks. Don't forget that the losers in commodities live off weekly letters and look for advice. So it isn't really the brokeragehouses' fault - but, then again they're in it to make money off the traders and not from their own trading in the pits. Quite a bag of tricks, isn't it ? No one to blame. Just U'reself, I guess. U know what cancer is like. It lives off and thrives on weak and strong tissue. -so with the big "houses " . ( I hope I'm not being too facetious. ) The
"houses" hire analysts,
( fundamental and technical ) an9-,
u must realize that in order for the house to grind out commissions that these characters have to grind out daily recommendations, ( I feel sorry for them . How wud U like to do it ? ) and don't let anyone tell me that the purpose of all this is not to "pay the rent". -the brokerage house must churn and churn and churn to make money. They don't make money by U making money - U do! And, the more money U make, the more happy they will be, because most traders wud churn more. Somebody doesn't realize that with lots of long-term, successful clients, if these clients shud stick with them, that they wud make more money than they ever dreamed of. See Neil Blewett's article pgs.i-xxx
3 27
SYSTEMS : SER"\•I CES
Look for a broker, - not the brogerage house. has to be a clearing member ) .
( except that it
When U go outside the brokerage house and your broker, U're left with nothing but the professional advisor. He charges U for his service.
He may see U privately, - probably as he shaves -because if he's any good, his productive time is too valuable to be bothered with U, - and charge $500 to $I,OOO for the visit and probably give U advice that will shake u to U're boots, because the advice was probably hardly any advice at all. - things like convert U're cash to gold. This consulting game is the biggest game there is to-day. It all depends on how it is packaged. It will probably get much, much bigger as everyone strashes and struggles to find out what's wrong. Consult the experts! The newest game in town! I'm scared stiff that once this book is published, that I will suddenly becum an expert. But I won't let it happen. There's nothing worse than an expert. The "Peter Principle". I can see myself now, shaving away in my bathroom, totally confusing my client and myself with lots of words and sound advice. Maybe that's why experts say so very little, - they don't want to confuse themself or sound stupid. Probably just give simple advice, which U already know. So, don't see these people personally, unless at a social level, or he/she is really going to teach U what he/she knows. If U're inquiring from a professional mail service, &/or telephone advisory system, there's a few questions U shud write to them about. Write to them and ask them these questions. ( This shud be a joke. ) /
QUESTIONS:
I. Why do U give trade advise if U know how to make money, - u shud get all the money U need from ~~e commodity exchange, like I try to do. 2. Do U follow U're own advice and if U do, cud I see U're record of the last two years. ( photocopies, including confirmation slips.) 3. Do U trade for yourself first, before U give advice? 4. May I know the entire model on which U trade ?
SYSTEMS:SERVICES
329
5. Is U're approach entirely mechanical 6. How many subsribers do U have ?
7. Is the advice timed to when I receive i t ?
Maybe U can dream up a few questions of U're own.
NOW, if they answer, I. I want U're money to use so I can make even more money. Or, I cannot trade with my own money, 'cause I always seem to lose using my own money. 2. Yes. - to both questions. 3. Yes.
4. Yes. 5. Yes and No. 6. They give it and now U know the size of the company u keep. ( if U can believe them.)
7. Yes.
THEN, you've got a first class advisory service .....
subscribe
In most cases, however, when U inquire, U will be tole that the formula is proprietary, ---- therefore, secret. Never trust just a formula, - no matter how good it looks, unless it has first been tested in the past and authentically. The only advisory service which I use is, a~
fundamental research - Commodity Advisory Service commodity Research Bureau One Liberty Plaza N.Y. N.Y. I0006
b) sound General Advice - Bruce Gould Box I6 Seattle Washington 98II -
The Reaper by R.E. McMaster P.O. Box 39026 Phoenix AZ 85061 ( a dandy cyclical analyst ! )
330
SYSTE!·~S:
SERVICES
If U've got technical tools, and I recommend P&L charting, ( really I do ) then these two sources of information will give U an incredible grasp on the market. And, if U really want to get into a long dissertation of fundamentals on a more analytical basis, I recommend, Commodities Report
: 2I9 Parkade Cedar Falls Iowa 506I3
And, by all means, subscribe to COMMODITIES. MAGAZINE 219 Parkade Cedar Falls IA
506I3
My God. That's a must
But, remember one little thing with regards to these various professional advisors : - that one of the key ingredients of contrarian opinion ( chapter 5 ) represents a consensus of professional advisors. This shows U how good these advisors are! If the consensus is 85% - that these advisors are bullish - then the market has run its course and the bull is over. Can u believe it, the advisors ·are still bullish!! Some advisor ... some professional. And it is so sad to me,the fact that the losing speculator finds that long term success is virtually impossible, and that it does not deter them, or their salesmen from demanding specific trading advice from these wire-houses and services. Remember also, that commodity letters and free advice cud get in the way of listening to the voice of the market. Better to see who is buying what at the supermarket. Or, that the market is not flowing with the news as i t shud. U want to know what the market is saying to u, - not the confusion of the babel. Really, no one who puts his decisions in the hapds of others, ( unless they're lucky with a sound advisor ) - succeeds for very long. Everyone, as he pursues his own self-interest, is not at all interested, basically speaking, in whether U lose or win. Unless, once again U have a successful broker. And, take note also, please that, several brokers are great technicians and have profound knowledge of the markets and are very successful, but that, when they trade their own money, they are unsuccessful. Accordingly, because of their psychological make-up, they trade only their client's money, since only with someone else's money, do they have success, and do it extremely well, and I mean extremely well. I think that U will find that this is the case with U're successful broker. This is the kind of man/woman
I2
SYSTEMS:SERV!CES I wud ~espect. Every city must have at least one! - surely And cne who will not churn. Remember, losers are scorned, winners evoke envy. Be careful of this. There's no joy in this. Please, don't be envious of a winning broker, or a winner. Stick with them. And, don't bug ~~ern. There's more than money involved. Respect U're broker and advisor. Don't treat him/her cheaply. If U want to go the cheap route, there is only one thing to say - What else can U expect for a nickel ?
33I
332
CHAPTER THIRTEEN
PLANNING
' •
THE ULTIMATE CHAPTER ? ( I think so. )
Herein we try to tie everything together.
" And all around U'll find peace. Not sleepiness. But the tranquility which stems from being mature of years and knowing the pace best suited to getting the most out of life " - from a Scottish travel brochure .
This trader is always writing things down. I'm continually writins a discussion of what's happening. What was the activity yesterday ? What can I expect to~day ? What is the market doing now ? What can I expect in the future ? Is it or isn't it reacting to the technical joy-sticks ? And, then when I have done this, ( it develops a flow after a while) ,I write down the reasons why I'm going to make a particular trade, whether it be a ten minute~ay trade or a major, major position which I had been anticipating for months. It's rather embarassing when U've made a bad trade and U see in print - U're own handwriting, how inane U were to make that trade. At least U have a record of the reasons behind that trade and can analyse it for future use. ( Even categorize and put them in a box for future reference ) . (A box for good trades and one for bad trades ) Under no circumstances can U continually make money, without writing
---------
·-------
-------
I3
an analysis of t~e market, and the reasons for making a trade. Some of U out there may be able to, but it seems mundane to me not to ! What's a little effort ? How can U fly by the seat of 'C're pants ? haye to have a trading plan and U have to make it work, and no fiddling with it ! One of the greatest disciplines to making U stick with it, is to 'write it down' - each time - daily No frivolity ! When U've got IOO contracts on, U don't want frivolity ! And i f U are on the line with a small equity of $2,000 and that's all the money U''!e got in this world - U most certainly cannot experiment with frivolity. It's beautiful to look over U're notes of three weeks back and know where U're thoughts were and it's so easy to 'feel' the evolution of a contract as a result. lJ
The key to success is being able to organize what U do and then be able to do it when U don't feel like it. Self-discipline ( I wrote a whole chapter on this one ) is the ultimate key and it requires hard work and effort. - a total comrnittment one way or another. And .... -thinking ! It's serious business. Frivolity is out.
And there's a lot to know. A trader must be able to understand what sort of factors influence prices. He/she must have a smattering of market theories to understand why prices move as they do. He shud be aware of all the various systems and approaches to the market. - all the various methods of forecasting prices and know the services which are available and whether he/she shud use them. He shud know the general principles of money management, for without this he's lost. What are the general comments that most traders make ? The maxims ? How can they affect U're thinking ? Do U really know the psychology of the market ? What are U're value judgments what's important to U ? Do U know the general philosophy behind charting, it's weakness and strength, ~h~ use of it vs. fundamentals ? Are U going to continually keep fundamentals in the back of U're mind as a guide-stick for technical analysis ? Do U understand U're / fellow chartists what they're like and where they act ? Do u know the market place have U been to a brokerage office have U visited an exchange ? Do U understand volume, open interest, comrnittment of traders, the cash, the basis, the odds, the seasonal patterns, the chart formations ? Do U understand trends, congestions, and trend reversals, and each of the above in relation to the other putting aside all the dilly-dallies of U're favorite technical tools ? What makes a winner ? And what's a loser like ? Do U have the effort and discipline - the guts issue of it all ? Does self-awareness mean anything ? ( It
~akes
even more guts to accomplish this ! ) Do necessary personality really have any bearing on successful trading ? Who trades and how ? What little kit of tools are U going to collect, and what sort of practical advice can be admitted to U're trading plan ? P~d last, maybe not least, are u going to let Point and Line charting influence U ? ~raits
Above are listed thirty-six ( count them ) facets of appreciating commodity trading, and I do not see how the trader cannot help but to be happy to be well versed in each and to have studied and recorded them thoroughly. Make a precis of this book. If U're just starting to trade, make notes, - study. Becum an expert, - a well disciplined one - wherein U will achieve the position of being a professional and eventually, and unassumingly rake in hundreds of thousands of dollars each year. Becum a pro and U can do this. But it entails achieving all of the above and becuming a so-called expert in each. No hassle. It can be done even if U don't have some money to trade with. Someday U will have some money, and boy, will U ever be ready.
So, let's get down to specifics. Let's categorize things a bit.
KEEP IT SIMPLE
U
~hud
becum a I. Z. 3. 4. 5. 6.
o6
philo~ophe~
p~ice ma~ing in6luence~ ma~~et theo~ie~ maxim'~ p¢ychology the ma~~et value j u..dgment~ wea~ne~¢ cha~ting ¢;t~ength ettow char~tif.>
on
6
7. the ma~ket place 8. method~ o 6 6o~eca~ting
-
---- .. -·· --·
------
tf.>
p~ice~
·---- ---·- ·-------- - - - - - -
I3
1. vo.tu.me. 2. cpe.n inte.~e.~t 3. c.c nttz.a.Jtia.H c pinion 4. c.ommittment c~ t~ade.Jt6
5.
'c.a..6h'
6. 'ba..oL!>' 7. , 0 dd.6 , 8 • .6ea.6onal patte.Jtn.6 9. c.haJtt pattef!.n.6
bec.u.m a p.6yc.h~atJt~.6t/p.6yc.holog~.6t ( go to a p.6yc.h~atJt~.6t nof!. one yea!!. - make the ~nve.6tment ) and Jtec.ogn~ze
I. the w~nnef!..6 and lo.6ef!.6 Z. e66oJtt and d~.6c.~pl~ne Jtequ.~Jted 3 . .6 el6- awalt en e.o .o 4. nec.e.6.6af!.y peJt.6anal~ty tJta~t.o 5. who tJtade.6 and how
above all know
eveJtyth~ng
1. Z•
tr~end.6
3.
p!!.~c.e
theJte
to know about
c. o n 9 e.o t~ o n.o JteveJt.oa.l.o
maj cr~ t-~~end ~nte.Jtmed~ate m~nof!. tltend do U know wha.t a c.cntJta-tJtend p~n-po~nt
~.6
the
tJtend ~.6
?
ma.jof!. tJtend
f~ne.o ~nteJtmed~ate tJtend m~nof!. tJtend l~ne.6
l~ne.6
both top and bottom ~dent~nY
the tJtend channel vol. 0.1. c.omm~tt. o6 tJtadeJt.o, c.ontf!.. o p~n~o n, c.a.6 h, ba.6 ~.o, o dd.o, .o ea.6 o nal patteJtn6, c.haJtt patteJtn.O
bec.u.m an a.otu.te. bltea.kou.t a.naly.ot
3 types
i~
~uppcnt
I . c. ana eo :U...c n 2 . bLend .U.ne 3 • bta.n-6 t 0 Jtm e.d
bec.uming ne~i~ta.nc.e
i~
en
to be a.) c.ontinua.tion b J n e v en~ a.t
c.onge~tion ti~ety
Con~iden
thnee.
c. a n.6 id en
ne.~i~ta.nc.e ~uppont ?
: volume a) high/tow activity duning the. da.y b) high/tow a.c.tivity a.t ~uppont a.nd n e.~ i~ tan c. e. c.) nean a.pex a.nd at binth
da.y~
up/down, one day down/up ?
length o6
c.onge~tion
he.igth o6
c.onge~tion
0.1., c.ommitt o£ tnaden.6, c.ontn. opinion c.a.~h, odd~, ~ ea.6ona.£. pa...ttenn~, c.ha.nt pa.tte.nn~ .
did U ~ee it developing ? do U ~e.e i..t developing ? ha..6 it developed ? c.la..6.6i£ic.a...tion : - 'v' , head & ~houlde.n, double, tnipte, ~auc.en, nec...ta.ngte diamond c.on.6iden : volume
I3 P:...A!~KING
0. 1.
ccmmitt. c6 t~ade.~~. cent~. opinion, ca..!:Jh, cdd.o, ba.oi,!l, .oe.a.oonal patte~n.o, cha~t pa:tte.Jtn.6
via
~e..6e.a.Jtch
0. 1.
comm. c6 :tJtadeJt.6 volume inde.x(chap:t.2) ba.6 i.6 pJtemium monthly,we.ekly baJt chaJtt.6
Now, apply
U 1 Jte.
kit on tool.6
1. Moving ave.Jtage..6 ? 2. p!te.o.ouJte indiea:toJt.6 ? 3. point and 6igu~e ? 4. tJte.nd l..i..ne.-6 bJteakou:t.6 new high!..tow.6 :tJtend 6ol..towing me.thod.o conge.6tion :tJtading tJtic.k.o ? 5. po..i..nt and line chaJtt..i..ng ? 6. whe.Jte. aJte. U ~e .6tcp.6, i6 U ' ,..d2. g o i n 9 t c u.o c. .6 t o p.6 • 7. u.6e o6 cha~t patte.~n.6 1
O~ganize
u
I
~e.
All o6 which 1 do, bu.t 1 .... leave .{.-{.. :to u )
1.
2. 3. 4. 5. 6. 7. 8.
c.ha~t.6
- moving av e.Jtag e
0 Jt
whate.ve.Jt b a.o ..i...6 chaJt.t J.Jee pa.ge. 345 di.O CU.6 .6 . i. 0 n .o h ee.:t .o ee page 346-7 execution .6 he.e:t .6 ee page 348 Jte.coJtd .o hee:t .o ee pa.g e 350 adju.6:tme.n.t .ohe.e..t .6 ee page. 352 income. .6 he.e.:t .6 ~e. pa.g e. 35! da..i...ty quotation ,'L e. co Jtd a.nd do:t c.a..tcu.ta:tic n page 573 1
I
337
example~
in
chapte~
22
I . g ap.6 ( chapt. Z3 ) Z. opening6/clo6ing.6 3. tlme p~ice ~eve~.6al.6
Exclude
6~om
U'~e
t~adlng
I. chin-wag with 6ellow t~ade~.6 unle.6.6 it6 so~ long, long te~m t~ade6, a 6o~t on nact ninilng mi.66lon, the Qlnd u wait month.6 no~. 2.
Re.6ea~ch
expo.6u~e
to
b~ohe~age
onnice activitie6
nundamental6 vla I. Commodltle6 Magazine
( a mu.6 .:t
2!9 Parkade, Cedar Falls IA
2. Commodity
Re6ea~ch
506!3
Bu~eau
One Liberty Plaza N.Y. N.Y. 10006
Sub.6c~ibe
e.g.
.:to a
cha~t .6e~vice
I. Commodlty
( it'6 handy
Re6ea~ch
Bu~eau
One Liberty Plaza N.Y. N.Y. !0006
2. IBEX Chart Services Box 693
2420 Ist Ave. Seattle Wash. 98I2I
I3
Le..t c:thucS d.c .:,cme. H.:c.,.:-Cc.c.-5. Tht cn-C.y
.:::i:-l1~i~-l1:g 6c:t U ltc.: cne I f.>u.bf.>c.,~~,cbe :tc
a.dvL:,cr~y
BJtu.c.e. Gou.ld. Box I6
Se~ttle,
Washington 98II
-get the back issues too!
FIRM RULE NEVER COMMIT MORE THAN 30% OF EQUITY AT ALL TIMES I tend to use 20%.
ThJtow :th-Cb boo~ ~w~y i6 U b!te.a~ :th-Cf.> Jtu.le.. r don':t wan:t u in my c.~mp. and, ab aw~y
down.
6~Jt
(
Oft
I'm c.onc.e.!tne.d, T~ROW :thi6 boo~ pabb it on ) i6 U do not WJti:te. e.ve.Jty:thing
ab
O.K. gang. Now U know the ground rules. do the above U've got it made.
~nd
O.K. now that U have committed U'reself to the above, and have becurr. totally exposed to all their facets, we will get down to some more details such as record keeping, what I wud do if I had $2,000 to invest or one million. I will explain how I trade long term, day trading, and swing trades. I will explain what a fool I can be, and then again how easy it is to make money, consistently. How I trend-buck, trend follow, pyramid, congestion play and how I handle tops/bottoms. We will discuss what I wud do if I was not a full time trader. And, U will get an idea
ho~
I use Point and Line Charting!
But, first, let's have some more discussion
Essentially a trading guide prods U to proceed as if U knew what u were doing. It also induces U to formulate a set of rules u can live with. If they are good rules, u record them and stick with them. The first step is to elect whether U intend to operate for a small quick profit, day-trade, seasonal
340
?LANNING
play, straddles, or just do what naturally corresponds to U're instinct, or any combination thereof, taking into consideration U're financial status at the time. Self-discipline is the purpose of developing a trading plan, and self-discipline creates the trading plan, and 'writing it down' creates the wealth. To achieve this objective, a self-created rather thanan 3dopted plan is superior. Too many people master one technique, then want to begin experimenting with others and too soon, and gamble too much on the first draft of the scheme. Remember, there is wisdom in patience. Once a plan has been formulated it must simply be adhered to. And, remember also that any approach must be regarded as unprofitable until it has proved otherwise. Perhaps the most stultifying mistake that can befall the trader is the assumption that success can be certain if he/she adopts a rationale trade selection strategy and intelligently follows the elements of a successful plan. Putting aside the 'human element' ( we all make mistakes ) unfortunately there is a final obstacle to success ----- money management. ( chapter I4 ) . If the trader lacks the discipline to set objectives, to include what return he/she wants from capital, how much to commit to the market and risk limits, and to act when any of these are reached, according to his trading plan, - he/she shud not trade futures contracts. I hate to be so negative about all this, but U shudn't. ( If U're already programmed to be a loser - why bother ? ) The trader, like the gambler, will find it far mo1:e difficult to handle his money in a 1ogical and disciplined manner, than to learn the rules of the games, if he does not include as a rule of the game - money management . It is impossible to develop a set of rules to serve as a guide to all traders under all conditions, and this trader will not attempt to do so ..... only suggestions, and what I might do under certain circumstances. The trader who succeeds in the long run is able to recognize and develop his behavioural skills on his own behalf ....... thus my emphasis on psychology in this book. / There has never been a successful trader no matter how magnificent his style who is not a superb manager of his money and a student of market psychology. Food for thought : . 12ever t_ry to reduce trading to a purely mechanical exercise. Mechanicalness must be displaced by awareness
what to do to make a great deal of money ...... keep things simple ..... that applies to every aspect of trading .... .... U're market and research approach ..... U're timing .. .. .. U're pri:.:e objective studies it's no trick at all to be right on the market .... traders who can both be r-ight and sit tight are uncommon .... it is only after an operator has firmly grasped this fact that he can make big money 'food for thought' both minds and trading plans must be sufficiently flexible to acquire profits, especially in unusual and adverse times .... U're trading style had best accommodate itself to prevailing market conditions . the chart purist who does not wish to knok' anything about fundamentals ot the market, seems to represent too extreme a view for the successful long term price forecasting ... ... the ideal compromise is to use both .... when they agree, the combination seems likely to be highly profitable when they disagree, the market shud be approached with caution so-so trades that offer a possible gain equal to or greater than risk must eventually drag most traders down. We tend to overlook the best trades .... there are mediocre trades presented every day and as well, sure-thing trades .... ... high risk trades nickle and dime to death ... big money is made by sitting tight on good positions, confining trades to situations of unusual appeal very few can trade everyday and emerge winners. Almost anyone who has the fortitude to await those opportunities for which his style is tailor-made will succeed, where his astute but more active peers will fail. it is obvious that a trader k•ith less probability of success but trading conservatively can actually have a better chance of long-term success, winning the game, than a trader~·ith a higher probability of success, but who chooses to trade more aggressively ? . some professionals believe that it is best not to lean too heavily on mechanical approaches to the market analysis ... ... if they really performed all that well, profits wud disappear because everyone wud apply similiar analytic procedures ..• traders can make money even if they cannot predict short-term price changes consistently ... a trader can simply follow a trend
342
PLAL~KI!~G
successful trading can be aided by knor,.'ing current conditions in a commodity knowing what changes to look for knowing how to interpret major news items ****** * and proper handling of one's position in the market. Do not distain, and do not wholly believe any sources of information . .... the best u can do is to review all carefully and make an educated estimate of their accuracy and more important as to their eventual effect on the market. The more information a trader is able to accummulate, the more likely it is known to large numbers of people, and the more information he requested in rendering a trade decision, the lower the potential profit from a current decision. Generally, the investor's goal is to achieve a workable approximation of truthfulness ... think independantly, avoiding the herd instinct .... the herd is often wrong, if not always wrong remove a portion of all profits from U're accounts, as part of a trading plan . the human element is undoubtedly the private investor's biggest enemy in any type of trading remember that prices tend to exhibit more sustained price trends than wud be expected on the basis of pure chance and that significant price moves take time to develop, as they do not cum overnite .... essentially, market fundamentals underpin trend direction commodity education is extremely worthwhile, since it enables one to evaluate a great many things one reads, ana also teaches patience, perserverance and controls other human emotion if U play U're hand correctly, with a plan, U are more than likely to end up with more profits than U anticipated
U losers in this world, have probably not even bothered to read the above. )
OKAY
- for U winners and losers, NOW CUMS THE FUN PART.
see next page
here we go
?:i.-:.!~X!NG
STEP # I Precis this book - at least ~~e technical sections. List the items of importance for each topic - there must be one on every page . Itemize all the facets for trends, congestions, reversals, volume, 0.!. , contrarian opinion, basis, odds, seasonal and cyclical pattezns,( did I miss anything ? ) - list them, categorize them - ready for handy reference. This shud take U at least two months. Study psychology and factors influencing prices.
STEP #2 Get U're basic charts ready. I have four for each contract. one : - unadulterated bar chart with no markings at all so I can see the forest. 1 memorize major and medium trend lines , and chart patterns with them. But no scribblings. At the bottom I place volume. ( 0.1. I just keep a weather eye on, and get from a chart service )
3 43
344
?LANNING
two
daily bar chart with my 'dot' in place, but nothing else just for visual observation - no scribblings - looking at the trees.
three
- c,hart with just the dots in place - easy to observe dots by themselves to analyse crest§ and 'waves' - to look at the forest and the trees.
PLANNING! ::our
345
- daily bar charts with dots in place on which I do all my scribblings of lines or whatever gets quite messy - channels, trend lines and whatever. Place other moving averages on in different colors if u·wish and maybe oscillators at the bottom of the page. We're looking at the roots !
(Also, prepare a weekly and
month~y
bar chart to look at the 'forest'
!~!)
Next, I prepare the 'basis' chart if I'm trading grains, and products, meats, cotton, copper, plywood, lumber and perishables ( eggs etc. ) . I don't bother with silver, gold or financial futures. + IO ¢
see pg.II3 /
+- 5
¢
0
- _s
¢
- IO ¢
346
PLAl-lNING!
Next,
have
~
worksheet
~Y
Two o: them.
for every 'thirty day period.
remember - writin down ?
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describing
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what the contract did the day before. Did it stop at a trend line? etc •... where was it strong weak, whatever.
b) DISCUSSION - a chit-chat with myself, presenting some fundamental/ technical factors that stand out and what I 'think'
c) the 'odds' for the commodity - at the top of the page I can expect this month, ® what 90, I20 days
in 30, 60,
e) MY MAJOR STRATEGY -at the toE of :12age
?LANNING!
347
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a)for silver - 14¢ on from dot b) - 8¢ on from dot c) dot distance , up"t , down -ld) cot off main channel l~ne ( v = yes ) e) dot turned ( v' = yes ) f) 3 dots on ( the price at that point g) days market has been up/down e.g. 2 ~ = 2 days down 3 't = 3 days up h) target re calc. in chapt. nine i) trend line prices for that day major 1' support v resistance medium if' " .J, " minor If " J, " j) support - 3 kinds ~) resistance -_3 kinds 2) next 50 % retracement cuming up m) basis + or and so forth or whatever.
346
?LJ.Nl\!NG!
~lext,
have my 1 action 1 sheet which is used wheneve:::, and I mean ~henever, I execute a trade. It lists as U can see, the items I shud keep my mind on, ( at ~~e the top ) and asks a few questions. Vihen I act I circle the appropriate word that supports my move and place dovm belov.· any pertinent figure or comment which may supportin particular any of the above. ( Develop U 1 re own, but this sheet is an absolute must, must, must . ) !
date
COMMODITY
VOL.
0.1 CONT. OP. COMM. TRAD. PSYCHOL. MKT.
trend
T.L. Is
congest. reversal
support resist.
premiu 1 s
dys1' ~ c.c hit
dt. hit dt. off old dt. c.c 2 day oid c.c
so
op.c.c op.dt c.c 3dts .on dt 1 .l-
last day's acti.
%
trend mj. med. min. day's up down target
P&L
dt.ds. ¥ dt. pos.:
technical
chart pat.
CASH BASIS ODDS SEAS'LS
cong. (con.) (rev.)
I-2-3
breakout
~....-1_ I
Fund. imputs that: Tech. imputs that: Rela~ed
commod. are bullish/bearish
- BUY I SELL
General mkt. indicators are~ It
because
Action taken cruantity open bought /sold offset bought I sold I cud have improved if I had What I did rite
month
price
13 PLANNING! ~ow,
349
we've really gotten somewhere.
We have a) all the charts I need b) my basis chart c) my two note sheets with all the technical data written down and chit-chats d) my action sheet - executed as I make my decision to trade. I never, never make a trade without committing myself to this sheet. I'm honest with myself.
( A hint
- I) I scotch-tape all the charts and basis chart together into one big sheet 2) I scotch-tape the two work sheets into one long sheet, ulimately giving me two peices of paper for study purposes, and, 3) the action sheet for under my pillow. )
- And, that's it ! I have all my work sheets, and, that just leaves us with our book-keeping of account activity. I suggest u maintain a record of U're trades, profits,losses, margin, free equity, whatever, - U're broker can make mistakes, and he/she will respect U i f U're on top of it.
h good record system is
I. daily activity record 2. account balance record 3. debit & credit statement
The 'DAILY ACTIVITY RECORD' accounts for the activity that took place that day, see next page, ( at the top ) and the open / positions held after closings, which includes a 'power statement' under it based on closing prices and closed out trades. ( $8,584 plus gains on 'open' silver contracts ) . Margins are portrayed to give me an idea how much 'free equity' I have for 'free' trading and if I'm over margined ... I am in the illustration.@ 35% . .( remember the 30 % equity rule ? ) . The accummulative balance is next portrayed on the 'ACCOUNT BALANCE RECORD' , two pages from here. This tells me how I've done on actual trades, profit or loss. I like to have this because I can see if I have more wins than losses they're clearly defined, as is the running profit/loss figure re: current balance. This is U're closed out
350
PLANNING!
DAI~Y
AC~IVI~Y
DATE
RECORD PREVIOUS
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PLANNING!
ACCOUN~
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DEBIT AND CREDIT STATEMENT ACCOUNT YEAR
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EXPLANATION
I3
PLANNING! trade sheet. The'daily activity' record accounts for activity plus i f U had closed out on close of all markets that day.
The 'STATEMENT/ON DEBIT AND CREDIT• ( last page ) , will account for corrections of fills, or computer errors. At the end of an accounting period (monthly ? ) , I can take the net credit/balance and either add it to my profits or adjust my losses accordingly. Without this statement, My records wud be out of balance at the end of my accounting period. There U have it, three record sheets. one, of daily activity and summary two, a current balance and P /L statei;tent three, an error account
I hate to tell U, but I've got to have on my desk daily, as a written out each morning. Read idea. It's very handy and sort !Pr••~nt poajtjon
SOYBEANS
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one more sheet! use. It's just sort of quick-glance watch-dog, it over - I think U will get the of programs me for the day.
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353
354
?LANNING! ana, that my friend is
i~.
At least that's all I can think of. After a while, i~ doesn't take long to do. ( Actually I have a computer doing some of it for me now. l But. still, commodity trading is effort and discipline. If U trade only one commodity and trade long term and occasionally, it takes no time at all.
APPROACHES TO THE MARKET PLACE Now I am going to do what few authors and systems advocates do and that is be honest. The next few pages will show the application of various trading styles to our Dec. Chicago I 78 silver chart and to be honest, it is not honest to say that these approaches work ...... they were applied after the fact .... after the market had made its' move. Any fool can apply a plan to past prices and find where it will work, and this is exactly what is done in this case. However, if one accepts the rationale that if a criteria existed and was acted upon, then a constant of one sort or another existed, and must have some validity. U will see how reasonable these approaches are, and given a rather firm adherance to their execution and anticipated results, we shall see what happens. I will say that as I write, I have no idea how they will work out. This is written before an analysis of the effect these approaches wud have on the chart. It shud be fun. Are U ready ?
Let's discuss money management firs~. We'll assume that the margin for silver is $!,000 . Therefore, to meet our criteria of 30~ equity rule, we'd need $3,400 to start with one contract. If we shud build equity in our account as we go thru a plan and it shud increase sufficient to take on more contracts, yet retaining the money management rule of 30 \ of equity for margin, we will do so. If at any time we get under our base cash flow of $3,400 , we will see what we shall do. ( Probably borrow from our favorite Aunt ! l Also, no account is being made for bad fills. And, an assumption is made that we do get filled within close approximation to price mentioned. ( Do U follow me . ) Using this minimum cash required concept to start with is worthwhile, as it illustrates that things can be done. Shud U wish to apply more cash as a starter, do the calculations, pyramide using 30 %
!3 PLA!\'TNING
355
rule and govern U'reself a=cordingly. If U presume t~at U are =o~~it~ing $50,000 or one million to the silver chart, this, at t~e moment ( will discuss later ) is not for U, since U're either fcolish or an experienced trader who does not need further suggestions. Keep in mind that the trader who maintains at all times a maximum ( no matter what ) of $50,000 in his account and trades a maximum of $8,000 of that amount at any time, will be around a long, long, time ...••... superb money management. ! In the following applications, we consider only specific technical aspects. We are putting aside any consideration of volume, O.I. , basis, odds, seasonal patterns, chart patterns, contrarian opinion, committment of traders. I leave this to U if U wish to do the work. We shall try to express only specific technical formats the trees and roots, if U will.
The following are techniques used by the following kinds of traders, and we will go thru each in detail on our silver chart and see how each does profit wise.
BREAKOUT TRADER TREND FOLLOWER TREND CHANNEL TRADING TREND LINE FOLLO~~R HOW I USE TREND LINES ( P&L CHARTING ) THE TREND BUCKER BUYING/SELL:::NG CONTRA-TREND BUYING SUPPORT SELLING ON RESISTANCE B'l"Y!NG/SELLING @ 50 % RETRACE.iENT THREE DAY UP/ONE DAY DOWN TRADER TrlREE DAY DOWNJONE DAY UP TRADER THE CONGESTION TRADER FOUR KINDS OF TRADER SANDWHICH TRADER DAY TRADER POSITION TRADER SURE THING TRADER P&L TRADER .
A detailed application.
3
356
IB:REAKOUT TRADER
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Purchase one contract (ct. ) on breakout thru previous congestion high @ 'A' ($5.5I). Next breakout@ B to upside failed@ C, so take profit - @ 57I as breakout gap @D is closed -(5.7I-minus 5.5I = $I,OOO minns 50 commission= $950 profit) .(Equity now $3,400 + $950 = $4,350, equity still enough for only one ct. ) Wait for next breakout: occurs below congestion lows @E - sell one ct. $5.60 market on stop. Retraces to 5.60 @ F - exit market and stand aside @ 5.61 ($IOO loss with commission= $4,250 equity) Next breakout@ 5.72 @ G, fails @ H, loss $100 (equity 4,]50) Next breakout @I , good for fifteen points, ($700 profit) Breakout '0' fails @ K- equity now $4,850 . Profit for period is $!,450 = 42 % return of equity in twelve weeks.
..
357 An even more profitable methid of breakout trading, but ~ith greater risk is to take the breakout @ S.SI 'A' , wiL~ stop loss at previous isolated low 532 ( never hit, but if it did, U're loss was $950 ) and going short at next breakout failure (5.72) @ C (equity now $4,350 ) and using as stop-loss, the previous isolated high @ 588, and hold short until a breakout from a congestion on the upside occurs, that wud give profits, and this occurs @ 558 ( profit 650 after commissions - equity $5,000 ) and going long @ 558, with offset @ 542, until there is a down breakout from a congestion or gap breakout that fails on the upside which occurs @ 598 ( profit $1,950 - equity now $6,950 - 3,550 profit after commissions = 100 % return on money ) • Do u notice that the gap breakout @ G did not really fail, because the low of day 'X' just filled the gap ? Review the rules in the above and see if u can cum up with the format and see if it works elsewhere.
Breakout trading is not too bad, especially if u have a commodity with a trend. The above format, I think is fairly reasonable, and rigid enough to be included as a trading format.
I
THE TREND FOLLOWER
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358
This trader wud have done his homework and assumed that the trend of silver wud be up. He wud always look to buy, take profits, never go short until major ~rend turned down. He's a long ~ermer. He thinks like this : Buy or. breakout opening @A ( offset @ 532) @ 547. Flag develops @B, get out as prices go thru flag about half way to end of pole target ( 6.00 ) @ 580 and stand aside. (profit 5.80- 5.47 = 1,650- 50 commission, equity now $5050 ), and wait for 50 % retracement from top of pole 588 to bottom of pole 532 , i.e. 560 which occurs @'C' and buys again. As price approached previous high again @ 588 @D , he wud be suspicious of a double top and wud take profits on close. (5.84 , with profit 584 - 560 = 1,200 equity now 6250 ) and wud buy again probably if prices went over the high. But it didn't. Prices cracked. He wud still look to buy and wud have done so in congestion @E (stop @542). He wud still be long since prices have gone over 588 and the 580to 590 area seems to provide support. His profit @F if he had closed out, was 6.IO -5.60 = 2,500 equity now $8,750 , a $5,350 profit. Does this make sense ? Do U see how a trend follower only trades on the side of the trend and do U see his thinking as to when he takes profits and stands aside ?
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I3 359
Really a difficult job and I hate it. U want to know why ? Because there are so many chartists putting channel lines on charts and there are stops in the market all over the place, with false penetrations and breakthoughs. I mean, how do U know when to act, unless U use the upper channel wall to trend buck with. But, do U know where to buy ? Sometimes, a clearly defined trend channel exists and sometimes last a long time, but by the time it's formed, it cud be a little late. I don't know. There's not one trend channel in the above I cud be happy with. What do U think. Sorry ! I like trend lines much better cuming up next.
I
TREND LINE FOLLOWER
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360
We assume we bought ~ 538 @ 'A' . We use isolated low/highs for our trend lines. \ole go shor-e as prices go thru trend line @ 'B' @ 572 (profit I700 - equity now 5050) . We go long on break thru an upside trend line drawn thru islolated highs, @ 569 @ C. (Maybe $50 profit after commission - equity now 5IOO). We have a loss as prices tumble tr~u trend line at 'D' of $600 -equity now 4,500 . and go short ( @'D' ) . There is an isolated high @ 562, so we draw a line thru 582 (isolated high) and 562 (isolated high) and we buy as prices go thru @ 550 (profit 450 - equity 4950 ) , @ E . The next trend line on the downside develops thru isolated lows, (542 and 548) and prices go down thru this line @ F @ 56I (profit 450- equity now 5400) and go short. We have a loss@ G@ 567, (loss 400, e~~ity 5000) and go long. We go short @ F @ 574 (profit 300, equity 5300). Go long@ G@ 574 (loss~), go short@ H@ 69I (profit I,ISO- equity 6550). Prices move above down trend line, but we don't have an up trend line thru isolated highs so we stay short and go long @ I@ 59I on close. Profit is S3,IOO - IOO% return on equity in IS weeks. After all that work, don't U feel that the trend line follower is the winner so far ? And, he's already at $8,750 , and took it easy .
lHOW I USE TREND LINES !
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( P & L CHARTING. )
Now, let me show U how ! use trend lines. Part of P&L Charting ) It's going to blow U're mind and cud make U a millionaire. I shall try to go thru it in detail and hopefully U will grasp it. It's incredibly beautiful.I hope U're ready. It's one of mv secret, secret weapons and I'm glad to give it to U. ( Some people wud charge thousands to reveal this one.What the heck. Why shudn't I give this one to U .) Here we go. Before we start, there's one little rule that I wud like to mention. (U will see the trend lines in the following silver chart and know how they are developed by following closely tae description and refering to that chart). But for the moment, I want U to remember a pretty fair rule and the only special caution to my P&L charting trend lines and it is : - always close the gaps
is closed not thru here
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leaving the gaps open can be effective in runaway markets, or wild pulsating markets. Do some work o~ this on U're own.)
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First, we draw a line thru the highs of day 'I' (550) and day '2' (546.50) and we have our trend line.OUr P&L trend line.( remember, always close the gap) • We have a trend line. If prices go thru this trend line we go with it, i.e. day '3'.@ 53B .I shall now draw the lines for U and see is u can figure it out. ( u will !) Draw line thru low of day 4 ( close gap ) and day 5 and sell if prices go down thru it, i.e. day '6' @ 568 . Buy next day @ 568, sell @ 572 (I leave it to U to see why. look at the chart. ) @ day ~ a line thru highs day 7 & 8 , and buy if prices ~o thru,~~- day~ 9 @ 562 . praw line thru low of day 9 and low of day TQ (close gap) and sell as it touches that line @ 5.82 . Please re-read the above and see if U get the message where to draw lines. I've drawn the lines for the rest of the chart for u. If I tried to describe each line I wud be here forever. U shud be able to figure how they are placed. If U have troub-le, take U're time, U will see it. Now, I will review our buy/sells to date, and list them as well as the future buy/sells past !0 on our chart as numbered and see what happens and pyramid with 30 % equity, if we can.
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..
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362
day 3 day day day day day
buy @ 538
sell@ 568 buy @ 568 7 sell@ 572 9 buy @ 56 I I I sell@ 582 I2 buy @ 562 6 7
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sell@ buy @ sell@ buy @ sell@ I7 buy @ IS sell@ I9 20 2I 22 23 24 25 26 27 28 29 30 3I
568 565 582 548 S50 S55
sss
buy @ S53 sell@ S63 buy @ SS2 sell@ 56 I buy @ S6S sell@ 578 buy @ S74 sell@ 592 buy @ 587 sell@ 604 buy @ 589 sell@ 60I buy @ 588
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4900 4850 5050 5550 6550 7550
+ 500(2cts)B050 + 200(2cts)8250 +I,700(2cts)9950 +4,950(3cts)I4,900 + 200(4cts)IS,IOO -I,200(4cts)I3,900 200(commissions) I3, 700 200(4cts)I3,900 +I,800(4cts)IS,700 +2,000(4cts)I7,700 +2,000(Scts)I9,700 -I,2SO(Scts)I8,4SO +3,000(5cts)2I,450 + 900(6cts)223SO +5,I00(6cts)27450 +I,600(8cts)29050 +6,400(8cts)3S450 +7,000(I0ct)42,4SO +6,600(I2ct)49,050 +8,400(I4ct)57,4SO
anc, goodness gracious me, let's stop rite
enough for 2 contracts ( cts. ) next trade. 2 cts. 2 cts. 3cts. 4cts. 4cts. 4cts. 4cts. 4cts. 4cts. Sets. Sets. Sets. 6cts. 6cts. Sets. Bets. IOcts. I2cts. I4ets. I7cts.
~here
and talk a little.
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U know why I cud not hold U're hand thru all of this. If U can't figure out how to do it - keep looking at it - the light will dawn. / Three things
I) .close those 'gaps ' ;t ~ <.:.a..~·d.. 2) act only on the~ 3) don't bother~ith the really flat line as per area '23'
and, then oscillate from an up line to down line ad inf~naturn.
So, in fifteen weeks~, w ve an increase in capital from $3,400 to $57,450 , that's . 689 return on equity. ( U're probably shaking ) ( Maybe it' y U're head.) Give this concept some
!3
363
thought - it's very interesting. And, silver ~as mainly in congestion between 590 and 540 - so much for not being a congestion trader. And, I '!Cl J::.appy to share one of my secret, secret tools with U. However, if e is bo-}: i.s published, there cud be some funny business \going on, because there cud be too man" peop 1 ~ doing the same t_hing Jat the same time, .which is why I will not reveal some of -;:,y more \ definitive tools. Be that as it may, if the market is determined to go in one direction, it will do so in spite of any fancy, little technique, no matter how widely it is used. We shall see what will happen.
\l
Now, let's assume that once u reach $50,000 equity, that U withdraw any amount over fifty thousand dollars from U're account ( and give it to U're favourite charity - namely U'reself ) , and accordingly at 30% equity rule, U're maximum number of contracts with silver will be IS contracts. O.K., using my trendline system, ( a 'line' in Point & Line Charting! ) , silver has given 2!7 points in the last fifteen weeks of trading ( after commissions ) . That's an average of I4 points a week. Let's lop off two more points for bad fills, or whatever, that's I2 points profit per contract of silver per week after commissions and bad fills. Let's lop off another four points - what the heck, why not ? Let's use that eight point per contract per week. For silver, at 30% equity of $50,000 at IS contracts per trade, for the year ending after the IS weeks, i.e. 37 more weeks .•••.. at the end of the year with the above constants U wud have equity $50,000 ( end of IS weeks ) plus, 8 points at $50 a point = $400 per week times IS contracts $6,000 per week. ( Cud U live with $6,000 income per week ? ) for 37 weeks cums to $222,000 plus the $50,000, gives U an income for the year of $272,000
=
Cud U live with that ? Give it some thought. And, U started with $3,000 , in this illustration, in any case. With other aspects of P&L charting , it is possible to tune it even finer. Take the above trendline system, get U'reself a graphyig enough to visualize the high/lows effectively, and see i f U can see anything. Remember, actual market conditions are something else. Actually, I doubt very many people will be successful with this technique because ofour little friend called human nature. At any rate, good luck.
364
THE 'TREND BUCKER
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Use trend line ( t.'l-le -~usual' {not P&L) trend line ) , after prices have been up 2 or 3 or 4 days to short against and wait three days to take profit.
Day A - short @ 573 (3 days up ) - take profit 3 days later @ B - happy with 562. Profit $450 Day c - short @ 587 (4 days up) - profit 3 days later @ D - happy on opening 565 Profit $1050 Day E - short @ 585 (3 days up) - take profit 3 days later @ F - happy with 555 Profit $1,450
·-
365 Day G -
short @ 567 ( 3 days up .... the iden~ical closes in the 3 previous days', 56I count as one day up ) , take profit 3 days later @ H - 'happy' with close @ 557 . Profit S450
There is no hit on trend line '!' Day J - short @ 603 (2 days up) -)take profit $400 , 3 days later @ K - happy wi~~ 594 Total profit $3,800 - over IOO\ return on equity in IS weeks. Not bad. Who says trend bucking doesn't work. But do U see how conservative I was ? Only five trades. The 'rule' criteria I used makes sense to me - but it is arch conservative. It illustrates that the prime trend bucking points occur infrequently. But why not wait for the loaded trades ? With SIO,OOO equity @ 30 %, U wud have capital for 3 contracts - profit $I!,400 $760 per week. Not bad. Our problem is when to take profits. I use 'happy' as terminclogy, for when U wud be content to take profits. ( not reverse U're position ) .
!BUYING/SELLING
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366 _;::; thil?. ca.se, we are b-.Jying, because silver is in a major trend ~~. We look to buy the contra-trend down. Rules: - buy 2-4 days from an isolated high, looking for 50 % retracements &/or support areas, utilizing chart patterns as guidelines. Day A - 50% retracement @ 555, but flag formed, use bottom line of flag to buy on day I-. @ 560 - take profits @ trend line @ B @ 587 - stand aside. Profit $!,300 Day B - wait 2-4 days, look to buy. We have support @ 560 , buy day B - a good bet because of support. ( This approach is a bit more subjective, isn't it?) - hold to sell @ trend line @ C @ 585 Profit $I,I50 Day D - wait 2-4 days . Wait to see if challenge to support is successful- it isn't- wait and buy in congection@ D @ 550 Look to take profit @ 50\ correction up, @ 563 , (terribly subjective!) Profit $600 Day F - wait 2-4 days from isolated high to buy near support @ 548-50, but try trend line @ 553 Buy, prices ccngest @ G- take profit, stand side @ 577 Profit $I,I50 Day G - buy in support area 'H' @ 565 , sell @ trend line @ 604 Profit $I,900 Day I - buy @ support @ 'I' we're still long Total profit, $6,IOO fifteen weeks.
, !79 % return on capital of $3,400 in
Do u see how nice and relatively safe contra-trend buying can be ? And profitable. Good for huge numbers of contracts. U can accummulate quietly, and is less well defined than the parameters of P&L Charting, wherein U mite feel obligated to act in a very small frame of reference. ( U can't beat L~e 'trees' .)This is fun and profitable type of trading. Perfect for telephone booth trading. Use P&L charting to support this approach and U have it made ! It's ~o easy. If the trend is up, look to buy L~e down contra-trend at the last. fresh, support area,nor in the region of 50 % , keeping 'n mipd congestions that are either continuation or reversal and take profits off trendlines from the upside or 50% corrections up, as in'E' in the above and one I did not include in above @ 'J' !
~
Good luck. This is one of the best and easiest and slowest ways to trade. - They're usually loaded. Have the patience to sit on U're cash for the buy point and sit on U're trade until profit areas are reached. U and U're broker will be very happy, as this is one of the best ways to trade. u cud be in commodities a long, long time. But, first, p must know whether the major trend of the commodity is up or down. The answer is on the pages of this book !
l3
367
BUYING SUPPORT
Support exists thru lines A, B, C, D, E, • Any time prices approach one of these lines we will buy and take profits @ 50 \ up retracements or resistance Day Day Day Day
: -buy @ 562- sell@ up 50% retracment@ day '2' @ 573 Profit $500 3 - buy @ 562 , take pro=it, stand aside @ trend line @ 585 Profit $1,100 { Note on day '4' , prices gap thru support l~e ) 5 - buy on support line 'A' @ 550 , sell @ 50 % retracement up @ day '6' @ 564 Profit $650 7 - buy as prices approach two support lines 'A' & 'C' @ 552 ( We cud take profits as prices hit resistance line @ '8' and buy on close day 9 @ 564 , assuming that resistance line D of the pennant congestion will hold, but we won't wait for our calculations! ) Hold ~7 until trend line hit @ '10' @ 579 Profit $1,300
368 Day II - buy @ support line 'D' @ ¥!! @ 565 , hold until trend line @ #12 hit @ 602 Profit $1,800 Day !3 -buy@ 583 and we're s~ill long Profit for buying support areas and taking profits @ trend lines, resistance or 50% up retracements is $5,350 - no losses - I57 % return on equity in fifteen weeks. Who needs fancy, expensive moving average, weighted average lines ! Another example of how easy trading can be. But do U notice we operate by rather specific criteria. At least it's fairly well defined. I really pray I am not leading too many people down the garden path. But the above seems so very obvious. Just take the above criteria to a few charts and see what happens. Really, shudn't everyone be able to succeed in futures trading ??? The above guidelines alone are sufficient to achieve a workable format for success, let alone any programs r have presented so far and yet to cum. ( Take U're pick ??? ) I guess the reason is that most traders do not have the patience to sit on their cash to wait for the ·buy and sit on their trades to wait to sell. They have to fiddle with the market, and are more st~ulated by the activities of the market than they are by making money. What do U think.
SELLING ON RESISTANCE ·---
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369
This is really trend bucking. In this case, since the major silver trend is up. But here ~e go - - we will take the first challenge of a resistance and use support to take profit. Day : - take first challenge of resistance ( refer to appropriate section in this book to know why we take the isolated high @ 574 for resistance) , @ day #I and sell @ 572 (stop-loss on close above 574) Take profits on a correction, assuming a flag formation, day #2 @ 563 Profit $500 Day 3 - take next first challenge back to resistance line 'B' , take profits @ support #4 @ 564 Profit $400 Day 5 - take first challenge of resistance line 'A' @ #5 on close and sell @ 583 . Do not take line B for profit because we do not yet know if this old resistance line has becum a support, which it hasn't . Take profits @ 550 support area@ #6 Profit $1,700 Day 7 - sell and take first challenge of resistance of 558 and take profits that day as prices reach the support area of 550 (sold 556,bought 560 day trade) Profit $250 Dav 8 - sell on resistane (old support) line c also there is a trend line thru tops of the last four days. Sell @ #8 @ 567 , buy as prices approach 550 again ( there's a trend line there, can U find it ?) @ 552 @ #9 Profit $700 Day IO - short first challenge to resistance line @ IO @ 567 (stop -loss on close above 559) .Take profits @ trend line thru pennant bottom line @ #IOb @ 563 (hardly worth the risk) Profit SIOO Day II - take first challenge of resistance line 'F' @ day #II @ 579 (stop-loss on close above 580) - stoppec out un close @ 583 Loss $250 Day I2 - take first challenge of resistance line G @ day !2 @ 592 (stop=loss on close above 593) We were stopped out on close @ 592 @ day I2 with loss $200 Day I3 - take first challenge of resistance 604 and sell @ 602 (stop-loss above 604, close only) take profits day I4 @ support area @ 584 Profit $950
Very interesting, isn't it? Did u learn anything ? Resistanc~areas in an up market are fascinating. Usually if the first challenge to an isolated high is successful on close, per day #II , it means that the resistance is actually support and market is going up much further. Do U understand? Total profit was $4,150 and !22% return on equity in fifteen weeks. All this is very subjective, I agree, but it can be dona. - and we did use some objective guidelines, did we not? Note. We cud have taken a trade between day 'X' and day 'Y' I leave it to U to see why.
.
370
I BUYING/SELLING at 50% RETRACEMENT
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Take isolated high 'A' (586) and add to it isolated low 'B' (533) and divide by two and U have $560.50 and this price is reached @ day #I , which is a 50% retracement down from the high 588 and buy here for day #I Day I - buy @ 56I - sell @ 50% retracement up from low C (560) towards high 588 and this 50% retracement equals 574 . Sell/reverse @ day #2 @ 573 Profit $550 Day 2 - we are short here at 573, and we buy again old 50% support area and reverse and go long @ 562 Profit $500
I3 37I we are long @ 562 and since we have a major up ~rend in silver, we assume that the next 50 %move up might not stop there. Take profit on first sign of weakness from old top, on day #4, possibly on close @ 575 . We do not go short because we do not have any 50% to go by (altho' the 575 area did seem to hold once again.) Profit $600 Day 4 - sell on day 4 as it is a 50% correction up from the low 'D' @ 543 from previous high 'A' @ 588 ( (588+543)divided by 2= 565.50 J • Sell @ day ~4 @ 565 Hold to buy and reverse @ 50% correction down from high 569 (E) to low 543 (D) i.e. 556 , which we do on day #5 Profit $400 Day 5 - we are long @ 556 and hold as prices go thru previous 50% retracement (E) and take profits on trend line @ 575 day #6 and stand aside because we do not have a 50% to go by. We are interested only in taking a position in the market by the 50% rule, not to take profits ---If a 50% is there to take profits, fine, but, if a strong resistance area, or trend line exists, why not take profits and stand aside. Profits $900 Day 7 - high 580 (F) plus low 55I (G) divided by 2 , equal 565.50 , so we buy @ 50% retracement on day #7 @ 566 and where we take profits I leave to U, but I take day #8 on trend line @ 603 and stand side Profit $!,800 Day 3 -
Day 9 - is a 50% retracement from 'H' to 'I' @ 593 , so we buy. We cud take profits at old highs, for other reasons, but otherwise for our present argument there's little reason to do so. Place stop-loss after prices challenge 604 @ 594 to cover commissions. Profit/loss is zero Day IO - buy @ 50% retracernent 584 from 'P.' (604) to 'J' (564) -we are still long. Profits $4750 - I39% return on equity in fif~een weeks. Are u interested in 50% corrections? Does it make sense to U ? Cud U derive a trading plan with builtin rules and constants and stick to it ? Do U have the patience ? Wud U use my approach for 50% corrections ? Do U see what this author's rules of the game were ? Do U see how these rules of the game flowed thru IS weeks of silver trading ? Do U want to apply these guidelines to another commodity that has a past history to see if it werks ?·Give it same thought. We made $4,750 on the above experiment and we didn't use stops . So much for stops ? (Please note that in the last few approaches that as we approached $7,000 equity, I did not apply our 30% equity rule, and increase the number of contracts to two contracts for any trades at that point. If I had done so, the above profits wud be somewhat higher. If U wish, go over my work and increase the profits accordingly .... maybe a good exercise for U.) (In the following approaches l will increase the number of contracts if the $7,000 equity figure is hit and build on that too. )
372
3 DAY UP I ONE DAY DiJ'Vv'N TRADER 3 DAY DOWN I ONE DAY UP TRADER
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These guys have a fascinating time. _Every day a market goes up three days in a row, they look for a place to sell ang take profits the next day. They sell on trend l~es and resistance during that third day up. They look to take profits the next day. usuaJJy op close, unless there's a trend line or support to the prices, where they will act. The reverse holds for three days down, and one day up. Let's see what these guys are up to. _.-Day I - third day up, take profits the next lows on day #2 @ 564 one day's work. Maybe
so we sell on trend line @ 573 . We look to day, which wud be good @ trend line thru . Stand aside. Profit $400 (Not bad for these guys are on to something.)
Day 3 - the next third day up, we find a trend line @ day 3 @ 583 on cl9se, so we short. We take profits the next day on close. (The high of that day bounced off a trend line, so why not wait 'till close?), on day #4@ 572 • Profit $500 (Not bad.) Day 5 - was the third day down, so we look to buy. 563 looks good @ trend line. Buy on close. Take profits next day on close
@ day #6 @ 569
Profit S250
( Not bad. )
.:
373 Day thi=c day up, on trend line, sell @ 584 . Buy on close the next day @ day #8 @ 576 ?ro::it $350 (Note how t=end lines a=e many minor trend lines. ) Day 9 - third day down - buy on close @ resistance line 'A' to take profit. somewhere this day and the resistance so why not take profits?) Take profit
@ 553 . Sell next day #IO (We have to take orofit area is being challenged, @ #IO @ 56! Profit $350
Day II - is the next three day segment. (We had to wait three weeks !!!! ) we buy the third day down@ #II@ 552@ trend line. The next day we have to be satisfied with 556 on day #I2 . Profits $250 Day !3 - we sell on close @ 566 (three days up). Take profits next day @ 563, day #14 Profit SIOO Day I5 - three days down, buy @ 566 (trend line) and sell next day @ 574 on close. Profit $350 Day !6 - three days up sell trend line on close @ 604 . Buy on close next day @ 592 Profit $550 Total equity now $5,800 , profits $2,400 This is a fascinating game. I occasionally use it to trade with, but actually I use this three day rule to analyse corrective moves to the market. I don't wish to give U any ideas, but do U see how the market moves in three day segments, a~ost three day swings, three days up, three days down, three days up etc. I apply this rule generally in ~~--~~~--~~;~~-~~ ~~~. ~~-~~~- --· -~---· ' .. H - ·:::-~~--~ .--==:=L= __ .. -- -- 1 - -- .:.t . I l . : · . . , . =.-=j =-=t__,_-.-1~--. ·_1 - · "- ==:.±::=.: ____ -=.:=±-==t::.-===:1.'-':i=:-i=--==1=-:=;:::=::r~-:t.'..-'---':'- :._::r ,i-___::;-·--,. ·-·- ~---=----···-··--··-·-----·~ --~-::.=--~ -·-·- -:J ·-'----· . __ .:__ .::-=~---{~-
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every market I trade, and is part of my P&L system. If I wish to be a position-swing trader, I look for some justification to reverse myself every three days. It's just a guideline and more often than not let's me pulse with the market. Please do not get too many bright ideas about this, but a commodity that is no~ a runaway market ( I hope U know what a runaway is. ) , is~a commodity that runs in these three day cycles. This trader uses this concept to know that every three days, something is up and to be looking for it. That is why as a position trader (who occasionally day trades ) , I find myself switching positions about every three days, unless I'm into a roaring bull or ranting bear. (What can I say?) (I'm just trying to help U.)
CONGESTION TRADER --·-------
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A very subjective creature, but very astute and usually experienced. He can sniff out a congestion and play his little games, with his set of guide lines. See if U can understand from the following
375
what his guidelines cud be.
Day I -prices are on a trend line so I'll go short ~ 572 and see what happens. Take profits next day @ 566 Profit S250 Day 2 - I will risk shorting into previous high 574 as I think after that long run up there will be a resting of prices. Short @ 57! . Profits next day thru imaginary bottom line of a flag @ 562 Profit $400 Day 3 - buy at bottom of flag congestion. Take~profits next day @ 582 . Profit $950 Day 4 - prices @ support - buy 562 - sell @ 50% retracement reverse @ 573 day #5 Profit $500 Day 6 - (short from 573) buy, reverse @ support again - in congestion! - profit @ 562 is $500 Day 7 - hold long 562 to see if market challenges old high 588 It does - short @ 583 , reverse on close day #7 , market probably in congestion between 588 and 560 . Profit $1,000 Day 8 - hold to see how 560 challenged - prices break thru so he holds short 583 , takes profit @ 550 (50% retracement down) Profit $!,600 Equity now $8,100 , enough for two contracts. Now the congestion trader may bounce up and down in the congestion. For our argument, we will just go long at the bottom of the congestion, @ day #9 @ 550 . Take profits @ 50% retracement up @ 565 . Profits (2 contracts) $1,400 Day IO - buy @ 552 and sell and take profits and maybe go short on first challenge to 569 on day #II Profits (2 Cts. ) $!,600
Our equity is now $I0,300 and we're getting into formidable profits, but I wish to stop right here. Congestion trading can be very subjective, because U can find many variables why u shud take a particular action and this author cud cum up with one for any point I wished to choose I may be leading either U or myself up the garden path. conoestions are easily recognized, particularily with P&L charting, and easily traded and profits easily procured, ~f U're experienced or aware. Develop a congestion area plan of U're own to have ready when prices rest. Look for
I. support and resistance lines 2. trend lines 3. 50% correction areas 4. flag,pennant,reversal formations or other chart formations 5. 3 days up/down patterns
And, then analyse breakouts ner chapter seven and nine.
376
To civerge somewhat, this a~thor wishes to categorize what he calls the four kinds of trader. I. 2. 3. 4.
sandwhich t.rader day-trader position trader sure thing trader
This author switches from one to the other to relieve boredom or to meet market conditions. The sandwich trader is the big-time
trader with perhaps millions at his disposal. He will have done his homework, his fundamental homework, and waited until the market had already commenced its' move to confirm fundamentals and then applies his technical tools to enter the market. In a bull market he will have sandwiched himself/herself above the lows - he/she may have already started to buy near the lows - testing the market, and as prices enhance upwards, he commits more to the market, and sits back and waits, waits for the moment of truth when finally prices move upwards. He/she never sells at the top. He/she is happy with calling the long-term market correct and very quietly gets out and moves on to another market already being studied for months. This trader sandwiches himself in between the top and bottom and is quite content to be there. U never see them cuming and U never see them going, except possibly via volume analysis per chapter two. Their entry and exit is unobtrusive and never rocks the boat. It's the ardour of the public who wants to get rich quick who creates those wide swings. Someday, u shud be a sandtdch trader, if U persevere. There's lots of room for everyone. The next trader is the day-trader, who may not hold a position over nite. Perhaps he takes that three days up/down and gets out that day, or the nex~ day.
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swingdsl~ was dtellhing U. at~outf, maybde selling on
tren ~ne an t en wa~ ~ng or a ay ~ or two to find an excuse to buy and reverse again. ( This is a very / delicate operation. ) or he may just be that 50% trader, buying selling support/resitance. He most certainly has a trading plan and style and is experienced. The next style is what I call the sure-thing style. This person will wait, and I mean wait, for what he calls a sure thing and then mercilessly hits the market with everything he's got and pyramids. Let's look at these people.
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377
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I. SANDWICH TRADER He has done his homework and is bullish on silver and if given only this chart, he may have waited for the correction @ 'B' or we cud assume he accummulated at 'A' or previously. He's happily sandwiched in above the lows and is probably getting out now in area 'C' , or is he? Who knows.(U'll never see him.) (He's probably still in the market, because we haven't had much of bull volume blow-off yet, have we, with huge swings, limit up, limit down, or whatever. ) Tell me, however, if u had 300 contracts on ( margin $300,000 , equity 900,000 ) wud U be happy with U're 550 or whatever move to 595 move, with a 44 point move and $660,000 profit • Now U see why he moves so quietly.
378
I
2.
wAY -
TR..<\wE?. \
Let's say his game plan is to act only against the market on trend lines and looks for 6¢ profit after commissions. He gets his wish on days 'X' ( can U find the trend lines ? ) , i.e. seventeen days. Waiting out the market and waiting for these particular days (we're being subjective) and taking the above criteria, and if he stated with SIO,OOO equity ( 3 cts. to start with ) then in the fifteen weeks, pyramiding with the 30% equity rule, up to IO contracts on the I7th day trade , the equity is $38,800 , a profit of $28,800 . Do U see why this trader likes to occasionally day trade ? It's fun and profitable. I usually limit a day trade to sure-thing trades, cuming up shortly. Consistently successful day-traders stick to a trading plan. There's plenty of material for U to stick to, if c wish to be a day trader. The market is U're's to do with as U wish. 3. POSITION TRADER The position trader's dream wud be somehow to get on the swings I to 2, 3 to 4, 5 to 6, 7 to 8, 9 to IO, IO to II,to I2 toi3 to I4 to IS to I6, and then up. U say this is crazy. Who can pick the exact tops and bottoms. So U say ! Let's look at what each was: Day I - we'll assume for some reason it was a buy. My reason is that on day 'X' prices moved above trend~. line. That's good enough for me. Day 2 - prices hit a trend line third day up. Sell Day 3 - bottom of flag - continuation congestion. Buy. Day 4 - trend line. Sell Day 5 - support area. Buy Day I6 - SO% retracement up. Sell Day 6 - support area. Buy again. Day 7 - previous high challenged (stop-loss above 588) . Sell Day 8 - 50% correction area. Buy Day 9 - 50% up correction area. Sell Day IO - 50% correction area, the support area . Buy Day II - trend lines from all over ~~e place hit this area. ~ell Day I2 - support @ 562 (last congestion bottom) Buy Day I3 - trend line and target area (604) . Sell Day I4 - SO\ retracement. Sell Day IS - double top ? Sell Day I7 - support 583 . Buy Impossible to pick bottoms, tops ? Garbage
All I did was look for
379
a) trend lines support ( to a major trend c) 50 % corrections d) resistance challenged b)
And, that's all I used - four tricks. And U say U cannot pick the swings. One thing tho' - U do not know whether one of the above will be the permanent top or bottom to the market. D cannot assume this. Use long term charts, (Monthly, weekly,) market psychology, fundamentals, reaction to news, or whatever to achieve this. 4•
SURE - THING TRADER
I
Looking for moments of unusual appeal. These are the moments that are second on my list of priorities. First is sandwiching - long term analysis. Swinging and day trading are just part of the act and keep this author entertained with wins and losses. The second big moment is the surething trade. A surething trade to me is over with quickly. Usually in about three days. Naturally there are myriads of sure-thing situations, but there are ones that are incredibly loaded. Our example : - 'loaded trade' on our chart. Let me tell u why. The price on day #7 is a challenge to old high of 588 . That day saw a gap. Most of the trading was between 582 and 587. There was a wall of sellers @ 587 and I wud join them - heavily The high of the day was at the trend line thru the highs of the last three days. - perfect. It was the third day up.-perfect. We have a trend line thru the lows of that and the previous day, thru which if prices passed the following day, the bears are in control. It's high is on the 'channel wall' (P&L) for the day. It's 14¢ on from the previous day's dot (P&L), it's past the 3 'dots' on (P&L) . What happens if the bulls panic Everything, absolutely, and I mean absolutely everything for a potential short term, ferocious bear crack. (They cum up in silver about every 2-3 months lately}. I wud run to the old sock and hit the market with everything I had, on day #7 @ 584 area and I wud have been long gone the next day i f prices were over 586 . I ~~a have pushed prices thru stops I wud have covered so fast. It turned out I was right. Prices gapped down the next day. Let•s say I had $25,000 capital. I wud have committed the full capital to this loaded trade .•.. the only, and I mean the only time I break the 30 % equity rule. I wud be short 33 contracts @ 583-4 Every 5¢ down from 583 I wud have shorted IO more on stop, but only while in congestion. My game plan wud be
380 Day I - short 33 cts . . . . . 583 ::::ay 2- short IO :::ts. 578 only ( stop loss 586) I short on scale down ·:? 5¢ each day only ! Day 3 - short IO cts. 573 (stoploss 586) I ~~d have been satisfied on third day down to take profits on close .. We're talking here of those special, special days, wn1cn cum now and then. To this author, these are situations of unusual appeal. To other traders, maybe following the trend is the sure-thing trade. In my sure-thing trade, or unusual appeal, I nailed home $66,700 with the $25,000 equity. Perhaps one shud wait with huge capital for these kinds of trades and do nothing else. Draw u·· re list of sure-thing trades and look for them. Actually, U will be surprised how often they occur.
381
p &L TRADER
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lcay ~ rfwe wud buy@ 5.38 as Prices rose thru rnv 't::-end line' (close gap). Sell and reverse on Jdav because of trend line :2 572 , Plus 3 days up, I4¢ abo'lLf! 'dot', 3 dots on & on channel wall @572 (see P&L charting chapter nine) . Stav short assuming a three day Pause to see if dot swings off main channel line, which it does on day ~5. confirming short position, look to buy at 3-4 days into continuation (?) congestion, flag, bottom trend line thru lows. Buy day #6 @ 562 and hold. (also, this day saw the low of 559 as touching as outer channel wall - a line drawn 7mm parallel to the right of the main up channel line) and look to sell. Sell the day following the third day's up strong close, when prices approach the trend line, sell @ 586, day #7 which is also the main channel wall (drawn 7 mm out to the left of ~ up dots of main channel line) and which is also I4¢ on l from dot of previous day and 3 dots 'on' . Hold this ~position, because that day's action forced the dot off the main channel line, so further selling will occur. Look to buy. Buy @ 562 , day#S which is at a trend line as well as the main channel (down) wall, as well as a support area and 50 % retracement, as well as I4 ¢ below previous day's dot, 3 dots down, and three days down. Look for market to rise three.·days. Look to sell. Sell @ 573 day #9 , a 50 % r~tracement up, and third day of attempting to rise plus it is the outer channel wall of down channels, as well the dot of the day before turned flat, indicating selling pressure. Look to buy. Probable congestion above support 560, as dots snake sideways. Volume dries up as prices touch 560 again. Buy 562 Day #II at bottom of congestion. Hold, wait to sell approximately three days later. Do so @ 585 day #I2 at trend line and challenge to old high 588, resistance. - gap opening that day - I4 ¢ on, 3 dots on, - temporary exhaustion gap - breakaway gap ? - wall of sellers. Hold. Look to buy three days later, - prices gap thru support @ 562 . Hold, wait for dot to move off main(down)channel line. -wary of bear cracks ! Dot moves off on day# I3 so buy following day in 55~area. Stand aside - do not go long until a pattern develops. Possible congestion, dots swinging and pulling together, so look to buy. Buy day #I4 as prices touch a line drawn thru the dots as they are swinging @ 545 day #I4 (a little trick). Look to sell - cannot sell - no confines presented to congestion. Look for 'T.R.' t~ be hit on upside. Market is 'digging in' and T.R. will re 1 ieve this supper t pres sure (see section on hitting ,digging chapt. nine) In spite of this release, support is there. Look to sell. Look for breakout on upside and sell three day's later ? Breakout occurs day # IS , look to sell
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383 and reverse 3 days later - which we do @ 568 day·#I6, a trend line. Dots are crunching up - selling pressure hold short - look to buy 3 days later. Gap opening day - hold short because prices are falling from 'crest' not a runaway bear. Look to buy @ support plus trend line @ 554 day #IB and reverse, of course hold long minimum of three days. Sell day #!9 @ 567 challenge to resistance @ 569 , plus I4 ¢ above dot and 3 dots on. Buy on close @ 563 of day #20 because dot just catching up and prices stopped on main ·channel line (a little trick) Sell day #2! @ 57! as prices reached a line that is parallel and out 7 mm from main channel line. - the main channel wall. Buy once again on close that day because close is on main channel line and and dots have not swung, buy day #2I @ 565 The next day is quiet and dot swings off main channel line and swings flat. It swung too fast. Look to sell next day day #22 Do so on main channel line @ 570 and reverse, of course. On day # 22, prices were such that the dot that day turned up. If sellers were in control, the dot wud have turned down. Signal given day before when dot swung off main channel line flat - prices were oversold that day, the day before #22. Therefore, since I do my dot calculation one half hour before close, I saw that the dot turned up day #22 so buy on close Day #22 @ 564 Look to sell and reverse 3 days later. Do so day #23 @ 578 which is a trendline as well as the old main channel line. Suspect temporary top, because when prices stop on old main channel lines, and when prices slither up outer channel, expect a correction. Look to buy 3 days later. Do so @ day #24 @ 565 a support area and 3 days down, as well as a 50% correction (580 to SSI) Hold long, look to sell 3 days later, but notice dots, how tight they are together around day #24 This means incredible buying force, since dots are down and buying force is sufficient to keep those dots tight together, altho' bears still in control. The bears will exhaust themselves and short-cover, so expect extended move up. Sell day #25 @ 592 as it touches main channel wall ~hird time. Prices will fall away. The dot the following day pulls off main channel line so expect selling pressure day #26. Look to buy 3 days from day #25 .Do so on day #27 @ 582 , which is the outer channel wall, silver usually takes 3 days to fall out of outer channel, if it's going to, as well as support @ 580 Dot turns up that day, so hold long - look to sell and reverse three days later, do so @ day #29 @ 604, which is a gap, plus the old main channel line, plus a new channel wall out 7 mm from last row of dots, - a set-up for a bear crack, but there is no previous high to be challenged, so not
384
a sure-thing trade for heavy committment. ~lso, 604 is the meeting area for ~yriads of trend lines plus I4 ¢ on . . . . look to buy 3 days later. Do so @ day #30 @ 590 which is a 50% retracement plus support area. Look to sell 3 days later, but can't because trend line hit @ day #3I @ 604 , reverse of course. Close is off highs for day from the challenge to 604. Volume is heavy. Suspect bear crack, but look to buy 3 days later. Prices do not crack, but slowly, and orderly progress downwards for 4 days. Assume support @ 582 and buy @ 50 % retracement 584 (from 604 to 564) @ day #32 • Market cud be expected to crack, but i t did bounce off a major support trend line thru 550 - 552 - 564 to 582 . The dot swung the day following day #32 . The market exploded from here, and we will stop.
This author tried to keep i t simple for U as I went thru the application of P&L charting to the silver chart. Do U see how I made use of the 'dots' swinging off the main channel line, as well as use of channel.walls (main & outer) - distance of dots to each other? The use of trend lines, support, resistance, 50% retracernents ? It will probably take U a couple of months to understand. But, have faith. It's there. And all very rationale. SCORE SHEET
Day #I buy 3 sell 6 buy 7 sell 8 buy 9 sell I I buy I2 sell !3 buy 14 buy 16 sell IS buy 19 sell 20 buy 2I sell 2I buy 22 sell 22 buy 23 sell 24 buy 25 sell 27 buy 29 sell 30 buy 31 sell 32 buy
profit 538 (& reverse) 572 I650 562 450 586 IISO 562 IISO 573 IOOO 562 IOOO 585 2200 550 stand as_.=.= sroo 545 568 (& reverse) 5500 554 3900 567 4200 II 563 900 57I 3I50 II 565 2500 570 2200 " II 564 2750 II 578 7800 565 9000 592 22100:: 582 I0800 604 28350 590 23400 604 27950 584 48450
..
no. of cts.
2 2 2
3
equity 3400 5050 5500 6650 7800 8800 9800 12000 I7IOO
24 27 36 43
22600 26500 30700 31600 34750 37250 39450 42200 50000 59000 BIIOO 91900 !20250 143650 I7I600
51
220050
5 6 7 9 9 IO II .....--..~. 12 IS I7
.
('A bit frightening isn't it ? $ 220,050 after fifteen weeks, tartinq v.•ith S 3,400 ( pyramiding with 30 % equity rule. ) Take it easy. Take U're time. Take a few months , maybe a year or two, and U v.•ill get on to Point and Line Charting. Read this book and get to know it thoroughly, and when U know and I mean know all the basics of volume, whatever, plus some guidelines from Point and Line Charting, - svmeday, some.how, someday U can put it all tog~ther and cum up with favourable results.
Take it easy, keep things simple, but persevere. Study, and study, - the light will dawn. Have faith in U'reself that U can do it but study, study first. Take U're time. If U're going to make $ 220, ooo in fifteen weeks someday, ·- U 're got plenty of time. For gosh sakes, don't rush out and apply Point and Line Charting to U're trading account. Take months· please take months, maybe a year, until U've got a good grip on it. And, when U do, don't let go. A bit of a warning: U may becum such an expert that some day U may start to blow U're brains and day trade with P&L and make mistakes. Look at theborrendous losses in my debit column which follows.
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385
LIST OF PRICES FOR THE DEC. '78 CHIC.
CHSILVER 7812 DATE OPEN
START
780630 780703 780705 780706 780707 780710 780711 780712 (780713 780714 780717 780718 780719 780720 780721 780724 780725 780726 780727 780728 780731 780801 780802 780803 780804 780807 780808 780809 780810 780811 780814 780815 780816 780817 780818 780821 780822 780823 780824 780825 780828 780829 780830 780831 780901 780905 780906 780907 780908 780911 780912 780913 780914 780915
543. 50 544. 00 546. 00 541. 50 539. 00 545. 50 544. 00 546. 00 548. 50 544. 00 539. 00 538. 00 539. 00 545. 00 557. 00 570. 00 563. 50 563. 50 560. 50 580. 00 574. 50 588. 00 573. 50 568. 00 565. 00 571. 50 568. 50 566.-50561. 00 573. 00 581. 00 581. 00 577. 50 561. 00 562. 00 547. 00 554. 00 543. 00 555. 00 550. 50 553. 50 551. 00 559. 50 563. 00 562. 50 564. 00 564. 50 559. 50 554. 80 552. 00 558. 00 559. 50 564. 00 565. 50
HIGH 546. 50 545. 00 546. 40 541. 50 543. 50 548. 80 545.80 548.00 550. 50 544.00 539.00 541. 00 543.00 557. 50 _574 .. 00 57o.·oo 573.00 567.00 571. 00 583.00 583. 50 588.00 575. 50 571. 50 570. 50 572.00 574. 00 569.60 572. 00 579.00 585.90 581. 00 581. 50 562. 00 562.00 555. 50 555.00 555.80 557.00 554.80 557. 60 561.90 563.90 564. 50 568.30 569.00 566. 50 561.30 555. 50 557. 50 559. 90 567. 50 566. 00 572.00
LOW 538. 50 541. 50 540. 50 534. 00 538. 50 544. 30 542. 60 545. 50 541.00 541. 50 532. 50 536. 50 536.00 545.00 553. 50 562. 10 562. 50 559.00 558. 50 572.20 573. 50 570.00 567.00 560. 50 563.60 566.00 561. 50 560.60 561. 00 572. 50 578.00 572. 10 564. 50 551. 00 545. 50 545.60 548.00 543.00 551. 30 549. 10 548. 10 550.00 557.70 558.00 561. 70 562. 10 560.60 555. 50 551. 10 552. 00 556. 50 558. 50 562.00 564. 10
CLOSE 541. 30 543. 50 542. 70 536. so 543. 10 544. 70 545. 30 546.20 542. 60 543.30 538. 70 539. 10 541. 60 557.00 566.80 565. 30 567.70 563.90 570. 70 574. 50 582. 50 572.00 568. 50 562. 50 569.80 569.80 566. 50 562.20 571. 20 575.80 583.20 575. 50 568.20 552.70 552.00 554.80 550.30 554.90 555.70 552.40 549. 70 561. 70 560.30 561. 20 567.90 567.60 564. 30 556.20 554.80 556.30 558.60 566. 60 563.60 565.70
HLC 542. 1 543.3 543.2 537.4 541. 7 545. 9 544.6 546.6 544. 7 542.9 536. 7 538.9 540.2 553.2 564.8 565.8 567. 7 563.3 566.7 576.6 579.8 576. 7 570.3 564.8 568.0 569.3 567.3 564. 1 568. 1 575.8 582.4 576.2 571. 4 555. 2 553.2 552.0 551. 1 551. 2 554. 7 552. 1 551. 8 557.9 560.6 561.2 566.0 566. 2 563.8 557. 7 553.8 555.3 558. 3 564.2 563.9 567.3
SILVER
AHLC 547.8 543.9 542. 9 541. 3 540.8 541. 7 544. 1 545.7 545.3 544.7 541. 5 539. 5 538.6 544. 1 552. 7 561. 2 566. 1 565.6 565. 9 568.9 574.4 577. 7 575.6 570.6 567. 7 567.4 568.2 566.9 566. 5 569.3 575.4 578. 1 576. 7 567. 6 559.9 553. 5 552. 1 551. 4 / 552.3 552. 7 552.9 553.9 556.8 559.9 562.6 564. 5 565.3 562. 6 558.4 555.6 555.8 559.3 562. 1 565. 1
780918 780919 780920 780921 780922 780925 780926 780927 780928 780929 781002 781003 781004 781005 781006 781009 781010 781011 781012 781013 781016 781017 781018 781019 781020 781023 781024 (781025 781026 781027 781030 781031 781101 781102 781103 781106 781108 781109 781i10 781113 781114 7EH 115 7E31116 7E5111 7 7!:~1120
781121 781122 781124 781127 781128 781129 781130 781201 781204 781205 781206 781207 781208 781211 .781212
563. 10 562. 00 568. 70 565. 00 571. 50 562. 50 570. 50 570. 10 577. 00 576. 80 577. 50 572. 00 570. 00 578. 00 569. 00 575. 50 580. 00 572. 80 578. 00 579. 00 567. 00 564. 00 576. 50 564. 00 574. 00 576. 50 572.30 571. 50 573. 80 570. 80 572. 00 583. 50 570. 80 584. 20 589. 40 581. 50 591. 00 592. 30 585. 50 588. 50 591. 00 585. 60 586. 50 588. 00 582. so· 584. 00 595. 50 582. 50 600. 00 603. 00 595.00 601. 50 604. 00 599. 50 601. 00 601. 00 591. 50 594. 50 595. 90 591. 00 590. 00 600. 5o 588.00 600. 50 604. 50 595. 50 602.00 602.00 594. 00 592.00 595.20 598. 50 595. 50 596. 00 584. 00 589. 00 591. 50 583.00 583. 00 584. 00 591. 00 596. 00 610. 60 596.00 612. 50 619. 00 607. 60 611. 00 624. 00 608. 20 627. 50 640. 00 627. 50 631. 50 632. 50 617. 50 601. 60 . 601. 60 601. 60 581. 60 592. 00 .581. 60 580. 50 580. 50 591. 00 579. 00 579. 00 585. 50 590. 00 584. 50 592. 00 580. 00 566. 50 582. 00 567. 00 572. 50 564. 20 568. 50 592. 10 568. 50 589. 50 593. 00 572. 10 577. 00 581. 50 568. 00 568. 00 585. 00 568. 00 580. 00 601. 00 579. 00 596. 00 607. 00 594.00 600. 00 611. 50 599. 00 601. 00 612. 20 600. 00 613. 00 615. 00 609. 10 606. 50 608. 50 603. 10 602.00 604. 00 . 589.. 00 597. 00 597. 50 585.00 591. 50 599. 50 588. 00 597. 00 598. 50 588. 00 594. 00 595. 50 583. 00 586. 00 585. 50 590. 00 579. 00 585. 50 585. 50 587. 00 580. 00 587. 00 585. 00 567. 00 585. 50 583. 50 590. 00 590. 00 582. 50 582. 00 587. 80
566.80 564. 70 576.80 574. 50 576. 80 573. 10 570.90 "575. 80 573. 90 573. 30 582. 80 589. 00 586. 70 588.30 584. 20 594.30 595.80 603.70 593. 50 592.80 598.70 599.20 597.80 590.60 589.20 583. 50 590. 70 610.30 612. 50 620.00 637.00 621. 60 601. 60 587. 30 584. 80 585. 30 585. 00 567. 00 572. 10 592. 10 580. 10 573. 90 582. 70 599. 00 598.20 603.80 609.30 612.80 604. 10 591. 80 590.90 597.20 589.00 584. 90 585.80 581. 80 581. 60 586. 90 583. 70 586. 40
565.8 566.2 574. 6 574. 7 574. 6 575.3 572. 3 572. 1 574.2 572.6 579.0 586.6 588.2 588.3 584. 9 590.8 597.9 602.4 595.3 593.2 595.7 599.7 597. 9 591.4 589.7 586.0 588.2 605.6 613. 0 617. 4 634. e 623. 9 601. 6 587. 0 585. 4 583.3 587.2 571. 8 569. 6 584.2 581. 7 574. 5 578.6 593. 0 599. 7 604. 8 607. 2 612. 3 605.2 594.9 591. 1 594. 9 591. 8 587.8 587. 1 582. 1 592. 9 586. 3 585. 7 585.4
565. 7 566. 4 568. 9 571.8 574.6 574. 9 574. 1 573.2 572. 9 573.0 575. 3 579.4 584.6 587. 7 587. 1 588.0 591.2 597.0 598.6 597.0 594.8 596.2 597.8 596.4 593.0 589. 1 588. 0 593. 3- - LAST PRICE 602. 3 ON OUR 612.0 CHART 621.8 625. 4 620. 1 604. 1 591. 3 585. 2 585. 3 580. 8 576.2 575. 2 578. 5 580. 1 / 578. 3 582.0 590.4 599.2 603.9 608. 1 608.2 604.2 597. 1 593. 7 592. 6 591. 5 588.9 585. 7 584. 0 583. 8 585.0 585.8
PART
c
now we're getting down to serious serious
the
,
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psychological part
386
CHAPTER FOURTEEN money
management !
$ ONE GREAT BIG HAPPY HARANGUE
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387
My friend- U know, I'm absolutely amazed •dth myself. I have one absolute criteria for successful trading in commodity futures contracts, and, that is to keep my physical condition and mental condition in optimum format, and I'm breaking that rule. (More later). Also, I have been wanting now for one month to return to the commodity market full time, but because of this book I have taken three months off ( a good step anyone shud take ) and, I'm finding all by myself that perhaps one of the most important chapters in a book on commodities that one cud write : - is, money management. It's early Monday morning, July 3Ist, I978, and by early I mean 4:45 A.M.. I have had a rather pleasant week-end and guess what I'm doing? (More later). Well, - this book is beginning to irritate me; - I itch to return to the market, but some compelling force obliges me to write .. And, I'm determined to finish it - even if it means not partaking.of the opportunity to make many times more money in the market than I cud ever dream of making on publication of this book. -, but here I am, 5:00A.M. - sitting down and writing a damn book ! and, I'm into a chapter called money management. It is simplistic. - there's nothing to money management, except hard fast rules, which U and I, and everyone who wishes to make money- no matter if we're buying potatoes in the grocery store - we shud oblige ourselves by. It is simplistic and it is hardcore. There's nothing like hardcore. I tell U one thing - I shall precise this chapter to death because money management is incredibly simplistic - but, U know what I'm doing ? (The more later). To cope with this simple problem ? I have had I/2 a bottle of wine. Maybe it's because this chapter is so incredibly simplistic that I need some diversion to cope with it. - I mean, really, one can jabber away on market theories and price making influences - on any stimulus that can occur to me from my environment. To really go far out, I will state "isn't that what socialism is all about ?" free-loading - freeloading ! Anyone can rant and rave about market forces - and market theories. But when it cums down to hardcore realities of life - a socialist will fail. He's only interested in taking from others and redistributing. ( A socialist never distributes his own money. ) Strange tho' that the topic of money shud fascinate a socialist. There's only one thing that make~ a socialist happy, -and that's money •..•• and lots of it. Me, I'm interested in expressing my wares to others. If they don't wish to "buy" - that's fine. But, here I am in the middle of a conundrum. One of the most important chapters in the book and I'm stymied with the truth. A corollary of our present times - stymied by the truth. And, the truth is - as far as this chapter is concerned that money management is simply a prime prerequisite of· those who wish to assume that they are alive and well in the commodity futures
388
SS$
market, or any facet of life, for that matter.
Have U ever been flat broke ? Have U ever done without cigarettes, booze, movies, taxi-rides, public transit, non-grain food, and so forth for years on end, in order to save and get ahead financially? Or have U joined the nearest picket line. Imagine, at S:oo A.M. , I/2 bottle wine and I'm trying to tell U one of the truthisms in commodity trading and life. Money management. I'll tell U something. One thing I've learned in these few years ~·ve been around is that U DO NOT put all your cards on the table and with money, - U do not blow it. At least it is true that those who ·are without money - have only one thing to put on the line and that is themselves. And to rant and rave about socialism some more, that is one thing the socialists don't realize. ( Heaven helprne, that I should criticize them - that, without the factor, - the factor of demand/supply, there will be nothing to redistribute and, that the results of the supply/demand factor will distribute nothing and that the people around the earth - and we're talking of billions - have nothing else but themselves to offer. They don't try to take from others. Only the socialists ·do that. The people are too busy into existing. To go one step further, there's nothing worse than a liberal. He seems to be guilty with his existence, which is in contrast with those who are less fortunate and he wishes to say " Oh my, I am guilty- it's ridiculous what's going on, - that I shud have so much. It's sinful that we shud have all this in my life." And he parlays it into a psychological escapism - which says to ethers " here U are- I will show U the lite". Liberals luv to direct traffic, to be with everybody else in this world, and join the survival game. They want to look after others. Socialism says - we want to take from others and direct others, (typical fascism- don't forget Hitler was a socialist) but~he liberal says - we want to look after others. It cud possibly be a delight to the world, if they cud mind their own business for a while. Liberals and socialists. have one thing in common. they will never redistribute their own money. U watch that fact. They luv the "buck" as much as any of us. Bresnef has his duchas or villas (indoor tennis courts) and Mao Tse-Tung had his Mercedes Benz ( the big one, of course.). I tell U - there is nothing like existing and unfortunately existing involves not putting U're balls on the line all at once, and that is what money management in commodity futures trading is all about. We piece-meal i t out.
I4 S$S
389
In total dollar volume, commodity future trading equals I/3rd of the total Gross National Product of the U.S ... What else can express the la"' of supply and demand - as corranodi ties do ? No wonder the socialist hates commodity traders. The socialist does not understand that u cannot control the market place. Tell me, why else do U think there is a shortage of grain in all the communist countries, besides the fact that socialism creates inefficiency. It's because the law of supply/demand says - that those who produce have a vested interest. Is it unthinkable that the producers are raiding the granaries and stealing government grain ?. They're taking from the granaries one way or another ? The only true form of capitalism exists not in our society - but in the communist societies ? - They know that the only true form of supply demand exists in a true market and that results with them in what's called the black market ? They get there what they wish ? The black market reflects supply/demand ? Golly, I hope I have irritated U in the last few paragraphs, maybe got U're ole' grey cell matter twitching • )
Money management shud not require considerable degree of thought. It shud not be full of dilemas and con~radictions. It shud not be frustrating. To say that a trader is doing so and making progress is incredibly ridiculous. U do not have to assume that U have to realize thatgverything is full of dilemas, contradictions and is frustrating to make progress. U just simply have to follow simple basic rules and face up to it. What the hell is the point of enjoying if U have to worry about such silly things as delirnas, contradictions and frustrating elements ? It's simple. Just follow the rules of basic simple money management. All decisions do not have to be determined by each trader for himself. He knows how much money he has. He knows by his own judgment how much he shud allocate to the market and he know~how much he shud risk to the market at any one time. How simplistic ! Money management is simple. U do not put U're cards on the table at one time, unless U feel that U shud strike while the iron is hot. And that's what major trends and major bull markets are made of. At that time, maybe , U strike and strike hard. ( Buying as long as the "dots" are up and not "3-4 days on" - only when it cums back thru the dots. ( chapt. 9) • ) On order to live long enough in the world of games, it has been said that to reach the long run, u must be solvent. We're not talking here of games. I'm talking of reality- How much money U have and how much U shud put on the basic survival plan.
390
sss I
a~ not with the losers. I am not with those who burden society and build on defeatism.
It has been said that money management principles contain so many decisions that it must be determined by each trader for himself and that no specific program, adequate for all traders can be devised. To this I say ...... no way. U've got SIO,OOO to invest - U've got $IOO,OOO to invest. U have made $50,000, U have $5,000 to invest. - U have $1,000 to invest and to each of these is applied specific criteria. If U've made over $50,000 then U take out $40,000 and start all over again with $!0,000 ? Because, all U need is a certain amount of money and U can make all the money U wish. U do not need a $IOO,OOO to make $100,000. All U need is $5,000- IO,OOO and for those who have $!0,000 U only use a certain. percentage of that ( 30% maximum). If U have $5,000, then U use a certain percentage of the ( still 30% and if u have only $!,000, U must be very careful, but cum back later if U're blown out of the box. ( Better to lose $I,OOO than SIOO,OOO ! )
But the same criteria holds true for all of those who have $IOO,OOOO $I,OOO,OOO , or $5,000 to invest. U have specific rules to oblige by and that is what is involved with money management.
It has been said that it is impossible to consistently make money in the commodity futures market .....•. A trader who is to succeed in the long run must be able to recognize and develop his behavioural skills to his own style. He must be able to handle his money in a logical and disciplined manner, and this can be more important than to learn the rules of the trading procedure.
However, the most stullifying mistake that befalls a trader is the assumption that success can be certain if he adopts a rationale trade selection strategy and intelligently follows the elements of a successful plan. Unfortunately, there is the final obstacle to success. - money management. If the trader lacks the discipline to set objectives and risk limits and to act when either is reached it cud be that he shud not trade commodities. There are ways of preserving U're assets. Emerson advises :Let us not becum elated when we pluck a few thousand dollars from the market. Don't believe that happy days are here with a few lucky shots. Nothing can bring U peace but the triumph of principles. And money management is one of those essential principles. Remember that efficient money management will keep U in the game and in the end run it will be long enough to give U the kind of life U dream of, which to some people wud be a shot of vitamins
from time to time.
I4 $$$
It has been said that C shud acquire wealth at a flat rate faster than the speed at which U previously stored wealth. That is to say, it's easy enough to make money and more difficult to hang on to it, and that u shud acquire U're wealth slowly and surely - at a flat rate and this flat rate shud be faster than U previously store U're wealth. There's the old saying - easy cum , easy go. I prefer the flat rate. The solid sure method of accummulating money. Let's say that U decide to launch a program. That U desire to accummulate $!00,000 with only $5,000 invested. This approach will be less conservative than commencing with $5,000, and with $5,'000 U try to errogate to $!0,000 • Of course, once u have the SIO,OOO, then U can errogate U'reself towards the $100,000 and more moneys. The purpose of all this is to develop what is called an asset preservation. That is, reducing the percentage u commit to the market at any one time. And to those who are defeatists, U are cutting the amount U pledge to lose. If U have committed $5,000 u are going to retain 40% of it in reserve, and of the other 60% do not pledge more than I/2. If U're bank role shud· grow, gradually diminish this amount, and as a result protect U're wealth. So that when U're capital aggregates $50,000 or more, reduce committment level to I/4 th of the 60% per trade. The firm rule which U have is that U do not commit more than 30% of all U're positions combined. Unless, of course, U are willing to facilitate an increase in capital by using various means of pyrarr.iding. That involves going with trend and buying and pyramiding on reactions of the market that have a relation to "channels, "going with the dots" or whatever. (chapt. 6&9) There are four basic elements of money management. capital 2. objectives 3. expectation of the game being played 4. probability of ruin
I. initial
The expectation of the game and probability of ruin are perhaps the two chief culprits of the trad~who does not win. The average trader is not aware and is generally unconvinced that he cannot change the mathematical expectation of the game by the way he plays the game. The probability of ruin does not receive the cool reflection it deserves. The speculator may be playing the
39!
392
$$$
game to the hilt. Contrary to this is the trader who is aware that ~~e greater advantage that u have - that success is vastly increased. A trader with less probability of success, but trading conservatively, actually has a better chance of long term success than winning the game. This is in contrast to the trader with a higher probability of success, but who chooses to trade more aggressively. We're talking of long term success here. 8ne of the more difficult aspects of commodity trading is being able to sit on one's cash. -probably one of the hardest rules for budding traders to self-enforce. A trader who will be around a long time is one who maintains $50,000 in his account, but trades up to a max~urn of $8,000 for margin and holds the rest in reserve. He sits .on the remaining $42,000 . Can U imagine that ! But he will be around a long time. There has never been a successful trader, no matter how magnificent his style who is not a superb manager of his money. And, the dismal probability of the small trader results mainly as a consequence of his inability to manage his/her money intelligently.
There are some generally accepted rule of thumbs around for money management. Some of them are : I. using maximum of 30% of equity for margin requirements - to this I adhere. 2. why not pledge 50% margin to equity ? Just like U now can with the stock market. Then u can avoid the intermediate wash-outs and take advantage of the long run inflationary trends. /
.3.Do not take a position in the market unless u feel that the price objective is at least 8-IO times your commission costs. 4. Risk as small as IO% of the trading as possible, and never more than IS% anything over IS% of trading capital consecutive losses will evict U from
capital . As after 6 the game.
5. One shud be reconciled in assessing risk to losing I/2 if a margin requirement three times
I4
sss while still retaining the full amount of a margin, plus I/2 of the margin to survive initial adversity of the fourth trade. Shud the fourth loss occur, the trader shud reconsider tis whole trading program. All of this above is involved with " risk " . We might as well assume that there's risk in the market. Everyone else does. Altho' risk is profoundly reduced by judicious application of things like "dot direction" (chapt. 9) . It has been said that so-so trades offer a possible gain equal to or greater than the risk must eventually drag most traders down. It cud be true. However, when involved with trading ranges, sometimes the price objective is minL~a~- however, it is money and in analysing congestions, it cannot be said that u cannot make money therein and that the eventual outcome of the market breakout cannot be determined. Risk is minimized is congestions and this includes, - bottoming and topping formations. Also, risk is minimized by day-traders who day trade from only one side of the market - going with the trend. Prices move back and forth thru upslanting or downslanting channels. Day trading furnishes more possibilities to stretch risk capital as some brokerage houses require less security deposits for day traders, because risk exposure is reduced. Some brokers will ignore U're account balance as long as U are not debit. U can swing some big no's with less cash this way. I have nothing against day traders. However, those who maintain a neutral behaviour towards risk can very easily becum buried. Some of us like risk. Some have a high degree of risk aversion. Risk lovers either require treatment or have already been restrained. All investors fall into a range of optimists and pessimists and behaviour is coupled with a degree of a risk-aversion in their personalities. An optimist will go long and a pessimist will be short and those who are optimistic will have a high degree of risk aversion react more emotionally to the market and tend to be the lea~ successful and this group engulfs the vast majority of investors. Those with a low aversion to risk, whether optimistic or pessimistic have the best chance of making profits. Emotions are the enemy of the commodity trader. - especially fear. So, if U are afraid of risk - U're in trouble. If U are analyzing risk in U're approach to trading, re-read the above. The risk on each position that U have shud not exceed IS% of U're total capital and reduce this as close to IO\ as possible and even less as capital grows. We're talking here of stops when the market goes against U and with a IO-IS\ loss of equity U say - " I want out. " . There are times in the market place
393
394
$$$
whe~ the risk involved in trading is at a minimum and times when it is at a maximum. Risk on the breakout of a congestion area can be calculated and therefore appears minimal and manageable. A run-away bull or bear, risk is minimal. ( Even the worst "system" works. ) - cause all U have to do is go with this major move. - however, risk is incredibly at a maximum as market tops and bottoms are forming - especially tops. This, my friend, is where P&L charting will cum in. To enable U to see that a top may be forming or to have formed. Here, in this area of a market top, risk is high; U cud lose all the money U have made in the uptrend as the market pumps away with its topping formation.
U m~nLm~ze risk by U're trading approach And this does not include stop-loss positioning. If ever I use a stop it is a mental stop. I don't like stops. I don't use them. But I do not suggest that U don't. Moreover, when U recognize that markets are over reacting, the best strategy to minimize risk is to ride the trends and trade less frequently. That is. to trade when risk appears reasonably low - not against the trend. Stick with it ! Take a broader view of the market. Some people play the markets on the basis that as soon as prices tend in general to rise as the maturity of the contract approaches, the trader simply goes along and has sufficient capital to take care of the interim market reaction reversals. A lot of these people in the long run will have profit.
It has been said that plunging is the most cardinal sin in money management. Pyramiding, in many instances, establishes u in a position similiar to plunging. Be very careful of pyramiding. But it can be very profitable/cit times - but only when U have a sustained bull or bear run. I have rammed $I,OOO into $450,000 in my lifetime, pyramiding and applying P&L trading. But pyramiding is fraught with danger. What happens if U don't have a sustained market flow of a major bear or bull ? Be careful of pyramiding, and apply only the formulas as explained in the following graphics, if U are a budding trader. These approaches are traditional and they're based on the premise, . that U pyramid with fewer contracts as prices move in the direction of the major trend.
SSS
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Personally, I have a different approach. Every now and then, I will bite the bullet - never more than 2-3 times a year it seems, and I will press a market. Particularily if I've been waiting for a year or two for a particular market to develop - and, it.is finally here. I break my cardinal rule of maximum 30\ equity committed to the market. I bring equityout of the woodwork to the brokerage houses and away I go and plunge. I affect a
395
396
$$$
80% of equity involvement and I apply this 80% rule to the accrued profits as well and accordingly pyramid: that in the end result, I am applying more contracts as the prices move, as apposed to when the move started. But, my friend, each purchase has its own mental stop. I make each accelerated purchase on the basis of my P&L charting rules. In other words I gobble up everytime the market makes a slight retracement back to maybe the main channel line (chapt.9) But, I may only do this for I/4 of the time span that is involved in a major price trend move. Inother words, if I anticipate that prices are going to go for ":x" months, I will spend l/4 of that time accummulating and that to me is my base and I sit back and wait during the rest of the time span period and analyse very carefully a topping formation before taking profits. Perhaps U too will have U're own approach to pyramiding. Remember, I feel that each step of accummulation must by itself be considered technically and psychologically ·U're first entry point and that each purchase being maybe twice as much as U bought at $5.00, and @ $5.50 and when something with the market goes wrong I wud dump what u bought @ $5.50, - not what U bought at 5 bucks. Unless, U are convinced that the market has topped and take profits and possibly stand aside and wait to short. ( Does that make sense ? )
IS 39i
CHAPTER FIFTEEN
max1• m s
n.on- C6.oe.nt..t.a..e. 6u.zzy. ma.x..Un6
CRITICISM There is some old saying that will justify almost anything. There is always an equally plausible maxim that appears to justify diametrically opposed actions. No matter what the event there are maxims around to describe it. Traders often blithely choose the one that encourages only what they are doing. Orin Thevault ( Commodity Futures Game, Who Wins, Who loses,Why! - Mcgraw Hill ) states that sociologists have named this phenomenon " selective perception " . The most favoured alibi comforts the trader when he has taken a loss or a smaller profit than he shud have. The successful trader derides maxims as conventional wisdom, that are overly general and have no predictive value and belong more in an explanation of random-walk theory than in a trading plan. He believes that success in trading requires more than/ the judicious choice and observation of maxims. " Nothing is so useless as a general maxim - Thomas Babington Lord - Macaulay - I859
398
MAXIMS
Theoretically, if any one rule or maxim was invariably correct it wud be followed to such an extent as to eliminate its validity. Human nature is such that any valid maxims are broken with monotonous regularity. So, if we do have a good maxim, it does n 't mean very much does it ? Because most people will not pay any attention to it anyway. After all, U can't remember everything. Lord Macaulay may have been rite. But there are a series of so-called maxims. which are applicable to good commodity trading. And, some of them are rather profound and shud be committed to memory. Take U're choice. In fact, I suggest that U make U're own collection of maxims that are good to U and repeatedly question and test them.
SOME ESSENTIAL MAXIMS The most effective approach to the objective of maximizing results is to play a favourable game in a small scale less desirable, but still providing a reasonable chance of success, is playing a favourable game on a large scale with enough profits coming early in the game to avoid ruin. A basically unfavourable game may yield profitable results i f one plays seldom and bets heavily. The only road that leads inevitably to disaster is playing an unfavourable game continuously.
Good sports die broke.
· There are no sure things.
Traders sleep, markets don't.
Dialogue is appropriate i f the mutual goal is enlightenment.
Accidental successes usually turn into accidental failures.
IS MAXIMS ~fin.'7ing
manifests both positive and negative aspects.
What the few can de, the many cannot accomplish.
Take positions along the line of least resistance.
Sell famine I buy glut
Buy the rumour ? sell the news .
When to buy and sell is more important than what to buy I sell
A bull can make money. A bear can make money, but a hog never can .
Never buy at the bottom, and always sell too soon .
Buy what will not go do~~ in a bear market. Never buy something that won't go up in a bull market.
Many a healthy reaction has proved fatal.
Watch out for a trend when market opinion seems
on~
sided.
Confine U're trading to situations of unusual appeal.
There is wisdom in patience. Wait for situations in which profit potentials seems unusually high.
399
400
HAXIMS
Trade infrequently unless. U're trading plan reasonably requires U =o take positions often.
There is hardly a maxim that someone cud not find fault with.
Put half U're profits in a safety deposit box.
Money is easier to make than it is to keep.
The race doesn't always go to the swift or the battle to the strong, but that's the way to bet.
MAXIMS FOR THE PESSIMIST
If anything can go
wrong~
it will.
No matter what the result, there's always someone to fake one better.
No matter what the result, there's always someone eager to misinterpret it .
No matter what occurs, there is always someone who believes it happened according to his pet theory.
In any collection of data, the figure that is most obviously correct - beyond all need of correcting - is a mistake .
Even if it is impossible to derive a wrong number, still a way will be found to do it.
Broad is the path that leadeth to destruction.
A trader will have to leave his mouth open a long time before a roast pigeon falls in.
FUZZY MAXIMS
Cut U're losses. Let U're profits run. - ( it's like telling somebody to stay happy and healthy. )
Bu~
only on down days. Sell only on up days.
403
CHAPTER SIXTEEN
WINNERS & lOSERS WHO ARE THEY?
How the. Lo-6 e.tt T h..i..n.k.¢ How the.
W..i..nne.~
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What Succe.¢.6 and Fo...i..lutte. Me.o.n.-6
HOW LOSERS THINK Tagore - the famous poet: ---- wrote, "Pessimism is a form of mental dysomania. It distains healthy nourishment and indulges in the strong drink of denunciation and creates an artificial rejection which thirsts for a stronger draught".
The losers are like the lemmings that race to the sea. They are caught in the trap of self-denunciation , artificial rejection and they can't wait to get more of it! Bombardment by negatives, by parents and relatives to children and the continuation of this thru life is as if there is a conspiracy to develop and sustain a "can't do" thinking-attitude in individuals. Conditioning continues thru song lyrics,television commercials, pressures from friends, relatives, neighbours, social contacts and nearly all of society. A newspaper cannot be sold, a news hour cannot be made interesting unless it reeks with unpleasantries and miseries, .... that which th~ loser is made of. The losers of the world love misery ..•. it is the only thing that makes him happy. Think of it! The losing trader is a self-defeatist. He functions best when he is under stress and strain, and is at home when he is losing
404
WINNERS:LOSERS
money. The loser who strikes gold in the market, literally falls apart ... he is not used to it. He does not know how to enjoy success. His thoughts have always been built on struggling and losing. He wins, - he goes berserk - he becums an expert - he develops what one prominent futures trader (Larry Williams) called •the King Kong feeling". He loses self-control, and boom- his profits are gone, and he's back to the misery and struggling again, that which he is used to, - like lemmings to the sea, and he may not wish to admit it but he loves to struggle,- to struggle to win. But his mind cannot cope with the winning itself. It copes with the struggle. Amazing, isn't it? He correlates a posture of immaturity. No wonder he is made a fool of by the amicable political candidate who assures the loser with "Look, don't worry about U're life. We'll take care of it for u. We know better than U what is good for U". The loser just has an overwhelmjng desire to win. They persuade themselves they can win, and keep coming back determined to save face. The degree of ineffectualness is already programmed into his/her psychological patterns. With success he becums almost hypnotized by the events which then shower upon him. He enters a trans state. - mind hypnotism. He gets sinking feelings about this and that. He cannot wait to apply what he did right, usually to the same market again, but at the wrong time. His mind is almost saying to him, "It really isn't happening to U". He doesn't really know where he is. He becums another person. [ It is always a happy event to see a loser win, but it's sad because U can recognize the transe state they are in, and you know that given time they will lose again -so much, that they will be right back where they started.]
Sometimes when a profit does accrue, the loser's mind will be so happy with the profit, that it will grab it, but nearly always prematurely. If a loss is occuring to the account, his mind says "It will all work out in the end" and he/she hangs on. He always cuts his profits short, and lets his losses run. /
The budding trader finds it hard to short the market. He thinks that the sky is the limit and that there is no ceiling on prices. As long as he buys against base zero, growth is inevitable, since to his mind, that is what life is all about, - growth, upward movement. His mind has a predilection to going only long in the market. He figures that if prices cum down, then that's a good time to buy. The budding trader is a price level trader rather than a price movement trader. He thinks in terms of value, not in
WINNERS:LOSERS ~erms
405
of value movements. He buys on days of declines.
Everyday logic does not work in the market. The loser thinks that his natural reaction to news is invariably correct. The opposite is true. Our natural reaction to news is invariably wrong. The loser is mentally attracted to the negative news output of our society. He knee-jerks in times of embullient excitement. He will slip into the market with the news rather than against it. He cannot stop himself from becoming more and more fascinated with publicized bullish and bearish events. His mind just does not "cotton" to dull markets. He always seems to be buying on up days, buying on emotion. The herd instinct makes him buy on the first reaction in a topping formation, simply because it's "cheaper",- simply because his mind says the price is cheap. His mind is so caught up with enjoying misery and struggling to exist, that it becums chained and entrapped in its own inertia. It does not release its host to self-perception, to self-awareness, to research its own attitudes and emotions, allowing it to probe its inner feelings in order to determine the market's influence on him. The losers mind does not think. It's supposed to. But it doesn't. It's entrapped by emotion. It's processes are overwhelmed by fear, greed, insecurity, unawareness. Sociologists claim that 85% of all the people on planet earth do not think. Of the remaining IS%, I3% think they think and the remaining 2% think. Got that? 2% of the total world population actually think! And, it's got nothing to do with being stupid, or bright. Even stupid people can think. - it's just that they don't! An interesting corollary here is that the 2% thinkers actually approximate the percentage of commodity traders who are consistently successful year after year. The 2% who think, know the market their trading, know the price movements, know the fundamental factors underpinning the trend, and the market's reaction to it, and are well-disciplined, almost bored, without fear, and know the game in the spirit of fair, good and bad bets. The I3% who think they think, involve themselves with all the technical wiggle-waggles of chart formations. Th~ becum "pros" - especially as a result of a short-lived, recent success and feel that they have found the holy grail and are capable of finally reaping revenge, and garnishing continuous success. At the back of his mind is fear, - insecurity, - all the non-productive behavoural patterns engrained since youth. They're still there, lurking, and he knows it. And, the market leaps back up to him, and grabs him, and shakes him, once again to his very roots. Involuntarily, Mr. I3% reverts back to the remaining 85% who
4 06
HINNERS :LOSERS \\'ho oo_not think at all. He believes that there is a conspiracy against him, by the market itself, by the floor traders, - those all around him. He feels this experience, rather than thinking about it. Fear, fear of the future, uncertainties, worries, insecurities, obviate all rationality and he exposes himself without thinking, - to risk, to plunging back into the market, biting the bullet, since he feels that an aggressive stance, (Mr. Macho) that the struggle will result in a return to some profit, with which he can start all over again. C. This is the man who just hates going home to his wife with bad news. Emotions grip him, during this event, just as it did when he was in the market place.) It is sad, very sad.. However, the ratio of thinkers to nonthinkers inevitably _will never change.
HOW THE WINNER THINKS I hate to tell U one thing. The winner doesn't think at all. Am
I shocking U
?
Well, he is almost bored by it all.
My friend, I'm telling U of the moment his mind has decided to strike in the market. His mind has stopped thinking, at least momentarily. His mind has relaxed, because he knows his game plan and the thinking is done. Maybe his mind will take a rest for one week, while his execution is in the market. He decides that if he's not in profits by one week, then he will get out, or some other rule. His mind jumps to the task, maybe after that one week - or when a signal permeates his mental alarm system that something is wrong with prices, with the market's reaction to news - the market is just not doing what it is supposed to. His mind is quick to adapt. He may decide to get out of the market until his thinking process is able to understand what has happened. His mind is sharp enough to know what is to be anticipated from his technical analysis and any deviation from that is thoroughly analyzed. He takes into account.the "noise" of the market. He digests news at an almost subliminal level. And, ·he applies news consumption to its affect on the market. His mind is continuously self-perceiving, making itself
.LC
WINNEP~:LOSERS
thoroughly aware and introspective, thoroughly researching it's own attitudes and emotions, probing his inner feelings in order to determine the market's influence in him. His mind has been disciplined to avoid thinking in terms of the quick killing and knows that commodities will always be there to-morrow and that there's a train leaving everyday, week or month, or at least, several times a year. He rarely blames anyone else for his mistakes. He plays fair with others. His mind is reclusive, not letting others influence it unless it's by mutual enlightenment, as it is yet expansive and all encompassing, - analyzing, questioning, appreciating. And, above all, enjoying what it is doing. It is not grappled by the nitemare of emotions, fear, and greed. It shuns all destru~tive elements. It watches very closely all that orbits in ~ts world. It thirsts for healthy nourishment. It rejects artificial stimulation, drinks only at the trough of knowledge. Fancy words! - But it is true! Above all, it has a sense of humour. It is even able to quietly laugh, although with sympathy for the loser. It respects the loser. It respects what it has already been thru. In fact, it respects everything. It allows the human element only emotions of compassion, sympathy and sometimes indulges in pleasure. It may say to its host "O.K. buddy, u like Beluga caviar. I know U do & U've just made $50,000 in the market & I want u to go out & buy $400 worth of it, & indulge U'reself with it. Eat nothing else. I think it's wonderful for U". It coasts along, it gets off on new information, but screens it as thoroughly as a bean picker at the supermarket. It will know all of the good elements in this book, and rejects memorization pertaining to the loser. It involves itself instead with the good things in this book and is very selective in its acceptance, knowing the golden rule "Keep It Simple". It has·patience, it is able to think when required. It is able to sit and wait, since it is so well disciplined. Maybe the mind is lazy. Maybe it just wants to sit and wait. After all, enough is expected of it. A well honed mind is in such good shape that like the jogger who is capable of ten miles, - that running to catch the bus is child's play. It is so well honed and trained that it can take it easy and can be lazy. It doesn't have to be worrying about "sprinting to the bus" -so lazy and so well tuned that it can just sit and wait for the silly little demands that the market place makes of it. It handles it like the pro it is - lazy, aware,
407
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WINNERS: LOSERS
tuned to the penultimate - life is a joy and trading in the market is unadulterated pure joy --- heaven on earth, and its radiance beams like diamonds falling from the galaxcy on all those around it, and that includes its host.
PoRTRAIT OF A WINNER Most who trade futures have the capacity to develop winning styles. However, most cannot resist deviating from their styles that customarily win for them. The winner sticks to a winning sty 1 e , - ~nows that this requires patience and perseverance. The w~nner has the fortitude to await those opportunities for which his style is tailor-made. A winner is foremost a controller. He luvs to focus on the loaded trades. He writes down on a piece of paper his reasons for making a trade. A winner realizes that there are very few surething trades and never over-looks the best trades and he sits tight on good positions. Discipline pays! He/she admits his/her fallibility, but is hungry and intent to take a turn and knows that there is no easy way for doing it. He is a thorough assessor of sound fundamentals. Often, he will discuss in full every aspect of the market with which he is involved. A winner can smell fear and will act ruthlessly. He analyzes the human element of the market. His style is magnificent. He is serene. peaceful. possibly auiet. He gives the outward appearance of being bored. (He probably is). His eyes sparkle. He enjoys life, and peoPle. But, watch out i f U were to get too close to him or to interfere with his game plan - to try to get information out of him, or an idea from him what he is doing, - to ask his opinion of the market,- what is going to happen! Just try bugging him and see what happens to u. Otherwise, he/she will shower U with his sparkling ambience. He has learned to recognize and develop his behavioural skills. He possesses the tremendous self-control needed to over-ride the sterile habits developed and rehearsed for many years. They are realists. They will never hold a position during a vacation. They occasionally exit "from-··.the market to rest, to count profits and re-appraise situations. He/she learns the causes of his/her successes (not his failures) . He/she records its persistence. He knows that it's a winning style that pays. He knows his place in his environment and he
WINNERS:LOSERS controls it. He knows that big money can be earned by those who can accept the emotional risk of going against universal opinion. He is wary of trend bucking, but at the same time knows its' golden opportunities. He knows when to strike,striking with his technical analysis and the market's reaction to fundamentals. He outguesses to-morrow's price changes, [P&L charting], as they are likely to depend on to-morrow's news, or anticipated news;- change in weather, released crop estimate, an unforeseen strike. His discipline and awareness results in a low aversion to risk. He is a realist. U do not have to tell him that those with low aversion to risk, whether optimistic or pessimistic, have the best chance of making profits. With great pistache, he throws away the enemies of the commodity trader - emotion, especially fear and greed. He/she adheres to the money management plan. With such a growth process, the winner ·has the quality of persistence. It looms large and to him is virtually irreplaceable. Most successful traders have been bloodied at least once. All have tried again. Some traders say that if U haven't made or lost a million dollars a couple of times, U have not got U're feet wet. Successful people focus sharply on goals. They pursue fulfillment of their needs with energy and direction. They make their own decisions on the control of their lives, and property. They decide what they wish to protect and get on with the job. The champion is aware of the circle of influence around him. He willingly defends his territory. He does not let others take advantage of him. He asserts himself. Winners first of all decide to claim victory. They are people with goals. They will probably tell U what their goal is. The great speculators of the past have all believed that the study of psychology, - the psychology of self, and the market place exceed all statistics in importance. These champions succeed. Their wealth grows. Their status becums permanent. It flows to them in seemingly endless fashion. They are beautiful people. (At least, I like a winner.)
AmvU.c.a. WM buift on .tov..<..ng .the. w.i.nneJt. [The .to.o e.M o6 .the woJt.td .oeem .to be. d!t.a.gg..<..ng on .the U.S o6 A. PopuL<..6m hM
409
I.:t t,e.e.d6 011 wel6 a.nd bdv.. c6t) .the. ha.ltd .:tha..t d) . The. !'.,'/~nl1e.A-6 0 n .:the. wo!Zl..d a-te. ..the. piC..ovJ...de./1.}., c~ the wc:u.d. THEIR SPIRIT WILL NEVER BE BROKEN. They ne.ve~t a..te.ov.: the. .c, fta.c.kl..e...6 o 6 t.he. mJ...ncLte...6-b 9 8% o 6 the. wo!Zl..d .to g e..t .e.cid a.
c.a.ltC.e./t.
-t-'Uu .tc
ne.e.d
tc theJn.
The.Jte. a.Jte. g..i.ve.M and ta.k.e.M ..i.n tJU.o wo!tf..d. The. winne.Jt ..i.-6 Wa.JUj o 6 ..the. ta.k.e.IC... He. ..i.-6 the. g.<..ve.~t. He. lu.v.o to g.<..ve., bU-t doe¢ not g.<. v e. .<..nv o£..u.nta.JL,i.£..y •
Why .ohu.d he. e.ve.IC.. g.<..ve. ..the. le.e.c.h a. c.ha.nc.e.?
" If you let the pigs up on your porch, they will s .. t all over it!"
- an old farmer saying, Ottawa Valley,Canada. A successful professional trader will make important big money four to five years out of six.
PORTRAIT OF A LOSER The loser is the public speculator. He may have recently begun commodity trading. He is frequently a poor student a= the commodity. He places his market action on hot tips, rumours and hunches. Because they know their positions are based on shaky grounds, they close them out quickly, as a way of finding protection against unanticipated adverse developments. They are frequently out to make a quick killing. i.e. They are plungers. He misjudges events, distorts facts, panics easily. The loser will convince himself that a trend is not underway until it has nearly reached its peak. Incredibly, he refuses to accept large profits. He settles for small profits. He can't wait to incur large losses. The degree of ineffectualness is programed into his psychological pattern. He buys and sells with news, rather than against it. He's always there, buying on the first reaction of a topping formation, usually because it's "cheap".
WINNEP~:LOSEP~
He is a price level trader, as opposed to being a price movement trader. Although he may be optimistic, he usually has a high degree of risk aversion and accordingly, reacts very emotionally to the market. This category engulfs the vast majority of traders. His emotions are his blatant enemy, especially fear. He does not look well. He does not keep himself in shape. He may be a yahoo - a great talker - full of memorized jokesoutwardly gregarious. The aura about him is one of heaviness. He never keeps things simple. He never, never appears bored. Rather, he/she is frantic and determined - usually a know-all. He will demand the most from all of those around him. He will demand the best position in the market, or in the office. If he is in the office; he will try to hog the "box" to himself. He responds to all kinds of fear, - fear of the future,- all uncertainties. He is so incredibly insecure. And he worries about everything, and makes a big fuss about .it. He is the kind of person who will hoard storable commodities in fear of a shortage. He will blame others for his mistakes. He becurns hypnotized by the market. He will never accept the fact that bad things are happening to him. He believes that all will work out in the end. He is an ego tripper. His ego tripping ruins him in commodities. The majority anticipate no need to change their habits. Only I2% of traders consider the possibility of discontinuing trading as a result of losing money. He is inclined to join those who blame "speculators" for the rise in food prices, unless of course he has made money on the way up. They do have an overwhelming desire to win. They persuade / themselves that they can win and keep coming back determined to continue. They tend not to be thorough. He is undisciplined and easily swayed by other people, - greedy, stubborn, and lazy. He runs with the crowd. He does not have the hungry element so often found in the winner. U will never find him a "bastard",- just annoying.
4II
4I2
WI!\"NERS :LOSERS
He seldom i:f ever runs his profits ruthlessly. "A profit is a profit" is his motto, when he shud be staying in a position. Losers invariably over-trade, as they scramble onto the rainbow. He will make his decisions on possible reactions to price moves or to margin calls. High risk trades nickle and dime him to death. He never sits tight on sure-thing trades,let alone recognize them. The very moment the market is peaking, he rests assured that it is going higher. He never realizes that the highest price for a commodity is formed only as the last purchaser buys is an environment of totally exhausted bullish news. He is the worst money manager in the world. They all are. Read on. 0 shud get a kick out of the following, reprinted with the kind permission of Richard Tewels,Charles Harlow,Herbert Stone, authors of the excellent book on which a lot of this chapter is based, namely commodity Futures Game Who Wins,Who Loses & Why. Publishers: McGraw Hill If 0 recognize O'reself, go out and get a bottle of Scotch. "drink it all" & have a little talk with U'reself, - even it"s U're first time! (either for the scotch, or whatever, or talking with O'reself). (Notice I said talking with U'reself, & not to U'reself.)
WI~~~RS:LOSEPS
H~ Hoyk has had more frielllis. reiAtiYCS. and count~llU at the sc:ilool than anyone eise. Herben himself enroliect as a stueient more than -10 years ago )USt after ·~ u-p his secun"· holdiqs em a 20 -peRCnt margm. stanmg in August 1929. He .bas JPDt ell the yecs siDce uyinst to deYeio-p 1 sim-ple set of mechanicaJ rules (secret, o! coune) that will belp him to achieve a substantial profit each ,ear at a CDDStant rate while usiDc a small - t o{ capicai ad entailinc virtually no risk. Herilen became seriously interested ill lDs project yean aco wiler! lie DOiiced that lDs rules worked specuculariy. panicuiarly w!Hm applied c:ar.iully to the body o{ historical data fl'lllll wilich the rules .t:a.d to- develo-ped. ·1 aoticed." says Hen-t. bis e,es unowed. •that o-taber Wb.t sold at a significazuly bialler price on September 8 thaD it hid on July 20 thl'lll.llhout the entire -period co"CC''ICi by 1111' records at the lime
all the December Wheat that I CDUid afford 15.000 busbels) but uaicwtllllltely a 111C11111 redi&Ctioll in tbe CONIWI loan priciC had DOt t..l fully disc:DWited. ad I lost l4 cenu a· busbel. I decidect that beaceforth wheat sbould lie boudlt only ill yean wben &bere was DO aci.iuslmat ill the loan price, aud I changect my rules ICilDrdizlaly. '"'The following ,ear I bou&ht wheat apiD on July 20 but lost 19 cents . a busbel by September 8. I noticed - late that the difference ill price betwea~ wheat and c:crn was wider than it had been for tbe last fi¥e .,.an ad l had failect to consider the imponuce of this ill my earlier -a,.. sions. There was no point in a~ my work because. of tbe liz ~ Je~VJ~tions Iaow .bad. four had -kect suc:ceaiully and tbe other two CDUid be eAlily filtered out. Tbe foUowiDc year I was aliule Wllucky. Tbeftno chance in the loan priee, but tbe ~ betweeo wbeat and CDI'II prima was even wider than it had been tbe year before. so lutarally did 1101 buy tbe wbeat. ln fact. utibzinc tbe infonD&tioa I bad piDecl, I sold it sbort • iastead. When it rose '7 cenu a busbel by Selxember 8 with no '-liacl greater than ,_. c:eot a busbel. I was a little diaal»PPiDteci. of caune. but ttl suddenly realized tbe sigDificaDce of tbe late Walell whiclt ~ viously cancels out tbe effect of tbe wbeat spread. Of IDY ~ senatiom. actually five had worir.ect, .-ltbou&h 1 did DOl beDefit by tbe late~~ one aDd two were filtered out. The ei&htb year was really quite u~ I apm bou&ht tbe wheat on July 20 and it was 4 ceDIS bieber 011 Sept-t.r 8. just as I had expected iD light of the natrOW wheat~ s;nad aDd uriy Leat. Because of some nm>Or of bea"Y Frencb export: in Aupst. wheat prices dropped DIOI'e tbaa 50 eeuu and before Iller CDuld rally back my lllal'lin was lODe aDd my broker sold me out ~ cat off tbe bottom. .My record. however, really is liz wins in ei&ht yean with tbe other two .,.an filtered out. Now I a.m sun tbat I have ell the important faaors, and if I can 1et SSOO 101etber belore July 20 I ezpec~ to maiLe- really iiDPDn&Dt moaey in the wboat market bum now ou. Wlless my c:nditDrs attach 111y ac:c:oUDt &pill before tbe realiziD& move takes place.· Hen-t ·s rules. inciucling the filters and uceptioDs. DOW fill S'! type. written pages (sinclo-spacecil wbich Hen-t keeps iD a padlockect clraww for Jealriry , _ alODg with instrUCtions 10 pass tbe -es aloD& to his cbildren in the ..eat of his pusing or beiD& committect to an illslitutioCL.
THE COMMODITY FUTURES GAME by Tewels et al. Copyright !974 by McGraw Hill. Reprinted by permission of McGraw-Hill Book Company, Publishers.
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:I.OSERS
Co'll G ..llibie fiDcis Herben Hoyie's scholarly fundameaw approach far 100 mmpiic:.ateci ancl believes the sollftCiest approach to uaciing is a buic· ally simple one. Gary inieially tried to adliewe wealth at the borw , _ .aiter bwm1 a booit suuesliD& that the proper approKh was to bet OD the m-iteS to sbow OD the ias: race each ciay early iD the JUSOil, Tbe tbiiDry hold that the wiDDiD& bertws would all ba.. aaae home by the last racc ucl thai the baDciic::appers hac! DOt ,et bad lime to evaluate suffacitiDI data t.o weilht the bones properly. Cary became cliscourqed wheo be nralia& thAt his profiu did DOt equal the cost of his racclhCk admissiolts. his pariWI&, loaldocs• .and dazliDc billl for his cbedced sponcgat. NcilbeT did the, •·
- Cary bisnest losses. U'ieclt.o make rome - . y playiDc bi.dtjack at N...U Pill' iDI: paiaces .aiter re:ld~ a boolc IUQCS&iD& tlu11 it wu .,..,._,. Gilly 10 kee$) lr.ICk oi picture canis .-i fiwes 111111 alwayo double dow1l OD IWO .lliDelo. l.loiort-tcly, wbell' Cary fiD.ally ac:nwed up enougil couraa:e to take a bus 111 L:u Veaas. his resulcs were DOt Dearly so aood as they bad " - wbell he dealt bimseJI $Cvetal tbousud iltlllds OD his cliDiDc I'OOIZl table. He a!-u:recl a £iiDty.eycd duicr who -.ked with five decks or canis .and cloalt them from a card shoe so rapidly that Gary CDUJd DOt keep CDUIII. It ... then that Gary turned to CIOIDIIIOdil)l u~ ""''bere is ao poizlt examillillc lbe f~tals.." Cary tells us. -~ ~·is refiectee! i.D pnces uyhow. Tbe most imponant tbiaa is to nae aaiy CICIIIIisleDtJy with lbe buic trellci. N - lrlllie apizlst tile trelld! WbCII it is up. olliy be lolij:. Wbell it is dowD. DDiy be short. Tbe buic u-d _,. be euily determiDed ill IliAD)' ways. but - oi tbe bat is with a line cbarL Just draw aliDe ulcmc receDt bouoms i.D a risizl& market or - t tops ill alalliac market and you h.awe a dear piccure oi a .marltet ·, direc:ciaa and ita rate of IDOIIl-OCHIII=t. "'The best way oi all. tbou&b. i.Dvolwes the IHOl* .... of mcmnc ......... wbicll requires some intelliaezace ll.Q. uceer:ii.Dc 55) ucl some k-*lac ol awh--•rics (addit:ioD .and sublndiaD). I have cliiCID..-.d -hioa really remarkable." COiltizwes Cary iD • CDIIfidCIIIial IOQC of woice. "Wboon ,.ou uae movi.Dc • ...,.... of diffan1 time spas. like 3 da'l'5 .and 10 Wa'l'5ill ..;ceu that are IDO\IiDc aroUDd at all.ud plot thae •weraces as linG un a cbart. the S-clay liDe will cross tbe 10-day liM &om time to time. altbou&b 1- DOt c:enaiD what e&\11&5 this. • Cary leus baclr. ill bi. chair to ciw the listaer time eo absorb tbe im~ of his ......aatiom. &11 order to make tba liM5 clar ciurioc per;ocis of unow Jlrice il~ I 6Dcl it best 10 - CDiored peacils. It is wile 10 use c:banreuse for lbe ~Y avwace and t-isc for the lo.day avcrace. Whal tile c:hartreule lit>e is below the turquoise liDe. I sell sbon uci wbeD it aoes above I .and co ltmc- Of - · I cet wbipuwed oace iD • while. but at least when tba-e IS • D>lliur n..ad I AID ill tbe market the ricbt way &bd 1 suy witb tbe 1110ve UDtil it baa IWI itJ course.· Unionu~~:~rely. while C..,., wu tradmc tbcte pro...d 10 be _ . oanow uadi.D& mariefcmo consitierilll!. a positioft to be worth talcill~t. So far the ideal periocl II> wait has bisloric::llly 10 ...,. hom one to :54 days. but Cary Deli.- that the key is on lbe chart -n.e and neecis IIMIJ'IIiy to be dia~. Currently be is tll\lllole to tncie cyilow becatDe be bas lost ~ thirds ol his c::apilal tradinc ~ly and spmt tbe otlaer third 011 chan paper. coioreti pem:ils. and tbe prwactOr.
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WINh~RS:LOSERS
F~d Fcntc•y turned to commodity trading m=y yean qo after suf. ferinst Jne¥OUS losses traciinlt Czarist bond&. He has " - e a ~ el¥ide the trulfltiD requjred to support bis December position after he liquidates tbe Sel>t-ber. but Fred bas bee led away for bis claily tnmcruiiizer iDjee-
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William Willi~ rull,· wanted to be a ~~:iaCiator out was ilom in th~ wron~ piace :11 the wron@: ume. lJoaoie to rcaiize his prUnar,r ambition. he tumed to commocilty tratiins:. '"I'bis wn01e ilusmess is icill or be icilied: says Wil· iiam. hoiciinlt up his clens:hed iist and fac:illlt the emperor. "The war to ileat this lhmlt JS to probe ior tile ilac one anci tileD milk it cirv. ~ William accomplishes this by wauinr; untii he sees wnat be believes 10 be a IJ'UI oppor· tunil'!' ed then IIIOYintt in with all his resoun:es. '"I'be way to detennine the size of an irutilli posit:IOD is to d!vicie your Cftdit balarac:e by the IDIU'JUI cieposit requi:eci and buy all you can. Whell the market aoes your way even a little. )'Out base is big ~ so that eve~~ the small mow wiU c:re:ate enoulth lldditional capstai 10 pyramid quickly. and tbeD 7'0U keep OD pynllllidiJII untii )'OU have all the IIIODeY that 7'0U can carT)' home." Willi= is QUite confident at the motDellt that he is about to a peat VICIOI'Y because be lw iustiiiCCIIeCied iD ~ the 11.000 be lost by holdiD& seven pork bellies twO days 1110 lorac with ~ be bo~ fmn tbe Credit Unioa aDd is htlpiq that tbe !5.000 busMis ol wbeat De intencis 10 buy iD the liiDnliDI will rise quidcly -.11 1M ilim to repay the loan before his wife larDs of it and onien ilim tNt of the boule apiA. William's llltra_.,.tive friend. Loa& :£. Baatis. asiu what be is aoiD& to cio if wileat aoes down and be fiDcis bimsclf iD debt to the Credit Uaion withtlut the meaDS to ~Y Dacit tbe obliptjcm. "'WbeD the pine pts t~- replies william. "tbe IOIIIb cet a-&·" ""But." Lata& penista. "isn't it true that iD lillY pme iD wbich 'P!'obabililies - iztwol¥81! the lonpr )'OU piaythemore cenaiD it becomes that a seriesofloues willoc=r? ADd isn't it aiso true that ) ' O U - - ewe~~ prepued for tile first loss. much 1aseriesot ta.m?"UiiliDqallof hisi:- ~ poww. William re;Nies. '11 you can't stud the beat, stay out of the i:i~ • Mllf'tU: M.U. oace read in a booklet that c:uh aDd iuwr. prica Qaft a tezlciency to duriltg tile deii~ - t h or lator. This 1118de a 1 II ell '$ impression OD ).Wws wfto raai:s the impDifWICe of this bit of iai-.Dooa - a . t above tbe Bill of RiP~ He is cur-.dy iCIII& ODe CDBttact of October lift cattle wbich is sellin& 4 cents a pound below tbe cash price of cattle as quoted on tbe DeWIWire in the broi
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inc tile +0 money. Ala 111a11er of !.ct. tbe c:uh price aauJd cizop 8 cents and tbe futures 4 cents anci .,.,u aauid lose.· His ailarp miDc! fuDc:liol>. 1n1: in its USUAl maftllet. Man:us fel)iied. '"HJa¥e lJ'OU a iate quote OD November potatoe
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letters 10 tbe Commodity
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Authtlrity. tbe Oaicaao M-lil• e o - Frauds DiYiliaa biaeriy CDI'IIpWnilllt of the fa ud lllilleadiDC c:uh prices reptiNii 011 tbe newswiftS by an iDcDftaloetent win CIII8IWIW aDd Q~ bow lillY boDest trader CDuici poaibir beat a . - with such unfair rules. .NotlliDclias uppemld to Mamas lillce he tocNt: cieliYery of a carload of Ollioas ODiy to lam that tradiDc llad emied ill that rmt i'tt and his ODiDas werelli"'Utinr; ~ the bqs iD wbicb they were clelnwed. He did succeed in sellirut - o f the~ 10 a dealer iD ~ burlap for~ as much as it CDII bizn 10 have the bap deociorized. Marc:us would like 10 tell of some other of his experieDces. but be lias to leave for court 10 filbt tbe ticltet unjustifiably placed on his car for JW'i
Ucbanac. Dow-Jooes.. ud
the State
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WI~LRS:LOSEP$
luon BentoU.. has had trouble all his lile with unrusooabie people. lD he was prepared for "Show and Tell" b e - &Qt called on. but when un!)rf:l)&red his aame was illwriabiy caliecl. In tbe Little Learue .De was called out em every play. Policemen berd him out of traifit to Jive him tickets. althoutth everyone else is clearly poe faster. N- he trades CDmmociilies. He reeently opened bis third CDIDIIIOdity ecc:DUDt to , . place the one he bas juit closed witb U'IOtber broker wilom he is auio& for rect~mmencim1 the -purchase of com which went down 9 t:eiiiS a busDel fol· lowmr. a sui'IJrisiD~y bearish crop ~ ISSued two weelc$ alter the pur· chase. '"My broke~ obviously ltnew of the ~ aDd ~ot me to buy the axn so be or his f~m~'s Jl&mten CDUld bail out." declares iYIIII. his eyes blaz:izl&. "£...., if he did not I t - it. be is derelict ill his ficiuc:Wy ml•ticm•bip to me because he should bave known it. After all. his iirm c:Wms to hne a Reseatrch ~artment ill OUc.qo richt i1l the Board of Tf81ie BuilciiDc.• Havinct calmeci down enougb 10 discuss his traciia& pbilolopby, iwo aalks of objecriwos. "A $l.OOO accouot really ouaht to provide &D a..enae retun1 of sew:ral buodrecl dollan eacb 11100tb u d - 51.000 or more. After all. it woldd yield 5 petCODt ill a Sa'WiD;s &Dei LoaD witb oo risk at all (to uy oolhizl& of tile use of a ootary public at DO cl:wte>. If YIIU dorl't aet a cbaDce ior p:reater reward. it ·s fooiisb to take the tmra risk. "You bave 10 be especially careiw of brokers.· be CDOtilluu. 1'bey are always foistio; advice oo )IOU like UlJiDI )'OU 10 use stops &Dei ob;.ca..es 10 malce sure tbat l'OU are always 1ettillc out of )'OUt positiolt way or the other. I bad a big profit a iew 11100tbs aao. toolt the profit ad - t into aootber posiz:ion whicb also resulted iD a profit. but I would haw made more JUSt stayill& with tbe first position. My broker did DOt mall:e a siD&Ie move to stop me from SWitcbin& the posiDon. I am still waitinc ior tbe CEA to do somethiq about it, but they usw.r my letters &DYiftOI'&. Three or four yean a~o I doubled my IIIODey iD tbe first liz -tbs of the yec. and my broker thought that was a bia deal. but I bad a friend who ~eel his mone¥ during tbe same period acrvss the stteet. My irienc!'s bmlter is qwte CDIISei'Yalin and told me tbat be really only eq~~~Cted an UIDual )'1eic of 80 pen:eut. l figured if be only dici baH tba: well. l was c:enain of 40 pen:ent .so 1 opeoed an accowu. In SlJite of bis vinuai guaraotee. I lost my mcmey on my fust two tracies iD only a wtoeir.. 10 I am ~g my lawyer fiie a suit baseci on material misrepl'esentauon. laclr. oi suitaDility. and cbtlliWI&." ~l. w~r
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WINNERS:LOSERS E.nc Von p,,..eror i>eiieves aamg IS eve!'1-"'nlnlo;. SO ne Dues All his
traciinl:
ciecisiDIU em the mazme:- tn wiDen maricets are acun, ciunng the inirequent penocis wnen De icnOWJ WDat IS Dappe!IUIO.. When his oroiter calls him with • tr:acimE suggestion. Eric cneciu his cilans anc then ioliows the suuestJOnS th:u A.IV"e aaeci well recellUY tgone in the ciiteCDOJ> of the broicer s s~· gesucm ior a ieast Otte ciay •· When he is aciviseci to taite a iou. &ic usualiy replies tbat "the mariat a profit has had to m well. Eric has great diificuiry in liquidating positioiiS at a profit. &ic once rud ill a book that priees tenti m act best just before tbey ODilapse &Dei worst just before they
mows
rally so Eric sold the booi<. A frienci once suaesteci that &ic cietermille objectives a~ci stops in ad· vance and place oniers at tbose poilus ill the mui
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Der-it N. Widulra ....l believes in following a stntecY of ~ statistical runs. Knowmg iUs own traciiDg limitaUoou. wiUch are iegion. Deposot ioliows the advice of bis broker who is alwloys sincere &Dei ocx:asioll· aUy lucity. Whenever Deposit has a series oi sua:eues with RUII ptllitilllls. be acies money to his aCCDIIIIt and takes iafce positions just ill tilDe for the inevitable tenes of loues. following this. he W>thdraws _ , of bis capital in ortier to trDCie a millimum IIJDOUIIt until his brol 't bel~ it.· sobs Deposit . ., no mooer withdrew pan of my ze. nwning funds than be was ncbt Dine times in a row. I bad to pau ap faar nf iUs suuestioras and take JX)IitiOIIS ill the other fj,.. only about ball as bi& as I had taken on the way down. 0.. ODe of those five, I CDUidn 't take the adYeniry necessary to achi...e the -profit so I baci a loa. 11>e broker claims to be ahead lor the year but it cenainly doem't show in lilY ~ He cl:aims it has somethillr; to do with IDOIIeY manapmcu. but I thilllt he is mi~tznll; his results." Followin1 the advice oilftll Bentaken. 0. posit is about to make a ciaim apinst the broker for the difference betwMoD the n:salts in his ac:munt and those be ~ be sboaid bave bad aa:ord· in2 to the broker's noc:ard. 0... o.tril:ft believes that all adversity is t~. Wba all is laiD& iUs "'•Y. Oscar can be found telliDc of bi.s succeaes to the llllail pwp of st'&J' men ill rnr ..au with II'"Y oo their ties wbo lpead all dar in the ~ because their wifts dri10e tbem from tbeir Dome. WD1111 - kets 111 apillst binL. ~.Oscar is not thin. So 1th:wa be ca b e wallcinc siowlr - c the blocl.. his lips -.me ill lilent ,...,..... bopiDa to find a miJ'ac:ulous ,_,_.,.in bis posilioDs by the time be _ . , . . the amzit. More ireqaady be CIIIIIIOt be fOUDd at all. •r I didn't have bad luck. I -'d bne ao luck at all." be tells all wilD wiD listen. '1 was doiDc all richt tmtil I 101 into those 12 -v-.as of May potatoes. I am asually in the bow a.- or keep in - t touch with my broker so I know at all tilDes "'here I am. However ,lJOt bus:v &DC! 1 bad 110 time to call or read a pa-per for Dine ciays. .&y the time I was iDi~. news that the crop 72 J)er'Ct:'lt pater thaD ~ bad become k.-n to ._,.,... but me. and the market sold down 10 far that! lOt IOici DUL • S o - . Suges!S that if Oscar haci pi8ced a ItO!) ill the market, be -uld .baw suffered little. but .he is i:ousily cUuing a Dole ill the school's oandbox in orcier to pi~ his bead into it.
vi•Im~R.S:LOSERS
Wheeil' Bcndi"' 15 irnown 10 every· rezistereci representative 111 tile i>roicel'aiP;e i>usine:ss except the younlflt anci least experieu~. &Dd tb~ wili unciouotedlr meet Dim soon. He can aiw.,-s be recop&Zeci br the natun of Dis propos.ajs wilicn invoive unortilociox transactions. nuce -~. anci consicierai>ie ume. eifon. ana c:ost to the broire: tall wastedl. '1 ha-.e acecss to 8.000.000 I'OUDCs of Mex:iam coffee which I ca11 piac:e anywhere you want w1thm twelltY·iour houn • he con.Ucies. "if tbete is some way we c:;m piace a hed&e a~amst 11 :md cinch tbe bi& cliiierence between the praent futures maricet anci my cash coilee. Of coune.l WO.Ud expect 110 ~ 011 the silort futures positioll because tbis is a bolla litie beQce." Or. "l am in toueh witb a shipload of 11011quota supr beiD& brou(tbt iD by some Cuban reiupes &lid if we ca11 ciispose of it tbrollgb ygur cash cieput~~~eut I would be ~ad to split the profit with you." Or. "I baodle the fizulllcial affam oi a croup ol220 bnu11 surpDDS who won't maice a move without my &a)l«<. If I ope~~ a commociityacatu~~twith S3.000.000.how miJju- botb baleiit a little &om it?" Wheeler is DOt a major meaace except to bimself wileD attemJ"iD& to crass the sueet unaicied aDd to UDSDpilisticated brolun 10 Ulllious 10 build a profitable dieutele that !bey aceept his halluc:iDatioiiS at face waiU&. Tbis bas bappaec! twice. 1D each cue 1111 acatullt was opeaed aDd a11 order ac· tually placeci ..mst Wheeler's cash positioos oaly to haw him disappear into the msbt leavin& OehiDd • clisCDIIIIected Uliepiaae aDd all "addreu UDic:Down." A fellow stuciet attem'P~ to aslt Wheeler wby be cioes what be cloes. but Wheeler is furti1oely slinitinc ciowD the CDrricior, eatizlc StraDploolcin& ~· anci mutteriJI& sometbiD& about cettinc the -=iusi-.e r\&bt to marilet tbe entire Russiall outpUt of piat:iDum through a holciin& CDIIIJIUIY be is abeut to form.
Ba"lt B-. is lalown to every broiler in the CIOUilti"Y. althou;h be iDYariably GOQ busincu eiMwbere. He is aiways tbe first to aaail iD the CDUJIOII that appears witb a finD's aciwn:isement. Wbell the rqistered ~ta tive begins calliD& p~ clien~. be always reacbes Barry fim, "Put me on your market letter list lor a few IDODW." danancil8arry, ·aDd Jelld me ciaiiy 1:barts on l'riee, ope~~ iDtetal. a~~d "'lume coverin& mercury. bnrilen. and ral)eteed lor the last lew years. Also. would you bave your researcb department take a look at the spread zelalioDsilip be.- April potatoes ud Feimw1• propue durin& the third quarter of leap years ud let me lcDow what they bave to ray? I call be reached e'lelliniSafter 10:30.• Once this illitial amtact bar be8ll macie. the broker need have 110 CDDcen> aDout Barry mnamin& iD touch. espeQally wbell reporu are d~~&. "Wbeu is the eoid stcnap repon on bellies CDIIIin& out aDd what cioes the faoor ez. pect it to say?" asks &arry 011lioe one while the broker's best c!ieDt is wait· in' on hold 011 line rwo to place an orcier lor 400 shares o{ stoc:k at tbe miDute after the repOrt is issued Barry will be certain maritet. Witbill to call baclt to leam tbe iicure:s and ask lor the reactioD on the floor aDd some esamate of wbe:re the maricet will ope iD the momizl&. He would call his IIW!I broker. of c:oune. but does not wisll to disturD him. espeQal/r ~ cause 8arry i>as 110 positioll iD bellies anyhow. Barry u most iD e¥icience at workshops and semiDars prscted a5 busilless-i>uilciiD& cie'Yiee:s by broit~ firms. He call be easily 1 ;mzed bv tile d02eareci notebook md c:hans be is cam'iDtt and by tbe holes iD his shoe:s. Just as the broker pauses lor brutb belore makmg his major pJillt .obout the enormous oppo"unity in the m&Tket because CbaDa ucl r-;;ena have invac:ied one another. Bany raises bis luulci ucl aslts. "How much wbe.ot is cransponed into Kansas City by barae relalive to nil ud how mucil cioes each ban:e hold? Also. wbel! cioes it cet too cold lor lwle tmflic ...c1 what histoncal implications bas Ibis bad for tbe O.inv-Keme• City wheat sprudr Whi~ the speaker tries to a . . - Barry's qaenioas wilhout acimittinc tbat he bas no lcDowlecice wilateW!I' of the Kuaas City lreittht slnletUre. the well-ciressed IIIWI llittin& _. the cioor who was about to ask how to opes~ a 110.000 accoant looks at his watch. J111tS his cbec:k· book back into his pocket. ud - - · DuriDc the relftsbm•u period followiJic tbe speech. Barry bas the ~er backed illto a eomer arltin& him wft, the - 1 0 peste muilet did 1101 bawe ~ "'Oume. amsiderii!J: all the pizzas that -lllicl in the lhlitecl Sta~ By the time the bnlker -pes irvin tbe CDI"IIer uci cleas the
coffee off his ruitcDat tbat Barry bas q,Uied on it. the .able aum- bar left. BerT'J' picks up lour eopies eacil of all the Hterature. takes all of the remainilltt cooicies and ciouchnuts. ceu his parkin& lic:Xet waiiliated. ud leaves mutterin" IOIMthin~; about the tmproducliwity of the .-izl&. · B~ Freftldira S#rtiltt believes tlutt t~ is a wisdom in maims tbat covers any conlinlencY liicely to be faced by a trader. Belt;.mizl bar bad two articles published. one of which atteml)ts to recuacile • Abseac:e makes tne heart ~ foncier" with "Out of sight. out of mind" ;md the other cxplainiD~ why "Bircis ol a ieather flock t01etheT • is Clllll1pietely CDIIIpatible with '"Ea!tle:s don't fioclc.."His "Tboui!Dts 011 Mamns as Appiied 10 Tradia&" IS the ciefinjtM. worit on the subiec:t ...d lw lormed the basis for the chapter !bat follows.
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Wih~ERS:LOSERS
COMME"-ITS " 90% of our decisions are foisted upon us by others. The wife, children, inlaws, neighbours account for 2/3 rds of the decision making process. So it is not surprising that most of the individuals who invest in commodity market will lose." - Robert Vichas , Getting Rich in Commodities, Currencies or Coins Before or During the Next Depression. Arlington House Publ. " Most people like to think it is more productive to look at all the technical wiggle-waggles." - How I Made One Million Dollars Last Year Trading Commodities Larry Williams Conceptual Management Carmel Valley ca. " You want to know what the speculator's marching song is? BUY HIGH / SELL LOW . " -Stanley Kroll, The Professional Commodity Trader I974 " Rules for Money Management and Timing I. Start with$ IO,OOO 2. co~t no more than 50 - 60% of equity 3. At the beginning of the month throw a dart at the board until the box gives you a trading recommendation. 4. Liquidate your trades once your reserves have exhausted or at the end of the month " - Eugene Epstein, Making Money in Commodities. Braeger Publ. Inc.
WHAT SUCCESS AND FAILURE MEANS Success or failure is the just result of what U have done in the past plus what U do now. Success carries with it a great deal of responsibility. - to U'reself and to others.
WINNEP$:LOSERS Success too suddenly can cause shock vibrations. It can whiplash U're emotions. It can make U "schizophrenic".'rt can make U a new person. U are suddenly wealthy. U are dreaming right away, - "castles - yachts, Rolls-Royces, 2-3 homes, - $I,SOO gold watches" - a barrage of lovely things. This sudden reverberation thru U're psychic results in an astonishing alteration of personality. The success makes U a new person. The old personality is lurking in the background. It cannot cope with the new personality. Sudden wealth evokes sudden change. It will send shock waves thru U're judgement, self-awareness, perception and appreciation of new and old things. Be cautious of new success. If U have made $50 - IOO,OOO in the last 6 months to one year, don't get excited! It takes 6-8 years to change U're mind's behaviour patterns. Take at least one year to value what is happening and what has happened to U. Appreciate what. success can do to U in the future. Use success, - do not let success use u. Apply the same discipline that created the success - to handling it. It wud be very sad, sad, sad, if U're success aborted because U are not used to success. Success should and will become as free and non-ending as the air U breathe. If U lose that $500,000 U're going to need mouth to mouth resuscitation. In the beginning, success is a heavy responsibility. Sudden success to a loser results in his feeling that every trade is a sure thing. It's the "King Kong" syndrome. Success feeds on itself - just as losing does. If u can handle success, U can handle anything and winning will be self-perpetuating. I do not wish to describe losing anymore, at this time. It is disgusting.
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WINNERS:LOSERS
TABLE OF WHAT WINNERS AND LOSERS DO WINNERS
LOSERS
Patiently sits on his money, waiting for the sure-thing trade & once in does nothing until he shud exit the market.
Cannot stand to have money lay idle. Once in the market he cannot stand to leave the trade alone, overtrades as they cannot bear to be out of a good thing.
Has patience.
Impatient. Overtrades.
Keeps his trading and at:t:itude simple.
Watches all the wigglewaggles. Makes everything complicated, impressing himself with his intellect.
Is happy to go either long or short.
Is afraid to short markets.
Doesn't listen to tips. Always looks for unusual pressures on the market. Digests news events cynically.
Is a news monger. Wants everyone's opinion, always buys at top of markets when news is most bullish. Is the last bull to buy at the top of the market. Easily swayed by bull talk & bullish news.
Never quits.
Never wins.
Accepts the things he cannot change, has the courage to change the things he can & the wisdom to know the difference.
Is stupid, pig-headed and a whiner.
Let's profits run, cuts losses short.
Cuts profits short, lets/ losses run.
Price movement trader.
Price level trader. Buys on days of price declines and may short on price rises.
A loner, or at least independant.
Greedy & follow the mass type of trader. Follows the dictum: - misery likes company.
WINNERS:LOSERS
Searches our rhe loaded trades.
Finds high-risk trades for excitement.
Is foremost a controller.
Sloppy slovenly, lazy, immature, irresponsible, careless, afraid, frivolous, undisciplined.
Appreciates the game being played in the spirit of fair, good & bad bets. Is affected by the profitability of the event occuring and the costs of playing the game.
Probability of ruin doesn't receive the cool reflection it merits. Generally, unconvinced that he cannot change the mathematical expectation if the game by the way he plays it.
Squares up to reality & readily admit their· fallibility.
Have an overwhelming desire to win. They persuade themselves that they can win & keep going & are not through until they are thoroughly defeated.
Hungry, intent to take a turn & know there's no easy way of doing it.
Greedy, stubborn, lazy. bury their head in the sand.
Invariably thorough assessors of background fundamentals & may discuss in full every aspect of the market with whoever they can.
Listen to tips, - never analyze them properly.
Looks for the winning edge of a proposition & analyzes the human element of the market.
Born bulls and are always looking to buy. Early in their trading career are happy enough to rely on broker's advice. If this is initially correct, they think it is all too easy & take over the / decision making themselves. They will then find a way to make their broker a scapegoat.
Can smell fear in the market & act ruthlessly on it, taking advantage of it.
Is not even aware of the psychology of the market.
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Consider buying prices on strength as well as on reaction. Considers sales on sign of weakness.
Buys on weakness. Sells on strength.
After a major upswing,looks for evidence of a top formation before selling. After a major decline, looks for evidence of bottom formation before buying.
Buys when prices seem low enou ·gh & sells when prices seem too high.
Lets profits run. When :hey begin to fade remarkably, they liquidate.
Cut profits quickly. If they begin to fade, holds tight.
Will regard any pronounced loss as proof that liquidation may be in order & will protect position with stops.
With any loss, waits for the market to come back to enable liquidation on favourable terms.
Straddles only when straddle itself has merit.
Straddles a loss position to defer taking a loss.
Will test a method before putting money on it. He will test advice, advisor service or broker before following recommendations.
Will follow advice of most convincing broker or advisory report, & if that proves wrong, they will try somebody else.
Will prevent a good profit from turning into a loss.
Will attempt to force the good profit into millions by next Wednesday, but will casually watch as profits erode.
( Have U gotten the message who the winners and losers are? )
CHAPTER SEVENTEEN EFFORT & DISCIPLINE WHAT THE WINNERS HAVE
Vi~
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Some cU6c.ipUnaJty
Jud.~
VISCI'PL1NE ~'/HAT
IS REQUIRED
If there is one consistency among successful traders, it is their disciplined and concomitant use of a good plan. It shud be evident that no chapter in this book or any other can make a successful trader out of anyone, if he does not commit himself to the art of discipline and effort. Luck ma~ affect results, but the judicious, determined application of one's trading plan will, nine times out of ten, give u profits, and profits which U can keep.
Rich in CommodLtlu, CuJVt.e.n.c.iu ol!. Coin6, Be~ol!.e ol!. Vwz..i.n.B :the
The trick according to Robert Vichas, Getting
Next
Ve.pl!.U~ion, is to hang on to the slimy lucre that always "slides and slips through our grasping hands". He is stating here - " real wealth acctmmtulation during ~y protracted period of our lives emerges only from exercising. substantial control on our existence "
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EFFORT Habitual plungers, apparently, invariably go broke. However, can U imagine what happens to the astute plunger, who is endowed with the perseverance and patience to wait for the golden opportunities for which his system is tailor made? And he plunges. He reeks havoc to the markets and walks away with huge bundles of money. It has been said of the 25% of traders who win in any given year, that only 2% manage their skills with discipline and effort, in such a consistant manner that they are insured of re-appearing year, after year. ( Remember our thinking 2% ? It correlates, doesn't it? ) U want to do this. - Don't U? But, U must apply U're skills in a consistant manner, self-creating an effective approach and self-disciplining U'reself, evolving a great deal of effort and as a result, achieving the trading plan, and giving U'reself huge bundles of money, like the astute plunger above. There are I68 hrs. in the week. Roughly 20 of these hrs. ( II.9% ) are devoted to making it. If u take into consideration the total number of hrs. per week, and if U are a full time trader, do U believe these 20 hrs. merit U're full attention? Enough time remains in the other I48 to play! If U are involved with another livelihood, - how about giving IO hrs. a week? Just change U're trading style. Approach the market on medium to long term basis. The importance of training U're mind to adapt itself to a trading plan and to claim victory follows from the fact . that material manifestations - like money - always trail psychological assumptions. If U are afraid of the market, or if u are not aware of what is involved with charts, then there's little way that U're psychological make-up will allow u to adhere to a disciplined plan, no matter how great U're effort. The trader will walk in a vicious circle, - acting like a non-starter, - if he bucks all logic, like Taurus the Bull. / There's more than effort involved and it is discipline, knowing all the successful aspects of trading and sticking to it. If U are a loser, the degree of ineffectualness is already programmed into U're psychological pattern. If U wish to become a champion, u must re-write U're program, by-passing previously learned habits. This part requires effort, and even discipline, to develop the appropriate discipline for successful trading.
EFFORT The winner possesses tremendous self-control, needed to over-ride the sterile habits developed and rehearsed from many year's of reacting to his environment. -The winner has psychological self-mastery. It has been said that successful speculation requires, not knowledge, training or unique insite into human awareness - but, simply self-awareness, and mercilessly throttling ~~e temptation to lie to oneself. The effectiveness of any system is dependant on the degree to which it is followed. For e.g.:- U must learn to watch the market developing - learn to sit quietly while others panic over the fact that they are· not in and be aware of the fact that being into yesterday's success, cud assure to-morrow's failure. ( Read the last part of the last sentence again and think about it.)
u must bring a healthy skeptimism to the market in the realization that well trained scholars with a deep and abiding interest in the field, do not find it incredibly difficult to disagree with one another. To such affirmations, U will remember.that even a broken clock will be rite twice a day, and the capacity of the human mind to resist the intrusion of new knowledge is close to infinite. Be aware that isolating, quantifying and successfully trading the non-random elements of the trading data U receive, requires unusual determination and discipline. The technician must be aware that he is trying to get more out of experience than is in it to begin with. Commodity futures trading has the same large challenge - the same small promise as any all-encompassing system, such as exists in any other discipline - be it medicine, philosophy or law. The present state of the statistical art in commodity futures forecasting warns - don't look around. something's gaining on U. It's the random walk theory - the new " King of the Hill". Those holding that random walk model describes reality better than any other model do not say that the trader canno~ make money. - They merely promise him the fight of his life, after paying for the privilege of trying. If he's going to have the fight of his life, -if the market is random or not, - then the trader is obliged by the mere nature of the market to seriously apply himself to it. In chapter 14, the all important concept of mon~y management is thrown at u. -and, I mean thrown. If the trader lacks tae discipline to set objectives and to risk limits and to act when either is reached, he will be stullified by the mi~take that befalls many traders - it is
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the ass·~ption that ~uccess can be certain, if he adopts only a rationale trade selection and intelligently follows the elements of his successful plan. Part of discipline is one's involvement with money management. It is incredibly critical. Talk to any reasonably astute person in the business ( almost any business ) and he will agree with U, that the discipline of money management is just simply essential.
I'm going to sbow U something. Do U know what the market is like? Some say it is a maze. Do u know bow to get out of any .maze that exists anywbere,anytime,anywhere? Discipline will get u out of any maze, & in this illustration, keep one band on one wall at all times. ( That is all u need to get in or out. ) Try it. See what it is like to "feel" discipline.
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WHAT TO 00
( cii..o c..i.pline )
U my friend, are the best protector of U're wealth. U and those with whom U align U'reself - all those who u permit
~
-t
EFFORT to o~bit in U're world. U are the centre of U're world. U have the rite to select U're friends and associates and U will be successful to the degree U're able to direct and influence them. - not them U. U must discipline U'reself to be aware of the effect others can have on u. As with any elements of self-mastery, U must discipline U'reself to be careful where U trade, how U trade, with whom U trade, whether u drink alcohol or not, and when, and how u keep U're physical being in the shape that U feel is required to evolve the discipline, and style to which u wish to adhere U'reself. Do not drink during the week. Do not put commodity trading down the list from U're other job or going to the theatre, drinking or socializing, or drugs, - at least put it at the same level as U're main job. Do not stumble over the simple 11 mole-hills 11 that exist in our lives. Take it easy. Trade simply. Acquire patience and realize that U cud be U're own worst enemy. Lack of patience and inability to wait is the largest single cause of losses. Winners train themselves to reject thoughts of losing, - at all times. Most people fail to take control of their own lives. They let others make the decision for them. They let a new habit creep into their mind so subsequently they let the bad habit rule them rather than control it. It has been said that 6-8 yrs. are required to replace a bad habit with a desireable one. ( 6-8 years !!! ) Strive to rid U'~eself of bad habits and the bad habits of others. Restrict those that orbit in U're world. If U find they have bad habits, U must get to know what these bad habits are. If U seriously desire to accumulate large sums of money - U must be willing to act in a courageous, decisive, civil-like manner and this ~equires disciplining with the aforementioned factors. Discipline U'reself also to realize that success or/ failure is the just result of what U have done in the past, plus what U do now. On failure, the successful trader healing, re-affirms what he knows of adding to his store of wisdom, of persistence looms large and is
gets up, spends a few days and goes about the business realizing that the quality virtually irreplaceable.
Simplify trading to one type or pattern and see if U are successful with it, and trade only those markets in which
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U have consistantly made money.
u have to organize what U do and then be able to do it when U don't feel like doing it. U never want to be in such a hurry that U can't wait around for the few markets that are good. If U decide on medium to long term trading, trade them quietly. Sit back and wait for more. Stanley Kroll stated that 11 it was never his thinking that made big money for him. It was sitting,- sitting tight. -waiting for the right moment, - striking, - sitting and waiting until you take profits 11
There is no better method of self-discipline than the embarrassing and unalterable testimony of errors of judgement plainly inscribed in U're own handwriting ( see chapt.I3 ) . From these notes to U'reself - success will evolve.
Discipline U'reself to duplicate U're successes - concentrating on what constitutes U're success (Dru1lll!10nd's Law). I suggest to U that U discipline U'reself to analyse what U do right, - ( not what U do wrong ) • Learn from U're successes, not U're errors. Don't take profits quickly for fear that they will evaporate. Don't be reluctant to take quick losses. U must do the opposite. - don't limit profits, and don't let losses accummulate.
SOME DISCIPLINARY RULES Don't overtrade. When in doubt, stay out. If U wish, trade / with the trend - not against it. Get information on the current market picture - use charts as an additional tool. Decide on a trading plan and follow it. Do not overtrade U're margin. Have a " mental " risk limit for each trade. Ignore well-meaning, but irrelevant bad advice. Remove a portion of all profits from your accounts. Be slow to change as long as the system U are using is fertile. Duplicate a profitable system. Experiment cautiously, until U are able to command U'reself to do things that U shud, but may not want to do. Develop deep calmness. Increase
.._I
EFFORT U're receptivity of intuition. Know U're sources of profitable decision-making and refuse to talk about it to others. Focus on the loaded trades and do not stray into marginal, or even bad trades. As mentioned above, write down on a piece of paper U're reason for making the trade. Once the reasons are there in black and white U can quickly see whether U are crap-shooting or not. Don't involve U'reself with high risk trades,they will nickle and dime U to death. The only big money to be made is by sitting tight on good positions. ( Even if it's only for a day or two ) . Observe U'reself and the majority from a disinterested and detached position,- which is a difficult step to accomplish. Don't walk into a brokerage firm and expect to get rich by Wednesday. Learn to look at the market U'reslf. Study what U can and analyze positions to make U're own decisions. Have a hobby to occupy U're time, as succe~s cums from quietly picking the good markets -quietly trading th~ and quietly waiting for the market to offer profits. ( If U have nothing to do but watch the "ticker" tape, trading is more difficult ) . Do not anticipate reactions to price moves and do not make trading decisions based on margin calls. (Do not meet the margin call- get out!! ) U shud not becum entrapped with an ecstatic framework. U must discipline U're thinking to comprehend as many relationships as necessary - to determine whether the price of a commodity is headed up or down, - but don't let this affect U're realization that once a plan has been formulated U shud adhere to it ~~til U decide on changing U're style. ( The power of selfcontrol and trusting in U'reself, after thorough preparation will lead u to halycon days ) .
The above is a clear-cut verbiage, by way of undulating clearcut suggestions to enrapture U're grey cell matter ( U're brain), if it hasn't by this time been freaked out. It is presented in the manner of requiring U to be aware of the things U have to remember. God help u ! This book is full of them. But, one rule is simple, - U have to have discipline to get to know all of them. However, the one starting advice is keep i t simple . . . . . . this applies to every aspect of trading/ Some day the above paragraph will appear to U as simple. U may be able to rhyme it off verbatim, but this takes time. I do not hold to the fact that "loss is inevitable". I like to think of winning, and not worry about losing.(Drummond's Law) But., but. the above words were spoken by an international poker player - that loss is as essential factor in the game and that it is to be controlled. A winner is foremost a
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controller. He squares up to reality, readily adnUtting their fallibilty, but he is well disciplined, hungry and intent to take a turn.
If U're going to be disciplined, at least be disciplined about U're losing - CONTROL it!
EFFORT
WHAT IS REQUIRED Predictive skills are not easily bestowed to the casual reader. They are acquired through work, experience and delving deeper and deeper into the thoughts of U're mind and how it interprets what makes the market tick. He who wud accomplish little,will sac~ifice little; he who wud achieve much must sacrifice much; he who wud attain highly, must sacrifice greatly. The market does not habitually shower loose dollars on the casual player who p2ays the game. The chartist ~ust be ready for thorough study and hard work, and learn to develop experience. It is an art because of its skill, and the finesse and experience of the technician are without doubt the essential ingredients in joyful trading. The technici~ must constantly check and re-check. He must apply himself affectively to the market, and this requires diligence in everything U do with U're life. Centuries ago, Plato told all of his students to maintain their health and physical condition at opt~ levels if they were to be among his best students. My friend,U're going to have to get up at 3:00A.M. and jog and give up all booze. ( I am partly joking. ) I do not drink during the week. I do not socialize during the week. I do not go to bed past IO:OO P.M. during the week.(I get up at 5:00 A.M.).I jog, I drink Perrier water, I'm a health food nut(but I luv meat & enjoy French Cuisine - but only on weekends). I make my own bread(with 2! grains). All of this requires effort, but in time, one becums well-disciplined & enjoys it! )
EFFORT So, disipline is required and this requires effort. U can't have one without the other. The trader shud bring a healthy skepticism to the market place. U have to learn to withdraw U're attention from all distraction, whether they happen to be the hub-bub of telephones or someone who wishes to impress U with his/her knowledge, of what prices are doing or going to do.
u
must require U'reself to attract the right information and realize that only accomplishment comes from practise. U must put forward great effort and not be way-laid by the psychological permutations and expressions thereof, by another trader, who wants to tell u what he is doing. - take it with a grain of salt - it will only clutter U're mind. Predictive skills are not easily bestowed. Make U'reself realize that few trade everyday and emerge winners. And, almost anyone who has the fortitude to await those opportunities, for which his style is tailor-made will succeed, where his astute, but more active peers will fail.
Work on the capacity to develop a winning style, and resist deviating from the style that customarily wins for U. Sticking to a winning style requires patience and perseverance. Force U'reself to realize that there are no short-cuts to trading success, and no substitute for experience, knowledge and hard work. Force U'reself not to act too quickly when U're trying to make money, and too slowly, when U' re trying to save money. The opposite is true.
RESULTS U're thoughts & action will crystalize into circumstances of wealth and financial freedom. If the task committed to and the effort and concomittant discipline fervently applied, this will enable U to becum a successful trader and will encourage U to pursue U're activities and U're trading more aggressively .. If U play U're hand correctly with a plan in mind, U are likely to end up with more profits than U anticipated.
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EFFORT
u know the old saying, "the poor get poorer and the rich get richer", -well, it's true. But, in this day and age, particularily if it's not inherited, it's acqui~ed th~u diligence and hardwork. ( And in the commodity industry, it can be achieved honestly.) ( Those who inherit great wealth and are not diligent will find that their life and wealth cud be frittered away. )
Remember the big bull markets of 73-75? Well, those with discipline and effort traded with less frequency, rode the trends, changing their trading styles to the new forces which entered the market. ~hose that didn't were whipped. Those that had the required pistache, grappled the market with both hooks, having the discipline to attack the market as befits a pro. They discounted official reports and proclamations made for genera 1 public consumption. ( They took a broader view of the market, in fact, an inte~nationa1 view.)
Learn all of the above factors. In fact, learn everything in this book. Trade, but also take 6 mths. out of U're life and read everything u can, until U've gone crazy. Read 'til U know. By all means do some trading, - but learn. Apply U'reself. Get into it. Get with it. Some day with this effort and resultant discipline, the market will be of much easier pickings, altho' it will still require a great deal of U're effort. Do u know what it's like to write this damn book ? Getting up at 4:00 A.M. everyday. I want to trade the market. I've taken three months off. It's hard! But, I enjoy it. I'm getting the greatest kick out of it - almost more than anything I've done in my life. I cud make more money in the market during these 3 mt.hs. , than I wud ever dream of getting_.-from book royalties.(if it's ever published). It is beautiful - as beautiful as what comes from hard work_ in the~::market place,- and that's making- money. One alteration please ..... . almost as beautiful. I luv making money - it's fantastic. - the fruits of my labors - great stuff ! I don't enjoy so much having the money, as making it. Money is good for doing things with. " Money's what makes the wor1 d go round". and, it's my money I want to use to grease the world. Too bad I can't print my own money.
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CHAPTER EIGHTEEN
self awareness THE HOLY GRAIL AND THE MOST IMPORTANT PART OF THIS BOOK
SU.CC e.6.6 tl u£ Spec.u.1..a.:ti.o 1'1.
IL equi..Jte.o
Wha..t 1mpa,Uw .:the Vew..i..on Ma.fU.ng PJtoc.e.o.o
Wha-t Sel.IJ- ex.a.m..i..na..t..i..on W..i..U. Reveal T.IU1..r..6 - a.c..t.<.o n.ai. An.a.1..y.o iA
Beha.v..i..ouJtal.. Slu:Lt6 Fea.IL
SUCCESSFUL SPECULATION REQUIRES Most people fail to take control of their lives. They let others make the decisions fo~ them. Most people feel that there is little they can do to change their lives unless the option to do so is forced upon them. They continue to ploc along in their old ways. Granted, most people do not have ·the option to change their/ lives. But do they? Y~y a person has grappled with his environment and changedit anc have becum alive with their new life. They either ·do it voluntarily or some personal or social disaster sweeps them away from their old ways,to some new found existence. However, most people just trudge along and even let new bad habits creep into their lives. Subsequently, they find it easier to let the bad habit control them, rather than they control it.
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Consequently, unwanted habits tend to change slowly. It has been said that 6-8 years are required to supplant a habit with a new one. It is particularily hard to supplant a bad habit.
Robert Vichas feels that " most self-imposed habits result from fear, greed or imitation". 2% of the population think for themselves. I2% copy the 2% and the 86% believe what they read and hear and do what they're told. William Morris,"How to Get Rich Slowly, but Almost Surely" Reston Publ., suggests that" self-perception, self-awareness through researching one's own attitudes and emotions may be the real secret of consistent financial e£fectiveness ". He claims that this is an essential pre-requisite to getting rich. To that I wud ·say - at least. Morris advises that an investor probe his inner feelings in order to determine the market's influence on him. Successful speculation requires not knowledge, training, or unique insite into human affairs, but simply self-awareness. U must know U're strength, weaknesses, and mercilessly throttle the temptation to lie to U'reself. Any approach to the market is dependant upon reality of human weakness. If the trader can becum sensitive to the market's effect on him, he can effectively apply his method of trading. Every trader needs to insulate himself from all psychological pressure. Since many psychological facts are psychological quirks and are not conscious, they must be brought out into the open, whereupon the task of controlling them is easier. I know of one trader who feels that all speculators shud have an accounting with themselves everynite based on settlement prices. This is a hard task, but is one way to approach the market in the context of appreciating U're psychological / impact towards successful speculation. The winner must train himself to reject thoughts of losing at all times. He must concentrate on winning (Drummond's Law) He must forget about his failures. He must becum aware, alive. Alive towards himself and aware of his environment. It has been said that the majority of people are subjective towards themselves and objective towards all others. The real task is to be objective towards oneself and subjective towards others.
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Futures trading forces those who undertake it to examine themselves in a very careful manner. They must test themselves to see if they can live in relat~ve peace, especially with those two constant companions - fear and greed. He must cum to know himself more thoroughly than most people care to.
WHAT IMPAIRS THE DECISION MAKING PROCESS Well, old habits will stop U dead in U're tracks. There's no way u can be successful in any field if U allow self-induced habits such as fear, greed, envy, jealousy, lazyness, -what ever, to impair the ·capacity of U're brain to cope with deciding whether or·not to apply, for example, U're specific trading plan to the market. Let's say U have just applied U're technique and it is working and u suddenly develop the King Kong feeling greed takes over - U're mind blows fuses left and rite U have pyramided like crazy and oh, ooy - just as the market is topping - U're totally committed to the market and wham! - one week later U're bankrupt. u allowed emotion to catapult U'reself beyond all bounds of objective reasoning. Let U're brain run wild with emotions in the luv-bed. The market ain't no place for the release of emotion. When U win - stay calm. When U lose, stay calm. When U commit U'reself to the market, stay calm. Do not allow U're brain tissue to be shackled by the debilitating effect of emotion. If U have had a fight with U're wife, stay out of the market. If u are hung-over, stay out of the market. If you are on drugs, stay out of the market. If you are not in good to excellent physical and mental shape_, stay out of the market. U're brain is only as good as what it is attached to and as it lives off its host, its host must be in keen shape. Being in good shape includes the fuel presented to the host, in the way of food, air, climate, and impact of the environment on the host's emotion centre. Psychological studies have shown that pressures, tensions, anxiety, and fear seriously impair the decision-making skills.
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U may perhaps, tend to be greedy, over-eager to succeed or rush too quickly into some risky speculative scheme; U may hold on too long, ...... U will then act in a self-defeating way. Old, bad habits are constantly being re-inforced. Alto' U may strike to remove them from U're life, U'll find that they gradually slip back and these old and more firmly established habits re-assert themselves. One of the worst old habits is fear. It absolutely paralyzes the decision-making process~ Fear will cause even the most brilliant to doubt his abilities and trade from the wrong side of a market. Fear and a high degree of risk aversion will cause a trader to react emotionally. As Tagore said, " Pessimism is a form of mental dysomania. It distains healthy nourishment and indulges in the strong drink of denunciation and creates an artificial rejection which thirsts for stronger draught". My friend, can U see .what probing the aspects of what affects the decision making process reveals ? All of the dreadful bad habits that occur to nearly everyone's psychic make-up, all these old bad habits are there, there, there, and no one who is a loser can hope to make lots of money if he still allows these silly annoyances to continue to plague his enjoyment of the market, and what life has to offer. And that is that One last suggestion. Be wary of allowing U're knowledge and appreciation of the market to increase until U know so much that U know too much. U will only then cum to realize that U can find an explanation for everything. " A speculator's bag of tools is never over-filled until the noise of information systems clogs the channels of clear cogitation" - Robert Vichas. Remember the caption that ! want to put on every page, -Ke.e.p -i..:t .6-i..mpf.e. !
WHAT SELF-EXAMINATION WILL REVEAL The commodity markets bring out the best and the worst in all of us and only by succeeding, we not only become better traders, we also becum more disciplined people. We look at life differently. We are more tolerant of others since we have failed time and time
I8 SELF
again, before we bec~~e successful. We becum less concerned for money for money's sake only. We take it as more of an indication of our abilities. Self-examination may lead U to the realization that U sometimes act in a self-defeating way. U may hang on too long because U're greedy or eac;rer to succeed, or U just cannot leave the market alone. When the commodity trader brings his psychological make-up into the open, examines h~self in a very careful manner, he must first test himself to see if he can live in relative peace with our two constant companions - fear and greed. Self-kpowledge can show things within ourselves which we wud rather not see but which once aware of can lead to an inner peace, not available by any other means. The mature trader will recognize that judgement cannot be reduced and it can never be eliminated. U must never rely on solely technical approaches to the market. Any reasonable self-examination will make U aware of the potency of U're brain·. One of its most potent forces is its capacity to understand. Isn't that what is supposed to make the human species so brilliant? This little brain of ours has the amazing capacity to know itself. It goes thru a decisionjudgement making process, before coming out with a resul-t. Only thru the capability of its facilities grown and nourished by discipline, and effort does it have the capacity to know its host, and employ the best means to satisfy a happy return to itself and to its host. ( Remember this. )
( Remember also that: ) Thoughts of action will crystallize into circumstances of wealth and financial freedom, beyond all expectations /
One last personal comment : - I have for the last 3 years delved into the subject of psychology. I have spent hours in the public library, trudging tbru psychology books. I have becum involved in group sessions. I have becum involved with a~psychiatrist. U name it, I have done it. I've even filled my bath tub to the brim, jumped in, candles glowing in the dark, bottle of champagne, caviar, ·- all the things I like - sound of the sea roaring thru my stereo system - stayed there, my mind flowing back into. _my life - _
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almost to my mother's womb- I was able to see my "crib", I saw something that I threw out of my crib - even the room I was in Thru all of this I've come to know more about myself. I've cum to know my ultimate weakness. - I am not a realist. To have a goal of making roo million dollars in commodity futures market isn't too realistic But the funny thing is, I know I a~ doing it ~ Also, ( in case U're interested ) I do not know what is "good' or "bad" . I presume that my personality is best described as being "romantic". I won't mention any malajustments I may have. Now, I ask U ! Cud U put U're basic weakness in print and expose it to the world ? Or, even know what U're basic weakness is ? It takes time and a lot of probing ( I suggest two years), but, when U know O'reself, U will appreciate how easy it is to be honest and open about things. The only thing U will hide is U're style and approach in making money in the futures market. - U will never let anyone know what U're up to. Remember, when u enter the pits with U're orders, U're dealing with enough market activity in that space and time without being "bracketed" by people U know.
TRANS-ACTIONAL ANALYSIS Some authors estimate that 90% or more of our decisions are foisted upon us by others and accounts for 2/3 rds of the imputs into our decision making.processes. Robert Vichas :- Getting Rich in Commodities, Currencies or Coins, before or during the next Depression (Arlington House Publ.)
states:" Some decisions are ·forced upon us by legislative decree - taxes, prescriptions from vitamin A to hard drugs, seat belts, census information, conscription, investment desisions etc."
18
SELF " Most people are duffers, so it shud not surprise us that most individuals who invest in commodity market3 do lose. The fact that they bungle has little to do with commodity speculation. They are willy-nillies. They have been paying the table all their lives." " It almost seems as if there's a conspiracy to develop and sustain a can't do attitude in individuals - pressures from friends, neighbours, relatives, social contacts and society in general create a posture of immaturity."
Many analysts do welt in obtaining, deciphering and analyzing information. The problem, however, centres on the trader's thinking processes, which are sometimes coloured and dominated by motivational factors that may have their roots in childhood experiences. Thru self-analysis, the trader will discover the nutritive source of these adversaries, and tear them out mercilessly by their roots.
Larry Williams states that " making money in the market presumes a difficult psychological problem to many people for two reasons. First, a natural reaction to news - it is invariably wrong - everyday logic does not work in the market. Second is directly related to our own self-im~ge and early childhood motivation".
I quote with the kind permission of Tewels,Harlow, Stone, authors of "Commodity Futures Game. Who Wins,Who Loses,Why!" Publ. McGraw Hill
the following treatise, presented here for easy reference on the following three pages:
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• TrcutlCtJonci cnaius1:. Ont svstemati: aoproach th.t m.,. $erve as ~r: expianatory mociei oi. tile roie oi. ieeilngs an~ thought ancl t.i>~ir mteraction is ~vaiiable in a reeen: poouia: stuo:iy." The mocie!. cn,aruo.llr cieveio!>eC by Erich Beme. has ~, n:.:nec ·· t:ansactionaJ :uWyus· ..nu is b.ucci ur. the premtse that in eve~· person there are at least three difierent peopiethe Parent. the Aciult. ll!lci tne Chiic!. Tbe Parent is tile reeorciing tn the bram of tht! ·tndiviciual's lii'St five yean. The al and nonverbai acimonmuns that the chile heard anci saw m his own parenu. The repla,- of the Parent ts a poweriui influence throughout eve!")· incitvidual's life. md the unperativcs pven in the e.rir yean Cllll De a burcien or a biessiiiJO, depencimst on whether they have been wciated by the Aciult. The Child is the bocir oi ciata of internal evenu that reeorcied when the little person wa> ciependent and clumsy and b.aci no voeaowary to speak o!. Because uf this condition. l.be Child i.s composed of feelings and emouons. Ha:ris maiatains !.hat the Adult deveio!)l as soon as a penon i>ec•ns finding out io: himself what is different ai:tout life irom the ·~ught concept" of life in his Pare~~t and "felt concept" of life in his Child. " Tile Adult relics on a "thought COftCC1lt ... which eu..Unes and u1)ciates the data from the Parent and Child 10 cieter• mine whether it is true and ;appllcoble. • It is important for the tracier to understand tbe implications of the Whit· ouote at the bestmntn& of the ehaoter.• Just A> tbere are im110nant rchnion>hil"' tkwt Mte ex\crnwJ \0 the U'ildcr, n~ny o( whic:h meay i,.,_ quiln\ ,_ fiecl .:mel l.:amed. &here :JJ"e tr.:an~aeuun> tl1.:11 take 1-11""~ tnt<:nually .:nul m.:tr be involuntilfY as well. The ·bound.:an~-. betw""n the l'.:orunt, Adult, ;and Child ;are lraciie,' .. ncJ Lhc totiil !)t:n.on may not ;alway> k~ whi<:J. J>ci'>On 1> I(Otnst to '""!-'ODd to ~ 11iven tra~W~ctiun. One ul the basic re:&>etl> ior unuet'lit;anchn~ thc idcntlly uf hi> Purellt, Adult. and Child is illu.tr.:ued in the u-adcr·,,..,.o lor""'"'" WIM:na tr~•h:r t:nten :a positiun. but dOc:. not IJliin an objective .a,_.d a :.tup. the plltl'l b incumplete. When quened about thc omi>.10ns. the u-.:uier IIW)' re1-1iy ~rn Willen it." The problem with "watchinc it" i> that it is nut" •t~1emeat ~~U~Cic b~·tbe Adult in the uaticr.lt the tr..de aoc:. b;oolly,tbc: amuun1uf...., tuk._.. , ..-ill probably be cre.:ater thltn &he amount ti1.:1t wuuld b.:lvc lNG~ 111ken 1111<1 the .~dull reqwred the trader to t..Jke the time to make " i~ d~ion .:oboutl.be value ul a COIII!tlcle pi11Q.. Jwol :&> i< i> LmJ""•iblc tu lc:&<:b naviat.:t· tion in thc midibl.: to build "" utolinoum JIUan in the n1iddlc of" b.:ad loss. The Adult. funcuun11111.,." J•ruboobility ... timattnr, know• that loucs must be piiUIIIcd in fld,·anL-c. The Child wunt.5 the feelin.; of assurance that everythine will be all ri~;ht without &he t>IOJn. The Chilo! wants no truc:k with unsavory CODSCQIIIOIII:t,>. The Parent noi11ht ;et in tloe .:~ct i>y :Jms appropnate 10 &be ~~~:~;~~>Kin. $UCh w. --s...,er n-1 " m11rgm c.:tll" or some other ruie th.:tt will be ~N~rked by -.h,..,I.J~ or -uu11ht." Havin" • plan oripl\lltt:d b)· &he At.:auun 10 tam.,..r with tht: plan is founci«l in his Cbiid and it. I~ vuinurabilitic.. The Child is responsii>le for pullinc out" >IO!M)rder ju>t bo:lure it u elec:led or wishin& to cancel an obiective beat use the llliltket is "IICtinlt well.- Such direetoves from the Child ma)' be secn tn orrien marked .. ..,nee! when eio>e" or "t~uod until executt~~l" The "'•Y tn which the tr~der confronts re;aiit)' cives " b~~>it due 10 hi> eventual suoc:ess or Iail ..re. Tbe s~iul tracier wtth ~ well-d~ ... cl .. h is 1ooci at aciapt1,11~ to v11rious market urul tr.>t stOJo-ioss orders mu•t be pj.,.,.l orre\'OCAbi)· ur the e will be rutned but ,..J.,tn be will be: ruined. The •u•· ceuiul u-ae wtth hi> {.,lin~:> of lo:~&r !Child!. pnm.ariiy that what i> Willi ted most-mon~· '-can be: iu>t ur dented. He I&IUi contrnllcd his teehncs I Child!. for he rCtliizes tb.:lt " vi<:llm l)i f,...r ~uhiv.,tod by c,...J c:an'bc lost to &he s&ultific.ounn of hurnn~ lur much but ""'"" to ensure hule. Th~ unsuc."'Ce5SfuJ tradw L."UtJCs watb untJ,cw.wu nuaiity iu u f~r diffetf'Wfll w11y. He dues not depenci on chltn11m~ hinow:lf bul• ,..,,1,...,. un l.:ut..Wn~ ur ch.:tn&ing the he views ~Iii)'. He t""d• In he ..,.;.,.1iwly , _ ,.. i..., antl retentive: that is. he lctJ to..,.. ano.J ,..,.,..,..,b,:r "·lwt lit> hi> 1.-i. ..,.,; CX~Je<::Uiiun>. The trao.ler in this >irtwtiun ;, •~llllil\11•"'1 hy hi> Child: fur e&am\IIC. me. will h•ve lon~t-run dollar tftuh• llfJIJnm<:hing SU '''"~""" !lfOfit. "'"I
w..,
=
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18 SELF
50 percent losses. When commios1oru "nd t:xeeution cosu are subtl'llaeci. the nonn:U expected path of such a traders cap;Uil is ~ eende downw..m slope tb..t terminates considerably shon of his c:11>4eity for self.Oeception. If such • trader elimiutes but one loss that a newly deYised filter would not only never have permitted but would haw. reversed lor 11 profit. while indudin& • profit that was virtWIUy certain beiore a.n unfavor:&ble ne"·• item Clused i1105S. his record on the tracie> becomes seven profits ud three losses. Only " rr:~der stripped of all vision. he re&SOJU. Clll quit on a system that is 70 percent accurate. 'I'he ca,..Ory of the donWwlt Child lor mis· interprenng realiry is vinually limitless. :-.lo maner how successful a trllde:- becomes. be stiU firuiJ it diffu:ult to liw. in the real world. Where members of the animal kingdotD must adjust to the extem:U environment on its terms. man can manipulate realiry over a IJroaa rllllgc by the use of symbolism. A trader must realize th:lt desirable qualities can be bestowed by words alone Allci that such words can be al· iixc:c:i more readily to the oa::won tlw> the OCCIISion can be IDOdiiied to fit the actual DIC&IIing of the words. A trader does not cnioy bein; wrong. Besides ruining bis credit ~. being wrong does not build a good image of the self. Yet mistakes must be constantly perceived Alld remembered for no other reason than that under no other conditions can they be controlled. Successful trading is reached. if at all. by toUowinc a series of successive approximauon.. E.arly in the proceu ienorance is the ruie. Jlnd the trader knows that he knows notbi!'l:· Followinr; a sometimes Ions; lll>llretlticeJhip in which the '\IOC&Duiary symbols are •cquired. 11 false s.ense of competence spreacls like 11 thin veneer and serves to entertain friends with the 11libness ol skilis not yet acQuired. though seeming to be. Civen enough time. p:11ience. :md perse~erance, the successful trader enters into thllt third state 1n ..-hich he beiieves he knows somethin~; and no more. In this stote he is "inner directed" ..nd not "other directed .... The "other.Oi.rected" ma.n reacu to what others beli....e about him. His roles and val11005 tend to be cierived from what his peers expect of him. The "inner.Oirected" mac holds to the Adult coune he lu&s set ior hinaelf. R:ather than beinc solely rad..r-equmped, as in "otherolanned. Mmly tri!de."S never move beyond the point uf UeVCiOJ>fl'lent Where they tend to execute lracio:s tb..t ure never t>i:mneu or pllll! lr-.>clc:> lh:tt are ne¥er executccl. The tr-o~cier must uncierst11nd thllt dac:isions with luvol'llble c:cmsequences tm..Uc hy the Am~ huilt 1nto " tratiin~: "l'l>rollch only if they are consciou•ly reducet>ic> :~t~
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·.
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who buy or sell on 1mpui)oe finC "ooner or ~ter th~t me~ it-~lin~ .. bow tradm~ are 50-SCi: UlO.&~ ~. there ~ no "u:niiic:ant StOit&a.ltc.:~l &:nrTeUallon between good feelings and proin.. bie trades. Therefore 10 ~"""! the rc:sult.s of emot10n::a.i ;a.ctiyjt~· tht: successiul trAder must be urc:u.srctl In g•ve up tracbn~ wh:lt he: i1ncis most rewarchn~ tn anterpunun.aJ rc:l••hu•~hil•:~~ good feeimp Th" propcru;rt)' lor the tr..Uer to rei~! >uch b h.is:h. and thc:r~ is a constant tem'PUllaon 10 S$-Jill out uver th.: buuncl;~ri~ of the weli..iehnecl role oi tr..ding. Good ieeiin~:o> will come ..0 " uf the successi.,J J>lans that the A. The broker is eq..aily well iiOvi>ed to "ncierst:ond thlat he l"'> thr~oe Jlecmie lor M client. not j"st one. Perhaps the "suitJ&biliry" Nle 5huu.lcl incl&Kie not only a financial but a behavioral matclMop ..s well. The fin.t nrlc of wrn· munication ts that when stimulus and response, in the P-A..C >Cn>e. make Plll'llllel lines the lr1111S11Ct10n is camplemc:ntary ,;md gar wntinue in· dcfiniteiy." In other words. " transaction be""""" bNkct ""d cli.,nt nr11y go on tndcfinitciy a. P..,.ent·Parent. Aduh·Adult. Child..Chilcl. Parent· Chile!. Child-Adult. anci so on:
cJ.,...,,..,...,j""''""" ,,...,11
l. /'areru./'aJYnt
Trv~U~JCtiDfl
Those people you have on the lloor alwaY> get the worst fill> )>Oii>ible. IOOUI\: Mllkes you wo'nder 'where it wiU All end. dOGn't rt~
CI.IENT:
2. A.dult..Adult Trvuacnorr I don't know whether to buy the bellies here or wait u.ntil after tire report. uor.u: 111 wire Chicqo wtcl 5c:e if they l~;~ve lillY infumuuiou un e&IICC:tll• tiuru.
CI.IENT:
3. Pal'ftlt·ChiJd Trvuoctimr (Parenl!: I see where tbe Ua~· lhCI¥iUK overa11c in r.IJ&y crossed the lO.Oay moving llvcraee on the IIP"tde yesterduy unci "" I touk a lon& po5iuon. It's off ;1 lillie tociay but the wc:elcly c:h:trt i• bullwr 1111d
CUEHT
wi>en the weekly says up, you j!>it.don 't WOfTY .. Lruut Jill)' uclv.:n.ity in the: dwly signal. e•1oec:Wily durin~ tbe time when the"""""""! t"'nd i> up. In fact, I think 111 scalp about JO 1>0ints on thc: u.,.icie IOdu)' 11nd louy it buc:k on Thursd11y momin& alter the WcdPCS
c:ur:N'T tAduh ): I know I huvc truuble l~"ing the "'"" iu when the uwrkut ~ u~inte puurly. J want yuu to tnvmu.e n1e yuu wuu'l listt,... , wl~u I try In pull out t hc •top. ••ou~ CP:lrent l: I won't cb.;an~ec: u.ny s1uu for yuu dunn.: m .. rkct la,urll. ~~6. iMia,a A. Hama.. J"m OK. to..
"IDic!.. liP· 11
"/Did...
o. 25.
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I am very grateful to the above authors in allowing me to print their comments on transactional analysis. They portrayed the concept far more succinctly and effectively than I ever cud. I alse feel very strongly that u must study transactional analysis, and accordingly, the purchase of the book "I •m O.K. You're O.K. " by Thomas A. Harris M.D. by Avon Publ.,!?paperback (recent price $2.25), wud be a good move. The use of transactional analysis towards releasing U're selfawareness to creating self-awareness will release U're psychic for the halycon days wherein u shall be guaranteed profits in
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SELF commodity futures trading. Of this one factor I am sure, if U becum a student of transactional analysis U most certainly will consistently reap glorious profits, year after year and it will change U're life. It is one of those things that can set U up for life !
BEHAVIOURAL SKILLS One speculator I know has $50,000 in his account. He trades only $8,000 and holds the rest in reserve. He will be around a long time. The prudent speculator occasionally withdraws from the market to rest. He has the ability to sit on cash for a while. He will never carry an open position into a major report. The successful trader learns the causes of success as opposed to the reasons of ·failure. Sorting out U're good and bad tendencies develops deep calmness, increasing the receptivity of intuition. Successful speculators know the source of their profitable decision making. The importance of training the mind to claim victory follows from the fact that material manifestations always trail psychological assumptions.
Substance is formed by individual and collective attitudes. God Grant Me the Serenity to Accept the Things I Cannot Change, the Courage to Change the Things I Can, and the Wisdom to Know the Difference. Get two large pieces of paper. On one list the behavioural skills with which u feel are U're outstanding traits. Of course, on the other put U're behavoural skills which U do not like. Are u good in talking in groups of people, or are U better in talking to just one person at a time? Are U pleasant or do U smile artificially. What are the things U do right? What are the things u don't do so well? When U ask U're friends what U do rite or wrong U will be surprised how little they will tell U, unless they are naturally open and honest. Are U open and honest? U will find that U're behavioural skills, altho' not too desireable, are in fact part of U're personality. So, why change them!
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SELF
The only circumstance to change is if, and only if this interferes with U're judgement making decisions in the market place. So what if U're behavioural skills do not make U a pleasant person to be with! Only if U're unpleasantries makes U unhappy and U are unhappy with U'reself. There's nothing wrong with being a bastard (see chapt.I9) as long as it does not adversely affect U're trading skill. Some of U're bad behavioural skills may not be an advantage to u. The ultimate bad behavioural skills wud be, laziness (do u flop into chairs) , sloppiness (do U pick U're nose), bugging others (does U're nose get in the way), chewing gum (the ultimate affront!), hogging the "box" (this will paralyze others with disbelief), hogging U're broker (why don't U try hugging him/her), being dishonest (who needs U) , unreliable (easily out-foxed), physically harming others (turn the other cheek) [I have even seen a trader beat another trader with his umbrella!) - things like that. How do U walk? How do U carry U'reself? How do U dress? How do U look? Do u turn people on? (Doesn't really matter.) Be careful if people like U, - U will turn them on. And trouble and interference with U're trading plan cud be the result. Maybe U shud try a "Have a nice day " smile. Some are turned on by it, and like myself, absolutely repulsed by it. Remember, birds of a flock fly together. The penultimate behavioural skill is knowing yourself. " To thine own self be true, then thou canst not be false to any man " - Shakespeare.
FEAR As we have been saying all along, the commodity trader who fears will be led to choose r.isky trades. He will abort. He will buck all logic - like Taurus the Bull. It seriously impairs the decision making process. People respond to all kinds of fear. Fear of the future of uncertainties, worry and insecurity. Fear causes even the most brilliant to abort. Most traders lose in commodities because of fear, - fear of loss. At times, it is not loss of money that traders fear most, but
SELF 447 the ego which can
bee~~
ruthlessly exposed.
One does not fear the normal routine of losses that occur during the normal pattern of a normal day. But no where in the material world in our society do some people cum as near to facing ourselves than in trading commodity futures. There is one place where fear will work to U're advantage it is when U can smell fear on the part of others. The winning trader can smell fear in the market and will act ruthlessly on it. In the Soybean mkt. of '77 , at the mkt. top for the year, the newswires were broadcasting "scary" up-limit days for 4-5 days. The floor traders were "scared". The ruthless trader wud have star.ted to short the market. He smelt fear. A grand exodus of longs in a bear snap denotes panic and fear.
A ruthless trader might buy as he smells the fear. However, he/she must make sure he/she knows what he/she is doing. Fear can work both for U and against u. Obviate all fear from U're personal life and sop up and take advantage of the fear that others have. In this context, isolate and destroy all your bad habits which affect your trading, but ruthlessly take advantage of the bad habits of others. (in the market place, that is.) Don't be a liberal. People are responsible for their own mistakes and ways.
" They make their own bed and they can lie in it. " - an old Scottish saying.
CHAPTER NINETEEN
necessary
personality
traits
U MA.Y NOT LIKE THIS
Some of U will hate.this chapter. By this time U will have become aware of whether U are a winner or a loser. - U've been through the previous chapters and U have some inkling now. (If U haven't an inkling from U're commodity trading activities.) Maybe by now U hate me. (I hope so,- I want to aggrevate U!) I've told U what winners and losers are and what's required to become a winner or to be a winner - namely, effort, discipline, self-awareness and a well-executed plan. That's a heavy enough game in itself. But now we are going to quickly talk of the necessary personality traits compatible with a consistent winning format, and this U won't like. It was stated in chapt.I7 that it takes a minimum 6-8 years to change one's behavioural patterns and here U're faced with the dilema of ' what am I going to do if I'm not a winner?'. God help u. ( - U need it. ) U can have the best trading technique in the world and blow it because of who U are and what U are.
( Are u
/
beginning to hate me? U're going to hate me even more.)
U're going to have to devote 90% of the time U devote to commodity trading to non-technical things - namely, changing to some degree U're personality make-up. What a task !
448
I9 449
HERE WE GO There's no way U can change U're personality. U're born with it - I ~hink. But what a task u have if U do not have at least some inkling of some of the necessary personality traits that make up the fantastic commodity trader ! - who consistently makes and keeps his money. U may not be able to change U'reself, but, please, at least be aware of the personality traits which U do have, and, please, please, be aware of those personality traits which U shud, shall we say, try to lick off the plate. That's a terrible analogy- isn't it? - " Lick off the plate!" - but this is a rough game and to some degree U must have a rough personality. One aspect of this book is to grind away at U - not being too pleasant. Only showing U some things to give U some fun or entertainment, or to make this book light and frivilous, in order to sell well ( my publishers won't like that! ) but to just grind away ! I've chos~n this style on purpose. Making U're grey cell matter twitch and twitter. I can't teach u very much if I'm too nice. It is necessary to prod. It's what I've been trying to do in this book. - hammer away at u. There's so much information in this book to almost freak U out, but at the same time telling u to grapple from it that which U are inclined to employ, with a few suggestions from myself, for successful trading, for making lots of money. I've tried to be a bastard. Because, that's what u have to be ---a bastard. That's right ....... a bastard. ( At least almost a bastard.) It involves disciplining U'reself and applying U'reself to the market. U have to be a bastard. U cannot be a wonderful ct.ap. U cannot be a wonderful person. Leave this for the other part of U're life. By all means have cocktails with U're broker or anyone else in the business. By all means socialize, and smile and be nice. But, during market hours, retract within U'reself. Put the blinkers on and be almost cold, - by all means polite. Any, really, don't be rude. But be a bastard.
450
Do not take any crap u'reself. We're talking of money here, - U're money. When U're fooling around with U're money - remember it's U're money U're fooling around ~ith. It's a very important rule. Let the brokerage firm know that it's U're money they are dealing with, - not just ordinary money. Let the market know that. Got that? - U're money. U'rrrrrrrrrre money. Do U ever notice how pleasant people can be ~hen they're trying to get U're money from U ? ( except when they're physically robbing U - at least that kind of robbery is honest.). When anybody's nice, in the business worldWatch out! U're money is at stake. Don't slip into U're' old bahavioural patterns, if u have them. of being a nice guy or gal. Save that for the dinnertable or the bed-chambre. Remember, U cannot be a nice guy in this business. But, I repeat, do not be rude. Nothing is gained by being rude and, be fair, but never go more than I/2 way. And, don't be "pushy" -who needs U! The only thing people need U for in this business is U're money Have I been haranging enough ? This chapter is not meant to be that pleasant. It wud be rough enough to change old personality traits, but so is losing all U're money rough Rougher than this book cud ever be. I want U to take a quick look at Herbert Hoyle and friends in chapt. I6. pg.4I3. These characters have the worst personality traits in commodity trading ever L~aginable. Brokers hate them. Everybody hates them. God help U if U're one of them. Most people are born losers. They learn losing habits during ' youth and never put any sustained effort to change their live's pattern. Success or failure is the just result of what U have/ done in the past plus what U do now. The situation for the loser is analogous to the teacher whose successful students invariably say " I got an 'A' " whereas the loser says "He gave me an "A'". Many of these students grow up to becum commodity traders. They blame everyone but themselves. Losers misjudge everything, distort facts and panic. Remember, the reason the ship goes down is because there's a hole in it.
I9 45I
The self-deluged high !lier invisages himself as striding into the broker's office, consulting the teletype briefly, proceeding with the trade while onlookers lionize him in astonishment and amazement. Losers are absolutely paranoid about exposing their thoughts about themselves to others. They cann9t admit their own failure. Mind U, they can fail but they will not admit it. Guess who's buying at the top of the market and selling at the bottom:- of the market- why , it's the greedy, follow the mass type of traders. - that's right. The greedy guy. If U're one of them, forget it. Go away from the market good-bye ! and U say good-bye - to U're money.
At least so far, I've been telling u personality traits U shud not have. Take a pad and pencil. Review these bad personality traits, but put down on paper the complete opposite. And, those personality traits U shud have.( Afraid of a little effort ? ) - the complete opposite to the above except that u shud be to some degree - a bad guy - that is - not that all nice. I am noticing a trend in the thinking-of the commodity trade advisors and they are beginning to suggest that the trader shud be to some extent, a bastard. I'm glad to see this, because I agree. (obviously) A comment: - I have just read that the volume of commodity trading last year in total value reached I.2 trillion dollars. That's right: - trillion ! There's a lot of people getting into the game. The door is wide open for many unscrupulous brokers. My friend, Be a bastard. Be careful. "caveat emptor" be very, very careful who U're dealing with. Deal only with a "clearing member of an exchange", as a starter. At least that's my suggestion. Man's mind is limited only because he chooses to deny himself the possibility of creating or innovating, of iocating alternatives, disciplining himself, of working hard. My father taught me - that the power of man's mind is infinite and its potential is scarcely tapped. I agree. u have to have confidence in U're mind. Acknowledge that U can do whatever U wish to do and decide on it and do it. It may take a bit of time, but it can happen. The successful commodity trader can be a loner. I am one. I am not a great leader. I wud not make a great politician. I respect myself and others too much for that.
452
When I trade I have to be isolated. I have to put my blinkers on. I cannot trade when there is hub-bub, babble and noise around me. I don't belong with the herd. Accordingly, if I am short-term trading I have to have an area all to myself and walls around me. I have had ticker-tapes in my horne. I have had office spaces to myself ( & a door literally broken down by someone who had to get to me) . I ha.·ro sat in rooms with other traders, with ear-phones on (I'm known by my earphones) and listening to music with my ears full of wet kleenex. Imagine - both wet kleenex and earphones! And, I cud still hear the babble. I change my phone and move • I fear somewhat the publishing of this book. I cud suddenly becum an "expert" - maybe invited to address gatherings or meet other "experts". I don't want that "crap" -remember, I'm a loner. I don't want to handle other people's money and I've no need to becurn a broker. When I change to medium or long term trading, I revert sometimes to my home desk. I apply myself to the market and other activities in an isolated manner. I direct terse communication by phone with a minimum of chit-chat with the broker. I want a broker who will give me no advice other than it's going to be a sunny day. I do not wish any information, unless asked for. I feel that the best broker is a female broker - they're less likely to be full of horse-shit. They're friendly and I love that female voice on the phone. I know of one prominent broker who locks himself in a room and refuses to talk to his staff during market hours. ( I don't know how he goes to the bathroom. A potty maybe.) Signals were given thru the window by hand, so no one cud reach him. I know of another broker who grabs the phone and runs to a closet, and opens it just enough so he can see the ticker board, and stays there all day, with pen flashlite in hand. I do not suggest that U becum a loner. I'm attempting to make a point. A lot of successful traders are bachelors. If U have a haranguing wife or partner to cum home to,- what can U do? Well, I suggest U then show her/him this book and chapters on money management and planning and if U both decide to accept a plan then it shud be easier for U - knowing what U are doing and doing it correctly. It enables U to see the lite.
I9 453
Some traders make good short term trades, - put the blinkers on - are disciplined and they can do it. Other traders lose because they do not have the necessary personality traits. They may allow the broker, consultants, and others to interfere with ~he decision making process. The brokers/ consultants must harmonize to achieve what U want. Dialogue is appropriate if the mutual goal is enlightenment. And, this is best achieved outside of market hours. The successful trader has perserverance. He gets up, after failing, re-affirms what he knows and goes about the business of adding to his store of wisdom. He realizes that the study of psychology exceeds the statistics of market data in importance. The study of psychology begins with the self, then others. The successful trader has the enlightenment to claim victory, focusing sharply on goals and pursues the fulfillment of his needs with energy and direction, making his/her own decisions, controlling his/her life, property, decide what he/she wishes to protect and then proceeds to safeguard it, willingly defending his/her territory - not letting others take advantage of him. He asserts himself. Winners never quit. ( Quitters never win. He is confident. He fights his weaknesses, having common sense and a mathematical approach to trading. He is not afraid to admit mistakes and re-covers immediately with a positive determination to succeed the next day. He buys every book in the business and subscribesto one or two good services. He takes a vacation, regularily. He gets away form the market to recharge his battery. Maybe he changes his style, like I suggest, to fit the market. Above all he is relaxed - almost bored, yet he is relentless in his committment to the market, if he wishes to make a great deal of money. $5 to 20,000 /yr. wud keep a lot of people happy. some need $IOO,OOO, - some millions. Different strokes for different folks. " Cynics survive" - the cynic recognizes that additional rules can be introduced into the game and takes them into account, realizing that commodity markets do not differ that much from other markets, except that it's one of the last to be brought under the destructive wings of government He is cynical about what he reads in the newspapers, what he sees on T.V. - cynical and distrusting of anybody in the
454
co~~odity futures business and cynical to anybody who happens to be nice to him/her, especially if it is becoming aware that he is making money.
Just wait 'till U start to make money. Let's say that in the last 3 mths. U have turned $5,000 into $50-!20,000. Can U imagine what happens? The broker knows. The margin man knows. The secretaries know. The people who handle the computer printouts know. The "clearing"memebers head office may know, and most certainly will know if this pattern continues. A consistant winner sticks out like a sore-thumb. He becurns a live one. There will be lots of money in U're account. U will be amazed by the subtle instances of prodding, probing, -all to the purpose of making U move that money, and maybe to churn trades, to make more money. An avalanche will hit U, ( eventually ) . People in the business and other traders will swamp right over U and drive U right into the wall, when they find out U're making money. The process·may take a year or two, but they will do it. I see no way of keeping U're trading patterns secret. U have to becurn a bastard and jump around and do whatever U can to let as few people as possible know what is happening to U're account. ( U will devise U're own ways. ) I have one firm rule. ( It's never been broken ! ) I never, never tell anybody how well I am doing. I used to tell people how bad I was doing, just to keep them happy. ( And they wud leave me alone ! ) But, now I've stopped that. I don't let anyone know what I'm doing. Not even the broker I'm dealing with. Perhaps I have accounts in other houses, - perhaps I don't. I pretend I 'm stingy (that's the fun part). Let no one know what you are doing, why,
when,
or how.
{except U're
spouse?)
That's why this book is so full of information. Take U're pick of approach. Jump from one approach to the other, if U so wish. That's what I do. - to keep myself stimulated and to apply my technique to the kind of market I am dealing with and to keep everyone guessing. Be flexible. But do not be flexible on the one factor: - do not let anyone know what U're doing, except possibly U're wife, and then she must be tight-lipped, and possibly mind her own business. Remember, too many cooks in the kitchen spoils the broth. But, how about a team effort from U're spouse? Get her/him to study this book or a book like i t . How about that?
l9
455
The hardest game in the world is keeping U're money. Don't be ruined by all the "yahoos" and losers, who cud influence U're trading. The successful commodity trader has one outstanding personality trait: - he knows what's going on. His mind is inquisitive. He's trying to appreciate ( not necessarily know) why things are doing what they do. This is the application of fundamentals to the market place. He knows the fundamental forces, being alert to the quick changes in supply and demand. And, he applies this to his technical analysis. He knows what price movements are "noise" and what are genuine. He sniffs around, just like a weasel - never letting anyone know he's a weasel. Never let anyone inside the commodity business get inside They will destroy U're trading. Never let anyone in the business influence u,
u.
Be aloof - hardcore and no fooling around - including sexual hanky-panky with anyone even remotely connected with the business, including secretaries. u will hanky-panky U'reself right out of profits.
Bye for now. We'll see U in the next chapter, when we will discuss who trades and how. Hopefully by the time U have finished section three of this book U will have becum rather astute in the all important facet of psychology in the market without which U would have no hope in hell of even having the remote possibility of making lots of money, and doing it year after year after year. Have fun. But take a break. The next chapter is a long one.
456
CHAPTER n·IENTY
WHO TRADES
&HOW
KNa"'' YOUR FELL~ TRADER
Ke;t;Ue. o 6 F-<..6 h c.e.a,b-6-i. 6-i.c.o.:Uo n ge.ne.Jz..a..l
~hont-~~ ~den da.y ~dvr. ~c.a.lpvr.
~he. ~loon ~den ~e.
.tong
~eJUn ~a.dvr.
~e.
la.ng e. Ua.den
~he.
e.xpe.n-i.e.nc.e.d,
~uc.c.e.h~6ul ~den
~e. pno6e.h~-i.cna..l ~den
the.
~e.nd
~e.
"ga.p" ma.n
~he.
.tr....a.de.
~he.
e.xc.ha.ng e. me.mben ·
buc.k.en
.
~e. ~ma.U ~den
the. a.v vz.a.g e.
~den
~e.
pubUc.
~dvr.
~e.
be.g-i.nn-i.ng
~dvr.
W.~C
TRADES
THE KETTLE OF FISH Two million Americans speculate in commodity futures contracts which in 1977 had a contract value of 1.2 Trillion dollars. One half contracted on the Chicago Board of Trade, - between 1/4 & I/3rd on the Chicago Mercantile, - and, the eleven other commodity exchanges absorb the remaining business. The C.B.O.T. is 30 years old & the Mercantile is 57. The kinds of traders who make up the kettle of fish are astounding in their variability and approach to the market. The bald, unyielding fact is that all traders as a group possess no basic or special forecasting skill. Their styles are based mainly on the search for minor, intermediate and major trends and they constantly probe for such trends. Once aboard a trend, each trader operates in a somewhat different fashion, possibly pyramiding aggressively or conservatively, liquidating part of the position periodically, maybe taking short turns in the market, and some successfully. U have people who are trend buckers, as apposed to being trend followers. There are countless active business and professional people who devote part of their time to trading futures. Engineers and lawyers dominate this group. Some frequent brokerage houses for an hour or two a day and some operate exclusively on the phone. Others rely on newspapers, and charts, trading only a few good plays a year. This mishmash of traders hold 46% of the value of all contracts, and the astounding result is that their gross profits are zero and potential losses occur when commissions are included. Some are successful. Very few consistently make money, year after year. Some have a good score in a particular year and go underground or overseas, arising from the adverse tax consequences that result from their success. The Riviera houses many successful commodity traders and their families. The Commodity Exchange Authority study indicates that speculators most often trade on the long side of any commodity. The U.S. of Agriculture survey of 8,783 speculate~ reported " the chances for success in the grain futures trading does not differ greatly from one occupation to the other .... " Special knowledge of the commodity had little effect on the outcome of speculative trading ...• and there's no evidence that the largest size classes (big money) include a higher proportion of successful traders than with smaller average positions. The average speculator is a male,45 yrs. old, earns $35,000 yr., trades contracts in 2's or 3's, and more than likely
457
458
WHO TRADES
resides in California, Illinois, N.Y., Texas, Iowa, or Ohio. Two-L~irds are college graduates, mainly male: one third are professional persons, while IS% are fa_~ers, feeders and processors. Over-all, the average transaction spans no more than IO days, and approx. 98 \ of contracts are offset prior to the time when delivery must be made or accepted. The trade on balance is short and the speculator is long. The following
tables are submitted for U're perusal:-
· .-Aggregate profits a.nd losses of specula.tors a.nd ratio of profits u, losses, by grain and occupational grouJ Corn
Wbea.t
. All grains Occup&uonal group
Business managers: Grain business.-------------Other ••• -------------------ProfessionaL. __ ._. _____ ---- _____ SemiprofessionaL---------------Cieric&l. __________ •• _------ _____
Profits
Losses
DoUar1 210,200 866, 100 190,200 6,500 44, 100 180,500 97,400
DoUara 743,600 5,466,600 1,094,700 61,300 277,800 I, 372;100 460,900 1,566,800 914,400
Farmers •••• -------------------Manual workers. ___ ------------Retired·------------------------ ~1.300 lJnknolVD •••••••• ~-------------- 228, 500 All speculators•••••• _. ____ • 2. 064. soo
Ill·
Profits
Ratio
I
• 16
. 17 .11 • 16 . 13 • 21 • 15 .25
. 17 1. so8. 40719· 411, 620
0.37 .11
• 17 . 09 • 21 . 16 • 17 . 17 . 26
Clerical •••. --------------------------------------Fannen ---------------------------------------Manual ••• workers •••• __ ••••••• ______ ._. ____________ ._ Retired. ________ • ____ •• __ -----_. __ • _________ • _____ lJnknowo __________________________________________ All speculators. _______ ------------ ___________
Profits
Losses
Dollara 12,273 51,512 11, 520 2, 843 2,933 9, 824 5,528 13, 187 14,418 124, o38
DoUara 39,885 365,990 65, 115 4,068 15,075 72, 611 31,969 108, 195 69,224 772, 132
1
Losses
DoUara 67, 959 651,926 78,694 2, 9&4 17, 810 63,232 66, 188 120, 059 115, 161
DoUcra 169,668 894,M2 219, 192 9,505 74,&49 204, 164 92,455 351,317 206,910
I
Oats RAtio
i
Source: U.S. Department of AJfieulture, Technicud BuUerin 1001.
Dow Jones-Irwin guide to commodities trading
0. 31 . 14 • 18 • 70 • 19 • 14 • 17 • 12 -21 . 1s
RAtio
Profits
• 16 11, 183, 993 ,2, 222, 6021
1
Occupational group Business m&nagers: Grain business ____ ••••. _. _. _••••• _••• ____ •• __ • _ Other.------------------------·-·------------ProfessionaL •••••••••••.• --. ______ ••• _____ •• _. ___ •. Semiprofessional ••••• ____ • __ ----- _________ • ____ •• _••
Ratio
DoUara DoUara 587, 135 219,665 469,706 4,323,944 836,440 140,425 4, 711 53,972 214, 101 45,421 187,886 1, 162,210 382,299 64, 714 205, 151 1, 203,813 647,706 170,648
0.28
958, 200 1
Losses
l
1
0.-t
• 7os
.36
.. ~· ~
.,. •3
.3-4
.~
.:
Rye Profits
Losses
DoUara 12,918 93,095 58,534 383 3,669 14,370 13,476 67, 1~~ 29,46 293,04.2 1
DoUcra 56, 756 362, 868 92,306 4, 366 15,556 58,234 34,470 88,341 112, 941 s25, 83s
Ratio
-
..r·
o.
,I
.0\ • r• 24
..
.:
::If
1
:3!
-
20 WHO TRADES
AN ANALYSIS OF SPECu.wATIYE TRADING .IN GRAIN FUTURES
..-Occupa.tional distritndicm of all trader: in sample Occupation
Wheat Corn
Oats
All Rye grains 1
--- --- --- - -
Business managers, grain business: Country grain buswess •••..••••••••••• Terminal and subterminal grain business·----------------------------
Num- Num- Num- Num- Nv.m-
ba114
ba65
ba33
ba21
ba133
158
107
44
38
183
59
316
18 179
272
172 17 Total ••• ------------------------==== ==== ==-===
Business managers, other: Wholesalers •••••• -_------------.---Retailers. __ -------------.------_--Bankers ••• ----~--------------. __ ••• Miscellaneous other than trade •••••••• Reai estate, insurance, securities ______ • Capitalists and financiers _____________ Business re agriculture •• -------------
44 452 5 364 427 19 73
16 201 4 161 178 5 33
143 130 4 27
131 1, 044 19 824 885 50 134
TotaL • _• _- ••• -- - ••• - - -- -- - - -- --- 2, 696 1, 384
598
504
3,087
15 1
10
91 26 12 58
Professional: Accountants and auditors ____________ Artists, actors, and musicians _________ Clergymen._. __ • __ •• --------------Educators·------------------------Dentists ______ --- __ ----. ___ -----.--_ Engineers andjudges architects. _ ••••• -- ••• _ Lawyers and _________________ Physicians and surgeons ______________ Professional occupations, n. o. c ••••••• Total ____________________________
112 937 16 733 749 44 105
80 24
JO
35 11
53 73 105 111 133 88
7 30 26 55 56 82 52
677
354
74 15
30
4
9
3
1
3 9
12 17 20 24 17
20 17 27 16
120 129 152 103
119
114
768
12 2
11
83
4
89
34
14
14
102
Clerical and kindred occ:dations ______ Sales persans and k.indre occupations. Inspectors, estimators, etc ••••••• ----Municipal and State employees .•••••• Federal employees •••• _••••• --.·----·
225 146 102 3 2
114 66 50
38 25
41
22
262 168
2
1
TotaL ___ ••• _. _ . ___ ••• - ••• -.- -- ••
478
234
Fanners, generaL ______ •• ----------. Farmers, specialty----_---. __ .-------
779 118
Total ••• -------------------------
897
Se miK!ofessional: miprofessional occupations ••••• ----_ Students-------------·------------Total ____________________________
clerical:
F armers:
=
11
3
18
77
19
23
119
86
82
554
365 47
150 19
121 16
900
412
169
137
1,028
2
-----------
3 2
128
t The numbers o! traders in the "All grains" column generally are not the sums of the figures for the individual grains because many traders traded in more than 1 grain.
Source: U.S. Department of Agriculture, TechnicDl
Bull~rin
Dow Jones-Irwin guide to commodities trading
No. 1001.
459
460
W:-10 TR.:t..DES
'fE~ICAL
BULLETIN 1001, U.S. DEPT. OF AGRICULTURE
-Occupational di.Jtribution of all tradert in sample-Con. Occupation
'Wheat Corn
Oats
All nye grains I
- - -- -- --
'Num- Num- Num- Num- Number ber ber ber ber Ma.nual workers: 377 134 liS 777 Skilled and semiskilled ••••••••••••• _. 680 Laborers and unskilled •••• __ •••• ___ ._ 155 75 27 171 25 Touu •• -------------------------Retired: Professional. _____ •• _______ ---- _____ Semiprofessional__.~---- ______ •••••• ClericaL __ ------ •••• -----_--------Business •••••• __ •• ----- _____ ••• ____ Connected with grain business •••••••• ~ianual •• -------------------------Farmers -------------------------Previous••connectioD unknown ••••••••• Government employees. __ •• _ •••• _. __
835
452
161
28 1 10 292 44 35 175 222
13
5
7 144 28 17 112 143
4 48 13 4
140
948
4
32 1 12 3.29
-----37 11 7 33 46 3
38 '218 265
50
8
4
43 62 1
815
468
180
141
954
735
396
176
112.
971
47
22
6
10
54
418 182 122 Total.--------------------------- 782 ====== ====== ToW, nonbedgers ••• _---- ____ • ____ 7, 541 3,928 1, 586 1, 313
1, 025
Total.--------------------------Unknown: Status llnascertainable ••••• ____ • ____ • Unemployed, former occupation unknown.--------------------------
9
8, 782
Hed~ers:
Processor hedgers·-----------------Grain merch&nts, terminaL___________ Grain merchants, subterminaL........ Grain merchants, country____________
44
45
15 22
7 17
10
8 16
3 10
61
371
23
ToW •• -------------------------- 122 ToW, all traden;__________________ 7, 663
5 13
47 49
27
140
3 ~2 6 32
j3.m 1, 623 j1. 340 js. 922
United States Department of AJ;Ticu1ture, Cirt:sUar No. 391.
Dow Jones-Irwin Guide to COmmodity Trading
20
WHO TRADES
A.."'
ANALYSIS OF SPECuLATIVE
TR.~Dl.SG
IN GR.UN Fti'TURES
.-Nwmber of speculative trader.<; with profits and teith losses, and percent with profits, by grain and major occupational group Traders with-
I
Commodity and occupational group
Total
Profits
Losses
I
Number
Number: 189 1, 993. 498
Number 272 2,695 677 91 479 897 835 816 779 I 7,541
IPercentage with profits
WRE: ....T
Business mana~ers: Gr&ir:. ____________________ busine.~------------Other ProfessionaL ••• _._. __ : ________ SemiprofessionaL._. __ ;.. ____ --- • Clerical _______________________ FarrDers----------·----------- 1 ~1anual workers. __ .----._----_ • Retired ••••••• ___ • _____ •• _---. Unk.Down ••• ------. __ • _. -----.
TotaL •••• _----_.--------.
S3
702 179 27 130 200 214 240 270
64
349 697 621 576 509
2,045
5, 49G
76 577 16 76 151 163 189 144
96 806 221 20 159 261 289 280 271
1. 525
2,403
!
Percent
I I.
30. 5 26. 0 26. 4 29.7 27. 1 22.3 25. 6 29. 4 34. 7 27. 1
CORN
Business mana~~;er~: Grain businc,;s _____________ Other·------·-----------Professional ••• __ ._. _______ .--. Semiprofe,;sionaL. __ ••• _______ • Cieri cal •••. _______ • ___________ Farmers---------------------Manual workers •. _ .•• ____ • ___ • Retired •••• _. ____ . _________ --Unknown. ________ • ___________ TotaL. ___ ._ ..•• ______ • _
133
172 1, 383 354 36
41!1
44.2 41. 7 37.G 44.4 32.3 36. 7 36. 1 40.3 34. 7
3, 928
38. 8
77 597 119 14 87 169 16) 180 182
29.9 37.4 37. R 50. 0 42.5 33. 7 32. 9 38. 3 41.2
1, 586
37. 1
59 504 114
37.3 39.9 31. 6 14.3 40.2 31. 4 37. l
235
412 452 469
..
OATS
n usi ness
manal(ers: Grain busin,ss ..••..... _. _• Other_ • ______ • _ _ _ _______ Prof~ionaL. ____ • _ .••. _______ SemJprofes:;IOn!l.l. _•. _____ . _ •• _. 1 ClericaL---. __ ._ ... _.• _•. _____ Farmers·--------------------l'.ianual workers .... _._ •. _••... 1 Retired ••••...••••.•.......... Unknown •••. ___ •...• _ ••.• __ •. TotaL ••• - •.. ---- .• -----
23
ProfessionaL ••••••••••• ----- •• Semiprofe!:;l;ionnt"••..•• ___ • ___ • ·j ClericaL•••• __ •••••• _. __ •• _._ •• 1 Farmers·--------------------Manual workers. __ • ___________ !
374
4.') 7 37 57 53
74
7 50
I
112 108 111 107 II 997
ti9
75 589 '
Rl"&
Business mnna~:crs: Grain ____________________ IJUl;ines!'. ---- _•• _. ___ Other
54
223
22 201
36 2 33 43 52
37 303 78 12 49 94 88
]-I
82 137 140
I
Source: U.S. Department of Agriculture, TechniCltl Bulletin 1001.
Dow Jones-Irwin Guide to Commodity Trading
461
462
WHO TRADES An investor's approach to the market depends a great deal on his personality and age. These factors are covered in other chapters, but suffice it here to mention two interesting items. one: - It is said that " only 5% of the population think for themselves, IO% copy the 5%, & 85% beleive what they read & hear and do what they are told". -Robert Vichas two: - In the conclusion of the best selling "Playboy's Investment Guide" - "Those persons who have created fortunes rather than inheriting them are not as a rule terribly intelligent, well-educated or hard workers ..•• Most are simply intelligent enough to admit that brains, knowledge and diligence has little to do with speculative success " The two above quotations seem to contradict each other. They are submitted only to illustrate how easy it is to take an opposing approach to any topic and do it with authority. I cannot wait to have my book published, when others speaking with stringent authority will be calling me a "nit-wit". I'm looking forward to the attack. I will not attack back. I will simply go to the market place and presumably make some money ...•• and lots of it. (Hopefully) (At least I'm honest enough in admitting that I too make mistakes, and I use the word presumably as well as hopefully)
CLASSIFICATION
GENERAL There are two general classes of traders. I. The Speculator a) Public Speculator b) Professional Speculator i) floor trader ii) scalper iii) day trader
WHO TRADES iv) position trader v) spreader or arbitrageuer 2. The hedger
SPECIFIC
SHORT TERM TRADER The short term trader's time horizon is extremely limited. He is the day trader, the scalper, or the floor trader. DAY TRADER: - The public has a fervor to day trading and short term trades. If they can, they will go into a brokerage office with their prized technique and attempt to take a score from the market on a daily basis. It has been said that most day traders do not in the long run consistently make money. I agree, because most traders cannot successfully trade every day. I have seen some traders, using rather large sums of equity, involving themselves on an ad hoc basis, in many, many contracts, in many different commodities and at the end of the day close themselves out, expecting to win some, lose some and are quite happy to have made a small profit on a day's activity. Some traders are successful with day trading. One simple guideline for them is to trade within the confines of a congestion, or within the congestion of an upward sloping channel, and trading off each channel line.
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I
463
464
WHO
TR~DES
Some prefer to reduce risk by day trading from one side of the market only, usually with the trend. Unfortunately, there are many unsophisticated day traders. They usually liquidate only the day trades that go in the right direction and maintain over-nite positions that were wrong, or they becum banged around so much by watching the box, that they do not know which direction the market will take, and begin to outguess the system which they are using and outguess the market. However, there are advantages to day trading, but I tend to recommend it only on a part time basis, just to entertain one's self. As U know, I like to jump from one of my trading styles to another. Certainly a day trade-r, if he is in profits for the day, will find it easier to sleep, than do other traders, because he is not in the market overnite. To-morrow has a new, bright horizon. Markets do not sleep over-nite. The day trader can digest the next day's market action by the day's activity itself. He has the advantage of operating while the market is active. He certainly is not affected by important gov't reports. Day trading does furnish more possibilities to stretch risk capital. Some brokerage firms require less security deposits for day traders because risk exposure is reduced. Some will ignore U're account balance as long as U are not "debit". Whether it is an advantage or disadvantage, - u can swing big numbers with less capital. To day trade suggests that "chart action be recorded in finer detail than for longer t~rm trades." P&L charting is advantageous because if U play with it enough U can develop such a detailed approach! SCALPER: - There are scalpers who operate to take a small turn in the market. The successful ones are very humble, astute volume watchers. Some use point and figure charts and scalping can be fun when prices trend well. i.e. when they fluctuate within a fairly well dilineated channel. A lot of profits are generated by bucking the trend within the channel. Some traders scalp from a "distance" by placing the order into the market in advance and as soon as the prices hit and prices have shifted away from that point, the broker will be instructed to take "x" points from the market. A professional scalper derives profits from trading dips and buldges of varying time lengths. It has been said that
WHO TRADES recognizing price trends is the most important requirement for successful scalping, but there's nothing stopping a professional scalper from opposing the short term trend. The definition of scalping is enlarged to cover not only those who trade with the smallest dips and bulges but those who trade up to a few days. In the well travelled markets, professional scalping tends to specialize into three distinguishable classes:I. unit change scalpers - stands to buy one tick below last sale, or one tick above it, almost invariably ending the trading session in zero net position. 2. day trading scalpers - who concentrate on,dips and buldges of greater than unit change. 3. day to day scalpers - who occasionally hold a market position overnite. The point here is that many traders beleive that scalping involves just the floor trader and unit change traders, but rather, scalping involves that person who expects to take a turn with the market either on intra o~ day-to-day, or up to 2-3 day basis .. ( like me occasionally) I
THE FLOOR TRADER This is basically U' re unit change trader whose marvellous function is in providing liquidity in the market. This poor chap has to face all the hub-bub in the ring. If U look at the faces of floor traders, most of them are young. I don't / know if this means that the older ones are worn out or have made their money and run or they have burnt themselves out financially. Talk to U're broker someday about the floor trader. If he's a knowledgeable broker u will find the topic fascinating. I feel that an entire book cud be written about them. If done with a sense of humour it cud be a best seller with the trade. 1
Sometimes the floor traders will sense that there are a number of stop-orders which can be activated by a good day's move in that direction. At this time, the individual traders on the
465
466
w"'HO
TP.ADES
floor may attempt to force the situation to push the price to the point where stop orders are activated. Then, as they are activated, they reverse their position and make a second profit on the rebound away from the "stops" Floor traders often play little games with the big trader whose pattern of trading can be recognized. This is another reason why I am inconsistent in my trading styles. Sometimes I play with thern .. Bel~eveit or not, one day for a glorious 20 minutes, I controlled the soybean market. The story goes like this: - I entered an "at market" order to buy 400, 000 bus. . The market had been very quiet up to that point. Amazingly, the mkt. shot up 7-8¢, whereupon I sold Nat mkt." my 400,000 plus sold another 400,000, reversing myself. (a net total execution "at mkt." of 800,000 bus.) (This is called "taking a popper".) and the market immediately went back down to the area where I first bought. U guesses it! Once again I reversed myself, at 800,000 bus. "at mkt.", net long 400,000 bus. and prices went back up 7-8¢. I did this round trip four times, until .finally I said to hell with it, and stayed with the major trend and was net long. I will never forget what happened: - the market went up the prerequisite 7-8 ¢ and sat there and didn't move for almost half an hour. The pit must have been dead silent - who was this character who came in every 5 mins. with 800,000 bus. "at mkt." ? It waited for me to enter the market, but I didn't and then finally took off and went up throughout the rest of the day. Now, do u see how the psychology of the market can affect the trading pit itself? The floor traders are no fools. They back off when something unusual hits the pits. However, the amazing thing is that I was filled with a I I/2 ¢ range each time. What liquidity!
THE LONG TERM TRADER This chap [ "chip" for female ] is perhaps the most interesting of all traders. This chap possesses all the virtues of the successful trader. His time horizon is months to years in span. He awaits good plays- perhaps 2-3 per year., sometimes holding on and rolling contracts, waiting maybe 2-3 years. (e.g. copper) He has the capital to withstand adverse market reactions. He may accummulate in a bottom formation, but rarely distributes within the narrow confines of a market top. He is always long
W'rlO TRI>.DES
gone before the top formation has occured. He may enter the market a little late and may leave a little early. He may or may not pyramid as ~he market goes as he anticipated. He does not sit and watch the "box" or the ticker-tape. He has researched thoroughly. His research may have included only a few mental gymnastics. Particularily the older traders are adept with sniffing out the good plays for the year. They're wise, old men and they don't fool around. For some people there's not enough action in long-term trading. My friend, one of the basis for U're trading plan must be to parlay at least I/3 of U're thinking approaches and market attack on the long term basis plan, if U absolutely must be more active than long-term trading portrays. I waited 2 yrs. for the soybean mkt. of '77 & I've waited 4 yrs. for the silver and gold mkts. of '78. These things take time. In the interim I like to jump around with occasional day-trades, occasional scalping _and some short-term runs, especially bear correction "snaps", if I can catch one. For medium to long term trading approach based on simple logical formats, I recommend Bruce Gould Box I6, Seattle, Washington 98III. ( He will do some of the thinking for U.) It is not uncommon for the long-term hundreds of thousands to millions of just trading I or 2 commodities once satisfied with that kind of income ? Pourquoi-Pas?
trader to pull in dollars per year, and or twice. Wud U be - someday ?
THE LARGE TRADER The large speculator shows a profit in IS out of IB years, even tho' he accounts for 2% of open interest. His profits are virtually 3 times the average loss of the small trader. The consistency of the profit making capacity of the large speculator is impressive. It is not uncommon for him to make 3-25,000 per month. Large traders, however, tend to use the markets as trading markets, rather than trending markets, and rely more heavily on the presence of negative serial correlations, for they tend to sell certain rallies and buy certain declines. Large traders are consistent winners, but they are short-term oriented as a group. Of course, individuals of this group may have the prerequisite that their approach be long term. But as a group the large traders are short-term oriented,
467
468
\·:HO T?ADES
- that period being of a few days to weeks, making use of the various buldges in the market. There is a fair amount of data available for the analysis of "smart money", since the large trader must present to the appropriate exchange a position report, on the contracts which they holdovernite. For instance, if U have more than 200,000 bus of soybeans U must report the fact to the C.B.O.T. Unfortunately, this information is made available to the public usually too late and too infrequently to be helpful in market analysis. Large speculators tend to be on the same side of the market as the small traders and opposite that of the hedger. However, they think nothing o·f taking short term snaps against the main trend. Many hug·e traders do not take advantage of the short-term snaps, but rather, since that have the capital to withstand a move against them. they take the long term approaches, making the decision based on fundamentals. He does his own heavy research, accummulates his position and then dumps and walks away maybe 2-3 months later. He may hear that there's a shortage of something, and he will do everything he can to get all the information he needs. ( Maybe with the help of a private staff - or his firm's staff.) This guy makes possibly $500,000 to millions a year. Many of the large traders main source of income is from futures trading. The large trader tends to trade in nearby futures, altho' some have a tendency to do better in more distant ones.
THE EXPERIENCED) SUCCESSFUL TRADER There are basically two kinds of successful traders. I. big huge trader 2. the technical trader
WHO TRADES The huge trader has the capital to withstand a move against him and his research is based mainly on fundamentals. He strikes, accummulates heavily. His contracts must be "recorded". He walks away from the market I-3 months later. The technical trader simply searches for a live market and uses straight technical analysis and may not get in right at the top or bottom, but sandwiches himself in the middle, taking not too many contracts on, but being able to analyze these markets and knows the profits he wants and may be in and out on one day or in for a week or two. He may make from 3-25,000 dollars per month. The huge trader usually makes a minimum of $500,000 per year. Great speculators have one thing in common and that is the realization -that the study of psychology exceeds statistics in importance. Even .the technical trader knows the value or psychology in the market and of himself, because, without this understanding he cannot apply his technical analysis. The study of psychology begins with the self, then with others. The experienced, successful trader has some simplistic rules and realizations by which he functions:One is that he appreciates that his first loss is usually the cheapest. A sharp trader is not likely to short a market during a technical reaction following a major upside breakout. He may look to buy a market when prices wander lower and there appears to be a lack of interest and speculators get bored with their holdings and throw them out. Most seasoned traders avoid positioning· markets in anticipation of breakouts. Some feel that they're better off waiting for the the markets to tell them what to do. Some, however, do take positions in markets in anticipation of the breakout, but this approach is of only minor attraction to these traders. What they consider important is the added confidence enjoyed in markets that they have operationally anticipated, and, as a result of this they have the courage to pyramid. Experienced professional traders may find it difficult to follow more than 3 commodities at one time, whether a fundamental or technical
469
~70
\.;rHO TRADES
analysis is used. The experienced speculator will not risk a great portion of his capital on a single trade. The successful trader feels that he must outguess to-morrow's price changes and appreciates that it will depend to some degree on to-morrow's news, or anticipated news. To most traders, it is a matter of pure chance whether to-morrow's news will be bullish or bearish. He realizes that it is impossible to develop a set of rules to serve as a guide to all traders, under all circumstances, under all conditions. He hopes only to succeed in the long run by being able to. recognize and develop his behavioural skills .. Successful traders usually apply the 30% stop rule. i.e. he will not invest more than 30% of the money he has committed to the market for margin purposes. The winning speculator knows his sources of his profitable decision making. However, he may refuse to talk about it. The prudent speculator will never have positions during a vacation and he will occasionally withdraw from the market to rest.
Rern~~er that only 2 % of traders are successful in a consistent manner that assures their appearance year after year. What the few can do, the many cannot accomplish. However, the professional trader makes important money 4-5 years out of six.
Most successful traders have been bloodied at least once before achieving success, but all have tried again. In the / growth process, the quality of persistance loomes large and is virtually irreplacable. Winners first of all decide to claim victory. They focus sharply on goals. They pursue fulfillmentof their needs with energy and direction. Winners train themselves to reject thoughts of losing at all times. Even the best speculator considers himself fortunate to be right on most trades. and to some extent, even to make profits during most years. May I respectfully suggest that U copy the following approach, which to me makes the perfect trader.
WHO TRADES
" I know of an engineer, who dabbled his way to considerable wealth. He required nearly 5 yrs. to stabalize his first million dollars, and climbed to I2 million in another three" -Robert Vichas The engineer " dabbled" his way to considerable wealth, but it took 8 yrs. It took him 5 yrs. to create and keep his first million. Too many traders try to accummulate their first million their first year, i f not by next Wednesday.
THE PROFESSIONAL TRADER Well, folks, presumably this is where I cum in. I'm a professional. I devote all of my working hours to commodity futures trading. I do not moon-lite with anything else. Why shud I? My everyday business involves commodity dealings. I have developed special representatives in critical areas. ( I tend to take their comments with a gra~n of salt.) I have a string of correspondents and I try to develop first hand information, all of which I keep to myself. If I do not see a risk I wish to take I don't take it. I will take a rest form the market, take a vacation,- write a book or something and recharge perspective. I luv to await the golden opportunities that manifests itself nearly every week, but certainly several times a year. I always feel there's a train leaving every day. However, I'm not that an astute trader to be on time for every one. Occasionally I will pick a train that leaves on a certain da~ but normally I anticipate one leaving perhaps a day or two away, or even months away, or years away. I scalp, I day trade, I position trade, - applying all techniques to the situation that seems appropriate, i f I am capable of it at the moment. I am never right all the time.
Let me show u a little photocopy , of one wk 's day trading, wherein very obviously I was incompetent that Wk. Special note:- I had some personal problems at that time & shud not have traded at all!!!
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If I make a mistake i t ' s usually because I fooled around with P&L charting, by outguessing it, or allowed ( which is nearly always the case), some extraneous factor - in a bad mood perhaps to influence me.It's always the babble of the other guy which interferes with my trading, if a mistake occurs. Always! And i t puts me in a bad mood. Successful professionals presumably are confident. We fight our weaknesses. We know ourselves well - very well. We probably have common sense- but most definitely we have a rnehodical approach to trading. I do not gamble, or go after the ephemeral rainbow in the sky. I repeat, I avoid gambling- I hate gambl~-I go to Las Vegas for reasons other than gambling. I go to study the scene. I stick to black-jack.
I
f
~~0
TRADES
I approach the market when the odds are in my favour. I make mistakes and admit them ( got to play the humble role.) But, I'm always amazed at my ability to recover and develop a positive determination to succeed the next day. Presumably, we are realists, ( I fall down here? ) . However, when the general public becums aware that an upper price trend is in progress, I prepare to exit - maybe a month or two down the road, but I'm getting ready as soon as the prices have commenced their trend. But I assure U, I judiciously apply P&L charting and study very, very carefully the fundamentals, and stringently enforce money management rules. I am incredibly disciplined when I attempt this tack. Above all I am happy and having fun and enjoy the market. I know that as long as commodity futures are trading that I will be there, probably for as long as I live. I will always be there, but U will never see me. Perhaps a few of U will some day get to meet me. U may meet me, but U will not meet my market action or not know when I'm entering or exiting the market. It's part of my style, of being a professional. ( I
think.)
It takes a minimum of 5 year's experience to becum a professional. The next time U see U're doctor, dentist, accountant or lawyer, ask how long it takes to get the "feel" of his profession. He will probably say 11 5-IO years". With the IO years I agree.
THE TECHNICAL TRADER I guess this trader is amply covered in chapters one thru nine. He is presented here in appreciation that there are two schools of thought in the approach to commodity market analysis. One~ of course, is the fundamental trader and the other, is, of course the technical trader. The technical trader is a wonder-worm. He wiggles his way thru such a maze of lines, circles, triangles, - diggledaggles. No human brain is capable of coping with all of the elements in technical analysis that have mushroomed in the last decade. That is why, at the top of every page, I wud like to put 11 Keep It Simple. ) - please, please, keep it simple.
473
474
WHO TRADES Technical analysis is fun, but it is deadly dangerous, because the technical trader easily slips in to the charts as if it were portraying the market, rather than the market portraying the charts. It puts technical analysis before chart action. He becums so engrossed that he eventually does not know what the market is actually doing. He eventually goes home cross-eyed at nite. He may still be cross-eyed, still looking at his charts at 4:00 A.M. - not knowing what to do. Perhaps the best advice is to do nothing at this juncture. Very few fervent chart readers consistently make profits, because their trading decisions evolve from the chart itself, rather than a basic trading plan. They let the charts decide the pla~ rather than the trading plan demanding from the chart certain prerequisites. One must trade only from a trading plan. Charts are only an adjunct to the plan. It is not unusual for a technical trader to abort an excellent position prematurely on the basis of his interpretations of the wiggle-waggles. It has been said the winners in commodity circles generally fall into one or two categories. I. flamboyant plunger 2. the bookish recluse
u do not have to be one of the two above in order to win. The point here is that these two groups win only by the judicious application of technique. The non-flamboyant plunger and the plarngoyant non-bookish extrovert can be a winner provided he sticks to his tried and true game plan. However, sadly, most inveterate plungers have foolish, weak application of technique and they envisage their fortunes to blossom within a few months, forgetting about next Wednesday. This plunger inevitably ends up by losing most of their speculative capital in one or two transactions. These plungers are just out to make a quick killing. It is precisely this type of person that is easily out-maneuvered by strong hands. Strong hands are not interest~d in a killing, to-day,as they know the commodity market will be there to-morrow. It is the self-deluged high-flyer who envisages himself striding into the broker's office, commanding a glorious extract from the market place and from all those around him. It is quite a site. It is quite exciting. Usually the other traders in the office have an innate feeling that before long this person will bomb out. Some wish he wud. In money management, plunging is the cardinal sin. Often, the pyramiding will in most cases end by establishing a position
tvHO TRADES
similiar to plunging. I admit, there are moments in the market when one cud bite the bullet and commit horrendous amounts of capital to the execution. - Fine, by all means do it, if U can pinpoint those very few trades a month, a year, to employ this attack. With this approach, the fallacy develops that one shud and cud heavily strike on so many, many occasions. And, one loses the disci~~ine of waiting for these rite moments by assuming they occur frequently, which they don't. I never shake so much as when I commit myself above the 30% equity rule, to perhaps IOO%. I never strike hard unless I'm right at the "box". Often I strike only once or twice a year. sometimes more. After plunging, I effect a mental stop and if I am not happy by the end of the day, I am long gone. The market shud go my way, or I have acted only on close. Only then do I place a stop in the market the next day, after opening, sufficient ·to cover commissions plus allocating for bad fills. ( The ~arket usually goes, at least momentarily in the rite direction the next day.) This is the one and only time that I employ actual stops in the market. All other stops are "mental". Rarely do I hold a plunging position more than two days, because I do not regard plunging as a medium or long term trading method. If I am into a good thing, I get on the 30 % rule as soon as possible, and within two days.
THE TREND BUCKER There is the trader who is a trend bucker as apposed to a trend follower. It is considered a dangerous and a more difficult game to play. It is only dangerous to the extent where the trader gets stubborn. However, trend bucking is more difficult but can be as profitable. The ultimate trend bucker is the trader who happens to be the ultimate seller in a bull market. What a winner he is l Trend bucking must be done by a specific criteria, such as trend channel walls, and P&L outer channel lines, "x" dots or distance from "dot" (chapt. 9) . Generally speaking, trend buckers luv using those trend lines against the major trend, (see illust. next page), and, -selling, buying news, going against the news, following the old dictum -" buy rumour, sell news " Trend bucking involves scalping and day trading and over-nite positioning.
47 5
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\\THO TR1..DES
will start to short for small scalps, maybe to bottom trend line
THE
II
GAP
II
MAN
A good "gap" man can convert those blank spaces on the chart into cash in his account. Gap man are always jumping into the areas where gaps are closed, and always interpreting certain gaps as meaning such and such. Gap men and women are beautiful people. All the more power to them. If u understand gaps, as well as simple basic phenomenon such as vol., O.I., and chart patterns and a few wiggle-waggles, - being a good gap man/woman will considerably enhance U're profits in the market place. I feel that a good gap man has / as much insite into the market as anyone. But, what constitutes a good gap man I don't know. Talk to a gap man. It is simplistic and I like it. By all means commit to heart the various types of gaps and what they mean. They are quite important. (see chapt.23)
WHO TRADES
THE TRADE Suffice it to say, these are the people who actually utilize commodities in which u trade. They tend to be short in the market. They form a prerequisite function of a hedger. These firms constitute the "trade", employ analysts whose function is not to speculate in the futures market, only to analyze price movements, employing hedges by selling/buying commodities against the commodity which they are using. These people are supposed to be pros, but like all experts, who do not put their own capital on the line ( like a genuine civil servant ) their credentials have more validity than the results of their market trading. One of.the largest grain co.'s in America went bust, recently. So much for salaried- experts ( I don't wish to state that all experts are bummers, but rather that they tend to be. God help me some day if I becum an expert. If I do, I will probably be in mental traction, on heavy tranquillizers, booze, yahooing around, relying on selling my expertise to a firm and to the market place, rather than extracting from the market place what I wish.) Our gov'ts are full of experts and look what they are doing to us. My friend, forget not that futures markets exist solely for the trade and farmer, producers and whatever, passing on their risks to others - U & I - the risk taker, - the speculator. The trade and farmers on average account for 58% of total O.I. of all futures contracts. The trade on balance is short. During a market rise the trade customarily buys heavily in the cash and sells moderately in the futures. I refer U to books "A,G,L,N,O," in the bibliography for excellent coverage on the topic of the hedge trader. Maybe U're public library has one of these books. I shall present here for your quick perusal, some exhibits which portray how hedgers approach the market and how they think.
477
Points of \'icw In Dcvdopin::
"""Primary S!,;.rliu;.'· fr~:n ""'guide or~ prot~.:ct•on to , purpose cxpo<<.:d J><•;ition ~
llcd~:lng
Net
positioo control (inventory risk )I l. Futiy ht-dJ,!'cd (tt·m nt"l J-cKIIIOn) l:uJ!t" wnlumc ·b.su- opc:r.alon
Partial ),t-ric:e (constan!. 1101 z~ro. net
r
JKI)il~t~n)
[:<:s: E:~clud~
L..i!o ba.\c. J.c·drr onl) •C'cumulalaon 3. \'•ri•l.le
I
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(p1annc.~
L ,.
.
--.,.,..
.,-!
j ..
---~ . :.
I.
• ••
t
~
.
.·I
;, :•
b.=d••
or bud~toled net position) Exan•ples: Hc•dquar-
ters m:.anaated Jredr.c; dis.crcaU,nary JJC~SiliOn •;thin limits 4. \'ariobltl••d~• Ide~!.
cr•te ,-ariaftC'e'S
10
profir from prier
!
IWU>p)
1:.
~mples'
f l
position takinJ; lt:&J'r-
Pnlic:icR
Cross po:;ition' (total commitment factors- ··a larger market") 1.
M.,~;,nuz.c lurno"'eT
witl1t'mt net ca~sure
2. Srm::ad,Hs::, and arhitrorR<··
H,'lll:t' t:•C"r!o\ tr¥eT Lirn Law C. 11•-dJtt: "'-"•""naJ srorar.cor futures to cconomin c.ash tied up in in.,na1orie1. or to sbonen expowre with.
~- Ux:
out s:-oif•cia·~ CU:"!'ent lh,.,.,.hout DilltJ:arcJ bu!.iiK:i.; rw!!'t'ds; str•i;ht SJJeCU· lation
Procurement tool (time and cost)
Marketins tool (time and price)
1. Take dehvcry on futures markeu to J!:CI nf:."t"dc:d JOOCh 2. Lnclt it- marw:in
2. Sell (utura to lock in realu:•tlon en aoods in
1.
mat~ri
(lo cover a sale C"Otnmitmenl J 3. Alsurc repurchase o! tcnJporar;l,_· liquidated Lilobasc:sto
pric:ed sales. requirrrnents contracts. or
·price
in, inlo the wind;
dat~t
of deJi.,.
cry"
chose ol new crop
S. Liquidate unwanted rislt b1· oelhn« futures wben cash ""on'l move 6. Sell futures lardJCr abud thon ••tua4 coD be booked ill IM
futures
S. Use fu1ures lo attain 1ars:c.:1 expc.sure when Ktuals not •'·ailable e. Pin doWTI allraclive msl lor anticipoted
mari
7. lle.ocb oul. speculote rcJ•nlleso of commer· c:ial needs
1. Lot. k in m•ra:.au -.·he~ ac"'uah .,.c buus:ht or
sold on formuJ,. t•rice be basc.-d on latt-r fu-
10
tures q'IOiattor"
future~ lo .,.,,,~ price for ant.cipated product ton 4. Cover risks or. u~
S. Sell
needs Cydial
aetu&b on
in.,entory
thrnur.l• io-
,.w
Dc.·h~r
futures rnarkel
Profit margins and incentives I
1:. Deal in haw. hhis
CICJ'W'o
-.,ci" a..v.nuaent ot •.,.a.b.ed •PJ'I....-) 3. Ute price or marcrn tar· ~ets lo determine: hn-· much busineu •·ill bP dolle. •• in c:k-cidin: bow much to llorc or ers a
ptae:eSS
•. Pin dOW!! other half of a c:uh commnd,ty trade in futures.. awam.-,s:. "P' ponunity to fuUill witb actuals
5. Buy low, sell bilh. wbercYer U.e OIJPO"'u• ily p ....nts it.ell- .u
cub. all futiPH. OJ
•
mis inriucima dtsaehonary J'C)Sition tak~
special position taking situatJOa
1 This column assumes a commercial operation in which all decisions are based on cash market considerations. The net cash positions (or portions of them) are tl•cn hedged in futures. 'This column assumes that added c:~sh positions y.-iJl be undertaken simply because they can be hedged. 'The c-olumn for profit marsins and incenti\'es relates to operations in which the primary focus is not on protection from general price swings, but on eam· ings from residuals and differentials (basis), or e"en from deliberate position taking. 'Includes earninp. of storage: by holding deliverable CASh product a;;ainst short futures. This is sometimes referred to as "cash and carry." SOURCE: H«!nry B. Arthur, Commodity Futures as a Busineu Management Tool, Di,'ision of Research, Graduate School of Business Aciministratior., Harvard Uoiver~ity, Ca."D'!:.ridge, Mass., 1971, pp. 336-337.
Commercial Uses of Futures Markets
Nature of Openitioo
Example
Buy Hedge: the purchase of futures against a forward sale of actuals.
A silverware manufacturer books orders for his product at a set price for delivery io six months. He may buy an equivalent silver futures position as a hedge, prior to actually purchasing the spot silver from a bullion dealer. \\'b::n he ultimately does buy his actual silver, he will simultaneously sell out his long futures hedge positioo.
Sell Hedge: the sale of futures against the ownership of actuals.
The operator of a country grain elevator buys soybeans from lo::al farmers at harvest time. To protect himself against Joss due to price decline· in the period before he is able to sell these soybeans, the operator hedges by selling (short) Chicago soybean futures. When he ultimately sells his cash soybeans, he will sirrrtlltaneously cover his short futures position.
QUASI· HEDGING
Buy Versus Fi:red Selling
OR
Price. Buy futures to cover input requirements for a product whose selling price is fixed or relatively stable.
A bottler who uses sugar as an ingredient in the manufacture of a soft drink, sold for 10¢ per bottle, buys forward delivery domestic sugar futures when 'it affords him a reasonable cost-price basis for this sugar.
Type of Use HEDGING
rJUCE SETTING
Sell Versus Fi:red Cost. Sell futures when it affords an attractive selling basis relative to fixed or rela· tivcly stable costs.
A farmer, who sees com prices have risen sharply, sells new crop futures short, even before he plants his seed. This assures him an acceptable price basis on the corresponding portion of his forthcoming new crop.
A plywood manufacturer sells plywood futures short, at wide premiums over actuals. He calculates that the existing selling basi~ provides a substantial "cushion .. against foreseeable changes in his raw materic.l costs.
Source: The Commodity Futures Market Guide - Stanley Kroll
20
WHO TRADES It has been said that there are two classes of commodity traders ...... speculators and the trade. (industry-hedgers) The speculator trades to make profits, and the trade trades to protect profits. It's that simple. The trade, hedger buys and sells futures as part of his marketing and merchandizing business. He may sell futures to hedge his risk on commodities owned but not yet sold, or he may buy futures to cover delivery committments where he doesn't yet own the required actual commodity. The hedging function then naturally focuses on the role of transfering the risk of drastic inventory price changes to other holders in the futures market - the speculator. However,the other side of the transaction might very well be taken by another hedger, who was offsetting as opposite risk or was liquidating another hedge, as a result of a change in his position in the cash market. The traditional risk transfer concept of hedging has evolved into a dynamic concept of risk management which accepts the maximization of expected return as well as the position of merely minimizing risk. Hedging is now viewed as an important management tool, which facilitates buying and selling decisions and gives greater freedom for business actions in markets not only dominated by the necessity of carrying inventories from one period of time to another but also in non-storage markets. The first axiom of hedging is that cash and futures tend to move in the same direction. The second general principle is that the price of ~~e cash commodity and the futures price must becum equal, in the delivery month. There is a theory around that states that most losers are small traders and that the safest position in the market is one directly opposite to the market trend, and accordingly, the hedger cums to play. Many hedgers lose however, merely by this very nature of hedging. In fact, the hedger's losses as he opposes a market trend feed the financial pot on which / speculators draw for profits. Hedging activity accounts for the largest share of positions held in commodity futures trading. However, not all the trade is truly hedger. Many operators are sometimes hedgers and sometime speculator . Just because U are a hedger will not then mean that U will make money. Hedging is not for the speculator, but it is an interesting bag of tricks and the trader shud be aware of the psychology - philosophy of the hedging process. So there U are.
479
480
WHO TFADES
THE EXCHANGE MBMBER The exchange member means just that - he/she is a member of an exchange where U're contract is traded, and wherein he/she owns a "seat". ( Surely U have heard of the "seat".) These traders are the traders with the penultimate capabilities, facilities, freedom of choice, and source information. They pay very little commissions and are on or near the trading floor at all times. Even when on vacation, it has been said he rarely fails to make a trade. They are the most active participants on the floor on an individual basis. They scalp, they day trade, they long term trade. An exchange member may scalp for a few points. I respect his ability in doing this. They will day trade. One exchange member a few years ago took the entire up-limit "pool" of silver in one bite. He was prive to his firm's computer calculations and researchers' data and he was happy with the situation. Within minutes, silver was down limit. He day traded IOO's of contracts and reportedly made SI,OOO,OOO with this little one day bite. An extremely rare event, but these things can happen. Exchange members might do things like accummulate millions of bus. soybeans, expecting a big move. They may work at it for 6 mths. to a year. Their capability and astuteness are a sure thing. I have not heard of too many exchange members of note, breaking their back completely, but, if they do they return fighting. If I cud ask to be any other type of trader, I wud ask to be an exchange member, except that the environment may interfere with my trading. I don't have to be one, but to be rite in the thick of things wud be quite fantastic.
THE FEMALE TRADER 5% of players are women. Aside from the instances of joint ownership, very few accounts are retained in the name of women. How do they trade? They seem to prefer extremes, either excessive risk taking or over-conservativism. Females appear
~~0
TRADES
less risk sensitive in judging individual trades. But, those who do adopt middle-of-the-road policies tend to overall success. In judging individual cases, winning traders emerge in every category. (Source:- Robert Vichas, Getting Rich in Commodities
THE SMALL TRADER The small trader seldom approaches the expectation of the game in the spirit of fair, good, and bad bets. He is determined by the profitability of the event occuring. He is concerned with the ratio of gain to loss and the costs of playing the game. In his desire to play a speculative game to the hilt in which results that are either good or bad occur quickly, the probability of ruin does not receive the cool reflection it deserves and the small speculator remains generally unconvinced that he cannot change the mathematical expectations of the game by the way he plays the game. Remember, that of the 25% who may win in any given year, only 2 % manage their skills in a consistent manner that assures their re-appearance year after year. Small traders, rather than acting consistently on the wrong side, are better described as operating haphazardly. The small trader is impatient, he runs his losses, he's afraid to short markets and he listens to tips - is a newsmonger. He fears the market. He aborts easily. He will be led to choose risky trades. He will buck all logic - charts, fundamentals, advice, trends, futures prices, information, - like Taurus the Bull. He raps with other traders as they circumnambulate / in the same circle. He walks and talks like a non-starter. Small traders are less successful on the short side of the market. They have a predilection for trading in distant months. The small trader tends to rely on long term trend following methods for profits, in which they assume that the tendency of a rising market is to continue to rise, and that the tendency of a falling market is to continue to fall. They buy strength and sell weakness. This enables the small trader to reap good profits in years such trend are of great frequency. ~e
small trader will becum whiplashed in non-trending markets.
48!
482
wnO TRADES
Also he becums whiplashed by employing techniques such as point & figure charting, moving averages in markets that are topping, bottoming, as the moving averages criss-cross each o~~er, or whatever, and prices girate in congestions. The small trader is not a good non-trending type trader. He's mish-mashed to death in congestions areas. Psychologically, the small trader does not anticipate a great change in his habits, and only " I2% consider the possibility of discontinuing trading as a result of losing money". ( Source:- Commodity Futures Game. Tewels,Harlow & Stone. McGraw Hill )
THE AVERAGE TRADER The average speculator is 45 yrs. old, earns $35,000 per year, trades in 2's and 3's , resides in California, Illinois, N.Y., Texas, Iowa, Ohio. Roughly 2/3rds are college graduates, mainly male. I/3rd are professional people. The bald unyielding fact is that most traders as a group possess no special forecasting skills. The average speculator has the expectation of losing money, with losses over a reasonable period equalling commissions. The average trader does not require a history of profits to continue trading. His needs may be met by merely playing the game. They may continue to trade because they continue to feel they can forecast prices. He works with second or third hand information received after it has already been scrutinized and acted upon by large deale~s. and other professionals. He has no special representative in critical areas - no string of correspondents. Rarely is he trained as an economist or trader. He cannot approach the market with consistent success, because his everyday business does not involve commodity dealings.
WrlO
TR~ES
THE PUBLIC TRADER Most styles are based on the search for minor, intermediate and major trends. The public speculator is constantly probing for such trends. Once aboard a trend, each operates in a somewhat different fashion, one aggressively pyramiding, the other pyramiding conservatively. Another may periodically liquidate part of his position, whereas another may decide that trend bucking is his bag of tricks, as opposed to being a trend follower. The public speculator does not like being short. Basically, he is usually long in the market. He is psychologically more equipped to be a bull than a bear for the understandable reason that the price cannot go below zero on the downside but the sky is the limit on the upside. The public speculator usually has a fervour for day-trading and short term trades. lt takes considerable discipline for him to becum involved in the basics of long term trading. The public speculator cannot leave the market alone. He has a clear tendency to cut his profits short and letting losses run. He buys on days of price declines and sells on price rises. This action indicates that public traders are predominate price level traders ( U shud be price movement trader.) When the general public learns about an opportunity, they are invariably wrong in their interpretation of the news event. Everyday logic does not work in the market. That is why attornies and doctors are the biggest pidgeons in brokerage circles. These men are trained to act in logical sequence patterns. The vast majority of investors, altho' optimistic, have a high degree of risk aversion and react more emotionally to market events. Emotions are the enemy of the public speculator, especially fear. The public speculator is attracted to the market in times of ernbullient excitement and are less inclined to be bearish for they tend to buy and sell with the news rather than against it. They frequently buy on the first reaction of a topping formation because it is cheaper. The concept of contrarian opinion holds to the analysis of the public speculator ( see chapt. 5) The final blow-off in the market is stimulated by those buyers who have finally crossed the psychological threshold, convinced that a bull market is now, at last, in full swing. The public speculator always misjudges events and distorts facts and panics easily. The public speculator's marching song is " Buy High - Sell The Low "
483
484
WHO TP.ADES The public speculator is frequently a poor student of the commodity or has recently begun commodity trading. He has limited resources and has a tendency to over-trade. At the first sign of problems, they frequently must liquidate their positions, rarely having the resources to withstand even a moderately adverse price reaction. They base their action on hot market tips, rumours and hunches, because they know their positions are based on shaky grounds. They are frequently out to make a quick killing, that is, they are plungers. Unfortunately they ignore the prime prerequisite of money management and operate without a written down trading plan. They are not aware of the importance of limiting risk relative to risk capital. They ignore reality. As in all speculative endeavours, losses will occur. The public speculator does not ·take this into account. They do not take into account the fact that trading with minimum margins in futures trading, that judgement has to be accurate to within very fine tuning, which is extremely difficult to obtain with regards to forecasting prices. The public speculator does not realize that he has to be able to forecast price and to be aware of market movement.
THE BEGINNING SPECULATOR This trader moves usually from the stock market or some other investment media to the commodity markets, because he realizes that's where the action is. Or, he may no longer have enough money to maintain a stock account. I have great compassion for the beginning trader. We all were one at one time. I began commodity trading by giving $!2,000 to a leading brokerage firm, by way of a managed account. / Within two weeks, the $!2,000 had catapulted to $!8,000 and within four days I received a cheque for what was left in my account, of $2.81 and my broker went on a holiday. (A standard procedure when U're broker has blown U out of money, he goes on vacation, he made so much money and to get away from his disgruntled clients.) At that moment I became interested in commodity futures trading. I was astounded that the experts did not know what they were doing. (They still don't.) Every beginning trader will go thru some special experience that he/she remembers for the rest of his/her life.
1-.'HO TRADES
!1any beginning traders do not have the fight in them to continue trading after their broker or advisory service has gone thru their money. If U are a beginning trader, I recommend four things:I. Obtain as much information about what constitutes a good broker. There's some information in this book. Be careful of fancy circulars, - get U're information from books (library?). And learn how to becum a good client. Lots in this book for that. 2. Subsribe to Bruce Gould, Box I6, Seattle, Washington 98III for basic fundamental and technical analysis and concomitant wisdom·Get back issues,especiallY- Vol.I. 3. Employ P&L charting along with Bruce Gould's approach, but do not fiddle with it too much. Then analyze all market tops and bottoms and congestion areas, in the commodity u are intersted in,for, if possible the last two years(see U're broker?) using P&L charting, to see when to take profits or enter the market. But be careful, do not becum an expert. ( P&L charting:I invented the damn thing & have yet to consider myself an expert yet, in spite of 5 yrs. using it.) Read this book carefully. And continue to refer to the chapts. on trend, congestion, market reversals, for guidance in determining market movements ...... know the basics of vol. O.I. cash, basis, odds. 4. Do not enter the market for at least 6 mths. Learn the rules of money managment to know / market plans that u feel easy with. Do not paper trade. Paper trading gives U too much confidence. U must trade in real market experience. Just analyze the markets. U will follow some markets and P&L charting will enable U to know the feel of market congestions, market trends, and market turnarounds. U will recognize them. If U must trade in this 6 mth's period, trade medium to long term, possibly following Bruce Gould's suggestions. One last little suggestion:- make a precise of this book. Shud take u 3 mths .
485
486
WHO TRADES
Look, if U've got $IO,OOO, if U've got $5,000 , realize that at this very moment U have got $IO,OOO or $5,000 . At least U've got some money. Don't be in a position 6 mths. from now in having only $I,OOO left. If U take U're time, plod along, keep things simple, and quietly adjust U'reself to the market, U shud be able to quietly over the next five years create $I,OOO,OOO , either before or after tax. Take U're time. Remember, that the predominant characteristic of the beginning trader is his impatience. He wants his fortune by next Wednesday. He shakes loose easily from the market. He does not have self-control and discipline. Take it easy. Take U're time. Gad! There's no better advice I can give U. Write U're plan down, and write down the reasons each time U trade .. The market will be here after 6 rnths. - just make sure U are too! If U blow U'reself out before then, then U have only U' reself to blame. Don't walk away disgusted with commodity trading. Too many do. They are so foolish.
My friend, we're nearing the end of my book, accept for items of interest and data in the appendices. Please do not put U'self in the position of making $200,000 in 2-3 months, and losing it in one week. Be wary of day-trading U'reself into $90,000 profit one day and losing $I50,000 the next. I wud like to think of U once having read this book to be making on a consistent basis, year after year good money. Wud U do that for me? I put a lot of work into this book, U know. I wud like to actually think of U making lots and lots of money. Be wary of those around Whatever
u.
Be wary of U'reself.
u do, I am with u. Particularily if U win.
APPENDIX A
• advice for the
individual
• practical trading hints • chart patterns • seasonal &cyclical patterns • thoughts
CHAPTER TWENTY-ONE ADVICE FOR THE INDIVIDUAL the following tid-bits of advice have been selected at random and are listed as such. It shud prove useful to u, as an occasional quick reference.
If U see no risk ·u wish to take - get out of the market for a while - take a vacation - regain perspective. ( If U can't get out, U shudn't trade commodities. ) It is better that U're money shud lay idle until U are convinced. Don't be intimidated or impressed by sudden runs in the market - they may just be "stops" being run. - runaway markets are not that common. ( But bear cracks can be very frightening to the longs. ) Over-trading is one of the worst sins that can be made trade too often and be the broker's best friend, trade less often to be your own true friend. buy only on down days, sell only on up days .... herd instinct almost forces us to buy on up ·days, while the law of probability tells us that up days are more likely to be followed by down days, especially if it is the hhird or fourth day of the move. ( Don't fall for those sucker plays. ) ( the above is re: uptrend ) dialogue is appropriate if the mutual goal is enlightenment· Unless the work of U're broker, consultants harmonizes to achieve what U want, they are not only useless to U, but their opinions can interfer with U're decision making process.
487
488
;..pvrc::: It is no trick at all to be right on the markets. ( U can always find lots of early bulls and bears. ) Men who can both be right and sir tight are uncommon. Sit tight. It is only after the operator has firmly grasped this fact that he can make big money. Be patient. There are I68 hours in a week. Roughly 20 of these hours are devoted to making it. Don't U believe those 20 hours merit U're full attention ? Enough time remains in the other I48 for play ( or other work) . "and the poor get poorer" ...•. if U learn to withdraw U're attention from all distraction -- whether they may happen to be of hub-bub, telephones, - noise U can't stash and to concentrate on one thing --- namely, commodity futures trading - U will learn how to attract the right information. But accomplishment does require practise. Taking profits too soon and waiting to buy at a predetermined area, such as an additional 50% can be good or bad advice ••.• U can fall into the trap of missing a winning bull in order to buy cheaper, or u can be resolved to wait for the market to cum to U even if it means never boarding the bull. If U are stopped out of a position, do not err in the opposite direction and reverse the position. Analyze each dealing on its own merits. Accidental successes usually turn into accidental failures. Planned successes denotes planning, not failing. (Don't forget.) Good sports die broke ..... There are no sure things. Stay out of traps. Traders sleep, markets don't, or is it, markets sleep trader's don't ? . Try to learn what news is significant and what is not. - use a panic exodus or entry as a trading opportunity, especially if it is against a strong trend. - don't be worried. However, don't buy a bull market that won't act on bullish news, & don't sell a bear market that won't act on bearish news.
--··-----
- - -·-----
ADVICE
These days there is a penchant for placing undue faith in the abilities of people with official credentials. They trade on the cult of expertise which is impervious to the idea of performance. If a professional has real credentials then even a record of consistant failure will not be held against him. " The analyst can be only as good as his market " pretty sweepingly absolves him from having to earn his keep. Exactly how a professional receives his credentials is a mystery, but performance generally has little to do with it. If every analyst flipped a coin in order to arrive at his recommendations, some wud compile truly impressive records. Brokers are on the firing line far more than analysts. For them, the kind of luck that is particularily useful is making money for the customer in the early stages. If a broker can hit.a couple of good markets, and turn $5,000 into $20,000 the customer wil-l be hooked.
Never try to reduce trading to a purely mechanical exercise Mechanicalness must be displaced with awareness. Generally, the best policy after accepting a loss is to stand aside. A broker's office is the worst place to evaluate market activity. Rumours flourish and emotions reign. News is over-emphasized and misinterpreted. The trader is much better off to rely on his charts. Rarely buck a runaway market. - any major trend, up or down, tends to start slowly and then accelerate sharply as the momentum of buying and selling accelerates. It is at this juncture errors start to creep in. Almost invariably, trends in commodities/ exceed one's wildest dreams or any chart prediction. If a market is not in a major trend, investors shud try to sell on strength and buy on wealness. Experience will show whether the market is in a true trend or merely a trading range.
489
490
ADVICE
Don't run the losses ..... unfortunately, many unsophisticated day traders develop the practise of liquidating only their day trades that go in the right direction and maintain positions that were wrong. There is a natural preference to taking profits quickly for fear they will evaporate. There's also a natural reluctance to take quick losses. We usually act too quickly when we're trying to make money and too slowly when we're trying to protect our money.
If U have missed an enormous bull run, don't be over-awed by widespread bull talk. Look to sell. The market will very likely go down much faster, as stop-loss selling snow-balls.
Don't listen to tips ...•. always look for unusual pressures on the market.
If a market turns quiet, don't forget that speculators can be very ~~patient. Often U will see the market wander lower on lack of interest and speculators get bored with their holdings and throw it out. Look to buy on this type of behaviour.
Don't trade too heavily in context with U're plan liability.
Never meet a margin call
liquidate
Don't ( never ) straddle to avoid taking a loss
---
liqu~date
The trader shud be certain that his rules are not out of date for each commodity he is following.
Decide on a trading plan and follow it ! Have a trading plan that has proved profitable in the past.
.
ADVICE ~emove
a portion of all profits from V re accounts 1
I
I
I
Use only mental stops and stick to them. Do not put in a stop order unless the market is very near U're price. Just buy or sell at the market, i f the price hits U're mental stop. ( Not everyone agrees with me on this . )
Know U- 1 re broker and his brokerage· firm. Pick an ecperienced broker. Deal only with a firm that is a clearing menilier ofan exchange.
Only commit 30 % of U 1 re operating capital at any one time. Trade only in big vol:ume commodities. These markets are large enough to prevent manipulation. Try to stick to U.S. Exchanges.
Think independantly .•. avoid the herd instinct. The herd is often ( always ) wrong.
The market has only one top per year. In looking for a top, give the market plenty of time to dance around, or else look for sharp break in an uptrend line. ( And watch out for those inverted "v" 's and island reversals. )
In general, the more prices rise, the more likely they are to continue to rise. If U ever have to bet blind, bet that the market will continue its chosen path.
Remember how unimportant most trading days are in the life of a major move.
49I
492
ADVICE
I want to be rich, but I never want to be in such a hurry that I can't wait around for a few markets ( sometimes months, sometimes years ) that are good markets and trade them quietly and then sit back and ~ait for a few more. I wud rather trade quiet markets which are starting their moves than the widely fluctuating markets where no one knows what will happen. Significant price moves take time to develop. They do not cum overnite.
However, what can really be of value is the ability to successfully trade fluctuating markets. This ability, no one can ever take away from u.
When U get sharp upward momentum, and a correction (which is natural ) expect further momentum.
DON'T WALK INTO A BROKERAGE FIRM AND EXPECT TO GET RICH
BY WEDNESDAY.
An
old adage dictum take positions along the path of least resistance.
Note the prices in supermarkets, whether its featured and how people are buying it. U develop some idea on what the market is doing without the formal framework of a model.
Remember that as more and more market participants ( 2.5 million in I977 ) attempt to predicate every action on chart rules, the accumulative effect of those similiar actions self-creates price fluctuations, which may destroy much of the validity of all chart technique. In particular, the placing of stop-loss orders at identical points by hundreds of traders may create false penetrations of trend lines and other fo.rmations.
ADVICE
If U're a day trader, watching the price ticks, remember that any series of up-ticks or down-ticks wud give the trader no more information about his next position than wud a series of heads to the better on a coin flip. These small random fluctuations are called noise and account for 75 % of all new prices coming across the ticker. It is a meaningless fluctuation that characterizes a market at rest. (However, an experienced "tick" listener, mite, just mite, know better.) News information available to everyone has little or no value. The futures market has an uncanny ability to discount future events well before they are cognized by the very many. By the time the majority learns a piece of news, it is already too late. It is after the fact. The majority is always wrong. ( Sell the news, buy the rumour: )
If U do not have more than $1-2,000 ; pool U're resources with five others, form an investment club and get a good broker.
No better system reigns than to write out each trade before hand.
One way of reducing risk for inexperienced day traders is to trade from one side of the market. Trading both long and short in one day will probably blow out all brain fuses of all but most hardened traders. Remember, U can swing some pretty good no's with day trading. Too many people master one technique, then want to begin experimenting with others. When U have found a winning style, stick to it. / U have to organize what U do and then be able to do it when u don't feel like it. Keep U'reself in shape physically. ( It will help the mental state, which is enough of a problem without having a derelict host within which to function ! ) - good nutrition and constant - good exercise and constant - good sleep . ( mix that up to· stir things s bit )
493
494
ADVICE
No alcohol during Sunday, Monday, Tuesday, Wednesday, and Thursday. An absolute cardinal rule. And for God's sake, no marijuana !!! - it's fat soluble, and one toke will last to varying degrees 30 days in the fatty tissue of brain cells ( absolutely murdurous.) and, this includes any mood altering chemicals whether prescribed or not. Check it out !
Watch out for a trend, when market opinion seems one sided. A good rule cud be to confine U're trading to situations of unusual appeal.
Let us not becum elated when we pluck a few thousand from the market. Don't believe that happy days are here, with a few lucky shots.
Nothing can bring U peace, but the triumph of principles. The prudent speculator will never have positions during a vacation.
Becum a price movement trader rather than a price level trader . ( except, perhaps for 50 % retracements. )
Never let U're bag of tools be overfilled until the noise/ of information systems clog the channel of clear cogitation.
A trader's greatest mistake is watching the market and making decisions based on possible reactions to price moves.
Take five years to create and stabalize U're first million dollars then climb to I2 million in another three.
ADVICE
chart purist who does not wish to know anything about the fundamentals of the market seems to represent too extreme a view for the successful long term price forecasting. ~he
A sharp trader is not likely to short a market during a technical reaction following a major upside breakout, out of a congestion.
Take a broad view of the market, in fact an international view, and be willing to temporarily discard some old concepts when there are unusual market patterns. be flexible.
Identify both major and minor Price trends. - both major and minor support and resistance levels. - trend channels, if there is one. - major trend lines - congestion areas - seasonals, odds and basis.
Do not initiate or liquidate a position due to impatience or boredom.
As the equity in U're account increases, do not commensurately increase the size of the position. ( Unless it is part of U're trading plan. ) Diversify into other markets, or take some money home.
A market will rarely penetrate an important overhead resistance level on the first attempt. Even if it does go through, it shud pull back at least to :the breakout point.
In a major downtrend, sell on a minor rally into overhead resistance or on a 50 % retracement of the last down-leg. ( and vica versa in a major uptrend. )
495
496
ADVICE
A minor trend rarely lasts more than seven trading days. Buy downflags in a major uptrend and sell upflags in a major downtrend, especially if the flag is five or more days old. Do not buy an upflag in an uptrend, espcially if a top is suspected.
A major move frequently runs three " legs " . Do not overlook seasonals.
Do not allow a few successful trades to build overconfidence and undermine meticulous care with respect to U're trading plan. This is the most deadly, destructive force that afflicts nearly every trader I know. ( There are exceptions, but few and far between. )
Quiet, weak markets are good markets to sell. They ordinarily develop into declining markets. But when a market has gone through the stages of quiet and weak to active and declining then on to semi-panic or panic, it shud be bought freely. When vica versa, a quiet and firm market develops into activity and strength, then into excitement, it sh ud be sold with great confidence.
Do U want to know my
secre~
weapon ?
Well, here it is :
Guard Your Secret Do not expatiate on failure or associate with those who do. Strive to feel and feed a sense of victory. Prating about your investments only scatters energy. It invites negative expressions from people who are envious, stupid, or just plain z.eroes or even minuses. Success must be continually fed. You starve the creature when you fail to keep private: mettters private:.
Source an excellent book
Getting Rich In Commodities Currencies, or coins, Before or During the Next Depression. by Robert Vichas
ADVICE
U want to make a great deal of money, well, final feel of advice.
KEEP THINGS SIMPLE. - that applies to every aspect of U're trading - U're market and research approach - U're timing and price objective studies.
finally, in this world, one thing counts,
In the bank, money, large amounts ( Fagin,
Oliver twist. )
After you have been trading sometime, it is good advice to read one chapter of this book a week, especially the technical chapters. I do ! . Make a list of the things you want to buy in this world and read it weekly . Make a graph for a wall which portrays the money you are making j losing on a 'closed out' basis, daily .
497
498
CHAPTER TWENTY-TWO PRACTICAL TRADING HINTS b~ L~\,'(CZ.,
If the market does not act as it shud on opening e.g. call for higher opening , and it doesn't do this then the market is weak. and vica versa. Morning Buldge· - 70 % of the time there is a price buldge
up or down during the first hour of trading. This is even truer if the previous day's action has been very strong or very weak. Be careful of buying strength during the first hour of trading especially following a strong close the previous day ( unless of course, u have a genuine runaway market, which does not occur that often.) Opening prices often are a good distance away from the previous day's close, as the gap will almost always be filled during the day if u just have the patience to wait. On a daily basis, the first I & I/2 hours of trading can usually be divided into three I/2 hour segments. Purchases or sales during the third segment are not as likely to be as correct as purchases sales made during the #I or #2 . U buy on opening if U feel it is about to stage a good rally
( otherwise U never, never buy on opening ) e.g. if the commodity closed at its low or close to the low the day before ( these conditions do exist ) and its almost a sure thing that prices will get clobbered the following morning with a buldge on opening, where the lows of the day are often established. ( the reverse is true for selling)
r
up ?
opening
r
22
HINTS U will find that the third day of a rally usually makes a short term top. Any time prices have moved up for three days in a row ( especially in congestions ) , odds are 80 % for a down move on the fourth and fifth day unless the market is a runaway, which always has only one day down or in the reverse. If prices close five days up or down in a row, we have a major move signal. Such a display of strength means a further move in that direction is ahead. e.g. five days down, - expect lower prices. This does not mean the major move will continue on the sixth day. With regards to trading ranges, if prices move in the same direction five days in a row, there's plenty of pent-up buying or selling in the market and be prepared for a great deal more action.
Each commodity seems to have a peculiar cycle common to it for that contract life. e.g. Silver '78 seems to be congesting &/or forming a medium term top/bottom every 8-9 days. Strange, isn't it ? But a commodity will undulate with a fairly constant ~ythym. Check it out for U'reself. Simply count the number of days between each important low to low and important high to low on the chart for any given commodity and see if U can cum up with its present cycle. When u are searching for a stop-point ( if U must have one, apart from a mental one ) U must realize that others are doing the same thing. The rest of the traders will usually place stops slightly below/above s·.lpport/resistance areas or just outside trend lines. So, when U're placing U're own stop give sum consideration to where u assume the other stops will be, with the pre.'11ise " if U 're going to get me, U're going to have to take a lot of people along first. Subscribe to Bruce Gould.see pg. 485 Some traders base their stops on time basis. i.e. for example, the commodity must start its projected move in four days or theres an indication that something isn't right. This trader uses a IO day time rule for major positions and occasionally, if I am firmly and heavily committed - one day !
One silly rule of thumb, but fairly workable and certainly projectable and especially if U feel U have entered the market at the proper price , is to place the stop under long positions at I & I/2 limit move , and over short positions at two limit moves. And, then place time 'stops'.
499
500
PRACTI=AL HINTS This trader tracks wheat, corn, beans and bean products, cattle, hogs, bellies, gold, silver, copper, cotton. I do not like broilers, eggs,plywood, lumber, potatoes, cocoa, coffee, orange juice, sugar unles on a long term basis, waiting for the right moment for big moves. I see little point is using P&L charting on something I'm not going to be trading short to medium term, unless I am in it. Conventional charting will do.
middle of the range close and the narrow range day : the narrow range day occurs after several wider range days, but both of these patterns demonstrate indecisiveness, while action during the next day or two may show signs of decisiveness.
After an extended day move up, on high volume, the next day or two are usually narrow range day on low volume, while the market catches up, often forming a pennant or flag, or very short term congestion. A good opportunity for a quick trend buck or getting on board the up move. Be careful of these high volume days near projected market tops. Be careful of buying the next day or two. ( watch the "dots (chapt.9) . High volume days on bear cracks usually begets more of the some, unless it has been an end-run out of a congestion.
One widely known rule concernsthe extent of a price reaction. In intermediate and short-term trends, a 50 % retracement is considered as objective. The extent to which prices reach this mid-point tests the degree of strength or weakness of the play. Sometimes the rule works well. Often it is difficult to pin-point.
Rarely place an order for execution on opening ( exc. the above Wait for a few minutes and let the market try to settle down or if U can, put in a stop-limit.
PRACTICAL
HI~~S
50!
o=ten u will see the general market wander lower on a long term basis, on lack of interest and speculators get bored of their holdings and throw it out. Look to buy on this type of behaviour. Don't trade too heavily, in context with U're plan liability.
Use a panic exodus or entry as a trading opportunity, especially if it is against a strong trend, except don't buy just near projected tops.
Imagine a trading-range where the volume is high at the lower end of their trading-range, but low as prices approach the upper end of the range. Does this action signal a strong or weak market ? This action shows support buying entering every time the prices churn in the lower quartile of the range. Obviously,· some traders perceive the commodity as a good bargain at the lower prices. This action must be interpreted as bullish. · On an intra-day basis, volume study requires dediGating consider~ly more time and attention to the market than mo~t traders can spare. The same rules apply intra-day as on daily volume day analysis. e.g. during the opening on heavy market,volume accummulates from the overnite orders, generated by factors widely known. After the opening, the market can be counted on to trade down a spell. On the other hand, if the market opens lower, with heavy volume, anticipate prices to rise, on a frequent basis during the mid-morning session. Also, let's say that prices have been trading up during the day on heavy volume and run into resistance during the closing hour of trading and prices falter. A wall of sellers have stalled prices - even tho' they may fluctuate during the last minutes of trading. Reckon on lower opening prices the next day. With a contra-position, prices subside on heavy volume, but the downtrend is stalled in the last hour of/ trading on good volume . - buyers have crossed swords with sellers towards the end of the trading session with prospects for a higher opening the next day.
502
PRACT:CAL HINTS With regards to gaps ( which are not closed during the trading session). - if the gap stays open, and for e.g. the gap is up and not up limit, if prices have run into resistance, then there's a heavy wall of sellers, even tho' volume may be heavy , moderate or light, and even tho' prices may fluctuate, possibly even~n the high of the day on close , reckon on lower opening prices the next day ( especially if against a channel line in P&L charting.).
Bull markets appear in a manner similiar to the pattern followed by nature for most living things - It consists of a slow start - gradual acceleration in growth that terminates at maturity.
Stay away from high risk trades. They will nickle and dime U to death.
Remember that volume dry-ups at times signal the termination of counter-trends. These quiet periods are generally splendid times to enter the market. e.g. counter-trend dry-up from a major up trend ..••. buy .
Pull backs and consolidations last from 5 to 20 days.
A note on Key Reversal Days: - a sell signal in a bull market has little significance with the reversal day, unless we have seen climatic action and an extended price move of from approx. 5-6 months duration.
One way of reducing risks for day traders is to day trade from one side of the market. If the intermediate trend is ascending, prices will work back and forth through this upslanting channel . - forego opportunities to short. Only accept trades from the long side.
PRACTICAL
~INTS
Period of Time- Price Reversal
- a phenomenon popular with technicians. Often conforms to a pattern for a commodity with a sizeable speculative following. The commodity volume pattern is heavier volume during the opening and closing minutes of trading with fairly uniform activity between. Such a pattern offers many profitable scalping opportunities as well as frequently enabling one to enter at opportune times. If a market opens higher on pretty heavy volume, usually the market will then settle back for a while, and, conversely, if the market opens lower on pretty heavy volume, usually the market will firm up for a while. In the context of the aforegoing volume action pattern, there are two types of higher or lower closings. I. where prices continue to rise ( expect higher opening the following day ) or fall right up to the close. 2. where prices stop rising I falling in roughly the last IS minutes to an hour of trading, but during that time fluctuate at or near the high/lows of the day. After an up day stalled with pretty heavy volume in last I/2 hour or so, supply has caught up with demand and lower prices may be anticipated the next day, on opening~
Have U ever heard of Tuesday Reversals ? Well, each day of the week has to some extent a distinct pattern, believe it or not. Keep the following in mind and see if it happens. Monday : is a trend following day, and usually confirms friday action. Tuesday : sharp reversals occur often on this day. Wednesday : is a trend following day Thursday : another reversal day Friday : is the strongest market day of the week .
. Start small : - if U are new to commodities and even if U have $ IO,OOO - 25,000 , use $5,000 maximum to get started with, trying on only one contract at a time, or better still use the mini-contracts. (ask U're broker). And, before U do this, precise this book, itemizing each page's message. in U're own handwriting, and study for at least six months, while charting one commodity. It will take U at least a year or two of actual trading to gain even the slightest "feel" of what futures are about. Take one year to create a profit of _$!0,000 to $20,000 and be happy. Start small.
503
504
PRACTICAL HINTS
- A suggestion : with large numbers of contracts, do not put entire position on at once. If U trade in fifty contacts of pork bellies, u may want to do it in installments of ten contracts at a time, five times. It's not a bad idea to let the market verify that initial position before putting on the full position - a little note on trend lines : when prices break thru a medium to long term trend line and trade outside of the trend line for two or three days, it's usually a good trading signal that the trend line has been passed thru. Of course, U now look for a trend line in the opposite direction. But, this is a handy little tool to further assess the validity of trend lines - a certain hint is to watch the magnitude of market chan e. When y a sma ler amount each day, it cud be a signal for an uptrend. _en t e mar et ~es up each day-: but in smaller aintr"unts, it's ~ hi r bet that a downtrend is at hand.
'spikes' often mark resistance/support. 'spike' resistance
'spike'
support
- on page 232, where we are talking of 'crests', please note that 'crests' provide support/resistance and could also be added to 'types' of resistance as mentioned on page 336, as well as the 'spikes' above, giving five types of support, resistance. Also see pages 168 - !73 !
- the following is an illustration of very, very, very typical tops for any commodity. See page 254 for a discussion of why I feel that most markets have normal graphic tops and are identifiable. There is that last bull leap, with prices closing at the top of the range for the day or at the bottom, and the following day U get the reversal, then very soon there is the reaction back up, volume is lighter, a pall sets over the market, there is a pause, then boom, good-bye, the bull is over, i f only temporarily. Watch for this And keep this page and page 254 handy in your mind when U suspect a top. These patterns happen again & again & again.And keep a weather eye on a downside 2-day line, per page 360 !
- a group of closes ( s.or more ) can act as support/resistance. In the silver chart, prices close within a box, within 5¢ of each other. Call it a cluster of closes, if U will.
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505
CHAPTER TWENTY-THREE
CHART PATTERNS
506
CHART PATTER~S
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CHART PATTERNS
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507
508
CHART
?ATTER~S
In the reading of any chart formation, it is important that the underlying explanation of what is happening is held in mind. Random-walk, trending, discounting and the floor and ceilings for each commodity all help in the interpretation of charts and help prevent some of the more spurious reasoning that can come from technical study. To be perfectly candid, there is very little objective, explicit evidence available to support the commonly accepted rules of chart analysis, yet the rules are widely accepted as valid and seem to produce worthwhile results. Whatever one believes is being measured - this entire approach is built on the assumption that certain repetitive patterns of price action will often occur before significant price movements. Much of what U will learn in this chapter is common knowledge, brandished by those who fancy themselves as technicians. Imitators have embalmed in their brain three or four basic chart patterns. At least it is good as a repartee for chin-wags.
CHART PATTERNS
PATTERNS USUALLY A CONTINUATION
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PATTERNS USUALLY A REVERSAL
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CHART PATTERNS
I
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simple
Market is coiling. Which direction will it spring ?
ascending
Market is trying to go through~ top .
descending
Market is trying to break thru on the downside.
Triangular formations occur with great frequency, because after a substantial rise or decline, price fluctuations are apt to be wide and hectic in reflection of the market's struggle to adjust
CHART PATTERNS
SII
to the new price level and then will gradually simmer down. (Volume is greatest at the congestion area's, triangles's conception and then will gradually ebb to the congestion's breakout . ) The triangle is the only or most common pattern that turns up as both continuation and reversal patterns. Triangles usually mark the mid-point of a move. Some chartists believe that the extent of the breakout from the triangle will be a minimum of the vertical side distance from the apex.
i [_-
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same as "a"
?
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Triangles frequently becum part of other more important chart formations. Often, a double top or bottom (discussion to follow) may be really a large triangle. An ascending triangle resembles a double top. Of the three triangles, the ascending and descending triangles are the most reliable. Namely, an upt. rend with an ascending triangle is the most reliable pattern to follow, or in a downtrend the descending triangle is the most reliable. Triangles generally develop as a consolidation pattern, that is a temporary interuption in the trend, but on occasion develops as a trend reversal. Triangles are fairly reliable, especially when no more than three or four oscillations occur before the breakout.
SIMPLE TRIANGLE
the symmetrical, equilateral, simple triangle does not indicate the direction likely to be taken by the ultimately emerging trend. if the simple triangle is to be considered as a possible price reversal, it must have sufficient broadening of scope and be of long duration. will last two weeks to a month.
512
CHARZ PATTERNS ~~e closer ~~e price gets to the apex, the less significance the triangle will have. Watch ou:t for end-runs. (chapt. 7) . A seemingly valid move will not violate either line of the triangle past the last third to quarter of the triangle.
usually mark the mid-point of a move. target )
triangle
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this is the least dependable triangle. It merely foretells that a substantial move out of the congestion may occur. can be depicted as a coil, as the apex is approached. The trading ran~e narrows and like a coil wound tighter and tighter, prices finally snap through the confines of the triangle. Trading volume diminishes as the apex is approached ..
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• Upward Slanting Triangle
SEPT. .
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5!6
CEART PATTERNS
the side o: the triangle which slopes does so in an upward fashion ascending triangle is found when the market top. Time after time, same resistance level
normally bullish. It is usually is trying to go through a previous prices have banged against the only to be thrown back.
In an uptrend, an ascending triangle is the most reliable pattern to follow for a continuation of an uptrend. If the prior trend is up, this favours the emergence of trend in the same direction. However, in the above illustration, U can see that it signaled a move against a downtrend. Usually the slo~ indicates direction of the ultimate move out of the .triangle. The support area is the uptrend line, - the slope of the ascending triangle and will exhibit a tendency to breakout on the upside. the highs of the triangle are pretty well the same price and the isolated lows are coming up against it, so· the top of the triangle is always flat and the bottom of the triangle is acute and slanting to it. again, the closer U get to the apex, the less reliable the movement is except that a close above the top flat line wud be bullish. The bottom line mu~t not be broken if it is, it is a bearish signal.
VESCENV1NG TRIANGLE
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it is formed by price swings similiar to the aseending triangle. In this case, each swing up ends with a lower high point while support continues to develop at the same approximate price on each reaction. Since the high of each move continuously moves lower, it is an indication that selling is becuming more aggressive and that prices will eventually break out of the formation on the downside. the descending triangle is normally bearish.
5I7
5I8
CF.hRT PATTERNS
descending triangle is the most reliable formation to follow in a major downtrend.
FLAGS ANV PENNANTS
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indications of trend continuance:- usually volume shud subside as apex is approached. a flag's boundary line remains equidistant, while a pennant's bo~ndary lines converge. they usually slant downwards in an upmarket, upward in a down market. The fact that flags, pennants ( & wedges ) / slope against the prevailing trend makes sense when realized that a consolidation area is often simply a~ area of price corrective action caused by a market sprint which overran the price level that cud then be supported by the law of supply and demand. ( corrective action is by implication trend countering. ) Volume is greatest at the congestion area's - flag, pennant's conception and will gradually ebb to the breakout and volume shud be smaller during the formation of the flag/pennant than during the move that preceded it.
23
CHART PATTERNS they mark the mid-point of a prevailing move and are usually continuation rather than reversal formations. these patterns tend to form rather quickly and characteristic of-sharp moves and are fairly easy to recognize. After a steep, precipitous move, prices consolidate as profits are taken and the move simmers down and all traders take stock of the situation and the flag/pennant unfurls. they never last long, often four or five days, and after the flag/pennant is formed, the move is abruptly resumed, carrying to new high/lows. they seldom pers·ist longer than two weeks. a downsloped flag/pennant is more likely to break out on the upside while an upward sloped flag/pennant is more likely to turn downwards. many chartists rank flags/pennants among the most dependable technical signals, particularily with reference to the direction of the impending move.
no important differences reign between a flag and pennant. CAUTION their significance must be attached to a composite evaluation of I. the resistance level of the congestion area. 2. the level and location of activity in this area. 3. the relation of this area to trend lines and trend channels. 4. chart price objectives.
5I9
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CHAR~ PATTEPJ'lS
beware of a flag/pennant which does not have a reduced volume. U may be seeing a change in trend. flags unfurl frequently in a surging commodity and are important in reversal chart analsis. when a flag or pennant occur after a gentle market move, the orthodox technician will obediently try to visualize another pattern.
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Reprinted with permission oi Commodit\· Researc.h Bureau. Inc.
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CHART PATTER.~S
II
REVERSAL
" V "
( USUALLY )
FOffi·~TIONS
FORMATIONS
An important and tricky formation , the "v" exists in both an upright and inverted form. Tricky because it is one half of an " m " or " w "· and means that the trend has suddenly reversed without warning or time enough to take early advantage of the sudden change. When it is first moulded, the natural tendency is to wait, to determine whether the " v " (bottom) or " ./\ " (top-inverted "v" ) will again be tested to create a double bottom or top. These spearhead situations exist where a trend, which probably has been steepening, abruptly reverses in one day, typically accompanied by a large gap on either side. The V pattern is by far the most hazardous because it constitutes an irrevocable about face with no warning and to board a trend emerging from a "v" is most difficult since the spectre of a double pattern is a distinct possibility. The v is characteristic of a market that is emotionally fuled way beyond the bounds of rationale values. 11
11
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11
CHART PATTERNS
lnverted-V and V- formations
chart -from: Commodity Perspective 327 S.LaSalle Chic. Ill. 60604
5.23
524
CHART PATTERNS
MUL TTPLE TOPS , BOTTOM.S •
The " rn " or " w " formations are also known as double tops and bottoms, and triple tops and bottoms. These p~tterns form when successive highs and lows stop at approximately the same level. A double top shud be considered complete only after the decline from the second peak carries prices below the first stopping point. Short range double tops form within 8 to IO weeks, and long range double tops develop over much longer intervals. For psychological reasons, round numbers are often likely areas for long-range double tops. Because double tops and bottoms signal sizeable trend changes, they are well worth watching for, altho' the formation is not very common. The importance of awaiting a confirming breakout on the downside following the second top cannot be over emphasized. In cons£dering multiple tops and bottoms, a multiple top is actually a resistance area. To analyse whether it's going to go through - take a look at volume. First, prices tend to move in the direction of increasing volume. In a double top, volume is frequently lower at the second top than the first top and support on the bottom side is broken when prices penetrate the area of the previous low, the valley formed by the middle part of " m " . The triple bottom which is similiar in appearance to the " m " formed at the top, materializes less frequently in intermediate and long term trends. It may pop up often during periods of consolidation and the third bottom will be accompanied by low volume. The conclusive test is that the bottom support area endures and volume and open interest picks up as prices thrust through the previously established high. Triple top is similarily characteristic to the double top. Triple tops cannot be anticipated. The third time a top is tested price may catapult into high ground. A triple top will look more like a double bottom as the original long term trend deregrinates upwards. Even during its formation, a double top or bottom is not easily distinguishable. It may really be a large triangle during its formation. An ascending triangle resembles a double top. An ascending triangle predicts probable direction of prices on breakout. Volume shud pick up on'each rally as the apex is neared.
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CEART
?~TTERNS
HEAD a.nd SHOULDERS
- is very important because it usually indicates a major trend reversal. Here the market has thrust up, gone down a bit, then thrust still higher, once again it goes down a bit, then thrusts even higher than its last peak, - at least tries to, as the "head" prevails - too much selling pressure and it falls back to a starting place and U have a " H & S " ( head and shoulder ) • The right shoulder is usually on a smaller volume than occured during the left shoulder. After a right shoulder has formed, the chartist will try to trace a line horizontally at the base of the H&S to create the neckline. The minimal move following a major H&S reversal·forrnation will approximate the distance from the tip of the head to the neckline. The slope of the neckline may influence the extent of the price move. A downward sloping neckline will likely carry prices lower than wud the same top formation with a neckline slanted upwards. The downward tipped neck-line carries a more bearish implication than an upward sloping neckiine. If there is a significant breakthrough of the neckline, prices will often make a return move to the neckline or at least an attempt, before the major move gets underway. The two shoulders need not be of identical size, altho' they shud be smaller than the head. A market is considered especially weak if the rally forming the right shoulder is unable to carry as far as the top of the left shoulder. The H&S sometimes develop a series of multiple shoulders, but is less common than the simple formation. H&S occur in both bull and bear markets and are the basic reversal formation. It is usually sited as the most common chart formation because most chartists have been programmed to identify every third assortment as a "H&S" . " Reinach " , as mentioned in_...:the excellent book Getting rich in commodities, currencies,of coins, before or during the next depression , by Robert Vichas, Arlington House Publishers , has classified twenty seven clear-cut, H & S patterns !
CHART PATTERNS
Reprinted with permission of Commodity Reseirch Bureau
Head and Shoulder
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PATTERNS
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ROUNVEV BOTTOM , TOP
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With a round top , ( scallop, saucer ) it is a gradual reversal of trend. This type of formation is accompanied by minor price swings, creating a scallop effect.
I
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APR.
!I'his formation depicts a fairly long st..-uggle between buyers and sellers, until the pred~.inance of buyers determine trend direction. These patterns, also known as saucers or bowls, are often harbingers of sizeable price moves. They are uncommon / formations and develop in relatively thin markets, ~:ith volume decreasing as prices reach the top or bottom ~~~ increasing as prices turn in the direction of the final move.
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530
CHART PATTERNS
One difficulty about rounded bottoms ( besides the fact that a six month wait is like sixty years for most traders ) is that as they wend their way down, a spurt of buying activity, for several days may give the impression that the long awaited trend has commenced. Afterwards, prices will drop back to approximately the same level. These eruptions can tempt an eager trader.
Reprinted with perminion of Commodity
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HAT BOTTOM
Also known as ~~e dormant bottom. It represents a long standing inactive period, accompanied by low volume activity. The few buyers, sellers resist allowing prices to move far in either direction. This state of affairs can continue for some time.
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53!
532
CHART PATTERHS
;th.er.. c. a/te. tlvte.c.
CLT.'-~AX PATTER.~S
such as
the island reversal the key reversal day the two-day reversal
1SLANV REVERSALS This formation isno ted for being one of the more dependable forecasts of futur·e price movements, which are always away from the island, the opposite direction from the trend that created the island. It is a trading range, separated by an exhaustion gap on one side and a break-away gap on the other. If an island is neutralized by the right hand gap being filled in a few days or a week later, then it is no longer valid. The island can consist of a single day or of several days, and the entire formation is closely related to the daily and weekly reversal phenomena. The key difference is simply that, following the gap to the island area, prices hold for one or several days before ~he buying ( or selling ) power disappears between ~rading sessions. Like the daily and weekly reversals, the island formation frequently occurs on relatively high volume and the subsequent trend change can occur suddenly or develop over a period of time. ( On the bottom side, the attempt to maintain a thrust into lower prices is done by either a high or low volume. ) Island reversals do not occur very often, but when u do see them U shud consider the possibility that a change in price is forthcoming.
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CHART PATTERNS
KEY REVERSAL VAY PATTERN
This is formed by a trading range that beseiges new high prices ( in an uptrend reversal ) , but then surprisingly closes below the previous day's settlement price, or·is simply one where prices sell off substantially and reverse and close up for the day.
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Altho' some major trends have turned on one-day reve~sals, it is generally considered more as an indication of a ~emporary interruption to a major trend - or the turning po~nt of a minor trend.In either case, it is a red flag a sign that the momentum o: the trend has slackened.
A more valid key reversal day is when prices exceeded the previous day's range both in high and low prices and closed lower than the precious day's low ( in a top ) or higher than the previous day's high in a bottom. / Trading volume is an important consideration. Valid one-day reversals have unusually high trading volume. In a one-day reversal the new high or low price is reached early in the trading session. This extreme level is then moved quickly a war from and not seen a.gain during the trading session. even stronger confirmation is it·s' association with an 'exhaustion " gap. A gap is simply a price range where no trading takes place. In an upmove, it results when the lowest price of the
An a
CHART PATTERNS
day is higher than ~~e highest price of the previous day. A relatively wide gap at the end of a long price move can signal the eYw~austion of that move. If it is followed the next day by a one-day reversal, both formations are mutually substantiated. A sell signal in a bull market has little significance unless we have seen climactic action and an extended price move of from five to six month's duration.
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CHART PATTERNS
TWO VAY REVERSAL PATTERN
This pattern arises at the end of a trend. Generally a 2-day reversal originates as a key reversal, a foin into new territory ( either high or low , but instead of closing near the bottom of the range, prices settle at the high of the range. In a 2-day reversal top, during the next day's trading, the highest price is tested again in a top, but prices close at opposite end of the range. ~
r
When prices head sharply lower, perhaps down limit or just off sharply, but the following morning, the next day's prices open a good deal higher than the previous day's close, it gives a 2-day reversal to the upside. ~
r
Such an unusual display of strength is indicati~e of a key reversal for the market. What happens is that prices fail to follow through with the previous day's slide. This type of action is unusual since lower prices forecast lower openings about 85 t of the time. Lower prices with a substantially higher opening is a pretty sure thing that a new move has begun to the upside. It is particularily significant if prices close down the limit and the next day open slightly up. Limit moves shud beget more limit moves.
Reversal patterns (Source: Commodity Research Bureau, Inc., One Ubeny Plaza, New York, N.Y. 10006.)
CHART PATTERNS
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CHART PATTERNS
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PATTERNS EITHER REVERSAL OR CONTINUATION
V1AMONVS are infrequently seen habitu~
of high-volume tops
There is nothing exotic or mysteriou~ about identifying the diamond ; but a certain amount is in the eye of the beholder. Once recognized, many chartists place a stop order to close out longs or go short when the price drops through the lower righthand side of the formation. Because of its' rarity, there is little statistical evidence on the reliability of diamond formations. Anyt~e U see a rising market turning diamond-shaped on high volume, be cautious with bullish positions. : i i:-+-t-!--'-~ I 1 _,1,L.,').-,.:. 7' 1....;... 1 -1-14 1 ...J...."i-!--!.l-4--~1-II~,J_I LJ j j _-U:;r·l~l-t,lp;;l~!;;.L;:I;1-1-ll--H-++-!-+++-'-+-H--~-1-++-l-t-!..!' J..i·~_+-:
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infrequently seen the longer the rectangle took to develop the more si~nificant will be the ultimate result the minimum anticipated price objective equals the height of the rectangle the top or bottom of the rectangle need not be perfectly horizontal has a long history of use by chartists because it takes at least two points to define each line, the rectangle is not built in a day. to trade :
I. Inside rectangle - any time after the fourth turn in prices, a short sale can be made when prices approach top of formation & buy when prices reach bottom of rectangle. 2. Take initial position on stop when prices-finally punch their way out. (As with other formations, a good rule of thumb for defining a breakout is at least 3 % of the price at the edge of the breakout.)
gradual reduction in volume during its development the rectangle is neuter .••. it carries no implications for the direction of the eventual price move out out of the formation. it can mark a price reversal as well as a pause that simply refreshes the existing trend. .
542
CHART PATTERNS
SER'PEI\rr HEAV
the long neck of the snake, with a long head as prices turn sideway for _a while, and then make a move further upwards or downwards. a rather frequent phenomenon to trade : - short term trading within the confines of the congestion channel of the head or the neck. - trade on stop once prices exit the head. -
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CHART PATTERNS
IV
OTHER PATTERNS
GAPS
On a bar chart, a price gap is simply an empty space. The price tracks of some commodities are full of gaps, thin markets ) , in ·which case they mean relatively little. Other commodities rarely gap ( heavily traded - great liquidity When they do, the gap is a meaningful chart pattern and is prognostic. Some gaps are closed during the same trading session or within a few days - while others may not be closed for weeks or months. A good " gap man " can convert these blank spaces into cash in his/her account. Gap afficionados point out that the ability of the market to " jump " price levels certainly must signify a powerful underlying trend. However, many gaps result purely from the coincidental fact that some significant development occured after a market had closed ; and that had the news becurn known during trading hours, no gap wud have appeared. Also, by the time it becums apparent that a gap isn't going to be filled, the subsequent move may be over. THERE ARE FIVE KINDS OF GAPS
I. 2. 3. 4. 5.
opening gap pattern gap breakaway gap runaway gap exhaustion gap
I. Opening gap - is usually formed during the first half hour of trading and subsequently filled. It has little meaning for anyone but a day trader. ( All gaps are continually being filled sooner or later, except breakaways, and the logical place to buy or sell is in the middle of the gap.) - most opening gaps are filled.
543
544
CHART PATTERNS
runaway
2.
Pattern, Common Gap - is usually formed in a market with small volume. When the number of actual sales during any trading session is small, the bids and offers change many times before an actual trade is consumated. As prices fluctuate over a period of days, these gaps will be formed and subsequently filled in. By " filled in " is meant that prices will eventually trade in the price level which was originally skipped and left blank in the chart. The common pattern gap has no particular significance; however, it can be a possibly forerunner of more volatile impending price action. They occur when prices are forming one of the familia~ patterns with which bar chartists deal.
CHART PATTERNS
3.
Breakaway Gap My favourite ! and one of my key tools ! )
- is what it's name implies - a gap formed as prices break away from a chart pattern or congestion area, as prices suddenly explode out of the congestion formation, leaving behind an empty area in which no trading has Brtokowoy taken place for a considerable length 90P of t~e, ( or in which no trading will ever take place ) • The breakaway marks the advancement of a major move and is usually accompanied by marked expansion of volume and are generally wider than any of the pattern gaps which precede them. Concerning the issue of false break-outs through trendlines or support resistance lines, a breakout does not penetrate the trendline by caracoling through it, but by leap-frogging it. (The regularity of this occurence posits that when prices gap above, below intermediate trend lines, that the trend has been reversed. ) Breakaways flaunt themselves at the termination of either bottoms or tops, and very frequently after consummated topping action. Normally the downside gap is more strung out. The longer the gap, the greater the expectancy that the ensuing move will be extensive. Attendant run-away and exhaustion gaps often follow the unvailing of a downside breakaway gap, especially after a small topping configuration, which is thereby trailed by more run-away gaps on the downside. Prices move out of trading areas on the direction of the most or largest gaps.
545
546
CHAR~
3.
?ATTERNS
Runaway Gap Continuation Gap )
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90P
- is a mid-move phenomenon. Prices have pushed higher or lower in orderly fashion, and then suddenly gap with a surge of buying or selling power. The extent to which prices will carry beyond the continuation gap is roughly equal to the distance from the last congestion or pattern to the gap.
Accordingly, run~way gaps appear following an already substantial price moye, and prices then skip upwards (E.G.) in leaps and bounds, as trading volume accelerates, suggesting that market progression still has a substantial distance to rise. Runaway gaps are easy to identify in retrospect. Runaway gaps are sometimes misinterpreted as exhaustion gaps.
4.
Exhaustion Gaps
- signals the last violent plunge of a long price move. Its' most important identifying characteristic is its width • •••• the widest of gaps • Exhaustion gaps pose special trading problems because the most specific characteristic that sets them apart from runaway gaps is the fact that a sudden dramatic reversal follows the appearance of an exhaustion gap. When prices open with a wide gap and then seem to go nowhere despite extremely high volume, an exhaustion gap shud be suspected. During the latter stage of a bull move, an exhaustion gap wud begin just like a runaway gap, opening higher than the previous day's high, but the day's high wud not be sustained, a situation in which many buyers and many sellers cause prices to skip until profit taking creates a congestion area, running headlong into a wall of sellers, and prices bounce off the barrier and towards the close, prices wud begin to decline and possibly retracing itself far enough to fill in the exhaustion gap.and ~equently below the previous day's close. (a key reversal gap).
CHART PATTERNS
It does not necessarily mean tha~ the market has exhausted itself ..•• the long run trend may still stand in tact, or some time may relapse before changing in course. The key reversal gap, however, is likely to attract additional liquidation of an up-move and stimulate new counter-trend positions, and very likely signify the termination of the existing price trend. A major top reversal from a bull market usually takes less time to develop than does a major bottom formation, followin~ an extended market. An exhaustion gap seldom paces out alone in the precipitous move.
At least one runaway gap precedes it. Obviously, therefore, after the first runaway ga~, each subsequent gap becums suspect. There is a popular not~on that all gaps must be filled. No rule states when they will be closed. Exhaustion gaps are usually fairly quickly filled. Runaway gaps require more time. ( They may never be stoppered if the contract expires.)
TRENVLINES Needless to say there is a whole chapter on this subject, it's so deadly important, ana must be considered as a chart pattern, as well as shud trend channels.
Look what happens when prices penetrate trendlines in the following examples.
547
548
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source: commodi.ty Perspective 327 S.LaSalle Chic.Ill.60604
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Source:Trading in Commodities. Grainger
Courtesy: Investment Rese•rr:h Bar chart: New York silver (December 1968).
Trendlines
549
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327 S.LaSalle Chic. Ill. 60604
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There are some more in the above. Can U find them ?
Chart From: IBEX Chart Services Box 693 2420 Ist Ave. Seattle Wash.98I2I
552
CHAR~
PATTERNS
RESISTANCE , SUPPORT
Reprinted with permission of Commodtty Rf:'search Bureau
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Refer to chapter on congestions! Support and resistance levels are unquestionably among the most important of all technical considerations. They are areas which prices ar~expected to have difficulty moving beyond.
23
CHART PATTERNS There are three basic categories . also see pg.504 I. Congestion areas. 2. Areas at which previous advances/declines were turned back e.g. trend lines. 3. Transformed support,resistance levels. i.e. former highs that have been penetrated and turned into support levels.( also former lows that have been penetrated.) The effect of support and resistance levels approaches the mystical at times. One of the most remarkable aspects is their tenacity. Another mentionable aspect of these levels is their chameleon-like ability to change roles. That is to say, an old support level, once clearly violated, will tend to act as resistance in later rallies, and vica versa. And, remember the discussion on break-away gaps that prices will often jump them, leaving gaps, providing a possible bona-fide extended move. The strength of support/resistance levels can be roughly gauged by the number of times they have shown themselves, and the more valid is any move away from them or correspondingly, the more valid is any move through them, especially if they are "jumped" Another measure of strength of these levels is the amount of trading which has taken place there. A level established over many days of high volume trading within a narrow price range will have more horsepower than a one-day spike. A support level can be viewed as a reservoir of buying. However, frequent price attacks on a support level can " use up " enough of this buying that the price simply plows on through. The strength of these levels is related to the amount of " work " that is done there. ( Resistance levels are a mirror image of the same rationale ) .
553
554
CHAPTER TWENTY-FOUR
SEASONAL AND CYCLICAL TENDENCIES
24
SEASONAL & CYCLICAL
WE
~AVE
THREE BASIC GROUPS OF COMMODITIES I.
Industrial copper, lumber, silver,
~old,
pkywood
2.
Agricultural pork bellies, hogs, cattle, & all grains
3.
Perishables eggs, potatoes
INDUSTRIAL COMMODITIES tend to produce the longest trend cycles due to their relative stability of supply and demand. Th~ are more subject to longer term business and economic eye les and to the shorter term viscisitudes of rain, drought and spoilage. AGRICULTURAL COMMODITIES are next as to length of trend cycles. These tend to make seasonal lows around harvest time which occurs around the same time each year. Altho' current marketing activities can distort historical patterns, they are generally valid. PERISHABLE COMMODITIES tend to fluctuate in the shortest term cycles. According to the concept of "structural theories" (chapt. II) we have two kinds of price movements. I. Seasonal price movement 2. Time cycle price movement. The SEASONAL PRICE MOVEMENTS affect all grains cotton cocoa coffee orange juice potatoes
555
556
~he
TIME CYCLJCAL MARKETS include pork bellies hogs cattle eggs broilers chickens choice steers
The world sugar and metals ( gold, silver, copper, platinum, paladium ) are neither seasonal nor cyclical.
Alt!8 the major metals and sugar do fluctuate around time cycles and with seasonal patterns, one must always be on guard for the possibility that the cycle might turn into a super-cycle.This is where technical analysis wud be a useful tool. Gold purchased in November of the last ten years wud have given a profit.
Some notes on time cyclical markets. • historical studies reveal that July pork bellies prices tend to rise from March Ist to sometime before March 22nd Pig Crop Report. Buy Aug. promises and sell promises
Bellies on Oct. Ist of each year which to be a year of declining slaughter them on Oct. Ist of each year which to be one of increasing slaughter.
pork bellies usually have large moves that begin in Aug. and the last week of October . . pork bellies present good selling opportunities in May of each year. . eggs normally make a real dip in price in May . eggs have a nice base from which to rise in late June to the end of December. broilers usually get moving to the upside in January.
SEASONAL & CYCLICAL
SOV~
557
NOTES ON SEASONAL TENDENCIES.
Perhaps one of the greatest tools around ( besides "odds" chap.S is the use of seasonals in detecting market positions in advance of their price movement, by using past seasonals as a guide. All agricultural and timber product commodities have a seasonal price cycle. The price usually advances during the spring and declines during harvest months when supply is abundant and advances with the onset of winter. These life cycle commodities have prices which move in relatively predictable cycles. A rule of thumb states that seasonals are usually at their lowest price just after harvest and their highest price six months after harvest. However, the seasonal patterns, sometimes do not work because of enormous exports. In line in our discussion of seasonal price p~tterns, all commodities will be herein discussed. However, the reader must be able to isolate the industrial from agricultural from perishables and be able to distinguish each of those three categories as to whether , as previously mentioned, it is either strictly seasonal or time cycle or both, or neither. Whenever possible, it is helpful to buy or sell in line with an observable seasonal pattern. For e.g. if soybean meal prices have advanced during the fall and early winter for eight of the past ten years, and if there is reason to believe this pattern will be repeated, then one has a supporting argument for purchases indicated by technical analysis. However, the seasonal itself must not be viewed as an completely independant basis for trading.
SOME MORE NOTES ON SEASONAL TENDENCIES. we know that wheat is usually low in July and high in January. wheat is usually a good buy on June Ist, Oct. Ist, Dec. Ist. wheat presents good selling opportunities in May of each year . . Dec. Wheat has risen 90 % of the time in Oct . . buy March wheat on Oct. Ist Sell on Dec. Ist. corn is usually high in July and low in Jan. corn sets up a buying point in March.
558
S:SASO!-:JG
&
CYCLICAL Dec. Corn has risen only IO % during the month of Oct. . Jan platinum has risen roo % of the time during the month of September. . there is a seasonal tendency for soybean meal to rally during May-June. March Sugar has risen only 20 % of the time during September . . orange juice invariably starts a strong rally during the first two weeks of Oct. There's always a fall hurricane or something so s nee Sept. & Oct. are·the usual hurricane months, the speculator is ready with at least one hurricane scare to push orange juice futures above summer levels. If there isn't a hurricane there's a freeze or a threat of one in November.So buy March O.J. in the summer. Potatoes have a seasonal tendency to begin rallying on Sept. Ist and becum a sell around mid-March the following year. At least once every growing season there is a real potatoe crop scare. Early frost, blight, or something to ruin the "Maine" potatoe crop. If U had bought May potatoes about Sept. Ist U cud have made substantial profits during the next four months. cocoa sees selling in early August. buy May Soybeans Feb. ISth sell April I5th. There is a correlation between Winnipeg May Flaxseed and Chicago May Beans. Nearly every year, while there is a major spring advance in beans, it is preceded by an advance in Flaxseed between Jan 2nd and Feb ISth . If this does not occur, there's no large net advance in .the price of beans between Feb. ISth and April ISth. ~
SEASONll
&
CYCLICAL
THE ?Or..LO\GNG IS h L!ST OF TABLES.
I. Seasonal patterns of cash prices. 2. a commodity category table. 3. theoretical buying dates. 4. list o! when certain commodities are harvested. 5. major illustrations of seasonal patterns.
I. LIST OF NORMAL SEASONAL PATTERNS OF
CASH
Seasonal Pattern of Spot Commodity Prlcesl Commodity
High
l..ow
Barley Broilers Cattle Cocoa
May July April December-January May January-February August July March June November May June ••(January) May July June-July February February • • (January) April July April September ••January, May December
June December November September March April, November (double bottom) November-December December December October March-April October-November November August November October June July-August June, October (double bottom) October December March August-September June
·coffee Com Cotton • Cottonseed Meal ·cottonseed 011 Eggs Flaxseed Hogs Oats Pork Bellies Potatoes Propane Rye Soybeans Soybean Oil •soybean Meal •sugar (World) Wheat Wool
l Some c:ommodltlu, aucl\ as tile malala, de not nave cl.. rty defined Maaonal prtca pan.ma.
• More than tna usual number ot axcaotlons to lila Muonal oatlam. •• TMM ;rains have ottan bean aut>jact to al\arp reactions In February (known as tile Fel:lruary l:lraak) at1ar wlllcl\ a ;ooct rally aometlmas IIU oc:currael.
courtesy: 'Modern Commodity Futures Trading' by G. Gold commodity Research Bureau N.Y.
559
560
SEASONAL & CYCLICAL 2.
b
CO~~ODITY
CATEGORY TABLE.
Commodity Category Table Major Use
c
0.., ':CD
==
c
CD-
C.:
0
a _e
E"' o.C 0~
CD :::0
e, _c
5e
cce :ELL. Broilers Cattle Cocoa Coffee Copper Com Cotton Eggs Flaxseed
Hides Oats
x·
X
X
X·
X
X X
X X X X X X X
X
X X
X X X
Pork Bellies Potatoes Rye Sliver
courtesy
X
X X
X
X X
X X X X X X
X X
X
X X X X
X X
X
X X X
X
X
X
X
X
X X X X X
X
)(
X
X X X
X
X
X X X
X X
X
X
X
X
X
X X X X X
X
X
X
X
X
X
X X X
X X
X
X X
X X
X X
X
X X X X
X X
X
X X
X
Soybeans X Soybean Meal Soybean Oll X Sugar Wheat X Wool
X X
X X X
X
X
X
Palladium Platinum
0 <(.)
X
X
Orange Julc:e
c
X X X X X X
X X
X
X X X
X
X
X
'Modern commodity Futures Trading' by G.Gold Commodity Research Bureau N.Y.
X X X X
24
SEASONAL & CYCLICAL 3.
EXAMPLES OF TrlEORETICAL BUYING DATES.
Theoretical Buying Oate
Uquidate
No. of Times Profitable
Cocoa
September 25th March 15th
November 30th May 15th
13 out of 15 years 8 out of 10 years
Soybeans
October 1st
(no liquidation dates given but figures did indicate advances at some time atter the initial date.)
October 5th
February 5th
8 out of 11 years
January 15th
12 out of 14 years
Soybean Meal March Wheat
. June 15th
"The Voice from the Tomb"
They are: Wheat
BUY
SELL
February 22nd
January 1Oth
July 1st
May lOth
November 28th
September 1Oth
-------------------------------------------------·---Com
March 1st
May 20th
June 25th
August lOth
These dates· are still believed to be used by some traders as signposts for trading directions.
Courtesy
'Modern Commodity Futures Trading' by G. Gold Commodity Research Bureau N.Y.
56I
562
SEASO!\AL & CYCLICAL
4.
LIST OF WHEN CERTAIN COMMODITIES ARE H..'h...RVESTED.
rye
around july
oats
around july
beans
around Sept. to November
cotton
around Sept. to October
cocoas
around Sept. to November
wheat
May thru to August
corn
Oct.· or Nov. thru to Dec.
barley
July thru to Sept.
potatoes
around Sept. Oct.
24 SEASONAL & CYCLICAL 5.
ILLUSTRATIONS OF SEASONAL PATTERNS.
(ave~ge
May
June
EGG CASH SEASONAL wholesale price of shell eggs. extra lar9e at Chicago, 1955-1967)
Ju Iy Aug. Sept.
Oct.
Nov. Dee.
Jan.
Feb.
Mar.
Apr.
POTATO CASH SEASONAL (wholesale price of potatoes, white eastern, at New York, 1961-1967)
s.o
~.0
3.0 September
Courtesy
Dow-Jones Irwin Guide To Commodity Trading
563
564
SEASONAL & CYCLICAL
CORN CASH SEASONAL (monthly average price of No.3 yellow corn at Chicago, January 1956-Dec:ember 19671
1.30
1.20
1.10~--~--~--~----~--~--~--~~--._--~___.__~~--~
Nov. Dee.
Jan.
Feb.
/IAar.
Apr.
May
June
July
Aug. Sept.
Oct.
SOYBEAN MEAL CASH SEASONAL (average price of soybean meal, 44 percent protein, at Chic:apo, 195>1967)
$71.00...-----------------------------, July
70.00
69.00 c: 0
1-
...
Ci
~
68.00
.E
December
0 0
67.00 March
October
66.00
Courtesy
November
Dow-Jones Irwin Guide to Commodity Trading
SEASONAL & CYCLICAL
PORK BELLIES CASH SEASONAL !monthly cash average price of Chicago pork bellies, 1949 through 19581
34.00
33.00
September
32.00
"t3
c:
31 .00
:::>
t:.. &>
c..
c"'
~
30.00
March
29.00 December October
28.00 27.00
November
26.00~----------------------------------------------------~ Courtesy
Dow-Jones Irwin Guide to Commodity Trading
565
SEASON~
566
& CYCLICAL
SOYBEANS CASH SEASONAL
(No.1 yellow. average monthly cash price at Chicago 1960-1970)
2.82 2.81 2.80 2.79 2.78 2.77 2.76 2.75 2.74 2.73 2.72 2.71 2.70 2.69 2.68 2.67 2.66 2.65 2.64 2.63 2.62 2.61 2.60 Oc:t. Nov.
Dec.
Jan.
Feb.
Mar.
Apr.
May
June
July
Aug. Sept.
Cash seasonal pattern is well known and is reflected in the pri~ of the various options.
Courtesy
Dow-Jones Irwin Guide to Commodity Trading
24
SEASONAL & CYCLICAL
567
Comment: A trade~ can get a reliable indication of important cycles simply by counting the number of days between each important low on the chart for any given commodity. for e.g. pork bellies often make some sort of bottom attempt every 25 days and that silver seems to swing in twelve day cycles. ( trading days.) The trader, if he wishes to use these commodity cycles as some sort of guide,shud at best, take the existing contract of the nearest month and count the days between important lows and highs for that commodity for that contract life. This shud enable him/her to capture the cycle undulation for that time period particularily if the market forces are constant with no new sudden blazing fundamental aberration of long effect.
The following is an interesting quotation: " The Grain Exchange designates the month for which contracts may be traded. Five months have been so designated for corn,wheat, & oats. These months are Dec. March, May, July and Sept. December represents the end of the harvest season for corn and the beginning of winter storage for all grains as navigation closes on the Great Lakes. Southern hemisphere crops are coming to market in volume by March, making it a important month for many grains. May is the "clean-up" month prio~ to harvest for small grains as well as the month when navigation again opens on the Great Lakes and when naturally dried corn, which has been stored at country points thuout the great grainproducing areas of the midwest, falls below IS % moisture. July is the month of heavy movement of winter wheat, with a fair amount of oats and barley. Setp. is a month when new crop soybeans start corning to markets in the southern parts of the u.s ..... seven trading months have been disignated for soybeans. Nov. replaces Dec. because the harvest is completed earlier than for corn. January has beea added because substantial amounts of beans have been marketed for that month.· This also makes contracts expiring every other month for beans from Nov. thru July. August has been added to provide a "clean-up" period prior to new crop harvest in September in southern regions. From a speech by J.M.Ragsdale, via Johnson, Harvey Freeman, and Bruce Gould ••••• )
568
CHAPTER TWENTY-FIVE
thoughts Being into yesterday's success is assuring to-morrow's failure. Winning is self-perpetuating. Commodities usually return to a profitable price. As a chartist, U have lots of company. There are literally thousands of people charting exactly the same movements U are. Law of Momentum: Once a trend has commenced it tends to endure at least until a significant counter force intervenes. Experienced traders appreciate that the first loss is usually the cheapest. The majority of men are subjective toward themselves and objective towards all others - terribly objective sometimes. The real task is to be objective towards oneself and subjective to all others. -
Soren
&
Kirkegaard" I847"
It was never my thinking that made the big money for me. It was Sitting . . . . . my sitting tight. -
Stanley Kroll
Keep things simple. A price at rest teads to stay at rest. A price in motion tends to stay in motion, are the essential tenents of the sharp, sharp trader.
l(.Lossit.is Ainevitable winner is
- the essential factor is to contro111 forem ost a controller. J
Take positions along the line of least resistance. - old adage dictum.
25 ~HOUGHTS
569
Even the best speculators consider themselves fortunate ~c be rigt.t on most trades or even to make significant profits during most years. There is some old saying that will justify almost any action or lack of action. Money is easier to make than it is to keep. Winners never quit,
and quitters never win.
God grant me the serenity to accept the things that I cannot change, the courage to change the things I can and the wisdom to know the difference. Human nature is more bullishly than bearishly inclined. The greater the following, the less golden the opportunity The smaller the following the more golden the opportunity. A shivering economic fact is that a government panacea designed to cure or correct a condition will instead inevitableyfurther aggrevate that condition. The basic tenant of the chartist is ...•. a trend contin~es until i t stops. Any approach must be regarded as unprofitable until it has proved otherwise. Even the strongest powers of empathy in the world are not going to tell U what the price is going to be, if the price is beyond the control of human will. Only 5% of us becum financially independant by age 65. 80% of 65 year olds have less than $600 in the bank. He who wud accomplish little, must sacrifice little. He who wud achieve much, must sacrifice much, he who wud attain highly, must sacrifice greatly. A speculator's bag of tools is never overfilled until the noise of information systems clogs the channel of clear cogitation. A professional cannot score profit by buying and selling with the public.
J
~
570
THOUGHTS
What the few can do,
the many cannot accomplish.
Man's mind is limited only because he either prefers to deny himself the possibility of creating, of innovation, or of locating al~ernatives, or else he is stymied by burdensome bureaucracies that incinerate incentive, impale initiative and incubate incompetence. When interpreting official manifestations, " cynics survive " The solution to government meddling is government control. It is safe to say that the major reason for the office of internal audit and inspection of the U.S.D.A. is the fact that "Uncle Sam " has moved from the role of referee to that of player in the market place. If all the areas of individual creativity were pre-empted by the planned collective, our society wud face extinction. As the cartoonist suggested when he depicted one Russian beaurocrat speaking to another, When all the world is communist, where will we get wheat? " I don't think we have ever seen a completely free market.,in the history of the world. For centuries individuals attempted to manipulate for their own benefit. To-day governments are attempting to manipulate our markets and for their own benefit. More than I900 years later ( Rome , we still permit our lives to be governed by the whims of government. Acts of government do not create wealth, wealth.
they redistribute
Restating Emerson's words " The governments chain us to the wheel of fortune. " After a shot of government intervention, markets energetically re-assert themselves. Accidental successes usually turn into accidental failures.
25 THOUGHTS
57I
Success or failure is the just result of what U have done in the past plus what U do now. There are I68 hours in a week. Roughly 20 of these hours are devoted to making it. Don't U believe those 20 hours merit U're full attention ? Enough time remains in the other I48 for play.
l
1
The great speculators in the past the study of psychology exceeds importance.
all_be~iev~d that{') stat~st~cs
~n
We are our own worst enemies. Our lack of patience and inability to wait are the largest single cause for losses. There is big money to be made in commodities ... and i t is not unusual for traders to make big profits what is unusual is being successful for a long period of time. The advantage of trading in market congestion is that u increase the probability of profitable trades consistently. tho' not so spectacularily as in a " straightaway " and will also reduce the risk of loss. Good sports die broke. Markets sleep,
traders don't.
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nn!li\1 ;t tiilli mt:; ;tH:, urt n ••· h : I · . " .. ......... ..... , .... . :l-iJ~mw~ £lfmi¥·::d ~ :i in i: :~ :: ~::>' ::: :! ::: ~: 8"-, .,_ ..................... . . .,. t~J~ ~f-nH ;n: ••
1
•·r ····
.· ··: :: ::. ::1::::::: ~~ n:: ::; :: ~ h~:::: =~ t-::::::: :: i : ·
.• :t:: .: ·::::·::: ::· ··:: ·••· ............ L, , .. .
··••4
I ··
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r 1::. "
; :_i
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1· :· ~-:.-: ···1·:·~:· ·:·! ·r· ·:-:::?.: ·····1.~.:-:::::~.: .... ·.. ·J·::· ::·-.i~:·
::·· ·: i.~ :
.~r :iif~·if·u lLUfl.~ ftil~~~i: :i::~~:!i !~q.:tif~ ;~~j:E!i i·:~~~::~; t-t'"t•·t tr•i•j:ij .-.. ···•· .•:!1Lt., -····•·r·•• .,.,. .... :::::::~ -: ;::::: : ::1 ~i~~H:H iLL!f! Ui:j!; Ei~~i:i~ j~!i:::~~ ~:<>n! ~:~:::::: -~::::::.: _:::::::·
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. , o .• ·-
... : ! : I : ~ : : : : : : :
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,
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:; : : : : : : ; : : . ; · : :: : · ·
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, ,
:::r:•--·
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--~
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....... :::I::::: ..
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IT
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'
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. •. :
i ::
,
.:
.::::.:::!:.:: ..
I :·
....
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0. ' . • . . ... 0.... . . 0.. -. . .
: . . ; , _ _ ,.
i
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...... ............. ........
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~.
t· '"····· .:r:1i:..t: .. -·-'-· ... ·-···-··· '"!"'•······
••
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?
.,. r ....... t
·r·_ r· .. ~~·::t.; ,., ·••··• tt:t1.+t:i ~·· ... ,...,.. P·J tt:r;,:t'! tl{ w. .• "' ....~, ••.. . .. -···~ !. • '. ·~···•+-+... ''.'. t:.... ___ ....................... ,. .••. t+•·~· .......... ~·t +~······· .... ,...,. . ····.···~~~
"t:jjj ..• r~Ht , ... --s~~.t~!
l,· ····-·· :.ttr:mt
-·
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!: . . .
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- - ;• ••.• 1
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I
573
---------·
'
~
...:.: .__
'"'
f:
<<. 4. jl
'Point and Line Char'Tin·g' l - ,.,. -I
e.g December Silver '78
{,tiD
HIGH
LOW
583.50
570.80
582.80
579.00
#2
589.50
581.50
589.00
586.60
#3
592.30
585.50
586.70
588.20
584.6
#4
591.00
585.60
588.30
588.30
587.7
#5
588.00
582.50
584.10
584.90
587.1
¥6
595.50 603.00 604.00 60!.00 595.90 600.50 604.50
582.50 595.00 599.50 59I.50 591.00 588.00 595.50
594.30 595.80 603.70 593.50 592.70 598.70 599.20
590.80 597.90 602.40 595.33 593.20 595.70 599.70
588 591.2 597 598.5 597 594.8 596.2
Day #I
¥7 #8 #9 #IO #II #I2
CLOSE
DOT
O.K. Here's how you do i t ! The market has closed on day #I and we have a high 583.50 and a low of 570.80 and a closing price of_ 582.80 . So we add all those numbers together and divide that number by three, in effect an average of the high,low closing price. ( 583.50 + 570.80 + 582.80 1737.10 ] divided by three= 579.00 ) O.K. you do that for the next three days, days #2,#3, aay #2 is 589.50+581.50+589.00 [1760.00] divide by 3 = 586.60 day #3 is 592.30+585.50+586.70 [1764.50) divided by 3= 588.2 Guess what? You take the average prices of the last three day's, (day #I 579.00, day #2 586.6 , day #3 588.2), add them. all tnqether, divide by three , ( 579.00 + 586.60 + 588.20 divided by 3 = 584.6 )
and U've got the dot !
cont'd next page.
In effect the dot in point and line charting can be defined as average of the high/low/close
Sound
co~plicated
ave~age
~~e
of the last three days.
? Not really. In fact it's simple, simple ,simple.
Time yourself. Femernber, it's what you do with those dots,
~hat
counts.
The publication of the above formula is intended for
~~e
personal
use of the purchaser ox this book, and that purchaser is to be one person only, and that person and that person only is to use point and line charting to assist his or her personal trading activities only. Permission is not granted to use any material relating to the above formula, or the formula itself, in any commercial venture or profit, except as it relates to the purchaser's private commodity trading account. The above formula is copyrighted.
5" 8y. too
This author rounds out the numbers past the decimal,
i,e.
588.I6 becurns 588.2
57 5
COMMODITY TRADING FACTS COMMODITY
I
I:•S A.M.•I:IO P.M. 1S.DOIIIP BJU77SH I'OUND I '""· MGNUry Mt\. I o..c.,..-•ott... )Q.DOIIUS. I !:15 A.M.•I:OS P.M. 8ROII.ER5. ICED laLl. WDM&ar)' Wt.1. I:U A.M.· I :10 P.M. ICIO.OOOCD CANADIAN l>OUJtR; fO.C.IO-uio!.-j t:OSA.M.·I~'4SP.M.j •o.-us. CA TTl.£. LIVE O.C.co M.,......, tac-.. t:OSA.M.·I~,cl P.M.! •1.000 US. CA TTL£. FEEDER H,.C_Ea_ 9:00 A~.-~:UO P.N. )0.000 LIS. COCOA COFFEE. ~C"· lil' Col'""- foopr f . - / 1:41 A.N •1 :JO P.M I 37.500 Las. CO/'P£11 , _ , , Eacb.lac:.• HY I I:SV ....1.•1 :ull '·"' I u.ooo Las. CORN UIOOIU C~o »ou4 ollr•* I 9:)0 A.N.•I:I.I P.M. COTiON NYConoaE~ I 9:30 .r..M.•l:OO P.M. I so.ooo Las DEI.fl'SCH£/I!ARJ: laai.M.-...,,Wi.t 1:4IA.N.·I :IQ t.lol. i 115.000 Dill EGGS. SHELl. Ooa,o ........, .. t . . - 9:20 A.lot.•I:OU Ul I 12.500 DOZ. FRENOI F1UNC j a:•s ....... ,:so P.M. 1 uo.ooo FF '•" Moaeu.ry Mkt.
GNMA
MINIMUM FLUC'TtiATION
TRADING HOURS COII.'TRACT CEI'>TRAJ. TINE SIZE
EXCHANGE
Cllco,..- oil.....
I:SOA.M.·I:JO P.M.
I
SIOO.OOO
AIIOUNT
__,,,.,I
TRE.ASURY BIU.S INHEA T. SOFT RED IIIHEA T. HARD RED INHEA T. SPRING
••u.lrlklM..,ICtt
I
1:15 A.W.•I:ll P.M.
"".S Gnuo b
SI.2SO.OO
:u
600.00
.11075S
750.00
.O:SSILI_ I
10.00
1.501
600.oo
I .01$1/U I
IO.SO
I .SOl
6)0.00
I .owu I
3.00
I I
"
1.100.00
uso.oo
.OJ~ILI
I
J.7S
.J~ILI
I
15.00
)(
114m!U
I
1:1.50
IIW
I
500.00
I
1,000.00
61
UO.DQ
.owu'
s.oo
:u
.DOIIISIDI.t
I
12.50
.00601
no.oo
JISt/DOZ..
I
11.2S
:u
•50.DQ
I .oooossiFF 1/ll
12SJIOOSf
.OOOUI$F
SJ .000.000
.OIP'T
5.00011!
1141
I I
12.50
.0051
)J.2S
1•m
10.00
lOS
1.000.00
10.00
lOS
1.000.00
7.$0
I .SOl
1:1.50
.110601
TJ(t.OO
10.00
51
500.00
10.00
.001501
12.50
6t
T.SO
)(
s.oo
I
•s
s.oo l
lOS
7.60
I
11
9.00
I
I s.oo I s.oo I s.oo !
1.00
1.250.00
no.oo
450.00
1.$00.00
)00.00
uo.oo I
400.00
I
53~
(
400.00
500.00
120.00
:1< .SOt .Sot
150.00
liW
l_ 1.000.00
211<' I
1.000.00
ISOI
1,500.110
11.50
sot
1.500.00
10.00
lOS
1.000.00
6.00
It
10.00
I
ll.lO
14
n.so
.11060$
150.00
2$.00
som
1.250.00
1.120.00
12..50
20t
JIJ()Q.tiO
t:JOA.W.•I:IS P.M.
5.000 IU
,,.,
I
I
I
11.50
1St
1.250.00
I
9:)0 A.M.•I:I.S P.N.
!.000 IU
1/U
I
6.15
20t
1.000.00
Clocooo - · ollrada l_ t:JO A.N.•I:IS P.W.
.:.c.._,. orTtMc
I
~A~EI<
.0$001
7.50
•·•o
f I:ClA.M,I:IO P.M.
AIIOUNT
Sll.SO 10.00
E.a-
l•U .......ryMkl.
..
~.~
I
.lllU/U .OOOISICD
GOLD anu.w--...,.wt •. I 1:21A.M.·I:)O P.M. IOOlrorO:t.l .lOS/OZ. GOLD ' - " > Ead>. loo:.. HY I 1:21 4.11 .•I :JO P.M I 100 lror OZ.. .IOSIOZ HOCS.L/1'£ Olocoeo ........... E..._ , ,,,~ ...M.·I2:!S P.M. I lo.ooo Las. I .0151/LI JAPANESE YEll' I .,., A.N.•I:IO I'.N. I u.soo.ooo l' I .OOOIS/Y ••u... _u.ry .. tl. LUMBER a.-..Mncaa.... E.-i 9:00A.M.·I:OS P.W./ ICIQ.DOIIIF .JOS/10001f1 MEXICAN PE:SO l.DU. Moftlul)· .Wk1o I 1:05 ....... :J~ P.W. I 1,000.0001' .IIOOOJS/P OAT.! a-.-••rT..... ,,,o ... w.•s:u P.M. I !.000 It! I 1144/IU I ORANGE JUICE H'V (OUOft i;.adlaftJc I 9:15 A.N.·I:Cl P.M. I U.OOOLIS. I .Dst/U PALLADIUM 9:20A.W.•II:SSP..W.IIOOlrorOZ..I .DSS/OZ I H"t Me•""'* baa"" PLATINUM HYWcrcoo.... j I:•SA.N.•l:IOP.... f SOlrorO:t.f .IOSIOZ. I PLYifiiOOD O..Caro llau4 of TtaAr I 9:00 ........ 1:00 P.M. 74.032 so. Fl/ .IOS/1000 I /'ORA BELLIES ~WCIQolllcE..._./ t:IOA.W.·I:OOP.... I 34.ooo Las. I .015tiLI I POTA TO!:S. IDAHO a.-..~o~c .....,.. £.-,.1 t:OOA.)I .• Jl:$0 P.ld. I 10.000 LIS : .OifU I POTATOES. MAINE W'l' Mcn::a11w.: l-.Cbanl~ ! •:oo 4.W.·1:00,..M. I 50:1100 Las . I .owu I SILVER .JIId/0%.. '-o-ooflr- I A..ll.·l~l P.N. I l.iiOOOZ. SILVER C...-ur i,)ot~. lac., NY .lot/OZ I I:•&A.W.•I:IS P.W s.ooooz SILVER COINS ,.,,. Mctc.e'* £.1Ldwur 110.000 I:UA.W.•I:Ill'.". IS/!lao I SOYBEANS O.C.,..r-fdollr""' I f:JO A.W.·I:ll P.M. I SJIOOilJ ll•i ! SOYBE.A/1' ME.AJ.. O.C.,o r-.o ol1ro4c !:JO A.W.•I:Jl P.M .101/T I 100 Toa' SOYBEAN OIL O...,o.....,..orlro4c I 9,JOA.W·I:llP.M I 60.000 LIS I .owu I SUGAR. I!IIORLD•J I HY Collcc .. S..o f . - f t:OO A.W.•I :CS P.W lll.IIOO Las. .OitiU I S~.tSF1UNC
UNIT NOVE FaoY PREVI01..'S CLOSE
576
CE.A IIEPOKTABLE POR110NS
The Commodity Exchange Authority requires that reports be filed.for each day on which a trade is made, for the day before, during and one day after the following pOnliom are reached by a person in the aggregate of all accounts which that person owns or controls: Regulated commodities
Reportable position
Eggs (shell or frozen) Pork bellies Cattle
Hogs Lumber Orange juice Potatoes Soybean meal Soybean oil
25 contracts
Wool
Corn
Grain sorghum, Milo Oats Soybeans Wheat
40
Cotton
50 contracts
CODtraets
577
CEA POSmON UMrrS
The Commodil)' Exchange Authority has established the following limits on the positions that may bt: held or the daily tratlt:s made by a person in the:: aggregate of all a.CCX~unts he owns or controls in any one contract month or in all contracts combined. Commodity
Position limit
Eggs (shell) Pork bellies
150 c:ontracts 4 250 contracts b
Broilers Cattle Cotton Plywood Stud lumber (BOT)
SOO contracts
Potatoes
350 contracts d
Oats Wheat
400 contracts• 400 contracts•
Soybean oil
540 contracts
Grain sorghum
550 contracts!
CorD
Soybeans Soybean meal
Hogs Lumber (CME) Silver Copper (Comex) Mercury
Daily position limit if different 375 contractsc 450 contracts
600 contracts 720 contracts 750 contracts' 1,000 contracts'
1,125 contracts h 2,000 contracts;
2,000 contractsi
a In addition to the limitations of 150 carlots on total net long or shon position, no per50n shall bold a net long or shon position in excess of 100 cariots in the October egg future, 75 carlots in the November egg future, 50 carlots in the December egg future, or SO carlots in the January egg future. b 150 contracts in February, MIIJ"ch, July, August, 200 contracts in May. 1:225 contracts in February, March, July, August, 500 contracts in May. dlSO carlots in March, April, May-300 cariots in others. 'To the extent that the net position held or controlled by any one person in all futures in any one grain on any one market is shown to represent spreading in the same grain between markets, the limit on net position in all futures may be exceeded on such contract market, but in no case shall the excess result in a net posi· tion of more than 3,000,000 bushels in all futures combined nor more than 2,000,000 bushels in any one future. 1825 net contracts in all months combined. ~"300 contracts in any one contract month. h 450 contracts in any one contract month. i600 contracts in any one contract month. i-tOOO net contracts in all months combined. ln addition to the above CEA limits, certain limits are imposed by some of the commodity exc:hlmges.
578
CONTRACT CHARATERISTICS FOR A GROUP OF COMMODITIES TRADED ON AMERICAN FUTURES MARKETS.
Pric~s
Commodity Broilns
An Quoud
Conmact Siu Minimum Pnc~ Vlfr'i~rtiol'l
( U or S J
mtni~S)
Most Actively Tr11d~ d Fu nt~s Mor1tbs
Dollars per Cwt.
25,000 lbs. 2·1/2 points•S6.2S S1.00/c:wt.•S2SO
Jan., Mar., May, July, Sept., Nov.
C1utle. LitJ~ (Cbic11go M~n:. £:c.)
Doll&rs per Cwt.
40,000 lbs. 2•1/2 points•S10.00 (Sl.OO/cwt.•S400)
Feb., April, June, Aug., Oct., Dec.
Cboice Steers fCbgo Bd of Td~)
Dollars per .Cwt.
27,600lbs. 2·1/2 points•S6.90 (Sl.OO/cwt.•$276)
J&n., Feb., April, June, Aug., Oct., Dec: .
Citrus (Fro:.en Conccl'ltrllted)
Cents per Pound
lS,OOO lbs. S poinu•S7 .SO (l eent•Sl'SO)
Jan., Mu., May, July, Sept., Nov., Dec:.
COCO/I
Cents per Pound
30,000lbs. l poinr•S3 .00 (1 cenr-5300)
Mar., May, July, Sept., Dec:.
Coppt!r
Cents per Pound
50,000 lbs. l point•SS.OO (l c:ent•SSOO)
Corn
Ooll&rs per Bushel
S,OOObu. l/8t•S6.25 (l c:ent•SSO)
Cotton No.2
Cents per Pound
50,000 lbs. l poinr•S 5.00 ( l c:ent•SSOO)
Mar .. May, July Oct,, Dec:.
Eggs (Fr~sb Sbdl)
Cents per Dozen
18,000 doz.. S points•S9 .00 (l c:cnt•S180)
Sept., Oct., Nov. Dec:., j&n.
FU::csced·R~Zpcseed
Doll&rs per Bushel
1,000 bushels l/8t•Sl.2S (1 c:cnr•SlO)
May, July, Oct., Dec.
(Iced)
(Winnipeg)
J&n., Mar., May, july, Sept., Oct., Dec:. Mar., May, July, Sept., Dec:.
579
Crup Year (mllrketing ye11r)
Normal Seasonal !>rice Pattern
Important Economic Fll&tors
Affecting Prices
Higb
l..o'UI
None
Feb., Mar., July
Nov. Dec.
Size of breeding flock, egg set, chicks placed.
None
Spring and Fall
Summer and Winter
Cattle on feed reports, inventory of canlc and calves on farms and ranches, calf crop, shipment of stOcker and feeder cattle into the corn belt, cattle slaughter and beef production.
Dec. l to Nov . .30
Winter
Summer
Weather, crop estimates, weekly FCOJ movement.
Oct. l tO Sept. 30
Aug.
May
World crop reports, political condi· tions, rate of imports, data on imporu, stocks, grindings, producer measures.
None
None
None
Production and consumption figures from the Copper Institute, govern· mental export controls and stockpiling policy.
Oct. l to , Sept. 30
Aug.
Nov. Dec.
Crop estimates, surplus disposal, carryover deliverable stocks, di$· appe1trance, loan tic up, other iced supplies, weather.
Aug. l to July 31
Aug. tO Sept.
jan.
U.S. Government program, world and U.S. crop estimate:., carryover, con· sumption, &nd textile industry activity.
None
Nov.
April
Number of layers on farms, storage stocks, production, consumption, weather.
Aug. J tO July 31
Summer
Winter
Crop reports: C&nada, U.S. and World; weather and exporu
to Feb.
(continued)
580
(continued) Most AclitJ~Iy Trad~d Fwrwr~s
Quot~d
Contract Si:~ Minrrnwrn Pnc~ Vanarion ( U or S J rnOtJesJ
Dolla.rs per Cwt.
20,000 lbs. 2·112 points•SS.OO ($1.00/cwt.•$200)
july, Aug., Sept.• Oct., Nov., Dec.
Pric~~ Ar~
Commodity Hogs,
/..i!J~
40,000 board feet 25&'•$10 ($1.00•$40)
Montbs
Ma.r., May, july (initially)
/..11mber
Dolla.rs per 1,000 Boa.rd Feet
Mercwry
Dollars per Flask
10 flasks of 76lbs. each 1 dolla.r-510
Oa:s
Dollars per Bus bel
5,000 bu. 1/8t•S6.2S (l cent•SSO)
Plarinwrn
Dolla.rs per Ounce
S cents•S 5.00
(S1/o:r..•S100)
Dollars per Ounce
SO troy ozs. 10 cents•SS .00 ($1/o:r..•SSO)
jan., April July. ·oct.
69,120 sq. feet 10t•S6.91 ($ 1.00•$69 .12)
Jan., Ma.r., Ma.y, July, Sept., Dec:.
70,000 sq. feet 10t•S7 .00 ($1.00•570)
every c:alenda.r month
30,000 lbs. 2·112 points•S7.SO
Feb., Mar., Ma.y, July, Aug.
Plywood
100 troy ozs.
Plywood (Chicago)
Plywood (New York)
Pork Bellies (Fro::.rn)
Dollars per 1,000 Square Feet
Cents per Pound
Ma.r.,Ma.y, July, Sept., Dec:. Mar., May, july, Sept., Dec.
Ma.r., june, Sept., Dec:.,
Poraroes Jdllho (Cbi.) (100/b. b11gsJ Potatoes, Maine (NY) (SO lb. bags) Propane li..PGJ
Dollars per Cwt.
Cents per Gallon
(1
50,000 lbs. c:ent/c:wt. •S S .00)
Nov., Ma.r.,Apt., Ma.y
100,000 pls. 1 point-SlO (1 c:ent•S1000)
Jan., Feb., May, Sept., Dec.
58!
C1'op Yeaf' (maf'keung year)
Normal S~asonal Price Pattern J..D'IIJ Htgb
Jmporunu Econormc Factors Affeczrng Prices
Oct. I to Sept. 30
june to Aug.
Nov. to jan.
Cold storage stockli, hog slaughter, sliced bacon pr04luction, live hog pric~. pig crop reportS"'iOW farrowings, breed· ing intentions, inventory numbel'5.
None
Winter
Summer
Economic condition~ construction activity Chousins starts), weather.
None
None
None ·
Production general economic: conditions, stockli
july 1 to june 30
May
Aug.
Crop estimates, deliverable stocks, imporu, carryover, loan entries, other feed supplies.
None
None
None
Production, general economic: conditions, stock£.
None
None
None
Production, general economic: conditions, stocks.
None
Winter
Summer
Economic conditions construction activity Chousing staru), weather.
Oct. l to Sept. 30
June to Aug.
Nov. Dec:.
Cold storage stocks, hog slaughter, sliced bacon production, live hog prices, pig crop reporr::.-sow iarrowings, breed· ing intentions, inventory numbel'5.
July thru june, bulk Oct. thru May
April
Dec:.
Spring
Summer
Crop estimates, total U.S. Fall stocks, carlot shipmenu. truck holdings 16 cities, Maine & Idaho situations, weather.
None
Winter
Summer
Production. consumption, gener&l economic: conditions, weather.
(comi,med)
552
(conzinued)
Prices Art
Commodity
Quoted
Rye
Dollars per Bushel
Sihler (New York)
Sil11er (Cbicllgo)
Dollars per Troy Ounce
Contract Si:e Minimum Price Variation ( U or S I mDrJe.s)
5,000 bu. l/8H6.2S (1 cenr•SSO)
Most Actively Futures Montbs
Tr~~ded
Mar., May, July, Sept., Dec:.
1 0,000 troy ozs. 10 poinu•S10 (1 cent•S70)
jan., Mar., May, July, ,Sept., Dec:.
5,000 troy ozs. 10 poinu•SS.OO (1 cenr•SSO)
Feb., April, june, Aug., Oct., Dec:.
Soybeans
Dollars per Bushel
5,000 bu. 118t•S6.25 (1 cenr•SSO)
jan., Mar., May, july, Aug., SeptNov.
Soybe11n Meal
Dollars per Ton
100 tons S points•SS.OO (51.00/ton•$100)
jan., Mar., May, july, Aug., Sept. Oct., Dec:.
Cc~ts
per Pound
60,000 lbs. 1 poinr•S6.00 (1 cent•S600)
Jan., Mar., May, julr, Aug., Sept. Oct., Dec:.
Cents per Pound
112,000 lbs. 1 poinr"'S 11.20 (1 cent•Sll20)
Cents per Pound
6,000 lbs. 1 point•$6.00 (l cenr•S60)
Soybe11n Oil
Sug~~rNo.
10 (Domestic)
Sug11rNo. 8 (World)
Wool Grease
Jan., Mar., May, July, Sept., Nov.
Mar., May, July, Oct., Dec.
583
Crop Ye41r (m4frketing ye4fr)
Normal Seas.onal Price Pattern H1gb LO'UJ.
lmpor11n11 Eco11omic FtJctors
Affecting Prices
july 1 to june 30
Aug.
jan.
None
None
.None
Sept. l to Aug. 1
May
Oct.
Crop estimates, deliverable stocks, crush, exports, loan entries, vegetable oil consumption, weather, meal price, cotton crop.
Oct. 1 to Sept. 30
july
Oct.
Oct. l tO Sept. 30
May
Nov.
Total supply; Production of commer· cia! formula feeds; exports, prices received by farmers for meat animals md products. Soybean and conor. crop estimaw, crush, exports, visible supplies, other fats & oils supply and demarid.
Quou Calendar Year Oct. l to Sept. 30 DomesticApril l to
March 30
Aug. to Sept.
Dec.
Crop estimates, deliverable stocks, Canadian situation, exports, loan entries, price U.S. wheat, feeds.
Production, consumption, government policy on silver sales.
U.S. Sugar Act, national income, consumption, quotaS, supplies in Northeast. Mar. April
May june
Economic conditions, world crop estimates, especially Cuba, world demand vs. free world supplies. Production, general conditions in wool textile business, imports, world production, sheep population trends, military use, gov't support prorram. Source: Ho'IJJ 10 Buy tJrui Sell Commodities (New York: Merrill Lynch, Pierce, Fenner & Smith, January 1970), pp. 36, 37.
584
584 FUR~HER
May 7'80
0~
PHANTOM/HIDDER HIGHS/LOWS
FOR PG.244
Many have written to me on confusion (it is difficult !) , of "phantom'' T.P.. 's per:-'='· 244 et al.
WI~L
THIS HELP ?
REVIEW
( Write to me if you have any further questions.)
: of isolated highs/lows. isolated low
isolated high
FORGET DEFINITIONS
Now,
isolated h/l's are easy to understand. But, phantom high/low is not !
FHANTOM LOK
PHANTOM HIGB
~
~
DAY WITH BOTH PHANTOM HIGH & LOW re:
graph pg.244 -
Sorry to have in the book l
~ade
often referred to as 'inside day'. all this so confusing
FURTHER EXPLANATION
585
(Forget about definitions;they are always too confusing.) What always happens with the phantom is that the day the phantom high/low (i.e. 'T.R.' per 'P&L' ) , , , , is hit,,, prices will go,,, usually,,, sometimes in ~he morning, ,, , often shortly after opening , , , -beyond the previous day's range or just to it, and visually and in fact creates a hidden/phantom high/low for that day. e.g.
phantom high X
~t~~prices
open here & U can see that there is an 'isolated' high for the day@ 'x' , (a phantom high) ; ; ; but the day is not over ; prices then go crawling up (&usually do 'crawl') and BINGO! ,,, hit that isolated but phantom high.
I
~rr~- ·::~:es
go just to or past previous day's low & move on up. Result:- phantom high hit.
e.g.
phantom low
~liJ-
prices go here first,as I say,usually in the morning and saunder on down to hit that little monkey, that phantom-isolated low for the day.
hI )
-prices go here first.
't-----I
ph an tom low
( T. R. per P &L)
hit
hope that this has been of some help to you.
P.S.-note that a phantom T.R. can be hit several days later, and not the day it is created.
'f = phantom
PERTINENT SUBJECT INDEX
Basis analysis 29,II3,I42,I80 Breakout analysis 58,!38,!63-8,356 Cash analysis 29,IOO,I42,I80,277 Charting I-!3,280,473 Chart patterns I54,I59-62,I65,I76,I80,I85-94,203,505-43 Committment traders report 30,96,98,I42,!80,I95,203 Congestion analysis 29,56,80,I37,!45-77,262,298,303,374-5 Contrarian opinion 30,95,98,I42,I80,203 Correlation analysis 28,283 Cycles 26,272,29S,307,499,555-67 Day
r~versals
20!-2,502-3
Fundamentals IO, !6,.29, I33, ISO ,!94, 272,309 Gap action I38,I40,I67,476,502,543-7 Index no's 26 Intra-day analysis 66,50I,I77 Mathematical trend analysis 35 (see P&L) Moving averages I7-I9, I38 News 3I,26S-70 Noise I77 O.I. analysis 29,7!-97,I32,I4I,I57-9,I79,I95 Odds 29,II4,I42,I80 Oscillators !9 P&L (Point and Line) ISO, 205-65,38I-4 Point & figure 32 Price reversal analysis 64,85,86,!68,I75,I78-204,504 Premiums 36 Rally reaction 29,29S Random walk I,29,298-302 Registered warehouse receipts 37 Seasonal tendencies S7,III,I80,272,555-67 Straightaways I4I Support & resistance !68-72,203,256,367-9,552-3 Target calculation !68,256-60 Time-price reversal 29,49S,503 Trend analysis 29,63,79,II9-44,I74,I76,IS3-4,276,29S,302, 357,364-6,475,502 Trend lines I25-30,I35-6,I42,I79,200-2,256,359-63,476,504,547 T.R. 's I72,IS0,24I-9
'
Volume 22,29,55-69,92,I32,I4I,ISI-8,I67,I79,I80,I95-6,500 Wave theory 26,304 Weather 270 50 % retracements 29, I72,I97,256,370-I
LISTS OF WHAT TO I4 37 69 !35-9 164 203-4 265 3!9 328 332 334-9
**
343-54 385 392 422 425-34 435 445 448-55 485
*
487-504
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