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Commodity Traders Club News

Commodity Traders Club News

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Characteristics of a Trading Methodology and System - Ned Gandevani

Studying successful traders reveals that they all have a trading system. Jack D. Schwager in his book
Market Wizards, identifies a set of "common denominators" shared by top traders. Among them, he writes:
" Each trader had found a methodology that worked for him and remained true to that approach." It is
significant that discipline was the word most frequently mentioned (in his interviews with successful
traders). Success in trading is based on two particular pillars; Methodology (or System) and the Trader’s
Psychology.

These two factors are so intertwined that they create a virtual circle. A better trading methodology and
system will result in improving the trader’s psychology and self-confidence. A better psychology will help
the trader adhere to his/her methodology which will consequently create better results in the trader’s
performance.

It's difficult to build a successful trading environment with only one of these pillars. An opposing and
undesired reaction is also possible in the trading virtual circle -- poor trading results may occur when a
trader’s method is not compatible with his psychology. Poor results can discourage a trader from being
consistent with the application of his method and might discourage him from acting on all system created

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signals, thus creating lost opportunities and unfulfilled expectations, which in turn would reduce the
trader’s self confidence. It is therefore imperative that a serious trader consider both of these crucial trading
pillars before he or she engages in trading activity.

What is a Trading Methodology or System?

Whether you decide to employ a subjective methodology or a mechanical system (either basic rule-based or
advanced machine-intelligence-based), when selecting or creating a trading method you should consider the
followings topics: Entry Point, Exit Point, Money Management, Market Focus and Personalization of the
Method.

Entry Point -- The entry point is based on a particular time or price where the trader would initiate his
trading position in the market. Entry points are created based on a set of rules or calculations that are
determined by the trading method. A trading system should tell us the precise point where we should enter
the market. This entry point could be either based on a particular market set-up, a signal, or a hybrid of
these two. An entry point is a crucial and integral part of any system.

1. Market Set-Up -- An entry point can be generated based on a market set-up or specific and quantified
price pattern. For example: "when the close of the second bar is higher than the close of the two previous
bars on a 30 minute chart, Buy at the open of the next bar." This rule for an entry point was generated by a
specific market set-up. A market set- up can also be based on a price pattern or chart formation. "Buy the
market at the break out of an inverted "head and shoulder" pattern before 12:00 noon" would be an example
of this concept.

2. Signal -- An entry point can be generated based on a particular signal. We will define a signal as an entry
point to Buy or Sell, which has been created by a computer program designed specifically for generating
trading entries. In Trade Station signals are displayed by an upward arrow (buy) or downward arrow (sell),
which is usually accompanied by an audible tone. A signal therefore, is generated based on a series of
calculations or conditions in the market place which may include technical as well as market sentiment
indicators. For example "if our 5-day moving average crosses over our 10-day moving average we place a
buy order."

3. Hybrid of Market Set-Up and Signal -- An entry point can be generated by a hybrid of a signal and
market set-up. For example, enter the market when you get a signal from your mechanical system and a
confirming chart formation. A moving average crossover might give the trader his signal, while the double
bottom chart formation gives him the market set-up confirmation to then enter.

Exit Point -- The exit point is a trading method’s criteria to exit the market and close out the existing open
position. Before we enter the market, we should be aware of where our exit point will be or what will cause
us to exit our position. This can be accomplished based on one the following:

1. Target Profit - Our exit point can be linked to a target profit. In other words, as soon as we make our
intended profit, we can exit the market. The target profit should be a derivative of our risk-to-reward ratio.
The risk-reward ratio is a predetermined amount of how much we are willing to risk versus how much we
want to make. A ratio of 3:1 would imply that we are willing to risk no more than one unit when attempting
to make at least 3 units. This ratio should be based on your own observations and experiments, as well as
psychological requirements. Without a properly set ratio, the game of probabilities is hard to win. To better
assess the profit potential in a market, we need to study that market and set our profit target based on its
potential. For example, the bond market’s daily fluctuation is usually about 16 ticks. It would unrealistic to
set our target profit for one full point (32 ticks) while day trading. In the case of the S&P market, the daily
average swing between its high and low is about 10 to 12 full points. Of course, there are exceptions on
certain days when volatility causes extreme price ranges, but we can’t base our methodology on the
extremes.

2. Stop Loss -- An inherent part of the trading process is loss. Some of our trades will be winners and others
will be losers. But we want to make sure that we don’t risk our total equity capital on one or even just a

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few trades. That’s why we place a stop loss exit point for every trade we take. We can have two types of
stop losses. One is a monetary or Price Stop. In this type of stop loss we decide on the amount of money
we’re willing to risk for our trade. This dollar value can be as little as one tick or as big as our total equity
capital. The monetary stop can also be based on the average volatility (price range) of the market. Another
type of stop loss is a technical stop. This is the type of stop that I prefer. Technical stops should be derived
from proven technical indicators or market set-ups.

3. Abrupt Change - It always amazes me to know that many traders will open a position and then leave it
unattended until they get stopped out or make a profit. They take a very passive approach towards their
positions. If they don’t make a profit, they’ll just wait until the market hits their stop. The astute trader will
observe any abrupt changes that occur in the market and act accordingly. An abrupt change in the market
will certainly give rise to new or different stop loss plans. If we see that market conditions change
(volatility for example) we should exit our trades immediately, regardless of any loss or profit. At this point
profit or loss doesn’t matter -- we must simply get out.

4. Timing -- After studying the character and internal dynamics of a market, one may learn how long it
takes for a particular market to travel from point A to point B. With this knowledge in mind, we can
determine if our position is making the appropriate amount of dollars per units of time, to determine if the
trade is progressing at a speed consistent with our expectations. If our open position moves at an
unacceptable pace compared to our past observations, we may have to exit early. This concept can be
invaluable to our trading. On numerous occasions, I have exited a trade utilizing this type of timing
technique, prior to the market hitting my technical or money stop point -- resulting in a winning or break
even trade, as opposed to a loser . I was able to retain money by monitoring the market through my timing
indications. In some of the financial markets such as S&P’s, one can monitor market movements based on
fractal movements. These fractal movements are the result of the general public’s (retail) thresholds of pain
or pleasure. Since the majority of retail traders in the S&P market are undercapitalized, as the market
moves one to two points for or against them, they jump out of their trades to cover with a small loss or
gain. This constant flow of retail entry and exit activity has created a unique price fractal in S&P market.
An astute trader can easily capitalize on this idea. Understanding this concept can provide you with easy
and stress free trades that are quite profitable.

Money Management -- When the vast majority of available trading books discuss the subject of money
management, they usually refer to the use of protective stop orders. But I believe that money management
in trading should be viewed from a different angle. In my opinion, money management should deal more
with optimization of one’s trading account and equity. What I mean is that if someone has an equity of
$10,000 in his account, he shouldn’t trade more than one contract at a time in the S&P market, assuming
that the margin for day trading is not more than $8,000. But in the bond market, the same trader needs to
trade at least 2 to 5 contracts, unless of course he does not possess a satisfactory confidence level in his
trading system and methodology. A trader who overuses or does not properly utilize the available capital in
his account is guilty of poor money management. Another important point about money management is
that as one trades a system and assesses the resulting win/loss ratio produced, he should then adjust the
trade size and stops to optimize return on investment. If for example you place one lot trades in the S&P
and your account equity is about $7,000, you should not allow your technical or monetary stop to exceed
more than $250 or so. If that’s not possible, then simply pass on the trade. There are plenty of opportunities
in the market. You don’t need to take extra and unnecessary risks to be profitable. Look at trading as a long
run endurance and not as a short-lived kamikaze attack. Don’t beat yourself up if you miss a good trade,
because it is you and your system that perceive trade opportunities. The same market conditions might be
perceived by many other traders as unfavorable. What this means is that if you’ve been able to recognize
one good trade by following your trading system, then by definition your system will show and signal more
winning trades and opportunities in the market. Money management also refers to full utilization of your
money in your trading account. If you’re not able to fully utilize your money in the beginning, don’t let it
sit idly in your account - work it. Buy 3 or 6-month T-bills and let the account earn some interest.

Another important aspect of money management is to never leave excess money in your margin account.
This surplus can be potentially harmful to your trading. When traders have extra funds in their account,
they tend to become lax with their stop placement. They may possibly increase their stop loss amounts,

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with the justification that they need to "give the market room to breathe." Or, some might fall into "mental
stop" trap. They simply don’t place any protective stop in the market with the justification that the "locals
(floor traders) will run our stops and then the market will move in our favor." Following this train of
thought can create a still bigger and deeper problem. As the market goes against their position, they begin
to start hoping and praying for God’s mercy. Hope and fear are magnified with each minor tick that
justifies or opposes the trader’s position. Anguish and jubilation are the emotions encountered with every
price print. The end result is an extremely distressful trade. If by chance you made money on that type of
trade, that gain can be your worst trading enemy and poison. Why? Because the next time you employ the
"hope and pray" strategy, a losing trade may very well cause irreparable damage to your trading account.
My advice is that as soon as you begin to "hope and wish" for the market to move in your favor, you should
exit immediately. Hoping and wishing is the same as trading without a plan at all and must be avoided at
all times. Therefore, money management refers to the methods of optimizing one’s equity through the
proper utilization and preservation of trading capital, as well as the correct placement and employment of
protective stop loss orders.

Market Focus -- Contrary to a popular belief that one trading system and methodology should work in all
markets, I believe that a good trading system is geared for one particular market. Each market exhibits its
own behavior and internal dynamics, illustrated by its daily range, degree of volatility, overall risk and
required trading capital. Your system or methodology should be a personal system which has been
designed for your own mentality, psychology and market of choice. This is essential in order to trade your
system consistently through both good times and bad. A subjective methodology is usually created by an
intense study of a particular market. To apply the same subjective method to other markets, is to assume the
premise that all markets behave in a like manner. Accepting the notion that all the markets behave in the
same manner day in and day out, would eliminate the time factor, dynamics and conditions of every trading
day and therefore ignore new and different market conditions and experiences. Furthermore, considering
only price action in a market would negate your observations and research on a market’s internal dynamics.
In my opinion, each market shares a set of characteristics common to its group member markets. A market
will also behave uniquely according to its own unique internal dynamics. For example, although the S&P
market shares a set of common characteristics with other financial market group members (like the bonds,
currencies, etc.), its behavior is based on its own internal dynamics and personality. If interest rates change,
the S&P would react almost in the same fashion as the bonds, since they are both a part of the financial
market group. Components of the group will tend to all react the same way to external factors. However,
the extent of reaction will be ultimately shaped by the S&P’s internal dynamics and indigenous factors. The
inter-market relationship should only be considered with a long term perspective. Trying to utilize inter-
market relationships for intraday activities would not prove to be profitable to a day trader in the long run. (
In future articles, I’ll discuss this point more in detail.)

Personalized System -- Its been observed by many good traders over the course of time that a successful
career in trading depends more on the psychology of a trader, than the trading system employed. As a
trader, you have to feel comfortable with whatever trading system or methodology you use. This comfort
level can be evaluated by your system’s draw down, time consumption, number of trades and signals it
produces and so on. In brief, to ensure the success of a trading system or methodology, you must select or
create a system that is compatible with your personality and individuality. A system that is custom fit for
you, is more easily adhered to, resulting in less "second guessing" or other discipline related problems.

For the past few years, I have developed my own non-mechanical trading methodology, The Winning Edge
S&P System. This system is the resulting product of research for my doctorate degree in International
Finance. If you are interested, to may be eligible to receive a free one week trial. I only teach the System to
qualified S&P day traders. Please -- no brokers or CTA’s. For details, please contact me at 516-423-8402
or e-mail at Gandevani@worldnet.att.net

The Edge - William Q. Smith

No, not the nick-name of a lead-guitarist for an Irish rock group. The other kind of edge, the main weapon
in your trading arsenal. I'm not talking about a single indicator or pattern, but the items, which used in

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combination give you an edge over the other traders. Have you thought about it lately? Don't even know
what your edge is? Don't trade until you do!

Now, I don't know much about English Literature or Italian Opera, my tastes run more to drinking wally
water and listening to "Too Slim and The Tail-Draggers," so I'll spare you the rambling, unrelated
discourse and stick to trading topics. Seriously, your edge has to be good. Have you done a backtest on it?
Do you keep a running total on how well it performs?

I'm not a very good trader, but I have become very good at following my system. I have lived through its
ups and downs, and I know it inside-out. The system uses a little Gann, a little Fibonacci, a little Swing-
trading, all on the computer so the entry and exits are mechanical. All I do is follow the system and track
how it is doing. I have a pre-determined set point where I will pull the plug on this system and look for
another, but this set point is well below the normal drawdown and periods of negative performance. This
helps me to remove much of the anxiety that usually comes from trading. Of course, by back-testing I know
what to expect as far as a normal drawdown. So, I just add a "fudge-factor" and arrive at my "bailout level."

Losing trades are a part of trading. My system is no different. I don't think a trader can be successful until
he/she reaches that point where a losing trade just doesn't mean anything negative to them. I have found
this very difficult to do, but I 'm getting better at it.

Something about years of our society and schools pounding the idea into my head that losing is bad and is
to be avoided at all costs. Thanks a bunch! Now I have learned to shrug my shoulders, and to just forget
about a losing trade as soon as it happens. It's over and done with, time to move on to the next trade. So,
how are you doing? On last month's brokerage statement was the sign in front of the final amount a plus or
was it a minus? If it was a plus, you're doing something right or headed in the right direction. If it was a
minus, you're doing something wrong or you are headed in the wrong direction.

It's not quite that simple, but that's a lot of it. Know what your edge is and track its performance. Develop a
mechanical system and style of trading that removes all of the emotional decisions. Learn how to dissociate
those losing trades, and carefully sit down and review your actual, bottom-line performance every month.
Hope this helps someone. Now, where did I put that "Too Slim and the Tail-Draggers" CD?

"Trader's Tax Survival Guide & Tax Strategies for Traders"
A Book, Video & Tape Review( Part 2) - Raymond F. Kohn

In a prior issue of CTCN, I reviewed Ted Tesser's newest book "Trader's Tax Survival Guide." The book
was packaged with a video tape and an audio tape. This review will cover the "Audio Tape" which was
titled: How to Turn $30,000 into $1,000,000 (And Get the IRS to Foot the Bill), copyright 1997,
approximately 2-hours.

The audio tape was recorded during a seminar conducted by Mr. Tesser during the "Future West '97"
seminar held last year. Unlike his companion book, that was previously reviewed, the audio tape is current
with the new 1997 Tax Code changes. However, despite the tax law changes enacted in 1997 and
incorporated within the audio tape, the basic message on the tape is the same as in his book. Understanding
the Tax Law is the difference between getting Rich and getting By.

Ted's tape begins with a shocking and attention grabbing fact that is worth repeating here: To begin, he
assumes that a successful trader/investor would be able to achieve an average compounded annual rate of
return of approximately 35% per year. (Which is roughly three times greater than the average annual return
for the S&P 500). Given this assumption, a trader starting out with just $10,000 36-years ago, would be
worth $ 1.1 Million today, and that's "after paying all the taxes that would have been due each year as a
result of his trading activity." (Ted makes note that the title of the tape mentions $30,000, however he
stipulates that only $10,000 is all that is really needed.)

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Then he asks the audience: "How much do you think I would have at the end of 36-years if I didn't have to
pay taxes each year on the gains?" The audience makes a number of guesses ranging from 5 to 10 times as
much. This is where Ted gets your attention: "Without having to pay taxes each year on the gains from
sales the $10,000 initial investment would be worth $492 Million today.

To drive the point home, he goes on to say that taxes are the single largest expense that any successful
trader/investor will ever have. No matter how much a trader spends on data services, software, seminars,
trading systems, etc. The combined total of all trading associated expenses can't even hold a candle to what
you'll pay in taxes. Now that's what I call the "American Way."

Hence the focus of his tape is similar to the focus in his book: Knowledge of the Tax Laws, and Tax
Planning is the key to success. He goes on to say: "There is no such thing as an income tax, you are being
taxed on your ignorance, not your income. The people who are taxed the most, are those who are ignorant
of what's in the tax law. Understanding the tax laws is the difference between getting rich, and just getting
by. It's not what you make in life, it's what you keep!"

He is not recommending any off-the-wall ideas such as: Tax cheating, Scams, Strange loop holes, or
becoming one of those crazy tax protestors who refuses to pay their taxes altogether -- He's just talking
about intelligently using the existing tax code to its fullest extent.

For Example: In the above example whereby a potential $492 Million was reduced to $1.1 Million just
because of annual tax payments -- The simple solution is to have the initial $10,000 put into a "Tax
Deferred" account like an IRA, or other type of pension plan, and then actively trading the funds within that
account for the next 36-years, thus, you would ultimately have the full amount of $492 Million. Even if you
pulled the entire $492 Million out of your IRA all at once, and paid both Federal and State taxes on the
entire distribution (which could total as much as 50% of the total value) you'd still have $246 Million left
over "after taxes." This is a far cry from the $1.1 Million that you'd have when taxes are paid each year.
This is the power of "tax free compounding." And, lets take it a step further. If the initial $10,000 were
placed in a Roth IRA, in 36-years the balance would still be $492 Million, it would all be Tax Free when
you withdrew it. WOW!

Now that's tax planning, It's simple, yet it makes all the difference in the world. There is no question that
tax laws are horrendously complicated, and filled with exclusions and exceptions that make administering
and complying with the code almost impossible. Yet despite the overwhelming and daunting prospect of
having to learn how the tax code works, it remains paramount to your ultimate success to either take the
time to learn those aspects of the code that effect your life, or, hire a professional like Ted Tesser, CPA to
do it for you. Trust me when I say, H&R Block just won't cut it.

Following this astonishing, attention-grabbing, first example, he goes on to discuss the new 1997 tax law
and many of the changes contained in the law which could have a significant impact on traders and
investors. The tape is very broad in scope, and as such, it does not talk about "Trader Status" to the
exclusion of all other tax topics. Some additional topics covered in his tape which exemplify "smart tax
planning" include the following:

1. Time the sale of securities for the best tax advantage. Be careful when selecting the specific lot you wish
to sell and its exact purchase and sale date in order to achieve maximum tax efficiency.

2. Take advantage of the $500,000 Personal Residence Exclusion whenever possible. For example: If you
have "investment real estate" which, if sold, would generate a significant tax liability. Don't sell it right
away, instead, move into the property converting it into your primary residence, and live there for a
minimum of 2-years, thus qualifying for the Personal Residence Exclusion. As a result, up to $500,000 of
the total gain realized from the sale would be Tax Free!

3. Roth IRA's are a perfect vehicle for active traders. You start with your initial nest egg, and begin trading
it aggressively. After a time, the Roth IRA could be worth a small fortune, all of which can be withdrawn
Tax Free. You get the double benefit of tax free compounding and tax-free distributions.

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4. Qualifying for "Trader Status" can be beneficial. However, there are many pitfalls, which if not carefully
addressed, will result in your trader status being denied. Ted discusses many of these issues in detail.

5. And finally, "Estate Taxes." Again, this is a very complex area of tax law, but Ted does a marvelous job
of focusing in on two significant tax planning tools, (The Crummy Trust, and the Charitable Remainder
Trust), which individually, or in combination, can protect huge amounts of your money from the voracious
appetite of the Federal Government.

The tape ends with a series of thought provoking Questions and Answers in which various audience
members ask Ted a number of very interesting questions.

A good portion of the tape discusses "Trader Status," and tends to re-hash much of the material that was in
Chapter 13 of his book, (and covered in my prior review), so there is no reason to cover the same ground a
second time -- With one added exception. The tape specifically makes mention of a small, but very
significant detail, that was not in his book. That detail is: If you wish to be classified as a professional
"Trader," and be able to deduct trading expenses on your Schedule 'C' -- then you'd better have an office. It
could be a "home office," or a rented "trading office." Ted states that if you don't appropriately declare
"office expenses" on your Schedule 'C' -- then you will be denied "Trader Status" during an audit.

A second detail worth mentioning: Ted talks about the likelihood of being audited just because you
classified yourself as a professional "Trader." He states that you are no more likely to be audited just
because you are electing "Trader Status," however, if you go back to "Amend Prior Tax Returns" to reflect
"Trader Status," and as a result are requesting a tax refund, this Will more than likely precipitate an audit,
and a great deal of IRS scrutiny. He recommends that you Do Not amend prior returns to reflect "Trader
Status," unless there's a lot of money at stake, and you are willing to put up an expensive fight with the IRS.

A member of the audience shared a personal experience. He was being audited by the IRS. The IRS was
denying all of his trading expenses and the district manager refused to even acknowledge that "Trader
Status" existed. District manager refused to even look at Ted's book as a tax reference.

This poor tax payer had to get actual copies of the "tax court cases," that were cited in Ted's book, and turn
them into the IRS office for review before they would even consider his position. It was well worth the
effort, he saved over $10,000 in additional taxes by holding to his position.

The tape was a marvelous adjunct to the book, and tended to fill in some of the missing details. It also
provided listener with some new information, and a spirited exchange of ideas in a seminar format. It was
almost like being there in person.

Patience, Patience, Patience - Rick J. Ratchford

It has been said that "Patience is a virtue." When trading various methodologies that require you to make
your own trading decisions, it would be wise to take the maxim to heart.

When you look at a price chart, do you ever find yourself noticing what appears to be a new move, yet your
method or indicator has not quite given you a signal that such a turn is in effect? Ever find yourself entering
the trade in expectation that the indicators will soon agree with you, although they have yet to do so?

Many traders can reflect back upon their account statements and count the many times they did just that.
Instead of patiently waiting for their signals to give the "go," they jump the gun to try and shave a few
points off. Usually they succeed, shaving a few points off their pocket book, that is.

Patience falls under the category of Discipline. Yes, it is hard to master, but is very important if you wish to
stay alive in this business. You must wait for your opportunity, letting all parts of your plan come together
before you can execute. It's your method, your plan. Why sabotage it?

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Unless your method gives allowance for such premature action, you are re-writing your method on the fly.
This is a recipe for disaster!

Allow me to make a few suggestions:
1. Create a check list for initiating trades. Before you place any trade orders, go down your list and make
sure you can check off all requirements to qualify the trade. if you cannot, ask yourself if you are jumping
the gun. If you answer to the affirmative, stay away from the telephone.

2. On your desk, trading screen, or wherever you are when you make a trading decision, tape a small index
card with the words, "Are You Sticking to the Rules?" This provides a reinforcement in your mind that you
are going to suffer again if you are not sticking to your rules.

3. Jot down the trade circumstances at the time you feel a trade may be setting up, but that your signals
have yet to agree. In other words, write down what you are thinking at the time, what the market is doing,
what your signals are saying, everything so that you can recall clearly the circumstances of the trade that
you did not enter. After a couple of days or so, go back and note if you were spared a loss or missed out on
a win. This will help you resolve if your rules really help, or they require modification. It is better to do this
when no money is on the line, than on the fly.

What usually goes on in the mind of a trader is that circumstances are "different this time," and thus you do
not want to miss the trade. In reality, nothing is different except your frame of mind. Any changes to your
tactics should be done "off-line."

Learn patience, and you will be traveling the proper road to successful trading. Even the top traders in the
world get impatient at times, thus losing much of their gains gathered by discipline. Hold tight to the rope
of focus and discipline, knowing that many opportunities come each week and that you will get yours soon
enough. Avoid the roll of the dice attempts to hit them all, but rather sort out those few significant trades
that may miss because they are too busy gunslinging and missing their targets. The patient cat catches the
mouse.

A Quick Buck? Day Traders Rise, Fall Fast on Speedy Action - Dawn Gilbertson

Reprinted with permission of The Arizona Republic

Leon Thompson has been frantically typing commands on his keyboard for an hour when the computer
suddenly freezes. He lunges for phone and asks a technician how long they'll be down. "Five minutes?"
"What?" office mate Mike Fischer shouts, starting to panic.

Thompson and Fischer day trade stocks for a living. It's a risky, quick-draw game in which five minutes
might as well be an hour. (It turned out that their computer glitch was fixed in a minute, so they had one
less thing to worry about.)

They dash in and out of companies, sometimes in seconds, depending how the stock market is moving.
They're looking for fractional gains, 1/8 here, a "teenie" - 1/16 - there. A delay can mean the difference
between winning and losing, like a botched pit stop for a race car driver.

"A long-term hold for these guys is 20 minutes," said Chris Miller, a Phoenix stockbroker who has friends
who are day traders.

The Beardstown Ladies, those folksy long-term investors/authors that spawned a zillion investment clubs,
these ain't.

Day trading has been a way of life on Wall Street for eons. But in the past couple of years it's spread to
office suites in cities throughout the country. In Phoenix there are at least six firms that cater to day traders,
three of which just opened this year.

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There, confident do-it-yourself investors with an extra $25,000 or $50,000 (at least) try to cut out the
middleman and, ultimately, get rich. Some are former Wall Streeters or brokers, but there are also plenty of
retired doctors, attorneys, executives and even plumbers and carpenters, industry officials say. A car
salesman stopped into Bright Trading's Scottsdale office last week to check it out, and a Motorola executive
was in recently.

"A lot of them are here for just a new way of life," Jessica O'Riley, manager of Cornerstone Securities'
Phoenix office, said of the firm's traders. "They think they can make more money doing this than what they
were doing before."

Thompson, a 38-year-old married father of three, is a high school social studies teacher turned trader. He
loved the students but not his long-term earnings prospects. "I could keep breaking my back and working
hard, but everything's based on seniority," he said. Thompson had managed his parents' portfolio and "did
well," so a cousin who's a day trader piqued his interest in trading for a living. Using his savings, he opened
an account at Bright Trading this year and also signed on as office manager. "I hope to be a lot more
successful (financially) than I was as a teacher." Thompson said. "I love it." he said.

He's made as much as $1,500 in a day, trading mostly bank stocks in 500- to 2,000-share blocks. Of course,
he's also lost as much as $700. He's still not profitable, so his parents are providing some financial support
in the meantime.

Bob Bright, a former trader who founded Bright Trading, said people take four to eight months to learn the
business. What they're learning is about trading, not investing, and there's a big distinction.

Forget about earnings, dividends, growth rates and other fundamentals. Traders care about the market's
movements that moment and a stock's trading patterns. Some don't like, or even know, the company behind
the ticker symbol they punch into the computer.

Fischer, who also trades at Bright Trading, buys and sells America Online all day but doesn't sing its
praises. "I don't like the company. It's just easy to trade," he said, citing its big swings in price and cult
following.

Each daytrading firm has a different twist on the game in terms of money required to start, types of stocks
traded, commissions, computer systems and tax treatment on gains. But the goal is the same: to take
advantage of the market's daily gyrations.

Ask Most investors how their stock did on a given day, and they'll give you the closing quote and how
much it was up or down. Ask a day trader, and they'll ask, "Which time?"

As anyone who's tuned into CNBC knows, stocks bounce around, sometimes violently, throughout the day.

The trick for day traders is to ride that roller coaster to their advantage. Thompson and his colleagues at
Bright stare at three or four computer screens all day, waiting to pounce. Like other firms, Bright offers
real-time quotes and instant execution of orders.

Their timing, and read of the market, is crucial. A ½-point, or 50 cent-per-share, move against them costs
$500 on a 1,000-share trade. Multiply that by all the trades they do in a day -- Thompson had 96 trades one
day last week, most of them buying and selling Citicorp stock -- and you'll see how bad bets can make this
a short career.

Fischer, who has trading and investment experience and his father is a Professional money manager, says
he lost about $65,000 in his first couple weeks, though "I've come back since then." "It's easy to get
whipsawed," he said.

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At one point Tuesday, he was up $4,000 thanks to a good call on AOL. He sold the stock short - a bet that
it's going to decline -- and it fell as much as $4 per share. "That doesn't happen every day," he said.

It also doesn't last. Fischer ducked out of the office for a meeting, and by the time he got back AOL had
recovered. The gains were out the door. He ended the day up about S500.

Gary Swiman, a 32-year-old former securities lawyer and certified public accountant who moved to
Phoenix from New York last summer, is Bright's token long-term trader. He focuses on retail stocks,
holding them as long as three days. "I like to play stocks away from these gamblers," he says with a laugh.

Mark Seleznov, owner of Trend Traders, said twentysomethings are suited to day trading because of their
experience with video games. "They actually do fairly well because they're used to reacting so fast," he
said.

Overall, he and others in the industry said the perception that day traders turn on the computer and print
money is a fallacy.

"People are competing with absolute pros out there and pros with much more capital," he said. "It's not
easy."

Mike Burton, Arizona's top securities regulator, is more blunt: "It's a quick way to get wiped out."

To investors who have made some good trades from their home computer or touch-tone telephone and
think they're ready to quit work, Seleznov offers this analogy:

"A lot of people play golf. There's not a lot of people on the PGA Tour."

Day Trading Isn't Nearly As Easy As It Looks

Watching a day trader move in and out of stocks, making (and losing) money on the tiniest of moves, is a
little like standing in a casino without any chips. After a while you get the urge to play.

So Leon Thompson, manager of Bright Trading's Scottsdale office, suggested I give it a try -- with his
money. That's the best way to get a feel for the split-second decisions traders make after scanning the
market information on the computer screens that surround them.

He OK'd 100-share trades, figuring that would minimize any damage. And while he let me enter the orders,
he was always within a whisker of the keyboard in case things got ugly.

I wanted to try an Arizona company and zeroed in on America West Airlines. It was down on a day when
most airlines were up, so I figured, based on Thompson's previous plays, it was due for a move upward.
The bid -- the highest price a prospective buyer is willing to pay at that moment -- was 27.

The ask -- the lowest price acceptable to a seller at the time -- was 27-3/16. The last trade was 27-1/16.

The market appeared to be going lower so I typed in a buy order for 100 shares at 27-1/16, and it was soon
accepted. The stock did move up, to 27-3/16. That's a gain of 1/8, or 12.5 cents. I could have sold it right
then and made $12.50 before commissions. That's what Thompson would have done. He's after a bunch of
small gains throughout the day.

There were still a few more hours in the trading session, so I held out for more.

But I wasn't too greedy. When it seemed clear this stock wasn't going to make any big moves this day, I put
in a sell order at 27-¼. It was never filled. America West's stock didn't get above 27-3/16 the rest of the
day. It went the other way, dipping below 27.

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I didn't sell because I kept thinking it was going to come back on the next market upturn, which we could
track via charts on the computer monitors.

"You don't know if it's going to come back," Thompson said, in a tone that says he's heard that a million
times before. "You can't assume it will or it'll wipe you out real quick."

The stock was stuck between 26-13/16 and 26-7/8 the remainder of the day. At Thompson's
recommendation, we put in an order to sell at the market close. Sometimes a stock rises slightly late
because the specialist on the New York Stock Exchange likes it to end the day on an uptick.

Not today. AWA shares were sold at 26-13/16. That's a loss of ¼ per share, or $25 before commissions.
(America West rose 1-3/8 next day.)

My other pick was Campbell Soup. We bought that after a news flash that the company was buying back
some stock. I know enough about buybacks to know companies do them because they think their stock is
cheap, and investors often piggyback on the news. I bought 100 shares at the market price of 56-3/16. The
stock promptly moved lower, and Thompson promptly recommended a sell order. We were out a minute or
so later, at 55-7/8 That's a loss of 5/16, or 31.25 cents per share, for a total loss of $31.25.

Time was the enemy in this case. By the time we figured out Campbell's ticker symbol -- no one in the
office regularly trades it -- it was already up. Plus, Thompson isn't a big fan of market orders because
you're not in control and the price usually turns out to be "terrible." The total damage from my day trading
experiment (repaid by The Arizona Republic): $56.25 plus $6 in commissions. I think I'll stick with day
reporting.

TIPS - How to be a Day Trader

Think you have what it takes besides money -- to dart in and out of stocks all day for a living or hobby?

Day traders in the Valley say prospective traders should:

· Practice, practice, practice. Try it using play money on one of the firm's simulation programs and watch
real traders in action. Some firms offer training classes, with a focus on trading tools.

· Recognize this is trading, not investing. Don't let the fact that you think Dell Computer is a great company
prevent you from selling it short (betting that the stock's going to decline) if the market's headed down.

· Have strong concentration skills (you're staring at several computer screens all day and have to make
split-second decisions) and a strong stomach.

· Don't assume that the brilliant trades you made from your home computers will make you a successful day
trader. In this real-time game, you're competing against Wall Street pros with years of experience and tons
of money.

· Pick a trading discipline and stick to it. If your focus is on bank stocks, don't get sidetracked by the hot
Internet stock a neighboring trader is all excited about.

· Start slow, with 100 or 200-share trades if possible. A 1/8-point, or 12.5 cents, loss per share is $12.50 on
100 shares but $125 on a 1,000-share trade.

· Don't overtrade. Commissions, however discounted, add up.

· Don't be stubborn. If a stock is not moving the way you thought it would, get out -- quick -- and cut your
losses.

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Editor's Note: The preceding three articles revolve around the daytrading of stocks. However, many of the
ideas and principals are similar or relevant to commodity futures daytrading.

BEYOND TECHNICAL ANALYSIS - Book Review by Raymond Kohn

Really good books are few and far between -- And, it is not often that I will give any book an unqualified
rave review. Beyond Technical Analysis by Dr. Chande, PhD), is one of those rare books that has earned
this rave review. You can't read this book without it having a profound impact on your trading methods and
techniques. In addition, this book can make a significant impact on your understanding of how the
investment and trading markets actually work, and ultimately improve your trading success. Don't miss this
one!

Beyond Technical Analysis -- How to Develop and Implement a Winning Trading System by Tushar S.
Chande, PhD), 1997, 252 pages, $75.00. (This book also comes with a demo disk of specialized software
developed by the author, which includes a method for developing synthetic data.) Dr. Chande is a
scientist/engineer/commodity trading adviser/author. He holds nine patents for various sophisticated
manufacturing techniques; he is a contributing editor to Technical Analysis of Stocks and Commodities
magazine; author of The New Technical Trader; he is a trading software developer and a registered
Commodity Trading Advisor.

This author brings his scientific "mind-set," and "analytical methodology" to the art of trading. And, like
any good scientist, he takes absolutely "nothing for granted," and "questions everything." He questions and
verifies even the most basic trading concepts, which have been repeated so often, and with such regularity,
that we all just assume that these absolute trading truths pre-date the "flood," and were sent down to us on
stone tablets. There are a lot of surprises for the reader when these "carved in stone absolute trading truths"
turn out to be absolute trading fallacies. It's a real eye opener to say the least.

Dr. Chande's Preface and Introduction does a very good job of describing the general sense of the book. It
reads in part as follows:

This is a book about designing, testing, and implementing trading systems for the futures and equities
markets . . . It focuses exclusively on trading systems.

The book is broadly divided into two parts. The first half deals with development and testing -- how the
system worked on past data -- and discusses basic rules, key issues, and many new systems. The second
half explores how the system might do in the future, with a focus on equity curves, risk control, and money
management. A key contribution is a new method called "data scrambling" which allows unlimited
amounts of synthetic data to be generated for true out-of-sampling testing.

A good trading system suits your personality. Fortunately, the fastest way to find one is through a process
of trial and terror ("terror" is not a misprint). Any system testing software on a fast computer will help you
churn out a thousand rosy scenarios. The markets will unerringly reveal any flaws in your design. They will
push you to determine what you truly believe. Eventually, if you survive, you will discover your trading
beliefs.

The markets will guide you to the systems that best suit you.

This book shows you how to create, test, and implement systems that suit your personality. You will
develop not just trading systems, but a system for trading. This book focuses exclusively on creative system
design, thorough testing, sensible money management, prudent risk control, and careful attention to
execution.

After reading this volume, you should be able to take our ideas and convert them into useful trading
systems. This book develops deterministic trading systems, which means that all the rules can be explicitly
evaluated.

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Below is a list of the chapter headings which will give you an idea of the kinds of topics covered in the
book:
1. Developing and Implementing Trading Systems
2. Principles of Trading System Design
3. Foundations of System Design
4. Developing New Trading Systems
5. Developing Trading System Variations
6. Equity Curve Analysis
7. Ideas for Money Management
8. Data Scrambling
9. A System for Trading

The book assumes that you have a basic working knowledge of technical analysis. With this assumption in
mind, Dr. Tushar S. Chande takes you step by step in a very logical and progressive manner, whereby, you
first evaluate and analyze your own trading and market beliefs. He says: First, assess your trading beliefs --
these beliefs are fundamental to your success and should be at the core of your trading system. After you
have a list of your core beliefs, you can build a trading system around them. Remember, it is not easy to
stick with a system that does not reflect your beliefs.

The author provides an extensive "checklist" whereby you simply check whether you "agree" or "disagree"
with a given statement. He then asks you to pare down your "agree" list to its top 5 trading beliefs. From
this point on, any system discussed in the book, or developed on your own, must be compatible with these
top 5 trading beliefs before you should consider them as possible trading system candidates. Any trading
system candidate must be compatible with your temperament and your belief system, and must reflect your
understanding of how the markets work. This "checklist" is so well done, that it forces you to really think
about what you believe, and to make decisions regarding your personal trading preferences. Once you
complete the checklist and review your own answers, the kind of trading systems and methods which are
most appropriate for you, become literally "Self-Evident."

Once these trading beliefs are identified, he then progresses to his "Six Cardinal Rules" in developing a
trading system and discusses each in great detail. Many of the Cardinal Rules are highlighted with specific
trading examples, charts and trading systems which exemplify and clarify the particular rule. When a
particular Cardinal Rule utilizes a trading system as an example, he develops the necessary computer code
and runs the trading system in a "SystemWriter/ TradeStation" fashion in order to generate a complete
Performance Summery of the trading system used in the example. "Six Cardinal Rules" in developing a
trading system are as follows:
1. The trading system must have a positive expectation, so that it is "likely to be profitable."
2. The trading system must use a small number or rules, perhaps ten or less.
3. The trading system must have robust parameter values.
4. The trading system must permit trading multiple contracts, if possible.
5. The trading system must use risk control, money management, and portfolio design.
6. The system must be filly mechanical.

These trading rules do not represent earth shattering new revelations. However, what is earth shattering is
the way he details each one of the rules and explains their subtleties and importance in developing a trading
system. For Example: I'll highlight Rule #3 which states that a trading system must have "robust parameter
values:"

The term "Robust" means that the trading system is Not Sensitive to small changes in parameter values, and
the rules are typically profitable over various testing periods, and in different markets. Robust rules avoid
"curve fitting" and therefore are likely to work in the future.

To exemplify this Cardinal Rule, the author develops a simple trading system, and while doing so, he
simultaneously details the reasoning behind each parameter used in this simple trading system, and then
discusses the probable impact the given parameter will have on the trading system results. (You really get

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to see how the author's mind works as he develops many trading systems throughout this book.) He then
writes the necessary computer code to test the trading system in a "systemwriter" format. He then tests this
trading system over a short period of time (using approximately 6-months of historical data). In this
example, the results were wildly spectacular with 87% of the trades being profitable, with as many as 14
consecutive winners, and only 2 consecutive losers, a "Profit Factor" of 13.49, and a net profit of $13,000.
WOW! (Some profiteer will probably sell this system for $3,000 at his next trading seminar.)

Dr. Chande then goes on to explain what is wrong with these spectacular numbers, and why a trader should
be very skeptical when seeing such results. He proves his point by re-running the same trading rules on
"SystemWriter," over the exact same markets, but over 5-years of data, instead of just 6-months of data.
The results were just the opposite, and horrendously unprofitable, showing 32% profitability, 9 consecutive
winners, and 48 consecutive losers, with a "Profit Factor" of 0.61, and a net loss of $107,870. Now that's a
different kind of WOW! -- What went wrong?

The answer is quite simple. The "spectacular initial results" are the "clues and symptoms" of a "curve fitted
trading system." Any curve fitted system will generate spectacular results over a specific data period, but
will fail miserable when tested on "out-of-sample-data" over a long period of time. He goes on to test this
same trading system on 15 additional futures markets over the same 5-year period of time with mixed and
erratic results.

He makes his final point by saying: "In summary, it is easy to develop a curve fitted, system over a short
test sample. If these rules are not robust, they will not be profitable over many different market conditions.
Hence, they will not be profitable over long time periods and many markets. Such rules are unlikely to be
consistently profitable in the future. Hence, you should try to develop robust trading systems."

The above example typifies the style, content and nature of this book. Dr. Tushar Chande begins with a
given subject matter, whether it be curve-fitted trading systems, stop loss techniques, trading multiple
contracts, equity curve analysis, etc., and then develops a trading model which isolates that particular
subject matter. He then proceeds to test the trading model, sometimes including various alternative testing
methods, and then analyzes the results. Multiple tests are done over many markets using many years of data
in an effort to isolate the true nature of the given subject matter, and how it relates to actual market
conditions.

As he proceeds with his trading system design and testing process the reader gets valuable insights into
how the markets really work, ideas for system design, and more importantly you get to see the outcome of
these various test models. This is where the reader really gets an education. You actually see the test results
in black and white over 15 different markets, using over 10-years of data. The surprise comes when he
proves beyond a shadow of a doubt that what you may have thought was true, turns out to be actually false.
And, what you may have thought was the greatest thing since baseball turns out to be the worst thing you
could possibly do. Dr. Chande literally destroys many of the "universal truths and assumptions" we all
make about the way markets work, and debunks the trading methods which we thought had a chance of
working.

Let me give you an example of how Dr. Tushar Chande, (and the reader) might evaluate and implement a
trading system: As a trader, my personal preferences and beliefs are that I want to be a long-term position
trader who takes advantage of major price trends. I also want to implement that time worn philosophy of
"cutting my losses short, while letting my profits run." Seems simple enough. So, I designed a simple
trading system which utilizes a trend following moving average cross-over system in order to keep me on
the right side of the trend. And, then I use an initial stop-loss, combined with a close trailing stop-loss to cut
my losses short if things turn against me. Now I begin my testing of this simple trading idea.

To begin, I start out by testing the basic trading system alone (without using any stop-losses at all), to see if
the system, all by itself, has any merit. Surprise, Surprise! The system, along with the arbitrary parameters
that I selected, make a ton of money in all 15 markets over the 10-years of historical data. WOW! -- I think
I may have accidentally stumbled across the "Holy Grail"! But the draw-downs are far higher than I can
live with. In fact, some of the draw-downs could choke a horse. No problem. I'm no dummy, the solution is

951

obvious and simple. I'll use an initial stop-loss to get me out of the trade if I'm wrong when the trade moves
against me. Then, after the trade starts making money, I'll use a trailing-stop-loss to get me out when the
market turns against me in order to protect the profits that I've already made. Sounds simple enough, and
makes perfectly good sense, it may need a few little tweaks here and there, but, I'm positive that I have
finally discovered that illusive "Holy Grail." I'm gonna be rich!

Because I've just finished reading Dr. Chande's book, I know how important it is to not assume anything.
So I start testing my new strategy over the same 15 markets, and over the same 10-years of historical data.
The anticipation is killing me -- Tick - Tock - Tick - Tock. The computer is finally finished running the
programs and printing out the "Performance Results." Heh! -- what's going on here? Every single market
I've tested lost tons of money, and the draw-downs were even worse than when I used no protective stops at
all! That's impossible, is the math-chip in the computer busted, or what? My "Holy Grail" trading system
has just gone up in smoke. What went wrong?

With a lot more historical testing, using a series of wide-ranging initial stop-loss parameters, and various
trailing-stop-loss methods, the problem is revealed. It appears that when trading for the longer-term the
markets tend to move up and down quite dramatically -- To such an extent that both the initial stop-loss,
and the trailing-stop-loss, were being hit regularly, thus causing the trades to be exited "prematurely."
When the market was in a neutral "trading range," the initial stop-loss caused many consecutive small
losses which accumulated into very large draw-downs, and once the market began moving, the trailing-
stop-loss caused the trades to be exited way to soon, thus missing out on the ultimate long term move.

So, instead of improving a profitable system with sensible money management techniques, I have created a
far worse situation than I originally had when I used no stop loss at all. This is just the opposite of what I
was trying to do.

Further research and historical testing (which is all included within this book) shows that when you are
developing a long-term trading system which attempts to take advantage of long-term trend movements
(when they occur) that only 4% of all the trades you make turn into the big winners. And, without these
occasional big winners, the system stinks. The other 96% of all trades turn out to be a random combination
of marginal winners & losers.

So, what have I learned by doing this exercise? 1. When I trade for the long-term trend, I have to use either
no stops, or very wide stops to protect me against only seriously catastrophic events.

2. If I want to trade the long term trend, I am going to have to learn to live with huge periodic draw-downs.
Because, as it turns out, large draw-downs are a necessary by-product of any long-term trading system.

3. I've got to find a way of eliminating trades within sideways trading ranges where the moving average
cross-over method is ineffective, and small losses accumulate quickly and exacerbate the draw-downs.

Ultimately, if I can't live with the kind of stomach churning draw-downs inherent with a long-term trading
system, then I have to find another trading system that I can live with.

And that, in a nut-shell, is the purpose of this book. The reader is taught to use a logical and scientific
approach of evaluating every aspect of the trading process. Absolutely nothing is taken for granted, even
the most obvious assumptions are questioned. Every aspect of your trading system is tested and re-tested
using various trading ideas and alternative ideas.

You quickly learn that system testing is not for the purpose of finding that perfect parameter set, nor should
testing be used to isolate the one system that makes the most money -- But instead -- Testing is a learning
tool which facilitates the trader's personal growth and understanding of how the markets really work. As a
result, the trader is not only better able to design profitable trading systems, but also design a trading
system that the trader can live with.

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This book is worth many times its modest cost. If you are a technical trader, it will change the way you
think about your craft, and it will make you a better trader. Don't miss this one. Read it, and read it often.

Feedback on the Real Success Course Gerry Quigley

I finished the Real Success videos a few days ago and am very impressed. The simplicity and success of the
technique is truly an eye-opening experience. Your discussion and use of the clusters of market orders
around support, resistance and trend lines is masterful. I highly recommend this course to anyone who
wants to get off to a successful start in daytrading the S&P.

Planting and Harvesting Swiss Francs J.S. from California

When I first began working with seasonal patterns and tendencies, I would look at my seasonal chartbook,
and I could see and understand the planting and harvesting cycle for wheat, corn and soybeans. I could see
and understand the demand seasonal for heating oil.

I was surprised to see a reliable seasonal pattern for the Swiss Franc. In the chartbook I had, it was
documented back to 1915. I don't know why there is a seasonal pattern in the Swiss Franc, but it's there.

There is also a seasonal pattern in the Yen, D-Mark and British Pound. The ideal seasonal top for the Swiss
Franc is in the December/January period with declining prices into the ideal seasonal bottom in June.
Check your chartbook. Prices topped around November/December 1997 and have been in a decline since
then. They may have made a bottom in April, as of this writing. We should expect to see rising prices from
June until December/January. Please remember, seasonal patterns do not always work. Bottoms and tops
may come early or come late.

Observations on CTCN Articles - C.J. Casebeer

The S&P Trading Tips by Dr. Paul E. Diehl -- He and a few others and I advocate mental stops. He notes
"Mark it down. They will gun your stops if you give them a chance." So true! And I wonder why the
majority of writers and so-called experts always make a big issue of putting in protective stops? Since we
should be with the trend, they are not usually necessary.

Now for Raymond Kohn-Part 1 -- Good info. Especially the "Tax Increase Politics" paragraph. Also,
"Schedule C shows no income. Thus, with no income to report, there is no social security taxes due on this
type of self-employment -- that's a very big bonus."

Also the paragraph "Short-term securities traders trying to catch daily market swings qualify for a rare tax
break." I assume this applies to futures too.

And there to cap it off, he states "this is such a significant change in the tax code that it could turn us all
into long-term investors!" The last paragraph tells us that long-term (position trading) is the way to go as
far as taxes are concerned.

Now for J.L. Wimauma -- "Tis Easier for a Camel. . ." Dr. Water! Also Dr. Batman is the premier authority
on water drinking. I have been very conscience of my water drinking for many years. Last summer I kept a
tally of my glasses of water drunk. Even in hot summer I had a hard time making eight glasses, except
when working outside, then I drank 12 glasses or more. All of us need to make an effort to drink more
water. Also a doctor told me years ago that the urine should run clear at least once a day. So J.L. is on the
ball.

And last on J.L., hurray for the "intra-day break-even stops" and do it mentally.

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Because of Ray Barros's Book Review on DiNapoli Levels, I just might read it. A 9.3 out of 10 is a good
rating and reason to do some learning.

When you publish "SAT" articles, I take notice. We need more of these kind of articles. So we can learn to
trade better.

Now, I have not read Greg Donio's "Options & Spreads, the Jewel Box Guarded by the Cobra." Not really
interested in these ways to trade let alone the long-winded writing. I will read it at a later time and see what
changes he has made to futures trading. Really, if you have a method to trade, keep it brief and to the point.
Why ramble about everything that comes to mind. Keep to the subject and as easy and simple as possible.

Andrew Abraham is with most of us -- trade the trend when there is one!

Dave, keep up the good work and hope you can beat the powers that be.

Ned Gandevani, MB What? - V. Bruce Evans

Ned states the S&P 500 Futures move on the average of 16 to 25 points per day. I have a spread sheet on
the futures going back to June '96. Of the 475 days, there were only 86 days with a daily range greater than
16 points. The average over the last 475 days is 11.71, way below 16 to 25.

OPTIONS & SPREADS: Today's Lessons from the 1860s Gold Room - Greg Donio

Early in World War II, the head of a Hollywood film studio feared the possibility of Japanese bombers
attacking California. Deciding that he wanted his studio camouflaged, he called in an expert and offered-to
pay any price. The expert replied, "It can't be done. You see, every camouflaged site needs a decoy site that
the enemy will mistake for his target. By the way, in case you didn't know, your studio is the decoy site for
the Boeing aircraft plant."

I carried that story around in my head for years before realizing what it had to do with me. It involved, to
state it simply, transferring the risk to someone else. As an option spread strategist, I do it all the time. It
might not sound very nice that aircraft manufacturer feared the whipping post and so exposed the back of
that studio head. Nevertheless, with stocks and futures and options, that item called the risk factor has filled
too many financial coffins. If you can pass the ball of risk to some other player and still collect a percentage
of the gate, you do it. "Spreads" in the game-plan score points. Crucial ones.

Of course, you also need good mental furniture upstairs, and that you are too smart to buy a gold brick
might not be enough. In an old comedy film, the Bowery Boys buy a "valuable mansion sight unseen at a
fabulous bargain price." They arrive in their jalopy to behold a decrepit wreck that vaguely resembles a
mansion. One of the gang says, "But we've only seen the outside. Don't judge a book by its cover."

"Yeah," retorts another, "but you don't have to open the box to know you bought a hunk of Limburger
cheese." They should have smelled the stench earlier, when a fast talker not listed in the phone book
offered a deal too good to be true. Let us see if you can "pick up the scent" with the following quick quiz on
investments:

1. At an archaeological excavation, a coin is found in fair condition and bearing the date 240 B.C. Do you
think it is genuine and a good "collectibles" buy?

2. For Sale: Civil War memorabilia. Confederate war medals, gray uniform remnants, and a CSA battle
saber. Would you purchase?

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Answers: You probably spotted the ruse behind the ancient coin in question #1. The coin-makers back then
did not know at the time that they were living 240 years before Christ. #2 would even have fooled many
Civil War buffs due to a fact not widely known: Confederacy did not award medals.

3. For Sale: From the 1800s, election campaign buttons & posters urging citizens to vote for the "log cabin"
presidential candidate. Whose name should appear on those buttons and posters?

4. An Old West stock promoter with derby, bow-tie and satchel steps out of a time machine and offers to
sell you certified shares in the Pony Express. The shares are genuine and you have admired that glorious
enterprise since you were a kid watching cowboy movies. Dividends if declared will be paid with 20-dollar
gold pieces that will travel through time. Would you invest?

Answers: William Henry Harrison in the year 1840. It should be of interest to business people that was the
first "smart advertising" presidential election campaign. W.H. Harrison's opponents jeered at his humble
birth and said, "The White House is too good for him. All he deserves are a log cabin and a jug of hard
cider." His supporters and campaign managers realized that many voters slept there and drank that.

So the cabin and the jug appeared prominently on posters and buttons. The losing side had the cold comfort
of knowing it provided the winning advertising angle. Since Harrison died after only a month in office, he
inevitably became one of the less-remembered presidents. Yet the notion of a "log cabin president" lingered
long enough in people's memories to attach itself to the better-known Abe Lincoln. But if you see a wooden
structure and the words "Vote for Lincoln," the poster is fake.

Far weaker and short-lived than its legend, the real Pony Express lasted less than two years (1860-61)land
was a financial failure. It was bad news for share-holders long before it became a feed bag for boots &
saddle screen-writers. Everybody remembers the heroic gallop across the Rockies, the six-shooter
protecting the mail, but does anybody remember the scorched investors?

5. For Sale at Hollywood Auction: Classic movie props including the "rosebud" sled from Orson Welles'
Citizen Kane. The problem is, everyone saw that sled incinerated at the conclusion of the film. Did it rise
phoenix-like from the ashes or is this a hoax?

6. You have in your possession what appears to be an old Action Comics comic book. In it, Superman
cannot fly but can only jump large distances. It's fake, sure. Everybody knows he flew.

Answers: "The sled" that appeared in the masterpiece Citizen Kane was actually 2-½ sleds. One descended
the snowy Colorado hillside, the other was burned, and the half a one was burned during the camera close-
up of the word "rosebud." The first still exists and brought huge bids.

When first presented to the world by creators Segal & Shuster, Superman could not fly but was an
awesome jumper. Hence the phrase "able to leap tall buildings in a single bound." Dated 1938, those issues
#1 are worth an astronomical sum. So if you open an old comic book and see a caped jumping jack.

Although mostly about collectibles, the preceding quiz has three messages or morals-of-the-story for
traders in options, futures and stocks. One: Be alert and aware, and you will know sooner than some which
financial boxcar carries the De La Renta perfume and which the fertilizer. Two: God is in the details.
Three: What "everybody knows" is often not true and is definitely insufficient for traders and investors.

Regarding what "everybody knows" and what many investors believe about all sorts of things, it is essential
that the successful trader or investor be a skeptic. That is, he must explore the jungle but he must not be the
dupe who reads the sunny advertising and then pets a venomous snake. A businessman checked into a hotel
down south and then approached a black hotel employee. He said "I'm a practicing Baptist and tomorrow is
Sunday. Do you know a church around here I can go to?"

"Well, a couple of blocks east of here is the white Baptist Church and a couple of blocks west is the African
Baptist Church that I attend. The only difference is in some of the Scriptural interpretation."

955

"What kind of difference?" "Well, you have to understand that being black makes a fellow skeptical. You
don't always accept the official explanation. At the white Baptist Church, they state that the pharaoh's
daughter found the infant Moses in the bulrushes. At the African Baptist Church we state, "That's what she
says!"

In a movie on TV -- a 1930a romantic comedy -- the following dialogue occurs: He: "The doorman of this
hotel was a general in the czarist army." She: "Didn't the czarist army have any privates?"

She sounds like a gal who became skeptical from hearing the same fibs too many times. When a self-
declared "Hollywood talent scout" opened his wallet to pay her restaurant bill, she also sounds like a gal
who would have spotted his meat-cutter's union card.

Skepticism and an eye for detail. This came to mind a couple of days after the death of Frank Sinatra, as I
watched a TV ad of a futures & options broker. Years ago in Atlantic City, signs and cards in store
windows announced a live performance by Frank Sinatra Junior. The "Frank Sinatra" was in big block
letters but you needed a magnifying glass to see the "Junior." In the broker's TV spot, "200 to 300 Percent
Profit Potential!" took up most of the screen but "risk is involved," was junior-size. Advertising people
describe that as playing up the good and playing down the minus. Cold comfort to those whose trades
perform off-key.

This deserves emphasis because when you quest for a diamond mine, there are so many ways that the
money in your checkbook can become somebody else's diamond mine. Be especially skeptical and attentive
to detail when anybody tells you that things have "changed so much" or "improved so much" since the old
days. Among the many old books in the New York University library is Ten Years in Wall Street by
William Worthington Fowler, published in 1873. No computers or fax machines, of course, but otherwise
the place resounded with familiar rings.

Back then, a huckster could sell you fake stock certificates in a company that did not exist. Today that is far
more difficult if not non-existent, but then as now there were also plenty of perfectly legal ways to fleece
investors on a woolly mammoth scale. During the Civil War Era, railroads were becoming a mature
industry, but mining stock and oil stocks boomed (and busted).

Textile merchants from Upper Broadway, lawyers from Albany, church pastors from the river counties, all
types of people with disposable cash swarmed to Wall Street and jostled each other in line to buy newly-
issued stock -- men lured by headlines that told about gold strikes out west but not about sly-fox arithmetic
on the investment end. Fowler called many of these corporations "bubble companies," i.e., destined to grow
big on hope and anticipation and then burst. Black Mountain Gold, Silver and Copper Company sold
$1,000,000 in stock and then spent $1,000 on mining land. Grand Junction Gold Mining Company sold
shares for $1,800,000 and bought $40,000 worth of property.

No ore strikes, but most of the difference went into the pockets of mining executives and stock promoters
whose "mother lode" was the investors' wallet. With headlines only part of the inducement, the advertising
and hard-sell proved muscular. The scenario repeated with oil-drilling shares. Fowler said:

"A volume might be written to describe how the English language was twisted and turned, to paint the
prospect of fortunes and avoid the legal liabilities incident to false representations; how the bubbles shone
as if colored with every brilliant dye that could be extracted out of Petroleum; what engines were set at
work to bring in the public; what stool-pigeons were called from the solid and respectable circles, from the
halls of legislation, from the learned professions, and from the church, to entice dupes, and feather the nests
of needy adventurers; how the owners of lands that smelt of oil, the mineralogists, the geologists, and
chemists were in clover, and then to tell how one by one the phantom-flowing wells dried up, the
magnificent oil territory became abandoned to its original desolation, watched over only by skeleton
derricks, while the thousands of victims came dropping in, file after file, to draw their dividends, as the
bubbles were bursting."

956

That is, to ask for dividends that did not exist as expensive share certificates turned into scrap paper.
Today's history books give an unbalanced picture, telling of oil and gold bonanzas but not of stocks
cramming a thousand tinder boxes. Do not tell me that this is no longer the 1860s, that this no longer
happens. Any second now my phone may ring and another broker-dealer will try to sell me an initial public
offering. This stock is expected to climb extraordinarily. Large numbers of people want to buy in but are
being turned away disappointed. However, a limited number of shares have been set aside for select
customers such as yourself." In other words, his desk is piled high with paper hard to get rid of. The
skeleton derricks reappear like hovering ghosts.

Nor is this the only thing that did not end with the gaslight. Not all blameless innocents, many speculators
make the same mistakes today that they made when Jenny Lind warbled. Back then, Uncle Sam bought and
coined so much gold that a strong federal government was believed to mean an ample supply but, of
course, shortage or fear of shortage was what boosted the price per ounce. Thus good news for the federal
government meant a fall in value of yellow metal and bad news a rise.

During the Civil War, telegraph lines hummed to and from many locations, including blue-coat command
tents in the field and the cavernous Gold Room near Wall Street. News of a Confederate victory lifted the
price of gold and a Union victory lowered it. Allegiances notwithstanding, long players cheered
Chancellorsville and booed Gettysburg, and short-sellers the reverse. A European-born broker on the floor
of the Gold Room offered William Worthington Fowler a standard deal: A contract for delivery of
$100,000 worth of the precious metal, three percent margins short or long.

Fowler wrote a check for $3,000 and said, "Go short at the market." It must have been a good week for
Beauregard's troops because the metal rose. The floor broker said, "Oh, Mishter, tish all right. You geep
your poseetion. But I musht have more marchin. Gif me dree tousand dollars more and I geep you short of
gold, den you mak monish." That broken English cantata was destined to be sung twice more and
responded to twice more, with a total loss to sweet William of $12,000: Futures trading's old "add cash"
bubble-burst.

It has been a long time since Grant and Lee locked glances through field telescopes. But has anything
changed? Traders still write check after check to put up "more marchin." Has anyone not heard the phrase
"throwing good money after bad?" Think of Henny Youngman in heaven as a doctor of finance. "Doc, it
hurts when I do that." "Well, then, don't do that!"

A far sadder story involved a friend of Fowler's whom he identified only as "L___." The price of gold fell
when General Sherman took Atlanta but afterward climbed repeatedly to Lee's delaying tactics against
Grant's Petersburg Campaign. L___ had enjoyed much success as a trader, with a hefty bank account and a
brownstone home in Manhattan. He wanted one more triumph before carrying his winnings away from
Wall Street. With gold at 200 he shorted $100,000 worth.

It climbed to 210 and he proceeded to do "averaging," a maneuver that served him well in the past as with
railroad stocks. Averager's logic said that gold had to decline 10 pts for him now to break even but if he
shorted another $100,000 worth at 210 it only had to fall 5-pts. He did so, and again at 220 and again at 230
and . . . Relentlessly he must have repeated to himself, "This averaging works but ya gotta stick with it to
the Gates of Hell!" The final tally was a $600,000 loss, wiping out trading capital, savings, brownstone, and
leaving a $30,000 debt on money borrowed.

L___ died six-weeks later in the attic of a decaying tenement, his sobbing wife by his bedside and only
moonlight illuminating the room. We need not search far for a financial autopsy report and a second
opinion. One of W.D. Gann's later Axioms: "Averaging a loss is the worst mistake an investor can make."
A statement by Christopher Morley: "If you have to keep reminding yourself of something, maybe it isn't
so." Dr. Henny Youngman's remedy: "Don't do that."

Another Ironclad Axiom of W.D. Gann and others: "Don't buck the trend." Adding more and more margin
money to a trade going the wrong way and averaging a loss whether with stocks or futures or options are
both bets that lilacs abound in a box that smells of Limburger. Both involve throwing good money after bad

957

when the Maxim is: "Cut losses short." A bet against the trend relies not only on a future U-turn but on a U-
turn within specific time and space frames. An alcoholic may lick it and a mugger may reform but probably
not in time to speak at the seminary graduation.

When two Greeks meet, they open a restaurant. When two sailors meet, they start a crap game. When two
speculators meet, they talk about the market. "How did you do?" "I broke even." If you believed all the
"former generals" off the immigrant boats, the mili-military corps in the old country must have been the
only army in the world with no privates. If you believe all IPO touts, no newly-issued stock will ever
nosedive. If you believe all traders, nobody ever did worse than "break even." That's what they say!

Dictionaries define "fish story" as "a lie or exaggerated tale." In a glaring omission, they do not define a
broker-dealer's pitch or a futures & options TV spot or a speculator's Chapter 11 "break even." Without
prevarication, I wish to tell of non-fatal snake-bite in the diamond region.

With horizontal calendar spreads, my standard strategy includes call options over a stock that is rising and
has a conservative price/earnings ratio or put options under a stock that is declining and has an inflated P/E
ratio. The options should be out of the money with a strike price four and a fraction or more from the price
of the underlying shares. In late April 1998, IBM with its conservative P/E fluctuated on the Big Board
between 109 and 111. Call options with a strike price of 115 seemed worthy of perusal.

Calls of that strike price with May expiration dates were skinny dollar-wise due to the lack of time value.
Junes and Julys had ample meat on the bone. My "credo" holds that the short end or near-in-time end of the
option "spread" should be worth at least two points and preferably more. Also that the short end should be
worth more than half the long end or far-in-time end, and preferably around two-thirds. At the time, IBM's
June 115 calls traded at about 3-½ and the July equivalents at about 4-½.

An IBM earnings report was due presently but was expected to fit analysts' expectations. I phoned the
broker and said, "I want to enter a spread order with IBM call options, the buy and the sell going in
together, each dependent on the other. I want to buy 10 IBM call options July 115 and sell 10 IBM calls
June 115, with debit of 1-point. These are both to open a position and both day orders."

The young man taking my order happened to be a broker-in-training who asked, "The Junes that you're
selling--are they covered or uncovered?"

"With a horizontal debit spread," I explained, "the short end of the spread is covered by the long end. So the
bought Julys cover the sold Junes."

That meant that if the 10 Junes were exercised and I had to come up with 1,000 shares of IBM to cover the
obligation, I could obtain them by exercising the 10 Julys I was to own. Broker exigencies require that this
"safeguard" exist on paper but the careful and capable spreader makes sure that it is never used. Those
"long end" or bought options are trader's treasure not to be exercised.

The "one-point debit" meant that the 10 Junes could be sold at any price and the 10 Julys bought at any
price but that the difference between an option bought and one sold could be no more than $100, or $1,000
on 10 bought and 10 sold. In other words, I expected what I bought to be worth $1,000 more than what I
sold, with what I sold plus one grand out of my own pocket paying for what I bought. The report came back
at the end of the day: Nothing done.

Early the next trading day, I entered an identical order except now with a 1-1/8point debit, i.e. $1,125. The
news came a couple of hours later. I sold 10 Junes at 3-3/8 ($3,375) and bought 10 Julys for 4-½ points
($4,500). The money from the sold Junes paid for most of the bought Julys except for $1,125 plus
brokerage commissions out of my own capital. My gold was in the gap or spread & profit-potential in the
hoped-for widening.

There are no sure things. Spreads are risk-reduction strategies but not risk-elimination. IBM's earning
report came in just one penny per share over analysts' expectations, which according to most theories

958

should not have caused the stock price to jump but did anyway. It leaped 5 & a fraction then kept climbing
in smaller increments. Rising above 115 it placed my short-end options in the money, first fractionally and
then a full point at 116, then more.

When it hit 116, I said to myself, "It's in forbidden territory and not just fractionally. I should pull out."
Deep in-the-money "short" or "obligation" options carry risk of "overnight exercise" between trading
sessions, so I was determined to do something before the end of the trading day. Another danger of a stock
pushing an option more than fractionally into the money is that it "squeezes" the spread, narrowing the gap
when the profits are in its widening. That shrinkage prompted me hesitantly to end the sortie.

The shares crossed 117 and the gap narrowed a bit. Why did I not pull out or close the position when my
better judgment told me to do so at 116? The reason that afflicts every flesh & blood trader: The hope of a
turn-around, the bet on a U-turn that has not happened yet, a de facto wager against the trend. I could
envision it falling below 115 in a hour like a dollar lottery player envisions millions or a failing restaurant
owner anticipates crowds.

Had I said to the broker, "Buy back the Junes at the market to close the position, sell the Julys at the market
to close the position," the worst would have happened. "At the market" usually means the worst--buying
back at the ask price or the too high price of the bid/ask gap and selling at the bid price or too low price. So
I asked the broker for each option's bid, ask and "last traded at" prices. When the Junes last traded at less
than the ask price, I entered an order to buy back 10 at the last-traded-at figure. When the Julys last traded
for more than their bid price, I offered to sell 10 for that higher figure to close the position.

Buy low/sell high has special meaning for the option spreader closing a position. Being choosy at the outset
over how wide an opening spread is another crucial factor. On this 1-1/8 point spread I lost _ of a point plus
commissions. It could have been worse. A couple of years ago, I bought into a 1-½ point or $1,500 spread.
Subsequent figures went against me and I closed out "at the market" with a final 7/8 of a point. After
commissions this amounted to a loss of nearly half the investment.

Why markedly less damage this time? No more "at the market" has to be one big reason. Perhaps an even
bigger one is my insistence on a narrower gap at the start. To reiterate guidelines from my previous article:
A single-point debit is pure gold but hard to find. 1-1/8 is excellent and less rare. 1-¼ and 1-3/8 are fine
and okay respectively. Half avoid 1-½ and wholly avoid 1-5/8or more. Less width at the start means bigger
and more frequent gains, fewer and smaller losses, at the conclusion. Although this recent IBM venture
showed loss, I thank Providence that the beginning spread was not 1-½ or 2 points!

The above statements are made with the qualifier that I am not what you would call philosophical about
adversity. Futures broker and independent trader Stanley Yabroff said while lecturing to a New York
University finance class, "You learn from your mistakes, not your successes." The financial wipe-out rate
among futures speculators is variously estimated at between 80 and 90 percent. Could it be that Stan was
trying to sugar-coat the setbacks in a field that is 80 to 90 percent setbacks?

Everyone has heard the adage, "A fool and his money are soon parted." Did you ever hear the following
saying? "The fool became wise and wealthy because of the experience." You did not because I just made it
up and even I do not believe it. Yes, we can learn from our mistakes and profit from them. Yet many, many
a trader keeps writing checks to the broker and does as badly on the last one as on the first. "Den you mak
monish." Aim for more profits and fewer mistakes, especially repeated ones and ones you see others
commit. Remember the little-known proverb: Experience is what you get when you didn't get what you
wanted.

Nevertheless, experience can serve not only to instruct but to test a methodology. After closing out IBM, I
pondered American Express which I had been watching. In itself, blue chip status means little to me.
"Everybody knows" you cannot lose with blue chips just as "everybody knows" Abe Lincoln was the
original Log Cabin President. Yet American Express had a fairly conservative price/earnings ratio of 25 or
26 and what looked like a solid "floor of support" around 100 for shares hovering between 104 and 106
after their gradual climb recently.

959

A horizontal calendar spread with call options having strike prices of 110 seemed a good idea, more so
since near the end of April the June 110 calls were meaty at around 3-½ and the Julys around 4-½. I like the
near-in-time option to be "at least 2 or 2 & a fraction and to be worth more than half the far-in-time one," as
mentioned among the rules of hammered-out practicality that served me in the saddle. That alone
eliminates huge numbers of options from consideration. I instructed the broker to sell 10 American Express
June 110 calls and buy 10 July 110s at a one-point debit. Nothing done. The next day I added 1/8 of a point
to the debit figure.

I bought 10 Julys for $4,625 (4-5/8 - ½ points) and sold 10 Junes at $3,500 (3-½ points) and paid $1,125
(1-1/8 points or the difference) plus commissions. Frankly, this bit of sailing has proven less than sunny
and breezy. At the time of this writing -- a trading day and a half past the five-week mark -- the July 110s
trade at 2 and the Junes at 5/8(June 2, 1998). Not only would the gain after commissions be runty if I closed
the position now but the timing has been lethargic. Experience with options spreads has accustomed me to
a three to four-week window of time. I would take profit something like a day after the three-week mark or
a couple of days sooner than four-weeks.

American Express has been a long trek to small nuggets, and it still might not pay completely for the
prospector's donkey. Yet everything is relative, especially amid the skeletons of men and longhorns.
Whoever bought those June options I sold has lost more than 80% thus far. Whoever bought Julys at the
same price I did but without spreading is down nearly 60% and falling.

There could be a turn-around but options, like futures contracts, are "wasting assets," i.e. burdened with
expiration dates. Will John Dillinger reform in time to speak at the commencement?

Spread methodology's armor has been dented but proven effective by experience. Thanks to spreading, I
protected my financial metaphor aircraft plant by exposing a June movie studio and a July iron foundry to
most of the risk & loss bombing hazard. Fallibly, I kept hoping for an upward thrust of American Express
shares to push the short and long ends (near-in-time and far-in-time ends) of the spread farther apart. A
strong floor of support held for the stock price, but alas, likewise a ceiling of resistance. Yet in Contrast to
the Verdun-size losses routinely suffered by options traders as well as futures traders, the spread strategist
perennially has blessings to count.

Merriam-Webster's definition of "Perennial:" Persistent, Enduring. Related to "Perennate": To live over
from season to season. Synonym: Continual. Wouldn't it be nice if those terms described the activities of
many speculators? Great Axiom: Handle trading like a business, not like a gamble. Many traders cannot
because they are not around for longer than a "poker marathon" length of time. Try to imagine a Cartier or
a Duncan Phyfe attempting to run business in circumstances where the statement "I'm cleaned out!" comes
so quickly. If the words "perennial" and "continual" and "ongoing" were merit badges or guild medals, the
spread strategist would have a nice drawer full.

Why is writing repeated checks to a broker a bad way to become "on-going"? Business-wise, it bears an
uncomfortable resemblance to opening a shop of the same type and at the same location as the one that
went broke. It bears an even worse resemblance to the casino gambler who says, "Maybe switching to
another table will change my luck." On-going business success means getting plenty of mileage out of the
original stake, not repeatedly bleeding your bank account.

In my recent years of trading options through York Securities in Manhattan, the only "second check" I
wrote to them was to buy into the Alliance Money Market Fund. I have not added money to my trading
account, officially called the margin account. Now, however, I am about to write another check to open an
additional trading account at a different discount brokerage house -- "opening a second shop" as the Italians
say -- and entirely with money from options-related profits. The struggling actor who achieves success
always recalls the date on which he received The Phone Call. If I could recall the date I first read about
horizontal calendar spreads, it would be framed in red on my wall.

960

My article references to culture, fine arts, literature, have evoked different reactions from different
subscribers, mostly favorable. Yet I did not realize how much this was needed until I just read about the
growing popularity of "dead pools," that is, gambling pools in which people bet on the future deaths of
celebrities in the coming year or month. Many people collected on Frank Sinatra, some on Dana Andrews
and Dorothy Lamour. Princess Di and John Denver surprised everyone; practically no bets. This macabre
type of wagering is done by employees in many business offices and on the Internet. Are you ready for
worse news?

"But it was on Wall Street -- where betting is like breathing -- where the ghoul pool found a permanent
home," wrote Laura Pedersen-Pietersen in the New York Times Money & Business Section. She quoted
Tony DeMartino who worked on the American Exchange for 40-years as saying, "The death pools have
been around as long as the exchanges, because during market lulls traders sit around for hours looking at
one another in utter boredom. They do stuff like this to stay awake." (June 7, 1988)

How is that for an astounding confession? Has culture gone that far downhill since the days when Wall
Street moguls rode horse-drawn hansom cabs to the art museum and the opera house? All right, there have
always been con-men and sneak-thieves on the Exchanges and the Curb and the Gold Room. Yet plenty of
club men gave profound attention to King Tut's archaeological treasures when these were brought to New
York. During lulls on the exchange floor, talk could turn to Rodin's statuary or a performance by Caruso.

With today's technology, anyone can bring to the trading pits an earphone containing Debussy's piano or a
symphony orchestra and Shostakovich. A satchel can hold vivid, detailed color-reproductions of paintings
by Titian and Boucher to which cameras 75-years ago could never remotely do justice. Yet floor traders "sit
around for hours looking at one another in utter boredom" and "stay awake" by betting on stars' obituaries.
Talk about an idle mind being the devil's playground.

In the pockets of the "open outcry" hand-signalers? Not Homer's adventures on the wine dark sea, not the
make-the-milkmaids-blush humor of British Jacobean playwright Thomas Middleton, not archaeology
memoirs by Sir Arthur Evans or Lord Carnarvon, but a pad bearing the names of Rod Steiger, Jessica
Tandy, Abe Vigoda, also the crossed out names of Jimmy Stewart, Tiny Tim, and Brian Keith who helped
to hurry things along. A hero to the dead pool crowd. This vultures-passing-the-time speculation "found a
permanent home" on "Wall Street -- where betting is like breathing."

Please, dear financial reader, have better ways than this of handling your free time or your idle interludes. If
you want evidence on the importance of culture, look at those who lack it as they watch the embalming
tables as well as the dice tables. Even if your monetary ventures are not Astor or Vanderbilt size (and
hardly anybody's are), cast yourself in the role of the carriage-trade tycoon enjoying art works excavated
from Pompeii or Gounod's haunting marble halls music or Anton Chekhov's short-literature sojourns to
Russia's wooded marshes as the mists rise and disappear into twilight. You will feel little "utter boredom"
and even less yen to gamble with autopsy rooms.

A better item for your pocket than a "Mickey Rooney this year?" marker may be Richard Muther's book
The History of Painting. Muther wrote of Tiziano Vecellio (aka Titian): "The beautiful sunny October days,
when thick blue grapes gleam from the dark foliage; when the leaves shimmer in warm, brown tones, and
succulent fruit loads the trees -- such is Titian's season. It is no accident that he is so fond of placing a
basket of ripe apples in his pictures of the Madonna, or of giving his daughter a bowl of fruit. These
peaches, grapes, melons, and oranges in their gleaming, golden splendor meant for Titian what the lily did
for Botticelli, the master of the springtime."

The painting of the artist's 18 or 19-year-old daughter holding the autumnal bowl was described in detail by
Frank Preston Stearns in his book Four Great Venetians: "Lavinia bends slightly backward to support the
weight of the fruit; her hair is rolled back gracefully under a jewelled crescent, and her light mantle falls in
a loop from her shoulders relieving a bust like pink snow. The painting of her neck is of itself a most
interesting study. Slashed sleeves, a necklace of Roman pearls and a girdle of chased (set with gems) silver,
produce a princely richness of effect."

961

The term "culture" has multiple shades of meaning. Several months ago I wrote about H.L. Mencken's
statement that the ghosts of primitive peoples have short life-spans. Members of primitive tribes see spooks
from their father's time, sometimes their grandfather's, but none from farther back in time than that. As new
ghosts are added to the folklore, old ones are forgotten. Also, stone age and jungle peoples tend to lack
history books and portraits which feed memory and imagination.

I compared this to certain segments of our civilized society: Right-wing reactionaries who declare
themselves "traditionalists" and cherish their "golden yesteryear" but whose knowledge of the past is so
meager that it cuts Irving Berlin's career down to a spotty latter half. Well, the process continues this very
moment. More ghosts and yesterdays disappear. Whole decades vanish to Unremembered Land. Vaudeville
memories fade; enter I Love Lucy memories.

A former FBI agent and prosecutor, Frank Keating is now the Republican governor of Oklahoma. After
two boys ages 13 and 11 were charged in the shooting deaths of four students at a Jonesboro, Arkansas
school, Governor Keating wrote a piece for the Wall Street Journal April 10, 1998 in which he reminisced
about when he was 11 years old in the 1950s:

We know the popular culture both shapes and reflects its time and those who inhabit it. What was different
about the popular culture in 1955?

"The big movies of 1955 included Mr. Roberts, Marty and Oklahoma! All three celebrated certain worthy
values-courage, fidelity, love, devotion to duty. Two had villains, but they were made to pay for their
misconduct in the final reel. I don't recall any sex, nudity or graphic violence in those films, which still
delight cable TV audiences almost half a century later."

He went on to hatchet today's raunchy rock lyrics in contrast to 1955's Yellow Rose of Texas and
concluded, "As a former prosecutor, I would feel confident in indicting the popular culture as an accessory
to the Jonesboro murders."

Note the 1950s slant. Judge Robert Bork praised 1930s Tin Pan Alley songs and 1930s film censorship
under Will Hays. Apparently Governor Frank Keating's cultural memory is even more stunted than Bork's.
Right-wing reactionary "good old days" disintegrate in wholesale lots. '30s and '40s slip through the cracks.
Like the ghosts of shamans and witch doctors they do not lasts.

If Governor Keating had known classical Greek culture, he would have known that Sophocles' drama
Oedipus Rex has been performed for 2,400 years without causing men to murder their fathers or marry
their mothers. If he had known Italian culture, he would have known that Verdi's opera Aida, has not
caused any young lovers to be buried alive. If British culture, he would have known that Shakespeare's play
King Lear has not provoked young women to gouge out their fathers' eyes. If French culture, that the
voluptuous nudes in the Delacroix paintings -- conquered, chained, enslaved -- have not yet compelled
children to go around hanging chains on undressed women.

There is nothing wrong with Rodgers & Hammerstein. However, there is plenty wrong with so-called
"traditionalists" for whom "The corn is as high as an elephant's eye" marks the outermost boundary of the
then-known world. When a governor's horse-blinder pronouncements got into the Wall Street Journal and
traders do D.O.A. wagers "on Wall Street -- where betting is like breathing," can this be called
encouraging?

Trading can be a business instead of a gamble. There can be traditionalists worthy of the name. When you
make choices, regard these two as key choices. No longer do Yankees who are long gold root against
General Grant but other absurdities persist. People thirsting for excitement still turn speculation into a crap-
shoot because they cannot tolerate a good business with idle periods. Rachmaninoff or Pavarotti on an
earphone can help you avoid a skeleton oil derrick, and there's plenty to avoid. Happily, there is also real
"black gold."

962

"S.A.T. Makes Lots of Money Trading & Why Others Don't or Can't Do It"

Reprint, "The Successful Anonymous Trader"

This is in response to the letters written concerning requests for personal instruction and education on day-
trading. I'm sorry to say I cannot fulfill these requests. I am very busy trading during the day and cannot be
interrupted while trading and spending time with my family in the evening. Plus I do not have the
temperament to be an educator. I'm also not a system vendor, guru or newsletter writer.

If it makes anyone feel better, I have tried to teach two good friends to do exactly what I do and they have
learned well. They can recognize all my trades every day. However, they still lose money. Why? They don't
take the signals. They watch 5 or 6 winners in a row go by, then take a loser and quit again; or they get in a
winner and as soon as they see a little profit, they get out; or sometimes will not use a stop and a small loss
turns out to be a big loss. Yet they have the same information available as I do. Why can I make $1,200
today and my friends lose $350 trading the same methodology? It's in their psychological makeup. They
need to work on it. They will eventually pick it up, if they stay with it long enough. I cannot get inside their
heads and that is frustrating for a teacher. You have to learn this by constant experience.

I can tell you what I did that helped me psychologically. I recommend buying the following books: Mark
Douglas - Disciplined Trader - especially chapters 15 & 16. I read this once a month; Joe Ross - Trading Is
A Business - excellent and thought provoking - questions everyone must answer before trading.

"Trading In the Zone" - Mark Douglas
Book Review by Ray Barros

In this book review I shall be looking at the essence of Mark's argument.

Summary: Mark argues that consistently successful trading is based on a specific mental mindset. Before
we can consider the nature of that mindset, we first have to consider Marks' approach to epistemology (the
nature of and means by which we acquire knowledge).

Mark Douglas belongs to the "out there as seen by the in here" school - i. e., he believes there is an
objective reality but that the perception of that reality is distorted by an individual's beliefs, values and
rules. In NLP terminology, "the map is not the territory;" however the closer the map resembles the
territory, the more successful an individual will be in dealing with life.

So what has all this to with trading? Reflect that market information is one aspect of reality. If we distort
our sensory perception then we are likely to perceive it inaccurately. Fear causes the greatest distortion.
Once fear invades our thinking processes, then either immobilization and/or myopia are the result. By
immobilization I mean the inability to respond appropriately to market info; by myopia I mean the inability
to "see" info that runs contrary to our current view of the market.

The key difference between the successful trader and the majority is that the former perceives market info
as a constant flow of opportunities whereas the latter sees it through veil of fear.

The successful trader achieves his more accurate perception because he has no fear of losing money on any
individual trade; this lack of fear is achieved because he holds two apparently contradictory beliefs:

The belief that the market is unpredictable and uncertain and the belief that the market is certain and
predictable.

The successful trader resolves the conflict because the first belief pertains to each individual trade whereas
the second pertains to trades over a large sample size. These beliefs are held not only on an intellectual
basis but also at every level.

963

As a result of these beliefs, other beliefs follow: • each trade is unique and independent of previous trades •
profits and losses are randomly distributed • profits are not dependent on knowing the outcome of an
individual trade. Indeed as Mark says: "The extent to which you think you know, assume you know, or in
any way have to know what is going to happen next, is the same degree to which you will fail as a trader." •
the successful trader takes FULL responsibility for the outcome of each and every trade.

The successful trader derives certain benefits from holding these beliefs.

Because he has no fear: 1. He sees the endless opportunity the market provides. 2. He operates in the
"NOW' moment rather than being held prisoner from a past trade or a future event yet to happen. 3. He
operates from balance rather the from recklessness or fear. 4. He can enters the "zone" at will.

"Zone trading" is defined trading when one is in harmony with the market.

EVALUATION - Bouquets: The book contains a wealth of information and distinctions important to
trading success.

Most important is idea that fear is the trader's greatest opponent; the way to trade without fear in not a
trading plan or discipline but to accept that loss, on any individual trade, is possible because the market can
and probably will do anything.

Apart from his central thesis, Mark covers a lot more ground: • The nature of beliefs and their formation •
How to acquire the successful trader's mindset etc, etc

BRICKBATS: This is a prepublication copy and as such is indeed of an editor and professional layout.
There are no aids to reading apart for some chapter headings.

In addition, although Mark's writing style has improved greatly since his first book, it can do with
improvement.

To glean what an author has to say, I first seek to understand the author's key words from his perspective,
then his key sentences and finally his key arguments,

Mark ouglas has a habit of introducing important ideas out of context and this makes reading his works
difficult. Having said that, I found "Trading in the Zone" is much, much easier to read than the "Disciplined
Trader."

MY VIEW: The material presented more than compensates for any deficiency in style or presentation. I
wholeheartedly recommend this book to all traders from novice to master as a worthwhile addition to his
library. Out of 10, I would give this a 9. The book costs US $200.00 and is available from Mark Douglas:
E-mail: MDoug927@aol.com - Voice: 312-938-1441 Fax: 312-938-1458

Member Requests

I am a new member and would like to know from fellow club members if there is a library one can borrow
Trading books on commodities etc. Please write via CTCN or e-mail Ash Sharma rsharrna@tcsn.net

Member Larry Morris is looking for feedback on Bruce Gould & his latest trading system. Please reply via
CTCN.

Like many others out there I'm new to this game. I've read enough to have an idea of what to do but I want
to paper trade and exchange information before playing the real thing. I'm therefore, opening a forum for
any beginner that wants to paper trade with me. I will have a wwwboard up and running to host the
discussions. Please e-mail me and I will discuss the details with you. Massimo - mpaolini@home.com

964

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